Court of Appeal upholds relief under the Contracts Review Act (NSW)

In a recent decision of the NSW Court of Appeal in Fast Fix Loans Pty Ltd v Samardzic [2011] NSWCA 260, the Court upheld the primary judge’s decision to award relief under the Contracts Review Act 1980 (NSW) (Act) in respect of a guarantee that was given by two guarantors under pressure from their son.

Facts

Milan Samardzic (Milan) was the sole director and shareholder of a company that was engaged in property development.

Milan asked his parents to give their unencumbered property as security for a second loan to help fund a development. Milan’s mother said they could not afford to borrow any money, but they were prepared to put their names on the bank documents if it helped him to get the money, but only if their obligation ended in three months.

The parents guaranteed a loan to the company and gave a mortgage over their property. A lawyer who spoke Serbian had explained the documents to them. Milan was present when the explanation was given.

First Instance

The primary judge characterised the transaction as “asset lending”. No enquiries were made into the parents’ ability to meet their obligations under the transaction. The only apparent concern of Fast Fix Loans was that there was adequate security available in the case of default. The parents obtained no benefit from the transaction and it was an improvident arrangement from their point of view.

The primary judge addressed the relevant factors of s9(2) of the Act and held that:

• having regard to the parents’ limited schooling, knowledge of English, experience with financial transactions and legal advice, they were not reasonably able to protect their interests and there was a material inequality in bargaining power between the parties
• there was no opportunity for the parents to negotiate the terms of the loan, nor were they advised of such an option. They were being pressured by Milan who they were proud of and trusted. They felt a moral obligation to assist him
• the agreement contained unreasonably difficult terms or terms not reasonably necessary for the protection of the legitimate interests of Fast Fix Loans. In particular, the interest rate of 24% per annum and in the event of default, 4% per month or 48% per annum, compounded daily
• whilst the parents had received legal advice, they did not fully understand the explanation -in particular, regarding the continuing nature of their liability beyond three months. They also had no knowledge of Milan’s or his company’s precarious financial position. 

On Appeal

The following issues were raised:

• the primary judge incorrectly applied the principles relating to borrowers in asset lending cases to guarantors. The Court of Appeal disagreed and held that there was ample basis for the primary judge to find assistance in the so-called “asset lending” cases
• the primary judge incorrectly concluded that Milan’s company was in a “precarious” financial position. The Court of Appeal disagreed. The position of Milan’s company was precarious because of delays with the development application for the project and the company’s limited ability to meet its obligations under the loan
• the primary judge erred in his finding of unjustness and in exercising his discretion to grant relief, in particular in concluding that Fast Fix Loans was not an innocent party. The Court of Appeal disagreed. The Act did not require Fast Fix Loans to be on notice of the circumstances rendering the transaction unfair, and Fast Fix Loans was aware of the precarious nature of the transaction. The Court also made reference to the high interest rate and said it may be a significant contributor to the injustice of a loan if the lender has not ensured that an unsophisticated borrower has received an explanation that brings home to the borrower the reality of how the interest rate, including any compounding, actually operates. 

Conclusion

This case again highlights the importance of lenders making sufficient enquiries of a guarantor’s ability to meet his or her obligations (even where the guarantor has received independent legal advice), and not to be concerned only with there being adequate security available in the event of default.

• confirming that “asset lending” principles apply to guarantors as well as principal debtors
• finding that “innocence” of a lender does not mean that relief will not be granted. If facts are known to the lender which should have put it on enquiry, that may be a relevant circumstance when considering whether a transaction is unjust “in all the circumstances”
• finding that where there is a loan to an unsophisticated borrower, the fact that the lender has not ensured that the borrower has received an explanation that “brings home” to the borrower the reality of how the rate of interest, including any compounding actually operates, may be a significant contributor to the injustice of a loan.