Agricultural and Rural Finance v Atkinson [2010] NSWSC 635

ARF sued 206 defendants who entered into loan agreements to invest in tea tree plantations in Port Macquarie, set up as part of an agricultural investment scheme managed by the second cross-defendant (“AOL”). The active defendants relied on the Contracts Review Act (“the Act”).

If the defendants failed to make out their defences under the Act, the next issue was whether the defendants had proven punctual performance of their obligations to pay principal and interest as a condition precedent to their entitlement to indemnity for the repayment of their loans from OAL.

The defendants argued the Act applied to their loans by operation of S 6(2), either because they were not for the purpose of carrying on a trade, business or a profession or because they came within the exception for farming undertakings. ARF argued that the Act did not apply because the loans were “for the purpose of a trade, business or profession”.

Justice Einstein considered the meaning of those words “trade, business or profession” used in the Act as follows:

In Ellison v Vukicevic (1986) 7 NSWLR 104 at 111 Young J said that ‘the words “trade, business or profession” are… very wide and cover the whole gamut of professional and commercial activity: see Holman v Deol [1979] 1 NSWLR 640. His Honour then approved the interpretation of Lee J in Collins v Parker (Lee J, 11 May 1984):

“The expression ‘for the purpose of’ has the meaning that the contract under consideration is entered into as an ordinary incident of the carrying on of a particular trade, business or profession then being carried on or proposed to be carried on.”

This interpretation of the Act has been subsequently approved: see, eg, Lander v Trigger [1999] NSWSC 1253 , Cash King v Satchithanantham [2006] NSWSC 1303 and Wallis v Downard-Pickford (North Queensland) Pty Ltd (1994) 179 CLR 388 (regarding a slightly different statutory context). Peden, The Law of Unjust Contracts (Butterworths, 1982) (‘Peden’) comments that the exclusion contained in s 6(2) ‘applies to contracts with a mixed business and private purpose’, giving the example of a motor vehicle used for the dual purpose of business and private use.
In the recent case of Ford v Perpetual Trustees, supra, Allsop P and Young JA, Sackville AJA agreeing, emphasised the need in applying subsection 6(2) to focus on the statutory language contained therein. At their Honours said that ‘[t]he application of s 6(2) should be looked at as a matter of substance and not form’.

Of relevance to the present case is Central Commodities Services Pty Ltd v Hertzog (1989) ASC 55-706, where the contract in question was a mortgage entered into to secure a share in the Cypart Trust No 5, [a trust of an investment company]. Callaway AJ noted that ‘although the defendant claimed that he wished to become a trader, this wish related to trading on his own account and did not relate to the investment in Cypart No 5’. Accordingly, the exclusion contained in s 6(2) did not apply. This decision provides some support for the proposition that where an investment contract is entered into as a matter of personal finance, rather than in the course of or for the purpose of a ‘trade, business or profession’ that relates to investing, s 6(2) will not apply. The commentary in Seddon and Ellinghaus, Cheshire and Fifoot’s Law of Contract (Lexis Nexis Butterworths, 9th Aus ed, 2008) (‘ARF sued 206 defendants who entered into loan agreements to invest in tea tree plantations in Port Macquarie, set up as part of an agricultural investment scheme managed by the second cross-defendant (“AOL”). The active defendants relied on the Contracts Review Act (“the Act”).

His Honour concluded the purpose of the loan contracts was not to carry on a trade, business or profession, rather it was for the purpose of managing their personal finances and (with the exception of one defendant) the Act applied. The fact that the investors were motivated to invest in the scheme to obtain income tax benefits did not make the purpose of the loan contracts to carry on a trade, business or profession. Justice Einstein stated:

The above conclusion is consistent with the narrow interpretation that has repeatedly been given to s 6(2): see further Coombs v Bahama Palm Trading Pty Ltd (1991) ASC 56-097 at 57, 025; Zipser, ‘Unjust Contracts and the Contracts Review Act 1980 (NSW)’ (2001) 17 Journal of Contract Law 76 at 76 (‘Zipser’); Cheshire.

Justice Einstein rejected ARF’s argument that the farming exception did not apply because the defendants, as licensees of the plots by reason of their investment, did not carry on the farming undertaking. The authorities reviewed by Justice Einstein established that the farming exception was to be given an expansive interpretation to include licensees of the land who did not engage in farming activities themselves. Investors who gained a right to the proceeds of the farming of the tea tree oil were within the farming exception, and the Act applied to all the defendants.

Justice Einstein considered whether the loan contracts were unjust within the meaning of s 7(1) of the Act. There are two steps in applying s 7(1):

1. whether the contract was unjust in the circumstances in which it was  made, having regard to the factors referred to in s 9.

2. whether any and if so what relief should be granted; this involves the  exercise of a judicial discretion.

The transaction as a whole as well as the contract itself may be looked at as relevant to determining whether a contract is unjust: Perpetual Trustee Company Limited v Albert and Rose Khoshaba [2006] NSWCA 41.

Justice Einstein referred to the guiding principles of what is unjust under the Act as summarised by Campbell JA in Kowalczuk v Accom Finance Pty Ltd (2008) 252 ALR 55, as follows:

Comparatively early in the life of the Contracts Review Act, McHugh JA in West v AGC (Advances) Ltd (1986) 5 NSWLR 610 recognised, that the Act:
… is revolutionary legislation whose evident purpose is to overcome the common law’s failure to provide a comprehensive doctrinal framework to deal with “unjust” contracts.

McHugh JA recognised,  that a contract can be unjust “because of the way it operates in relation to the claimant or because of the way in which it was made or both.” He recognised that a contract could be unjust because it contained “substantive injustice” — which arises “because its terms, consequences or effects are unjust”, or because of “procedural injustice” — which arises “because of the unfairness of the methods used to make it” — or both. He recognised, that a contract can be “unjust” even if it is not unconscionable, harsh or oppressive.

Thus, if the contract is found unjust by reason of circumstances not known to one of the contracting parties, it does not automatically follow that relief will be given to remedy that injustice.

In relation to the public interest factor in s 9(1) of the Act the lender argued that sophisticated investors ought to be held to their contractual obligations. Justice Einstein found that the provisions of the contract were not themselves unjust. The public interest required that the borrowers be kept to their obligations to repay the loans.

The borrowers claimed the absence of negotiation or the opportunity to negotiate the terms was unjust. However, the nature of the scheme and the statutory requirements for the registration a prospectus and complying with the ATO product ruling limited the scope for negotiation. Justice Einstein found it was the investors choice whether to subscribe or not and there was nothing unjust in that.

The borrowers argued that the punctual repayment requirement of the indemnity was not reasonably necessary for the protection of the legitimate interests of OAL, the company which managed the investment scheme and was obliged to give the indemnity. However, OAL had a direct financial interest in punctual repayments, on the basis that this determined whether it was liable on the indemnity, and therefore whether or not it had a contingent liability on its balance sheet.

It was also argued that the consequence of a breach of the punctuality clause lead to the loss of the indemnity, which was a disproportionate detriment compared to the loss suffered by AOL from its breach. Since the clause was not unnecessary to protect the legitimate interests of AOL, that argument failed.

Justice Einstein found that there had not been punctual repayment and as a result the indemnity was lost.

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