Perpetual Trustee Company v Khoshaba [2006] NSWCA 41

This case was regarded as a watershed in the Court’s interpretation of the Contracts Review Act.

In relation to the Act generally Basten JA said at [115]:

That is not to say that the Court is launched on an uncharted sea with no navigational guides, but rather that constraints which would preclude intervention according to established principles of legal or equitable doctrine, may not be decisive under the Act. Thus, while equity provides relief against the unconscientious conduct of the defendant, the Act may permit relief in circumstances where the conscience of the defendant is not affected. Similarly, a contract, or a provision thereof, may be unjust in circumstances where there was no pre-existing duty owed by, say, a lender to a borrower to act in a particular way.

Chief Justice Spigelman clearing the way for a radical departure from earlier cases said:

In many respects this case, in its basic structure, is similar to that considered by this Court in West v AGC (Advances) Ltd (1986) 5 NSWLR 610 where the Court held, by majority, that the contract was not “unjust”… Of course each case must depend upon its own facts. Furthermore, West is now 20 years old. When the Parliament adopts so general, and inherently variable, a standard as that of ‘justness’, Parliament intends for Courts to apply contemporary community standards about what is just. Such standards may vary over time, particularly over a period of two decades.

Spigelman CJ described the uniqueness of the claim as follows:

An important feature of this case is that no criticism has been directed to the terms and conditions of the loan and mortgage entered into between the parties. Nor has it been suggested that the Appellant received any advantage, direct or indirect, from the transaction other than that specified in the loan agreement itself. What is said to be unjust is the fact that the Appellant agreed to give a loan to the Respondents at their request in circumstances, not known to the Appellant, that funds advanced would be used for a dubious investment.

In response the the departure from guidelines argument Spiegalman CJ held:

 … departure from the guidelines …[is] a relevant consideration in the determination of ‘justness’ …[but] such departure …[is] not, of itself, entitled to significant, let alone determinative weight… at least in a case where the departure from the guidelines is not evidence of departure from prudent lending practice.

The Court held that where the lender is engaged in asset lending it cannot be regarded as an innocent party (regardless of its ignorance of the circumstances which make the loan unjust from the mortgagor’s point of view). Spigelman CJ holding:

In my opinion the Appellant cannot be regarded as an innocent party of the kind referred to in the authorities. Again I place particular reliance on the indifference of the Appellant and its representatives to the purpose of the loan, indicating that it was content to proceed on the basis enforcing the security.

Basten JA agreed, noting:

To engage in pure asset lending, namely to lend money without regard to the ability of the borrower to repay by instalments under the contract, in the knowledge that adequate security is available in the event of default, is to engage in a potentially fruitless enterprise, simply because there is no risk of loss. At least where the security is the sole residence of the borrower, there is a public interest in treating such contracts as unjust, at least in circumstances where the borrowers can be said to have demonstrated an inability reasonably to protect their own interests.

The decision contains a troubling paragraph by Spigelman CJ:

Plainly, the conduct, whether by act or omission, of the party resisting a finding of unjustness under the Act is highly relevant, and will often be determinative. However, the scope of relevant circumstances is not confined to what the person resisting an order under s7(1) did or did not do and knew or ought to have known.

Taken in isolation this would seem to suggest that some loans will be set aside in circumstances where the lender was ignorant anything was amiss and did everything reasonably prudent to ensure everything was in order and did nothing culpable. However read in context it refers to the entirety of the circumstances which make the loan unjust. His Honour clearly maintains the requirement that the lender have done something culpable before relief will be ordered against it:

In my opinion the Appellant cannot be regarded as an innocent party of the kind referred to in the authorities. Again I place particular reliance on the indifference of the Appellant and its representatives to the purpose of the loan, indicating that it was content to proceed on the basis enforcing the security.

Spigelman CJ decision against the lender was as follows (underlining added):

On the information actually available to the Appellant, a husband and wife – one with a $43,000 per annum income and the other a pensioner – borrowed $120,000 for, as far as the Appellant cared to know, immediate expenditure. Enforcing a security against the personal residence of such borrowers should not be treated as if it were the first resort. That is what, on paper, the Appellant can be described as having done.

This conclusion is reinforced by the Appellant’s concomitant failure to verify or follow up, in the way identified by Rolfe DCJ, other details in the loan application. I do not suggest that the matter can be approached, as his Honour appeared to do, on the basis that the Appellant should be fixed with the knowledge it would or may have acquired if the Guidelines had been observed. However, the other failures, such as not verifying employment and income and not ensuring documents were properly executed, reinforce the conclusion that the Appellant was prepared to act on the basis of adequate security alone.

Where the security is the family home of a low income earner and a pensioner, this posture on the part of a lender is entitled to significant weight against the lender in the determination of unjustness.

Basten JA agreed (underlining added):

To engage in pure asset lending, namely to lend money without regard to the ability of the borrower to repay by instalments under the contract, in the knowledge that adequate security is available in the event of default, is to engage in a potentially fruitless enterprise, simply because there is no risk of loss. At least where the security is the sole residence of the borrower, there is a public interest in treating such contracts as unjust, at least in circumstances where the borrowers can be said to have demonstrated an inability reasonably to protect their own interests.

The ignorance of the purpose of the loan was focused upon in Khoshaba’s case. As of and by itself it is not significant, rather it tends to show that the lender was engaged in pure asset lending. One can imagine therefore a case where the profit and loss figures of the mortgagor are carefully scrutinised to ensure the loan is affordable but the loan purpose is not enquired after – not being an example of asset lending – it would not be unjust. Spigelman CJ held:

In my opinion, the purpose for which a loan is advanced is a relevant circumstance. This is confirmed by s9(2)(l) which includes, amongst the matters to which a Court shall have regard in determining whether a contract is unjust: “The commercial or other setting, purpose and effect of the contract.”

The purpose of a loan is a concern of a lender, because it is usually a material consideration in determining whether the particular lender is able to service and repay the loan. The Appellant’s own Guidelines confirm the relevance of this matter, both in identifying the requirement that the purpose be specified and in the structure of the Guidelines themselves. In detail not necessary to be set out, the Guidelines specify quite distinct criteria, including different maximum amounts of loans, for different kinds of purposes to which the loans will be applied.

Later His Honour noted:

The conflicting considerations are finely balanced. Had the Appellant or its representatives made any inquiries about the purpose of the loan I would have allowed the appeal. I do not mean to suggest that the Appellant had to determine that the proposed investment was reasonable and capable of servicing the loan. It is the indifference, suggesting that the Appellant was content to proceed on the basis of enforcing the security, which I find determinative.

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