A sister was persuaded to grant a second mortgage over her home for the benefit of her bankrupt brother. The interest rate was 48% p.a. with a default rate of 96% p.a.
The second mortgagee sought possession and judgment for $160,000 plus unpaid interest. The sister argued that she did not receive the funds, the funds were distributed without her authority, she signed the mortgage and loan under pressure from her brother and claimed relief under the Contracts Review Act.
The court accepted that the brother represented to the broker that the loan was for business purposes. The court suspected that the purpose of the loan was deliberately not explored and was euphemistically labelled “working capital” to avoid the legal complications of providing consumer credit.
The court made the following findings:
- there was no reliable basis for the broker to accept that the brother was financially sound at the time he sought the loan;
- the broker and lender dealt with the brother as if he had authority to act on behalf of his sister, even though they took no steps to confirm this;
- the sister did not receive independent legal advice;
- the sister signed all the documents her brother put to her, including the Consumer Credit Code declaration and the declaration that she had received independent legal advice but they were not witnessed.
Was the loan made to the sister at all?
The court found that the sister gave implied authority to the lender to distribute the funds as directed by her brother.
Was the loan unjust?
The court found that the contract was unjust in the circumstances because:
- the sister was rushed into signing the documents because she trusted her brother and he pressured her;
- the haste and pressure contributed to her not obtaining independent advice;
- the short term of the contract;
- the exorbitant interest rates of which the sister was unaware;
- the lender’s knowledge of all of the above. The court found that the lender did not take reasonable steps to avoid being fixed with constructive knowledge.
However the court refused to relieve the sister of the requirement to repay the principal, concluding:
Although she was rushed and pressured into signing the documents, ultimately it must be accepted that she made a choice, not labouring under any disability in the making of choices, to grant the mortgage to secure a debt for the benefit of her brother.
However the court did vary the interest rate under the loan to the commercial rate of 7% but only from the date on which the loan was due to be repaid, because the sister was aware of the amount borrowed which included prepaid interest.