Download What can a lender learn from a loan application?

APPLYING GENERAL CONTRACT AND CONSUMER PROTECTION PRINCIPLES TO
CREDIT DISPUTES
RESEARCH PAPER 3: WHAT CAN A LENDER LEARN FROM A LOAN APPLICATION?
ASSET-BASED LENDING ON THE SECURITY OF THE FAMILY HOME AS
UNCONSCIONABLE DEALING
SUMMARY
This research project investigates the role of general principles of contract law and
consumer protection legislation in regulating the provision of credit to consumers.
While many issues arising in respect to consumer credit contracts are covered by the
Uniform Consumer Credit Code (UCCC) there are inevitably gaps in the legislation.
General contract and legislative principles may supplement the specific provisions of
the UCCC and thus promote a more effective system of consumer protection
regulation through a multilayered approach in which both statutory and common law
concepts contrite to an effective system of regulation. The project aims to provide
guidance to industry participants about alternative legal responses to credit disputes
and also to identify relevant considerations in reforming the existing law.
This paper considers when asset-based lending may amount to unconscionable
conduct or undue influence under general principles of equity. In this paper equitable
concepts are used to address a consumer credit issue and also illuminate the scope of
the jurisdiction to set aside unjust contracts under the UCCC. The credit issue of asset
based lending prompts consideration of the scope and rationale of the doctrine of
unconscionable dealing.
The funding for this project was provided by the Consumer Credit Fund on the
approval of the Minister for Consumer Affairs. Research assistance was provided by
Natalia Antolak-Saper. The author wishes to thank for their contributions the
1
Consumer Law Action Centre, solicitors at Consumer Affairs Victoria, participants at
the Monash Centre for Regulatory Studies Research Breakfast and the delegates at the
Credit Law Conference 2007. All errors remain the author’s own.
2
WHAT CAN A LENDER LEARN FROM A LOAN APPLICATION?
ASSET-BASED LENDING, UNJUST CONTRACTS, UNCONSCIONABLE DEALING, AND
UNDUE INFLUENCE1
A lender will generally be concerned to ensure that its borrowers have the ability to
repay their loans. Even if the loan is secured, good banking practice has traditionally
required that ‘any security should be regarded as a last line of defence to fall back
upon in exceptional circumstances only’.2 However, there is no legal duty for a lender
to assess the ability of a borrower to repay a loan.3 Where the loan is secured by a
substantial asset, some lenders may engage in a practice known as ‘asset-based
lending’. Asset-based lending is lending on the security of an asset, such as real
property or shares, rather than relying on the existence of an income stream to repay
the loan.4
Asset-based lending is not offensive per se. There is a difference between mortgaging
shares to repay a loan and mortgaging the family home. Even the use of a home as
security may be a way for borrowers with no regular income to access credit for new
lifestyle or business ventures.5 In some asset-based lending cases it should be
accepted that the borrower has decided to take a risk in respect of the asset which has
been mortgaged in order to pursue other goals. Less palatable cases involve a
vulnerable borrower who does not understand the nature of the risk that he or she is
assuming or is otherwise unable to conserve his or her own interests. The more
aggressive forms of asset-based lending are sometimes described as ‘predatory
lending’ or ‘equity stripping’. These practices involve lending to borrowers who
blatantly have little capacity to repay the loan, often with a significant establishment
fee. After a short time the borrowers are forced either to refinance the loan at greater
cost or sell the house. ‘In both cases the predatory lender will have stripped a
significant proportion of the equity the borrower previously held’.6 Financial overcommitment by a vulnerable borrower and the loss of the family home may have
significant social consequences. The borrower and his or her family may lose the
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stability associated with home ownership. A family burdened with significant debt
may be forced to turn to the state for welfare support.
There are a number of possible responses to the more aggressive forms of asset-based
lending. A direct legislative measure would be a requirement that a lender take
reasonable steps to assess the ability of a borrower to repay the loan. In the absence of
such a duty, regard needs to be had to equitable and statutory doctrines. This paper
considers when such loans may be vulnerable to challenge as unconscionable under
the equitable doctrines of undue influence and unconscionable dealing and also
statutory prohibitions. Where the loan has been for a non-business purpose, it may be
regulated by the Uniform Consumer Credit Code (‘UCCC’)7 or the Contracts Review
Act 1980 (NSW) (‘CRA’),8 which allow courts to give relief against an ‘unfair
contract’. While some loan contracts have been set aside as unfair on the basis that the
lender was engaged in asset-based lending, the grounds for relief on this basis are not
well defined and the cases are not entirely consistent. Exploring when asset-based
lending is unconscionable may be a way of clarifying what aspects of this practice are
unjust.9
Exploring when asset-based lending may amount to unconscionable dealing also
prompts consideration of both the elements and objectives of the equitable
jurisdiction. The early jurisdiction of the doctrine was concerned with protecting
expectant heirs who attempted to raise finance on the sale or mortgage of their
expectancy.10 Asset-based lending may be seen as a modern variation of a socially
controversial lending practice.11 The issue prompts consideration of the nature of
special disadvantage in a financial setting. Is a borrower’s desperation to save the
family home sufficient? The issue also raises the question of what degree of
knowledge of the borrower’s special disadvantage should be required from a lender
for a transaction to be set aside as unconscionable. Typically, asset-based loans are
arranged by a broker. Thus the lender’s main source of information about the
circumstances of the borrower will be the loan application and other associated
documents. More fundamentally, asset-based lending cases prompt the question of
whether neglect, as opposed to active exploitation, on the part of a lender should be
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recognised as a sufficient justification for invoking the doctrine of unconscionable
dealing.12
Part I of this paper outlines some problem cases of asset-based lending to borrowers
with various degrees of vulnerability. Part II considers the elements of unconscionable
dealing. Parts III, IV and V consider the application of these elements – special
disadvantage, knowledge and the role of legal and financial advice respectively – to
the asset-based lending cases. Part VI considers the possibility of unconscionable
dealing encompassing not merely a concern with exploitation but also with neglect.
Some of the cases under discussion might also be analysed as involving undue
influence by a third party. Whether the loan transaction is tainted by this form of
impropriety also turns on issues of knowledge and the information available in the
loan documents. The issue will be discussed whee relevant throughout the paper.
I
A
SOME PROBLEM CASES
Perpetual Trustees Victoria Limited v Ford13I
In this case, Ford, the borrower, suffered from a congenital intellectual impairment
and was illiterate. Ford owned a house which had been inherited from his mother. In
2004, Ford entered into a loan agreement for $200,000 secured by a mortgage over
the house. At the time of the transaction, Ford received a Disability Pension of
$452.70 per fortnight. He had no capacity from his income or other resources to pay
the interest on a loan of $200,000. The loan was arranged by Ford’s son with whom
Ford had, until recently, been estranged. The purpose of the loan was to purchase a
cleaning business to be operated by the son. The business was purchased in Ford’s
name although he did not plan to operate the business and did not have the skills to do
so. Ford did not receive any legal advice. Within 12 months of the date of the
transaction, Ford had defaulted on his obligations to the lender and the lender sought
to recover the principal sum of $205,428.89 and take possession of Ford’s house.
5
In the Supreme Court of New South Wales, Harrison J held that the lender did not
have knowledge of the borrower’s disability for the purposes of the equitable
doctrines of undue influence or unconscionable dealing. Ford’s disability was so great
that the loan was found to be void on the ground of non est factum. However,
Harrison J ordered the borrower to repay the loan funds to the lender on grounds of
unjust enrichment following a defective transaction.
B
Elkofairi v Permanent Trustee Co Ltd14
The borrower, Mrs Elkofairi, had limited ability to read English or to understand
anything other than the most basic spoken English. Mrs Elkofairi received a disability
pension. The relationship with her husband was difficult and sometimes violent. All
business and financial decisions were made by Mr Elkofairi. Mrs Elkofairi and her
husband entered into a loan agreement with the respondent. The total amount
borrowed from the respondent was $746,000. This was secured on the family home.
About $470,000 of the loan money was applied in discharge of the existing mortgage
over the property. The remainder went towards Mr Elkofairi’s business interests. The
loan application did not record any income for Mrs Elkofairi. Mrs Elkofairi had no
real understanding of the transaction and was not given legal advice.
In the New South Wales Court of Appeal, Beazley JA (Santow JA and Campbell AJA
agreeing) held that the transaction was unconscionable and also unjust under the
CRA. Beazley JA accepted that, in regard to the transaction, Mrs Elkofairi was
partially a volunteer. However, Beazley JA held that the lender did not have express
notice or any other information sufficient to put it on notice of this fact and hence
relief was not available under the principle in Yerkey v Jones.15
C
Permanent Mortgages Pty Ltd v Cook16
The borrowers, the Cooks, were a married couple. Each of the borrowers had limited
educational qualifications. They were dependent on social services and redundancy
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payments. In 1992, the borrowers had obtained a home loan for about $53,000 to
build a house. The borrowers had subsequently found it necessary to take out a series
of loans, each one refinancing the last and for a larger amount, in order to meet
interest and expenses. The case concerned a loan entered into in May 2003 for the
sum of $200,000 which was secured by a mortgage over their house. The borrowers
required assistance in completing the loan application and loan documents. As part of
the loan application, the borrowers signed a loan repayment ability declaration, which
falsely stated their income and provided a false accountant’s statement. The lender did
not verify either the amount or source of the income stated on the loan application. At
trial, evidence was given by Dr Steve Keen, Associate Professor of Economics and
Finance at the University of Western Sydney, who ‘categorised the mortgage as
evidencing a “Ponzi” loan, namely one which “can only be repaid by either taking out
a larger subsequent loan, or by selling the asset that was financed using the loan”’.17
The borrowers defaulted on their loan repayments and the lender attempted to
exercise its rights under the guarantee and mortgage to sell the family home.
In the Supreme Court of New South Wales, Patten AJ held that the Business Purpose
Declaration was not effective to displace the application of the UCCC. Patten AJ held
that the loan was unjust under s 70 of the UCCC.
D
Perpetual Trustee Co Ltd v Khoshaba18
Mr and Mrs Khoshaba were pensioners and members of the Assyrian community in
Sydney. In late 2000, the Khoshabas became aware that many members of the
Assyrian community were investing in a trolley-collecting business operated by Karl
Suleman Enterprizes Pty Ltd (‘KSE’) and decided to invest in the scheme on the basis
of promised high returns. In fact, the business operated as an (illegal) pyramid
investment scheme. False information about Mr Khoshaba’s income was submitted to
the lender, although the trial judge found that the Khoshabas were not aware of this.
The lender’s own guidelines for assessing the loan application were not followed. In
particular, the lender did not verify the employment and income position of the
applicants nor the full details of the purpose of the loan. Under the loan agreement,
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the lender lent the Khoshabas $120,000 and took a mortgage over their family home.
Eventually the scheme collapsed, leaving the Khoshabas without the expected flow of
revenue and a debt to the lender.
In the New South Wales Court of Appeal, Spigelman CJ (Handley and Basten JJA
agreeing) held that the contract was unjust under the CRA. The Court held that the
lender had been indifferent to the purpose of the loan and had been content to lend on
the value of the security.
II
A
THE DOCTRINES
Unconscionable dealing
Unconscionable dealing ‘looks to the conduct of the stronger party in attempting to
enforce, or retain the benefit of, a dealing with a person under a special disability in
circumstances where it is not consistent with equity or good conscience that he should
do so’.19 Unconscionable dealing is traditionally seen as being concerned with the
‘exploitation by one party of another’s position of special disadvantage’. 20 The
doctrine operates where:
(1)
a party to a transaction was under a special disability in dealing with
the other party with the consequence that there was an absence of any
reasonable degree of equality between them; and
(2)
the disability was sufficiently evident to the stronger party to make it
prima facie unfair or ‘unconscientious’ that he or she procure, or accept, the
weaker party’s assent to the impugned transaction in the circumstances in
which he or she procured or accepted it.
Where such circumstances are shown to exist, an onus is cast upon the
stronger party to show that the transaction was fair, just and reasonable.21
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There are a number of statutory prohibitions on unconscionable dealing. 22. In
assessing whether a contract is unconscionable under the statutory provisions, courts
have been influenced by the approach under equity.23
B
Undue influence
While unconscionable dealing and undue influence cases may overlap, they focus on
different factors. Undue influence is concerned with a relationship of influence that
affected the dependent party’s mind and judgment in entering the contract.24 A lender
may be tainted by undue influence over the borrower by a third party where the lender
had notice of the impropriety by the third party.25 In Australia, most asset-based
lending cases seem to rely primarily on unconscionable dealing rather than undue
influence. This is somewhat surprising given that in some of the cases, such as Ford
and Elkofairi, discussed above, the borrower was arguably acting under the influence
of another family member in taking out the loan. There has been greater reliance on
undue influence in England, although most of the cases concern transactions where
the vulnerable party acts as guarantor for a third party rather than being the
borrower.26
C
Unjust contracts
The UCCC and the CRA both allow a court to give relief in respect of an ‘unjust
contract’. The legislation provides a range of factors the court may consider in
determining whether a contract is unjust. Although the jurisdiction extends to
substantive unfairness, as with unconscionable dealing, the courts tend to look for
procedural injustice before granting relief.27 It has been said that:
a contract may be unjust under the [Contracts Review] Act because its terms,
consequences or effects are unjust. This is substantive injustice. Or a contract
may be unjust because of the unfairness of the methods used to make it. This
is procedural injustice. Most unjust contracts will be the product of both
procedural and substantive injustice.28
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The threshold for relief from an unjust contract under the UCCC or the CRA is lower
than in relation to a claim of unconscionable dealing at general law. 29 However, some
similar factors will be relevant to the courts’ decision. In particular, courts have held
that the lender’s knowledge of the injustice30 will be relevant to the exercise of the
court’s discretion to grant relief under the relevant legislation, 31 although an absence
of knowledge of the circumstances of injustice does not preclude a claim for relief.32
III
UNCONSCIONABLE DEALING AND SPECIAL DISADVANTAGE
The requirement that the weaker party be under a special disadvantage determines the
parameters of the doctrine of unconscionable dealing. Generally, and for good
reasons, a party entering into a contract is expected to take care to ensure that the
contract is in his or he own best interests and once made the law will not interfere
with this assessment. The requirement of special disadvantage in unconscionable
dealing sets the standard of when a party may ‘be excused from having to exercise
that level of individual responsibility or self-reliance generally expected and required
of contracting … agents’.33
The situations which may constitute a special disadvantage for the purposes of
unconscionable dealing cannot be comprehensively defined. The traditional starting
point is the statement of Fullagar J that some of the circumstances which may place a
person under a special disability are:34
poverty or need of any kind, sickness, age, sex, infirmity of body or mind,
drunkenness, illiteracy or lack of education, lack of assistance or explanation
where assistance or explanation is necessary. The common characteristic
seems to be that they have the effect of placing one party at a serious
disadvantage vis-à-vis the other.35
Courts have stressed the importance of the disadvantage being ‘special’. As Mason J
explained in Amadio:
10
I qualify the word ‘disadvantage’ by the adjective ‘special’ in order to disavow
any suggestion that the principle applies whenever there is some difference in
the bargaining power of the parties and in order to emphasise that the
disabling condition or circumstance is one which seriously affects the ability
of the innocent party to make a judgment as to his own best interests, when the
other party knows or ought to know of the existence of that condition or
circumstance and of its effect on the innocent party. 36
Mere inequality of bargaining power does not constitute a ‘special disability’ in the
requisite sense. This was confirmed in Australian Competition and Consumer
Commission v CG Berbatis Holdings Pty Ltd in which Gleeson CJ said:
A person is not in a position of relevant disadvantage, constitutional,
situational, or otherwise, simply because of inequality of bargaining power.
Many, perhaps even most, contracts are made between parties of unequal
bargaining power, and good conscience does not require parties to contractual
negotiations to forfeit their advantages, or neglect their own interests.37
Some of the personal circumstances of the borrowers in the asset-based lending cases
in Part I may have constituted a ‘special disadvantage’. The concept clearly covers the
borrower in Ford who suffered from such a severe congenital intellectual impairment
that the transaction was void on the basis of non est factum. In Elkofairi, Mrs
Elkofairi was also under a special disadvantage due to her age, inexperience, language
difficulties and the dominating influence exercised over her by her husband. Both of
these cases may also have involved undue influence, which will be discussed further
below..
While the borrowers in Cook were operating under a special disadvantage, different
views have been expressed as to whether this amounts to a special disadvantage. 38 As
pointed out in the case, the Cooks spoke ‘English as their first language; were
experienced borrowers; had the services of a solicitor; were extremely anxious to
obtain the loan; and were prepared to sign false statements and procure false
certificates’.39 On the other hand, the borrowers had low levels of literacy and needed
11
the assistance of their broker to complete the loan forms. The dealing concerned an
issue of extreme emotional importance to the borrowers, their family home. This
factor perhaps clouded the borrowers’ ability to conserve their own interests. In
Australia at least, the family home has significant emotional and social importance
unlike most other assets. Certainly, the evidence of the Cooks was that their only
thought in entering into the loan was to save the house.
Whether the situation of the borrowers in Khoshaba constituted a special
disadvantage is even less certain. Basten JA considered that the borrowers’
background, including the fact that English was their second language and that they
had limited formal education and no business experience, was a disadvantage that,
while not constituting a special disadvantage or disability for the purposes of
equitable principles of unconscionable dealing, ‘was sufficient in the circumstances of
the case to satisfy the requirement of the public interest in concluding that the assetbased lending in that case was unjust’.40 The Khoshabas were borrowing money for
investment purposes,41 for which better judgment might be expected than from
borrowers attempting to save their family home as in Cook.42 The Khoshabas appear
to have been seduced by the promise of extremely high returns for a relatively small
investment, which might suggest that they were naïve in business affairs. In relation
to the Contracts Review Act 1980 (NSW), it has been said that the Act will not
‘permit intervention merely where the borrower has been foolish, gullible or
greedy’.43 Nor do these factors amount to an inability for a borrower to protect its own
interests. On the other hand, it might be argued that the Khosobas where the victims
of a fraud and in this respect unable to protect their own interests.
Can the sheer imprudence of the transaction constitute a special disadvantage for the
purposes of unconscionable dealing? In Elkofairi, Beazley JA (Santow JA and
Campbell AJA agreeing) stated that:
In my opinion, notwithstanding that [Mrs Elkofairi] did not have knowledge of
the appellant’s lack of education and her language and domestic difficulties,
her lack of income, in the circumstances of this transaction – that is a large
borrowing secured over her only asset, in circumstances where the application
12
form failed to disclose any income for either husband or wife – placed her in a
special position of disadvantage.44
This passage seems to suggest that the substantive unfairness of the transaction placed
Mrs Elkofairi in a position of special disadvantage. This conflation of special
disadvantage with substantive unfairness has generally been resisted by courts. It has
been said that the unfairness of the transaction may be a ground for inferring that the
dealing was unconscionable in a procedural sense.45 Perhaps an explanation of
Elkofairi is that the failure by the borrower to show any income to service the loan
secured by the family house should have prompted the lender to look more closely at
the transaction, in which case the special disability of Mrs Elkofairi would have been
revealed.
IV
KNOWLEDGE
Issues of knowledge and notice are central to unconscionable dealing, undue influence
involving a third party and are also relevant to the jurisdiction to set aside a contract
as unjust. In relation to unconscionable dealing, it is the stronger party’s knowledge of
the special disadvantage of the weaker party and, in the face of this knowledge, the
stronger party’s failure to take any steps to protect the interests of the weaker party,
that taints the conscience of the stronger party so as to justify the courts setting aside
the transaction.46 The degree of knowledge of the weaker party’s special disability
required from the stronger party in order to establish unconscionable dealing is not
entirely settled.47 There is also some uncertainty about the degree of knowledge
required for a lender to be tainted by undue influence between a borrower and a third
party. Courts have not explored the degree of knowledge relevant to establishing an
unjust contract under the CRA or the UCCC. The issue of knowledge is central in the
asset-based lending context because of the role of brokers in facilitating many of the
transactions.
A
Breaking the link between lender and borrower: finance brokers
13
In many asset-based lending cases, and in all of the cases discussed above, the
transaction was arranged through a finance broker.48 The role of the finance broker is
to survey a range of lenders and products and to recommend the combination that best
suits the needs of the borrower. The broker may be responsible for giving the loan
documents to the borrower, assist the borrower in completing those documents and
even answer questions about the loan.
Courts have consistently held that a broker is not the agent of the lender even where
the broker is paid a commission by the lender and conducts all dealings in relation to
the application.49 Thus, knowledge of the broker will generally not be attributed to the
lender on the basis of agency. Where a loan transaction is mediated through a broker,
the lender will have no direct actual knowledge of the borrower’s circumstances.The
primary source of information available to the lender about a borrower will usually be
the loan application submitted by the borrower for approval of the loan. The question
therefore arises as to whether a loan application can ever give a lender sufficient
knowledge of the inability of a borrower to conserve its own interests, or of a
relationship of influence or of other factors relevant to finding a contract to be unjust.
B
Degrees of knowledge
For the purpose of considering this question it is useful to distinguish between
different types of knowledge that are recognised by the law. There are at least four
categories to consider: actual knowledge, wilful ignorance, constructive knowledge
and constructive notice.
1
Actual knowledge
In this context, actual knowledge is where the stronger party has actual subjective
knowledge of the special disability of the weaker party. Where a lender deals with a
14
borrower only through a loan application, the lender is unlikely to have actual
knowledge of the borrower’s inability to conserve its own interest or other
vulnerability.
2
Wilful ignorance
Wilful ignorance concerns cases where the stronger party is wilfully or recklessly
indifferent to the true state of affairs.50 Wilful ignorance is usually treated as being the
same as actual knowledge. It is certainly sufficient for the purposes of unconscionable
dealing. In Amadio, both Mason J51 and Deane J52 quoted with approval the statement
that ‘wilful ignorance is not to be distinguished in its equitable consequences from
knowledge’.53
3
Constructive knowledge
Constructive knowledge arises where the stronger party is aware of facts which would
lead a reasonable person to know of the vulnerable party’s special disability. Some
judicial statements appear to contemplate that constructive knowledge will be
sufficient to establish unconscionable dealing. In Amadio, Mason J stated that it
would be sufficient ‘if, instead of having actual knowledge of [the special disability],
A is aware of the possibility that that situation may exist or is aware of facts that
would raise that possibility in the mind of any reasonable person’.54 Somewhat
similarly, in Radio Rentals, Finn J explained the knowledge requirement as follows:
It is knowledge of a particular state of affairs which itself embodies a
judgment as to the disadvantaged party’s ability to conserve his or her own
affairs in the parties’ dealing. It is that state of affairs which is to be
‘sufficiently evident’ to the stronger party. If that person does not actually
know of that state of affairs and is not ‘wilfully ignorant’ of it (in the sense
that he or she is intent on not knowing it despite what is evident to him or
her…), that person must at least be aware of circumstances that would cause
15
him or her or a reasonable person in his or her position to suspect from what is
evident that that state of affairs may exist.55
The role of constructive knowledge in establishing unconscionable dealing is not
without critics and is an issue to which this paper will return further below.
4
Constructive notice
Constructive notice is the case where the stronger party knows facts sufficient to put it
on inquiry as to the possibility of the special disability (or undue influence) but it fails
to inquire. Constructive notice is generally thought to be insufficient to establish
unconscionable dealing. For the purposes of undue influence, a lender will be tainted
by a transaction involving undue influence between a guarantor and a third party
where the lender had actual or constructive notice of that influence. 56 It is unclear
whether constructive notice would be sufficient to implicate the lender where the
borrower enters into the loan under the influence of a third party who is intended to
benefit from the loan, as in Ford and Elkofairi. In Ford, Harrison J thought that this
level of knowledge would not be sufficient. Presumably on this view the standard
would be similar to that for unconscionable dealing. On the other hand, there does not
seem to be any cogent reasons for distinguishing between undue influence cases
involving third party guarantors and undue influence cases where the third party is the
beneficiary of the loan.
C
Knowledge from a loan application
Clearly, the higher the degree of relevant knowledge (in the sense discussed above)
that can be attributed to the lender, the stronger the case for the contract to be
characterised as unconscionable, unjust or tainted by undue influence. For
unconscionable dealing and possibly the other doctrines, the lender should at least
have constructive knowledge. Can this level of knowledge ever be gleaned from a
loan application? Generally, a loan application will contain information about the
16
income and assets of the borrower as well as information about the purpose of the
loan. Commonly, a loan application will require the borrower to provide verification
of the income and assets referred to in the application. It is suggested that this sort of
information might in some cases and in combination provide a lender with at least
constructive knowledge, if not reckless indifference, to the circumstances of the
borrower. However, this level of knowledge is likely to come from a combination of
different pieces of information, or ‘trigger factors’. A loan application with a high
number of trigger factors might even provide a basis for finding that a lender was
recklessly indifferent to the special advantage of the borrower. The relevance of
information that might be found about the borrower’s circumstances must accordingly
be considered.
1
Blatant defects in the application
The loan application may have been completed by the borrower with the assistance of
a broker and hence appear on its face to be in order. Nonetheless, it is possible that in
some cases the application might reveal a special disadvantage on the part of the
borrower, for example evidence of poor language skills or obvious misunderstanding
of the nature of the transaction.
2
The nature of the security
It is suggested that the use of the family home as security may be a factor which, in
conjunction with others, may be relevant in attributing knowledge to a lender of a
borrower’s inability to protect his or her own interests. While some borrowers may be
prepared to risk their home to obtain a loan to pursue business opportunities, many
borrowers would be highly risk-averse in relation to that asset. Certainly, courts have
considered that the fact that a loan is secured by the family home is relevant in
assessing whether the contract was unjust. In Khoshaba, Basten JA explained that:
To engage in pure asset lending, namely to lend money without regard to the
ability of the borrower to repay by instalments under the contract, in the
17
knowledge that adequate security is available in the event of default, is to
engage in a potentially fruitless enterprise, simply because there is no risk of
loss. At least where the security is the sole residence of the borrower, there is a
public interest in treating such contracts as unjust, at least in circumstances
where the borrowers can be said to have demonstrated an inability reasonably
to protect their own interests.57
3
Borrower on a disability pension
In Elkofairi and Ford, the borrowers were reliant on a disability pension. Where a
borrower’s reliance on a disability pension is identified in the loan application, this
may be a highly relevant factor in assessing whether the lender had knowledge of the
special disability. While many recipients of a disability pension may be very
competent in managing their financial affairs, some recipients of a disability pension
receive that pension precisely because they are under a special disadvantage.
4
No income
In Elkofairi, the loan application did not reveal any income on the part of the
borrowers. In the NSW Court of Appeal, Beazley JA (Santow JA and Campbell AJA
agreeing) held that ‘the absence of any relevant financial information was sufficient to
put the respondent on notice of the appellant’s lack of capacity to meet the repayment
obligations under the mortgage’.58 This lack of income may also be a basis for
inferring that the lender had knowledge of a special disability on the part of the
borrower. As already noted, capacity to repay is generally a fundamental concern of a
lender in assessing a loan application.
5
Insufficient income to repay the loan
18
A loan application may reveal that the borrower’s income is not sufficient to allow
repayment of the loan or to allow repayment without hardship on the part of the
borrower. Under the UCCC, in determining whether a contract is unjust, the court
may consider:
Whether at the time the contract, mortgage or guarantee was entered into or
changed, the credit provider knew, or could have ascertained by reasonable
inquiry of the debtor at the time, that the debtor could not pay in accordance
with its terms or not without substantial hardship.59
However, courts do not seem to have relied directly on this provision in setting aside
an unjust contract.
Is evidence of insufficient income sufficient to attribute to a lender who enters into a
loan with a borrower in these circumstances knowledge of any special disability on
the part of the borrower? It is not for courts to second-guess the reasonable business
decision of a lender about the circumstances in which it is prepared to lend. In Ford,
Harrison J stated that it was not illegal, or even always unfair, for a financial
institution to lend ‘relying only upon a conservative debt to asset ratio, without any, or
at least any apparent, regard to the resources of the borrower or to his or her capacity
to make repayments of interest and capital from his or her own funds in a timely
way’.60 Nonetheless, if the application reveals an income that is blatantly insufficient
to allow repayment of the loan (allowing some scope for the living expenses of the
borrower), this may be a strong factor supporting a finding that the lender knew of the
borrower’s inability to conserve his or her own interests.
6
Verifying ability to repay
In Cook, the borrowers misrepresented their income. In Khoshaba, the borrowers’
income was misrepresented by someone other than themselves.61 In Khoshaba62 the
court referred to the failure by the lender to verify income or employment as a factor
relevant to finding that the transaction was unjust. However, this finding was not
19
based on the failure to verify income alone. In that case the lender had also failed to
ascertain the purpose of the loan. Moreover, the stated income of $43,000 for Mr
Khoshaba and a pension for Mrs Khoshaba was arguably not a secure basis for
repaying a loan of $120,000.
Unless there are other factors indicating that a statement of income is misrepresented,
it is suggested that knowledge of a factor that has been misrepresented by the
borrower should not be attributed to a lender. Where a borrower misrepresents his or
her income, it is difficult to argue that the conscience of the lender is affected by its
reliance on that statement of income. Thus in Riz the court stated that:
7
No purpose
In Khoshaba, the statement of purpose in the loan application was left blank and the
lender made no inquiry about that purpose. The lack of any stated purpose for a loan
might also be a factor relevant to whether a lender had knowledge of the borrower’s
inability to conserve his or her own interests for the purposes of unconscionable
dealing. This factor was decisive in the court’s finding that the loan was unjust under
the CRA. The NSW Court of Appeal was influenced by the ‘indifference’ shown by
the lender to the purpose of the loan which indicated that it was ‘content to proceed on
the basis of enforcing the security’.64 The decision suggests that a notion of
transactional neglect, discussed above, may also inform the characterisation of an
unjust contract under the CRA or UCCC.
8
Blatant defect in purpose
In Khoshaba, the purpose of the loan was to invest in an illegal pyramid selling
scheme. The loan application was left blank with respect to the purpose of the loan. In
Khoshaba, the court indicated that if the purpose of the loan had been indicated, the
lender would not have been expected to make inquires into that purpose.65 However,
where information about purpose is included in a loan application, the defect in that
20
purpose may be readily apparent. In such a case the defect may be relevant in
assessing whether a lender had knowledge of the borrower’s special disability for the
purposes of unconscionable dealing. In Khoshaba the trial judge was of the view that,
if the lender had been aware of this purpose, ‘it would have been plain to [the lender]
that the Khoshabas were the putative victims of a fraud and the loan would never have
proceeded’.66 Arguably, if this had been the case it would have been unconscionable
for the lender to fail to alert the Khoshabas to this risk.
9
Assessing the purpose of loan
In Riz, which involved a proposed investment in the same scheme as in Khoshaba, the
court was satisfied that the loan contract and the mortgage were not unjust in the
circumstances in which they were made as the purpose had been specified. In
Micarone v Perpetual Trustees Olsson J said that:
on receipt of an apparently regular and satisfactory loan application, there is
no obligation on a proposed lender to pursue further detailed enquiries as to
the circumstances of the applicants; the proposed business transaction to
which it relates; and the commercial viability of it.67
Knowledge for the purposes of unconscionable dealing should not be attributed to a
lender on the basis of information about the investment which could only have been
obtained through further inquires by the lender to asses the merits of that purpose.
This would come close to founding the jurisdiction on constructive notice and
requiring a lender to insure the borrower against investment risks.
10
Purpose is to benefit a third party
In Elkofairi, the position of the Mrs Elkofairi was similar to that of a guarantor.68 Mrs
Elkofairi was a co-borrower but was to obtain little direct benefit from the transaction.
A significant proportion of the loan money was to go to the business interests of the
21
borrower’s husband. The role of the borrower was, in substance, to provide her
interest in the family home as security for the loan. Where the lender has knowledge
of this structure, the court may treat the borrower as being in substance a guarantor. In
Elkofairi, although the court held that the lender had no knowledge of the true nature
of the loan, the court provided some safeguard for Mrs Elkofairi’s position by finding
that the lender had knowledge of the special disability of Mrs Elkofairi on the basis
that the loan application disclosed no income from which Mrs Elkofairi might repay
the loan. This finding essentially requires that if a person is named as a borrower they
must be treated as a genuine borrower and their ability to repay the loan must be
assessed even where they are borrowing with another family member.
In Ford, the vulnerable party was sole borrower in relation to the original transaction,
but intended to on-lend to the true borrower, his son. Harrison J accepted that the
borrower did enter into the transaction as a result of, and under the influence of, his
son.69 In such a case the device of recognising a guarantee is not available. If the
lender is aware of the true nature of the loan as being to benefit a third party, then this
may also be sufficient to establish knowledge for the purposes of tainting the loan
transaction with undue influence.70 A borrower might on-lend to a family member for
valid reasons. However, the possibility of abuse by the family member in such cases
must now be well known.
V
LEGAL AND FINANCIAL ADVICE
Once it is established that the borrower was under a special disability and the
disability was evident to the lender, the onus is cast on the lender to show that the
transaction was nevertheless fair. Would this onus be satisfied by the lender showing
that the borrower received independent legal advice? Legal advice may explain to a
borrower the nature of the documents but will not cover the financial implications of
the loan or the prudence of any proposed investment. Should a lender require financial
advice for prospective borrowers? In Khoshaba, Spigelman CJ did not think that a
failure to require financial advice should be accorded much weight in deciding
whether the transaction was unfair, particularly where the financial advice would
22
concern the merits of the investment rather than the loan. If the borrowers have
obtained financial advice, it may be less likely that the transaction will be
unconscionable, as the financial advice should have made the borrowers aware of the
risks of the transaction. However, much depends on the quality of the advice and the
nature of the borrower’s special disability. Financial advice will be of little impact if
the disability of the borrower (known to the lender) is such that the advice would have
little or no effect.
VI
KNOWLEDGE, NEGLECT AND THE BASIS FOR UNCONSCIONABLE DEALING
Unconscionable dealing is traditionally understood as preventing exploitation by a
stronger party of a weaker party unable to conserve his or her own interests. It is
exploitation that touches the conscience of the stronger party so as to justify equitable
intervention in the transaction. The exploitation of a special disadvantage implies
‘intentionality’ on the part of the stronger party.71 This rationale starts to erode once
courts accept a lesser degree of knowledge than actual knowledge.72 Hence, Duggan
is critical of the apparent tendency of some courts to accept constructive knowledge
as sufficient for unconscionable dealing. In Radio Rentals, Finn J explained that:
The more attenuated is the level of knowledge required, it is said, the more the
doctrine itself becomes disconnected from its animating purpose of
proscribing advantage taking or exploitation, the more it becomes a device for
correcting defective consent or contractual imbalance.73
The case involved Radio Rentals, a retailer of electrical goods, and Walker Stores,
who leased out such goods. The consumer, Mr Groth, had both an intellectual
disability and a schizophrenic illness. He was in receipt of a disability pension which
was his sole source of income. In the period between November 1996 and October
2002, the consumer entered into 15 rental, two loan and 19 service agreements with
Radio Rentals and three rental agreements with Walker Stores. These all related to
electrical goods. The payments he made under those agreements totalled $20,700.43.
The Australian Competition and Consumer Commission (‘the ACCC’) brought
proceedings against the two companies under the Trade Practices Act 1974 (Cth)
23
alleging that in entering into, and enforcing, the 39 agreements, the companies were
guilty of unconscionable conduct for the purposes of s 51AA and s 51AB of that Act.
The ACCC argued that Radio Rentals and Walker Stores knew or ought to have
known that Mr Groth was unable to conserve his own interests and that the
agreements with them would result in financial hardship for the consumer. Finn J
found that Mr Groth was ‘able to present himself in a manner which did not
immediately suggest he was markedly intellectually disabled’.74 Accordingly, the
disabilities of Mr Groth were not sufficiently evident to the sales people who dealt
with him to fix Radio Rentals with knowledge of Mr Groth’s disadvantage.75
Moreover, Finn J held that items of information held by various employees of the
companies could not properly be aggregated in the circumstances where the
information came from unrelated transactions and interactions.76
The ACCC also attempted to argue that Radio Rentals and Walker Stores took
advantage of Mr Groth because they knew of his financial circumstances and in
particular that he had an inadequate monthly surplus after paying the moneys owning
to those companies to cover his living expenses. This argument was raised too late in
the proceedings to be pursued.77 Finn J noted that the ACCC has presented proof of
financial hardship. For more than five years Mr Goth ‘maintained an exemplary
credit’.78 Finn J stated that it was not to the point ‘that, with different risk
management practices, [Radio Rentals and Walker Stores] may have been able to
detect Mr Groth's circumstances and to take steps to assist him’.79 Finn J stated that
the ‘positive, neighbourhood-like, obligation implicit in this stands apart from the law
of unconscionable dealing as it has been conceptualised to date and it appears to be
distinctly tort like in character, conjuring up as it does a negligent failure to discharge
this claimed “responsibility”’.80
Bigwood argues that once courts start to accept a lesser degree of knowledge than
direct actual knowledge, the focus of the doctrine of unconscionable dealing starts to
move from preventing active exploitation towards a concern with ‘transactional
24
neglect’.81 Bigwood argues that the shift in the courts’ approach should be
acknowledged:
Shifting to a negligence based liability approach will only create a better fit
between what the courts say they are doing in the decided cases – regulating
against exploitation – and what they are actually doing in that name,
regulating against transactional neglect.82
Importantly, Bigwood sees a concern with ‘transactional neglect’ as consistent with
the purposes of unconscionable dealing, or indeed undue influence. Bigwood explains
that under the liberal conception of contract:
corrective justice seeks to protect a contracting party from being used merely
instrumentally at the hands of her bargaining opponent, while identifying a
reason – agency responsible ‘fault’ or ‘blame’ – that plausibly singles out that
other person as the ‘merely instrumental user’ of the contracting party seeking
exculpation from the transaction.’83
In relation to transactional neglect, the fault element exists in D’s (the stronger
party’s) unexercised capacity for choice:
D was able to understand the unreasonable risk of P [the vulnerable
party] being used merely instrumentally at D’s hands if D did not
respond to that foreseeable possibility, and it was possible for D to
make a difference through choice, that is, if he had wanted to choose to
take reasonable precautions against the risk by administering to P“s
autonomy interests before contracting with her – then he can hardly
complain if he is subsequently found to have used P merely
instrumentally, despite not having possessed a fully exploitative will
towards her at the time.84
It is suggested that transactional neglect provides a better explanation of the concern
in asset-based lending cases, namely that the lender neglected to respond to
information in the loan application which indicated that the borrower was unable to
conserve its own interests. Transactional neglect may also provide a unifying concept
25
for cases in which asset-based lending has been found to be unjust under the UCCC or
CRA.
The move to encompass transactional neglect in unconscionable dealing is not unfair
with respect to the relationship between the parties in this context. The information on
which knowledge is attributed to the lender has come to the lender at its request. The
lender has requested information from the borrower that is relevant to the ability of
the borrower to repay the loan. A borrower might reasonably assume that the lender
has sought the information because it intends to assess whether or not the loan is
viable with the borrower having a likelihood of repayment. The loan has presumably
not been presented to the borrower on the basis that the lender will foresee almost
immediate default by the borrower allowing it to sell the house. The loan will
presumably not even have been presented on the basis that the creditworthiness of the
borrower is irrelevant to the lender because it is relying purely on the security of the
house as a means of repaying the loan.
Looking at the issue in doctrinal terms, a neglect-based jurisdiction need not
transform the doctrine of unconscionable dealing into a device for rectifying defective
consent or substantive unconscionability. It is still premised on the lender having
knowledge of facts that should reasonably have alerted it to the need for care with
respect to the interests of the borrower. Bigwood explains that:
one of the principal instances of superior-party ‘neglect’ in this context is
likely to reside in D failing to take reasonable precautions against the realistic
chance of P being specially disadvantaged relative to him in the transaction
proposed, that is, if in exercising care with reference to the matter in question
a reasonable person in D’s position (with D’s knowledge) would predicate his
actions upon the assumption of its possible existence and take such steps as
are reasonable in the circumstances to reduce the chance to an acceptable
level.85
For this reason, a jurisdiction encompassing transactional neglect need not result in
lenders refusing to lend on the security of the family home. Rather, the incentive to
26
lenders is to take genuine steps to assess the ability of the borrower to repay the loan
or to ensure borrowers understand the real basis on which the loan is being made.
VII
CONCLUSION
Asset-based lending may be a legitimate way of raising finance for a borrower with
no income to repay a loan. Asset-based lending may also lead to the loss of the main
asset of vulnerable borrowers. For the lender’s role in such transactions to be
unconscionable, the lender’s conscience must be affected. This requirement
traditionally looks to exploitation by the lender – namely, knowledge that the
borrower is vulnerable and a taking advantage of that fact by continuing with the
transaction. In the context of asset-based lending facilitated by a broker, where the
lender has no direct dealings with the borrower, the lender is unlikely to have direct
knowledge of the borrower’s special disadvantage. Knowledge may only be
established on the basis of reckless indifference to facts in the loan application which
would indicate that the borrower is unable to conserve its own interests, or, more
commonly, facts that would indicate those circumstances to a reasonable person in the
position of the lender. It has been suggested that there may be a range of factors in a
loan application which may, at least in combination, give rise to this degree of
knowledge by the lender and hence to the need for care by the lender in the
transaction. However, such cases may be more accurately conceptualised as extending
unconscionable dealing from regulating exploitation to regulating transactional
neglect.
1
Dr Jeannie Marie Paterson, BA/LLB, PhD (Monash), Senior Lecturer, Faculty of Law,
Monash University.
2
J Milnes Holden, The Law and Practice of Banking (8th ed, 1993) vol 2, 12; quoted in J Wadsley,
‘Bank Lending and the Family Home: Prudence and Protection’ (2003) 3 Lloyds Maritime and
Commercial Law Quarterly 341, 342.
3
Ross Cranston, Principles of Banking Law (2nd ed, 2001) 222; Wadsley, above n 2; L Aitken, ‘A
“Duty to Lend Reasonably” – New Terror for Lenders in a Consumer’s World?’ (2007) 18
27
Journal of Banking and Finance Law and Practice 18. Also Banco Exterior Internacional SA v Thomas
and Anor [1997] 1 All ER 46, 55–57; Citibank v Nicholson and Ors (1997) 70 SASR 206, 229;
Australian Societies Group Financial Services (NSW) Ltd v Bogan (1989) ASC s 55-938, 58,557,
58,562 (Campbell J).
4
See, eg, Permanent Mortgages Pty Ltd v Cook [2006] NSWSC 1104.
5
A factor recognised in O’Brien [1994] 1 AC 180, 188.
6
The House Standing Committee on Economics, Finance and Public Administration, Inquiry
into Home Loan Practices and Processes (2007), [4.7].
The UCCC applies to credit contracts between a lender and an individual borrower where
7
the credit is provided, or intended to be provided, wholly or predominantly for personal,
domestic or household purposes: s 6(1).
The CRA does not apply a contract ‘entered into in the course of or for the purposes of a
8
trade, business or profession’ carried on by the person seeking relief s 6(2)
9
See also Helen Saunders, ‘Relief from Unconscionable Contracts: The Contracts Review Act
1980 (NSW) and the “Unwritten Law”’ (2007) 29 Australian Bar Review 290.
10
See generally R P Meagher, W M C Gummow and Lehane J R F, Equity: Doctrines and
Remedies (3rd ed, 1992), [1608] – [1611].
11
Modern concern over home loan lending practices may be seen in the House Standing
Committee on Economics, Finance and Public Administration, Inquiry into Home Loan
Practices and Processes (2007).
12
See generally Rick Bigwood, Exploitative Contracts (2003) ch 9. Also Wadsley, above n 1.
13
Perpetual Trustees Victoria Limited v Ford [2008] NSWSC 29 (‘Ford’). See also Pasternacki and
Solka-Pasternacki (as Executors of the Estate of the Late Mary Nagy) v Correy [2000] NSWCA 333
and Mizzi v Reliance Financial Services Pty Ltd [2007] NSWSC 37 (‘Mizzi’).
14
[2002] NSWCA 413 (‘Elkofairi’). See also CIBC Mortgages v Pitt [1994] 1 AC 200.
15
(1936) 63 CLR 649 (‘Yerkey v Jones’). See also Garcia v National Australia Bank (1998) 194 CLR
395.
16
[2006] NSWSC 1104 (‘Cook’), appeal on issue of relief in Cook v Permanent Mortgages Pty Ltd
[2007] NSWCA 219.
17
Cook [2006] NSWSC 1104, [79] (Patten AJ).
18
[2006] NSWCA 41 (‘Khoshaba’).
28
19
Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 (‘Amadio’), 474 (Deane J). See
also Bridgewater v Leahy (1998) 194 CLR 457.
20
Amadio (1983) 151 CLR 447, 489 (Dawson J); Blomley v Ryan (1956) 99 CLR 362, 415 (Kitto J).
21
Amadio (1983) 151 CLR 447, 474 (Deane J).
22
Eg Australian Securities and Investments Commission Act 2001 (Cth) (‘ASIC Act’) ss 12CA and
s 12CB. See generally Gail Pearson, ‘The Ambit of Unconscionable Conduct in Relation to
Financial Services’ (2005) 23 Company and Securities Law Journal 105.
23
See, eg, F Zumbo , ‘Dealing with unfair terms in consumer contracts: Is Australia falling
behind?’ (2005) 13 Trade Prctices Law Journal 70.
24
See further Anthony Duggan, ‘Undue Influence’ in Patrick Parkinson, The Principles of
Equity (2nd ed, 2003); Rick Bigwood, ‘Undue Influence in the House of Lords: Principles and
Proof’ (2002) 65 Modern Law Review 435.
25
Bank of New South Wales v Rogers (1941) 65 CLR 42; Royal Bank of Scotland v Etridge (No 2)
[2002] 2 AC 773.
26
See further discussion below.
27
See Carlin TM, ‘The Contracts Review Act 1980 (NSW) – 20 Years On’ (2001) 23 Sydney Law
Review 125; Zipser B, ‘Unjust Contracts and the Contracts Review Act’ (2001) 17 Journal of
Contract Law 76, 79.
28
West v AGC (Advances) Ltd (1986) 5 NSWLR 610, 620.
29
Bakarich & Ors v Commonwealth Bank of Australia [2007] NSWCA 169, [89].
30
See also the discussion of the role of knowledge of the lender in interacting the UCCC s
70(4) and the CRA s 9(4) in Anthony Duggan and Elizabeth Lanyon, Consumer Credit Law
(1999) 339, [9.2.7].
31
Collier v Morelend Finance (Vic) Corporation Pty Ltd (1989) ASC 55-716; Beneficial Finance
Corporation Ltd v Karavas (1991) 23 NSWLR 256; Nguyen v Taylor (1992) 27 NSWLR 48 and
Khoshaba [2006] NSWCA 41, [77] (Spigelman CJ), [119] (Basten JA).
32
See, eg, Elkofairi [2002] NSWCA 413; St George Bank Ltd v Trimarchi [2004] NSWCA 120;
Khoshaba [2006] NSWCA 41 and No Fuss Finance v Miller [2006] NSWSC 630.
33
Rick Bigwood, ‘Australian Competition and Consumer Commission v C G Berbatis Holdings Pty
Ltd’ (2004) 28 Melbourne University Law Review 203, 222.
34
Blomley v Ryan (1956) 99 CLR 362, 405 (Fullagar J).
29
35
Blomley v Ryan (1956) 99 CLR 362, 405 (Fullagar J).
36
Amadio (1983) 151 CLR 447, 462.
37
(2003) 214 CLR 51, 64.
38
See also Collingwood v Romkara Pty Ltd [2003] WASC 190, [54]; Durkin v Pioneer Permanent
Building Society Ltd [2003] FCA 419, [47]; Familiar Pty Ltd v Samarkos (1994) 115 FLR 443; Asia
Pacific International Pty Ltd v Dalrymple [2000] 2 Qd 229.
39
[2006] NSWSC 1104, [84] (Patten AJ).
40
[2006] NSWCA 41, [131].
41
Cf Ribchenkov v Suncorp Metway Ltd (200) 175 ALR 650, [70]–[71].
42
See also the treatment of a business loan in Accom Finance Pty Limited v Mars Pty Limited,
Accom Finance Pty Limited v Kowalczuk [2007] NSWSC 726.
43
Khoshaba [2006] NSWCA 41, [128] (Basten JA).
44
[2002] NSWCA 413, [56].
45
Blomley v Ryan (1956) 99 CLR 362, 405.
46
See Rick Bigwood, Exploitative Contracts (2003) 249; Anthony J Duggan, ‘Unconscientious
Dealing’ in Patrick Parkinson (ed), The Principles of Equity (2nd ed, 2003) 146–8.
47
On this issue, see also Australian Competition and Consumer Commission v Radio Rentals
Limited [2005] FCA 1133 (‘Radio Rentals’).
48
Ministerial Council on Consumer Affairs, National Finance Broking Scheme Consultation
Package (2007) 13, citing the ABIO Bulletin Dec 2002, 3.
49
See, eg, Octapon Pty Ltd v Esanda Finance Corporation Ltd (Unreported, New South Wales
Supreme Court, Cole J, 3 February 1989) 13; Custom Credit Corporation Ltd v Lynch [1993] 2 VR
469; NMFM Property Pty Ltd and Ors v Citibank Ltd (No 10) (2000) 107 FCR 270, 392–396; SteeleSmith v Liberty Financial Pty Ltd [2005] NSWSC 398, [104]; Ford [2008] NSWSC 29. See also
Polandri Wines Ltd v O’Donnell [2002] WASC 123; Permanent Custodians Ltd v Yazgi [2007]
NSWSC 279.
50
Bigwood advocates a concept of ‘inferred knowledge’ to indicate these types of cases where
evidence ‘supports an inference of fact that D knew (despite his affecting not to know), for
example where his eyes were wilfully shut or where he, as an honest and reasonable person,
was recklessly indifferent to the existence of the fact’: Rick Bigwood, Exploitative Contracts
(2003) 257.
30
51
(1983) 151 CLR 447, 467.
52
(1983) 151 CLR 447, 479.
53
Owen and Gutch v Homan (1853) 4 HLC 997, 1035 (Cranworth LC).
54
Amadio (1983) 151 CLR 447, 467.
55
Radio Rentals [2005] FCA 1133, [21].
56
See, eg, Bank of New South Wales Ltd v Rogers (1941) 65 CLR 42. See also the generous
standard of notice applied in England in Barclays Bank plc v O’Brien [1994] 1 AC 180.
57
Khoshaba [2006] NSWCA 41, [128].
58
Elkofairi [2002] NSWCA 413, [56]. See also Khoshaba [2006] NSWCA 41, [85] (Spigelman CJ);
Cook [2006] NSWSC 1104, [128] (Basten AJ); Elkofairi [2002] NSWCA 413 [56] (Beazley JA).
59
See also the Code of Banking Practice (subscribed to by members of the Australian Bankers’
Association) s 25.1, which requires banks to make an assessment of a borrower’s ability to
service a loan before providing credit.
60
[2008] NSWSC 29 [107]. See also Radio Rentals [2005] FCA 1133, [201] (Finn J), where this
type of argument was raised too late to be pursued.
61
See also Riz v Perpetual Trustee Australia Ltd [2007] NSWSC 1153 (‘Riz’); King Mortgages Pty
Ltd v Satchithanantham; Cash King v Satchithanantham [2006] NSWSC 1303 (‘King’).
62
Khoshaba [2006] NSWCA 41, [84] (Spigelman CJ). See also King [2006] NSWSC 1303, [142]
(Bell J).
63
[2007] NSWSC 1153, [78] (Brereton J).
64
[2006] NSWCA 41, [92] (Spigelman CJ).
65
See, eg, Khoshaba [2006] NSWCA 41, [125] (Basten JA).
66
[2006] NSWCA 41, [92], [19].
67
[1999] SASC 265, 215 (‘Micarone’).
68
See also Micarone [1999] SASC 265; Mizzi [2007] NSWSC 37; King [2006] NSWSC 1303; Abbey
National Bank plc v Stringer and Ors [2006] EWCA Civ 338.
69
[2008] NSWSC 29.
70
See especially Ford [2008] NSWSC 29.
71
Rick Bigwood, Exploitative Contracts (2003) 255.
31
72
Anthony J Duggan, ‘Unconscientious Dealing’ in Patrick Parkinson (ed) The Principles of
Equity (2nd ed, 2003) 147. See also Micrarone v Perpetual Trustees Australia Ltd (1999) 75 SASR 1,
115.
73
Radio Rentals [2005] FCA 1133, [19].
74
Radio Rentals [2005] FCA 1133, 158.
75
Radio Rentals [2005] FCA 1133, 169.
76
Radio Rentals [2005] FCA 1133, 176 - 184.
77
Radio Rentals [2005] FCA 1133, 187 – 190.
78
Radio Rentals [2005] FCA 1133, 193- 196.
79
Radio Rentals [2005] FCA 1133, 201.
80
Radio Rentals [2005] FCA 1133, 201.
81
Rick Bigwood, Exploitative Contracts (2003) 255.
82
Rick Bigwood, Exploitative Contracts (2003) 511.
83
R Bigwood, ‘Contracts by Unfair Advantage: From Exploitation to Transactional Neglect’
(2005) 25 Oxford Journal of Legal Studies 65, 90.
84
R Bigwood, ‘Contracts by Unfair Advantage: From Exploitation to Transactional Neglect’
(2005) 25 Oxford Journal of Legal Studies 65, 90–91.
85
Rick Bigwood, Exploitative Contracts (2003) 510.
32