Reported Decision : (2005) NSW ConvR 56-123 New South Wales Court of Appeal CITATION: KYABRAM PROPERTY INVESTMENTS PTY. LIMITED & ANOR.v. MURRAY & ANOR.MURRAY & ANOR. v. KYABRAM PROPERTY INVESTMENTS PTY. LIMITED & ANOR. [2005] NSWCA 63 HEARING DATE(S): 16/02/2005, 17/02/2005 JUDGMENT DATE: 17 February 2005 JUDGMENT OF: Beazley JA at 1,32; Hodgson JA at 30; Ipp JA at 31 DECISION: CA 40495/04 - Appeal allowed.; CA 40504/04 - Appeal dismissed. CATCHWORDS: CONTRACTS - sale and purchase of land - mortgages - default on repayments by mortgagors - whether mortgagors were in a position of special disadvantage with respect to the lenders - unequal bargaining power - whether mortgage transaction unconscionable LEGISLATION CITED: Contracts Review Act 1980 (NSW) Commercial Bank of Australia Limited v Amadio (1983) 151 CLR 447 Elders Rural Finance Ltd. v Smith (1996) 41 NSWLR 296 Elkofairi v Permanent Trustee Co. Ltd. (2003) Aust Contract R 90-157; [2002] NSWCA 413 CASES CITED: James & Ors v Australian and New Zealand Banking Group Limited & Ors (1986) 64 ALR 347 Teachers Health Investments Pty. Ltd. V Wynne (1996) NSW Conv R 55-785 West v AGC (Advances) Ltd. (1986) 5 NSWLR 610 KYABRAM PROPERTY INVESTMENTS PTY. LIMITED and BANKSIA SECURITIES LIMITED (Appellants) WENDY JILL MURRAY and ROBERT ORMISON MURRAY (Respondents) PARTIES: WENDY JILL MURRAY and ROBERT ORMISON MURRAY (Appellants) KYABRAM PROPERTY INVESTMENTS PTY. LIMITED and BANKSIA SECURITIES LIMITED (Respondents) FILE NUMBER(S): CA 40495/04; 40504/04 D. Conti SC/P. Bolster - (Kyabram and Banksia) COUNSEL: J.V. Agius SC/R.W. Evans (Mrs. and Mr. Murray) Kell Moore Solicitors (Albury) - (Kyabram and Banksia) SOLICITORS: McKells Solicitors - (Mrs. and Mr. Murray) LOWER COURT JURISDICTION: Supreme Court - Common Law Division LOWER COURT FILE NUMBER(S): CLD 12184/01; 12555/01 LOWER COURT JUDICIAL OFFICER: Shaw J IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40495/2004 CA 40504/04 CL 12184/2001 BEAZLEY JA HODGSON JA IPP JA 17 February 2005 KYABRAM PROPERTY INVESTMENTS PTY. LIMITED & ANOR. v. MURRAY & ANOR. MURRAY & ANOR. v. KYABRAM PROPERTY INVESTMENTS PTY. LIMITED & ANOR. JUDGMENT 1 BEAZLEY JA: In this judgment I propose to refer to the various parties and witnesses by their names, Mrs. and Mrs Murray, Eric Duddy, Kyabram and Banksia, respectively. 2 On 30 May 1997 Mrs. and Mr. Murray made application for a loan of $2 million through finance brokers Ashe Morgan Winthrop (AMW). AMW submitted the loan application to M & S Financial Services (M&S). The purpose of the proposed loan was to finance the purchase of the farm property known as West Garawan, and a smaller property known as Square Bush, that Mrs Murray had purchased at auction on 9 May 1997. West Garawan had been owned by Mrs Murray's uncle, Eric Duddy, and the property was sold on 9 May by Westpac Banking Corporation as mortgagee, pursuant to its power of sale following default by Mr Duddy in the payment of the mortgage. 3 Mrs Murray purchased the property at Eric Duddy's request and, it would appear, as agent for him, as Westpac had made it known that it would not accept a bid from him. On Mrs Murray's evidence Eric Duddy told her that he had $2 million, and also confirmed that by saying, "I've got the money". Mr Duddy's evidence on this point was that he had $2 million organised. The amount of Mrs Murray's successful bid for the property was $1.8 million. 4 The deposit came from Mrs Murray's mother, Jill Duddy, who had agreed with Eric Duddy, to make the necessary sum available. There is a dispute as between Mrs Murray and Eric Duddy as to precisely what happened thereafter. It is not necessary, however, for the purposes of this appeal to resolve that dispute. 5 What is undisputed is that Eric Duddy did not raise the funds or provide the funds to complete the purchase. Mrs Murray therefore had two options: she could either fail to complete the contract and forfeit the deposit moneys, and be potentially liable for any damages that might flow from the failure to complete, or she could seek to finance the sale herself. She chose the latter course. Before doing so, however, she had unsuccessfully attempted to sell the property. 6 The loan proposal offered West Garawan as security, as well as the Murrays' own property, Boala. West Garawan was represented in the loan proposal as being valued at just over $3 million and Boala was stated to have an expected valuation of $1 million, thus providing a debt to security ratio of 50 per cent. 7 The stated value of West Garawan at $3 million, was based upon a valuation of P J Woods, valuer, dated 4 April 1997. That valuation, which had been obtained by Eric Duddy prior to the auction at a time when he was attempting to refinance, was made available to Mrs. and Mr. Murray by their finance brokers, AMW. There was apparently also another valuation of the property for approximately $3 million done by Mr Patfield, and to which Mrs. and Mr. Murray also had access. 8 The Woods' valuation was annexed to the loan proposal. The loan proposal also included the statement that Mrs. and Mr. Murray intended to lease the property to a third party for a period of four years, at an annual rental of $200,000. At the same time they intended to improve their property Boala for the purpose of resale, intending to keep West Garawan, to farm themselves, that being the more profitable property. 9 There was also available to Mrs. and Mr. Murray, at the time they made the loan application, the trading figures for West Garawan for the previous five years. Two significant matters emerged from those trading figures. First, West Garawan had traded at a loss or only a small profit in that period. Secondly, in the last year for which those figures were available, the gross income for the property had increased by $140,000, due to the change from dry farming to irrigation farming and, in particular, to growing cotton. 10 Mrs. and Mr. Murray contended a third matter of relevance was apparent from the figures, namely, that West Garawan had not returned a net income of $200,000, or anything approximating that sum, in that period. I will return to the relevance of that contention later in my reasons. 11 The loan application was processed by a Mr Bishop on behalf of M&S. He gave evidence that when he considered the application he had regard principally to the following matters: 1. The value of the property; 2. The ability of Mrs and Mr. Murray to secure the loan; 3. Mr Murray's considerable experience and expertise in farming; 4. The fact that the property Boala was to be sold in due course so as to reduce the debt; and 5. A certification from Mr and Mrs Murray's accountant as to their ability to service the loan. 12 Although M&S had the trading figures for West Garawan, to which I have referred earlier, in their office records in a loan application file of Mr Eric Duddy, Mr Bishop had not recalled that was so at the time he was considering Mrs. and Mr. Murray's loan application. He said, as to those figures, that in any event they would not have been relevant to his assessment, because of the proposal to lease the property. 13 On 3 June 1997 M&S advised Mr and Mrs Murray that they had negotiated a loan for $1.6 million from Kyabram and $400,000 from Banksia. Mrs. and Mr. Murray accepted the loan offer on 5 June 1997. It was a condition of the advance from Kyabram that West Garawan be leased and that the rental moneys be paid direct to the mortgagee. 14 On 9 July 1997 Mrs Murray completed the purchase of West Garawan. On the same day she entered into a 4 year lease of the property with third parties at an annual rental of $200,000. The mortgage documentation relating to the loan was completed the following day, 10 July 1997. The lessees defaulted on the lease payments in the early part of 1998, having paid only $90,000. No further lease payments were made. 15 Mrs. and Mr. Murray thereafter undertook the farming of West Garawan but sustained losses in doing so. It would appear that as a consequence they became in need of more funds, and thus borrowed a further $340,000 from Banksia, again through the agency of AMW, who, in turn, again engaged the services of M&S. Banksia, I should note, had the same directors as Kyabram. Mrs. and Mr. Murray continued making repayments on both loans, but eventually defaulted on 13 July 2001. 16 There is no dispute that Kyabram and Banksia are entitled to the orders that they sought in their initiating claims, including orders for possession and judgment for the amount outstanding on the mortgage, subject only to the question of whether Mrs. and Mr. Murray are entitled to equitable relief in relation to the mortgages, on the basis the transactions were unconscionable or, alternatively, on the basis that they are entitled to relief under the Contracts Review Act. 17 The trial judge did not consider Mrs. and Mr. Murray's claim against Banksia. The parties agree that his Honour should have done so, and also agree that the same considerations applied in respect of that claim as applied in relation to the claim against Kyabram, at least in relation to the initial advance of $400,000. It will be convenient, therefore, in these reasons, to refer to the claim against Kyabram on the basis that the comments that I make in that regard will apply to the Murrays' claim against Banksia. 18 Mrs. and Mr. Murray urged that they were in a position of special disadvantage in the loan transaction such that they are entitled to relief on the basis that the dealing was unconscionable. The law as to unconscionable dealings is well known, the principal authority being that of the High Court in Commercial Bank of Australia Limited v Amadio (1983) 151 CLR 447. In that case Mason J said, at page 461: "[R]elief on the ground of 'unconscionable conduct' is usually taken to refer to the class of case ... in which a party makes unconscientious use of his superior position or bargaining power to the detriment of a party who suffers from some special disability or is placed in some special situation of disadvantage." 19 His Honour also said at page 462 that the principles relating to the unconscionability may be invoked: "… whenever one party by reason of some condition of circumstance is placed at a special disadvantage vis-à-vis another and unfair or unconscientious advantage is then taken of the opportunity thereby created. I qualify the word 'disadvantage' by the adjective 'special' in order to disavow any suggestion that the principle applies whenever there is some difference in the bargaining power of the parties and in order to emphasize that the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party." 20 Mrs. and Mr. Murray relied upon four factors to establish a position of special disadvantage known to Kyabram. They were: 1. Their need to borrow a large amount of money to settle the contract for the purchase of West Garawan and Square Bush; 2. The fact that the borrowings could not be serviced from the income that could be made from the two properties, having regard to the historical trading figures of West Garawan, which were known only to Kyabram; 3. Unfair advantage was taken to demand security over West Garawan and Boala being the Murray's sole source of income, but which would ensure the repayment of the lenders debt in full. See Teachers Health Investments Pty. Ltd. v. Wynne (1966) NSW Conv R 55-785 at 56,029 and Elkofairi v. Permanent Trustee Co. Ltd. (2003) Aust Contract R 90-157, [2002] NSWCA 413 at paras. 50-61. 4. The use of the inflated valuation of West Garawan to ensure compliance with the lending guidelines of Kyabram and Banksia. 21 Before considering whether the transaction was unconscionable, I should deal immediately with two of the above contentions made on behalf of the Murrays. First, the second contention that M&S knew, and Mrs. and Mr. Murray did not know, the historical trading figures for West Garawan is not factually accurate. As I have already pointed out, the figures were available to both parties. It should also be noted that M&S did not have regard to those figures in assessing the loan application. 22 Secondly, as to the third submission or contention, I should say immediately that this case is quite unlike either Teachers Health Investments Pty Ltd v Wynne or Elkofairi v Permanent Trustee Co Ltd. In the case of Wynne, the borrowing was upon the matrimonial home of the parties for the purposes of a business venture in which the husband had an interest, but the wife did not. Moreover, in that case the financier knew, but the wife did not, of information which enabled the financier to know the financial circumstances of the husband (the principal debtor) and his company, and that his ability to service the loan was extremely doubtful. 23 Further, in that case, the wife had been given false information by the husband, and believed that her interests were well protected. That is not this case. 24 In Elkofairi, the mortgagors (Mr. and Mrs. Elkofairi) had no income and no assets, other than the property the subject of the proposed mortgage. It was apparent, therefore, on the face of the loan application, that they had no ability to service the mortgage. It was also conceded in that case that the mortgagor's only concern was with security. The mortgagor had not been concerned with the borrowers' ability to repay. 25 What then was unconscionable about this transaction? The trial judge found that there were a series of factors that led to that conclusion. Those factors are summarised in paragraph 34 of the written submissions made on behalf of Mrs. and Mr. Murray in the proceedings: I set out each of those factors (see underlined portions below) and give an immediate response as to why I consider those factors do not provide a basis upon which it could be said the transaction was unconscionable. (a) Kyabram, by its agent M&S, "had 'one significant advantage' which the defendants did not have, namely M&S had available to it the profit and loss statements for Mr. Eric Duddy . I have already said that it was factually wrong that M&S had, and Mrs. and Mr. Murray did not have, the trading history for the property. That factor should therefore be disregarded. (b) M&S was closely related to the plaintiffs; there were common directors, they operated from the same premises, and it referred loan applications exclusively to Kyabram and Banksia . I do not consider this matter to be a relevant consideration, and in any event, there was no suggestion that Mrs. and Mr. Murray were misled about this, or that it had any effect on the transaction. (c) Referring to a long passage quoted from Elders Rural Finance Ltd. v. Smith (1996) 41 NSWLR 296, his Honour said 'most of those factors specified by their Honours are applicable to the present case'. Whilst not reiterated by his Honour, they are readily identifiable . This case is very different from Elders Rural Finance Ltd. That case does not assist given the substantial factual difference between it and this case. (d) Mr. Murray, despite his agricultural experience was out of his depth in assessing a project of this kind . (e) There was an element of naivety about the behaviour of the Murrays . Although these were assessments made by his Honour of the parties to the transaction, I have to say that I consider his Honour's observations must be attended by considerable doubt, given Mr. Murray's experience and qualifications, and given that there was never any suggestion that Mrs. and Mr. Murray did not understand and appreciate the nature of the loan transaction, its terms or its consequences should there be default. Nor was there any suggestion that their wills were overborne by the lenders. (f) There was an inequality of bargaining power . This was not established on the evidence, but in any event, as I have also indicated in the passage cited from Mason J in Amadio , the fact that the parties may be in a relatively unequal bargaining position does not of itself put them at a special disadvantage. There are comments of a similar nature by McHugh J in West v. AGC (Advances) Ltd. (1986) 5 NSWLR 610 at 621, where his Honour noted that it is inherent in any commercial transaction that a disparity in parties' bargaining power will, to some extent, exist. Those comments were made in relation to the Contracts Review Act , but in my opinion the same applies in relation to any borrowing transaction between individuals and a corporate lender. (g) Some weight should be given to Mr. Ivey's opinion that the " material available to Kyabram and Banksia should have indicated the difficulties that the Murrays would have had in servicing the loan, and that the historical trading figures should have been an important consideration to Kyabram and Banksia ." The admission of Mr. Ivey's evidence is under challenge on the appeal. In my opinion, his evidence as to what a lender should have done was wrongly admitted by the trial judge, although other aspects of his evidence were properly admitted. The evidence was wrongly admitted on the point to which I have referred because Mr. Ivey had no relevant expertise in relation to the situation a credit lender should take into account. (h) Kyabram and Banksia 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 Murrays demonstrating the unfairness of the loan contract, hold that it was unfair or unconscionable . It was unnecessary for Kyabram and Banksia to undertake the enquiries as is contended. To do so would cast an unnecessary burden on a lender. Further, the fact is, it was an integral part of the loan application submitted by the Murrays that the property was to be leased for $200,000, and that there was a tenant ready to enter into such a lease. (i) The factors referred to in (h) are set out in para. 31(a)-(h). (j) The Murrays were under considerable pressure to complete the purchase of West Garawan . Whilst it is true that the time for completion was imminent at the time that the Murrays made the application for finance, any pressure that they were under very much came about by their own conduct. I am not critical of their conduct in that regard, but the fact is that they had entered into a transaction and found themselves in a particular situation whereby they required this finance. That was the pressure they were under. It was not pressure which was caused by the lenders, nor was there any evidence that the lenders took any advantage of it. (k) The Murrays "were under an element of 'real and tangible' disadvantage in making a judgment as to what was in their best interests. Not only did they lack the requisite financial expertise but also lacked relevant documentation would have indicated the likely trading results of this property", even if it was proposed to grow different crops . This assertion is not factually correct for reasons that have already been adverted to in these reasons. (l) The lender failed to adequately analyse the past financial data and future projections and was in a far better position to do so . The evidence of Mr. Bishop was that the financial figures were not part of the application, which was made to him, and in any event, were not relevant because of the Murrays' proposal to lease West Garawan and the change in farming operations. (m) Kyabram and Banksia entered into arrangements that were not capable of fulfilment [by the defendants] . It was not known to the lenders, nor should they have known, in my opinion, that the leasing arrangements and the consequent ability of the Murrays to service the loan were not capable of fulfilment. (n) Kyabram and Banksia were adequately protected, having adequate security, but the defendants were vulnerable . In my opinion Mrs. and Mr. Murray were no more vulnerable than any borrower who might lose a source of income, either from a loss of employment or loss of or diminution in income from other investments. (o) The agreements were obtained in circumstances of unfairness and unconscionability . This is a conclusion dependent upon the above facts and circumstances having been made good. In my opinion there was no element of unconscionability in this transaction. It was a loan for a large sum of money, but not unusually so. The interest rate was a reasonable rate of interest, and the term of the loan was reasonable and one commonly found in contracts of this nature. No pressure was exerted by the lenders upon Mrs. and Mr. Murray to enter into the loan. The circumstances of the purchase were a little unusual, but understandable, given the family relationship and the long family history of farming in the area. There was no suggestion in the evidence that the valuation of the property of West Garawan at $3 million was false or even suspect. Insofar as there was a discrepancy between the valuation and the purchase price, that discrepancy was explained away in the loan application by Mrs. and Mr. Murray's assertion that there were bidders at the auction at about that amount, but that Mrs. Murray had effectively talked the price down by raising questions relating to certain bores on the property. 26 To the extent that Mrs. and Mr. Murray had any concerns about their ability to service the loan, they were concerns that they kept to themselves. In particular, Mrs Murray's concern that the lessees would not be able to maintain lease payments of $200,000 per annum was something she never conveyed to the mortgagees. 27 As in all of these cases, each case has to be considered on its own facts, and the facts found in one case have to be carefully analysed to see whether they have any bearing upon the facts of the case under consideration. It is helpful, however, in this case to refer to the decision of Toohey J in James & Ors v Australian & New Zealand Banking Group Limited & Ors (1986) 64 ALR 347, and particularly his Honour's comment at page 3, line 1, which is apposite to this matter: the situation in which the Murrays found themselves was "very much in their own hands". The difficulties in this case had their genesis in the problems being experienced by Mr Eric Duddy. Unfortunately, Mr and Mrs Murray became involved in those problems. In doing so, they subsequently engaged in a normal lending transaction with no unusual features. In my opinion the transaction has not been shown to be unconscionable. 28 There were no additional or different factors that would entitle Mr and Mrs Murray to relief under the Contracts Review Act. 29 It follows from what I have said that I consider that the appeal in Kyabram Property Investments Pty Limited v Wendy Jill Murray & Anor should be allowed, and that the appeal in Murray & Anor v Kyabram Property Investments Pty Limited & Anor should be dismissed. 30 HODGSON JA: I agree. 31 IPP JA: I agree. 32 BEAZLEY JA: I direct that the parties bring in agreed short minutes of order. It would be anticipated that the short minutes of order may not contain an order as to costs. We reserve the question of costs for determination. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.