Riz v Perpetual Trustee Australia Ltd

[2007] NSWSC 1153

Reported Decision: (2008) NSW Conv R 56-198
(2007) ANZ Conv R 615

New South Wales

Supreme Court

CITATION:	Riz & 1 or v Perpetual Trustee Australia Ltd & 4 ors [2007] NSWSC 1153
HEARING DATE(S):	24 July - 17 August 2006
JUDGMENT DATE :	18 October 2007
JURISDICTION:	Common Law Division
JUDGMENT OF:	Brereton J
DECISION:	Borrowers’ claim to avoid or vary mortgage and loan contract under Contracts Review Act and for unconscionability dismissed. Judgment that borrowers pay lender outstanding balance of loan and for possession. Judgment that solicitors pay borrowers damages for breach of professional duty.
CATCHWORDS:	CONTRACTS – Unjust contracts – Mortgage and loan contract – Relevant circumstances – Where money borrowed for improvident investment – Purpose of the loan – where lender aware that loan for purposes of investment but not of particular investment proposed nor of improvidence – where false information provided to lender by borrowers’ agent – where lender considered and was satisfied that loan was serviceable – where unfair tactics used against borrower by promoters of investment scheme but not by or on behalf of lender – whether lender engaged in “asset lending” – whether unjust that lender failed to detect false information supplied to it – NEGLIGENCE – professional liability – solicitors – independent advice – where solicitor retained to advise on mortgage and loan contract – where solicitor not retained to provide advice on proposed investment – where client about to enter into improvident transaction which ought to have been apparent to solicitor – whether solicitor had or ought to have had knowledge of extraordinary risk associated with investment – where investment subsequently failed – whether solicitor liable for failure to advise on investment – whether suggestion that solicitor should obtain independent legal and financial advice sufficient
LEGISLATION CITED:	(NSW) Contracts Review Act 1980, ss 7 & 9
CASES CITED:	Antonovic v Volker (1986) 7 NSWLR 151 Astley v Austrust Ltd (1999) 197 CLR 1 Beneficial Finance Corporation Ltd v Karavas (1991) 23 NSWLR 256 Bester v Perpetual Trustee Co Ltd [1970] 3 NSWR 30 Brusewitz v Brown [1923] NZLR 1106 Chandran v Narayan [2006] NSWSC 104 Citicorp Australia Ltd v O’Brien (1996) 40 NSWLR 398 Credit Lyonnais Bank Nederland NV v Burch [1997] 1 All ER 144 Curnuck v Nitschke [2001] NSWCA 176 David v David [2007] NSWSC 855 Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413 Hawkins v Clayton (1988) 164 CLR 539 Heydon v NRMA Ltd (2000) 51 NSWLR 1 Hogan v Howard Finance Ltd (1987) ASC §55-594 Ibrahim v Pham [2007] NSWCA 215 Neuschul v Mellish & Harkavy (1967) 111 SJ 399 Nguyen v Taylor (1992) 27 NSWLR 48 Perpetual Trustee Co of New South Wales Ltd v Bridgewater [1936] 3 All ER 501 Perpetual Trustee Company Ltd v Khoshaba [2006] NSWCA 41 Powell v Powell [1900] 1 Ch 243 Royal Bank of Scotland v Etridge (No 2) [2001] 4 All ER 449 St Clair v Petricevic (1988) ASC 55-688 St George Bank Ltd v Trimarchi [2004] NSWCA 120 Stivactas v Michaletos (No 2) (NSWCA, 31 August 1993, unreported, BC9301874) Teachers Health Investments Pty Ltd v Wynne (1996) NSW Conv R 55-785 Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642 West v AGC (Advances) Ltd (1986) 5 NSWLR 610 Text: Meagher, Gummow & Lehane, Equity – Doctrines and Remedies, 4th edn
PARTIES:	Omar Riz (first plaintiff/first cross defendant) Amal Riz (second plaintiff/second cross defendant) Perpetual Trustee Australia Limited (first defendant/cross claimant) Direct Mortgage Solutions Pty Limited (second defendant) Manuelpillia Paul Dominic (third defendant) Suzy David (fourth defendant) Fred David (fifth defendant)
FILE NUMBER(S):	SC 20591/02
COUNSEL:	C J Leggat SC w B J Saunders (plaintiffs/cross defendants) J B Simpkins SC (first defendant/cross claimant & second defendant) R J H Darke SC w M C L Dicker (third - fifth defendants)
SOLICITORS:	Legal Aid Commission of NSW (plaintiffs) Gadens Lawyers (first defendant/cross claimant & second defendant) Middletons Lawyers (third - fifth defendants)

IN THE SUPREME COURT
OF NEW SOUTH WALES
COMMON LAW DIVISION

BRERETON J

Thursday, 18 October 2007

20591/02 Omar Riz & Anor v Perpetual Trustee Australia Ltd & Ors

JUDGMENT

1 HIS HONOUR: The plaintiffs Omar and Amal Riz borrowed, on the security of their home, $275,000 from the first defendant Perpetual Trustee Australia Ltd (Perpetual), for whom the second defendant Direct Mortgage Solutions (DMS) acted as mortgage manager and introducer. They applied $111,000 to discharge an existing home loan with Citibank, and $150,000 to an investment in Karl Suleman Enterprises (KSE), which has since notoriously failed. The third, fourth and fifth defendants are partners in Dominic David Stafford (DDS), a firm of solicitors whose employed solicitor Ms Sabrina Jajoo acted for Mr and Mrs Riz in connection with the loan. Mr and Mrs Riz claim relief under the (NSW) Contracts Review Act 1980 avoiding the loan and mortgage to the extent that it exceeds the amount applied to refinance the Citibank loan, contending that the loan contract and mortgage between them and Perpetual is an unjust contract within the meaning of the Contracts Review Act. They also claim damages against DDS, for breach of fiduciary duty and/or negligence. Mr and Mrs Riz ultimately did not press claims for relief against DMS. Perpetual cross-claims for possession of the home and judgment for the amount outstanding. Early in the trial Perpetual sought leave to file a second cross-claim against DDS; that leave was granted but an order made for the separate determination after all other issues in the proceedings.

Background

2 Mr Riz came to Australia from Lebanon in early 1977, having married his wife in 1976; she followed in 1981. They have six children, now aged between 6 and 24. Their first language is Arabic, which they speak, but in which they are illiterate. On any view their English is poor, Mrs Riz’s moreso than Mr Riz’s, although she understands some words and phrases, and he can speak basic English.

3 It is very difficult to ascertain with precision the events which culminated in Mr and Mrs Riz borrowing from Perpetual and investing in KSE. The evidence of Mr and Mrs Riz was imprecise, to the point of often being very uncertain, and sometimes contradictory, as to the sequence and detail of events. Their evidence manifested confusion and poor recollection of events, and demonstrable errors. While I accept that due allowance must be made for their linguistic difficulties and lack of commercial sophistication, I do not accept that all the deficiencies in their evidence can be so benignly explained. They appeared very guarded, particularly in respect of their financial resources and the status of their relationship (including whether or not they were separated). Given the rate at which they reduced the Citibank mortgage, the circumstance that they had six children to support, the funds available to them from time to time for a deposit on their home and other expenditures, including overseas travel, I am confident that they must have had sources of income that they have not disclosed, and which would have disqualified them from unemployment benefits and required lodgement of tax returns. In my view their evidence is strongly coloured by their perception that they have been let down by many on whom they relied – including those who solicited their investment on behalf of KSE, and Ms Jajoo. They were determined to attribute as much responsibility for their predicament as they could to Ms Jajoo, and this affected the evidence of their son Mohammed also; yet in some respects at least they were demonstrably incorrect in this endeavour. Mohammed was determined to implicate the solicitors in everything that his father had done, including in matters which it is highly improbable if not impossible that DDS had any involvement; in this respect his evidence probably reflects what Mohammed was told in 2004 and subsequently, in connection with the preparation of his affidavit, as distinct from what he recalls of the events of 2001.

4 Moreover, Mr and Mrs Riz often gave evidence inconsistent with their earlier affidavit and oral evidence on material issues, advancing first one and then another version of an event, the second version typically being more favourable to their case than the first; and not infrequently, one or other of Mr Riz, Mrs Riz and Mohammed was contradicted by another of them. Their evidence must be treated with great caution. What follows summarises what I am prepared to accept, having regard to their evidence, the documentary record, and the evidence of Ms Jajoo and Ms Hanna – which, as I will explain below, was ultimately implicitly accepted on behalf of Mr and Mrs Riz, whose submissions proceeded on that basis.

5 Neither Mr nor Mrs Riz has ever lodged a tax return in Australia. From 1989 to 1995, Mr and Mrs Riz operated a business at Newtown, called the Beirut Pizza Shop, which they owned. During that period, they applied for and obtained Centrelink Family Assistance benefits, and they continued to receive Centrelink benefits at least until the events in 2001 which give rise to these proceedings. From 1996 to 2002, Mr Riz was also employed part-time – 4 to 5 hours per day, 2 days per week – at the Kebab House.

6 In December 1999, Mr and Mrs Riz completed the purchase of their home at Condell Park for a price of $243,000, of which Mrs Riz’s mother advanced about $90,000, and they borrowed $145,000 from the St George Bank, secured on their home. The St George loan required repayments of $965 per month. At the time, Mr and Mrs Riz were in receipt of Centrelink benefits, and Mr Riz was earning about $4,000 per annum from his part-time employment. In order to obtain the loan, Mr Riz procured a letter from his employer at the Kebab House, to the effect that he was in full-time employment. Although Mr Riz, in answer to one question, apparently admitted that he knew the letter to be untrue, he subsequently asserted that he did not know what was in it, and reading his evidence as a whole and making due allowances for his language difficulties I am not persuaded that he intended any such admission. However, he plainly did accept that he had understood that he would not be able to obtain a loan unless he appeared to be in fulltime employment, and requested his employer to provide confirmation of availability of full-time employment for that purpose.

7 The St George loan was serviced in accordance with its terms, but on 3 October 2000, Mr and Mrs Riz completed a refinance with Citibank, discharging the St George loan. The amount of the Citibank facility was $160,000. Mr Riz says that he refinanced because the Citibank loan would be reduced at a quicker rate, apparently thinking that the loan would be paid off in five years, but the documentation in evidence, though not conclusive, suggests that it was a five year interest-only loan, under which the capital was repayable at the end of the five year term. At the time of this refinance, Mr and Mrs Riz remained on Centrelink benefits, and Mr Riz’s income from his part-time employment remained about $4,000 per annum. Mr Riz says that no questions were asked by the mortgage broker about his employment or income, and claims that he did not know that Citibank was unlikely to lend him money without knowing those things. A falsified letter from a purported employer for whom he had never worked and with whom he had had no contact was used in connection with the application; Mr Riz denied any knowledge of it, but his attitude to this is illustrated by the following excerpt from his evidence:

Q. And you knew from that experience [with St George] that you would need to say something about your employment?
A. When you tell someone that you are on Centrelink benefits and you are not working and your money is limited and you have children and it is not possible to get a loan, he tells you, he answers “You don’t worry about anything, I will take charge”, what would you say to him?
Q. Did you know that he was going to tell a lie about your employment?
A. No, I don’t know. I don’t know how he brings the money, how he deals with the banks or what sort of connections he has got, I don’t know.

8 The Citibank loan, on which the regular repayments commenced at in excess of $1000 per month, was serviced in accordance with its terms, and in addition significant additional reductions were made – according to Mr Riz, largely from moneys provided by relatives from overseas – so that by September 2001 the balance had been reduced to about $111,000, and the monthly repayments to the high $600s.

9 In about October 2000, a fellow employee at the Kebab House, Lilly, told Mr Riz that he should talk to Karl Suleman, that investments with Mr Suleman generated a lot of money, that many people were doing so and making a lot of money through such investments and receiving interest every fortnight. Lilly suggested that it would be to his benefit to invest with Mr Suleman; she gave at least some indication of the potential returns, and said that he could invest as much money as he wanted. When Mr Riz told her that he did not have any money to invest, Lilly told him that he could get a loan and repay it quickly. Mr Riz says that while it sounded like a good investment if he had the money, he was at first reluctant to invest and did not want to borrow to do so, and told Lilly as much. Lilly said she would bring some friends to talk to Mr Riz. Lilly also said that she wanted to meet his wife and children.

10 At some stage Mr Riz mentioned to his wife what Lilly had said, and she replied that she did not want Lilly to visit them at home. He asked Mrs Riz whether she thought that borrowing some money and investing with KSE would be a good idea (chiefly, to raise funds for renovating and extending their home); but she was categorically against the idea and did not want to discuss the proposed investment at all.

11 Lilly persisted, pursuing Mr Riz many times over the ensuing year, and saying that such an investment would provide an opportunity to buy a bigger house and have a better life. Lilly continued to tell him that all those who had invested with KSE had received a lot of interest, and some who had had only one house now had two or three houses. Mr Riz was told that Mr Suleman was very wealthy and successful. On a couple of occasions Mr Suleman himself purchased a kebab from Mr Riz at the Kebab House, and gave Mr Riz generous tips.

12 An acquaintance of Lilly, Mary Daniel, (although Mr Riz did not know her surname) attended at the Kebab House on a number of occasions, and Lilly mentioned that she had invested with KSE and was making a lot of money. Mary Daniel asked whether he wanted to invest with KSE; Mr Riz was equivocal, but ultimately replied that he would make further inquiries. Mr Riz’s evidence was that he was not convinced by Lilly directly, because Lilly did not herself invest, and wanted to enquire from people that had already invested with KSE directly.

13 Lilly took Mr Riz to see Mary Daniel at her home at Canley Vale. He did not tell Mrs Riz that he was going to see Mary Daniel; as far as he was aware she was still opposed to any investment. Mr Riz says that at this stage he was simply making enquiries and gathering information. Mary Daniel told Mr Riz that KSE was a very good investment that would enable him to improve his life and his house. She said that for each $50,000 invested there would be a return of $5,000 every fortnight. She said that Mr Suleman was good, and was paying the interest on her investment on time. It occurred to Mr Riz that the return being offered seemed too good to be true.

14 On the same day of the visit to Mary Daniel, Lilly took him to see Esher, apparently an employee of KSE, at Smithfield; Esher told him that Mr Suleman was paying him $1,200 per week for doing nothing, and that Mr Suleman was a good person and that it was good to invest with him. Mr Riz did not ask any questions about Mr Suleman’s business and his operations. Mr Riz remained unresolved. Then, in Mr Riz’s presence, Lilly asked a number of people sitting in a coffee shop, who said that they had invested with Mr Suleman and were making lots of money.

15 Mr Riz says that after seeing Mary Daniel, Esher and the others he told Lilly that he may be prepared to proceed. The uniform outcome of his enquiries had been that investors were being paid interest on time and encountering no problems. I am satisfied that after visiting Mary Daniel and Esher and speaking to the people in the coffee shop, Mr Riz was inclined to invest with Mr Suleman if he could persuade his wife to agree and if he could raise the funds to make an investment.

16 Mr Riz knew that he would have to borrow to invest, and had only about $50,000 available under his existing Citibank mortgage. He had told Lilly that he wanted to make an investment, but was unsure whether he could borrow the money. Lilly said that Mary Daniel could help, and took him to visit Mary Daniel a second time, to explore borrowing. Mr Riz says that at this stage he did not intend to borrow money, but to investigate the possibility of borrowing.

17 Mary Daniel took Lilly and Mr Riz to the office of Mary Haider and Zia George, who operated Quick Loan Services (QLS), in Harris Street, Fairfield. Mr Riz told them that he might be able to get $50,000 from Citibank, but he thought that this would involve formalities, including a requirement to provide details of his employment income, and he knew that if he told Citibank the truth about his employment and income he would not get a loan from them. He told Mary Haider that he had a casual part-time job. Mary Haider commenced to complete a form by asking questions about Mr Riz’s assets, and he was given a list of documents to provide (telephone bills, electricity bills, council rates and documents relating to his then mortgage payments). He denied that there was discussion about raising $150,000 for investment in KSE, but having regard to evidence later given by his son Mohammed I am satisfied that a loan in that amount was discussed.

18 Mr Riz returned to QLS with the documents requested by Mary Haider. On this, if not the previous, occasion, he told Mary Haider that his family was living on Centrelink benefits, and asked whether they would be affected; she said that he should open an account in the name of their son Mohammed to receive the payments from KSE (and I infer, though he did not concede it, that he understood that this was to avoid Mr and Mrs Riz’s Centrelink benefits being affected by income from the investment). Elsewhere Mr Riz sought to attribute the advice to open an account in Mohammed’s name to Ms Jajoo, but the chronology makes this impossible.

19 Up to this point, Mr Riz had been rather coy with his wife as to where he had been and what he had been doing. He had told her he had been enquiring how Mr Suleman was offering such high interest. He told her that KSE was a good investment and would enable them to make the house bigger and that in seven months the loan would be paid off. At this point, when he was taking the documents to QLS, he told her that he was going to invest, and she acquiesced in the proposal to borrow moneys and invest them with Mr Suleman.

20 Mr Riz received a telephone call from Mary Haider, who told him that the loan application papers were complete and asked him to bring his wife in to sign them. He returned to QLS a third time – this time with Mrs Riz, who remained in the car with their baby child and did not enter QLS’s office –the loan documentation was brought out to her and she signed it in the car. The documents which Mr and Mrs Riz signed on this occasion comprised a loan application form of DMS, and a “declaration form”. The dates on the loan application enable this occasion to be fixed as 8 August 2001. The loan application form was a six page document, which Mr Riz signed at the foot of the third page, and Mr and Mrs Riz signed on the fourth page (twice), the fifth page and the sixth page (twice). It stated that Mr and Mrs Riz were (and had been for four years) self-employed in the business of “blinds installation”, from which they each derived income of $38,000; Mr and Mrs Riz say they were unaware of that statement in the form and never gave anyone instructions to that effect. The application stated that the purpose of the loan was “refinance and further investment”, showing that $115,000 was to be applied to refinance, $10,000 to costs, and $150,000 for “others”, implicitly the proposed further investment. The declaration was in the following form (italics represent handwriting on the form):

DECLARATION FORM

I, We OMAR RIZ & AMAL RIZ

Of 148 EDGAR ST. BANKSTOWN

in the state of NSW

Declare and affirm that the information (personal particulars, I/D, assets & liabilities and annual tax returns) that I (we) provided

to the brokers and financiers are true and correct.

OMAR RIZ AMAL RIZ

applicant signature applicant signature

21 QLS submitted the loan application to a mortgage originator, KBL. On 13 August 2001, Mr Peter Zhao of KBL forwarded the loan application to DMS, accompanied by a body of supporting documentation, some of which (such as copy driving licences and certificates of citizenship) were plainly authentic; there were also rate notices, a statement of the mortgage account from Citibank, and a valuation of the Condell Park property apparently obtained by KBL. However, it was also accompanied by a bundle of income tax returns and financial statements for a purported partnership of Mr and Mrs Riz, and for each of them individually, for the financial years ending 1999 and 2000. The copy tax returns were unsigned by either Mr or Mrs Riz but apparently signed by a tax agent, Mark A Thompson, for whom a contact phone number was provided. The partnership returns described the main business activity as “Venetian blinds installation”, and that for the year 2000 referred in the statement of distribution to the partners’ names as being Saddi, Elia and Saddi, Nawal.

22 From the facts (1) that the occupation “blinds installation” and the income of each of Mr and Mrs Riz of $38,000 – corresponding with what appears on the tax returns – is stated in the loan application signed by Mr and Mrs Riz at QLS, in the same handwriting as the balance of the loan application, and (2) that when received by DMS from KBL, the returns (but not most other documents in the bundle faxed) bore not only the imprint of transmission from KBL (the so-called Sanctuary Windows imprint) but also another, earlier (but undesignated) imprint, I infer that the false tax returns were procured, and included in the loan application, by QLS.

23 Assessment of the loan by DMS, reflected in a loan worksheet in the DMS file, showed that – based on the combined apparent income of Mr and Mrs Riz according to the purported tax returns – while the debt service ratio was 34.7% (slightly outside the parameters for a dual income family, the standard parameters being not less than 30% for multiple income earners, or 35% for a single income earner), the serviceability test (which required a minimum of 1.25) was comfortably satisfied with a result of 1.58. On 17 August DMS issued a loan approval and sent it to KBL. KBL forwarded the approval on the same day to QLS, and QLS sent a facsimile to DDS, covering a copy of the formal loan approval and purporting to convey the instructions of Mr and Mrs Riz “to proceed with their formalities, our client has been advised to contact your esteemed office”.

24 On Sunday 19 August, Ms Jajoo telephoned Mr and Mrs Riz’ home, and spoke to their son Mohammed, identifying a number of documents which would be required and which Mr Riz said he would bring in the next two days; these included council and water rate notices and receipts evidencing payment. The documents requested were duly provided; the evidence does not reveal precisely when, but Mr and Mrs Riz paid their Council Rates in full on 20 August, and on 29 August they attended DDS where they saw Ms Hanna and executed a discharge authority addressed to Citibank in her presence.

25 On 30 August 2001, before Mr Riz had met Sabrina Jajoo, an account was opened with the St George Bank in the name of Mohammed in readiness for the investment. This refutes the persistent assertion of Mohammed and Mr Riz that it was the recommendation of Ms Jajoo that this account be opened, to avoid potential loss of Centrelink benefits for Mr and Mrs Riz if the investment were in their names; it is far more probable that (as Mr Riz first asserted) the suggestion was that of Mary Haider at QLS.

26 On 3 September 2001, Mr and Mrs Riz apparently signed requests to Citibank to provide a payout figure, but the circumstances in which they did so are not otherwise apparent.

27 On 13 September, First Title Express, who were acting for Perpetual, forwarded the loan and transaction documents to Mr Riz at his home address. On 17 September, Mohammed and then Mr Riz spoke to Ms Jajoo on the telephone, informing her of receipt of the documentation and arranging an appointment for their explanation and execution the following Friday, 21 September.

28 Mr Riz saw Ms Jajoo at DDS’ office on 21 September. Mrs Riz did not accompany him. Ms Hanna was present to interpret, but Ms Jajoo and Mr Riz conversed in English. Ms Jajoo explained that it would be necessary for Mrs Riz to attend, but at Mr Riz’s request explained the documentation to him. According to Ms Jajoo, in the course of the discussion, Mr Riz said:

We’re thinking of investing with Karl Suleman in a trolley business with Karl Suleman Enterprises, so we’ll be making repayments of $10,000 every two weeks.

29 She answered:

I’m not advising you in relation to Karl Suleman Enterprises. I’m only advising you on your obligations to the bank under the loan contract. We don’t advise on any Karl Suleman matters. We don’t approve of Karl Suleman contracts in the way that they were structured. Other lawyers set up his business structure and contracts. Suzy David from our office was trying for a while together with a large firm of lawyers in the city to change everything but before Mr Suleman brought all the information and documents they needed he went back to his own lawyer and said it was all being fixed by his lawyers. But this was a few months ago. We don’t know where it got up to or what happened.

30 Mr Riz replied:

I know many people in it with Karl. I wanted to see what to do with the loan first.

31 Ms Jajoo responded:

You should see an independent lawyer and a financial adviser when you decide to invest in whatever you want to invest in. You need to take your paperwork and the contract to a lawyer and a financial adviser so they can properly advise you.

32 Ms Jajoo produced and provided to Mr Riz a form of cost agreement. Mr Riz wanted to take the documents with him to be signed by his wife if they decided to proceed, but Ms Jajoo would not allow this and insisted that she attend to have the documents explained, and retained the documents for that purpose.

33 Mr and Mrs Riz conferred with Ms Jajoo on 25 September. Again, Ms Hanna was present, although Mrs Riz said that interpretation would be unnecessary, and often when Ms Hanna commenced to translate a sentence Mrs Riz responded to the effect: “It’s alright, I understand”.

34 In the course of the consultation with Mr and Mrs Riz on 25 September 2001, Ms Jajoo explained that the first repayment was due 28 days after settlement, and the minimum monthly repayment was $1,796.61. Mr Riz interjected: “$10,000 every fortnight”. Mrs Riz said: “No, we want to pay $10,000 every fortnight from the beginning”. Ms Jajoo altered her file note accordingly.

35 Mr and Mrs Riz executed the loan contract, the mortgage, and various associated authorities. They also signed a certificate that they had obtained legal advice and understood the documents and did not require them to be translated.

36 Ms Jajoo explained that the lender required references from an acceptable referee; Mrs Riz said that the family doctor would complete them, and Ms Jajoo gave her the two reference forms for that purpose. Ms Jajoo completed the direct debit authority, except for the details of the account from which repayments were to be made, which had not yet been decided. She wrote on the form, as requested, “*Please direct debit the minimum monthly repayment for the first monthly repayment and thereafter $10,000 every fortnight”. Mr and Mrs Riz signed and dated the authority, which was left with Mr Riz for completion and return when it had been decided from what account the repayments would be made.

37 Later in the course of the consultation, Mrs Riz again instructed Ms Jajoo:

But you tell the bank we want to pay $10,000 every fortnight like we talked about before.

38 Mrs Riz continued:

We want a cheque to Karl Suleman. Omar’s told me what you’ve told him. This is a big risk.

39 Ms Jajoo answered:

I did have a conversation with Omar and I told him that we don’t advise on anything to do with Karl Suleman. We don’t approve of it. Karl previously had a solicitor who set up his whole business structure. Then Suzy David from our office had referred him to a firm of lawyers and trying for a few months to change the whole structure. However, Karl Suleman did not provide all the requirements, and Susie doesn’t know details of the structure. Karl Suleman went back to his own lawyer some time in May this year and said it was all being fixed up by his own lawyer. But we don’t know where it is up to. So if you are taking the risk of investing in whatever it is you are wishing to invest in, then you must see an independent solicitor and also a financial adviser in relation to any Karl Suleman contracts.

40 Mrs Riz replied: “You recommend someone”, and Ms Jajoo responded: “No I can’t recommend, but you should go to your own accountant and also see another lawyer”. Mr Riz concluded: “Okay, we continue with the loan for now”.

41 When it came to discussing how the proceeds of the loan were to be drawn down, Ms Jajoo said:

After paying out Citibank you will be left with approximately $159,800. How do you want that drawn?

42 Mr Riz said:

We want a cheque to Karl Suleman Enterprises for $150,000 we will get about $24,000 per month and that means $12,000 per fortnight. So that’s why if we go ahead we can put $10,000 per fortnight towards payment of the loan. But if we don’t want to go ahead can we cancel that cheque?

43 Although Mr and Mrs Riz maintained that Ms Jajoo spoke glowingly of Mr Suleman in response to inquiries they claimed to have made of her about the prudence of their proposed investment in KSE, no submission to that effect was pressed and I do not accept that any such conversation took place.

44 The reference forms were completed by Dr Nabil Assaad on 26 and 28 September. They and the direct debit request (completed with reference to Mohammed’s St George account) were returned to DDS by 4 October. The mortgage was stamped on 4 October, on which date DDS returned the executed documentation to First Title, who advised on the same day that they were ready to settle.

45 As I have foreshadowed, and although at first it seemed that much might depend upon competing versions of events of the consultations of 21 and 25 September 2001, ultimately the submissions on behalf of Mr and Mrs Riz proceeded on the basis of substantial acceptance of the version given by Ms Jajoo and Ms Hannah. This largely relieves me of the need to analyse the competing submissions as to credit. It suffices to say that I am not persuaded that the version propounded by Mr and Mrs Riz, who bear the onus, is more probable than the competing version given by Ms Jajoo and Ms Hannah, particularly having regard to the general difficulties with the evidence of Mr and Mrs Riz to which I have already referred, and to the following matters:

• that Ms Jajoo’s version is corroborated by Ms Hannah, whose evidence I found convincing, notwithstanding her affiliation with DDS;
• that Ms Jajoo’s evidence (and also that of Ms Hannah) was consistent with her quite comprehensive contemporaneous file notes, the authenticity of which was not disputed;
• the inherent improbability, in that context, of the version advanced by Mr and Mrs Riz that Ms Jajoo merely placed documents in front of them for signature without offering any explanation of them at all;
• that despite their denials of being given documents to take away for completion and of understanding what was said, in fact Mr and Mrs Riz must have received and taken away a direct debit request and referee forms and subsequently had them completed and returned, which not only undermines the reliability of Mr and Mrs Riz’s recollection, but also demonstrates understanding and compliance with requests made and instructions given in the course of the consultation;
  
• that although Mr Riz asserted that Ms Jajoo told him at the meeting on 25 September 2001 to arrange for an account to be opened in Mohammed’s name, such account was in fact opened on 30 August 2001 three weeks before he first met Ms Jajoo, and that while Mr Riz denied having become aware on or about 19 August of a request to bring in a rates notice and receipt, saying that Mary Haider had asked him to do so, the rates were paid on 20 August, the day after Ms Jajoo says she asked for the latest rates notice and proof of payment;
  
• that at one stage Mr Riz asserted that his signature on the discharge authority was forged, a contention which he later abandoned;
  
• that the affidavit and oral evidence of Mr and Mrs Riz included many internal inconsistencies, including frank contradictions of earlier evidence given by them (a far from complete catalogue of instances of this is to be found in paragraphs 26, 27 and 28 of the written submissions of Mr Darke SC, for DDS);
  
• that the recollection of Mr and Mrs Riz was patently not good (instances of which are catalogued in paragraph 31 of Mr Darke’s written submissions).

46 On 8 October, Mr Zia George of QLS spoke to Ms Jajoo, advising that he had been endeavouring to contact Mr Riz to explain that the brokerage fee was $5,000, whereas Marie had mistakenly told him it was $3,000. Ms Jajoo then telephoned Mr Riz and explained the difficulty, and he replied that he would sort it out with Mr George. On 10 October, Ms Jajoo had a telephone conversation with Mr Riz, who was at QLS with Mr George, and Mr Riz gave instructions to pay $150,000 to KSE, and $5,000 to QLS.

47 First Title certified title to Perpetual on 10 October. The transaction was settled on 15 October, when DDS received on behalf of Mr and Mrs Riz a cheque payable to Mr and Mrs Riz for $3,353.68, a cheque payable to KSE for $150,000, and a cheque payable to Zia George for $5,000. On 16 October, Ms Hanna handed the first two cheques to Mr Riz, in the presence of Mary Haider who collected the cheque in favour of Zia George.

48 On or about 17 October, Mohammed and Mr Riz attended at KSE’s office at Liverpool. Mr Riz handed over the cheque for $150,000, and Mohammed executed a “Preliminary Loan Agreement” with KSE for a principal sum of $150,000, with fortnightly repayments of $9,555 for a term of three years. Mr Riz and Mohammed returned on 23 October to execute a more comprehensive loan agreement. Although Mohammed is literate in English, Mr Riz sought no translation or explanation of the loan agreement or its provisions, and Mohammed did not read it.

49 A fortnight later, Mohammed received, into the St George account in his name, the initial payment of $9,555, but that was the only payment received. Mr and Mrs Riz continued to service the Perpetual loan for about a year, they say from funds that they borrowed for that purpose from acquaintances.

The case against Perpetual

50 Ultimately, the case for Mr and Mrs Riz against Perpetual was put on the basis of the Contracts Review Act, and unconscionability at general law.

51 Proceedings for relief under Contracts Review Act, s 7, involve two steps. The first is whether the contract was unjust in the circumstances in which it was made, having regard to the factors referred to in s 9. This is a conclusion of fact, albeit one of ultimate fact involving a broadly based value judgment [Antonovic v Volker (1986) 7 NSWLR 151, 154-155 (Samuels JA, Kirby P agreeing); Beneficial Finance Corporation Ltd v Karavas (1991) 23 NSWLR 256, 270E (Samuels JA); Perpetual Trustee Company Ltd v Khoshaba [2006] NSWCA 41, [34]-[40] (Spigelman CJ), [106]-[111] (Basten JA)]. The second, which arises only if the first is resolved in the affirmative, is whether any and if so what relief should be granted; this involves the exercise of a judicial discretion [Khoshaba, [34]-[36] (Spigelman CJ), [109] (Basten JA)].

52 In West v AGC (Advances) Ltd (1986) 5 NSWLR 610, McHugh JA (as he then was) explained that circumstances productive of “unjustness” in a contract may be substantive or procedural: substantive unfairness pertaining to the harshness of the terms imposed, and procedural unfairness pertaining to the manner in which the contract was negotiated and formed. His Honour explained (at 620-622):

Under s 7(1) a contract may be unjust in the circumstances existing when it was made because of the way it operates in relation to the claimant or because of the way in which it was made or both. Thus a contractual provision may be unjust simply because it imposes an unreasonable burden on the claimant when it was not reasonably necessary for the protection of the legitimate interests of the party seeking to enforce the provision: cf s 9(2)(d). In other cases the contract may not be unjust per se but may be unjust because in the circumstances the claimant did not have the capacity or opportunity to make an informed or real choice as to whether he should enter into the contract: cf s 9(2)(a), 9(2)(e), 9(2)(f), 9(2)(g), 9(2)(i), 9(2)(j). More often, it will be a combination of the operation of the contract and the manner in which it was made that renders the contract or one of its provisions unjust in the circumstances. Thus a contract may be unjust under the Act because its terms, consequences or effects are unjust. This is substantive injustice. Or a contract may be unjust because of the unfairness of the methods used to make it. This is procedural injustice. Most unjust contracts will be the product of both procedural and substantive injustice.

… If a contract or one of its relevant provisions is neither unfair nor unreasonable so far as the applicant is concerned, it is difficult to see how the existence of inequality in bargaining power or lack of independent advice, for example, can render the contract or a provision of the contract unjust.

…

If a defendant has not been engaged in conduct depriving the claimant of a real or informed choice to enter into a contract and the terms of the contract are reasonable as between the parties, I do not see how that contract can be considered unjust simply because it was not in the interest of the claimant to make the contract or because she had no independent advice.

53 Accordingly, an unjust contract is usually a product of the combination of substantive and procedural unfairness. However, as Spigelman CJ observed in Perpetual Trustee Company Ltd v Khoshaba (at [64]-[92]), each case must depend on its facts; West is now 20 years old and community standards may have changed from those applied in 1986 in West. In a factual context not dissimilar to the present, his Honour rejected (at [66]) the submission that the investment agreement was not part of the “circumstances relating to the contract” within s 7(1), and affirmed that the purpose for which a loan is advanced is a relevant circumstance, and is a concern of a lender because it is usually a material consideration in determining whether the particular borrower is able to service and repay the loan, although the fact that a lender has no involvement in the investment is entitled to significant weight in its favour. His Honour said (at [76]):

76 … Plainly, the conduct, whether by act or omission, of the party resisting a finding of unjustness under the Act is highly relevant, and will often be determinative. However, the scope of relevant circumstances is not confined to what the person resisting an order under s 7(1) did or did not do and knew or ought to have known. The critical phrase in s 7(1) – “the circumstances relating to the contract at the time it was made” – cannot be so limited. Section 9(1) provides that when determining unjustness “the court shall have regard to the public interest and to all the circumstances of the case". Furthermore, s 9(2)(l) includes, as I have noted, amongst the relevant circumstances “the commercial or other setting, purpose and effect of the contract”.

77 In the present case, the appellant submitted, correctly in my opinion, that the fact that the appellant had no involvement of any kind in the investment was entitled to significant weight in its favour.

54 His Honour accepted that while Perpetual’s lending guidelines were designed for the purpose of protecting the lender and not the borrower, to enable it to assess and minimise its own risk, that did not lead to the conclusion that failure to adhere to its own guidelines was entitled to minimal weight when determining what was just in all the circumstances:

The benefit to the borrower from a proper risk assessment may be indirect, because unintended, but that does not mean that it cannot, in appropriate circumstances, be entitled to significant weight in the determination of unjustness. It is clear from the list of factors contained in s 9(2) and (3) of the Act, that a substantial purpose of the legislative scheme is to protect persons who are not able to look after themselves.

55 Spigelman CJ attached decisive weight to the circumstance that the section of the standard form loan application that was intended to state the purpose of the loan was left blank, indicating that Perpetual “was content to lend on the value of the security”, a matter entitled to significant weight in the determination of unjustness (at [82]). Perpetual’s concomitant failure to verify other details in the loan application reinforced the conclusion that it was prepared to act on the basis of adequate security alone, and although Perpetual was not to be fixed with the knowledge that it might have acquired had its guidelines been observed, “Where the security is the family home of a low income earner and a pensioner, this posture on the part of a lender is entitled to significant weight against the lender in the determination of unjustness”. His Honour said:

90 In a tripartite situation such as this, I do not believe that a failure to recommend that a person obtain advice is entitled to significant weight when the advice is relevant to that part of the transaction which does not involve the rights and obligations or interests of the person who is said to have failed to make the recommendation. Even pensioners must take responsibility for their own actions.

91 On the facts of the present case, it appears clear that the overwhelming enthusiasm of their compatriots in the Assyrian community was the primary motivating factor in the respondent's wish to obtain the loan. I doubt that any recommendation by the prospective lender would have had any effect.

92 The conflicting considerations are finely balanced. Had the appellant or its representatives made any inquiries about the purpose of the loan I would have allowed the appeal. I do not mean to suggest that the appellant had to determine that the proposed investment was reasonable and capable of servicing the loan. It is the indifference, suggesting that the appellant was content to proceed on the basis of enforcing the security, which I find determinative.

56 In considering whether or not the relevant contracts were unjust, it is of course necessary to keep in mind that the contracts in question are the loan and mortgage, and not the investment contract with KSE, although I accept that the purpose of the loan, and thus the investment contract, is a relevant circumstance, as Khoshaba makes clear. In the present case, Mr Leggat SC, for Mr and Mrs Riz, submits that the relevant contracts – the loan agreement and mortgage – were unjust in the circumstances in which they were made having regard to fourteen matters, on each of which I shall comment before endeavouring to synthesise the issues:

• Mr and Mrs Riz were “very simple folk”;
  
• They had no financial ability to comply with the provisions of the contracts that required them to make 360 monthly payments each of $1796.61;
  
• They could only repay the loan by selling the family home;
  
• They understood the fundamentals of a mortgage in the sense that if they defaulted they would lose their home;
  
• Perpetual knew that they had no savings and therefore their ability to repay was critical;
• Perpetual had information available to it in the latest “partnership tax return” that was relevant to their capacity to repay, in particular that it included partnership income of Mr and Mrs Saddi;
• Perpetual chose not to call evidence as to whether it used the Saddi income figure or failed to appreciate its significance;
• Perpetual failed to inquire and resolve how it could rely on the direct debit form authorising loan repayments of $10,000 per fortnight when the available financial details demonstrated no capacity to make such payments;
• Perpetual failed to comply with provisions of its lending manual in relation to income verification and evidence of income receipt;
  
• Mr Paterson (a lending expert called by Perpetual) gave evidence that compliance with prudent lending practice in relation to tax returns, serviceability ratio and the direct debit request would have resulted in the loan being rejected;
• Perpetual knew the loan failed the serviceability test in its lending manual even on the income figures provided;
  
• Perpetual knew it held no certificate indicating that that the borrowers had obtained financial advice;
• If financial advice had been obtained, it would have been to the effect that the proposed investment was “too good to be true”;
• If such advice had been given, Mr and Mrs Riz would not have proceeded.
  

57 Mr and Mrs Riz were “very simple folk”. Although I accept that Mr and Mrs Riz were commercially unsophisticated, I do not accept that Mr Riz – who was the moving party and had the conduct of the transactions on behalf of them – was naïve. He had previously borrowed funds from financial institutions on three occasions – from the National Bank to finance the purchase of the Beirut Pizza Shop, from St George to finance the purchase of the home, and from Citibank to refinance. The last two involved giving mortgage security over the home. Ultimately it was conceded that Mr and Mrs Riz understood the fundamentals of a mortgage, in that if they defaulted they would lose their home. In my assessment, Mr Riz also knew that he ought not have been able to obtain the loans from St George and Citibank if he was living on Centrelink benefits, and he was at best indifferent to what his agents might say or do on his behalf to obtain loan approvals. It took him some considerable time – perhaps a year – to be persuaded to invest in KSE and to borrow funds for that purpose, and he undertook considerable investigations before deciding to do so. When the investment was made, it was made in the name of their son Mohammed, plainly so that the income received would not affect Mr Riz’s social security entitlements; I am unable to accept Mr Riz’s professed ignorance as to that being the reason for the arrangement (which, according to his son, he told Mohammed at the time). Nor, in the light of Mohammed’s evidence, can I accept that when Mr Riz went to QLS and completed the loan application, he had contemplated investing not $150,000, but only some lesser amount.

58 They had no financial ability to comply with the provisions of the contracts that required them to make 360 monthly payments each of $1796.61. I do not accept that Mr and Mrs Riz could not have serviced the loan. I accept, as was submitted on their behalf, that the family income of Mr and Mrs Riz was about $35,000 per annum: Mrs Riz received a parenting payment of $8196, Mr Riz received a Newstart benefit of $4997, the family received additional benefits of $15,058, Mr Riz earned from his part-time job $150 per week, amounting to $7800 annually; the total family income was thus $36,051. On that income they had serviced the home loan from St George and then from Citibank, achieving very substantial reductions, well in excess of the minimum repayments required by the Citibank loan contract (albeit that other sources of funds may have assisted in those reductions). The Citibank loan had initially required repayments of more than $1000 per month, although this reduced with the capital reductions. Had they invested the surplus loan proceeds from Perpetual, after refinancing Citibank, in an orthodox investment with a much lower rate of return than they expected to obtain from KSE, that income would have been available to service the loan and would have been adequate, with their other income, to do so: investment of the $150,000 surplus at 10 percent would have generated a further $15,000 per year, bringing their total income to in excess of $50,000, and their monthly income to an excess of $4166. Monthly repayments of $1790 appear far from unachievable on that basis, especially having regard to their track record with St George and Citibank.

59 They could only repay the loan by selling their home. It follows, for the reasons just explained, that I do not accept this proposition; it is not apparent that Mr and Mrs Riz could not have serviced the loan. If it is intended to mean that they had no other assets than their home, then the same can be said of most home loans, which in the vast majority of cases can only be repaid, if not serviced, from sale of the home, and that is not of itself a circumstance of injustice. In any event, the investment would itself have created an additional asset from which repayment could have been made.

60 They understood the fundamentals of a mortgage in the sense that if they defaulted they would lose their home. I agree, but this is not a circumstance of any injustice.

61 Perpetual knew that they had no savings and therefore their ability to repay was critical. Again, I agree; but again, this is not of itself a circumstance of injustice: in most home loans, the borrower will have few other assets from which repayment might be made, so that serviceability depends upon income.

62 Perpetual had information available to it in the latest “partnership tax return” that was relevant to their capacity to repay, in particular that it included partnership income of Mr and Mrs Saddi. Close inspection of the purported tax return for 1999/2000 for the partnership of Mr and Mrs Riz – not their individual returns – would have revealed, in the distribution statement, a reference to Mr and Mrs Saddi as the partners to whom income was distributed, and if detected, this might well have been an indication of fraud. However, a lender prudently requires income tax returns for the purpose of income verification, because loan applicants are unlikely to have overstated their income in an income tax return, the tax context being one in which there is an incentive to minimise income. Income of the partnership is, of course, distributed between the partners and brought to account in their separate individual returns. A lender could adequately verify income by examination of the individual returns, without recourse to the partnership return. In this case, there was no particular reason why the partnership return, as opposed to the individual returns, would be scrutinised by the lender. A lender is not an auditor, and is not to be expected to scrutinise every entry in an income tax return to ascertain whether the borrower or borrower’s agent who is engaged in some fraud. It is telling that the reference to the Saddi income was not detected by Mr McCully, who was instructed to examine the transaction on behalf of Mr and Mrs Riz for forensic purposes, nor by Mr Paterson, who was instructed on behalf of Perpetual.

63 Perpetual chose not to call evidence as to whether it used the Saddi income figure or failed to appreciate its significance. DMS’s documents demonstrate how the loan was assessed. It is quite apparent from the calculation sheet that the loan was assessed on the basis of the purported income of Mr and Mrs Riz which was derived from the supposed partnership and which was shown in the purported partnership return to have been distributed to Mr and Mrs Saddi. However, in the light of Mr McCully’s concession that on his examination of the documentation, conducted under the microscopic focus of litigation, he did not detect the reference to the Saddi income; Mr Paterson’s similar failure to detect it; and the circumstance that the issue was not raised in the pleadings or affidavits or otherwise until the trial had commenced (Mr Leggat explained that it was reserved as a “sleeper” for forensic advantage, but it remains unknown when anyone in the plaintiffs’ camp first detected it), I am quite unprepared to infer that Perpetual’s assessor adverted to the circumstance that the partnership return contained reference to persons other than Mr and Mrs Riz, or ought to have done so.

64 Perpetual failed to inquire and resolve how it could rely on the direct debit form authorising loan repayments of $10,000 per fortnight when the available financial details demonstrated no capacity to make such payments. It is true that the amount of the direct debit authority was inconsistent with the disclosed financial capacity of Mr and Mrs Riz. However, as Mr Paterson explained, a direct debit request is not part of the loan approval process, and is obtained subsequently, after the loan has been approved, in preparation for settlement, when it would be seen by an administrative assistant, rather than by the assessor who approved the loan, and usually contains no reference to any specific amount. It would therefore not have affected a prudent lender’s assessment and approval of the loan. And it would be irregular, and even a potential source of legal liability, for a lender, having approved a loan, to refuse to proceed on the basis of doubts as to the viability of a proposed level of voluntary repayment higher than required by the contract. Mr Paterson, in more than thirty years of lending experience, had never encountered a loan being declined after approval because of concern at the amount voluntarily inserted by a borrower in a direct debit authority.

65 Perpetual failed to comply with provisions of its lending manual in relation to income verification and evidence of income receipt. In this respect, it was submitted that the undated and unsigned tax returns containing a reference (suggestive of fraud) to different persons, the Saddis, meant that there was no reliable income verification, and that the declaration form ought also to have been a matter of concern, because it was undated, involved no specific adoption of any documents, was not witnessed, contained no reference to which brokers or financiers information had been supplied, disclosed a fax imprint of Sanctuary Windows (an entity which the lender knew had no connection with Mr and Mrs Riz), did not in terms show any connection to any particular loan application, did not relate in terms to any specific documents, was transmitted as page 27 of facsimile transmission of about 90 pages, and contained no indication that its nature or effect was explained to the non-English reading Mr and Mrs Riz. However, I do not accept that there is any significance in the circumstance that the copy income tax returns obtained by Perpetual were unsigned; copy tax returns are usually unsigned (and in these days of electronic lodgement so often are the originals too). There is no significance in the circumstance that the declaration does not refer to a specific broker or financier; the form [see [20]] is a generic one and does not require completion of references to specific brokers or financiers; the circumstance that it does not refer to a specific lender is similarly beside the point. That it is unwitnessed is also of no significance; it contained no provision for attestation, and no-one suggests that the signatures on it are other than those of Mr and Mrs Riz. That it contained a fax imprint of Sanctuary Windows and was transmitted as page 27 of 93 is not suspicious: pages 26 to 93 comprised a fax coversheet from KBL to DMS, the declaration, the loan application and all the supporting documents, including the purported income tax returns; each page bore the imprint “Sanctuary Windows” and the facsimile number 97565707, which KBL’s letterhead showed to be KBL’s facsimile number. Nor is the circumstance that it bore no indication that it was interpreted or explained to Mr and Mrs Riz: given that it was accompanied by the loan application completed in English and signed by Mr and Mrs Riz there was no reason for DMS to suspect that they did not understand English; there is no evidence that it is ordinary lending practice to require certification that a declaration accompanying a loan application has been explained; and in any event, certification of understanding of the loan contract and mortgage documentation would be required at a later stage. Mr Leggat having abandoned reliance on Mr McCully (whose evidence was substantially discredited), the only expert lending evidence was that of Mr Paterson, who said that having regard to the apparent authenticity of the personal details provided, the history of repayments to Citibank, satisfactory credit references, the absence of other debts, satisfactory valuation, and an acceptable though marginally high debt service ratio, the loan approval accorded with prudent lending practice. He observed nothing in the tax returns as suggesting a need to make further inquiry, given that they were accompanied by a declaration that would result in them being accepted at face value and not scrutinised closely for indicia of fraud.

66 Mr Paterson (an expert called by Perpetual) gave evidence that compliance with prudent lending practice in relation to tax returns, serviceability ratio and the direct debit request would have resulted in the loan being rejected. Mr Paterson’s concession to this effect was based primarily on the inclusion in the partnership tax returns of the reference to the Saddi income, which neither he nor Mr McCully had detected, although they were scrutinising the transaction with a far sharper eye than would be expected of a lender’s assessor. Neither gave evidence that a lender acting reasonably would have detected that reference, and for reasons explained above (at [65]) I am quite unsatisfied that such a lender would have done so. Insofar as his concession relied on the direct debit request, that was in the context that he maintained that ordinarily a lender would not give close attention to the detail of a direct debit request, but accepted that in the unlikely event that the approving officer (as distinct from an administrative assistant) became aware of a direct debit request so disproportionate to the borrower’s apparent circumstances, further inquiries would be indicated. Nonetheless, in upwards of 30 years of lending experience, Mr Paterson had never encountered the situation of a loan not proceeding after approval because of a direct debit authority that might be regarded as too high. I accept that had a lender adverted to the reference to the Saddi income and the direct debit authority, further inquiries would have been indicated. But I do not accept that a lender’s failure to detect indicia of a fraud being practiced on behalf of a borrower against the lender, is a circumstance of injustice to the borrower. And I also do not accept that a lender, having approved a loan after taking into account security and serviceability, must in the borrower’s interest query an apparently excessive direct debit authority.

67 Perpetual knew the loan failed the serviceability test in its lending manual even on the income figures provided. Serviceability was calculated on two bases – a debt service ratio (which measures commitments as a proportion of income), and a serviceability ratio (which measures net available income after allowing for living expenses and loan repayments, against total outgoings). For a dual income family (which is the picture presented to Perpetual), the indicative minimum debt service ratio was 30%; if it exceeded that, referral for approval was required. The material presented to Perpetual indicated a ratio of 34.7%. Mr Paterson described it as “modestly high but acceptable”. He explained that the 30% parameter was a first reference point, to guide but not determine the lender’s decision. On the information available to Perpetual, Mr and Mrs Riz had total income of $74,142, and outgoings of $25,726. To achieve 30%, the outgoings would have had to be reduced only to $22,243, so the discrepancy was slight. On the other hand, the indicative minimum serviceability ratio was 1.25; on the material available to Perpetual, Mr and Mrs Riz passed this comfortably with a serviceability ratio of 1.58, with an annual surplus of $14,914 after allowing for living expenses and loan repayments, and without including any investment income. The lender, having regard to the good serviceability ratio as well as the marginally high but acceptable debt service ratio, would conclude that the loan was serviceable. Moreover, these results were achieved without reference to any anticipated investment income – because the loan was prima facie serviceable without reference to it. Inclusion of the investment income would have increased its serviceability. I do not accept that Perpetual ought to have known or suspected that the loan was not serviceable.

140 The total amount of the loan was $275,000, as at 15 October 2001. Of the proceeds of the loan, $111,335.91 was paid to Citibank to refinance the existing home loan; in that respect Mr and Mrs Riz suffered no loss. Mr Riz received a further $3,353.68 from the proceeds of the loan. A further $5,000 from the proceeds was paid to Zia George as a brokerage fee, the liability to pay which was incurred upon approval by Perpetual of the loan, before any involvement on the part of DDS, and which would not have been averted had proper advice been given by DDS. That leaves $155,310.41 from the principal of the Perpetual loan which Mr and Mrs Riz incurred as a liability which, properly advised, they would not have incurred. That represents 56.5% of the total loan of $275,000.

141 Since then, the loan balance has been increased by interest and the costs of default, including presumably interest at the “higher rate” applicable on default. As quantification of the amount outstanding was deferred until judgment, similarly quantification of these matters was necessarily deferred. Mr and Mrs Riz would have had to pay interest on the Citibank loan in any event, and only 56.5% of the total interest charges at the lower rate should be included in their damages, against which must be set off the sum of $9,555 paid to Mohammed Riz on behalf of KSE on 31 October 2001, pursuant to the KSE investment. However, that the Riz went into default was a foreseeable result of the failure to give appropriate advice in respect of the proposed KSE investment, and to the extent that their debt has been increased by interest at the “higher rate”, the whole of such additional interest and costs of default should be included in their damages.

142 Mohammed’s claim has been admitted in the liquidation of KSE for $140,445. The evidence suggests that there is likely to be a dividend of between 15-19 cents in the dollar, once all recovery actions are completed; this equates to $21,066 to $26,684. Obviously there is risk that the recovery might be less and a chance that it might be more, but the best that can be done is to conclude that there will probably be a recovery of 17 cents in the dollar in three years time. $23,875.65 discounted at 3% deferred for three years (0.915) is $21,846.22, for which credit should be given.

143 Accordingly, the damages to which Mr and Mrs Riz are entitled against DDS are $155,310.41; plus 56.5% of all interest charges on the Perpetual loan other than any additional “higher rate” interest, less $9,555; plus 100% of the additional “higher rate” interest and other costs of default; less $21,846.22 (being the value of the anticipated dividend in the liquidation).

Conclusion

144 The loan contract and the mortgage were not unjust in the circumstances in which they were made. Mr and Mrs Riz were represented and advised by their own lawyer. Perpetual did not demonstrate the indifference referred to in Khoshaba, and did not engage in asset lending, but assessed the loan having regard to serviceability. On the information available to Perpetual, the loan was prima facie serviceable, even without reference to investment income; bringing ordinary investment income to account would have enhanced its serviceability. Even on the actual financial position of Mr and Mrs Riz, the loan was serviceable on the reasonable assumption that the surplus was invested in a conventional investment. Although Mr and Mrs Riz were the subject of unfair tactics, those were perpetrated not by or on behalf of Perpetual, but by the promoters of KSE, or by their own agents QLS. For borrowers to obtain a loan by a misrepresentation made on their behalf, even if not known to them, where the lender would not otherwise have approved the loan, does not make the loan contract objectively unjust to the borrowers against the lender.

145 Had I concluded that the contract was unjust because Mr and Mrs Riz had assumed burdensome obligations which they would not have assumed had they not been misled as to the KSE investment, or had false information not been supplied to Perpetual by QLS, I would nonetheless have declined as a matter of discretion to grant relief against Perpetual. Perpetual knew that the purpose of the loan – absence of which was decisive in Khoshaba – was in part to refinance and in part for further investment, and was not content to proceed on the basis of the security alone, but assessed the loan for serviceability – which appeared to be satisfactory. In this case, Perpetual’s assessment of the loan application does not manifest the “indifference” that was crucial in Khoshaba, and Perpetual can indeed be regarded as an innocent party.

146 There is no basis for concluding that Perpetual unconscientiously took advantage of Mr and Mrs Riz. Even if the circumstances of Mr and Mrs Riz amounted relevantly to circumstances of “special disadvantage”, there is no evidence that Perpetual or its agents had knowledge of those matters; and Perpetual and its agents dealt with Mr and Mrs Riz through their own solicitors DDS. The loan transaction, viewed from Perpetual’s perspective, was not apparently an imprudent, let alone an improvident, one.

147 Accordingly, all claims of Mr and Mrs Riz against Perpetual fail, and will be dismissed. There being no other defence to Perpetual’s first cross-claim, Perpetual is, subject to compliance with the relevant formalities, entitled to judgment for the amount of its debt, and to judgment for possession of the property.

148 Although the duty normally owed by a solicitor to a client extends only to legal advice, it is often difficult to disentangle legal and practical advice, and a solicitor who is carrying out a transaction for a client is not justified in expressing no opinion when it is plain that the client is rushing into an improvident adventure. The cases that state that it is not the function of a lawyer to give financial advice mean that a lawyer is not expected to bring to his or her task the knowledge and expertise of a stockbroker, an accountant or a financial planner. But a lawyer giving independent advice is required to address the fairness or reasonableness of a proposed transaction, so that the client can appreciate its disadvantages. The circumstances relevant to a loan transaction that a solicitor advising on it must consider and address include the purpose of the loan. Where it is evident that the borrower is relying on a proposed investment of the proceeds to generate the income to service a loan which is to be secured over the family home, and where at first sight the expectation appears utterly unrealistic, a solicitor acting reasonably would take steps for the protection of the client’s interest.

149 In this case, it was or ought to have been plain to Ms Jajoo that Mr and Mrs Riz were putting their home at risk for the purpose of raising funds for an investment in respect of which they had expectations that objectively were absurd, such that (as Ms Jajoo conceded) it appeared to involve a very high risk. It was insufficient for Ms Jajoo to tell Mr and Mrs Riz that she was not advising on the proposed investment and that they should seek and obtain legal and financial advice elsewhere, yet continue to act on and facilitate the loan transaction, all the moreso when it ought to have been evident that they did not appreciate the importance of obtaining such advice and did not intend to do so. What was required was advice that firmly brought home the apparent improvidence of the proposed investment. If, for reasons of conflicting duty to Mr Suleman, that advice could not be given, Ms Jajoo should have declined to act further on the loan transaction; I cannot accept that a solicitor acting as she was on a loan transaction can avoid the consequences of what would otherwise involve a conflict of duties by disavowing responsibility to give advice which she was otherwise bound to give, on the topic which would otherwise give rise to the conflict – here, the apparent improvidence of the proposed investment. It follows that Ms Jajoo was in breach of her duty of care, by not giving advice that firmly brought home the apparent improvidence of the proposed investment.

150 The damages to which Mr and Mrs Riz are entitled against DDS are $155,310.41 (which is 56.5% of the principal) of the Perpetual loan; plus 56.5% of all interest charges on the Perpetual loan other than any additional “higher rate” interest, less $9,555; plus 100% of any additional “higher rate” interest and other costs of default; less $21,846.22 (being the value of the anticipated dividend in the liquidation).

151 Accordingly, while I will afford the parties an opportunity to bring in short minutes to give effect to this judgment, the appropriate orders would be to the following effect:

(1) Order that the plaintiffs’ claims against the first and second defendants be dismissed.

(2) Give judgment that the third, fourth and fifth defendants pay the plaintiffs the sum calculated in the manner I have indicated.

(3) On the first cross-claim, give judgment that the plaintiffs/cross-defendants pay the first defendant/cross-claimant the outstanding balance of the Perpetual loan, and give judgment that the plaintiffs/cross-defendants give the first defendant/cross-claimant possession of the property.

152 In view of this outcome, it would seem that the second cross-claim, determination of which was deferred, should be dismissed. I will hear the parties as to costs if they so wish, but prima facie the plaintiffs should pay the first and second defendants costs, and the third, fourth and fifth defendants should pay the plaintiffs’ costs.

153 At this stage, the only formal order is that the parties bring in short minutes to give effect to this judgment on a date to be fixed. On that occasion, I will if required consider any question of costs and any application for a stay.

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