Chen v Song [2005] NSWSC 19

Upon the borrower’s default in making repayments Chen (the lender), claimed possession of properties secured by registered mortgages purportedly granted by the Songs (the borrower), as well as the balance due under the mortgages. The borrower alleged the signatures on the mortgages were forged so that there was no agreement, that if there was an agreement it was a term that the mortgage would not be registered, and that no money had been advanced to Song, that the mortgages were granted in circumstances that were unconscionable under s 43 of the Fair Trading Act and under the Contracts Review Act, namely that the rate of interest was excessive.

Justice Campbell found that it was the daughter of the Songs who had signed the mortgages. His Honour found that the Songs had not authorised their daughter to sign the mortgages.   

Justice Campbell set out the legal principles with respect to the indefeasibility of title obtained by the registration of a forged mortgage, as follows:

It was not disputed that, even if the signatures of the mortgagors on the mortgage had been forged, on registration of the mortgage the plaintiff acquired an estate as mortgagee which was indefeasible, subject to their being any exception to indefeasibility: Real Property Act s 42, Frazer v Walker [1967] 1 AC 569, Mayer v Coe (1968) 88 W.N (Pt 1)(NSW) 549.

An exception to indefeasibility expressly recognised in s 42 of the Real Property Act is fraud.  What is meant by “fraud” in this context was discussed by Lord Lindley in a well known passage in delivering the advice of the Privy Council in Assets Co Limited v Mere Roihi [1905] AC 176 at 210.  His Lordship said:-

“…by fraud in these Acts is meant actual fraud, i.e., dishonesty of some sort, not what is called constructive or equitable fraud – an unfortunate expression and one very apt to mislead, but often used, for want of a better term, to denote transactions having consequences in equity similar to those which flow from fraud. Further, … the fraud which must be proved in order to invalidate the title of a registered purchaser for value, … must be brought home to the person whose registered title is impeached or to his agents.”

In Grgic v ANZ Banking Group Limited (1994) 33 NSWLR 202 Powell JA, with whose judgment Mahoney JA and Handley JA concurred, after referring to the passage in Assets Co which I have quoted:-

“…and the many cases which have been decided in that period of ninety years, the position still remains that, for the purposes of s 42 of the Act, “fraud” comprehends actual fraud, personal dishonesty or moral turpitude on the part of the registered proprietor of the subject estate or interest or of that registered proprietor’s agents….”

Justice Campbell found that the lender, as registered proprietor, had not committed fraud in procuring the registration of the mortgage.

As to unconscionability Justice Campbell set out the relevant principles as follows:

In Commercial Bank of Australia Limited v Amadio (1982-1983) 151 CLR 447 Mason J at p 462 spoke of:-

“…an underlying general principle which may be invoked whenever one party by reason of some condition or circumstance is placed at a special disadvantage vis-à-vis another and unfair or unconscientious advantage is then taken of the opportunity thereby created. 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 emphasize 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”.

162 In Amadio Deane J said:-

“…The jurisdiction is long established as extending generally to circumstances in which (i) 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 (ii) that disability was sufficiently evident to the stronger party to make it prima facie unfair or “unconscientious” that he procure, or accept, the weaker party’s assent to the impugned transaction in the circumstances in which he procured or accepted it. Where such circumstances are shown to have existed, an onus is cast upon the stronger party to show that the transaction was fair, just and reasonable…”

There was no evidence that the daughter had any difficulty understanding English. Further, there was no evidence that the suspicions of the lender were aroused as to any English language disability of the Songs. In that regard it was significant that the Songs were represented by a solicitor who had an obligation to ensure that his clients understood the transaction, whether they spoke another language or not.

As to whether it was a term of the mortgages that they were not to be registered, the memorandum incorporated into the mortgage contained a term that referred to notices under s 57 of the Real Property Act which presumed the mortgage could be registered and would take effect if the borrowers defaulted. 

Justice Campbell found there was no contract to which the Contracts Review Act could apply, for the reason that on registration the lender:

… acquired an indefeasible estate or interest as mortgagee but the registration of the mortgage did not validate all the terms and conditions of the mortgage but only “those which delimit or qualify the estate or interest or are otherwise necessary to assure that estate or interest to the registered proprietor” (PT Limited v Maradona Pty Limited (1992) 25 NSWLR 643 at 679 per Giles J).  It would seem that what is validated by the registration of a forged instrument does not amount to a contract to which the Contracts Review Act can apply.  Khan v Hadid; Permanent Trustee Co Limited v Frazis (1999) NSWSC 319 (Dunford J).

There was no contract between the lender and the borrower.

The borrowers claimed they were entitled to relief under s 6(2) of the Contracts Review Act pursuant to a contract to borrow money to purchase a franchise business. The issue was whether the business was intended to be carried on by a company or by the borrowers as individuals. Justice Campbell found the business was intended to be carried on by the borrowers as individuals and not the company. As a result they were entitled to the relief sought if they could show the contract was harsh or unjust under s 7 of the Act. Justice Campbell found there was nothing about the contract to borrow money that was harsh or unjust, either in its terms or its operation, except for the payment of interest stating:

I find that the rate of interest was not unjust for a short term bridging loan, where the loan was required urgently, and would not be unjust for the original term of the loan and perhaps somewhat longer.  However, in the present state of the evidence I would be disposed to find that the rate of interest of 8½% or 7½% per month, especially if compounded, would be unjust, as a rate of interest continuing year after year, after the loan had ceased to be a short term bridging loan.

The provisions of the Fair Trading Act did not apply because the money was not borrowed for household or domestic purposes as required by the Act.   

The daughter was not entitled to any relief, having been the knowing mind behind each of the transactions. Therefore the only relief granted was to the parents under the Contracts Review Act in the form of a variation of the long term interest rate applicable to the loan.

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