This case concerned the meaning and operation of the clauses in a mortgage document, specifically, ‘Default interest’ and ‘Event of default’ clauses, as well as the right of the lender to charge a loan expiry fee.
The mortgage agreement provided, in a relatively common form, that interest was payable at a “Higher Rate” but that the lender would accept payment of interest at a “Lower Rate” if the borrower made payments on time and had duly observed and performed all of the terms, covenants and conditions in the agreement.
After the loans expired without being repaid the statements which the lender issued to the borrower showed interest charged at the Lower Rate but with a warning at the bottom of every page that, “This is a statement of transactions only and does not show a payout figure or default interest calculation.” The borrower continued to pay interest at the Lower Rate without immediate complaint from the lender.
The borrower argued that the lender was estopped from denying that the Lower Rate of interest would be charged and not the default rate of interest, that is, the Higher Rate that applied when an event of default had occurred. The Judge rejected the estoppel claim, finding that none of the elements of an estoppel were present:
The [lender’s] conduct was not clear and unambiguous; the [borrower’s] reliance was not reasonable; the [lender] had no reasonable expectation that its words or conduct would induce some detrimental reliance by the [borrower]; and the commercial reality and inherent probabilities are against the [borrower]. Even more fundamentally, I am not satisfied that [the borrower] held and maintained the assumption that is the foundation of the [borrower’s] case.
Justice Pembroke decided that the clauses were to be read bearing in mind the commercial nature of the transaction. The Judge quoted from an earlier decision which stated:
The Court has before it two groupings of substantial commercial enterprises, well resourced and advised, dealing in a commercial transaction having a great value. … This is not, of itself, a reason for denying them the beneficial application of the principles developed by equity. But it is a reason for scrutinising carefully the circumstances which are said to give rise to the conclusion that an insistence by the appellants on their legal rights would be so unconscionable that the Court will provide relief from it.
At least in circumstances such as the present, courts should be careful to conserve relief so that they do not, in commercial matters, substitute lawyerly conscience for the hard headed decisions of business people.
The Judge emphasised that the Court would not impose a remedy based on a general concept of unconscionability to save a party from the consequences of making hard headed business decisions, when the borrower was an experienced business man who would have been aware of the risk at the time of the agreement.