Bartle v GE Custodians Ltd
[2010] NZCA 174
•6 May 2010
For a Court ready (fee required) version please follow this link
IN THE COURT OF APPEAL OF NEW ZEALAND
CA627/2009
[2010] NZCA 174BETWEENBRUCE LEONARD BARTLE AND DOROTHY JUDITH BARTLE
First AppellantsANDBARTLE PROPERTIES LIMITED
Second Appellant
ANDGE CUSTODIANS LIMITED
First RespondentANDTASMAN MORTGAGES LIMITED
Second RespondentANDJONATHAN MATHIAS
Third Respondent
Hearing:11 and 12 November 2009
Court:William Young P, Hammond and Arnold JJ
Counsel:J G Miles QC, P J Dale and D W Grove for Appellants
R B Stewart QC, B J Upton and M V Robinson for First Respondent
No appearance for Second and Third Respondents
Judgment:6 May 2010 at 2.15 pm
JUDGMENT OF THE COURT
A The appeal is allowed.
BWe declare that the loan agreements at issue in this case are oppressive within the meaning of the Credit Contracts and Consumer Finance Act 2003.
CWe remit the case to the High Court for consideration of the appropriate remedy.
DThe appellants will have costs in the High Court as fixed by that Court.
EIn this Court, the first respondent must pay the appellants costs for a complex appeal on a band A basis and usual disbursements. We certify for two counsel.
Hammond J [1]
Arnold J [103]William Young P [232]
HAMMOND J
Table of Contents
Para No
Introduction [1]
The general narrative [10]
The tangled web of companies [27]
Oppression
The claim in this case [32]
The evolution of the present oppression remedy [36]
The legislative basis of the oppression remedy [40]
Judicial consideration of the oppression remedy to date [43]
The arguments in this case [59]
Discussion: The relevant factors in this case [61]
1. The credit contract [62]
2. A murky and disjunctive transaction [73]
3. The type of lending [77]
4. Total failures of comprehension [81]
5. The relationship between TML and GE [84]
6. Incompetent legal advice [91]
Conclusion [98]
Introduction
[1] The appellants, Mr and Mrs Bartle and their associated company Bartle Properties Limited, purchased an apartment in Auckland as part of a “Blue Chip” investment scheme. The investment failed. The Blue Chip group of companies are worthless.
[2] The Bartles sought to avoid the credit transaction which supported the purchase of the apartment – and the potential loss of their residential home, which was mortgaged to support that transaction – on the basis that it was unconscionable at common law or that it was oppressive and should be reopened under the provisions of Part 5 of the Credit Contracts and Consumer Finance Act 2003 (the CCCF Act).
[3] The appellants’ proceeding against the respondents in this respect was heard by Randerson J in the High Court in April and May 2009. In September 2009, his Honour delivered a judgment dismissing those claims.[1]
[1]Bartle v GE Custodians Ltd [2010] 1 NZLR 802. The report is truncated. The full judgment is Bartle v GE Custodians Ltd HC Auckland CIV-2008-404-3460, 30 September 2009.
[4] The Bartles have appealed to this Court on a number of grounds with respect to those holdings. The proceeding is said to be a test case for many investors who are in a similar position. Many of these investors are elderly and the security of their homes is at stake.
[5] It is convenient to note here that the solicitor who acted for the Bartles, Mr Jonathan Mathias, was found to have been negligent by Randerson J but is bankrupt. There is no appeal against the Judge’s finding against Mr Mathias. Whether any recovery is to be had through his insurers may be problematic.
[6] It is as well to be clear at the outset that all that this Court is asked to decide on this appeal is whether the credit transaction is susceptible to being reopened under the CCCF Act. Although in the High Court the Bartles sought to have the mortgage over their home set aside, Randerson J declined to reopen that transaction. The judgment was issued on an interim basis, with various issues relating to relief reserved for further consideration. What we are asked to do on this appeal is to find (contrary to the holding of Randerson J) that the transaction was unconscionable or oppressive within the meaning of the CCCF Act and to make a declaration to that effect; and to then remit the proceeding to the High Court for further consideration of outstanding issues.
[7] I will proceed in a relatively conventional fashion by first outlining the general narrative and the nature of the particular transaction. I will then consider the character of an oppression action under the CCCF Act. I will then turn to the case for and against the reopening of this transaction under the CCCF Act.
[8] I observe at this point that a great deal of the evidence and argument in the High Court and in this Court was taken up with whether an agency relationship existed between the lender (GE, the first respondent) and mortgage broker (Tasman Mortgages Limited (TML), the second respondent). This was because the Bartles’ were anxious to establish that the knowledge of TML could be attributed to GE. It is easy to understand why that was thought to have been an important matter. At the same time, I observe from the outset that to my mind this is at heart an oppression proceeding under the CCCF Act. Obviously, the relationship between the various parties and what knowledge those parties had is of real significance, but I think those factors are better considered within the framework of the CCCF Act itself.
[9] This is of some importance on this appeal because a great deal of the evidence and argument, and much of the High Court judgment, are taken up with the minutiae of a complex transaction, rather than being seen, as I think to be appropriate, in the more rounded way which is required by the CCCF Act. However the minutiae are to be seen, the transactions as I will describe them undoubtedly occurred: they are an established fact. The real question is whether the transaction is to be avoided on the basis of the statutory scheme to which resort has been sought.
The general narrative
[10] At the time of the relevant transactions, Bruce and Dorothy Bartle were aged 66 and 65 respectively. They had a combined pension income of $21,736. They owned a house on Amber Drive in Whangarei worth about $400,000, which was unencumbered. They had about $48,000 in the bank. They owned a campervan, a car and personal effects.
[11] Blue Chip New Zealand Limited advertised an investment opportunity. “Opportunity” is a somewhat optimistic description; as will become apparent, the investment scheme had rather more the character of a Trojan Horse to access the equity of investors in their homes. This company was part of a loosely aligned Blue Chip group of companies. The largest shareholder was Mr Mark Bryers.
[12] As Randerson J noted (at [2]), the Blue Chip scheme was said to be attractive to people who were “asset rich but cash poor”. Persons in the Bartles’ situation would use the equity in their unencumbered home to assist with the purchase of a residential apartment and thereby secure an income stream. The scheme was not “long term”: the idea was that after four years, the apartment would be sold. The Bartles would receive a small share of any capital gain. In the meantime, their income would be enlarged by $451 per fortnight (before tax), being rental on the apartment. In fact they were borrowing money to pay that sum to themselves.
[13] The Blue Chip scheme was promoted on the basis that there would be no cash outlay from the Bartles. The Bartles’ claim was that they understood Blue Chip would be responsible for all costs and expenses including payments due under any loans required. However, as will become apparent, there were a number of problematic features for them.
[14] The Bartles were introduced to a Mr Michael Davis. He acted as the sales agent for Blue Chip throughout. Mr Davis recommended to the Bartles that they obtain legal advice from Mr Mathias, the third respondent. Mr Mathias was an Auckland based lawyer, who was said to be experienced in Blue Chip transactions. It is now suggested by counsel for the Bartles that he was a “tame” solicitor for Blue Chip. Randerson J found him to have been negligent in a number of respects in relation to the Bartles’ transaction. There is no appeal against that holding.
[15] The Bartles took advice from Mr Mathias and made such inquiries as they could. Mr Bartle in particular gave the matter close albeit somewhat misconceived consideration. On 29 September 2006 the Bartles signed an agreement for sale and purchase to purchase unit 701 in an apartment building being refurbished on Symonds Street in Auckland. The purchase price was $552,000. No finance had been confirmed at that stage but the agreement was unconditional.
[16] Finance was subsequently arranged by TML, and actually advanced by GE. This finance was under a “Fast doc” scheme under which self-employed investors were not required to produce proof of income. Advances would be approved if the borrowers had a sufficient loan to equity value ratio in their home and signed a declaration as to their ability to pay.
[17] The advances were made in three tranches:
(a) 8 November 2006 $137,484
(b) 28 September 2007 $125,791
(c) 28 September 2007 $366,291
________
$629,566
________
[18] The first two advances, totalling $263,275, were made to the Bartles personally. They were secured by mortgage over their Amber Drive residential property. The third advance was made to Bartle Properties Limited. That was a company formed by the Bartles for the purpose of purchasing unit 701.
[19] The Bartles provided personal guarantees of the obligations of Bartle Properties Limited to GE in respect of the third advance. Their guarantees in that respect were secured by the mortgage over Amber Drive. The result was that Mr and Mrs Bartle were personally ultimately responsible for all the advances.
[20] In financial terms, the Bartles were borrowing nearly $630,000 to purchase a unit for $552,000, secured over their Amber Drive property which was worth $400,000, and the unit itself. That unit had been purchased shortly before this transaction, and the Blue Chip group had taken a handsome commission on that earlier transaction. So Blue Chip was clipping the ticket at every point. The difference in the amount borrowed by the Bartles and the purchase price was to be used also to pay substantial Blue Chip fees.
[21] In short, the Bartles were unwittingly borrowing very heavily in order to facilitate a relatively small income stream for four years paid from borrowed monies and with only the possibility of a small capital gain, and with a good chunk of what they had borrowed going to Blue Chip’s various pockets.
[22] The Bartles understood their investment was to be a joint venture with the Blue Chip group. But at the time the Bartles signed the agreement for sale and purchase for unit 701, the joint venture agreement had not been signed or shown to them. That did not occur until 7 November 2006, more than a month after they were committed to the purchase.
[23] One of the consequences of this extraordinary arrangement was that the Bartles – who were naive, but also very poorly served by their solicitor – thought they would be borrowing only the initial advance of $137,000 (and possibly another sum of $50,000). They did not understand until much later (and too late) that they would be responsible for the total borrowing. It was their understanding that Blue Chip would provide any additional funding as well as taking care of all payments and expenses.
[24] Just about everything that could be a fundamental error in the joint venture agreement was present in it. The agreement was with Blue Chip Joint Ventures Limited, a Blue Chip subsidiary with negligible capital. There was no guarantee from the parent company. The agreement was poorly drafted for the purpose for which it was to be employed. It contained no specific term. Further, the clauses of the agreement were heavily slanted in favour of Blue Chip.
[25] It is important not to let the fundamentals of this transaction be obscured by the “smoke and mirrors” which routinely attend a case of this kind. Those features included an investment scheme which was overly elaborate, poorly drafted and explained, and had no apparent business plan. It was hopelessly over-dependent on a distinctly rising real estate market. Even assuming the scheme went according to plan, and there were plenty of opportunities for it not to, the principal beneficiary would be Blue Chip. All there was in this scheme for the Bartles were fortnightly payments of $451, which they had borrowed to pay themselves, and the prospect of 10 per cent of any capital gain after four years on unit 701. For this they were placing their freehold home on the line.
[26] The remainder of the general narrative is entirely predictable. Mr and Mrs Bartle or their newly formed company entered into other agreements (of course with substantial fees) in connection with the investment, including a deed of lease and a property management agreement. Settlement on unit 701 was completed in September 2007. The title was registered in the name of Bartle Properties Limited. The fortnightly payments of $451 which the Bartles had been receiving from December 2006 dried up shortly after the purchase of the unit. Blue Chip was in financial trouble, and investors were advised in November 2007 that Blue Chip was restructuring. The Blue Chip group finally collapsed in early 2008. There were substantial losses for a large number of New Zealand investors. Unsecured creditors are quite unlikely to effect any recovery from the Blue Chip group of companies. The mortgages secured over the Amber Drive property and unit 701 fell into default. Unit 701 was sold for $250,000. The Bartles face the prospect of a mortgagee sale of Amber Drive, although we were told from the bar that GE has stayed its hand in the meantime. It says it intends to be a good corporate citizen. Quite what that will come to may be problematic.
The tangled web of companies
[27] The Blue Chip group comprised Blue Chip New Zealand Limited (in liquidation), TML, Executive Mortgages Limited (EML), Blue Sky Holdings Limited (in liquidation), Blue Chip Joint Ventures Limited (in liquidation), together with a number of related companies which are not material to this proceeding. There is no parent holding company.
[28] GE lends money and is primarily a vehicle for investment monies. The company is owned by an Australian based company, GE Finance and Insurance Limited, which is ultimately owned by a large American conglomerate, the General Electric Corporation of the United States. GE operated in New Zealand through a subsidiary, Australian Mortgage Securities (New Zealand) Ltd (AMS).
[29] GE was independent of the Blue Chip group. As a provider of funding, it “outsourced” its lending operations in New Zealand. It entered into a “Correspondent Deed” with TML and EML. It has been agreed that for the purposes of this proceeding, TML and EML may be viewed collectively. Nothing turns on their independent status as two different companies. Under the Correspondent Deed, TML and EML had a range of responsibilities which included obtaining financial information from borrowers for the purpose of supporting loan applications, and seeing the applications entered into. They also had ongoing responsibilities with respect to the enforcement of loans.
[30] A flow chart of the relationships between the various entities is set out as Appendix 1 to this judgment.
[31] Certain features of these tangled arrangements need to be emphasised:
(a)GE claims to be an “innocent” lender, in that it advanced monies for secured loans which were arranged by other companies (TML and EML).
(b)By putting these mortgage originators (and supervisors) in place, GE had in commercial terms “outsourced” those functions.
(c)It is common ground that GE had no association with the Blue Chip group. It is also common ground that it had no knowledge that the advances were being made in connection with transactions marketed by or involving the Blue Chip group. It was for this reason that counsel for the Bartles devoted so much attention in the High Court – and indeed before us – to the proposition that TML and Blue Chip New Zealand Limited were agents of GE. If that was so, the knowledge held by those companies as agents could be attributed to GE as principals.
(d)Very significantly for this case, GE now says that if it had known the relevant facts relating to this credit transaction it would not itself have advanced these monies.
Oppression
The claim in this case
[32] Randerson J noted:[2]
It is common ground that the loan agreements entered into between the Bartles and GE were credit contracts for the purposes of the Credit Contracts and Consumer Finance Act 2003 (the CCCF Act) and that the associated mortgages were security interests as defined in the same Act. Mr Dale rightly abandoned a submission that the joint venture agreement with Blue Chip and any other contracts arranged by Blue Chip associated with their investment were collateral contracts or linked transactions in terms of s 119 CCCF Act. ...
[2]At [312].
[33] There has therefore been no challenge in the High Court or before us to the application of the CCCF Act to this case.
[34] As the Judge noted, the amended statement of claim:[3]
sought an order under s 120 CCCF Act reopening the loan agreements on the grounds that they were oppressive or that GE had induced the Bartles to enter into the loan contracts by oppressive means.
[3]At [312].
[35] There was no challenge by Mr Stewart QC to the proposition that in an oppression action the claim could be brought directly against GE. He did of course argue strenuously that a claim had not been made out.
The evolution of the present oppression remedy
[36] There is a long history of legal regulation of the provision of credit in the common law world. Historically, in the United Kingdom there were ecclesiastical, then legal, prohibitions on usury. When those prohibitions were lifted, money lending was regulated in recognition that credit contracts were particularly open to abuse by unscrupulous providers of credit.
[37] In New Zealand, under s 44 of the Mercantile Law Act 1880, there was “no limit to the amount of interest which any person may lawfully contract to pay”. That regime came to an end with the Money-lenders Act 1901, which explicitly recognised in the Preamble that “certain persons ... trading as money-lenders ... [had] inflicted harsh and unconscionable bargains” which “should be subject to control”.[4] That Act was replaced by the Money-lenders Act 1908. That legislation was in turn replaced by the wider ranging Credit Contracts Act 1981 and certain parallel legislation to deal, for instance, with hire purchase agreements. Ultimately, it was thought to be desirable to bring, to a significant extent, credit transactions together under a single and relatively uniform regime. Even so, the present CCCF Act is still not a complete code. For instance, it exists alongside the Credit (Repossession) Act 1997 and other legislation.
[4]Money-lenders Act 1901, Preamble.
[38] That this legislation was initially seen largely as a consumer credit measure can be seen from the fact that the CCCF Act was introduced into the New Zealand Parliament in 2002 as the Consumer Credit Bill. The name of the CCCF Act was changed during the Select Committee hearings to the name the statute now bears, to better reflect its wider ambit.
[39] The oppression remedy in the CCCF Act is a statutory remedy. It is in addition to any other remedies that may exist at common law or under any other statute.
The legislative basis of the oppression remedy
[40] The thrust of Part 5 of the CCCF Act is that courts are given power to reopen a credit contract where its terms are oppressive, the creditor is acting in an oppressive manner, or the debtor has been induced to enter into it by oppressive means: see s 120. The court will then have the power under s 127 to make such orders as are necessary to remedy the matters that caused the reopening.
[41] Under s 118 of the CCCF Act, oppressive “means oppressive, harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice”.
[42] Under s 124 of the CCCF Act, in deciding whether to reopen a credit contract under s 120 the court must have regard to:
(a)All of the circumstances relating to the making of the contract, or the exercise of any powers, or the inducement to enter into the contract;
(b) And, the following matters if they are applicable:
(i) the amount payable by the debtor under the contract;
(ii)if a debtor is in default, whether the time given to remedy the default is oppressive, having regard to the likelihood of loss to the creditor;
(iii)certain features of the terms of reinvestment, if such have been offered;
(iv)whether there has been a refusal to release any part of a security interest; and
(c) Any other matters that the Court thinks fit.
Judicial consideration of the oppression remedy to date
[43] Given the apparent breadth of the statutory provisions, it is unsurprising that judges and commentators have had to grapple with whether there is a central approach, or unifying idea, behind the oppression remedy.
[44] Webb and Birkinshaw[5] suggest that to date there seem to have been at least three broad approaches.
[5]Duncan Webb and Christopher Birkinshaw Credit Contracts and Consumer Finance in New Zealand (Brookers, Wellington, 2004) at 138 – 139.
[45] One approach, which they term the “ad hoc” approach, is described as follows:[6]
... the courts seem to look for any close analogies in the cases and, if they do not exist, they reason from first principles and ask the global question whether the conduct of the financier falls foul of acceptable levels of conduct as indicated by the concept of oppression.
[6]At 138.
[46] A second suggestion, advanced by Pol is that:[7]
The fundamental principle upon which the re-opening discretion may be exercised is abuse of the relationship between the parties. If this relationship has been manipulated, distorted, or otherwise abused, the contract is liable to be re-opened as oppressive, whether of term or exercise of power.
[7]Ronald Pol “Credit Contracts: The Factors Going to Oppression” (1989) 6 Auckland UL Rev 139 at 154.
[47] A third suggested approach by Webb and Birkinshaw builds upon the judgment of Hammond J in Prudential Building and Investment Society of Canterbury v Hankins[8], decided under the Credit Contracts Act 1981. The authors divide the issue of oppression into a number of steps:[9]
The first is to determine whether the complaint goes to the substantive distribution of the benefits and burdens under the contract (substantive unfairness), the conduct of the party in procuring or enforcing the contract (procedural unfairness) or both. The second step is the examination of the nature of the contract or conduct that allegedly makes it objectionable. This may be due to one or more of: the impaired consent of one party, the existence of an inappropriate benefit, or the nature of the relationship between the parties. Third, at a still more detailed level, one can examine certain factors, which are recognised as falling into one of the above categories of unfairness. This list of factors is not closed and other matters, although not recognised by precedent, will still be of relevance. In this modest way, it is suggested that the features of the ad hoc approach adopted by the courts to date can be utilised in the decision-making process. The fourth and final step involves a value judgment as to whether the situation analysed demonstrates sufficient injustice to warrant relief. This is the decision-making part of any analysis. The question is whether the conduct complained of in the case under consideration is sufficiently objectionable to provide relief.
[8]Prudential Building and Investment Society of Canterbury v Hankins [1997] 1 NZLR 114 (HC).
[9]Webb and Birkinshaw at 138.
[48] There have been a number of reported cases which have referred to the oppression remedy.[10]
[10]See Dollars & Sense Finance Ltd v Nathan [2007] 2 NZLR 747 (CA); Greenbank New Zealand Ltd v Haas [2000] 3 NZLR 341 (CA); Huirama v Trimac Finance Ltd (2000) 8 NZCLC 262,154 (HC); Taylor v Westpac Banking Corporation Ltd (1996) 7 TCLR 177 (CA); Kerr v Ducey [1994] 1 NZLR 577 (HC); Hayes Securities Ltd v Bambury [1991] 1 NZLR 304 (CA); DFC Financial Services Ltd v Roberts (1989) 4 NZCLC 65,391 (HC); Housing Corporation of New Zealand v Maori Trustee (No 2) [1988] 2 NZLR 708 (CA); Cambridge Clothing Co Ltd v Simpson [1988] 2 NZLR 340 (HC); National Westminster Finance New Zealand Ltd v United Finance & Securities Ltd [1988] 1 NZLR 226 (HC); General Finance Acceptance Ltd v Melrose [1988] 1 NZLR 465 (HC); Manion v Marac Finance Ltd [1986] 2 NZLR 586 (HC); Anderson v Burbery Finance Ltd [1986] 2 NZLR 20 (HC); and Italia Holdings (Properties) Ltd v Lonsdale Holdings (Auckland) Ltd [1984] 2 NZLR 1 (HC).
[49] I think it is appropriate to return to first principles. The oppression remedy is not a contract remaking remedy. It floats, like oil across water, across the top of credit contracts. It is ever-present. It polices serious abuse of credit contracting, where curial intervention may properly be invoked. So conceived, the CCCF Act performs a valuable prudential function in the law and indeed society in general. The statutory imperative is to see that those who borrow money understand what is going on in the transaction and what they are getting into. If they do understand and adopt the risk, then such borrowers can hardly be heard to complain. The legislation is thus a valuable corrective. If this is paternalistic – and undoubtedly it is – it is because Parliament has seen that to be necessary in the interests of the citizens of this country.
[50] Further, the legislation is prophylactic. Most “smoke and mirrors” schemes will not get off the ground at all if the essentials of the scheme are laid bare for examination by the borrower. In that sense, the legislation is intended to make the gullible less gullible. This legislation is therefore very much part of the strong imperative towards “truth in lending” which has been a feature of commercial law in this jurisdiction, as with other jurisdictions, in more modern times. “Truth in lending” is not merely restricted to such obvious features as interest rates, but extends to what the transaction in its fundamentals is really all about.
[51] Oppression in the CCCF Act is a generic remedy. The statutory definition in s 118 is deliberately broad. It extends that term to something that is oppressive, harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice. There is a tendency – apparent in this case, as in the decided cases – to “extract” one of those statutory terms and fasten upon it, often by reference to the way that term has been developed by common law or other legislation. However, it cannot be stressed too strongly that oppression is a standalone, generic and statutory remedy. In my view, it should not be given a pinched or unduly restrictive meaning, because s 118 of the CCCF Act clearly indicates that Parliament intended the provision to have a wide ambit of application.
[52] The concept of an oppression action is resorted to in other areas of the law. In most of the common law world (including New Zealand), there is an oppression action in company law for minority shareholders. The present New Zealand provision is s 174(1) of the Companies Act 1993. It is highly likely that language was borrowed from the company law jurisdiction by the drafters of the CCCF Act for s 118. In a House of Lords decision on the then equivalent provision to s 174 in England, Viscount Simonds said that “oppressive” corresponds to the “dictionary meaning of the word”, which is “burdensome, harsh and wrongful”.[11] And in Elder v Elder and Watson Ltd[12], Lord Keith said it included “a lack of probity or fair dealing” and “a visible departure from the standards of fair dealing and a violation of the standards of fair play”.
[11]Scottish Co-Operative Wholesale Society Ltd v Meyer [1959] AC 324 at 342.
[12]Elder v Elder and Watson Ltd [1952] SC 49 at 60 (HL).
[53] The term “unconscionable”, which is used in s 118 of the CCCF Act, is well developed in equity jurisprudence. It has been seen to be particularly applicable to the situation where the weaker party is under a significant disability; the stronger party knows or ought to know of that disability; the stronger party has victimised the weaker in the sense of taking advantage of the disability whether by act of extortion or passive acceptance; and there is a marked inadequacy of consideration or some procedural impropriety. In the equity context, see Bowkett v Action Finance Ltd;[13] Commercial Bank of Australia v Amadio;[14] the observations of Hammond J in Prudential;[15] and particularly the recent decision of the Supreme Court in Gustav & Co Limited v Macfield Ltd,[16] confirming that the “nub of the matter” is “whether it would be unconscientious for the stronger party to procure or accept” the weaker party’s assent “to the impugned transaction”.[17]
[13]Bowkett v Action Finance Ltd [1992] 1 NZLR 449 (HC).
[14]Commercial Bank of Australia v Amadio (1983) 151 CLR 447 (HCA).
[15]Prudential Building and Investment Society of Canterbury v Hankins [1997] 1 NZLR 114 (HC) at 124-127.
[16]Gustav & Co Limited v Macfield Ltd [2008] NZSC 47, [2008] 2 NZLR 735
[17]Per Tipping J at [17].
[54] It may be useful to note here also the justly celebrated decision of Judge Skelly Wright in Williams v Walker-Thomas Furniture Co,[18] which is familiar to all North American commercial lawyers insofar as it has become the foundation of the “meaningful choice” doctrine which permeates the Uniform Commercial Code jurisprudence on unconscionability. Mrs Williams was a welfare mother with seven children and a monthly income of $218. She had purchased $1800 of merchandise from Walker-Thomas over a period of several years. For each purchase Mrs Williams signed an instalment contract which included a highly complex cross-collateral agreement. This device provided that each payment would be credited pro rata to all purchases which Mrs Williams had ever made from the store and which she had not paid for in full. In other words, until the customer reduced her balance to zero, the store retained a security interest in every item it had sold her. Mrs Williams’ last purchase was a stereo set which cost $514.95. After she had paid the store more than $1400, Mrs Williams defaulted, and the store filed an action to replevy all the items it had sold her. The trial court granted the judgment, and the Municipal Court of Appeals affirmed it. The Circuit Court of Appeals reversed the lower courts and remanded the case for findings on the issue of unconscionability. The tenor of the judgment is critically important. It is that unconscionability is usually founded upon a recipe of one or more spoonfuls of consumer ignorance and several spoons of seller’s guile.
[18]Williams v Walker-Thomas Furniture Co 350 F2d 445 (DC Cir 1965).
[55] A third distinct strand which Parliament expressly included in the section goes to unreasonable standards of commercial practice. That is patently an objective standard. In Greenbank, Tipping J noted that the words which formed the definition of oppressive in s 9 of the Credit Contracts Act 1981 “all contain[ed] the underlying idea that the transaction or some term of it is in contravention of reasonable standards of commercial practice”.[19] And as Hammond J observed in Huirama, it “cannot be for the finance industry itself to dictate what is oppressive and what is not”.[20] It has also been observed by a respected Canadian appellate Judge (Lambert JA) in Harry v Kreutziger[21] that the well known decision of Lord Denning MR in Lloyd’s Bank Ltd v Bundy[22]and the Canadian decision in Morrison v Coast Finance Ltd[23]were only of the most general guidance and really aspects of a single question:[24]
... whether the transaction, seen as a whole, is sufficiently divergent from community standards of commercial morality that it should be rescinded.
[19]Greenbank New Zealand Ltd v Haas [2000] 3 NZLR 341 (CA) at [24].
[20]Huirama v Trimac Finance Ltd (2000) 8 NZCLC 262,154 (HC) at [101].
[21]Harry v Kreutziger (1978) 95 DLR (3d) 231 (BCCA).
[22]Lloyd’s Bank Ltd v Bundy [1975] QB 326 (CA).
[23]Morrison v Coast Finance Ltd (1965) 55 DLR (2d) 710 (BCCA).
[24]Harry v Kreutziger (1978) 95 DLR (3d) 231 (BCCA) at 241.
[56] The three strands I have identified - abuse of power, unequal bargaining positions coupled with hard terms, and departure from standards acceptable to the community - may well cover most of the cases which are likely to advance through our courts. But again it cannot be emphasised too strongly that the s 118 definition is not a bounded one: in terms of formal logic, it is not an intrinsic definition. Oppression is defined as including oppression, which leaves the expression quite untrammelled. The term goes beyond the existing concepts in our jurisprudence. The legislation itself also makes it plain that all of the circumstances of the particular transaction are relevant: oppression is the trigger for curial investigation and, perhaps, intervention. See Latimer Holdings Ltd v Sea Holdings New Zealand Ltd[25]for further observations on oppression in commercial law.
[25]Latimer Holdings Ltd v Sea Holdings New Zealand Ltd [2005] 2 NZLR 328 (CA).
[57] The line of reasoning set out above has also been adopted in relation to oppression under the New Zealand Companies Act. As Richardson J said in Thomas v H W ThomasLtd:[26]
I do not read the subsection as referring to three distinct alternatives which are to be considered separately in watertight compartments. The three expressions [oppressive, unfairly discriminatory or unfairly prejudicial] overlap, each in a sense helps to explain the other, and read together they reflect the underlying concern of the subsection that conduct of the company which is unjustly detrimental to any member of the company whatever form it takes and whether it adversely affects all members alike or discriminates against some only is a legitimate foundation for a complaint under s 209.
[26]Thomas v H W ThomasLtd [1984] 1 NZLR 686 (CA) at 693.
[58] In short, the section should not be read down. Oppression can take many forms. What the drafters did in the CCCF Act was to sweep up the existing jurisprudential ideas about oppression to give some additional content to the term, but it is not a closed concept.
The arguments in this case
[59] It is difficult to reduce to a nutshell the position of the respective parties. No disrespect is meant to Mr Miles QC and Mr Dale in saying that the Bartles’ fundamental case is that this was such an utterly mad-headed – and oppressive – transaction that even Nelson with a telescope to his blind eye could have seen it to be such. At times the term oppression was stressed and, perhaps more frequently, the notion of unconscionability. They maintained that the transaction simply ought not to be enforced in the particular circumstances of the case.
[60] Counsel for GE appear to have seen this as a lay down Misère case. They argued that it is not the function of the courts to unmake commercial transactions. They suggested that Fastdoc “asset lending” is not necessarily commercially inappropriate. The Bartles had legal advice. Mr Stewart stressed that as a critical factor. And because it was simply a funding source which had nothing to do with the “making” of the actual loan, GE should not have to bear the cross of its security being avoided.
Discussion: the relevant factors in this case
[61] I think this case does involve oppression within the meaning of the CCCF Act. It will be well apparent from what I have said earlier that to my mind oppression is not a “concept” as such: it is a determination to be made in light of a variety of factors, which cannot be formularised into an intrinsic legal definition. I analyse the matters which concern me, and which collectively I consider give rise to oppression in this case, under six heads.
1. The credit contract
[62] I start with a technical but important matter: what was the credit contract in this case? Further, is it permissible to look to the surrounding documents such as the agreement for sale and purchase at one end of the entire transaction, or the later joint venture agreement at the other end?
[63] Credit contracts are defined by s 7(1) of the CCCF Act as contracts under which “credit is or may be provided.” Section 7(2) expands that definition to catch arrangements which “in substance” have the effect of providing credit. For an example of a linked transaction, relating to an agreement for sale and purchase with deferred payment obligations, which was caught under the Credit Contracts Act 1981 see O’Connor v Heaslip.[27]
[27]O’Connor v Heaslip [1989] 1 NZLR 632 (HC).
[64] Even if a narrow view is to be taken of the term “credit contract”, I consider that both the loan proposal sent to the Bartles and the mortgage itself fall squarely within the statutory definition. I did not understand Mr Stewart to contend to the contrary on that point.
[65] There are two features of those documents, taken alone, which are clearly oppressive. First, the loans were fixed interest, and only for a short period of time which was reflective of the short term investment scheme being promoted (ie, until unit 701 was sold). The loan document referred to a five year period. But after that period, the loan payments were to revert to a variable rate principal and interest loan. How were the Bartles to be able to support those necessarily enlarged payments, if it came to that? Secondly, and relatedly, the loan terms were for 25 years, for 65 year old pensioners solely on pensioners’ incomes!
[66] I consider that in some cases a wider view can properly be taken (ie, beyond the face of the loan agreement itself into the surrounding non-credit documents). This inquiry into surrounding non-credit contracts is appropriate where the surrounding transactions are the only means the borrower has of meeting their loan obligations short of realising the asset. If there was evidence that the lender knew of a regular income stream and other significant asset ownership which could be utilised, then that might be relevant.
[67] Here, the joint venture with Blue Chip Joint Ventures Limited was the only known way that the Bartles could repay the loan without realising the asset, GE having no information as to income level. The Bartles were entirely reliant on the scheme’s “success”, and so at least a brief consideration of the risks associated with the joint venture would have been reasonable. This is especially so considering that after the five year period the interest rate would change from fixed to floating and include repayment of the principal as well as interest.
[68] GE failed to look into the transactions which were vital for the loan to be serviced, and hence were indifferent to the Bartles’ ability to meet their obligations under the loan.
[69] I think it very significant that the Judge found that, if GE had known the real facts as to the Bartles’ financial position, it would not have lent on the terms put in place in this case. The Judge said (at [196]):
Mr Grant accepted that GE placed substantial reliance on the borrower’s declaration that they could afford to repay the loan without hardship. He said GE was not aware at the time of the Bartles’ financial position. Given the information now available in that respect, Mr Grant accepted that the Bartles were not in a position from their own resources and the rental income from the investment unit to meet their obligations under the mortgages and that, if GE had known that, the loans would not have been made.
[70] There is clear evidence to support that finding. Mr Grant was a director of GE and the managing director of AMS until 27 February 2009. In his brief of evidence, he said:[28]
Applying GE's serviceability criteria, we would not have considered that to be sufficient to service the total loans taken by Mr and Mrs Bartle and their company.
[28]At [30].
[71] Mr Grant also said that if the only way a loan could be recovered was foreclosure, “there would be no reason why we would want to do that lend”.[29]
[29]At [37].
[72] GE’s own evidence that this loan should not have been made is powerful evidence of a departure from reasonable standards of commercial practice. It is a clear indicator that the loan itself was oppressive.
2. A murky and disjunctive transaction
[73] Section 123 of the CCCF Act provides that it is the time of entry into the relevant credit transaction which is critical. Here, this is around October 2006.
[74] In many commercial transactions, there is a single document or linked documents which can be considered as a whole. In this case, the way in which matters unfolded in documentary terms is very important. The Bartles were committed by an unconditional agreement for sale and purchase to buy unit 701, before they had finance or had even seen the joint venture agreement.
[75] The Judge made express findings of fact as to the fragmented and incomplete knowledge of the Bartles:[30]
The Bartles’ lack of appreciation of the risks they faced and the true nature and structure of the transaction is understandable. None of the documentation prior to the time they signed the agreement for sale and purchase described the nature of the security arrangements or the guarantees associated with them. The joint venture was described only in general terms and was not made available to them until 7 November 2006 when it was brought to them by Mr Mathias for signature some five weeks after the Bartles had committed themselves to the purchase. By the time the Bartles came to sign the loan and mortgage documents in 2006 it was too late for them to avoid proceeding. They had been permitted to sign an agreement for sale and purchase which was unconditional from their perspective without having received any of the loan documentation and agreements essential for the success of the transaction.
[30]Bartle v GE Custodians Ltd HC Auckland CIV 2008-404-3460, 30 September 2009 at [124].
[76] In short, this was a “fractured” transaction where the Bartles were hopelessly handicapped from the outset in forming a proper appreciation of what the overall finance transaction really was.
3. The type of lending
[77] This loan transaction can fairly be described as an asset lending scheme. It was the Bartles who were putting up their asset, substantially for the benefit of Blue Chip which received substantial fees by way of brokerage and working capital; Blue Chip was entitled to nearly all of the potential gains; and Blue Chip also received substantial underwriting and other fees.
[78] Asset lending is not necessarily unconscionable per se, but the true character of the exercise has to be recognised, and it has a substantial potential for injustice. As was said by Basten JA in Perpetual Trustee Co Ltd v Khoshaba, the exercise can be a “fruitless” one.[31]. If the loan is not serviceable, then in substance it is not a loan but an asset sale. In economic terms, the lender risks nothing but the borrower risks the assets. See Riz v Perpetual Trustee Australia Ltd:[32]
Such a transaction involves no risk to the lender, but considerable risk to the borrower, given the likely inability of the borrower to perform and the probability if not certainty of resort to the security, with the lender being in a better position to protect itself against loss. The substantive unfairness lies in the imbalance of risk.
[31]Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41 at [128].
[32]Riz v Perpetual Trustee Australia Ltd [2007] NSWSC 1153 at [70].
[79] There has been governmental concern about this type of lending. In New Zealand, the Ministry of Consumer Affairs in its review of the operation of the Credit Contracts and Consumer Finance Act 2003 noted concern over “security arrangements that capture all of a borrower’s assets”.[33] In Australia, the National Consumer Credit Protection Act 2009 (Cth) came into force on 1 April 2010. It places stringent obligations on credit providers to ensure that the loan does not create substantial hardship (which is presumed if the consumer would have to sell their principal place of residence to meet the contract obligations: see s 119). Further, the ability to avoid the statutory obligation cannot be evaded by the intrusion of “middlemen”.
[33]Ministry of Consumer Affairs Review of the Operation of the Credit Contracts and Consumer Finance Act 2003 (Wellington, 2009) at 44.
[80] The second striking aspect of this financing was that it was a Fastdoc loan. Again, there is nothing commercially improper or inappropriate about such a loan per se. But there is a substantial potential for injustice, which has to be guarded against. Here, all the Bartles were required to do was to fill out a statutory declaration, and provided they had a sufficient loan to value ratio in their property (which they did), and mortgage insurance, the loans would be granted. Yet patently, if anything went wrong (such as a Blue Chip or market collapse, both of which transpired), the Bartles had no way, at their ages and on their pensions, to continue to service the loans.
4. Total failures of comprehension
[81] In this case there was a failure of comprehension both on the part of GE as the lender, and the Bartles as the borrowers.
[82] To take first the position of GE, it is common ground that GE knew nothing at all about Blue Chip, and in particular that TML was part of the Blue Chip group. I will say something further about the relationship between TML and GE shortly.
[83] Income-wise, GE had no knowledge of the Bartles’ income. It relied instead upon the statutory declaration signed by them in the Fastdoc application that they could afford to service the loan application (even though it seems plain that the Bartles thought they were involved in a much more limited and short-term transaction).
5. The relationship between TML and GE
[84] Perched in between a lender who merely wanted to lend with no other obligations, and a non-comprehending borrower, was the loan originator, TML. TML was operating an asset lending scheme for Blue Chip, which was particularly targeted at older people experiencing income problems but who had equity in their homes. This can fairly be described as a kind of predation. For persons such as the Bartles, the scheme was inherently defective and fraught with risks.
[85] It was in such a context that there was so much evidence and argument as to whether TML could be considered to be the agent of GE. If that was the case, it would be a particularly unfortunate finding for GE.
[86] As I have already indicated (at [29] above), GE had endeavoured to “outsource” its loan originating operation. Again, there is nothing commercially inappropriate in that per se. It is commonplace in commercial life that the finance arm of one entity may be a subsidiary company, or that operation may be outsourced altogether.
[87] However, in this instance, even if TML was not a full agent of GE, it clearly was an agent for very important purposes. For instance, TML had responsibility for servicing and enforcing the loan. If there was a default on the mortgage and a notice under the relevant property legislation had to issue, only GE or its agent could take that step. Clause 19.5 of the Correspondent Deed expressly provided:
19.5 Mortgage Servicing
The Correspondent shall service and administer the mortgage loans on behalf of the Trustee in accordance with prudent mortgage loan servicing, managing and administration standards.
The Correspondent shall promptly notify AMS NZ, the Trustee and, if required, the approved mortgage insurer in writing of any event, circumstance or occurrence which may adversely affect any mortgage loan or the ability of the Correspondent to service, manage or administer any mortgage loan or to otherwise perform and carry out its duties, responsibilities and obligations under the Correspondent Deed or this Operations Manual.
The Correspondent shall take such steps and incur such expenses as are necessary to enforce the terms of each mortgage or otherwise exercise any of the rights conferred under each mortgage including the taking out of insurance policies over the mortgaged property, undertaking necessary repairs (subject to the mortgage insurance policy and to the extent permitted by law) and paying rates, assessments and taxes levied thereon.
[88] Further, I do not accept that a lender can automatically avoid the application of the CCCF Act by the interposition of an intermediary loan originator, particularly in circumstances such as the present where on any view of the matter there were major agency functions being performed by the intermediary. The key issue here is not the mens rea of the ultimate lender, but rather the facts of the actual transaction.
[89] In fairness to GE, the relevant provision in the operations manual provided that:
10.3 Borrower Income
Correspondents must not submit loan applications to AMS NZ for approval unless the Correspondent is completely satisfied, having made all reasonable enquiries of the borrower, that the borrower will be able to meet its obligations under the loan contract in accordance with its terms without substantial hardship. Income for all borrowers must be established to be sustainable and adequate to repay the proposed new debt and any existing debt, plus interest and fees within an agreed term.
[90] GE can fairly say that it tried to keep these loans “clean”. There may therefore be downstream issues – if AMS and TML are worth powder and shot – between GE and its Correspondents. But GE cannot avoid the effect of what was brought into being by it where the statute provides for curial intervention in a particular case.
6. Incompetent legal advice
[91] A competent and independent solicitor would have quickly alerted the Bartles to the perils they faced. This was pleaded by the Bartles against Mr Mathias, their solicitor, and fully considered by Randerson J in his judgment.
[92] The Judge held that Mr Mathias had breached a duty of care to the Bartles in three key respects:
(a)he failed to ensure the Bartles understood the effect and implications of the transaction;
(b)he failed to explain the risks associated with the transaction including the entering into of substantial mortgages; and
(c)he failed to give the Bartles independent advice as to the risks that they faced if the Blue Chip group did not honour its obligations.
[93] In response to those allegations, Mr Mathias advanced the wishful defence that any duty of care he might have had did not extend to giving advice about the wisdom of the transaction, and was limited to giving accurate accounts to questions asked of him. Randerson J, with respect rightly, would have none of that. He said Mr Mathias had a duty to his clients to see that they understood the transaction.
[94] The High Court Judge found as a fact that Mr Mathias was not independent, and there is no cross-appeal against that finding.
[95] It is worth adding a few details to show the extent to which Mr Mathias was acting for the lender. For instance, in the letter of instructions to Mr Mathias of 20 October 2006 it was said:
Extent of instructions
In acting for the Lender, you are asked to investigate and approve all matters that you consider necessary and prudent to protect the Lender’s interests and ensure that it obtains the required security for the advance. Although this letter is not intended to be exhaustive in setting out these matters, we would expect you to search the relevant titles (including any land covenants, memorials or other aspects of the title which may detrimentally affect our interest) and undertake any other investigations that you consider appropriate. We would expect you, for example, to advise us if there is any prior interest or any other matter affecting the property over which security is taken or affecting the Borrower(s) that may adversely affect a lender’s position. In addition, if your clients are obtaining a LIM report that contains information which may have an impact on the value of the mortgaged property or which could adversely affect a lender’s position, we expect you to inform us.
If, you are aware or become aware that any of the details in the loan contract, mortgage or guarantee is incorrect, incomplete or inaccurate, such as the name of any borrower, guarantor or mortgagor, or if any property is misdescribed, then we would ask that you advise us and obtain our approval to any required changes.
(Emphasis added.)
[96] Not only do these instructions (accepted and acted on by Mr Mathias) confirm that he was acting for GE’s interests, but also he could and should have noted that the Bartles were not independent property investors as some documents described them. Rather, they were superannuitants with a very limited income.
[97] GE cannot rely on the borrowers having had legal advice which was neither competent nor independent to evade an oppression finding.
Conclusion
[98] I would declare that the credit contract at issue in this case was oppressive within the meaning of the CCCF Act, for the reasons I have traversed.
[99] I would remit the proceeding to the High Court, for a consideration of the appropriate remedy. I make no observations on what that might be. There was no argument on the point at all before us; little imagination is required to see that this may be the most difficult part of this case.
[100] The appellants should have their costs in the High Court, to be fixed by the High Court.
[101] In this Court, the first respondent should pay the appellants costs for a complex appeal on a band A basis and usual disbursements. I would certify for two counsel.
[102] Finally, the legal profession has had some criticism of late relating to court representation. It is pleasing to be able to record that counsel for the appellants have acted, in this instance, on a largely pro bono basis. They are to be commended for that.
Appendix 1
ARNOLD J
Table of Contents
Para No.
A Factual background [105]
(i) The Blue Chip model [106]
(ii) The parties’ knowledge of Blue Chip [117]
(a) The Bartles [118]
(b) GEC [124]
(c) TML[127](iii) The relationship between GEAMS and TML [130]
(iv) Process for Fastdoc loans [135]
(a) Operations Manual [139]
(b) Process in relation to Bartles [144]
B Unconscionability at equity and oppression under the CCCF Act [165]
(i) Equitable doctrine of unconscionability [166](ii) Oppression under the CCCF Act [168]
C Issues on appeal [180]
D Discussion [182](i) Agency [183]
(ii) Reasonable standards of commercial practice [197]
(a) Evidence in this case [198]
(b) The authorities [201]
(c) Conclusion [214]
E Overall evaluation [217]
F Decision [231][103] I have had the opportunity to consider Hammond J’s judgment in draft. While I agree with him as to the disposition of the appeal, I prefer to explain why in my own words.
[104] The appellants, Mr and Mrs Bartle (the Bartles) and their company Bartle Properties Ltd (Bartle Properties), sought relief from the enforcement of mortgage obligations undertaken to secure borrowing under loan agreements which they entered into with GE Custodians Ltd (GE). They did so on the ground that the mortgages (and loan agreements) were unconscionable, either at equity or under the Credit Contracts and Consumer Finance Act 2003 (the CCCF Act). The agreements were alleged to be unconscionable because of their nature and the process by which they were entered into.
A Factual background
[105] I will not repeat the facts which Hammond J has outlined. I do, however, wish to supplement his description by emphasising some additional points. I will deal with these under the following headings:
(a) The Blue Chip model.
(b) The parties’ knowledge of Blue Chip.
(c)The arrangements between GE and the loan originator, Tasman Mortgages Ltd (TML).
(d) Process for Fastdoc loans.
(i) The Blue Chip model
[106] In a letter dated 27 September 2006 to the Bartles, Blue Chip explained the “investment” as follows:
The Transaction
The transaction has been designed to provide you with a secure passive income stream, with the risk and responsibility of interest payments transferred to Blue Sky Holdings Limited.
Under the terms of the transaction a corporate trustee will acquire title to the legal property to be held in accordance with the terms of a “Joint Venture” between yourself and Blue Sky. Under the terms of the Joint Venture you are entitled to:
·interest on the borrowings you raised to make this investment (which will be adjusted to take account of any subsequent increase or decrease in interest rates);
·a fixed fortnightly procurement fee, which is payable from the date of payment of your Initial Contribution until such time as the property is sold;
·depreciation on the structural component of the property, which can be used to defer the tax liability on your procurement fee; and
·an agreed share of the net sale proceeds on sale of the property.
You are the sole shareholders and directors of the corporate trustee.
Essentially, the Joint Venture will receive the rental income on the property and pay all ownership costs. To the extent that the working capital collected in your initial contribution by the Joint Venture is insufficient to meet these Blue Sky will make a contribution to the Joint Venture.
The Joint Venture will appoint Blue Sky Holdings as the manager to deal with matters of administration. To the extent that matters require approval of the Joint Venture parties you will control what is permitted by way of voting rights.
The transaction continues until either you choose to wind it up or the property is sold. On termination the property is sold and the sale proceeds are applied:
·firstly to discharge the balance loan secured against the property;
·then to return the amount of your Initial Contribution,
·any surplus is then split in accordance with the sharing arrangement detailed in the joint venture.
…
Risks
Every investment has its risks. You should make sure that you are fully aware of the risks and are satisfied with the investment before signing the Agreement for Sale and Purchase of Real Estate.
In undertaking this transaction your risks include:
·the actual amount of capital gain and therefore your share of the net sale proceeds on a specific property;
Blue Sky Holdings take the risk of:
·interest rate variations.
…
[107] The Bartles executed the agreement for sale and purchase of an apartment, Unit 701, on 29 September 2006. The vendor was noted as Symonds Street Development Ltd (SSD), which did not execute the agreement until some time later. Although SSD was not an associate of Blue Chip, there was an underwriting agreement between them, by virtue of which Blue Chip was to underwrite the sale of the apartments in return for the payment of a 15 per cent commission based on pre-determined values of apartments sold.
[108] On 27 September 2006 a deed of lease in relation to the apartment had been entered into between SSD as lessor and ART Apartments Ltd (a Blue Chip subsidiary) as lessee, with Blue Chip New Zealand Ltd as guarantor. The lease was for a term of four years, with a weekly rental of $640 (inclusive of GST) and Blue Chip had an option to purchase the apartment if the lessor decided to sell. As part of the sale and purchase transaction, the Bartles acknowledged, in an undated written agreement with SSD, that the sale of the apartment was subject to the lease.
[109] The Bartles also entered into a property management agreement with Bribanc Property Group Ltd, another Blue Chip subsidiary, on 29 September 2006. Under it Bribanc undertook to carry out the owner’s “functions and duties as landlord” and to carry out “all routine cleaning, maintenance, repairs and upkeep” of the property, in return for a fee.
[110] Bartles Properties was incorporated to be the corporate trustee to purchase and hold the property as a “bare trustee” for the joint venture between the Bartles and Blue Chip Joint Ventures Ltd (Blue Chip JVL). The joint venture agreement was dated 7 November 2006. Relevantly, the structure of the joint venture was as follows:
(a)Its purpose was “to engage in the business of owning and renting residential property” (and such other business as might be agreed).[34]
(b)Each joint venturer made an “initial contribution” to the joint venture. The Bartles’ initial contribution was that they assumed responsibility for all borrowings relating to the property together with “a contribution towards all costs and disbursements associated with the Joint Venture which obligation and responsibility shall represent 75 per cent of the Joint Venture Units”.[35] Blue Chip JVL’s initial contribution was described as:
Arranging and causing all loans to be made to the Joint Venture for the Property, providing an agreement to indemnify the Joint Venture and [the Bartles] against all or any liability for operating cash shortfall from the Property … and an agreement to assume management responsibility for the Property and the Joint Venture together with a contribution towards all costs and disbursements associated with the Joint Venture which sum, contributions and agreements shall represent 25% of the Joint Venture Units and [certain specified items].
(c)Blue Chip agreed to make monthly payments to the Bartles’ bank account of an amount “equivalent to the interest or principal and interest payments” incurred by them for the borrowings necessary to purchase the apartment.[36] In effect, Blue Chip JVL undertook to meet the Bartles’ payment obligations in respect of their borrowings. In addition, in consideration of their contribution to the joint venture, Blue Chip JVL agreed to pay the Bartles a fortnightly “procurement fee” of $451.58 from the date of the borrowings until the termination of the joint venture.[37]
(d)On the sale of the property, the net proceeds were to be split 10.10 per cent to the Bartles and 89.90 per cent to Blue Chip JVL.[38] The net proceeds were the proceeds of sale “less all actual costs and liabilities attributable to [the property] outstanding at the date of distribution to the [joint venturers]”.[39]
(e)The joint venture was to continue until the “termination date” unless before that date the joint venturers resolved by special resolution to sell the property or terminate the joint venture.[40] The termination date was defined to mean “the date of the winding up of [the joint venture]”.[41]
[34] Cl 3.1.
[35] Sch 2 to the joint venture agreement describes the initial contribution of each party.
[36] Cl 6.10.1.
[37] Cl 6.10.2.
[38] Cl 6.10.4.
[39] Cl 1.1.
[40] Cl 12.
[41] Cl 1.1.
[111] The purchase price of the apartment was $552,000 (including a car park and a furniture package). The Bartles borrowed almost $630,000 to fund the purchase. The difference was taken up first, by a payment described as “working capital” ($55,200) and second, by fees of one sort or another, most levied by Blue Chip companies. For example, Blue Chip charged a brokerage fee of 2.95 per cent for “the negotiation, organising and raising of finance during the month of September 06” ($16,284) and a joint venture agreement fee ($3,500).
[112] Although it is not reflected in Blue Chip’s letter of 27 September 2006 or the joint venture agreement, Blue Chip had indicated to the Bartles that it proposed to purchase the apartment from the joint venture after four years (ie, in 2011). On that basis, the Bartles expected that:
(a) they would be relieved of their debt obligations in four years.
(b)in the meantime, Blue Chip JVL would meet the interest payments due on their borrowings, and they would receive fortnightly payments of approximately $450 by way of a procurement fee; and
(c)if there were a capital gain on the sale of the property, they would receive a little over 10 per cent of it.
In effect, as they understood it, the Bartles would be making the equity in their home available to Blue Chip for four years to fund the purchase of the apartment and in return would receive regular fortnightly payments.
[113] The joint venture accounts for the year ending 31 March 2007 indicate that the $55,200 provided by the Bartles as “working capital” for the joint venture was the source of the funds for the fortnightly procurement fee payments and the monthly reimbursement of the interest payments on their borrowings. The fortnightly procurement fee payments commenced on 8 December 2006 and ended on 14 September 2007. The monthly interest payments commenced on 1 December 2006 and ended in February 2008. The payments ceased because by letter dated 21 September 2007 (eight days after the second and third advances were made) Blue Chip JVL unilaterally terminated the joint venture.
[114] Thereafter, the Bartles were dependent on rental payments from the apartment to meet their commitments under the loan agreements. As at April 2009, the Bartles had received one rental payment of $1,700, and the apartment was being advertised for rent at a weekly rental of $430 – $460, which was insufficient to meet the outgoings. We were advised that the apartment was sold in July 2009 for $245,000, which was less than half its 2007 market value (according to a valuation obtained in June 2007).
[115] The Blue Chip model, as reflected in the joint venture scheme put to the Bartles, had serious defects. In particular, it could only hope to work if in the short term:
(a) there was strong rental demand for apartments of this type;
(b) apartment prices increased significantly;
(c) interest rates did not increase significantly; and
(d)Blue Chip could continue to persuade people to invest in its products.
As Mr Stewart QC noted, it was vital to the investment that the Blue Chip group did not collapse. Plainly, none of these areas of risk was identified in the “Risk” section of the letter quoted at [106] above.
[116] The Bartles’ Blue Chip “investment” was disastrous from their perspective. But that does not, of course, mean that they are entitled to relief on the ground of unconscionability or oppression.
(ii) The parties’ knowledge of Blue Chip
[117] I deal in this section with the knowledge of the Bartles, GE and TML about Blue Chip, and in particular its joint venture product.
(a) The Bartles
[118] I have summarised at [112] above the Bartles’ expectations as to their Blue Chip “investment”. Although, as Mr Stewart submitted, the Bartles did ask questions about the Blue Chip investment proposal, and did take time to consider it, it seems clear that, at the outset at least, they did not understand all that was involved.
[119] The Bartles said in their evidence that they did not understand the full implications of the joint venture scheme for them until August 2007, 10 months after they had signed the sale and purchase agreement and taken out the first loan for $137,484. Mr Mathias, the lawyer whom Mr Davies suggested they use in preference to their own lawyer as he was a “Blue Chip lawyer”, familiar with Blue Chip products, visited the Bartles at their home in August 2007 to obtain their signatures on documents relating to the second and third loans, made in September 2007. While reading the documents, Mrs Bartle noticed that the monthly payments for all the borrowing totalled almost $5,000. When she asked Mr Mathias who was responsible for the payments, he indicated that Blue Chip was. Mrs Bartle then asked who would be responsible if something went wrong, to which Mr Mathias replied that they were.
[120] The Bartles said in their evidence that they were horrified at this, but thought that it was too late to do anything about it because they had already signed the mortgage documents.
[121] The Judge accepted that the Bartles did not understand the nature of the transaction into which they were entering. He said:
[123] Since I accept the Bartles as honest witnesses, I can only conclude that at the time they signed the agreement for sale and purchase there was a significant degree of misunderstanding by them as to the actual amounts they would personally be responsible for borrowing. What they clearly understood was that their property would be mortgaged to provide a contribution by them towards the joint venture and that Blue Chip would be contributing to the joint venture to the extent necessary to complete the purchase. They also understood that Blue Chip would be responsible for all costs and expenses and that they would receive $451 per fortnight (subject to tax) over a period of four years. At the conclusion of that period, the property would be sold, all borrowings repaid and they would receive a small share of any capital gain. They were never told at any time prior to signing the agreement for sale and purchase that they would be responsible personally for the total borrowings of over $630,000 or that they stood to lose their home if Blue Chip collapsed. I am satisfied that, if they had been aware of this, they would never have entered the transaction.
(Emphasis added.)
[122] Moreover, it is relevant that Randerson J found that Mr Mathias, the lawyer to whom the Bartles were referred by a Blue Chip representative, was liable to the Bartles on the basis of his negligence in giving them assurances to the effect that their home would not be at risk, and they should not face any problems, if they entered the Blue Chip transaction.[42]
[42] At [147] – [148].
[123] I see no basis on which to interfere with the Judge’s findings in respect of the Bartles’ knowledge.
(b) GE
[124] GE operated in New Zealand through a subsidiary, Australian Mortgage Securities (New Zealand) Ltd (AMS). As Randerson J said, GE and AMS can be regarded as one for the purpose of the proceeding.[43]
[43] At [167].
[125] Randerson J noted that GE/AMS had no direct or indirect ownership interest in Blue Chip, TML or its associated company, Executive Mortgages Ltd (EML), and there were no common directors. GE/AMS dealt with TML/EML but not with Blue Chip or the Bartles.[44] As the Judge said:
[169] For the purpose of this proceeding it is accepted on behalf of the Bartles that [GE] had no actual knowledge that the loans were for the purpose of a Blue Chip investment. It was also accepted that [GE] had no actual knowledge of the terms of the joint venture arrangement with Blue Chip nor of any representations that may have been given by Blue Chip or Mr Mathias to the Bartles in connection with their investment. Further, it was agreed that [GE] did not actually know that the Bartles would have insufficient income to support the repayment of the mortgage advances.
[44] At [168].
According to Mr Grant, a director of GE who gave evidence, he did not learn of any connection between TML and Blue Chip until June 2007, and he had no reason to be concerned about it.
[126] There was no challenge to any of this.
(c) TML
[127] It was part of the Bartles’ case that TML knew both about their personal details (eg their financial position and status as retirees) and the nature of the Blue Chip product and that GE was fixed with TML’s knowledge. I deal now with TML’s knowledge of the nature of the Blue Chip product. I deal later with TML’s knowledge of the Bartles’ financial position and status.[45]
[45] At [145] and following below.
[128] Mr Mark Bryers, the principal of Blue Chip, became a director of TML on 5 September 2006. There was a high degree of common ownership between Blue Chip and TML. Later, on 14 March 2007, a Blue Chip company acquired the shares in TML and EML. On 31 May 2007 Lombard Group Ltd (not related to Blue Chip) signed a conditional agreement to acquire 70 per cent of the shares in TML from Blue Chip. AMS gave its consent to the acquisition on 11 June 2007.
[129] In relation to TML’s knowledge of Blue Chip, Randerson J said that, while TML knew that the loans were being raised for a Blue Chip investment, “there was no evidence of any greater knowledge on its part of the details of the investment such as the terms of the critical joint venture agreement”.[46] There is no basis for departing from that assessment.
(iii) The relationship between GE, AMS and TML
[46] At [282].
[130] The relationship between GE and AMS is governed by two documents, the New Zealand Master Trust and Security Trust Deed (the Trust Deed) and the Master Origination and Servicing Agreement (MOSA). Randerson J described the general effect of these documents as follows:
[176] … Under these documents, [GE] held loans secured over residential property as custodian trustee. The loans were secured by registered mortgages. As a further protection, [GE] held insurance cover against any losses it might sustain through default under the mortgages. The secured loans were later sold to finance and other investment houses. This type of financing is commonly referred to as “securitisation”.
We were advised that the mortgages of the Bartles and other Blue Chip investors with loans from GE were not securitised. They are still held by GE.
[131] Under MOSA, AMS had the responsibility of originating loan proposals, settling loan transactions and managing the loans after they were advanced. In performing its responsibilities under MOSA, AMS was required to comply with certain agreed procedures. AMS was entitled to contract others to perform its responsibilities under MOSA.
[132] AMS entered into a Correspondent Deed with TML. The general effect of the Correspondent Deed was that TML would originate, implement and manage loans for AMS, although it could not determine that a loan application would be granted.
[133] A number of features of the Correspondent Deed are significant in the present context:
(a)Apart from any express delegation of the exercise of the powers in the Deed, TML was an independent contractor and not the “agent, partner or employee of AMS or [GE]” and was not permitted to act inconsistently with this status.[47]
[47] Cl 3.1.
(b)TML was entitled to make mortgage proposals to AMS. These had to conform with the Operations Manual.[48]
[48] Cls 2.2 and 4.1.
(c)AMS was under no obligation to accept any loan proposal.[49]
(d)TML was obliged to advise AMS of any information which might reasonably be material to a decision to accept or reject a loan application which it became aware of, even in the period between approval and settlement of the proposal.[50]
(e)If AMS accepted a loan proposal, TML was required to implement the proposal in accordance with the Operations Manual. In doing so, it was required to “use the same degree of skill and care as would be used by a responsible and prudent mortgagee”.[51]
(f)Once a loan proposal was implemented, TML was required to manage the relevant mortgage “using the same degree of skill and care as would be used by a responsible and prudent mortgagee”, and was required to exercise the powers and perform the obligations and functions of the mortgagee under each mortgage, in accordance with, among other things, the Operations Manual.[52]
(g)TML had no liability for the actions of (among others) any approved solicitor which it appointed in accordance with the Correspondent Deed provided that the appointment was consistent with the Operations Manual and the terms of appointment were such that the solicitor was “appointed to act for AMS and [GE] and is directly liable to AMS and [GE] for its acts or omissions in acting as an Approved Solicitor …”[53]
(h)TML was required to keep records and to produce them for inspection by AMS if required.[54] It was also obliged to comply with the law in performing its obligations under the Deed, including the law “relating to or regulating the engaging in of misleading, deceptive and unconscionable conduct” and “the Credit Contracts Act”.[55] TML was required to exercise its own judgement, skill and discretion in performing its obligations under the Deed, albeit subject to the terms of the Deed.[56]
(i)On a default under a mortgage, TML was required to enforce GE’s powers under the mortgage in such a way that TML considered reasonably necessary to remedy the default, recover the outstanding amount under the mortgage and preserve GE’s rights, again consistently with the Operations Manual.[57] Provided that it complied with the Operations Manual and obtained any necessary consents, TML was entitled to take any action that GE was entitled to take under the mortgage, including commencing legal action.[58]
(j)TML was required to ensure that mortgagors held adequate insurance over the insured property and that it noted GE’s interest.
(k)There was a representations and warranties clause.[59] This provided (among other things) a warranty that each loan application had been fully investigated by TML in accordance with the Operations Manual and TML was satisfied that “all statements and information contained in it are correct in all respects”.[60] It also provided a warranty that the Credit Contracts Act 1981 (if applicable) had been complied with “except to the extent that such non-compliance was caused by the act or omission of AMS, any adviser … to AMS, or any person referred to in clause 6.4” (see [133](g) above).[61]
(l)TML acknowledged that in performing its obligations under the Correspondent Deed, it did not act as an agent for the mortgagor.[62]
[49] Cl 4.3.
[50] Cl 4.4(b).
[51] Cl 4.5.
[52] Cls 5.1 and 5.2.
[53] Cl 6.4.
[54] Cls 7.2 and 7.4.
[55] Cl 7.5.
[56] Cl 7.7.
[57] Cl 9.1.
[58] Cls 9.4 and 9.5.
[59] Cl 12.1.
[60] Cl 12.1(g).
[61] Cl 12.1(i).
[62] Clause 12.4(f).
[134] In summary, then, under the Correspondent Deed TML originated, implemented, managed and took recovery action in respect of loans, albeit within the requirements of the Operations Manual. The only significant function that AMS retained in the context of individual loans was the formal power to accept or reject applications.
[97] Kendall Wilson Securities Ltd v Barraclough [1986] 1 NZLR 576 (CA).
[205] This Court upheld the trial Judge’s findings, although it reached a different view as to the appropriate contribution of the negligent parties. In the course of his judgment Somers J said:[98]
I have no doubt that the ordinary prudent lender would inquire into the ability of a possible borrower to meet his obligations without resort to any proffered security. McMullin J adverted to this in Farrington v Rowe McBride & Partners [1985] 1 NZLR 83, 98.
[98] At 601.
[206] Similarly in the United Kingdom, Gage J accepted in United Bank of Kuwait v Prudential Property Services Ltd[99] that, in appropriate circumstances, a lender might be held to be contributorily negligent as a result of its failure to make proper inquiries about the ability of a borrower to service a loan.[100] In that case the plaintiff lender, relying on a (negligent) valuation by the defendant valuers, had limited the loan to 70 per cent of the value of the security. On the facts, Gage J found no contributory negligence.
[99]United Bank of Kuwait v Prudential Property Services Ltd [1994] 2 EGLR 100 (HC). This case went on appeal to the House of Lords, where it was heard with two other cases – see Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191. Their Lordships’ reasoning does not affect the point made in the text.
[100]At 105 – 106. See also Chelsea Building Society v Goddard & Smith [1996] EGCS 157 (HC) at 10 and the discussion in John Murdoch “Client negligence: A lost cause?” (2004) 20 Prof Neg 97 at 105 – 106.
[207] The United Kingdom equivalent of Fastdoc loans, referred to as “non-status” or “self-certification” loans, were considered in another case involving a claim against a negligent valuer, Platform Home Loans Ltd v Oyston Shipways Ltd,[101] in the context of a contributory negligence argument. Jacob J did not accept that such lending was inherently imprudent.[102] He did, however, accept that in particular circumstances it may be imprudent to lend on a LVR of 70 per cent with “virtually no questions asked”.[103] In the particular case, given the very high value of the loan (£1.05 million), the Judge found that the lender was contributorily negligent, a finding which was upheld on appeal.[104]
[101]Platform Home Loans Ltd v Oyston Shipways Ltd [1996] 2 EGLR 110 (HC).
[102] At 110
[103] At 111.
[104]See Platform Home Loans Ltd v Oyston Shipways Ltd [1998] Ch 466 (CA). The matter went to the House of Lords, but the contributory negligence findings were not challenged; rather, the issue was how the contributory negligence should be taken into account in assessing damages – see Platform Home Loans Ltd v Oyston Shipways Ltd [2000] 2 AC 190.
[208] Second, there are several Australian cases which are critical of asset lending particularly where the relevant asset is the family home. Mr Dale referred to two in particular, Permanent Trustee Company Ltd v O’Donnell[105] and Spina v Permanent Custodians Ltd.[106]
[105] Permanent Trustee Company Limited v O’Donnell [2009] NSWSC 902.
[106]Spina v Permanent Custodians Limited [2009] NSWCA 206.
[209] The O’Donnell case involved several sets of proceedings in which borrowers sought relief under the Contracts Review Act 1980 (Cth) on the basis that the loan agreements and supporting mortgages were “unjust”.[107] The proceedings have striking similarities with the fact situation in the present appeal,[108] although there are material differences, as Randerson J noted.[109] The judgment is a lengthy one and I will not attempt to summarise it in any detail. Rather, I make three brief points about it:
(a)First, the Judge, although accepting that a finance broker is prima facie the agent of the borrower, held that the broker was the agent of the lender in these particular instances.[110] This resulted from the degree of control exercised by the lender and the fact that the broker represented the lender in determining loan eligibility and preparing loan applications.[111]
(b)Second, the Judge held that the lending at issue was asset lending. He acknowledged that not all asset lending was problematic, but some was, citing various authorities to explain why.[112]
(c)Third, the Judge held that the borrowers were entitled to relief under the Contracts Review Act.[113]
[107]Section 9 provides for relief in respect of unjust contracts and lists some relevant considerations. “Unjust” is defined in s 4 to include “unconscionable, harsh or oppressive”.
[108]There is a useful summary of the factual situations at [1] of the judgment.
[109]At [275].
[110]At [336] – [362].
[111]At [350] and [359].
[112]At [379] – [381].
[113]At [446].
[210] On the question of why at least some asset lending is problematic, one of the authorities cited in O’Donnell is particularly helpful, namely the decision of Brereton J in Riz v Perpetual Trustee Australia Ltd.[114] There the Judge said:
70 The substantive unfairness is said to be found in the “asset lending” element. Although asset lending is not necessarily unjust, such contracts have the potential for injustice. The perceived injustice in “asset lending” is sourced in what is described in [Perpetual Trustee Company Limited v Albert and Rose Khoshaba [2006] NSWCA 41] by Basten JA (at [128]) as the futility of the exercise: if the loan is not serviceable, then it is not in substance a loan but an asset sale, in which the lender risks nothing but the borrower risks the asset. Such a transaction involves no risk to the lender, but considerable risk to the borrower, given the likely inability of the borrower to perform and the probability if not certainty of resort to the security, with the lender being in a better position to protect itself against loss. The substantive unfairness lies in the imbalance of risk. Where that is voluntarily accepted, such a transaction may not be unjust. But where in the circumstances in which the transaction is made – particularly where the family home is involved – the borrower has a less than full appreciation of the risks or consequences, or is under some misapprehension or pressure, so as to provide an element of procedural unfairness, such a loan may be unjust. And even apparent comprehension of the transaction and its legal and practical effect and voluntariness is not entirely prophylactic: the purposes of the Contracts Review Act include protection of those who are not able to protect themselves, and while the Act is not a panacea for the greedy, it may come to the aid of the gullible.
[114]Riz v Perpetual Trustee Australia Ltd [2007] NSWSC 1153.
[211] Asset lending may well be appropriate in respect of self-employed persons who for some reason are unable to verify their past incomes (through failure to finalise accounts or taxation returns, for example) or to predict future income with accuracy (because they face uneven cashflows, for example).[115] But what may be appropriate for genuinely self-employed borrowers facing this type of difficulty will not necessarily be appropriate for all borrowers, particularly retired persons on modest incomes and with modest assets. Reverse mortgages are, of course, a form of asset lending, and may well be an appropriate form of borrowing in many situations. But again, that does not resolve the issue in the present case.
[115]See Permanent Trustee Company Ltd v O’Donnell at [379].
[212] Finally, to round off the Australian material I note that Mr Dale drew our attention to the National Consumer Credit Protection Bill 2009, which has now been enacted as the National Consumer Credit Protection Act 2009 (Cth). The Act establishes a licensing regime for persons engaging in credit activities and sets out the responsibilities of licensees. Section 118 deals with the circumstances in which a credit contract must be assessed as unsuitable by a licensed credit assistance provider. One of the circumstances is where it is likely that a consumer will be able to comply with his or her financial obligations under the contract only with substantial hardship. It is presumed, unless the contrary is proved, that a consumer could only comply with substantial hardship if the consumer could only comply by selling his or her principal place of residence. In effect, then, there is a presumption against asset lending of the type at issue in the present case.
[213] Further, attached as a schedule to the Act is the National Credit Code (the Code), which takes effect on 1 July 2010. The Code enables courts to reopen unjust transactions, and contains a list of factors to be taken into account in determining whether a credit contract is unjust, one being whether at the time the credit contract was entered into the credit provider knew, or could have ascertained by reasonable enquiry at the time, that the debtor could not pay in accordance with its terms or not without substantial hardship.[116]
(c) Conclusion
[116]See cl 76(2).
[214] Although the direct evidence on asset lending was limited, a fair summary of what Mr Grant and Mr Anderson said is that such lending is acceptable in relation to some borrowers, but not in relation to all. A similar view emerges in the Australian cases – in some circumstances, although not in all, asset lending is seen as oppressive or unconscionable.
[215] Given the similarities between Australia and New Zealand in this context and the fact that many lenders operate in both jurisdictions (as is well exemplified by the present case), I consider that the New Zealand courts should adopt a similar approach. So far as possible, there should be a consistent approach to what is regarded as acceptable commercial practice in relation to lending on both sides of the Tasman Sea.
[216] Accordingly I consider that asset lending of the type at issue is capable of being oppressive, although not in every case.
E Overall evaluation
[217] In drawing all this together, I accept that it is necessary to adopt an approach that is realistic from a commercial perspective. Lenders need a high degree of predictability in order to advance money to borrowers, and the courts should not unnecessarily limit borrowing opportunities, either wittingly or unwittingly. Furthermore, the importance of sanctity of contract must not be minimised. Accordingly, the relevant principles need to be clear and not dependent on an ex post facto analysis of the circumstances or determined by subjective reactions to what turn out to be poor investment decisions. On the other hand, Parliament enacted the CCCF Act to provide some protection to those who have entered into loan agreements, thereby protecting people against themselves. The courts must ensure, to the extent legitimately possible, that the protection Parliament intended to confer is not whittled away by lending arrangements and structures which undermine its efficacy.
[218] I have concluded that the loan agreements were oppressive in the present case, for the following reasons.
[219] First, GE took little or no risk on the Bartles’ loan transactions. The value of the securities it held significantly exceeded the value of the borrowing, and it was in any event insured for any shortfall. No doubt, GE would have preferred that the Bartles met their ongoing obligations under the loans, but in a practical sense it was indifferent, given the securities it held. By contrast, the Bartles faced a high degree of risk. They had no income sufficient to meet their obligations, even taking account of any returns from the apartment, and their most significant asset by far, their home, was fully exposed. The loan transactions were in this sense one-sided. From GE’s perspective they were based essentially on the value of the security offered, without genuine regard to the ability of the Bartles to service them.
[220] Mr Anderson accepted that Fastdoc-style loan products were not suitable for all lenders. GE itself acknowledged the Bartles were not suitable for such loans. As I have already noted, Mr Grant said in his evidence that, had GE known the Bartles’ financial position, it would not have made the loans. Moreover, the 2007 Operations Manual (which was in force when the second and third loans were made) indicated that Fastdoc loans were for “self-employed” borrowers, which the Bartles were not. As I have noted, Randerson J gave little or no significance to this, treating “self-employed” as a convenient category for people like the Bartles.[117] But I regard it as significant, given the requirements in the 2007 Manual.[118] In my view, both the Manual and the required documentation indicate that TML did have enquiry responsibilities relevant to the question of whether the loans were affordable for the Bartles.
[117] See [145] above.
[118] See [159] above.
[221] In short, there is no dispute that these were loans that should not have been made. However, I accept that this alone does not mean that there was oppression in terms of the CCCF Act.
[222] Second, there is the nature of the loans. The first and second loans were for terms of 25 years. The third loan was for a 30 year period. The first five years was on an interest only basis, thereafter principal and interest were payable. Given the Bartles’ ages, and the fact that they were retired with a limited income, their ability to meet their commitments depended almost entirely on their ability to sell the apartment in the relatively short-term at a handsome profit. While GE did not know of the Blue Chip connection (at least until June 2007), it did know from the material provided to it that the borrowing was to fund the purchase of an apartment for investment purposes. It did not know, however, of the proposal that Blue Chip would purchase the apartment from the Bartles after four years. GE also knew the Bartles’ ages from the outset. In my view, the purchase by an older couple of an investment apartment funded entirely by mortgage finance secured against their home and the apartment should at least have put GE on inquiry. Further, when TML’s knowledge is taken into account, the point is even stronger. TML must have known that the description of the Bartles as “self-employed” or “self-employed investors” was inaccurate, especially given that at the outset the Bartles described themselves as “retired” and given also the enquiry obligation in cl 9.5 of the 2007 Manual.[119]
[119]See [159] above.
[223] I do not suggest that it is always unreasonable for lenders to make long term loans to older people such as the Bartles, and I accept the point made by Mr Anderson in his evidence that few mortgages run for their 20 – 30 year life because borrowers tend to remortgage after 7 – 10 years. Nevertheless, where such long-term loans are being contemplated, the lender needs to look closely at the borrowers’ circumstances. This GE manifestly failed to do, either itself or through TML. (TML’s affordability assurances were obviously false.) In this context, it is relevant that even a limited enquiry by GE would have revealed that the Bartles were simply not in a position to service their borrowings.
[224] Mr Grant said in his evidence that other borrowers had done very well from Fastdoc-style arrangements in the period preceding the making of the loans to the Bartles. But that is beside the point. What is reasonable commercial practice in this context cannot be determined on the basis that investment markets happen to be buoyant at a particular time, any more than it can be determined on the basis that investment markets happen to be depressed. Reasonable commercial practice should operate over a range of market conditions. An over-heated property market may mitigate or mask the effect of inappropriate lending practices – it does not make them appropriate.
[225] Third, in arguing that there was no oppression, Mr Stewart emphasised the terms of the Fastdoc declarations that the Bartles had made to GE, and the fact that the Bartles had access to independent advice on the loan transactions from Mr Mathias. I agree that both of these factors are relevant to the question whether there has been oppression, but I do not regard either as determinative.
[226] The key feature of the oppressive conduct in this case is the asset lending. If the Bartles had had the nature of the lending properly explained to them before they entered the initial loan transaction, and had decided with that knowledge to proceed, no question of oppression would arise in my view. But they did not understand what was involved until later, as the Judge found.[120] At no time before entering the sale and purchase agreement did the Bartles understand that that they would be personally responsible for the total borrowings of almost $630,000, or might lose their home. The Judge found that they would not have entered into the agreement had they known this. Far from bringing home to the Bartles the true nature of the lending, Mr Mathias contributed to their misconceptions and lulled them into a false sense of security. When they did become fully aware of their obligations, they regarded themselves as fully committed.
[120]See [121] above.
[227] Under the CCCF Act GE was at risk if it entered into lending that was oppressive. In that sense, it had an obligation to avoid such lending. If it chose to rely on someone else to ensure that there was no oppression, such as a legal adviser, rather than turning its attention to that matter itself, it must take the risks associated with that, namely, that the person does not fulfil that role adequately. If the legal adviser does not fulfil the role adequately, the oppression remains. This is so, in my view, even if GE was entitled to expect that the legal adviser would give proper advice. Any other approach would severely undermine the policy of the CCCF Act.
[228] In short, had Mr Mathias acted as a truly independent advisor it may be that no question of oppression could arise. But he did not, so GE derives no benefit from his involvement.
[229] Further, I do not regard it as determinative that the Bartles entered into the sale and purchase agreement unconditionally, before finance was arranged. The transaction would not have been undertaken if the loans had not been made available.
[230] Finally, as I have already said, I consider that there is a proper basis to attribute TML’s knowledge of the Bartles’ financial position, retired status and limited or non-existent earning potential to GE from the outset. I consider that GE effectively delegated to TML a task which the CCCF Act assumes will be performed by a lender, namely that of considering whether a lending transaction is oppressive from the perspective of the borrower. GE was entitled to ask another entity to perform that function if it wished, but cannot escape responsibility under the CCCF Act if that entity erred in a material way in fulfilling that function.
F Decision
[231] For these reasons I consider that the loan transactions were oppressive within the meaning of the CCCF Act. I agree that the matter should be referred back to the High Court for consideration of the question of relief.
WILLIAM YOUNG P
Preliminary comments
[232] Broadly, I agree with Hammond and Arnold JJ that the loan agreements are oppressive and ought to be re-opened under Part 5 of the Credit Contracts and Consumer Finance Act 2003. I also am of the view that this result depends upon GE being, in some way, implicated in those aspects of the loans which result in them being categorised as oppressive.[121] Further, I consider that GE[122] is sufficiently implicated if the actions and knowledge of TML[123] in relation to the advances to Mr and Mrs Bartle are attributed to GE.
Why the loan transactions were oppressive
[121]See Burbery Mortgage Finance & Savings Ltd (In Receivership) v Haira HC Rotorua CP 93/89, 21 April 1994 per Barker J; and Prudential Building and Investment Society of Canterbury v Hankins [1997] 1 NZLR 114 (HC).
[122]For simplicity I will use the same abbreviations as the other judges and, as well, conflate GE and AMS referring to both as “GE”.
[123]Which I conflate with EML.
[233] The transaction which Mr and Mrs Bartle entered into with Blue Chip was highly improvident from their point of view:
(a)The purchase price of the apartment (including a car park and a furniture package) was $552,000. Allowing for the 15 per cent commission which Blue Chip took from the vendor, the market value of the apartment can have been no more than around $470,000, this notwithstanding the valuation which was obtained. That perhaps is a generous assessment given that the apartment was sold in July 2009 for $240,000.
(b)The amount borrowed by Mr and Mrs Bartle was almost $630,000.
(c)The only income generated by the business venture was rent which was never going to be enough to meet the outgoings. This shortfall was to be met in part from the difference between what was borrowed and the purchase price of the apartment. Otherwise the shortfall was the responsibility of Blue Chip.
(d)Although not provided for in the legal documentation, it is clear that Mr and Mrs Bartle and Blue Chip dealt with each other on the basis that at the end of 4 years, Blue Chip would purchase the apartment on terms which would at least relieve them of their debt obligations.
(e)If Blue Chip became insolvent, the deal was likely to be disastrous. The value of the apartment was inherently unlikely to increase sufficiently to mop up both the deficit between its value when purchased and the total amount borrowed, and also the shortfall between income and outgoings.
(f)The business model exemplified by this transaction was so speculative that the prospects of Blue Chip failing were very real, to say the least.
(g)Mr and Mrs Bartle had at most a bounded comprehension of the underlying risks.
[234] The improvidence of an investment made with borrowed money does not, by itself, justify a conclusion that the agreement to lend that money was oppressive. There are, however, some additional considerations which in my view warrant the conclusion that the loan agreements in this case were oppressive:
(a)This was asset lending as described by Hammond and Arnold JJ.
(b)On the basis of the evidence in this case, we are entitled to proceed on the basis that, at least in the case of asset lending to an elderly retired couple, reasonable standards of commercial practice require lender inquiry into whether a loan can be repaid without substantial hardship.
(c)Because Mr and Mrs Bartle were retired and had practically no income other than national superannuation, they were putting their house on the line.
(d)The certificates by TML that it was not aware (and could not ascertain by reasonable inquiry) any reasons why, or circumstances in which, Mr and Bartle would not be able to repay the advance (either at all or without substantial hardship) were false. Even cursory consideration of the investment plan would have identified the very substantial probability that Mr and Mrs Bartle would only be able to repay the advance by selling their house.
Attribution
[235] Where B has performed a service at the request of and for the benefit of A, there is sometimes an issue whether the actions or knowledge of B should be attributed to A.
[236] First some generalities. Where B was the employee of A and was relevantly acting in the course of that employment, B’s actions or knowledge will readily be attributed to A. Where B was acting as the agent of A, attribution is sometimes appropriate. And where B was either an independent contractor (where the underlying relationship is commercial or economic) or simply a volunteer (in a social or family context) B’s actions or knowledge will seldom be attributed to A.
[237] On a strict approach to agency, B is A’s agent if authorised by A to act on its behalf so as to affect A’s relationship with third parties.[124] But it is important to recognise that an inquiry into the legal ability of B to affect A’s relationships with third parties is often of only collateral significance to the question whether B’s actions or knowledge should be attributed to A.
[124]See Francis Reynolds and Peter Watts Bowstead and Reynolds on Agency (18th Edition, Sweet and Maxwell, United Kingdom, 2006) at [1-001].
[238] I can illustrate this in two ways:
(a)A solicitor whom I retain to conduct a conveyancing transaction on my behalf will undoubtedly be my agent with power to affect my relationships with third parties (for instance as to confirmation). But if my solicitor while acting for me (and charging me for the time!) drives a car to a meeting and negligently damages another car, I am plainly not vicariously liable.
(b)A real estate agent I employ in relation to the sale of my house is likely to be authorised to accept a deposit on my behalf and in that sense is a true agent. But my undoubted liability for misrepresentations made by the real estate agent is at best collaterally associated with the formal agency. For instance, if for some reason, I had stipulated that the deposit should be paid to my solicitor and not my agent, I would still be liable for misrepresentations made by the real estate agent even though the real estate agent had no authority to affect my contractual relationships with third parties. The reason I am vicariously liable for misrepresentations made by the real estate agent is simply because that agent is standing in my shoes and representing me in dealing with potential purchasers.
[239] The awkwardness of the underlying concepts is illustrated by Colonial Mutual Life Assurance Society Ltd v Producers and Citizens Co-Operative Assurance Co Australia Ltd.[125] In issue in that case was whether an insurance company was vicariously responsible for defamatory remarks made by its canvassing agent who was strictly only an agent in relation to his authority to accept premiums. Otherwise, the agent was an independent contractor. The insurance company was held to be vicariously responsible for the canvassing agent’s defamation effectively because he had been its representative, rather than because he had the right to give receipts for premiums. Interestingly, Gavan Duffy CJ and Stark J chose to use an apparent oxymoron when describing the canvassing agent as:[126]
an agent of the defendant in the nature of an independent contractor.
[125]Colonial Mutual Life Assurance Society Ltd v Producers and Citizens Co-Operative Assurance Co Australia Ltd (1931) 46 CLR 41.
[126]At 46.
[240] Often enough where attribution is an issue, the only ability of the “agent” to affect the principal’s legal relationships with third parties is in respect of the actions in respect to which vicarious liability are asserted. So in the English case Morgans v Launchbury – a case which concerned the liability of the owner of a car for the actions of a bailee – Lord Wilberforce noted that: [127]
I accept entirely that “agency” in contexts such as these is merely a concept, the meaning and purpose of which is to say “is vicariously liable,” and that either expression reflects a judgment of value – respondeat superior is the law saying the owner ought to pay.
And Gleeson CJ commented in Scott v Davis:[128]
Lord Wilberforce made the point that to describe a person as the agent of another, in this context, is to express a conclusion that vicarious liability exists, rather than to state a reason for such a conclusion.
[127]Morgans v Launchbury [1973] AC 127 (HL) at 135.
[128]Scott v Davis [2000] HCA 15, (2000) 204 CLR 333 at 339.
[241] All of this, to my way of thinking, highlights the reality that issues of attribution involve policy judgments, a point which is made quite clear from the judgment of the Privy Council in Meridian Global Funds Management Asia Ltd v Securities Commission.[129]
[129]Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500.
[242] Before turning to the facts, I should also mention the related and somewhat amorphous concept of the non-delegable duty of care discussed by this Court in Mount Albert Borough Council v Johnson.[130] Although the formal reasoning process associated with the imposition of a non-delegable duty does not require an attribution of the third party’s acts or knowledge to the defendant, the end result comes down to pretty much the same thing. And as the speech of Lord Reid in Davie v New Merton Board Mills Ltd[131] indicates, the more closely the actions of the independent contractor are integrated into the defendant’s business (particularly if they involve the sort of work which would normally be carried out by an employee), the more likely it is that the defendant is liable.
Attributing the actions of TML to GE
[130]Mount Albert Borough Council v Johnson [1979] 2 NZLR 234.
[131]Davie v New Merton Board Mills Ltd [1959] AC 604 (HL) at 646.
[243] The services provided by TML to GE involved origination and management of mortgages. There can be no doubt that TML acted as GE’s agent in the management of mortgages. By way of example only, TML, as agent for GE, issued any necessary Property Law Act notices. Rather less clear is whether TML also acted as GE’s agent in relation to the origination of mortgages, and most particularly in respect of credit-assessment.
[244] As Arnold J has pointed out, the Correspondent Deed between GE and TML provided that, with the exception of powers expressly delegated under the deed, TML was an independent contractor and not an agent or employee of GE. Plainly this categorisation (as an independent contractor) did not extend to TML’s role in relation to the management of mortgages. More to the point in the present context, it arguably did not extend to the obtaining of valuations (where TML might be thought to have been acting as agent for GE) and certainly did not extend to TML’s role in respect of mortgage insurance. This last point requires some explanation.
[245] TML arranged mortgage insurance in relation to mortgages which it originated and this required it to complete proposals. In doing so, it indisputably acted as agent for GE. The proposals which TML, acting as agent for GE, completed in relation to Mr and Mrs Bartle recorded:
The Insured acknowledges its duty under New Zealand law to disclose to the Insurer every material circumstance within the actual or presumed knowledge of the Insured, a material circumstance being a circumstance which would influence the judgement of a prudent insurer in fixing the premium or determining whether to accept the risk of insurance.
[246] As a matter of commercial commonsense, the information which would be material to a prudent insurer would also be material to a prudent lender. To my way of thinking it follows that when TML gathered information relevant to the ability of Mr and Mrs Bartle to meet their mortgage obligations it was doing so at least in part as an agent for GE in the context of the requirement for it to obtain mortgage insurance and, at the same time, make proper disclosure.
[247] In any claim against the insurer, the relevant knowledge of TML would undoubtedly be attributed to GE. I recognise that it does not necessarily follow that the same knowledge should be attributed to GE in the present claim (which is by Mr and Mrs Bartle). But the idea that knowledge should be attributed to GE for some purposes but not others strikes me as a little artificial.
[248] There is of course a broader context.
[249] It will be recalled that the liability of the insurer for the actions of the canvassing agent in the Colonial Mutual Life case and of the vendor for misrepresentations made by a real estate agent turn not so much on the ability of the agent in each case to commit the principal contractually, but rather on the reality that the agent is representing, or standing in the shoes of, the principal. In a real sense that is exactly what TML was doing for GE. In originating business for GE, TML was operating in a way which was conceptually similar to the canvassing agent in Colonial Mutual Life. In that sense, TML was representing GE. The terms of the certificate which GE required of TML indicated GE wanted to know that there had been reasonable inquiry into the ability of borrowers to repay, inquiry which could only be carried out by TML. This meant that TML carried out credit assessment functions which might more commonly be the responsibility of an employee of a lender. In that sense its functions were closely integrated into this aspect of GE’s lending business. All in all, it seems to me to be reasonable to conclude that when TML carried out its credit assessment functions it did so for and on behalf of GE so that its actions and particularly its knowledge can, for present purposes, be attributed to GE.
[250] I see this conclusion as being consistent with the scheme, purpose and policy of the legislation. The idea of a non-delegable duty is not entirely apt in the present context. A financier is not under a duty to avoid oppression. So there can be no non-delegable duty to do so. Rather, lending on oppressive terns or in oppressive circumstances has certain statutory consequences. But that said, it would be inimical to the orderly operation of the statute, if out-sourcing of virtually all the usual functions and assessments of financiers provides immunity from those statutory consequences.
[251] Accordingly I consider that the knowledge and actions of TML are properly attributed to GE.
Solicitors:
Ellis Law, Auckland for Appellants
Simpson Grierson, Auckland for First Respondent
19
9
0