New South Wales Supreme Court CITATION : Galadriel Lothlorien Pty Ltd v Station 1 Pty Ltd [2008] NSWSC 91 HEARING DATE(S) : 25 June, 18 – 20 July, 6 August and 13 November 2007 JUDGMENT DATE : 15 February 2008 JURISDICTION : Equity JUDGMENT OF : Hamilton J DECISION : Judgment for the second and fourth defendants on the plaintiff's claims on guarantees. CATCHWORDS : CONTRACTS [146] - General contractual principles – Harsh and unconscionable contracts and statutory remedies – Contracts Review Act 1980 – "Unjust" contract – High interest rate, desperate borrower, inability to negotiate terms – Plaintiff's demands for full contractual interest prevent refinancing. LEGISLATION CITED : Contracts Review Act 1980 ss 4(1), 6(2), 7 & 9 CATEGORY : Principal judgment Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 Custom Credit Corporation Ltd v Lynch [1993] 2 VR 469 Elkofairi v Permanent Trustee Co Ltd (2002) 11 BPR 20,841 Esanda Financial Corporation v Spence Financial Group Pty Ltd [2006] WASC 177 CASES CITED : Jones v Dunkel (1959) 101 CLR 249 No Fuss Finance v Miller [2006] NSWSC 630 Octapon Pty Ltd v Esanda Finance Corporation Ltd SCNSW (Cole J) 3 February 1989 unreported Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41 St George Bank Ltd v Trimarchi [2004] NSWCA 120 West v AGC (Advances) Ltd (1986) 5 NSWLR 610 Both matters: Galadriel Lothlorien Pty Limited (P) PARTIES : Station 1 Pty Limited (D1) Stojan Paceskoski (D2) Antonio Saglimbeni (D3) Anna Maria Saglimbeni (D4) FILE NUMBER(S) : SC 2818/06; 1805/06 R D Marshall (P) COUNSEL : No appearance (D1&3) In person (D2) S M Golledge (D4) Gordon & Johnstone Lawyers (P) SOLICITORS : No representation (D1&3) Self represented (D2&4) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION HAMILTON J FRIDAY, 15 FEBRUARY 2008 2818/06 GALADRIEL LOTHLORIEN PTY LIMITED v STATION 1 PTY LIMITED & ORS 1805/06 GALADRIEL LOTHLORIEN PTY LIMITED v STATION 1 PTY LIMITED & ORS JUDGMENT 1 HIS HONOUR: INTRODUCTORY 2 As contested at trial, this is an action on guarantees between a financier and two guarantors, the second defendant and the fourth defendant. Whilst they remain parties to the proceedings, the trial did not proceed against the first defendant, the principal borrower, which is in liquidation, nor the third defendant, the fourth defendant's husband and also a guarantor, who is bankrupt. 3 There was a great deal of evidence at the trial about peripheral matters and considerable divergences in the evidence. Nonetheless, the facts that I find material to my determination of the matter are in comparatively short compass and, with the exception of certain disputed facts, are uncontroversial or easily found. The facts in this category are dealt with under the heading "Uncontroversial Facts". Those facts that are in substantial dispute are dealt with under the heading "Disputed Facts". UNCONTROVERSIAL FACTS 4 The first defendant was the owner of a property. That property was at 102-120 Railway Street Rockdale ("the property"). The property contained commercial and residential flats. The first defendant proposed to develop that property by a strata subdivision into 26 units. The property was purchased in 2004 for $3 million. To complete the purchase, the first defendant raised from Perpetual Trustee Company Limited a loan for $2.3 million (referred to in the evidence as "the Challenger loan") against a registered first mortgage of the property. It raised a further loan of $120,000 from Filmseal Pty Ltd ("Filmseal") under what is known in the finance industry as a "caveat loan". Although the name is recent, this is the familiar transaction whereby money is borrowed on a second mortgage, not intended to be registered, but under which it is anticipated that the second mortgagee's interest will be protected by a caveat. Whilst the Challenger loan was a long term loan, the term of the Filmseal loan, which was entered into on 6 September 2004, was for three months only, maturing on 5 December 2004. The concessional interest rate under the Filmseal loan was specified as 3 per cent per month and the default interest rate as 4.5 per cent per month. There was a provision (cl 6.3) for the capitalisation of unpaid interest, apparently upon a monthly basis. 5 The second defendant, the third defendant and his wife, the fourth defendant, all gave personal guarantees of both the Challenger loan and of the Filmseal loan. The fourth defendant was a real estate agent and a director of the first defendant. The other directors of that company were the second defendant and the third defendant. The third and fourth defendants owned their own home and some investment properties. One investment property they held through a company in which the second defendant was also involved. The second defendant owned his own home and participated with the third and fourth defendants in the investment through a company that has just been mentioned. 6 By early March 2005, the Filmseal loan was well past due and was unpaid. Although only $120,000 had been received under the Filmseal loan, the payout figure, with the high interest rate, was in the vicinity of $180,000. The defendants were somewhat desperately seeking a replacement short term loan. Whilst the fourth defendant was at this time expressing optimism about their future prospects on the basis that their assets still greatly exceeded their liabilities, their situation was in reality a difficult one, as they were in default under the Filmseal loan and were obviously not an attractive proposition to conventional lenders. At that time, they had been receiving advice concerning the obtaining of finance from Leon Angelopoulos, a finance broker, and legal advice from Janice Williams, solicitor. Mr Angelopoulos referred the fourth defendant to Diversity Financial Solutions, who referred her on to Tony Sabbagh, an accountant and finance broker. It was Mr Sabbagh who negotiated the loan from the plaintiff to the first defendant and submitted the formal loan application. 7 There are strange features of the role in this matter of Mr Sabbagh, who did not give evidence. There is evidence that it was he who specified the lower rate of 7.25 per cent and the default rate of 14.5 per cent for the interest on the loan, rather than the lender. The fourth defendant deposed that Mr Sabbagh insisted that the guarantors receive legal advice from Mr Jack Eid, solicitor, of Diversity Lawyers (not related to Diversity Financial Solutions, despite the similarity in names), rather than from their existing solicitor. In the absence of contrary evidence, I accept her evidence concerning that. Mr Sabbagh was present when Mr Eid advised them concerning the loan documents. Mr Sabbagh retained some $34,800 out of the amount advanced, of which he subsequently paid over to the plaintiff as interest under the loan one half, being $17,400, but retained the balance of $17,400, which led to a bitter dispute between the defendants and Mr Sabbagh. 8 Whilst the fourth defendant was expressing optimism about the defendants' position at the time of the borrowing from the plaintiff, others recognised their situation as difficult or desperate. These included Mr Angelopoulos and Mr Eid. More importantly, Denis Hill, who was engaged in the loan negotiations on behalf of the plaintiff, agreed in evidence that the application for the Galadriel loan "revealed a desperate need for finance". Pamela Reading, the principal of the plaintiff company, accepted that she knew that the money was wanted urgently to avoid default on an existing loan. 9 The documents for the Galadriel loan were signed on 4 March 2005. They were prepared by the plaintiff's solicitors. The loan was for two months only. The documentation provided in the conventional way for a higher rate of interest to be reduced to a lower rate on timely payment. The higher rate of interest was specified as 14.5 per cent per month. The lower rate of interest was specified as 7.25 per cent per month. The agreement provided, by cl 4: "Where the Borrower is in default of the terms of this loan agreement interest shall be calculated daily on the balance of the principal sum which shall include any interest then due so that interest shall compound daily." 10 There is a substantial conflict as to who proposed the interest rates of 7.25 per cent concessional and 14.5 per cent default. Ms Reading claimed that both rates were proposed by Mr Sabbagh in a telephone conversation with Denis Hill that she overheard on loudspeaker. The formal loan application was submitted by Mr Sabbagh on 1 March 2005. It has on the front a note apparently in his handwriting stipulating the amount of the loan as $240,000 and the term as two months. It also states "Interest Rate: 7.25%". On the defence case, these rates emanated from the plaintiff. 11 The rates are extremely high. On an annual basis they are respectively 87 per cent and 174 per cent, even before one starts to apply the daily compounding provision. Even by the standards of the caveat lending trade they are high. The respective rates under the Filmseal loan were only 3 per cent and 4.5 per cent per month. Mr Angelopoulos, whom I found a reliable witness, had considerable experience as a finance broker, including experience with caveat loans. His evidence was that concessional rates in this market were around 5 per cent, but that the higher rate was not double, but generally 2 to 3 per cent more than, the concessional rate. Previously the plaintiff itself had generally charged 5 per cent as the concessional rate, although its higher rates had been double the concessional rate. There was conflicting evidence as to the degree to which it had previously charged a concessional rate of 7.25 per cent. Mr Angelopoulos described the rates charged on the subject loan as "highway robbery". Ms Reading herself agreed that it was "extraordinarily expensive finance". 12 The documents were executed on the defendants' part at house premises at 9 Arthur St, Castle Hill that had been converted into Mr Sabbagh's place of business. It was here that the defendants received advice from Mr Eid. The second, third and fourth defendants were present, as was Mr Sabbagh. The advice was given in English, although it is clear that the second defendant was not fluent in English. It is not clear to what degree Mr Eid was advising the first defendant through its directors, the second, third and fourth defendants, as borrower and to what extent he was advising the second, third and fourth defendants personally as guarantors. Insofar as these functions overlapped, it is to be noted that the interests of the borrower and the guarantors were not identical. When Mr Eid rendered his bill on 11 March 2005, it was rendered to the first defendant and the surrounding documentation appears to treat the first defendant as the client. 13 One of the areas where the evidence diverges widely is how much time Mr Eid spent explaining the contract and the terms in which this was done. According to the second and fourth defendants, it was done in the most perfunctory terms, taking only a few minutes. According to Mr Eid, it was an hour long explanation. I do not need to resolve this disparity. I say only three things concerning this evidence. The first is that there is a conflict, in that Mr Eid claimed that he mentioned the higher interest rate of 14.5 per cent, but this was denied by the second and fourth defendants. On no account did he specifically say that he had drawn their attention to, or mentioned, the provision for interest in the default situation compounding on daily rests. There is therefore no evidence that this significant provision was drawn to their attention. The second is that, on the evidence, it would appear that the defendants were desperate and determined to enter into the documents and would have, in any event, entered into them to obtain the loan. The third is that Mr Eid did not suggest any negotiation by the defendants concerning any term of the contract because, in his perception, the loan was offered on a take it or leave it basis, as such loans generally are. 14 The first defendant did not repay the loan at the expiry of two months after the advance and has not since repaid it. After this default, there were copious written and oral communications between the parties concerning the situation. The defendants did not, for quite some time, protest at the interest rate. It was said by the fourth defendant in explanation that this was because, during that period, there were still hopes that the loan would be rolled over, again showing the defendants' desperation to maintain this loan, despite its disadvantageous terms. 15 The first quantification of the amount demanded for repayment included a claim only for simple interest at the lower rate: see letter of 27 June 2005 from the plaintiff's solicitors, Fiddes McKenzie, to Janice Williams. However, by the time these proceedings were commenced, originally in the District Court at Newcastle, on 11 October 2005, the compounding interest provision in cl 4 of the agreement was pleaded, and interest was claimed at the higher rate and on the compounding basis, so that already some seven months after the loan $405,919 interest was claimed on a principal sum of $240,000. The plaintiff thereafter continued to claim interest on the compounding basis. On 17 January 2006, the debt to the plaintiff was claimed to be $1,286,184.15. It is true that at one stage the plaintiff offered on a without prejudice basis to take a smaller sum in settlement. However, the terms of that offer, which was contained in a letter from its solicitors dated 24 March 2006, was that judgment be entered against the defendants, both borrower and guarantors, for the full amount outstanding of the debt and interest in accordance with the agreement. The plaintiff would accept in satisfaction of that judgment $310,000 and the plaintiff's legal costs of $28,708.57 within 28 days, and the further amount of $250,000 within six calendar months. The largest sum which the defendants were prepared to offer was $440,000 inclusive, payment upon settlement of the refinance, as full and final payment of the outstanding debt (see the defendants' solicitor's without prejudice letter of 28 March 2006). 16 The defendants attempted to obtain finance which would clear both the first mortgage and the debt to the plaintiff. They received conditional offers of finance from Meridian Mortgage Corporation Pty Ltd dated 2 September 2005 and from Bleier Mortgage Corporation Pty Ltd dated 15 November 2005, but each of these was insufficient to pay out the Challenger loan. The borrower received an offer dated 13 December 2005 from St George Bank for a facility of $3,150,000. The defendants attempted to organise settlement of this loan in January 2006, but by 17 January 2006, as noted above, the plaintiff was demanding $1,286,184.15, so that the St George facility would be clearly insufficient to pay out, in addition to the Challenger Loan, the Galadriel loan and thus obtain the withdrawal of the plaintiff's caveat. The size of the plaintiff's demands thus bedevilled the defendants' efforts to refinance. The plaintiff contends that the defendants would not, in any event, have been able at that time to pay out the Challenger and Galadriel loans. 17 Ultimately, the defendants' efforts to refinance failed and the lender's actions under the Challenger loan caused the failure of the first defendant. DISPUTED FACTS 18 The resolution of the disputes of fact will involve my assessment of those witnesses who gave oral evidence. I have already stated that I found Mr Angelopoulos a reliable witness. The other witnesses who are relevant are Mr Hill, Mr Eid, the second defendant, the fourth defendant and Ms Reading. Mr Hill I also found a reliable witness who appeared to have a good recall of the matters that he gave in evidence. As to Mr Eid, I formed the view that he was attempting to give the Court accurate evidence concerning the matters in which he was involved. However, as to the meeting at which he gave advice to the defendants, he suffered the difficulty that he was attempting to recall evidence of a comparatively rote nature, of which he had not made any contemporaneous note. I had the impression that he was recounting what he believed he would have done in such a situation, rather than any actual recollection of the occasion. As to the second defendant and the fourth defendant, I had the impression that they were attempting to give the Court an accurate account of what occurred, but I must bear in mind the pressure exerted on them and their recollection by the dire situation in which they find themselves. In the case of Ms Reading, whilst I do not reject her evidence out of hand, I was unimpressed by the account she gave of hearing Mr Sabbagh's telephone conversation with Mr Hill on loudspeaker. This material was not mentioned in any of her earlier affidavits and the evidence concerning it had the appearance of being what she thought were the most advantageous responses to questions she was asked in cross examination. Furthermore, her evidence concerning the use of the 7.25 per cent and 14.5 per cent rates generally was contradictory, confused and in part admitted to be wrong. I approach Ms Reading's evidence with great caution. 19 The first two disputed areas, which can usefully be considered together, are noted in [10] and [11] above. The first disputed area is who proposed the interest rates of 7.25 per cent concessional and 14.5 per cent default, and the second is whether the plaintiff had previously charged a rate of 7.25 per cent concessional (as opposed to its usual rate of 5 per cent) in respect of caveat loans. As noted above, Mr Sabbagh noted a rate of 7.25 per cent on a sheet attached to the formal loan application but, as I have already said, it cannot be inferred from that that it was from him that this rate originated. Ms Reading in cross examination claimed that she heard the 7.25 per cent and 14.5 per cent rates both stipulated by Mr Sabbagh to Mr Hill in a telephone conversation that was on loudspeaker. Not only had she not mentioned this in affidavit or oral evidence in chief, but no mention of any such conversation at all was made by Mr Hill in his evidence. Ms Reading's evidence as to whether 7.25 per cent concessional and/or 14.5 per cent default interest rates had previously been charged by the plaintiff was inconsistent and confused. Mr Hill's evidence was to the effect that those rates had been charged in prior transactions. 20 I do not accept that the rates charged emanated from Mr Sabbagh. It seems to me unlikely that the rates, particularly when they were so high, would have been suggested by the person negotiating the loan on behalf of the first defendant. The lack of evidence to this effect from Mr Hill is significant. I am not prepared to accept Ms Reading's evidence to the contrary. I find that the rate of 7.25 per cent was stipulated on behalf of the plaintiff and that the rate of 14.5 per cent, if mentioned before the documentation was forwarded from the plaintiff's solicitor, was also stipulated on behalf of the plaintiff. Ms Reading's evidence as to whether those rates had previously been charged was confused and contradictory. I accept Mr Hill's evidence that 7.25 per cent had previously been charged by the plaintiff. I regard Mr Hill as a more reliable witness than Ms Reading and he had handled the negotiations for all the plaintiff's previous caveat loans. The fact that the plaintiff had previously charged 7.25 per cent also makes it more likely that that rate emanated from the plaintiff, rather than that Mr Sabbagh by coincidence suggested the same rate. The plaintiff suggested that the absence of Mr Sabbagh as a witness should tell against the second and fourth defendants on this issue under the principle in Jones v Dunkel (1959) 101 CLR 249. But, in view of the hostility between Mr Sabbagh and the defendants, I do not think it was incumbent on them to call him as a witness. 21 There is a conflict as to whether Mr Eid mentioned the higher interest rate of 14.5 per cent when giving advice to the defendants. This is denied by the second and fourth defendants: see [13] above. I have already expressed my reservations about Mr Eid's evidence, arising from the quality of his recollection. However, whether he was a short time or long time in making the explanation, I accept that his explanation proceeded by reference to features in the document before him. I think it inherently likely that he would have mentioned both of the interest rates set forth in the Schedule to the agreement at Item Twelfthly. On the balance of probabilities I find that he did mention the higher interest rate of 14.5 per cent. However, as I have already said, I find that he did not mention the provision for compounding the interest in default on daily rests. This provision does not appear in the Item in the Schedule, but in cl 4 in the body of the agreement. 22 The plaintiff contends that there should be a finding on the evidence that the defendants could not in any event have paid out the Challenger and Galadriel loans in late 2005 or early 2006: see [16] above. The plaintiff says that it is not established that the first defendant could have met the terms of and completed the proposed St George loan. To come to this conclusion the Court would have to determine questions that are hypothetical. For instance, it is not clear whether the Galadriel loan could have been paid out if it included a reasonable demand for interest such as that ultimately claimed in the proceedings. Even if there had been a small shortfall between the St George loan and the ultimate payout figure of both loans, it may be that the defendants could have met it from elsewhere. What is plain is that the St George loan could not, by a large margin, clear the existing loans including the demand of almost $1.3 million made by the plaintiff in January 2006. I do not find that the defendants would not in any event have been able to pay out the Challenger or Galadriel loans in January 2006. I do find that their efforts to refinance were bedevilled by the plaintiff's large demands for interest. CONTESTED ISSUES 23 When the defendants filed their original defence in the District Court on 30 January 2006, they did allege that the interest rate under the loan agreement was "harsh, oppressive, and unjustly penalising the Defendant [sic]". The insistence on interest at the higher compounding rate was maintained until after the commencement of the trial. In an affidavit of 25 June 2007, Ms Reading stated the amount due under the loan of $240,000 advanced in March 2005 with interest calculated on the higher rate as $11,588,845.51, a graphic example of the effect of a very high interest rate and the daily compounding provision. In his opening address on 18 July 2007, Mr R D Marshall, of counsel for the plaintiff, abandoned the plaintiff's claim on the basis of interest compounding daily and indicated that the amount in fact claimed included interest at the lower rate until 29 September 2006, after which interest was claimed at the Court rate of 10 per cent per annum. He said of the higher claim, "We don't press that. We waive it because it's just not necessary in the circumstances." It was not until then that the plaintiff abandoned its claim for interest at the higher rate calculated on a daily compounding basis. 24 At the trial, the fourth defendant's defence was conducted by Mr Golledge of counsel on a pro bono basis. The defence document on which the fourth defendant relied was the further amended defence ("the fourth defendant's defence") filed after the proceedings had been transferred to this Court. The material paragraphs of the fourth defendant's defence are as follows: "6 In answer to the claim made against her, the 4th Defendant says that the Court should, pursuant to section 7 of the Contracts Review Act (NSW) 1980, refuse to enforce the terms of the guarantee. Particulars The guarantee was unjust, in the circumstances which existed at the time that it was made, by reference to the following features: (i) the guarantee purports to render the 4th Defendant liable, as surety, for repayment of a debt on which interest was to be charged at a rate of 174% per annum compounded daily. The rate is extortionate and constituted an attempt by the plaintiff to unconscionably exploit the necessitous circumstances of the defendants. (ii) to the plaintiff's knowledge the 4th defendant was not provided with independent legal or financial advice in respect of the decision to sign the guarantee document. (iii) the terms of the loan agreement, and thus the nature and extent of the obligations imposed by the guarantee were misrepresented by Tony Sabbagh and Mr Eid and the plaintiff is, in the circumstances, responsible for the effect of those mis representations [sic]. (iv) to the plaintiff's knowledge, at the time of signing the guarantee document and by reason of the necessitous circumstances of the First Defendant, the 4th Defendant was unable to negotiate for the alteration of any of the terms of the guarantee [including as to interest] and was in a grossly inferior bargaining position in respect of the agreement. (v) the plaintiff failed to make any reasonable enquiries as to the ability of the First Defendant or the 4th Defendant to comply with the terms of agreement or the guarantee presumably being satisfied that its commercial interests were advanced, in such transactions, by a course of business that includes the obtaining of extortionate rates of interest on short term loans. (vi) in all of the circumstances the 4th defendant was not reasonably able to protect her interests in relation to the giving of the guarantee. 7 Further, or in the alternative, the 4th Defendant was in a position of special disadvantage at the time that she signed the agreement and the plaintiff has acted unconscionably in obtaining the guarantee on the terms contained in the written documents on which the plaintiff relies. Particulars The 4th defendant repeats the particulars contained in paragraph 5 hereof." The repetition in the particulars appended to paragraph 7 of the particulars in paragraph 5 is clearly a clerical error. What was meant to be repeated was the particulars appended to paragraph 6 set out above. 25 The second defendant was unrepresented at the trial and his defence as it stood was the defence filed in the District Court. Its allegation as to the interest rate I have already set out in [23] above. As that defence challenged the justice of the interest rate, I propose to adjudicate the matter on the basis that he is entitled to the benefit of the Contracts Review Act 1980 ("the CRA") and the defence of unconscionability insofar as I find them applicable. THE LAW 26 The material provisions of the CRA are as follows. In s 4(1), "unjust" is defined as including "unconscionable, harsh or oppressive". I set out the material parts of ss 7 and 9: "7 Principal relief (1) Where the Court finds a contract or a provision of a contract to have been unjust in the circumstances relating to the contract at the time it was made, the Court may, if it considers it just to do so, and for the purpose of avoiding as far as practicable an unjust consequence or result, do any one or more of the following: (a) it may decide to refuse to enforce any or all of the provisions of the contract, (b) it may make an order declaring the contract void, in whole or in part, (c) it may make an order varying, in whole or in part, any provision of the contract … …… 9 Matters to be considered by Court (1) In determining whether a contract or a provision of a contract is unjust in the circumstances relating to the contract at the time it was made, the Court shall have regard to the public interest and to all the circumstances of the case, including such consequences or results as those arising in the event of: (a) compliance with any or all of the provisions of the contract, or (b) non-compliance with, or contravention of, any or all of the provisions of the contract. (2) Without in any way affecting the generality of subsection (1), the matters to which the Court shall have regard shall, to the extent that they are relevant to the circumstances, include the following: (a) whether or not there was any material inequality in bargaining power between the parties to the contract, (b) whether or not prior to or at the time the contract was made its provisions were the subject of negotiation, (c) whether or not it was reasonably practicable for the party seeking relief under this Act to negotiate for the alteration of or to reject any of the provisions of the contract, (d) whether or not any provisions of the contract impose conditions which are unreasonably difficult to comply with or not reasonably necessary for the protection of the legitimate interests of any party to the contract, (e) whether or not: (i) any party to the contract (other than a corporation) was not reasonably able to protect his or her interests, or (ii) any person who represented any of the parties to the contract was not reasonably able to protect the interests of any party whom he or she represented, because of his or her age or the state of his or her physical or mental capacity, (f) the relative economic circumstances, educational background and literacy of: (i) the parties to the contract (other than a corporation), and (ii) any person who represented any of the parties to the contract, (g) where the contract is wholly or partly in writing, the physical form of the contract, and the intelligibility of the language in which it is expressed, (h) whether or not and when independent legal or other expert advice was obtained by the party seeking relief under this Act, (i) the extent (if any) to which the provisions of the contract and their legal and practical effect were accurately explained by any person to the party seeking relief under this Act, and whether or not that party understood the provisions and their effect, (j) whether any undue influence, unfair pressure or unfair tactics were exerted on or used against the party seeking relief under this Act: (i) by any other party to the contract, (ii) by any person acting or appearing or purporting to act for or on behalf of any other party to the contract, or (iii) by any person to the knowledge (at the time the contract was made) of any other party to the contract or of any person acting or appearing or purporting to act for or on behalf of any other party to the contract, (k) the conduct of the parties to the proceedings in relation to similar contracts or courses of dealing to which any of them has been a party, and (l) the commercial or other setting, purpose and effect of the contract." 27 By s 6(2), a person may not be granted relief under the Act in relation to a contract "so far as the contract was entered into in the course of or for the purpose of a trade, business or profession carried on by the person or proposed to be carried on by the person …". It was not submitted that this provision precluded the second and the fourth defendants from relying on the CRA in these proceedings. 28 The most comprehensive statement as to the interpretation and application of ss 7 and 9 is that of McHugh JA in West v AGC (Advances) Ltd (1986) 5 NSWLR 610 at 620 - 621: "Under s 7(1) a contract may be unjust in the circumstances existing when it was made because of the way it operates in relation to the claimant or because of the way in which it was made or both. Thus a contractual provision may be unjust simply because it imposes an unreasonable burden on the claimant when it was not reasonably necessary for the protection of the legitimate interests of the party seeking to enforce the provision: cf s 9(2)(d). In other cases the contract may not be unjust per se but may be unjust because in the circumstances the claimant did not have the capacity or opportunity to make an informed or real choice as to whether he should enter into the contract: cf s 9(2)(a), 9(2)(e), 9(2)(f), 9(2)(g), 9(2)(i), 9(2)(j). More often, it will be a combination of the operation of the contract and the manner in which it was made that renders the contract or one of its provisions unjust in the circumstances. Thus a contract may be unjust under the Act because its terms, consequences or effects are unjust. This is substantive injustice. Or a contract may be unjust because of the unfairness of the methods used to make it. This is procedural injustice. Most unjust contracts will be the product of both procedural and substantive injustice. The definition of 'unjust' in s 4 is not exclusive. It is in my opinion a mistake to think that a contract or one of its terms is only unjust when it is unconscionable, harsh or oppressive. Contracts which fall within any of those categories will be 'unjust'. But the latter expression is not limited to the so called 'tautological trinity'. The Contracts Review Act 1980 is revolutionary legislation whose evident purpose is to overcome the common law's failure to provide a comprehensive doctrinal framework to deal with 'unjust' contracts. Very likely its provisions signal the end of much of classical contract theory in New South Wales. Any contract or contractual provision, not excluded from the operation of the Act and which the court considers is unjust in the circumstances existing at the time when it was made, may be the subject of relief under the Act. Moreover, the provisions of s 9(2) do not exhaustively indicate the criteria as to what can be taken into account in determining whether a contract or any of its provisions is unjust. The provisions of s 9(2) of the Act are concerned for the most part with matters of procedural injustice. But the court is entitled to have regard to all the circumstances of the case, subject to s 9(4), and the public interest. In an appropriate case gross disparity between the price of goods or services and their value may render the contract unjust in the circumstances even though none of the provisions of s 9(2) can be invoked by the applicant. Indeed, notions of unfairness and unreasonableness will, I think, generally be present when a contract or any of its provisions is declared unjust. This will particularly be the case where procedural injustice is relied on. If a contract or one of its relevant provisions is neither unfair nor unreasonable so far as the applicant is concerned, it is difficult to see how the existence of inequality in bargaining power or lack of independent advice, for example, can render the contract or a provision of the contract unjust." 29 In general terms, the propositions laid down by McHugh JA have continued to be regarded as good law. The subsequent consideration of those propositions was recorded by Beazley JA in Elkofairi v Permanent Trustee Co Ltd (2002) 11 BPR 20,841 at [69] – [78]. In St George Bank Ltd v Trimarchi [2004] NSWCA 120, Mason P at [36] reiterated that a circumstance unknown to one party may still contribute to rendering a contract unjust, though that party's state of mind may be relevant to whether relief should be granted. The judgments in Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41 again proceeded on the basis of the general soundness of McHugh JA's exposition. Spigelman CJ at [65] noted that standards may have changed since the time of West. It was emphasised that the process of decision making involved two stages (per Spigelman CJ at [34]) or three stages, if you include a preliminary stage of finding disputed facts (per Handley JA at [99] and Basten JA at [106]). A recent example of the application of these principles by a trial Judge is seen in the decision of Barrett J in No Fuss Finance v Miller [2006] NSWSC 630. CONCLUSIONS 30 The degree to which the plaintiff now seeks to have the guarantees enforced is set out in [23] above. It is contended on behalf of the fourth defendant that, by virtue of the provisions of the CRA and of the unconscionability of the transaction, the Court should rule that the guarantee ought not be enforced against the fourth defendant. As I have already noted, the particulars in the fourth defendant's defence to be taken into account in relation to the CRA and to the defence of unconscionability are identical. 31 Particular (ii) alleges that, to the plaintiff's knowledge, the fourth defendant was not provided with independent legal or financial advice in respect of the guarantee. In my view, it is not established on the evidence that the plaintiff did have that knowledge. The legal advice of Mr Eid was on the evidence independent of the plaintiff. I have accepted that it was the broker that insisted that the advice be that of Mr Eid. 32 As to particular (iii), the allegation of misrepresentations by Mr Sabbagh and Mr Eid, I am not convinced that any misrepresentation by either of those gentlemen is established. However, if there were any misrepresentations, I am of the view that it was not established that the plaintiff was responsible for them. In my view, it is not established that Mr Sabbagh was the plaintiff's agent on the facts of this case and there is no presumption that a finance broker is the lender's agent: see Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226; Custom Credit Corporation Ltd v Lynch [1993] 2 VR 469; Octapon Pty Ltd v Esanda Finance Corporation Ltd SCNSW (Cole J) 3 February 1989 unreported; and Esanda Financial Corporation v Spence Financial Group Pty Ltd [2006] WASC 177. Since, on the evidence, Mr Sabbagh was not acting as the plaintiff's agent, the plaintiff could not be responsible for the actions of him or Mr Eid. 33 That leaves the allegations contained in particulars (i) and (iv), to the effect that the higher rate of interest was extortionate and an unconscionable exploitation of the necessitous circumstances of the defendants (particular (i)) and that by reason of those necessitous circumstances, the fourth defendant was unable to negotiate for the alteration of any of the terms of the guarantee. In my view the second defendant is also entitled to rely on these allegations. Mr Eid's evidence to the effect that he believed the terms were non negotiable has already been referred to: [13]. I am of the view that the interest rate imposed was extortionate, even by the standards of the market in caveat loans and all the more so in light of the daily compounding provision: see [9]. The plaintiff was well aware of this and equally well aware that the defendants were in no position to bargain and would accept whatever interest rate, however extortionate, was stipulated by the plaintiff. 34 The time at which it is to be judged whether a contract is unjust is the time at which it was entered into. At that time, the situation was as follows in relation to the subject contract. 35 The fourth defendant was not inexperienced in nor ignorant of matters of finance. She was a real estate agent. She had engaged in projects for the development of property. She had raised finance for those transactions. She had been involved in one earlier caveat loan, the Filmseal loan. The second defendant had also been involved in at least two investment or development projects and in the Filmseal loan. He did not speak English fluently, although he must have been able to communicate in English, since, on the evidence, he and the fourth defendant had no other common language and obviously communicated concerning their common projects, including whether the subject contract should be entered into. 36 I have found that the 14.5 per cent default rate was mentioned to the second and fourth defendants by Mr Eid, but not the compounding provision. The plaintiff was not aware of or responsible for what advice was given or not given by Mr Eid. 37 The Filmseal loan was overdue and the Challenger loan on the property was threatening to go into default. The defendants' need for finance was desperate. This was known to the plaintiff. The money was needed in a few days. The offer of finance was made on a take it or leave it basis. There was no room for negotiation. The possibility that the loan might go into default was known to the plaintiff. The rate of interest was extortionate, even by the standards of the caveat loan trade. 38 I find that the contract, insofar as it related to the guarantees given by the second defendant and the fourth defendant, was unjust within the meaning of the CRA. 39 That raises the question of what relief should be granted to the second defendant and the fourth defendant. I bear squarely in mind the injunctions of the appellate courts that the relief granted should not be greater than is necessary to redress the injustice that has been found. The plaintiff argues that the relief granted should not preclude the recovery by the plaintiff from the guarantors of the amount now claimed; that is, the principal under the loan together with interest at a reasonable rate. However, as I have found, the plaintiff's conduct included not only the imposition of the onerous terms as to interest, but its insistence upon payment at the full compounding default rate at the time the defendants were attempting to negotiate a refinance that would have discharged the plaintiff's loan and therefore the guarantors' liability. This insistence prevented the success of the refinance. Whilst I have not made a positive finding that the refinance would have otherwise succeeded, I have declined to make a finding that it would have failed in any event. The plaintiff's conduct destroyed the defendants' chance of refinancing. 40 I also bear in mind that, although the second and fourth defendants would have regarded the loan as advantageous to them at the time it was entered into, it was not they, but the first defendant, that received the funds. The reason for the non repayment of the loan was the failure of the first defendant. The second and fourth defendants are not retaining funds they received from the plaintiff. 41 In the circumstances, I consider it just to refuse to enforce any of the provisions of the contract against the second defendant or the fourth defendant. 42 In view of this conclusion, I do not need to determine the defence on the basis of unconscionability. 43 The result will be that there should be judgment for the second defendant and the fourth defendant on the plaintiff's claim. The ordinary consequence as to costs, subject to any submission the parties wish to put, would be that the plaintiff pay the second defendant and the fourth defendant's costs of the proceedings. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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