In this matter the lender obtained default judgment against the borrower. The borrower obtained a stay of the writ of possession and brought this application to set aside the default judgment and filed a defence under the Consumer Credit Code (“the Code”), Trade Practices Act 1974 (Cth), Fair Trading Act 1987 and Contracts Review Act 1980.
Associate Justice Harrison reviewed the relevant authorities noting that:
to set aside a default judgment, the court must look to the whole of the relevant circumstances which include: the existence of a bona fide defence on the merits, an adequate explanation for the failure to defend and any delay; in determining whether there are bona fide grounds of defence the Court must not try the issues to be determined at the trial: what is required is that the Court determines that the facts sworn to as providing a defence, if established at the trial, would afford a defence and that the defence is set up bona fide.
The case was interesting because at the time default judgment was entered the borrower knew the proceedings were on foot and was represented. Moreover, the lender’s solicitors bound themselves not to enter default judgment until a given date and that date came and went without a defence being filed. The judge noted:
The Hillsan then extended the time for filing the defence on four occasions while negotiations took place. Generally speaking, while settlement negotiations may take place prior to the filing of a defence, the period of time for this to occur is not an open-ended one. Hillsan’s solicitor had already warned the Ms Macaulay’s solicitor that it was proceeding to enter default judgment on 2 November 2009. There was no obligation upon it to give a further warning… While Ms Macaulay may have been tardy in filing her defence, she acted with expedition once she was advised that default judgment had been entered. It is my view her explanation in these circumstances is adequate.
This seems a perverse conclusion. The lender was entitled to enter default judgment, wanted to avoid it being set aside and so gave repeated extensions of time, nothing came of it and so they finally entered default judgment – and it got set aside. By this reasoning a lender could never win, no matter what it did to give the borrower an opportunity to file a defence, even if it waited a thousand years, so long as “the borrower acted with expedition once she was advised that default judgment had been entered” the judgment could be set aside.
One of the two grounds of defence seemed to be that the borrower did not receive independent legal advice and that it may have been credit code regulated. There was no substance, no meat to the claim, the borrower was not defrauded, she spoke English, she was not a mental or physical cripple, she was not taken advantage of, all she could point to was that she did not receive independent legal advice, without pointing to any particularly onerous clauses, nevertheless the Court found the defence was arguable.
The other ground of defence related to a variation of the mortgage whereby she borrowed an additional $80,000. Here the complaint was that it was not the subject of negotiation between her and the plaintiff; secondly, it was not reasonably practicable for her to negotiate the alteration of, or to reject, any of the conditions upon which the variation of mortgage was given to and advances were made by the plaintiff; thirdly, she was unable to make a judgment as to what was in her interest and necessary to protect those interests; and finally, that she was under the influence of the plaintiff, or its servants or agents, including its solicitor in whom she reposed her trust and confidence. All this was claimed even though she was a grown woman without specifying any disability she was under or unconscionable advantage that had been taken of her.
His Honour concluded:
In my view the matters raised under the Contracts Review Act and Consumer Credit Code are defences on their merits. Whether or not Ms Macaulay ultimately can succeed in these defences depends on the resolution of factual conflict. These facts and circumstances can only be determined at trial.
However His Honour did not point to any facts in dispute. With respect, even if the facts claimed by the borrower were accepted, the loan still would not be set aside.
This case is a further continuation of a disappointing trend whereby the Associate Judges, instead of acting as filters, weeding out unarguable cases, instead, wherever a Contracts Review Act defence to a mortgage is raised, throw up their hands and allow it to go to trial.
This wastes the lenders time and money and the borrower is ultimately saddled with a large legal bill and usually bankrupted. It is false compassion to give borrowers the allusion that they will somehow be absolved of their debts when the number of mortgages actually set aside, or even granted relief is extremely small and limited to extreme fact situations of people genuinely unable to look after their own interests.
Nor can judges console themselves that property rights are not ultimately undermined by this process. Though most lenders ultimately get their money back, the uncertainty and horror of being told that there is an arguable case and that what they thought was a secure property right may in fact turn out to be worthless leaves a psychological scar and few non-bank lenders who undergo the Contracts Review Act mauling ever wish to return and lend again. By analogy a surfer who is grabbed by a playful killer whale and pulled under and tossed about before being released is unlikely to return to the surf.
The essence of property rights is that they are secure. Security requires that they are unchallengeable. Imagine if the banks could put on a Contracts Review Act defence and drag out recovery in Court for three years when an investors term deposit was due. Imagine if one in every 50 got up and the depositor lost his deposit – can anyone doubt that term deposits would no longer be attractive?
The ill conceived Contracts Review Act and decisions such as this one have seriously damaged the non-bank lending market. They continue to erode it. This is no cause for celebration, a vibrant economy needs lending, it needs the cracks where banks cannot go to be filled in. Without this sort of dynamism our economy is one step close to a third world economy. This has been explained in great detail by Hernando De Sotto in his seminal work, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, recommended reading for judges and legislators. In the Democratic Socialist Republic of Sri Lanka it is illegal to evict people from their homes. As a result it is impossible to raise capital and GDP per capita is only $4,589. Thus compassion for borrowers who cannot repay their mortgages is actually misguided because condemns entire country to a lower standard of living.