Tonto Home Loans Australia Pty Limited v Tavares & Ors; Firstmac Limited v Di Benedetto & Ors; Firstmac Limited v O'Donnell & Ors

[2012] HCATrans 165

[2012] HCATrans 165

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney   No S28 of 2012

B e t w e e n -

TONTO HOME LOANS AUSTRALIA PTY LIMITED

Applicant

and

JOSE DE CARVALHO E REGO TAVARES

First Respondent

KIM LEE-ANNE ROWE

Second Respondent

AUSTRALIAN SECURITIES AND INVESTMENT COMMISSION

Third Respondent

Office of the Registry
  Sydney   No S29 of 2012

B e t w e e n -

FIRSTMAC LIMITED ACN 094 145 963

Applicant

and

LAWRENCE DI BENEDETTO

First Respondent

MARIA DI BENEDETTO

Second Respondent

AUSTRALIAN SECURITIES AND INVESTMENT COMMISSION

Third Respondent

Office of the Registry
  Sydney   No S30 of 2012

B e t w e e n -

FIRSTMAC LIMITED ACN 094 145 963

Applicant

and

GILLIAN O’DONNELL

First Respondent

JOHN ROBERT O’DONNELL

Second Respondent

AUSTRALIAN SECURITIES AND INVESTMENT COMMISSION

Third Respondent

Applications for special leave to appeal

GUMMOW J
KIEFEL J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 22 JUNE 2012, AT 11.50 AM

Copyright in the High Court of Australia

__________________

MR S.L. DOYLE, SC:   May it please the Court, I appear with MR J.M. HORTON for the applicants in these applications.  (instructed by Allens Arthur Robinson)

MR P. MENZIES, QC:   If your Honours please, I appear with my learned friend, MS B.K. NOLAN, for the first and second respondent in each of the applications.  (instructed by Champion Legal)

MR R.J. WRIGHT, SC:   May it please the Court, I appear for the third respondent in each application.  (instructed by Australian Securities and Investments Commission)

GUMMOW J:   That is the ASIC body?

MR WRIGHT:   That is ASIC, yes, your Honour.

GUMMOW J:   Yes, Mr Doyle.

MR DOYLE:   Your Honours, these applications concern the test to be applied under the Contracts Review Act in determining whether a contract is unjust.

GUMMOW J:   Are extensions of time necessary?

MR DOYLE:   There is, I am sorry, your Honour, yes, by a day.

GUMMOW J:   Yes, we grant that.

MR DOYLE:   Thank you.  It involves the question of what the test is and the scope of inquiry to be undertaken in assessing whether a contract is or is not unjust, particularly in light of two features which we have identified in this case.  The Court of Appeal ultimately held that all three finance contracts in this case were unjust and granted relief against the lender in favour of the borrowers.  This was done, in the words used by the Court of Appeal, because the unjustness arose “from the deception and fraud practised by Streetwise in the arrangement of” those contracts.  Your Honours, that is from paragraph 252 of the reasons of the President. 

The Court of Appeal did not, in our submission, identify a test to be applied in determining whether contracts are unjust.  Rather, they identified a variety of features which were put in the mix to lead to a judgment made as to whether they were unjust.  We urge that they fell into error in two respects in doing so.  First, the Court of Appeal identified the business structure employed by the lenders as including a feature which carried an inherent risk, as they described it, and thus called for diligent application of lending guidelines with which we take no issue, but they went beyond that to hold the lenders responsible for the action of Streetwise, and this was despite it being found to be an independent business and not the agent of the lenders, and, indeed, on one view of things, being the agent of the borrowers. 

There was not said to be anything improper in itself in the form of the business structures which the lenders adopted and in deciding, as the Court of Appeal did, that the lenders should be responsible for the conduct of the link, as they described it, they undertook a wide‑ranging inquiry which extended beyond what we submit to be legitimate under the Act, including whether the lenders had sought out this link as a business connection and identifying conduct of that link as praying upon the respondents in connection with the joint venture or property investment transactions which Streetwise tried to encourage the borrowers to enter into.  That is the first aspect, and I will come back to why we say that is wrong. 

Secondly, although it arises from the first, in assessing the unjustness of the contracts the Court of Appeal took into account that the investments the borrowers were making, or at least hoping to make, with Streetwise in these property developments and joint venture were worthless.  That, in our submission, somehow makes the lenders responsible for the wider misconduct of Streetwise and casts too widely the net which is authorised under the Contracts Review Act.  Your Honours, might we take you briefly to some passages of the evidence which make those points before we come back to the Act itself.  We ask you to go to the application book to page 310.  Could we ask your Honours to note what is said first in paragraph 252:

The first stage of analysis is whether the contracts were unjust as between the parties in the circumstances in which they were made.  Of particular relevance here is the element of procedural injustice.  The agreements for loan and mortgage were unexceptional.  They contained no harsh or unjust terms of themselves.  The unjustness of the contracts arises from the deception and fraud practised by Streetwise in the arrangement of the agreements.

What is said to follow in the following paragraphs is, by way of emphasis, of a much greater discussion which takes place in the earlier paragraphs of the judgments to which the various parties referred in their submissions and which your Honours will have read.  Could we ask you to note, firstly, paragraph 256 where one of the features which was sought to be emphasised is that the Streetwise, the introducer:

It was a sought‑after commercial counterparty put in place by Tonto HL for the purpose of hoped for introduction of business.  It was part of the “shopfront” of the retail business of the enterprise, albeit sub‑contracted, and branded as Streetwise.

Your Honours, in paragraph 257:

One legitimate way of analysing the facts is that through S Property, S Loans was the agent of the borrowers . . . Nevertheless, this legal position should not be over emphasised in the whole commercial context in which the lending took place, in particular the place and function of S Loans in the commercial enterprise of the lending programmes.

If your Honours then turn to paragraph 260 on the next page, the opening line concludes the reference to “these borrowers were preyed upon by Streetwise”.  If your Honours would read the rest of that sentence.  Then their Honours continue further down:

That is not to say that the borrowers were not careless, to a degree, foolish and gullible.  They all succumbed to the lure placed before them of monetary gain, the lure being made more respectable by its characterisation as the provision for their future and “wealth‑building” for their later years . . . These matters went, in particular, to the collateral joint venture transaction.

Then if your Honours would turn and read, if we can trouble you to, both paragraphs 265 and 266 where their Honours ultimately conclude saying that the lender should take significant responsibility for the conduct of Streetwise.  Then, finally, from the reasons, can we ask you to go to paragraph 278 where the President is in this context discussing the relief to be granted but reinforces the substance of the matters we have just taken you to:

From the evidence as to their resources, a substantive share of responsibility for the loans could well deprive them of their homes.  In the circumstances of their being misled and preyed upon by Streetwise and all the other circumstances, such a result would be unjust.

In our submission, what the Court of Appeal has done goes beyond what it was authorised to do under the Contracts Review Act.  Firstly, when we deal with the language of the section – your Honours have the Act extracted in tab 6 of the authorities bundle – we wanted to take you first to section 7(1):

Where the Court finds a contract or a provision of a contract to have been unjust in the circumstances relating to the contract at the time it was made, the Court may –

do certain things.  The section is plainly, in our submission, directed to identifying something of the contract or its provisions which are unjust and not unjust circumstances.  So that an inquiry as to the form of the establishment of a business structure of a lender is not relevant except to the extent to which the actual circumstances at the time the contract was made might cast light upon whether that contract is unjust.  So, for example, to the extent to which it required diligence, that is, the business structure required diligence by the lender in the application of its guidelines as might impact upon that contract, but it is to go too far to attribute responsibility to a lender for the circumstances which include whether it sought out Streetwise as an introducer or the circumstance that Streetwise has in relation to the potential property investments between it and the borrowers has preyed upon those people. 

Those things might bear upon the circumstances being unjust, but they do not, in our submission, bear upon the contract itself being unjust.  Of course, both section 7 and section 9, to which we would ask your Honours to go, speak of having regard to the circumstances, but in each case they are, in our submission, circumstances which bear upon the primary question of whether the contract is unjust and it is not enough, as in our submission the Court of Appeal has done, to point to a mix of facts which might themselves be thought to be unfair and to conclude from them that the circumstances are unjust.

Section 9(2) identifies a series of particular things to which the court is to have regard and they, in our submission, each have as their focus the contract.  A number are directed to the reality or the quality of the consent of the contracting parties.  Some are directed to whether the contract terms overreach and so on.  We wanted to draw your attention particularly to subparagraph (2)(j) where a fact to which the court is to have regard is:

whether any undue influence, unfair pressure or unfair tactics were exerted on or used against –

the borrowers, relevantly, and then there are three categories of people; the other party to the contract, any person acting or purporting to act for the other party to the contract, or a person to the knowledge of the other party to the contract who is acting or purporting to act.  That limitation of those three categories is robbed of meaning by the approach the Court of Appeal has undertaken here because Streetwise does not satisfy any one of those three alternatives and was not said to.  So that the approach which, in our submission ‑ ‑ ‑

KIEFEL J:   The central feature about Streetwise was its dishonesty.  That is the key to the finding of the Court of Appeal.

MR DOYLE:   True, that is so.  The central feature of Streetwise’s dishonesty was that it was a fraud by both parties.  What is complained of against the lenders is that they introduced it into their business structures, in a sense, as a subcontractor and that highlighted the requirement that they should be more assiduous in the application of their guidelines. 

KIEFEL J:   They did not guard against the risk of Streetwise’s conduct or assess it in any way?

MR DOYLE:   They did not take those steps which, it is said, the guidelines, had they been applied, would have detected the error in the information that was provided which would have identified the fraud.  But our point is that the section properly construed really does, in our submission, require that the contract or something of it, one of its provisions, be unjust in circumstances, that it is to go too far, as this Court of Appeal has done, in casting the net much broader, looking at the way in which the business structure was established, who was chasing whom in terms of the approach between the lender and the introducer, and concluding, as they have, that ultimately there was something unjust about the outcome and that is not what the statute authorises.  It is not what section 7 calls for, which is an identification of something unjust of the contract or its provisions, and would render meaningless the limitations expressed in 9(2)(j) in the circumstances of this case.

Your Honours, the other point, I suppose, we ought to make is that none of the provisions of subsection 9(2) are directed to the worthwhileness of the underlying investment transaction.  It may be said that the subsection 9(2)(l), “the commercial or other setting, purpose and effect of the contract”, capture the purpose being intended in investment in some other property and in different circumstances that may be true.  But, of course, here, if that section has any compass, it would be identifying the perceived purpose, that is, the contractual purpose, rather than what we now know to be the real purpose of the fraudster.  So that it would not permit under subsection (l) consideration of making the lender responsible for the fraud of this third party. 

The approach we urge is reinforced by the statement of his Honour Justice McHugh in West v AGC, which we gave your Honours a reference to in our written outline, where his Honour stated that it is important to bear in mind that it is the contract or its provisions which must be unjust and not the transaction, but the contract which must be initially examined.  Now, that correctly, in our submission, identifies the proper scope of section 7(1).  Those observations have been repeated in a number of decisions in the Court of Appeal, correctly, as if they state correctly the position, although more recently there has been a move away from them, again as we have identified in our written submissions, founded on the proposition that what is unjust depends upon contemporaneous perceptions of what is just or unjust and that West is an old case. 

So much can be accepted, but the contemporaneous perception of what is unjust cannot serve to extend the scope of what is the proper inquiry under subsection (1) as to whether it is the contract or its provisions which are unjust.  Our complaint is not that people’s views of what is unjust might change, but that in determining whether something is unjust one has to focus on the contract or its provisions in the circumstances rather than the circumstances themselves.

This application raises the point of where the line is to be drawn between the contract or its provisions which are unjust in the circumstances and the broader question of whether the circumstances themselves are unjust.  We would accept it is a difficult line to draw.  The Court of Appeal in this case does not articulate a test by which that line can be judged.

KIEFEL J:   That assumes that a test is capable of being expounded.

MR DOYLE:   There must be a test which identifies, in our submission, whether the contract or its provisions are unjust, at least to identify whether one can have regard to things beyond the particular things we have identified or at least – perhaps we will put it differently – whether the scope of section (7)(1) enables you to have regard to the manner in which the business structure of the lender has been established as a relevant factor or the fraud, relevantly, of a third party in inducing the borrowers to enter into a joint venture with that fraudster and so on.  The test which we would urge is one which comes closer to what Justice McHugh said as the focus being on the contract or its provisions in the first instance.

The applications also raise a question with respect to the relief that was ordered – I should say the amended application seeks to raise such a question.  The same two issues arise.  In respect of two groups of borrowers, the Court of Appeal has, in effect, relieved the borrowers entirely of their liability under the loans, save for the extent to which they accepted the loans had been used to pay out some earlier mortgagee.  There was an uplift, or an adjustment made in the case of one of the respondents, people called O’Donnells, because of their greater involvement in the assessment of the underlying transaction – we need not take your Honours to the detail of that now – but the effect for the others and save for that uplift for the O’Donnells, was to relieve them entirely of the burden of the contract of loan.  That, in our submission, is capricious and the passage that we took you to at the outset from the reasons, that the President identified and his reasons are accepted by the other members of the court:

The unjustness of the contracts arises from the deception and fraud practised by Streetwise –

a third party.  There was an acceptance that that was the primary source of the injustice.  It was said that the lenders should bear significant responsibility, and that was the word used in paragraph 266.  There was a finding of these borrowers being careless, which we took you to in paragraph 260.  The end result, though, is that they are relieved entirely of the consequences of their carelessness, without which this loan could never have occurred, and that instead of the lenders bearing significant responsibility, they bear all of it.  In our submission, that is capricious. 

Your Honours, this is an appropriate vehicle for the grant of special leave.  It is not suggested that the circumstances here are unique, although the Act, of course, operates only in New South Wales.  The third respondent, in its written submissions, identifies the practices which are engaged in here as being widespread.  It is also urged by the third respondent, correctly, to raise some questions of public interest and public importance and for those reasons we would ask for the grant of leave.  If the Court pleases.

GUMMOW J:   What do you say about ASIC’s point on page 422 paragraph 6.  If special leave were granted, ASIC would raise a notice of contention on sections 12CB and 12CC of its statute as to the expression “in all the circumstances unconscionable”.

MR DOYLE:   The Court of Appeal dealt with the proposition whether there was separate relief to be granted based upon unconscionability and

said there was no element of moral obloquy in this case because the lenders were innocent, duped themselves.  So, in our submission, the notice of contention would be bound to fail, but we note that it is said that if there is leave, this is something which ASIC intends to raise – raise many of the same factual questions, although ultimately to achieve determination of their being unconscionable conduct will require something more than the facts as found here warrant.

GUMMOW J:   We do not need to call on you, Mr Menzies and Mr Wright.

We are not satisfied that any question of principle respecting the construction and operation of the Contracts Review Act 1980 (NSW) arises on these applications. Nor do the interests of justice call for grants of special leave. On each application special leave is refused with costs.

AT 12.12 PM THE MATTERS WERE CONCLUDED