This case involved a loan by Suncorp-Metway secured by a mortgage over a nursery business. The loan was for $490,000 on an ‘interest only’ basis but after two years had to convert to principal and interest. At the time of the approval an internal memorandum by a Suncorp loan officer noted:
The ability to amortise debt over a 10 year term is reliant on the increased profitability of the nursery. Based on the cash flows provided this should be achieved. On an interest only basis they have the ability to meet interest from existing incomes and historical nursery profitability. Given the uncertainty of nursery profitability I am only willing to provide a two year interest only.
Based primarily on the underlined words, Rothman J held that the contract was unjust under the Contracts Review Act. The Judge felt it was unjust to require someone to repay the principal on their loan if the lender thought they might have a tough time doing it. The remedy ordered was that all higher rates of interest charged be remitted and eviction be stayed for six months.
This case marks a further worrying development by the courts exercising Contracts Review Act jurisdiction. Essentially the court no longer looks at the mortgage deed to determine the legal rights as between the parties but now also looks at the lender’s internal memoranda to determine whether there was some “thought crime” going on at the time which would make the loan unjust. The obvious result of this decision is that instead of documents being brought into existence for the genuine purpose of loan underwriting lenders will now try to “manufacture” these documents so they will one day look “just” to a Judge so they can get their money back. The Judge essentially found that if a lender has doubts a borrower will be able to repay the loan then it is unjust. However this reasoning on close examination does not stand up. This is because if it were applied uniformly across all mortgages then all mortgages would be found unjust. It is self-evident that all mortgage lenders doubt the borrower will be able to repay the principle – otherwise they would not insist on a mortgage in the first place.
What then is to be the fate of this new principle? Obviously the NSW Courts will not uniformly apply it to every mortgage loan. But is there some rhyme or reason as to when and where it will be applied? The answer is “No” the principal stands on its own. There is no articulated principle that allows lenders to predict where the thunderbolt will strike. The problem lies not with the Judges but with the legislation itself which asks Judges to consults their hearts and not black letter law. It deliberately sets out to free Judges from the constraints of precedent and principle. The problem is that when precedent and settled fixed law are absent then so is the rule of law. In Perpetual Trustee Company Limited v Albert and Rose Khoshaba  NSWCA 41 Chief Justice Spigelman revelled in the resulting uncertainty, short-sightedly believing it to be a good thing:
Of course each case must depend upon its own facts… 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.
The question is where will this all end? Whose fluid “community standards of justice” will be applied? The answer is to be found in the famous book by Hernando De Soto The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. De Soto argues that uncertain land title in third world countries means that lenders cannot safely lend against real property – this in turns causes the squalor and poverty which we see on the television.
The Contracts Review Act in NSW is rapidly making land title for lenders more and more uncertain and is therefore making it harder for borrowers to raise money. This is particularly noticeable by the failure of private lenders to return to the NSW market now that the non-bank lenders have exited. This is because private lenders are not prepared to risk their capital on the off chance a Contracts Review Act decision goes against them. Eventually NSW will either become a depressed commercial backwater or the NSW legislature will repeal the Act – it is difficult to see a middle ground. Either you have contractual certainty and commerce flourishes or you have a legal system that applies the Judge’s concept of justice instead of a predictable fixed body of law.