Supreme Court New South Wales Medium Neutral Citation: Fitzgerald v Watson [2011] NSWSC 736 Hearing dates: 16 June 2011 Decision date: 14 July 2011 Jurisdiction: Equity Division Before: Gzell J Decision: Mortgagee has made out entitlement to relief. Catchwords: MORTGAGES - Mortgages and Charges Generally - Rights and Liabilities of Mortgagor and Mortgagee - effect of signing mortgage documents without reading them - effect of accountant's certificate of ability to service loan - whether finance broker the agent of mortgagor or mortgagee - whether defendant mortgagor in a special position of disadvantage as against plaintiff mortgagee - whether provision entitling mortgagee to lodge a caveat applied to after acquired real property - whether mortgage unjust under the Contracts Review Act 1980, s 7(1) - whether Consumer Credit (New South Wales) Code applied - certificate signed that credit for business or investment - whether under s 11(2) of the code the conclusiveness of the certificate to be denied Legislation Cited: Conveyancing Act 1919 Contracts Review Act 1980 Consumer Credit (New South Wales) Code Cases Cited: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 Wilton v Farmworth [1948] HCA 20; (1948) 76 CLR 646 Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd [1986] HCA 14; (1985-1986) 160 CLR 226 Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413 Composite Buyers Ltd v Soong [1996] NSWSC 3; (1995) 38 NSWLR 286 Troncone & Ors v Aliperti & Ors (1994) NSW ConvR 55-703 Coleman v Bone & Anor (1996) 9 BPR 97706 Perpetual Trustee Company Limited v Albert and Rose Khoshaba [2006] NSWCA 41; 14 BPR 98353 Category: Principal judgment Parties: Ronald Reginald Fitzgerald (Plaintiff) Kathleen Susan Watson (Defendant) Representation: A Chee (Plaintiff) R Newton (Defendant) Nugent Wallman & Carter (Plaintiff) Taylor & Scott Lawyers (Defendant) File Number(s): 2010/40995 Judgment 1The Plaintiff, Ronald Reginald Fitzgerald, seeks judgment against Kathleen Susan Watson, the Defendant, in the sum of $69,356.47 together with interest and costs. He also seeks to enforce the judgment against a property owned by Mrs Watson at Tumbi Umbi. 2Mrs Watson purchased a property at Wyee Point in about April 2001 with a $50,000.00 loan from Australia and New Zealand Banking Group Limited on the security of that property which she mortgaged to the bank. 3In November 2003 she raised a further $40,000 from Response Finance Pty Ltd, again on the security of the Wyee property, which she mortgaged to Response Finance. Mrs Watson said that the de facto husband of her adopted daughter was the borrower and she was the guarantor giving security over the Wyee property. But she readily accepted that she was the mortgagor when the document was put to her with its reference to her as mortgagor and her acknowledgment of receipt of the principal sum and that she would pay it to the mortgagee and all other moneys thereby secured on the final maturity date. 4Mrs Watson borrowed the moneys to enable her adopted daughter and her de facto husband to purchase a pizza shop. He was to refinance within two months to enable the second mortgage to be paid out. 5The term of the loan was 60 days. It was at a high rate of interest. The adopted daughter's de facto husband defaulted in providing the instalment payments and from early January 2004 Mrs Watson was in default and being charged interest at 7% per month. She was in desperate need of refinance. Response Finance was demanding approximately $100,000.00 and threatening to commence legal proceedings. 6Mrs Watson was in receipt of Centrelink payments and was studying at TAFE to become a nurse. Because of her limited income she could not raise from ANZ sufficient moneys to pay out Response Finance. She described the interest rate she was being charged by Response Finance as overwhelming. 7Mrs Watson and her husband saw an advertisement on television of Xenium Financial Group being able to raise finance. She made an appointment and she and her husband met the principals who said they could obtain finance for her. She was told that Short Term Mortgages Pty Ltd was associated with Xenium. 8Mrs Watson understood them to be finance broking companies and that she would have to pay them a fee. First mortgage finance was arranged for most of the amount that Mrs Watson needed to pay out ANZ and Response Finance. But more was needed. 9Mr Fitzgerald had let Xenium know that he was interested in lending funds. He was approached by it and agreed to lend to Mrs Watson on a second mortgage. He preferred not to lend on such security as it was risky, but the amount was small at $50,000.00 and the Wyee property was valued at $240,000.00 with a prospective first mortgage loan of about $140,000.00. 10Mr Fitzgerald said he usually inspected properties offered as security but this was such an urgent matter that there was no time for an inspection. He retained James Barton Carter, solicitor, to act for him. 11Mrs Watson and her husband went to the Xenium office a second time where she signed some documents at the urging of her husband. Those documents related to the retainer of Short Term Mortgages as her broker. They included her consent to Short Term Mortgages lodging a caveat over the Wyee property to secure its fee. The mortgage documents were executed later. 12Short Term Mortgages referred Mrs Watson to Stanley Price, a solicitor, and she and her husband called on him to sign the mortgage documents, which had been forwarded to Mr Price by Mr Carter. 13Mrs Watson claimed that Mr Price had tagged the places where she was to sign and asked her to sign. She said she received no advice from Mr Price. She said that in the half hour with Mr Price he answered questions put by her by saying he would return the documents to Short Term Mortgages and they would explain the matters to her. 14Mrs Watson said she did not read the mortgage documents before she signed them. She understood that mortgages were serious legal transactions that could have potentially serious legal consequences for her if they were breached. 15By signing the documents without reading them Mrs Watson represented to Mr Fitzgerald that she had approved the contents of the documents or was willing to take the chance of being bound by those contents. In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at [45]; 180-181 the Court said: "It should not be overlooked that to sign a document known and intended to affect legal relations is an act which itself ordinarily conveys a representation to a reasonable reader of the document. The representation is that the person who signs either has read and approved the contents of the document or is willing to take the chance of being bound by those contents, as Latham CJ put it, whatever they might be. That representation is even stronger where the signature appears below a perfectly legible written request to read the document before signing it." 16The reference to Latham CJ was to his statement in Wilton v Farmworth [1948] HCA 20; (1948) 76 CLR 646 at [2]; 649: "In the absence of fraud or some other of the special circumstances of the character mentioned, a man cannot escape the consequences of signing a document by saying, and proving, that he did not understand it. Unless he was prepared to take the chance of being bound by the terms of the document, whatever they might be, it was for him to protect himself by abstaining from signing the document until he understood it and was satisfied with it. Any weakening of these principles would make chaos of every-day business transactions." 17Mrs Watson did not say that she was urged to sign the mortgage documents by her husband. 18A letter was addressed to Mr Fitzgerald from D & A Biggs Accounting Services. It was sent by email to Mr Carter by Mr Price. It was in the following terms: "I certify that: 1. I am a practicing ( sic ) accountant and a member of the Institute of Chartered Accountants in Australia. 2. I have been retained by Kathleen Susan Watson ("mortgagors") to advise them of their obligations under the above mortgage and provide this letter. 3. I understand that the mortgagors have applied for an interest only loan of $50,000.00 with monthly instalments of $831.25 over 12 months at 22.95% per annum fixed. I understand that the first 6 months instalments have been paid in advance. 4. Based on information given to me by the mortgagors, I am aware of what their income and expenses are. It appears to me that the mortgagors are able to meet interest payments and can do so without substantial hardship. 5. This statement is not a guarantee of performance by the borrowers but merely a statement that the borrowers' current circumstances indicate an ability to service the interest payments. I am not aware of any circumstances affecting the mortgagor's ability to meet their commitments, however, circumstances may change. I understand that this loan has been approved subject to various conditions contained in the Letter of Offer. This letter is provided to satisfy one of those conditions." 19Mr Fitzgerald said he relied upon that letter and the valuation in making his decision to lend the funds. Mrs Watson said she had never dealt with D & A Biggs and had not retained them as her accountants. 20Mr Carter said that reliance upon an accountant's certificate was a feature of the mortgage industry. 21Included in the documents executed by Mrs Watson was a declaration that she had received independent legal advice regarding the loan and security documents and freely and voluntarily signed the documents. She also signed a Consumer Credit Code declaration that the credit provided to her by the credit provider was to be applied wholly or predominantly for business or investment purposes. Mrs Watson also signed a loan repayment ability declaration stating, amongst other things, that she knew her income and expenditure and based on that knowledge and her understanding of her current financial position she declared that she was able to make all the required monthly repayments and repay the loan in accordance with its term and she could do so without substantial hardship. 22Mrs Watson had a detailed understanding of a secured loan. She knew that it was the nature of a mortgage that if she defaulted, the mortgagee could sell the secured property. She knew that in order to refinance the loans from ANZ and Response Finance she would have to mortgage the property again. She knew that lenders needed to be satisfied about the ability of the mortgagor to repay. She knew that most loans required monthly instalments. She knew the mortgagee needed to be satisfied about the value of the property offered as security. 23Mrs Watson defaulted and the first mortgagee sold the property. Mr Fitzgerald received $22,403.61 and sues for the balance of the loan together with interest. 24It was submitted that Short Term Mortgages was the agent of Mr Fitzgerald. I reject that submission. Mr Fitzgerald had told Short Term Mortgages that he was interested in lending money but when he was approached to lend Mrs Watson $50,000.00, Short Term Mortgages was acting for Mrs Watson. 25A finance broker is prima facie the agent of the borrower. In Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd [1986] HCA 14; (1985-1986) 160 CLR 226 at [5]; 234 the court said: "... under the general principles of the law of agency, a broker is the agent of the assured, not the insurer ... There will be rare circumstances in which a broker may also be an agent of the insurer, but the courts will not readily infer such a relationship because a broker so placed faces a clear conflict of interest between his duty to the assured on the one hand and to the insurer on the other." 26There is nothing in the fact of this case that would lead to a departure from the general principle. Mrs Watson agreed to pay a fee to Short Term Mortgages and consented to the lodgement of a caveat to secure that entitlement. 27Mr Fitzgerald made no inquires of Mrs Watson or Short Term Mortgages as to the capacity of Mrs Watson to service the loan. He relied upon the certificate of D & A Biggs and he was entitled to rely upon the loan repayment ability declaration signed by Mrs Watson. 28Mr Fitzgerald was not put on notice that Mrs Watson claimed that she had done no business with D & A Biggs. 29The use of the plural "mortgagors" in the certificate of D & A Biggs was fastened upon to suggest that the inference should be drawn that the letter was not arranged or authorised by Mrs Watson and that it was arranged by someone else, possibly Short Term Mortgages. 30While inelegant, par 2 of the letter defines the plural term to mean Mrs Watson alone. 31It was submitted that the case was analogous to the facts in Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413 and should be treated in the same way. 32In that case, however, the appellant was completely uneducated. She could not read or write either in her first language or in English and she could understand only very simple expressions in English. The solicitor did not explain to her the power of sale under the mortgage she executed. From time to time her husband would ask her to sign papers, which she did. He did not tell her what the papers were, nor did she ask. The property over which the mortgage was taken was held by the appellant and her husband as joint tenants. The loan in question was for $446,000.00 to refinance existing debt and additional funds of $350,000.00 for business purposes. The appellant was not aware that these moneys were received and she did not know where the money went. In the pro forma application form used by Permanent Trustee the income section was left blank. The appellant and her husband each owed the Commissioner of Taxation approximately $25,000.00 and there was a threat that judgment would be entered against them. There was no reference to the appellant or her financial position in any of the correspondence. The appellant signed an acknowledgment that she had chosen not to take independent legal advice on the nature and effect of the mortgage. 33The appellant's husband's accountant wrote a number of letters the last being as follows: "We know the borrower's income and expenditure and based on that knowledge and my understanding of the borrower's financial position. We are of the opinion that the borrower is able to repay the loan in accordance with its terms and can do so without hardship." 34Beazley JA with whom Santow JA and Campbell AJA agreed said: "55 The only information in respect of Mr Elkofairi's financial situation were the 3 letters from his accountants. Those letters were exceptional in their total lack of detail relating to Mr Elkofairi's financial position. To the extent they represented that Mr Elkofairi would have no difficulty in servicing the loan they were incorrect. Whether the respondent actually appreciated this or not, the total absence of financial information, both in the application form and in the information provided by the accountants and the fact that no income was stated for either Mr or Mrs Elkofairi, should certainly have sounded a warning bell to a lender in respect of any borrowing, let alone a borrowing in the order of three quarters of a million dollars. In addition, there were added factors that the respondent was aware that the appellant did not have legal advice in respect of the mortgage. Nor did it have any information as to her ability, existing or prospective, to service the loan. 56 In my opinion, notwithstanding that the respondent did not have knowledge of the appellant's lack of education and her language and domestic difficulties, her lack of income, in the circumstances of this transaction - that is a large borrowing secured over her only asset, in circumstances where the application form failed to disclose any income for either husband or wife - placed her in a special position of disadvantage. Though the full extent of that special position of disadvantage was not known to the respondent, nonetheless the absence of any relevant financial information was sufficient to put the respondent on notice of the appellant's lack of capacity to meet the repayment obligations under the mortgage. That left as the only source of repayment the selling of her only asset, as again the respondent must be taken to have known." 35The circumstances of this case are vastly different. The lender was an individual and not a lending institution with pro forma documentation. Mrs Watson had a solicitor, Mr Price, acting for her. The loan was relatively small at $50,000.00. Mr Fitzgerald was not put on notice that Mrs Watson relied solely on Centrelink payments and there was the evidence of Mr Carter that his client could rely on the D & A Biggs certificate, non-detailed though it was. If Mrs Watson had had no dealings with D & A Biggs, the certificate was, nevertheless, sent to Mr Fitzgerald's solicitor by Mrs Watson's solicitor and neither Mr Fitzgerald nor Mr Carter were put on notice that Mrs Watson disputed the certificate. And, Mrs Watson signed the loan repayment ability declaration by which she was bound. Furthermore, Mrs Watson had a sophisticated knowledge of mortgages and their legal consequence if there was default. She knew that the mortgagee could sell her Wyee Point property if she defaulted. 36In my opinion this case is distinguishable from Elkofairi and Mrs Watson was not as against Mr Fitzgerald in a special position of disadvantage. 37It was submitted that the valuation of the Wyee property at $240,000.00 should have alerted Mr Fitzgerald to the possibility that Mrs Watson and her husband were of extremely modest means and that the house might be their sole substantial asset. 38But the loan was very small and Mr Fitzgerald worked out that there was sufficient equity to cover the first mortgage and his mortgage and he had the D & A Biggs certificate to rely upon. 39There was some suggestion that Mrs Watson's late husband urged her to sign the documents in Xenium's office. She did not say she was overborne by her husband, the documents were not the mortgage documents and neither Mr Fitzgerald nor Mr Carter were put on notice of any urging. 40Mr Fitzgerald's conduct was not unconscientious. Mrs Watson has no equity to exonerate her from the liability for the balance of the debt, which stood at $57,484.94 on 5 June 2006 when Mr Fitzgerald received the payment of $22,403.61 from the solicitors for the First Mortgagee. 41Mr Carter included a standard clause in his mortgages and did so with respect to the second mortgage to Mr Fitzgerald. The provision was as follows: "8. In the event that the mortgagor shall be in default under this mortgage the mortgagee shall be entitled by way of further security to lodge a caveat over the interest of the mortgagor of any other real property and by virtue of his execution of this deed shall be deemed to have consented to such lodgement and the mortgagor shall not be entitled to obtain a withdrawal of such caveat until the mortgagor has repaid the principal sum secured under this mortgage and all interest and costs outstanding to the mortgagee." 42On 12 January 2010 Mr Carter lodged for registration a caveat over the Tumbi Umbi land. 43Mrs Watson acquired the Tumbi Umbi land after the mortgage to Mr Fitzgerald had been executed. It was submitted that cl 8 of the mortgage did not apply to after acquired real property or to real property not in the contemplation of the parties when the second mortgage over the Wyee property was executed. 44Clause 8 is general in its terms. It enables additional security to be taken by lodgement of a caveat over the interests of the mortgagor "of any other real property". Real property can be bought and sold. There is no reason why additional security should not be available with respect to any future acquisition of real property while the mortgage remained unpaid. 45It would severely limit, if not defeat, the additional security if cl 8 was limited to real property in existence at the time the second mortgage was executed. One might expect that if there was other real property owned by Mrs Watson it would have been given as security under the first mortgage, thereby leaving no scope for the operation of cl 8 if so limited. 46The same considerations apply to the argument that real property not in the contemplation of the parties when the mortgage was executed falls outside the operation of cl 8. There is nothing on the face of the clause to suggest it is so limited and to so construe it would severely limit its operation 47Reference was made to Composite Buyers Ltd v Soong [1996] NSWSC 3; (1995) 38 NSWLR 286. In that case guarantors provided in writing that they "jointly and severally charge as beneficial owners all freehold and leasehold interests in land which we or any of us now have or during currency of this instrument may acquire with the whole of our obligations hereunder". The plaintiff registered a caveat over a number of parcels of the defendants' land. A preliminary question was answered that the document was capable of giving the plaintiff an equitable interest in the defendants' land provided equity would grant specific relief against the defendants' land on the basis of the instrument. 48It is not clear from the report whether the parcels the subject of the caveat were after acquired, but there is equally no suggestion that the provision was incapable of application to after acquired real property. 49I do not understand the submission that s 23C of the Conveyancing Act 1919 was not satisfied in relation to any equitable charge that might be said to arise under cl 8. Amongst other things it provides that no interest in land can be created except by writing signed by the person creating the same. And Mrs Watson signed the mortgage containing cl 8. 50In Troncone & Ors v Aliperti & Ors (1994) NSW ConvR 55-703 it was held that upon the proper construction of an agreement that creditors could lodge caveats, the debtor impliedly granted an equitable charge to the creditors. 51That decision was followed by McClelland CJ in Eq in Coleman v Bone & Anor (1996) 9 BPR 97706 in which an agreement referred to the plaintiff putting a caveat on a property. His Honour held this was sufficient to create such estate or interest in the property as was sufficient to support a caveat. 52In my view, in signing the mortgage containing cl 8, Mrs Watson impliedly granted an equitable charge over any real property she might acquire in the future. 53In the alternative Mrs Watson claimed that cl 8 made the mortgage unjust in terms of the Contracts Review Act 1980, s 7(1) which was in the following terms: "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, (d)it may, in relation to a land instrument, make an order for or with respect to requiring the execution of an instrument that: (i)varies, or has the effect of varying, the provisions of the land instrument, or (ii)terminates or otherwise affects, or has the effect of terminating or otherwise affecting, the operation or effect of the land instrument." 54Mrs Watson relied on the facts that based her claim that she was in a special position of disadvantage. That basis for finding the mortgage unjust fails for the reasons expressed above. 55Reliance was placed upon Perpetual Trustee Company Limited v Albert and Rose Khoshaba [2006] NSWCA 41; 14 BPR 98353. There the institutional lender failed to follow its own guidelines with respect to a loan to a husband and wife, one of whom earned $43,000.00 per year and the other was a pensioner. The appellant failed to make any inquiries about the purpose of the loan and treated enforcement of the security as its first resort. 56I have already dealt with the question of serviceability of the loan in this case. And Mr Fitzgerald did not utilise enforcement of his security as the first resort. It was the first mortgagee who enforced its security, paying the surplus to Mr Fitzgerald. 57It was submitted that Mr Fitzgerald turned a blind eye to the circumstances of Mrs Watson and the likely consequences of total loss of her equity in Mr Fitzgerald's pursuit of profit. I reject that submission. Mrs Watson was desperate to obtain finance to pay out the Response Finance loan that had been taken out to allow her adopted daughter and de facto husband to buy the pizza shop. Mr Fitzgerald received D & A Biggs' certificate and, as I have found, he was entitled to rely upon it as establishing Mrs Watson's ability to service his loan. He did not turn a blind eye. 58Likewise, I reject the submission that the loan should be characterised as unjust on the footing it was made without proper regard to Mrs Watson's ability to meet her obligations under the loan. 59Clause 8 of the mortgage was not unjust. Its purpose was to further secure the obligations under the mortgage. Nor is its application to after acquired property unjust. It would defeat the purpose of providing additional security if it was limited to property owned by Mrs Watson at the time she executed the mortgage. 60The loan to Mrs Watson was not unjust. Its purpose was to enable Mrs Watson to pay out Response Finance and rid herself of its invidious interest rate. That purpose was achieved. It was beneficial to Mrs Watson. 61The Tumbi Umbi property was purchased with moneys paid to Mrs Watson as a result of her husband's death at his work and by moneys raised by the community. It was submitted that it was all the more unjust that recourse should extend to the fruit of the community benevolence in the form of the Tumbi Umbi property. 62The Contracts Review Act , s 9(4) provides that in determining whether a contract or a provision of a contract is unjust, the court shall not have regard to any injustice arising from circumstances that were not reasonably foreseeable at the time the contract was made. 63In my judgment community contribution to a home for Mrs Watson was not reasonably foreseeable when the loan from Mr Fitzgerald was made and, if recourse to the Tumbi Umbi land under cl 8 of the mortgage amounts to an injustice, it is not to be considered. 64Mrs Watson's claim to relief under the Contracts Review Act is dismissed. 65It was submitted that the Consumer Credit (New South Wales) Code applied to Mr Fitzgerald's loan because it was designed to discharge a personal obligation of Mrs Watson and was thus for a personal, domestic or household purpose. 66In my view the credit provided by Mr Fitzgerald was to discharge the loan required to purchase the pizza shop and the Code does not apply to the transaction. 67The Consumer Credit (New South Wales) Code , s 11 contained the following provisions: "(2) Credit is presumed conclusively for the purposes of this Code not to be provided wholly or predominantly for personal, domestic or household purposes if the debtor declares, before entering into the credit contract, that the credit is to be applied wholly or predominantly for business or investment purposes (or for both purposes). (3) However, such a declaration is ineffective for the purposes of this section if the credit provider (or any other relevant person who obtained the declaration from the debtor) knew, or had reason to believe, at the time the declaration was made that the credit was in fact to be applied wholly or predominantly for personal, domestic or household purposes. For the purposes of this subsection, a relevant person is a person associated with the credit provider or a finance broker (or a person acting for a finance broker) through whom the credit was obtained." 68It was submitted that Mr Fitzgerald and Mr Carter ought to have been aware or at least suspicious that the loan had nothing to do with a business purpose. I reject that submission. It was based upon the proposition that fairness demanded a further inquiry beyond the D & A Biggs certificate on the facts of this case. I have found to the contrary. Mr Fitzgerald was entitled to rely upon the Consumer Credit Code declaration. In any event, I have found that the purpose of the loan was not predominantly for personal, domestic or household purposes. 69Mr Fitzgerald has made out his entitlement to relief. I will hear the parties on the appropriate terms of orders and I will hear the parties on costs. 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. Decision last updated: 15 July 2011