Unconscionable Loan Agreements Ruled Unjust in NSW Supreme Court

The court determined that the loan agreements were unconscionable and unjust under the Contracts Review Act, due to the circumstances in which they were obtained.

New South Wales Supreme Court

CITATION : [COMPANY] and [NAME] v [NAME] and [NAME]; [NAME] v [NAME] [2004] NSWSC 298 revised - 5/07/2004 HEARING DATE(S) : JUDGMENT DATE : 19 April 2004

JUDGMENT OF : Shaw J at 1 DECISION : See [58] - [71]

LEGISLATION CITED : Contracts Review Act 1980 Fair Trading Act 1987 (NSW), s42 Commercial Bank of Australia v Amadio (1983) 151 CLR 447; [NAME] v Smith (1996) 41 NSWLR 296; [NAME] v [COMPANY] (2003) Aust Contract R 90 - 157; CASES CITED : Esanda Finance Corporation Limited v Tong (1996) 41 NSWLR 482; Maguire v Makaronis (1996) 188 CLR 449; [NAME] v [COMPANY] (1995) 184 CLR 102; [COMPANY] (1986) 5 NSWLR 610; [NAME] Corporation v [NAME] (2001) 187 ALR 168 12184/01 [COMPANY] (First Plaintiff/Cross Defendant) [COMPANY] (Second Plaintiff) [NAME] (First Defendant/Cross-Claimant) PARTIES : [NAME] (Second Defendant)

12555/01 [NAME] (Plaintiff) [NAME] (Defendant) FILE NUMBER(S) : [NAME] 12184/2001; 12555/2001 D [NAME] with P Bolster (Plaintiffs) COUNSEL : [redacted] P [NAME] ([NAME]) [NAME](Plaintiffs) SOLICITORS : [redacted] Duncan MacLean ([NAME])

IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

Shaw J

19 April 2004

12184 of 2001 12555 of 2001

[COMPANY] (First Plaintiff/ Cross Defendant) and [COMPANY] (Second Plaintiff) v [NAME] (First Defendant/Cross Claimant) and [NAME] (Second Defendant) [NAME] (Plaintiff) v [NAME] (Defendant)

JUDGMENT

1 Shaw J: This is a case concerning the purchase of rural properties, which has been agitated at some length before this Court, and involves some questions of law and questions of fact. 2 In this judgment, in respect of the first matter, I shall generally refer to [COMPANY] (the first plaintiff) and [NAME] [COMPANY] (the second plaintiff) as the plaintiffs (unless there is any need to distinguish between their interests), and [NAME] as the defendants, [NAME] as the cross-claimant, and [COMPANY] as the cross-defendant. In respect of the second matter, [NAME] as the plaintiff, and [NAME] as the defendant.

Background 3 The proceedings originated in this Court by a statement of claim filed on 13 July 2001 by the first plaintiff, alleging that it was the mortgagee in relation to specified properties known as "[NAME]" and "[NAME]" near Gunnedah in New South Wales. It was alleged in the statement of claim that the memorandum of mortgage contained a covenant by the mortgagor (namely the first defendant) to pay principal and interest and that there had been default in relation to such payment. The memorandum of mortgage was said to be dated 9 July 1997, with a variation of that memorandum dated 20 August 1999. The plaintiff's claim was for possession of the land, and an order for costs. Leave was granted to amend this statement of claim on 28 June 2002 but, more relevantly, there was a further amended statement of claim filed in court on behalf of both plaintiffs on 3 November 2003. This amended pleading supersedes also an amended statement of claim, which was filed 7 August 2002. 4 I adopt the summary of this labyrinth formulated by Mr [NAME] who appeared for the defendants: [redacted]

(i) Judgment in respect of monies advanced by the Plaintiffs to the [NAME] (ii) An order for possession of the properties known as "[NAME]" and "[NAME]". (b) In those proceedings [NAME] cross claims against [NAME] seeking: (i) A declaration that the loan agreements between [NAME] and the [NAME] is unconscionable. (ii) Relief under the Contracts Review Act. (c) In proceedings 12555 of 2001 [NAME] seeks relief by way of indemnification from [NAME] in respect of her having acted on his behalf in purchasing at auction two properties, [NAME]. [NAME] seeks damages from [NAME] in respect of a breach of an agreement and/or misrepresentation. (d) The two sets of proceedings were heard together, with the evidence in one being evidence in the other. 5 It is alleged, in this third amended pleading, that the first plaintiff lent the defendants $1,600,000 on 4 June 1997. Then it is said that on or about 9 July 1997 the second plaintiff lent the defendants $400,000, and that those loans were supported by mortgages with respect to the properties [NAME] and [NAME]. On or about 7 October 1998, it is said that the amount advanced by the second plaintiff was increased to $740,000. It is further put that both mortgages contain a clause for re-entry and sale in the event of default by the mortgagor. It is pleaded that there were implied terms in the mortgages to the effect that all of the rights and privileges of the first defendant in relation to the property, and in particular the licences as specified in the pleadings, were further security for the loans. It is further noted that on or about 10 June 1999 the second plaintiff changed its name from [COMPANY] to [COMPANY]. 6 Thus, in what I take to be the final attempt to plead the plaintiffs' case, orders are sought from this Court for a judgment against the defendants in the sum of $2,220,423.66, or such further amount that may be due at the time of judgment. An order for possession of the land is also sought, in addition to certain ancillary orders effecting a transfer to the first plaintiff in relation to water licences issued by the Department of Land and Water Conservation. Costs are also sought on an indemnity basis. The second plaintiff also claims certain amounts in respect of each defendant, and an order for possession of the land.

Facts 7 The evidence indicates that the defendants in the first proceeding are the son-in-law and daughter of [NAME], brother of [NAME], the defendant in the second proceedings. It is contended, that as at May 1977, they operated a farm on the Breeza Plains (located near Gunnedah) called [NAME]. The evidence suggests that they purchased [NAME] (also located in the same area) with the intention of holding it temporarily until [NAME] sorted out his problems with the [NAME] bank but then decided to keep the property, to lease it out for a period, improve their own property, and sell it off to reduce their debts to a manageable level. In relation to their existing property, the debts were apparently minimal and the home was owned unencumbered.

8 At the time of the mortgage auction of [NAME], there was an unsuccessful application by [NAME] for an injunction from this court and an argument between [NAME] and [NAME] about whether the bores on the property were located on Crown land. It is also said that there were people present at the auction prepared to bid $3,000,000 for the property. 9 [NAME] purchased two properties at an auction conducted by the mortgagee exercising a power of sale, [NAME] Corporation, on 9 May 1977, being [NAME] for $1,800,000 and Square Bush for $35,000. 10 In the related proceedings [NAME] seeks compensation or indemnity from [NAME] by reason, so it is asserted, of the failure to fulfil his promise to reacquire [NAME] from her, whether as a result of inability or unwillingness. 11 The defendants went about seeking finance to complete purchase on or before 20 June 1997. They came across a rural mortgage broking business namely [NAME] ([NAME]) who were the agents for the plaintiffs. The partners of [NAME] provided [NAME] with two divergent valuations of [NAME], although both valuers came to the conclusion that the property was worth more than the contract price. The valuers adopted different methodologies. [NAME] was of the opinion that it was worth $3,042,000; on the other hand, [NAME] arrived at the figure $2,926,000. 12 In 1997 a proposal was put to the defendants that a loan could be provided by [NAME] for $1,600,000 on the basis that the security for that loan would be the [NAME] property and that the term of the loan would be approximately 2 years, with a number of detailed terms and conditions, including that the plaintiffs would be paid the rental income from the lease of that property. 13 On 30 May 1997 the defendants made an application to [NAME] for a loan. The full text of the defendants' application, for a loan put to the agent for the plaintiffs, is to be found in Exhibit 1 (pp 70 – 103) in these proceedings. It is an extremely detailed document but I think that it is accurately summarised by the plaintiffs in the following terms: a) specifically referred to the valuation report of [NAME] of 4 April 1997 supporting a valuation of $3 million for [NAME] rather than the price achieved at the auction sale held on 9 May 1998. b) offered both [NAME] and [NAME] as security and represented their total value, notwithstanding the result of the auction, to be $4,042,000. This was based upon a valuation made by [NAME] of 4 April 1997 of [NAME] at $3,042,000 and an estimated valuation of [NAME] $1 million. [NAME], a property gifted to [NAME] by her father in 1993 was largely unencumbered and estimated as being worth $1 million. c) stated that [NAME] was worth $3,042,000, on the basis of the [NAME] valuation of 4 April 1997, although no mention was made of the [NAME] valuation. d) stated that although they originally made the purchase with the intention of holding it "temporarily" while [NAME] sorted out his problems with [NAME], they had since decided to keep it, lease it out for four years and, during that time,l further improve [NAME] and sell it to "reduce debt to a manageable level". e) contained background and other information supplied to [NAME] and [NAME] of [NAME]. f) contained the following enclosures provided for by the defendants: [redacted] ii. budget rationale for 1997-1998 and 1998-1999. iii. statement of assets and liabilities. iv. copies of working account bank statements from November 1996 to April 1997. v. balance sheet and profit & loss accounts for the defendants carrying on partnership in relation to the [NAME] operation for the 1st and 2nd years of trading. vi. copies of title searches for [NAME]. vii. copy of letter from [NAME] & [NAME] entitled "Proposal of a Four Year Lease on [NAME]" between [NAME] (landowner) and [NAME]/[NAME] (licensee). g) Stated that Square Bush was in the process of being resold to a neighbour with the funds from the sale being applied for the purpose of working capital for their existing farm, [NAME]

On 4 July 1997, the defendants signed letters of acceptance in relation to these loans. 14 [NAME] finally entered into an instrument of mortgage to [COMPANY] on 1 July 1997 which was associated with a solicitor's certificate provided by [NAME] attesting to his advice to the borrowers that he was not acting for the lender in relation to the documents and that he witnessed the execution of the documents by the borrowers.

15 By September 1998, [NAME] was making it clear that a lease on the [NAME] property would be signed and that the money would shortly be in place, and further that she and her husband had the intention to sell [NAME] as soon as an approval for the irrigation development was obtainable. This application was apparently subjected to some neighbourhood objections.

16 By May 2000 it had become clear that the defendants had been having difficulties servicing the loans for [NAME]. They asserted that these loans: …were only required because we were asked to bid and acquire the property on behalf of a relative, who then did not consummate the purchase with the funds which we were assured had been arranged for that purpose…

They asserted that they had done the best they could to honour the terms of the loans and that there was now uncertainty and also "considerable difficulty in harvesting our summer crops due to wet weather." By 24 October 2000 the dilemma had crystallised that the defendants could not meet the October payment, and that both [NAME] and [NAME] were on the market. 17 To complicate matters further, there is a claim brought by [NAME] as claiming relief against [NAME], the prior owner of the disputed properties, [NAME], and the property known as [NAME]. This was commenced by statement of claim on 15 August 2001, which was subsequently amended. As I have said, it seems to be essentially agreed that at the auction held on 9 May 1997 [NAME] bid for the properties, each was "knocked down" to her, and that [NAME] bid at the request and on behalf of [NAME]. I accept that as a fact.

18 The plaintiffs draw attention to what they argue to be the appropriate method of assessment of the value of the [NAME] property and, in particular, point to evidence of the market by reference to a number of sales of what are said to be comparable properties. Having regard to those considerations, the total estimated value of the relevant property is said to be $3,042,000. This valuation is made expressly subject to a number of qualifications, including that the property is free and clear and that the valuation is only valid for the period at which it was made, that is to say the period about January 1997. 19 [NAME] processed the loan application on the basis of the valuation of [NAME] provided by [NAME]. The valuation of [NAME] assumed that there would be a lease payment in relation to the property of $200,000 per annum, paid directly to the lender, and also was given access to [NAME] records prepared by [NAME]. The loan from the first plaintiff was for $1,600,000 for two years, expiring on 1 August 1999 by way of interest only at 7.25% or at 10.25% in the event of default. 20 A separate loan was negotiated with relation to the property then known as North Central, although now known as [NAME], for the amount of $400,000 for the term of 90 days at an interest rate of 9.5% or 12.5% in the event of default. 21 There is no doubt that the defendants defaulted in making repayments under the mortgages as at April 2000. In October 2000 notices of default were issued on behalf of the plaintiffs in respect of both principal and interest outstanding under the mortgages. They sought amounts of $1,657,000 ([NAME]) and $765,201.54 ([NAME]). Proceedings for possession were commenced on 13 July 2001. The defendants have had the benefits of occupancy of the properties without servicing the mortgages over a considerable period of time. 22 The plaintiffs seek possession of both properties and judgments for the amounts outstanding under the respective loans. The calculation of the amounts owing put in submissions by [NAME] for the plaintiffs is as follows: as at the starting point of the hearing before this Court (3 November 2003) the first plaintiff was owed $2,220,423.66, and the second plaintiff was owed $1,147,496.56 with the need for updating as at the time of the judgment, and with interest accruing at the rate of $558.90 per day on the [NAME] loan and $392. 22 per day on the [NAME] loan. It is common ground that the money was borrowed, the amount as specified remains outstanding, and that the defendants are in default of their commitments in relation to the loan.

The Claims 23 So far, although involving a relatively complex property transaction, the case in point of legal principle is clear-cut. Obligations have been entered into and breached. Prima facie, the Court is obliged to make orders enforcing the payment of the monies owed and to enter an order for possession of the relevant properties. 24 However the defendants mount a claim in opposition to the making of such orders, based on a claim for relief under the Contracts Review Act 1980 (NSW) and under the general law of unconscionability in relation to the loan and mortgage.

[NAME] 25 It is difficult to see any sustainable defence in relation to the [NAME] loan or mortgage, because [NAME] (the second defendant) is not a cross-defendant in these proceedings and so there is force in the submission for the plaintiffs that [NAME] is entitled to judgment for the full amount and possession of at least one of the properties. I so find and propose to order.

[NAME] 26 However, in relation to the [NAME] loan agreement and mortgage it is alleged, by the defendants, that the first plaintiff knew, at the time the loan was approved, a number of matters that, in effect, rendered the transaction unfair and/or unconscionable. 27 Those matters which, it is alleged, the first plaintiff ([NAME]) knew at the time of the transaction, are: (a) the valuation of [NAME] by [NAME] that was relied upon by the [NAME] in applying for the loans significantly overstated the true value of the property;

(b) [NAME] was a failure under [NAME] and that it was this failure that led to his default and the ultimate mortgagee sale;

(c) the [NAME] were unlikely to receive sufficient rent under the lease to service both the [NAME] and [NAME] loans;

(d) the [NAME] had incurred losses in operating [NAME] in the 1995 and 1996 [NAME] years;

(e) the loan would have resulted in an unacceptably hight debt level; (f) the ability of the [NAME] to service the loans was impeded by [NAME] and [NAME] imposing a condition that [NAME] be leased and the rental income from it was to be assigned to the plaintiffs;

(g) the [NAME] could not comply with the terms of the loan without incurring future indebtedness; and

(h) the [NAME] were compelled to accept the loan or else face the prospect of refusing to complete and thereby accept the legal consequences. 28 Matters which it is alleged that the defendants "believed" at the relevant time are: (a) [NAME] was commercially viable; (b) the lease was viable; (c) the debt to equity ratio was no more than 50% based on the value being reflected in the valuations rather than the sale price; (d) the lease was not reasonably necessary to protect the position of the plaintiffs; and (e) the [NAME] could not reject the terms of the offer. 29 Other objective factors are alleged by the defendants to have rendered the contracts unjust, including: (a) an inequality of bargaining power between the [NAME] and the plaintiffs; (b) an inability on the part of the defendants to negotiate; (c) the unreasonable difficulty for the defendants in obtaining loans and mortgages; (d) the requirement of a lease being not reasonably necessary to protect the position of the plaintiffs; and (e) the inability of the [NAME] to reject the terms of the offer.

So, it is said, the plaintiffs acted unconscionably in relation to both properties and therefore the mortgage and loan agreements were unjust in the circumstances in which they were made in July of 1997. 30 Other arguments put by the defendants include that, on the basis of historical trading data, it was clear to the plaintiffs that the [NAME] property had not returned a net income of $200,000 per annum in any of the preceding five years and hence the loan was simply non-viable in the sense that future income would have been plainly insufficient to enable [NAME] to service the loan. 31 The factors that I have summarised are taken from the pleadings. However, in the argument at trial, some reduction is possible of the points that were taken and the propositions as I understood them, that were emphasised by counsel for the defendants in support of their cross claim against the plaintiffs are that: (a) at the time of loan application [NAME] and the plaintiffs were "effectively" under the same control; (b) there is an underlying central feature of the defendants' loan application being the proposal to lease [NAME] for $200,000 per annum; (c) [NAME] had in its possession documents submitted in support of the loan application by [NAME] as at the time of the approval of the loan application showing that [NAME] had not returned a net income of $200,000 pa in any of the preceding five years; (d) trading results of the defendants from the operation of [NAME] showed only a modest income; (e) any competent finance company should have known that the proposal by the defendants to lease [NAME] for the sum specified was "a pipe dream"; (f) [NAME] was aware that [NAME] had sold at auction for $1,800,000 and despite valuations in the vicinity of $3,000,000 any reasonable loans officer would realise that that valuation was "erroneous" having regard to the price which had been obtainable on the market as demonstrated by the sale price at auction; (g) if, as it should have, [NAME], acting for the first plaintiff, had been used in assessing the loan application it would have lead to a loans/equity ratio and the first plaintiff's guidelines would not have been satisfied for the grant of the loan; and (h) given that the duration of the loan (two years) in the event of default on the part of the defendants there was sufficient equity in [NAME] to enable the security to be realised and the debt and interest satisfied so, it is put by the defendants that the position of the first plaintiff was protected and therefore that they could afford to make a risky loan.

These are the various bases of unfairness (using that term compendiously to refer to unconscionability, injustice or other statutory bases of relief) to which the plaintiffs respond as follows. As to the viability of the loan, evidence is pointed to that [NAME] had "a very big question" as to whether the tenancy would cover the interest repayments on the mortgage (T.p 94.1). The defendants asserted to the plaintiffs the viability of the lease and did not pass on to the plaintiffs any concerns about viability. On the contrary, the offer, containing the requirement that the property be leased as proposed in the application was accepted almost immediately on 4 June 1997. It is submitted that there is no evidence that the plaintiffs ever regarded the loan as being unviable at the time that it was entered into. Various reasons are put forward as to why the historical earnings in relation to the [NAME] property would not have had much weight with the lending authority or its agent, namely: (a) for a time the property was drought declared; (b) the irrigation scheme had not been fully developed until December 1995; (c) there had been a "dramatic" increase in income following the irrigation developments, an increase of 140%; (d) [NAME]' valuation indicated a doubling of value of the property to the level of $3,000,000 and, it was said that it followed, that the yearly income of the property would be up to $600,000.

This, it is argued, demonstrates ability to service loans totalling $2,000,000. 32 [NAME] insists that the defendants did not propose the lease of the property as part of the finance loan application, but rather that the plaintiffs unilaterally imposed that special condition on the defendants as a condition of finance (T.90. 19 – 37), although she does accept that as at 25 May, 1997 she was looking at a "tentative plan" to lease [NAME] for four years. (T.91.57). 33 Following the auction of 9 May 1997 I find as facts that the defendants were under considerable pressure to complete the purchase of [NAME] and, thus, obtain the loan; that was because in the absence of completion the $193,000 deposit (borrowed from [NAME]'s mother) would be forfeited and if the property could not be re-sold for at least $1,800,000 there would be an obligation to [NAME] for any shortfall. True it is that, as at the date of the hearing, the loan from the mother had not been repaid because, according to [NAME]'s evidence "we were never in a position to do so" (see generally T.138). In their anxiety to obtain a loan, the defendants approached all the main banks in Tamworth, except [NAME], and at least two financiers (T.138.49 – 57). I accept that [NAME] was not in a position to provide that finance or was unwilling to do so. And so the defendants were looking at all the options (T.145).

[NAME] 34 There is a controversy as to whether at all material times, or at least at the time of the auction, the first defendant intended to keep [NAME] for herself, or whether she merely regarded herself as acting as an agent for [NAME] pursuant to an oral agreement. 35 The former view is lent some support by the evidence of her mother, [NAME], that shortly after the auction and after deposits had been organised, the first defendant said "Mum, I have bought it for myself" (T.261.32 – 33). However, the expression is somewhat ambiguous and the recollection was strongly challenged in cross-examination. There is some evidence indicating a rift between mother and daughter. There are other conflicts between witnesses in relation to post-auction conversations. In this regard, I accept the submission of counsel for the defendants to this effect:

The resolution of these conflicts is of less importance than might first appear to be the case because they are peripheral to the issue of [NAME]'s capacity to satisfy the arrangement. These conflicts may be explained by the fact that some five years had passed before witnesses and parties had to recall events which had happened in a relatively short space of time in circumstances where attention was focused on more important issues. 36 [NAME], a lending manager, prepared loan submissions for [NAME], and prepared such a submission in relation to the application for finance lodged by the defendants. He was called as a witness for the plaintiffs. In cross-examination, he accepted that, at the time of assessing the [NAME]' application, [NAME] had "one significant advantage" which the defendants did not have, namely [NAME] had available to it the profit and loss statements for [NAME] (T.280.55 – 58; 281. 1 – 2). 37 [NAME] was closely related to the plaintiffs; there were common directors, they operated from the same business premises, and it referred loan applications exclusively to the plaintiffs (T.282. 10 – 26).

Principles 38 For illumination of the legal tests, the defendants rely upon [NAME] v Smith (1996) 41 NSWLR 296. In [NAME] the court was asked to consider the meaning of and whether the contract in a particular case was "unjust" under the Contracts Review Act 1980. Mahoney P discussed the new and wide discretion conferred by that statutory concept of "unjust" by reference to [COMPANY] (1986) 5 NSWLR 610 at 621 and other authorities applying that dictum (at 298 C- E). The President of the Court of Appeal (as his Honour then was) said that he would not extend the judgment by attempting to "draw out the elements of the term or to mark out its boundaries." Importantly, his Honour said that: in the end, the meaning of injustice lies in the reaction of the individual judge, informed by what has been said to those to whom he should pay regard. (at 298 F)

Then his Honour indicated some of the indicia of what was "unjust" in the following passage: … regard may be had in the application of it [that is the term "unjust"] to the present facts to matters such as the following. The contract had a potential "at the time it was made" to result in the future in the imposition on the plaintiffs of great burdens and, perhaps, benefits of significant dimensions. The likelihood, at that time, of its doing so heightened particularly the likelihood of its imposing burdens – and the possibility that the burdens would be heavy was substantial. The capacity of the plaintiffs to appreciate these possibilities, to assess them, and to determine whether they should be accepted and with what safeguards, was limited. The position of the parties, particularly their [NAME] position, and accordingly their capacity to bear the burdens which might result from the contract, was a matter of importance. It was important that, if the contract proved to be burdensome rather than beneficial, the plaintiffs may well be financially destroyed. It was relevant in considering the justice of the contract in the circumstances in which it was made that one of the parties, [NAME], knew and appreciated the extent of the risks, and what might happen to the plaintiffs and that the other party, the plaintiffs did not understand this or the real implications of it. And I think that, knowing what they did, [NAME] were under a duty, not legal but in justice, to ensure that the plaintiffs appreciated the extent of the burdens which might fall upon them and the likelihood that they would. (at 298, 299)

Handley JA referred to the "gross disparity" between the positions of [NAME] and the plaintiffs. His Honour went on to say that: [NAME] was protected by its securities and so the details of the projections and the feasibility were not of critical importance to it. On the other hand, the [NAME] incurred risks without any real understanding of what they were doing, and stood to lose [the relevant property], and the only way of life they knew, if the project failed. (at 307.G)

In my opinion, most of those factors specified by their Honours are applicable to the present case. I note that Meagher JA dissented in [NAME] .

39 The plaintiffs seek to distinguish the Elder's case on a number of factual bases. First, it is said that [NAME] was not a mere financier but played a more significant role, being the agent of the vendor. As Handley JA said (at 309): … it [ [NAME] ] was closely and directly involved in the compilation of the [NAME] projections which were crucial to the decision to lend. To its knowledge it was the only party who ever evaluated those projections, or was in a position to do so.

Secondly, it is said that the borrowers in that case had no conception of the risk of the transaction themselves and saw the readiness of [NAME] to advance money to them to go into the transaction as a recommendation. Thirdly, those involved in borrowing in the [NAME] case had no formal education whereas [NAME] had agricultural qualifications and experience, which was set out in the loan application itself. 40 In my opinion, these factual considerations are insufficient to displace the basic principles for which [NAME] stands. [NAME]'s agricultural experience I am of the view that he was out of his depth in assessing a project of this kind and there was an element of naivety about the behaviour of the defendants; there was an inequality of bargaining power. Moreover, in my view, some weight should be given to the evidence of [NAME] and [NAME] whose evidence is based upon their experience of having acted for clients in relation to various loan applications. [NAME] proffered the opinion to the court that the material available to the plaintiffs should have indicated the difficulties that the [NAME] would have had in servicing the loan, and that the historical trading figures should have been an important consideration to the plaintiffs. I do not disregard the evidence of [NAME] who proffered the opinion that a reasonable financier should have granted the further advance made to the defendants, at least on the basis of the second application letter, whereas [NAME] did not deal with the second loan application. However, it is my view that the plaintiffs could and should have engaged in further and more extensive inquiries as to the viability of the proposed leasing arrangement and, essentially adopting the factors put forward by the defendants demonstrating the unfairness of the loan contract, hold that it was unfair or unconscionable. In my view, the observation of Mason J and Commercial Bank of Australia v Amadio (1983) 151 CLR 447 at 467 is applicable. His Honour said: As we have seen if A having actual knowledge that B occupies a situation of special advantage in relation to an intended transaction, so that B cannot make a judgment as to what is in his own interest, takes unfair advantage of his (A's) superior bargaining power or position by entering into that transaction, his conduct in doing so is unconscionable. 41 I conclude on the basis of the whole of the evidence that the defendants were under an element of real and tangible disadvantage in making a judgment as to what was in their own best interests. Not only did they lack the requisite [NAME] expertise but also lacked relevant documentation that would have indicated the likely trading results of this property. I have not overlooked that fact that it was proposed to grow a different class of crops in reliance upon the irrigation of the property. 42 I conclude that the lender failed to adequately analyse the past [NAME] data and the projections of the future. Yet it was in a far better position to do so than the defendants. I find that the plaintiffs entered into arrangements that, at a practical level and having regard to objective considerations, were not capable of fulfilment. Warning bells should have been ringing. The plaintiffs were adequately protected in the sense that they had adequate security to facilitate the repayment of the loans if the properties had to be sold but the defendants were vulnerable. 43 Whilst the law cannot protect all of those entering into commercial transactions from foolishness, as I have indicated, in my opinion there are sufficient special circumstances in the present case so as to allow and require a declaration that the agreements entered into between the plaintiffs and the defendants were obtained in circumstances of unfairness and unconscionability, and that they should, so far as the agreements relate to the [NAME] property, be set aside subject to the observations I now make about interest. 44 The qualification that needs to be made to these proposed orders are that: i. the order should be made conditionally on the payment of any unwarranted benefit flowing from the transaction. ii. the defendants, having accepted in the conduct of the proceedings the obligation to pay the principal sums advanced by the plaintiffs, must be required to pay interest under the agreement from the date of commencement of these proceedings. 45 In accordance with authority, to set aside a mortgage with a result of leaving the fruits of the transaction of which complaint is made would be impermissible: Maguire v Makaronis (1996) 188 CLR 449 at 475. As Kirby J said in that case (496-7): the ordering as a condition of rescission of a contract flawed by breach of fiduciary duty, that the party seeking relief should restore to the other what was secured under the contract, is neither new nor surprising. It is ancient and very common. Where the contract impugned involved the payment of money, the beneficiary seeking relief from a contract is ordinarily required as a term of such relief, to repay the monies actually advanced together with reasonable interest. If such condition is not, or cannot be, offered the Court may refuse relief altogether. Alternatively, other and different relief may be fashioned to do "practical justice.

See also [NAME] v [COMPANY] (1995) 184 CLR 102 at 114; [NAME] Corporation v [NAME] (2001) 187 ALR 168 at [39] – [41]; Esanda Finance Corporation Limited v Tong (1996) 41 NSWLR 482; [NAME] v [COMPANY] (2003) Aust Contract R 90 – 157 per Beazley JA at [80] - [85] and Santow JA [98] - [111]. 46 There is no evidence that the interest rate is unreasonable. And there is force in the submission of the plaintiffs that the [NAME] have had use of borrowed funds without paying interest for a substantial period and that, therefore, they should be required to pay the interest properly due under the mortgage. [NAME] argues that equity requires such a course.

Accordingly, I propose to order, in accordance with an alternate proposition put by the plaintiffs that the defendants must pay interest from the date of commencement of these proceedings. However, I do not propose to make any order with respect to any increase in value of the [NAME] property.

47 Since the remedies under the Contracts Review Act essentially overlap with the ex-forms of equitable relief, which I have discussed, it seems to be unnecessary to deal with that statutory ground of relief. However, some of the cases decided under that statute are relevant to the exercise of the discretion, which the court should embark upon in litigation of this kind. I would exercise my discretion in favour of granting relief to the defendants with respect to the loan transaction, and take the view that the qualifications to that relief which I have indicated are sufficient to allow such relief to be granted because they would not relieve the defendants of all responsibility for the conduct of the events that transpired and, as is conceded, the defendants remain liable to the plaintiffs for the principal sums.

[NAME] v [NAME] 48 I turn now to the claim brought by [NAME] against [NAME]. These cases were heard conjointly. The parties are, in substance, in agreement, that [NAME] attended the auction on 9 May 1997 at the request and on behalf of [NAME], as Mr [NAME], counsel for the defendant [NAME] in the asserts: the fundamental question at the heart of these proceedings is whether the plaintiff breached or repudiated the agreement and decided to keep the properties for herself or whether it was the defendant who breached the agreement and/or made false representations to the plaintiff which caused her to suffer some loss. 49 Self-evidently, the plaintiff ([NAME]) bringing this action bears the onus of proof to show that, on the balance of probabilities, [NAME] did in fact breach a prior agreement. The plaintiff in this action relies upon breach of contract, deceit, and alleged breaches of s42 of the Fair Trading Act. That statutory provision says: (1) A person shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. (2) Nothing in this Part shall be taken as limiting by implication the generality of subsection (1). 50 The basic questions are ones of fact. Although the plaintiff in the action gave her evidence in an affirmative style, with clarity and at times dogmatism, I am not prepared to accept her evidence where it is contradicted by documentary evidence. I also take the view that [NAME] gave credible evidence and that where there is a direct contradiction between the evidence of the plaintiff and [NAME] I hold that the plaintiff has failed to discharge the onus of proof which lies upon her. I was impressed with the demeanour of [NAME] and I agree with the submissions by his counsel that there are at least some elements of the evidence of [NAME] with respect to her dealings with [NAME] that do not "ring true". 51 My major concern is with conflicts between [NAME]'s evidence and documentation. Without being exhaustive, I shall give some examples. [NAME] has said that she did not ask her uncle, the defendant, if she could keep some interest in the property, the file notes of the solicitor ([NAME]) suggest that she did. Again the solicitor's file notes suggest a desire on the part of [NAME] to obtain an interest in the property on the day of the auction and shortly thereafter. [NAME] has said that she sought advice from [NAME] (solicitor) as to enforcing the contract with [NAME], the relevant file notes do not support the proposition that such advice was sought and that Mr [NAME] was retained to act as a solicitor in the ordinary capacity of an attorney dealing with conveyancing. In answer to these difficulties, [NAME] says that the file and notes of her former solicitor are "fanciful" and "extraordinary". The solicitors were not called to give evidence. 52 [NAME] denies that she told [NAME] that she certainly intended "to keep an interest in the property" (T.52.33). [NAME] accepts that no formal demand had been made by her or on her behalf of [NAME] between 9 May 1997 and August 2001 when the first [NAME] of Claim was filed (T.24.30). She accepts that she "may have" said to an accountant, [NAME], that if I did give it [the property, [NAME]] back [to [NAME]] he may well lose it. 53 Similarly, and contrary to the plaintiff's evidence, there is nothing in the file of [NAME], of [NAME], solicitors, to suggest that she sought or obtained advice as to any option she had other than to complete the purchase. The file produced and tendered is an ordinary conveyancing file. The plaintiff's account of her conversation with [NAME], the defendant's accountant, is inconsistent with the account given by [NAME] to the court, upon which he was cross-examined. He rejected categorically the plaintiff's version of the telephone call of 12 May 1997. 54 Contrary to the plaintiff's case, it is my conclusion that the balance of the evidence indicates that at least one of the real options being considered by [NAME], post auction, was to keep the property for herself, or at least, according to her mother's affidavit (paragraph 43) a "small interest" in it. 55 About 4 years after the auction, [NAME] commenced proceedings against the plaintiff. Some weeks later, the present action was initiated, not preceded in the long period after the auction by any formal demand against [NAME] seeking to enforce the asserted agreement. Moreover, the evidence as to [NAME]'s capacity to re-purchase the farm is far from clear, although he asserted in evidence that he could have put a deal together if given a chance. (T.246). In relation to an agreement alleged to have been reached between the parties as to the transfer of the property back to [NAME] "next week", any such arrangement, even if I accepted this evidence, is imprecise, uncertain, not evidenced in writing and, hence, probably unenforceable: see s 54A, Conveyancing Act 1919 (NSW). 56 In short, I am not satisfied that the plaintiff has discharged her onus of proof against [NAME] that there was contractual breach, an action in tort, or under the Fair Trading Act or, it follows, any ascertainable loss or damage.

Accordingly, in this aspect of the proceedings I find for the defendant, [NAME]. 57 I do not think that there is any need for the Court to make conclusive findings of credibility. I have indicated the evidence that I prefer to accept. There may have been misunderstandings and vague or amorphous conversations, which might have led to participants taking contrary views as to what was actually happening. I do not propose that any costs arising from this proceeding be on an indemnity basis.

Orders

58 I decline to uphold the claim of [NAME] against [NAME], and [NAME] should have the costs of those proceedings. 59 The agreements constituted by acceptance by the defendants on 4 June 1997 of the offer loan made by the first plaintiff dated 3 June 2000 and the mortgage registered as number 3304536 at the Land Titles Office dated 9 July 2001 in favour of the first plaintiff over the parcels of land known as '[NAME]' were: a. Obtained in circumstances rendering it unconscionable for the first plaintiff to rely upon their full legal effect other than in accordance with the terms of these orders; and b. Unjust in the circumstances that existed at the time they were made within the meaning of section 7 of the Contracts Review Act. 60 Judgment for the first plaintiff against each of the defendants in the sum of $2,050,369.88. 61 Interest shall accrue on the unpaid amount of $2,050,369.88 and be calculated at the non-default rate prescribed by the loan agreement in favour of the first plaintiff over the property '[NAME]'. 62 Judgment for the second plaintiff against each of the defendants in the sum of $1,269,00.89. 63 Orders that interest shall accrue on the unpaid amount of $1,269,00.89 and be calculated at the default rate prescribed by the loan agreement dated 4 June 1997 between the second plaintiffs and the defendants. 64 The first and second plaintiffs are entitled to possession of each of the parcels of land '[NAME]' and '[NAME]' from 27 June 2004. 65 The first and second plaintiffs have leave to issue Writs of Possession in respect of each of the parcels of land '[NAME]' and '[NAME]', but such writs are to lie in the Registry until 27 June 2004. 66 Liberty to apply on reasonable notice for any re-consideration of the deferral periods above. 67 The defendant is to do all such things as may be necessary to effect a transfer to either the first plaintiff or to the second plaintiff of the benefit of the following water licenses issued by the Department of Land & Water Conservation pursuant to the Water Act 1912: a) 90 SL 030373; b) 90 BL 130617; c) 90 BL 020451; d) 90 BL 022463; e) 90 BL 022464; f) 90 BL 022465; g) 90 BL 022466 h) 90 BL 130841; i) 90 BL 249021. 68 Upon the defendants paying the amounts owed to the plaintiffs above, within 28 days the first plaintiff shall deliver to the defendants a discharge, in registrable form, of the mortgage in favour of the first plaintiff over the '[NAME]' property. 69 The defendants to pay the second plaintiff's costs of the proceedings on an indemnity basis, either as agreed or as assessed by the Legal Profession Act, pursuant to the terms of the [NAME] loan agreement. 70 The first plaintiff to pay the defendant's costs of the cross-claim on a party-party basis, in an amount that is either agreed between the parties or assessed pursuant to the Legal Profession Act. 71 The defendants to pay the first plaintiff's costs of the main action on a party-party basis, in an amount that is either agreed between the parties or assessed pursuant to the Legal Profession Act. **********

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