Morrison v 180 Capital Finance Pty Ltd
[2011] VCC 1464
•20 December 2011
| IN THE COUNTY COURT OF VICTORIA | Revised |
Not Restricted
AT MELBOURNE
CIVIL DIVISION
COMMERCIAL
GENERAL DIVISION
Case No. CI-10-01905
JOSEPH MORRISON
| AND OTHERS (as per the attached Schedule) | Plaintiffs |
| v | |
| 180 CAPITAL FINANCE PTY LTD | |
| AND OTHERS (as per the attached Schedule) | Defendants |
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| JUDGE: | HIS HONOUR JUDGE GINNANE |
| WHERE HELD: | Melbourne |
| DATE OF HEARING: | 28 and 29 July, 1 and 3 August 2011 – Last Written submission 23 August 2011 |
| DATE OF JUDGMENT: | 20 December 2011 |
| CASE MAY BE CITED AS: | Morrison & Ors v 180 Capital Finance Pty Ltd |
| MEDIUM NEUTRAL CITATION: | [2011] VCC 1464 |
REASONS FOR JUDGMENT
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Catchwords: CONTRACT – short-term loan with high interest rate – higher interest rate payable on default – loan in default – whether interest rate a penalty – whether requirement of loan contract interest rate unconscionable conduct – remedy – Trade Practices Act 1974, ss. 51AB, 51AC and 87.
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| APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr J Catlin | Sofra Solicitors Pty Ltd |
| For the Defendants | Mr A Smith | Yates Beaggi Lawyers |
| For the fourth defendant by | Mr C Northrop | GSM Lawyers |
| counterclaim |
SCHEDULE OF PARTIES
| JOSEPH MORRISON | Plaintiff |
| and | |
| YANADALE SERVICES PTY LIMITED | Second Plaintiff |
| and | |
| LUBERN PTY LTD | Third Plaintiff |
| v | |
| 180 CAPITAL FINANCE PTY LTD | Defendant |
| - AND- | |
| 180 CAPITAL FINANCE PTY LTD | Plaintiff by Counterclaim |
| v | |
| JOSEPH MORRISON | First Defendant by Counterclaim |
| and | |
| YANADALE SERVICES PTY LIMITED | Second Defendant by Counterclaim |
| and | |
| LUBERN PTY LTD | Third Defendant by Counterclaim |
| and | |
| DEBRA ELLEN CASTELLANO | Fourth Defendant by Counterclaim |
| HIS HONOUR: |
1 180 Capital Finance Pty Ltd (“180 Capital Finance”), the defendant, loaned $50,000 to Mr Joseph Morrison, the plaintiff, on 22 April 2008 for a term of 165 days.[1]
[1] Transcript (“T”) 288
2 Yanadale Services Pty Ltd (“Yanadale”), Lubern Pty Ltd (“Lubern”) and Ms Debra Castellano signed Guarantees of the loan.
3 Mr Morrison did not repay the loan by the due date.
4 The central issue in the proceeding is what sum, if any, Mr Morrison and the guarantors are obliged to repay to 180 Capital Finance.
5 180 Capital Finance is a non-bank lender, whose customers include businesses experiencing cash flow difficulties.
6 In June 2009, Mr Morrison, Yanadale and Lubern commenced proceedings in the Magistrates’ Court at Shepparton claiming declarations that the interest component in the Loan Agreement was null and void and of no effect against them at common law and in equity and pursuant to the Trade Practices Act 1974 (“the Act”), because the interest rate payable under the Loan Agreement was a penalty and enforcement of it constituted unconscionable conduct within the meaning of s.51AC(3)(b) and (e) of the Act.
7 180 Capital Finance commenced proceedings in the District Court of New South Wales to recover the debt owing. Thereafter, Mr Morrison’s Magistrates Court proceeding was transferred to the County Court and 180 Capital Finance pursued its claim by way of counterclaim.
8 180 Capital Finance counterclaimed against Mr Morrison and against Yanadale, Lubern and Ms Castellano as guarantors for the amount alleged to be owing under the Loan Agreement. It also sought orders for possession of properties over which Lubern, Mr Morrison and Ms Castellano had given mortgages.
9 The Statement of Account for the loan showed that the principal advance of $50,000 on 17 April 2008, plus the establishment fee of $3,850 and valuation fees of $2,300, had increased by 10 August 2011 to $438,061.39. This included legal fees and interest payable of $302,682.10.[2]
[2] Exhibited to the affidavit of Mr G Wosczlaski, a director of 180 Capital Finance, of 12 August 2011
10 The interest rate applied was 96 per cent per annum. The basis on which the legal fees attracted that rate of interest was not explored at the trial.
11 Mr Morrison, Ms Castellano and companies associated with them granted 180 Capital Finance a number of securities in order for Mr Morrison to obtain the loan of $50,000.
12 Lubern is the registered proprietor of 62 Buchanan Road, Bunbartha in the Goulburn Valley, from which a dairy farm of approximately 200 acres capable of milking 180 to 200 cows is operated.
13 In April 2008, Lubern granted a mortgage to 180 Capital Finance in respect of 62 Buchanan Road, Bunbartha.
14 Lubern and Yanadale granted fixed and floating charges over their assets to 180 Capital Finance.
15 Mr Morrison and Ms Castellano are the registered proprietors of 60 Buchanan Road, Bunbartha from which the dairy farm is apparently also conducted.
16 In April 2008, Mr Morrison and Ms Castellano granted a mortgage in favour of 180 Capital Finance in respect of 60 Buchanan Road, Bunbartha.
17 Mr Morrison and Ms Castellano are also the registered proprietors of a residential property at Point Cook. In April 2008, they also granted a mortgage over that property to 180 Capital Finance. That mortgage is not registered.
18 Both properties in Bunbartha were mortgaged to Banksia Securities Pty Ltd as first mortgagee at a variable interest rate, which was 11 per cent per annum at the time of trial.
19 The property at Point Cook is subject to a first mortgage to another financier.
20 In April 2008, 180 Capital Finance registered a caveat on the title of the Point Cook property.
21 In April 2008, Mr Morrison, Lubern and Ms Castellano signed a Deed of Guarantee and Indemnity of Mr Morrison’s debt in favour of 180 Capital Finance. At about the same time, Yanadale also signed a similar Deed of Guarantee and Indemnity.
22 Ms Castellano ceased being a director of Lubern on 20 June 2006. She and Mr Morrison had been co-directors of Yanadale. Ms Castellano ceased being a director of Yanadale on 25 January 2008.
23 Yanandale’s principal purpose is to provide Mr Morrison’s project and construction management consultancy services to industry, particularly to the resources industry.
24 I am satisfied on the basis of Mr Morrison’s evidence that each of the security instruments referred to above was executed by him, Lubern, Yanadale or Ms Castellano, as the case may be.
25 Mr Morrison, Lubern and Yanadale rely on a number of defences to the counterclaim, two of which were heard as preliminary issues.[3] They were, first, whether the interest rate under the loan was a penalty. Secondly, whether the interest rate payable under the Loan Agreement should not be enforced because of unconscionable conduct on the part of 180 Capital Finance.
[3] Reasons for determining these issues as preliminary issues were given in a ruling of 28 July 2011
26 They also allege that the rate of interest on monies should be calculated at the rate of 12 per cent per annum. This defence was referred to at trial as “the applicable interest rate defence”. There were other defences relied on concerning the calculation of the debt, which it is unnecessary to detail at this point.
27 Ms Castellano was separately represented. In essence, her defence to 180 Capital Finance’s counterclaim raises similar issues, but also relies on separate and additional defences invoking the principles in Yerkey v Jones[4] and, secondly, alleging a material alteration of the unregistered mortgage of the Point Cook property after it was executed, relying on the rule in Pigot’s Case.[5] Leave was given for Ms Castellano to rely on these defences during the trial. The late reliance on these defences was a reason for determining the issues previously identified as preliminary issues as otherwise the hearing would have required adjournment. These additional defences have yet to be heard.
[4] (1939) 63 CLR 649
[5] (1614) 77 ER 1177
28 Mr Morrison and Ms Castellano had previously lived in a de facto relationship.
The Entry into the Loan Facility Agreement
29 As stated, Mr Morrison is a construction manager with experience of business and contractual documents. He works on significant projects in Australia and internationally. He also, through Lubern, conducts the dairy farm at 60 and 62 Buchanan Road, Bunbartha.
30 In 2005, Lubern was placed into voluntary administration subject to a Deed of Administration owing about $195,000. The principal creditor was the Australian Taxation Office. The final payment under the Deed was due in 2008.
31 In 2007 and 2008, the dairy business had been adversely affected by the drought and Mr Morrison was using a considerable proportion of his contracting income to support it.
32 In 2008, Mr Morrison had a number of financial objectives. He was leasing the dairy herd and was due to make the final payment to purchase it. He wanted to restructure the mortgages at 60 and 62 Buchanan Road. He needed to obtain finance for at least part of the amount due under the Deed of Administration.
33 He purchased the dairy herd so that it would be an unencumbered asset against which he could obtain finance to make the final payment due under the Deed of Administration.
34 Mr Morrison unsuccessfully sought additional finance from banks, Banksia and finance brokers. He had approached Union Fidelity Capital Funding, a finance company, unsuccessfully.
35 In January 2008, Mr Morrison contacted Mr Jason Onley, the head of sales at the 180 Group Capital Finance Group, after having read their pamphlet. He made an electronic application for finance online.[6] He recorded in the application that he was seeking “$200,000 or total refinance” for a term of two years and that he was under a written contract to a mining company via Yanadale, earning $32,000 per month for the next twelve months.
[6] Court Book (“CB”) 462
36 Mr Morrison’s evidence was that Mr Onley offered him $50,000 on a short- term basis and indicated that he would also assist him in arranging more suitable long-term finance.[7] He would also assist in clearing his and Lubern’s debt records. He understood that Mr Onley was going to assist him to arrange further financing.
[7] T 49-50
37 Mr Morrison never met Mr Onley personally; they communicated by email and telephone. Some of the emails were copied to Mr T Sofra, who is Mr Morrison’s solicitor.
38 For part of the time Mr Morrison was absent working on construction sites.
39 On 4 February 2008, Mr Morrison appointed 180 Corporate Finance for the next 185 days as consultant to him in matters which included:
“…
- Assisting him in making recommendations in relation to financial
matters that directly relate to Lubern.
- Assisting him and making recommendations in relation to creditor
negotiations that directly relate to Lubern or Mr Morrison.
- Assisting me/us and making recommendations in arranging bridging finance, factoring finance or other forms of finance to assist managing cash flow considerations for the Company and /or newly created entity and/ or the Clients.” 40 The Engagement Terms contained acknowledgements by Mr Morrison, including that:
“(a)
the Engagement Services may not be successful in averting any orders for the winding up of the Company given that any one creditor maybe responsible for that eventuality.
(b) it is the finance company, in its absolute discretion, that ultimately decides whether to provide a pre-approval for bridging finance, factoring finance or other forms of finance for the Company and/or a newly created entity and/or the Clients and on what terms.”
41 Mr Morrison paid 180 Capital Finance $11,000 for the services to be provided under the Engagement Terms. Mr Onley gave evidence that these services included assisting Mr Morrison with issues arising under the Deed of Administration, such as its variation, arranging the adjournment of creditors’ meetings, the payment of the administrator and arranging assistance for Mr Morrison with legal matters and court-related expenses. He had dealings with Mr Sofra, who was Mr Morrison’s lawyer/accountant.
42 On 19 February 2008, Mr Onley, in an email to Mr Morrison, stated:
“This is the major hurdle as we need an exit for the loan to provide the
funds. your home; Refinance of the cows; possible sale of water rights (from the valuers I have spoken with the price seems to vary a lot) let me know how you went with a letter of intent for someone to buy your water allocation/rights.”
43 Mr Morrison’s evidence was that he did not know what arrangements Mr Onley made to obtain extended finance for him.
44 Mr Onley gave more detailed evidence of the events leading up to the making of the Loan Facility Agreement. He stated that finance was to be provided on a bridging basis for 165 days until refinance could be achieved with another lender.[8] The loan provided short-term finance. Mr Morrison needed to understand and agree to proceed with refinance so as to provide an exit strategy from the loan.
[8] T 204
45 180 Capital Finance received valuations of the properties in which Mr Morrison had an interest. In February 2008, the Point Cook property was valued at $450,000. In April 2008, the 110-hectare property at 60-62 Buchanan Road, Bunbartha was valued at $950,000.
46 Mr Morrison informed Mr Onley that the dairy herd was valued at $250,000, but that value was not included in the asset valuation.[9]
[9] T 238 and CB 979
47 180 Capital Finance’s records show a net equity in the assets to which Mr Morrison had access, as $456,465 based on the real property assets.
48 Mr Onley gave evidence that he initially assessed Mr Morrison’s loan application as high risk because of the nature of the property available as security and his ability to service the loan. A property in regional Victoria was a high risk asset, because of the greater difficulty in selling it.[10] Another factor relevant to risk was that Lubern was under administration.[11]
[10] T 197
[11] T 198
49 Mr Onley proceeded to negotiate an adjournment of the final payment under the Deed of Administration to prevent Lubern being placed into liquidation for failure to make the final Deed payment of $190,000.
50 Mr Onley’s evidence was that Mr Morrison and Mr Sofra requested him to raise the whole of the final payment owing under the Deed of Administration. Mr Morrison told him that he was earning $30,000 a month, that he would pay $10,000 a month until refinance was available, that he had a buyer for the water rights and the dairy herd was estimated to be worth $250,000.
51 Mr Onley spoke to possible lenders in late March and the first half of April 2008, including specialists in rural property finance, without success. He informed Mr Morrison that his enquiries regarding obtaining finance for Lubern were being refused because lenders would not provide funds while Lubern was subject to a Deed of Administration. There was also a problem of a Caveat lodged by Union Fidelity in respect of fees owing to it. No incoming lender liked to sit behind a caveat.
52 180 Capital Finance made an initial loan offer of $50,000 to Mr Morrison. It then apparently withdrew that offer and required, as a condition of the loan, that guarantees be provided.[12]
[12] T 208
53 The loan offers included the following provision in respect of the interest rate:
“Interest Rate on the Principal Advance
For so long as there is no default under the Loan Facility, the interest rate on the Principal Advance will be 4% per month (‘Interest Rate’). In the event of default under the Facility Agreement the interest rate is and shall remain 8% per month (‘Specified Rate’) until all amounts due under the Loan Facility Agreement are repaid. All interest will be payable on the Repayment Date. The Financier may elect to capitalise any interest as and when he sees fit.”
54 Mr Onley gave evidence that he spoke to the guarantors. Ms Castellano had received legal advice that she was not to sign the documentation, that she had bailed Mr Morrison out of problems before and was not prepared to assist in this process. However she did sign the Guarantee and Indemnity.
55 The guarantors signed declarations that they had obtained independent financial and legal advice.
56 The loan of $50,000 was used to provide part of the final amount due under the Deed of Administration.[13] Mr Morrison received financial support from his family and friends to provide the remainder of the payment, which was made in May 2008.
[13] T 212
57 Thereafter Mr Onley contacted finance brokers informing them that the Deed had been paid out in attempts to obtain further finance for Mr Morrison. A number of lenders and brokers were approached. He told Mr Morrison, Mr Sofra and Ms Castellano of the responses that he received. He discussed the exit arrangement from the loan with Mr Morrison, Ms Castellano and Mr Sofra.[14] He told them that they needed to consider the option of refinancing the loan and the sale or refinance of assets, being cows and water rights[15].
[14] T 214
[15] T 216
58 Mr Onley continued to have discussions with Mr Morrison after the term of the loan expired.[16] He told him that the entry of a judgement against him had prevented the Commonwealth Bank from providing finance.[17]
[16] T 217
[17] T 217 cf the response of La Trobe Financial of 25 February 2008, CB 122
59 Eventually, in November 2008, Mr Onley, through National Farm Finance Australasia, arranged an “indicative loan approval” from Manion Home Loans of $617,000 for one year at a Loan to Value Ratio of 65 per cent with an indicative interest rate of 11 per cent per annum. A service fee of $12,340 was required. Mr Morrison could not pay this fee. He was also concerned with the realities of the value of 65 per cent.[18]
[18] T 62, 64
60 Mr Onley told Mr Morrison that if the loan was not repaid, the default interest rate would apply. He told Mr Morrison that it was in his best interests to take the Manion offer and proceed to refinance the Loan Facility.[19] Mr Morrison initially told him that he had accepted the offer, was proceeding to sign documentation and that he had sent the documents.[20] This did not occur.
[19] T 218
[20] T 220
61 In February 2009, 180 Capital Finance sent letters of demand to Mr Morrison and the guarantors. Mr Morrison telephoned him and said that he would be making a payment. He also said that the interest rate was high. No payment was made.
62 Mr Onley ceased his attempts to obtain finance for Lubern and Mr Morrison in December 2008.
63 On 23 April 2009, 180 Capital Finance appointed a Receiver and Manager over the assets of Yanadale and Lubern pursuant to the charges that had been granted. Following proceedings in the Supreme Court, a Deed of Settlement was executed on 5 June 2009 and Mr Morrison paid $50,000 to 180 Capital Finance, funded partly from the sale of dairy cattle.
64 No other payments were made other than a valuation fee of $1,250 in February or March 2009.
65 On 8 May 2009, 180 Capital Finance terminated the appointment of the Receiver.
Was the Interest Rate payable under the Loan a Penalty?
66 Clause 5 of the Loan Facility Agreement provides:
“5 Interest and fees
5.1 Payment and rate
(a) The Borrower must pay interest on:
(i) the Advance; and (ii) the Overdue Money. (b)
The Interest Rate on the Advance until it becomes due and payable will be at the Specified Rate but if:
(i)
an interest payment calculated at the Interest Rate is received by the Financier on the Repayment Date; and
(ii)
no Event of Default has occurred at or before the receipt of such interest payment by the Financier,
the Financier will accept that payment for the period to which it relates instead of an Interest payment calculated at the Specified Rate.
(c) The Interest Rate on the Advance or the Outstanding Principal, after any such money becomes due and payable and remains unpaid, and the Overdue Money will be the Specified Rate.”
67 In Item 5 of Schedule 1, the Interest Rate is specified at 4 per cent per month. The “Specified Rate” means the Interest Rate plus 4 per cent per month (definition in clause 1.1 ).
68 The term “Advance” in clause 5.1 is defined to mean the “Principal Advance and/or the Deemed Advance”. The term “Deemed Advance” is defined to mean the Establishment Fee, which was $3,500: see Schedule 1, Item 7.
69 Clause 5.2(a) provides that interest accrues from day to day and Clause 5.3 provides for the capitalisation of interest.
70 Clause 5.2 (d) provides that interest:
“… in the case of the Overdue Money, be computed from and including the day when the Overdue Money becomes a debt due and payable to the Financier by the Borrower up to but excluding the date of actual payment of that money.”
71 Clause 6 contains the obligation to repay. Clause 11.1 provides for payment of the legal costs and expenses on a full indemnity basis.
72 It is unnecessary to set out any terms from the Guarantees and Indemnities signed by Mr Morrison, Lubern, Yanadale and Ms Castellano as no separate issues were raised about them.
73 In O’Dea v Allstates Leasing System (WA) Pty Ltd,[21] Gibbs CJ stated that a provision in a mortgage that interest was payable at the higher rate of interest, although if interest was paid punctually the interest would be reduced to the lower rate, did not constitute a penalty: see also Ringrow Pty Ltd v BP Australia Pty Ltd.[22]
[21] (1983) 152 CLR 359 at 366-7
[22] (2005) 224 CLR 656
74 In Kowalczuk v Accom Finance Pty Ltd,[23] Campbell JA, with whose judgment Hodgson JA and McColl JA agreed, stated that an interest rate is not a penalty:
“… If the mortgage is drafted so that the borrower agrees to pay a particular rate of interest, but the lender agrees to accept a lower rate of interest in full satisfaction of the borrower’s obligation to pay interest at that particular rate provided that the lower rate of interest is paid timeously (and, sometimes, provided that there is no breach of any other provision of the mortgage) that provision is not one that states the consequences of a breach of contract, and hence the law of penalties does not apply to it.”[24]
[23] (2008) 77 NSWLR 205
[24] (supra) at [162] and Interstar Wholesale Finance Pty Ltd & Anor v Integral Home Loans Pty Ltd (2008) 257 ALR 292
75 In Ange v First East Auction Holdings Pty Ltd, Sifris AJA, with whose judgment Neave JA and Tate JA agreed, stated:
“The current state of the law in Australia is that a term of the contract that imposes an obligation on a party to pay money on the happening of a specified event which is not a breach of contract does not constitute a penalty. Primarily, this is because it is not the role of the court to relieve a party from a bad bargain.”[25]
[25] [2011] VSCA 335 at [91]
76 It is the operation of the impugned term as a matter of substance that is important. As Deane J stated in ESANDA Finance Corporation Ltd v Plessnig:[26]
“… Nor will … [such provisions] impose a penalty merely because they operate to withdraw an incentive for observance by the defaulting party of the terms of the agreement. Such provisions will not be penal unless their operation is, as a matter of substance, to impose some additional or different financial obligation or burden upon the defaulting party in the nature of a disincentive or punishment for breach.” [27]
[26] (1989) 166 CLR 131
[27] (supra) at p153
77 Clause 5.3 of the Loan Agreement does not, on existing authority, create a penalty. The effect of it is that 180 Capital Finance agrees to accept the lower interest rate if it is paid on time.
Was the Enforcement of the Interest Rate Unconscionable Conduct?
78 Section 51AC(1)(a) of the Trade Practices Act 1974 states:
“A corporation must not, in trade or commerce, in connection with:
(a)
the supply or possible supply of goods or services to a person (other than a listed public company); or
(b) … engage in conduct that is, in all the circumstances, unconscionable.”
79 180 Capital Finance’s lending of money to Mr Morrison was the supply of services[28] in trade or commerce, because the loan was provided for the purposes of carrying on the dairy business. The requirement that Mr Morrison sign the Loan Facility Agreement containing the higher interest rate was a requirement to comply with conditions in connection with the supply of services, i.e. the provision of the loan.
[28] Defined in s.4(1)
80 Section 51AC(3) of the Act deals with the determination of whether the supplier has engaged in unconscionable conduct. Mr Morrison relied on s.51AC(3)(b) and (e). Those provisions, combined with the opening words of s.51AC(3), state:
(3)
Without in any way limiting the matters to which the court may have regard for the purposes of determining whether a corporation or a person (the supplier) has contravened subsection (1) or (2) in connection with the supply or possible supply of goods or services to a person or corporation (the business consumer), the court may have regard to:
(b)
whether, as a result of conduct engaged in by the supplier, the business consumer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier;
…
(e)
the amount for which, and the circumstances under which, the business consumer could have acquired identical or equivalent goods or services from a person other than the supplier.”
81 In final submissions, the plaintiffs sought to add to their defence to the counterclaim reliance on paragraphs (c) and (d) of s.51AC(3) to allege in substance that 180 Capital Finance must have known that Mr Morrison would be unable to repay that loan. I refused leave for that amendment to be made.[29]
[29] Ruling of 3 August 2008.
82 Unconscionability can be a ground for striking down an agreed default provision even if it is not a penalty.
83 180 Capital Finance submitted that for conduct to be unconscionable it must involve behaviour which amounts to more than reliance by a party upon its existing contractual entitlements. Absent the existence of some special disadvantage on the part of one party to a contract, fraud or mistake, s.51AC cannot operate to abrogate the rights of a party to rely upon the terms of an otherwise enforceable contract or agreement.
84 180 Capital relied on the decision of the Full Court of the Federal Court in Hurley v McDonald’s Australia Ltd[30] for the proposition that:
“For conduct to be regarded as unconscionable, serious misconduct or something clearly unfair or unreasonable, must be demonstrated - Cameron v Qantas Airways Ltd … . Whatever ‘unconscionable’ means in s51AB and s51AC, the term carries the meaning given by the Shorter Oxford English Dictionary, namely, actions showing no regard for conscience, or that are irreconcilable with what is right or reasonable - Qantas Airways Ltd v Cameron …. The various synonyms used in relation to the term ‘unconscionable’ import a pejorative moral judgment … .” [31]
[30] [1999] FCA 1728
[31] (supra) at [22]
85 180 Capital Finance also relied on the following passage from Hurley’s Case:
“There is no allegation of any circumstance that renders reliance upon the terms of the contracts unconscionable. For example, it might be that, having regard to particular circumstances it would be unconscionable for one party to insist upon the strict enforcement of the terms of a contract. One such circumstance might be that an obligation under a contract arises as a result of a mistake by one party. The mistake is an additional circumstance that might render strict reliance upon the terms of the contract unconscionable. Mere reliance on the terms of a contract cannot, without something more, constitute unconscionable conduct.” [32]
[32] at [29]
86 The plaintiffs relied on a number of matters, none of which, on the evidence, establishes unconscionability.
87 The first was that the interest rate had never been explained to Mr Morrison. The loan offer suggested that the interest rate was 4 per cent but had been subtly changed in the final loan document. However Mr Morrison made declarations that included acknowledgments about the effect of the interest rate.[33] He gave evidence that he did not recall whether there was a specific discussion about the interest rate. He understood it to be 4 per cent per month.[34] I do not consider that this argument establishes unconscionability. Both the original loan documents and the Loan Agreement refer to 8 per cent. Mr Morrison had access to legal advice if he required it.
[33] See CB 612 -613
[34] T 60-61
88 Secondly, the plaintiffs relied on the contention that the interest rate was unconscionable, because the loan offers were ambiguous and suggested a rate of 4 per cent. I do not accept that they had the ambiguity alleged. In any event, the important consideration was whether the loan agreement stated the interest rate. It did so.
89 Thirdly, the plaintiffs relied on what they contended was the obligation of 180 Capital to refinance the loan. They argued that the Court should find that it was part of the agreement, or understanding, between the parties that 180 Capital Finance would take the lead role in finding refinance. The parties envisaged that repayment of the loan would occur through refinancing. This was Mr Morrison’s preferred option because he did not want to sell assets.
90 The plaintiffs have not established that 180 Capital Finance was obliged to obtain refinance. Clause 4.3 of the Loan Agreement clearly provided:
“Obligation to secure refinance:
The Borrower:
(a) acknowledges that the Facility is only provided to the Borrower on the condition that the Borrower has good prospects for refinancing the Facility on or before the Repayment Date; and (b) undertakes to take all reasonably necessary steps to procure the refinancing of the Facility on or before the Repayment Date”.
91 The Engagement Terms did not increase 180 Capital Finance’s obligations in this respect.
92 In any event, the evidence leads to the conclusion that 180 Capital Finance did attempt to obtain refinance for Mr Morrison. It did so eventually in obtaining at least indirectly, the Manion Home Loans’ offer, but Mr Morrison was unable to pay the service fee.
93 The plaintiffs’ case ultimately depends upon the consideration in s.51AC(3)(b), i.e. whether the condition providing for the interest rate of 96 per cent per annum was not reasonably necessary for the protection of 180 Capital Finance’s legitimate interests.
94 The evidence of Mr Andrew Roscoe, a witness called by the plaintiffs, was relevant to this issue. Mr Roscoe is a Chartered Accountant who, in the course of his practice, reviews finance applications and finance documents for primary lenders. He has connections to several broking firms and secondary lenders that are used for clients. He acts as the business adviser and tax agent for several brokers. He advises clients on loan offers, including in respect of farming properties.
95 Mr Roscoe gave evidence about distressed or impaired borrowers who struggled to get finance from a primary lender, being one of the major banks. He had knowledge of the interest rates charged to impaired borrowers in April 2008. His evidence was that at that time interest rates to impaired borrowers ranged from 12 to 15 per cent per annum, being an equipment finance rate where there was security over the asset to 30 per cent per annum. These were compounding daily default rates. He had obtained finance for farmers within this range of interest rates.[35]
[35] T 153-154
96 The “indicative loan approval” from Manion Home Loans, which contained an interest rate of 11 per cent per annum, is also of relevance.
97 180 Capital Finance argued that it was never intended that the loan extend beyond 165 days and that it was envisaged that refinancing of the bridging loan would occur. While that may have been the intention, the eventuality of default was provided for by including the higher interest rate of 96 per cent per annum.
98 A similar argument to that put by the plaintiffs was accepted by the New South Wales Court of Appeal in Kowalczuk v Accom Finance Pty Ltd.[36] In that case, a very high default interest rate was held to be unjust under the provisions of the Contracts Review Act 1980 (NSW). Campbell JA, with whom the other members of the Court agreed, considered that the high interest rate was also unconscionable under s.43 of the Fair Trading Act (NSW), which was the equivalent of s.51AC of the Act. Campbell JA stated:
“Unconscionability, for the purpose of s 43 is a characteristic that the conduct of Accom must have before there is a breach. At least in the facts of the present case, it seems to me that unconscionability within the meaning of s 43 is somewhat harder to establish than is injustice within the meaning of the Contracts Review Act. However, in my view the reasoning that leads to the conclusion that the provisions of the mortgages concerning default interest and compounding are unjust within the meaning of the Contracts Review Act also leads to the conclusion that those provisions are unconscionable within the meaning of the Fair Trading Act. … .”
[36] (supra) at [216]
99 The reasons why Campbell JA considered that the default interest rate was unjust within the meaning of the Contracts Review Act appear in the following passages:
“The traditional law of penalties had a sound basis of justice in taking the view that a contractual provision that imposed an extra obligation when there was a default was inherently unjust if the extra obligation imposed was not a genuine attempt to estimate the loss that flowed as a consequence of the default. In my view, even if as a matter of drafting a mortgage that imposes higher and lower rates of interest is able to avoid the application of the law concerning penalties, by making the lower rate a bonus for compliance rather than a penalty for breach, a mortgage so drafted can still be looked at for its substantial commercial effect when one is considering whether it is unjust within the meaning of the Contracts Review Act.
It is beyond belief that the difference between the lower and the higher rates, for these mortgages, was anything like a genuine attempt to establish the loss that would flow from the occurrence of a default. That is particularly so when the mortgage included provisions whose obvious objective was to provide a separate basis upon which every cent of extra expense incurred as a consequence of default could be recovered.
It does not follow from the view that I am expressing that in no circumstance is any difference between a higher and lower rate in a mortgage justified, when the higher rate becomes payable upon default. I have some doubt whether such a provision could coexist with provisions like those in the present Memorandum, that made every cent of the extra expense incurred as a consequence of a default specifically recoverable. If there were no provision that made extra expense incurred in consequence of a default recoverable, or provisions that made only certain specific expenses incurred as a consequence of a default recoverable without covering the entire field of loss suffered in consequence of a default, there would often, it seems to me, be room consistently with the Contracts Review Act for a provision that allowed a higher rate of interest to be paid upon default, to the extent that it protected a legitimate interest of the lender.”[37]
[37] (supra) at [172]-[174]
100 In Kowalczuk’s Case, three mortgages were in issue. The first provided for a lower rate of interest of 48 per cent and a higher rate of 96 per cent, the second and third provided for a lower rate of 60 per cent and a higher rate of 120 per cent.
101 The plaintiffs have established that the requirement that Mr Morrison agree to the insertion of the higher default interest rate in the Loan Facility Agreement was unconscionable within the meaning of s 51AB of the Trade Practices Act. The plaintiffs have established that this requirement was not reasonably necessary for the protection of 180 Capital Finance’s legitimate interests for the following reasons.
102 First, no attempt was made by 180 Capital Finance to establish what connection the higher rate bore to any loss it Finance might have reasonably expected when it entered the Loan Facility Agreement. To apply the approach Campbell JA in Kowalczuk’s Case, it is difficult to accept that the doubling of the lower interest rate on default was necessary to protect the legitimate interests of 180 Capital Finance. While bridging finance may often attract a higher interest rate, it the evidence suggests that it did not justify the 100 per cent increase between the lower and higher rates in this loan. Nor do the matters identified in Mr Onley’s evidence of the special risks applying to Mr Morrison.
103 Second, there was no substantial risk to the eventual recovery of the loan, because it was secured by property in which there was equity of $456,000.
104 Thirdly, Mr Roscoe’s evidence supports the conclusion that in the eyes of other lenders to impaired borrowers, in April 2008, a much lower interest rate was sufficient protection of their legitimate interests. The Manion Home Loans’ offer also supports that conclusion.
105 Fourthly, a major obstacle preventing Mr Morrison from obtaining finance, being the existence of the Deed of Administration, was eliminated by the loan of the $50,000, which was used to enable the final payment due under the Deed to be made. Once arrangements were in place for that final payment to be made, the evidence that Mr Morrison had previously experienced great difficulty obtaining finance had less relevance in determining what interest rate was reasonably required to protect the legitimate interests of 180 Capital Finance.
106 For those reasons, the inclusion of and reliance on the higher interest rate of 96 per cent was “irreconcilable with what is right or reasonable”, to use the words quoted in Hurley’s Case and unconscionable conduct within the meaning of s.51AB of the Act.
107 I have concentrated on the plaintiffs’ case in its reliance on s.51AC(3)(b). That paragraph contains one of the matters that the Court can take into account. However, I also consider that at the broader level, involving the application of the definitions of unconscionability given in Hurley’s Case, that 180 Capital Finance’s conduct in requiring the higher interest rate in the Loan Facility Agreement and, relying on it, was unconscionable conduct within s.51AB of the Trade Practices Act.
108 It is not material to the determination of the plaintiffs’ argument relying on s51AC(3)(b) that Mr Morrison had experience with business documents in project management and perhaps in dairy farming. Rather the focus is directed to determining whether the plaintiffs were required to comply with conditions that were not reasonably necessary for the protection of the legitimate interest of the supplier.
Remedies
109 The plaintiffs have suffered, or are likely to suffer loss or damage because of the contravention by 180 Capital Finance of s.51AB, because of their liability to pay interest calculated under the higher interest rate. Therefore, under s.87(1) of the Act:
“The Court may … make such order or orders as it thinks appropriate against the person who engaged in the conduct … (including all or any of the orders mentioned in subsection (2) of this section) if the Court considers that the order or orders will compensate the first-mentioned person in whole or in part for the loss or damage or will prevent or reduce the loss or damage.”
110 The orders of most relevance in s.87(2) are those contained in (a) to (ba), which enable the Court to declare the whole or part of an agreement void, vary the contract or arrangement or make an order refusing to enforce any or all of the provisions of the contract. Such orders would prevent or reduce the plaintiffs’ loss or damage.
111 180 Capital Finance submitted that in determining whether to make an order under s.87(1)(d), the Court could have regard to the conduct of the parties since the contravention. It described the relief sought as amounting to “remedial overkill”. It submitted that the Court should have regard to the causal link between the unconscionable conduct and the loss and damage, whether the plaintiffs had been the author of their own misfortune and whether the orders proposed could mould a just outcome.[38]
[38] Citing Akron Securities Ltd v Iliffe (1997) 41 NSWLR 353
112 In the alternative, 180 Capital Finance submitted that, if the plaintiffs’ claim of unconscionable conduct succeeded and the Court was considering making orders under s.87(1), that the Court should vary the default interest rate to 4 per cent. In Kowalczuk’s Case, Campbell JA expressed reservations about that course, but ultimately did not have to decide the issue, because the Court was given an undertaking by the mortgagee that it would not enforce the mortgage or guarantee for more than the lower rate of interest fixed by mortgage at simple interest, plus any costs it was entitled to pursuant to that mortgage. The effect of this undertaking meant that there would be no liability under the other mortgages.[39]
[39] At [155].
113 The plaintiffs submitted that the default provision of the loan contract should be declared void ab initio.
114 I am persuaded on the facts of this case that, in the exercise of the powers in s.87(1) of the Act, an appropriate order to prevent loss or damage to the plaintiffs is to vary the Loan Facility Agreement to delete the requirement to pay interest at the specified or higher rate.
115 I will hear the parties as to the form that variation should take.
116 The course I propose to adopt will affect the sum that 180 Capital Finance can claim from the plaintiffs and from Ms Castellano. It will affect the amounts due under the Guarantees, Indemnities and Mortgages.
117 I do not consider that I should determine at this point the date from which interest should be paid or, how to determine the amount of costs, that Mr Morrison, or the other plaintiffs, should pay 180 Capital Finance.
The Applicable Interest Rate Argument
118 I will deal briefly with one other argument relied on by the plaintiffs, although not developed in detail. It was that the mortgages and charges contained an applicable interest rate of 12 per cent per annum which should apply to the debt claimed by 180 Capital Finance.
119 I accept 180 Capital Finance’s submission that under the terms of those securities, the Loan Agreement Rate still applies. That is the effect of the opening words of the clauses in the security documents dealing with rates: see, for example, clause 7.2(a) of the Charge.[40]
[40] CB 1176
Conclusion
120 I will fix a date for the determination of the remaining issues in the proceeding. 180 Capital Finance should file and serve a recalculated Statement of Account seven days prior to that date.
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