Bakarich v CBA [2007] NSWCA 169

This case was a decision by the Court of Appeal in relation to a defence raised by mortgagor/guarantors under the Trade Practices Act, Contracts Review Act and Unconscionability. One significant pronouncement made in the course of the decision by Hodgson JA that has since been quoted was:

I will focus on questions arising under the Contracts Review Act 1980, because it seems clear that the threshold for relief is lower under that Act than is the case in relation to unconscionability at general law

The conduct of the bank at the nub of the guarantor’s complaint related to a tightening of the circumstances in which money would be allowed to be drawn down for a trade facility – namely only for confirmed orders. They submitted that irrespective of whether this change amounted to a variation of the underlying contract sufficient to attract the rule in Ankar v National Westminster Finance (1987) 162 CLR 549, such a change in the conditions of credit brings on the Bank a duty to disclose or alternatively made the contract unjust.

Hodgson J held at [112] in relation to the Ankar argument:

There were, at the time the guarantees were signed, no settled terms on which the Bank would advance $2.65 million, that the guarantors’ case concerning material alteration to the principal contract had to fail. In the result, the guarantors were not guaranteeing a loan to Demson on the terms ultimately determined by the Bank, but guaranteeing whatever loan the Bank might make to Demson up to the limit of $2.65 million. Of course, this was in any event the effect of the “all monies” clause in the guarantees, and of the term in the guarantees maintaining the liability of the guarantors in the event of variations in the contract.

In relation to the Trade Practices and His Honour went on to say however that there can be circumstances in which the Contracts Review Act can be relied on so as to prevent a creditor taking advantage of an “all monies” clause so as to impose liability on a guarantor. He cited without disapproval State Bank of NSW v. Muir (1997) NSW Conv R 55-823:

The prospect that one of two joint borrowers under a housing loan from a bank would, by joining in the home mortgage, become potentially liable, or cause the home to become security, for unrelated individual debts of the other joint borrower is likely to be quite remote from the reasonable contemplation of the ordinary housing loan borrower, and the inclusion in a housing loan mortgage of an “all moneys” clause having this effect could hardly be said to be reasonably necessary to protect the legitimate interests of the lender in respect of that transaction. The imposition, under the umbrella of a housing loan mortgage, of potential liability on one of two joint mortgagors for the debts of the other arising from other transactions, may properly be characterised as a potential trap for all but the unusually commercially sophisticated or well advised borrower.

His Honour conceded the case did not reach that threshold. He did however espouse a new principle relying upon temporal paradox and the Contracts Review concept of thought crime:

I think it would generally be unreasonable for a bank to take a guarantee of a company’s liability to the bank from a family member of directors who is not otherwise associated with the business of the company, where the bank imposes explicit and readily enforceable contractual limits on the advances it is to make to the company but obtains a guarantee which extends to liabilities of the company going beyond those limits, unless the bank takes reasonable steps to ensure that the guarantor understands that this is what the bank is doing and assents to it. Indeed, if in such a case the bank represented to the guarantor that the bank had agreed to provide finance to the principal creditor, and that the guarantee was of repayment of money provided pursuant to that agreement, the representation would be misleading. In the present case, the limits were not determined until after the guarantees were obtained; but since the Bank intended to impose limits of that kind at the time the guarantee and the mortgage were signed, I do not think that makes a material difference.

The upshot was that the Court was inclined to grant relief but the parties entitled to relief were dead and their heir would have been obliged to pay the money the bank thus lost so no order for relief was made.

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