Supreme Court New South Wales Medium Neutral Citation: Big Kahuna Holdings Pty Ltd v Joanna Kitas [2012] NSWSC 615 Hearing dates: 28, 29, 30 and 31 March 2011 Decision date: 06 June 2012 Before: McCallum J Decision: Relief under Contracts Review Act granted so as to vary interest rate under mortgage Catchwords: MORTGAGES - whether loan agreement and mortgage unjust - whether defendant entitled to relief under the Contracts Review Act Legislation Cited: Civil Liability Act 2002 Contracts Review Act 1980 Fair Trading Act 1987 Trade Practices Act 1974 (Cth) Uniform Consumer Credit Code Cases Cited: Baltic Shipping Co v Dillon [1991] 22 NSWLR 1 at 9 Bank of Queensland v Dutta [2010] NSWSC 574 Burke v State Bank of NSW (1994) 37 NSWLR 53 Esanda Finance Corp Ltd v Tong [1997] 41 NSWLR 482 Kowalczuk v Accom Finance [2008] NSWCA 343 Lopwell Pty Ltd v Clarke [2009] NSWCA 165 No Fuss Finance Pty Ltd v Miller [2006] NSWSC 630 Permanent Mortgages Pty Ltd v Cook [2006] NSWSC 1104 Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41 Riz v Perpetual Trustees Australia Ltd [2007] NSWSC 1153 Spina v Permanent Custodians Ltd [2009] NSWCA 206 State Bank of NSW Ltd v Burke (1997) NSW ConvR 55-814 West v AGC (Advances) Ltd (1986) 5 NSWLR 610 Category: Principal judgment Parties: Big Kahuna Holdings Pty Ltd (plaintiff) Joanna Kitas (defendant) Representation: Counsel: M R Gracie (plaintiff) B M Zipser (defendant) Solicitors: Whitfield Solicitors (plaintiff) Peter Mitchell Law Practice (defendant) File Number(s): 2007/264557 Publication restriction: None Judgment 1HER HONOUR: These proceedings arise out of a loan secured by a mortgage signed by the defendant, Ms Joanna Kitas, at the request of her brother, Mr Socrates Kitas (known as Scott Kitas). Apart from a small sum in the order of $4000, Ms Kitas received no benefit from the loan and is unable to repay it. The security property is her home. 2Scott Kitas is not a party to the proceedings and was not called by either party as a witness. At the time of the hearing, he was an undischarged bankrupt with over $77 million in debts claimed by unsecured creditors. It was common ground in that circumstance that neither party had any practical remedy against him. 3The lender, Big Kahuna Holdings Pty Ltd, is the trustee of a superannuation fund held for the benefit of Mr Adam Tilley and his wife. The relief sought by Big Kahuna against Joanna Kitas includes an order for possession of the security property and judgment in the sum of $160,000 (the principal sum alleged to have been advanced) together with unpaid interest calculated in accordance with the terms of the mortgage. The mortgage granted to Big Kahuna is a second mortgage. In the event that the first mortgagee does not consent to an order for possession, Big Kahuna also seeks orders for judicial sale of the property. 4The interest rate provided for in the mortgage is 4% per month (48% per annum) with a default rate of 8% per month (96% per annum). However, at the outset of the proceedings Mr Gracie, who appeared for the plaintiff, made an open offer on its behalf to accept payment of the principal amount together with unpaid interest calculated at the rate of 2% per month (24% per annum) plus payment of the plaintiff's costs as agreed or assessed. 5That offer was rejected by Joanna Kitas. After the conclusion of the hearing, the Court was informed that the offer should be regarded by the Court as a concession by Big Kahuna as to the maximum interest claimed in the proceedings (letter dated 4 April 2011 from Whitfields Solicitors to the Court). 6The relief sought in the proceedings is opposed on a number of grounds. As a preliminary point, Ms Kitas does not admit receipt of the sum of $160,000 (save as to an amount of $4,113.50) and contends that the funds advanced were distributed without her authority. She states, further, that the mortgage and other transaction documents were signed by her under pressure from Scott Kitas and otherwise in circumstances warranting relief under the Contracts Review Act 1980, the Consumer Credit Code, the Trade Practices Act 1974 (Cth) or the Fair Trading Act 1987 and under the general law. Prior financial dealings between Scott Kitas and Joanna Kitas 7The security property is a house in Paddington. As at February 2007, when the mortgage was entered into, Joanna Kitas was the sole registered proprietor of the property. It is nonetheless relevant to consider her financial history and prior dealings with Scott Kitas in order to understand the context in which she was prevailed upon to grant the mortgage as security for a loan for his benefit. 8Joanna Kitas is an artist and part-time teachers' aide. Her income from the sale of her art appears to be sporadic. In 2006 her net business income exceeded $40,000 while in 2007 she returned a loss. Her regular income from her work as a teachers' aide is less than $25,000 per annum. Her past tax returns show additional income from rental properties, mostly offset by the expenses of those properties. 9There was a measure of vagueness in Joanna Kitas' evidence as to how she came to own the security property. It appears that, for much of her adult life, Ms Kitas has relied heavily on her mother in the management of her financial affairs, paying little attention herself to the detail of those matters. However, her mother was not called as a witness at the hearing. Although Ms Kitas has had a series of prior dealings in real property (including granting a number of mortgages), the principal evidence as to those dealings came from documents, with limited explanation from Ms Kitas. 10The property over which the loan was secured was bought in 1995 in the names of Joanna and Socrates Kitas as tenants in common in equal shares. According to Joanna Kitas, shortly after she finished high school, one or both of her parents (probably her mother) suggested that she and Scott buy the property. The purchase price was $290,000 (Exhibit 8, page 3). Joanna Kitas states that she contributed $40,000 to the purchase from her savings. Her mother organised a loan to her and Scott to assist in the purchase but the evidence does not reveal the amount of the loan or whether Scott Kitas contributed any part of the purchase price from his own funds. 11The property was rented from the time it was purchased. Joanna Kitas stated that she did not communicate or deal with the real estate agent who managed the tenancies. Her mother dealt with those matters. 12At some point, it appears Scott Kitas decided that he wished to withdraw from that investment. Their mother arranged for Joanna Kitas to buy him out. On 24 December 1998, Scott transferred his one half share in the property to Joanna. The form of transfer records that the consideration for that transaction was one dollar. However, Joanna Kitas stated in her evidence that Scott received $240,000 for his half share. She said (T159.24): Scott had been paid for that. Whether it was through a loan that my mother may have organised from me or whether it was from my mother. He actually received $240,000. My mother would have just put the property on my name to - but, I mean, more than likely it did. It is her money, it's either her money or a loan, borrowed money from a bank, but he received $240,000 market price. It was quite high really, probably higher than he should have received. 13There were no documents in evidence to confirm Ms Kitas' recollection as to that issue. If Scott Kitas did receive $240,000, there was evidently a fraud on the revenue in the registration of the transfer for consideration of one dollar. However, there is no basis to conclude that Joanna Kitas was aware of that fact (if it be the fact). 14Joanna Kitas stated that, after she bought Scott's share of the property, she made payments to her mother from time to time which, so far as she was aware, were used to pay down or reduce a loan from the bank. Joanna Kitas did not know the name of the bank from which money had been borrowed, the amount of the loan, its term or the amount or frequency of repayments to be made. A search of the property discloses that there was no mortgage registered on the title during that time. It appears that her mother lodged a caveat on the title in August 1999, but Joanna Kitas understood that was for her protection (against unscrupulous third parties), not her mother's (T153.30). The caveat apparently recorded an equitable interest held by Joanna Kitas' parents to secure repayment of $20,000. 15The property continued to be rented until about November 2005, when Joanna Kitas moved in. Before moving into the property, she decided to renovate it. At her request, Scott Kitas organised a line of credit for her with Perpetual Trustees Victoria Ltd to pay for the renovations. The limit of the line of credit was $100,000, of which she drew down $46,961.25 (affidavit of Joanna Kitas sworn 24 January 2011 at paragraph 42; Exhibit 8 at page 78). 16The line of credit was secured by a registered first mortgage to Perpetual Trustees. Joanna Kitas acknowledges that she signed that mortgage and that, at the time she did so, she understood that she was responsible for repaying the money she had borrowed and that if she did not repay the money on time, the lender could take possession of and sell the property. 17Joanna Kitas moved into the renovated property in about November 2005. Some time after that, on an evening when Scott Kitas was at her house for dinner, he asked her whether he could borrow money from her using the line of credit. According to Joanna Kitas, he said: I am caught between selling one property and buying another. Can I borrow money from you using the line of credit I organised for you? It is difficult for me to borrow money myself. I will repay you back (sic) in about six months. In the meantime, I will pay the interest on the money I borrow. You do not need to tell mum. I will take you to my solicitor. He will draw up a caveat over my home to protect you just in case anything happens to me. If the property is sold, the effect of the caveat is that you get your money back before anyone else gets their money. 18Joanna Kitas agreed to facilitate that advance. She stated that Scott wanted to borrow up to the limit of the facility immediately. In December 2005, she drew down an amount of $50,000, which she gave to him. In January 2006 that amount was repaid and she made a separate drawdown of $200,000, leaving the account in debit in the order of $246,000. A one-off payment in the sum of $20,000 reduced the borrowings to roughly $228,000. In March 2006, the borrowings were split into two facilities, each secured by the mortgage granted in July 2005. 19Joanna Kitas stated that, when she drew down the amount of $200,000 for Scott, she transferred that amount to an account with St George Bank which she had set up for that purpose. As to the repayment of the $50,000 into the Perpetual loan account, she said (at paragraph 50 of her affidavit sworn 24 January 2011): A reason for the last step was that, as discussed between Scott and me at the time, Scott and I did not want our mother to find out that Scott was borrowing $200,000 from me. I was concerned that this would upset or worry her. I thought that the last step would assist in preventing my mother from finding out that Scott was borrowing $200,000 from me. 20Joanna Kitas stated that Scott paid the interest on the amount she lent him, although she "always had to chase him for payment" (paragraph 51 of the affidavit). 21At the time he approached his sister for a further loan, Scott had not repaid to her the amount of $200,000 borrowed on the original line of credit. As at the middle of February 2007, it remained the position that the property owned by Ms Kitas was mortgaged to Perpetual to secure both facilities. The sum of the debt on the two facilities was approximately $229,000. In re-examination (at T209.42) Ms Kitas said, and I accept, that the smaller facility (then in the order of $28,000) represented her outstanding debt in respect of the renovations. The larger facility (in the order of $201,000) was the debt owed by Scott. Introduction of the loan application to Big Kahuna 22By 22 February 2007, Scott Kitas evidently needed to borrow more. He approached Mr Andrew Kingston, who worked as a consultant to a finance broker, Hunt Pacific Finance Pty Ltd. 23The sole director of Hunt Pacific is Mr Adam Tilley. Mr Tilley is also a director of the plaintiff company, Big Kahuna. When the loan proposal was brought to Mr Tilley by Mr Kingston, Mr Tilley decided (after consulting his wife) that Big Kahuna would make the loan. 24As already noted, Big Kahuna is the trustee of the joint superannuation fund of Mr Tilley and his wife. The evidence did not establish whether it is a regular lender or whether it has written lending guidelines. The loan application 25Mr Kingston said that, when Scott Kitas approached him for the loan, he said: I'm looking for a second mortgage, short-term loan of $160,000 for about a month. The security is a property at Paddington in my sister Joanna's name. I bought it for her and I have been contributing to the mortgage. It is worth in the vicinity of $1 million and has a mortgage of about $200,000. The loan will be paid out in a month as I have arranged to refinance the existing mortgage with a bank. 26Mr Kingston asked Scott Kitas about his sister. Scott Kitas said: She is an artist and an art teacher. I am in the process of refinancing Paddington with the bank, I am well down the track with it but if there is any problem then you can do it for us. 27Mr Kingston frankly acknowledged that he did not receive any information as to Joanna Kitas' income apart from the fact that she was an artist who sold artworks and an art teacher (Ms Kitas noted in her evidence at T208.22 that she is in fact only a teachers' aide, not a teacher). Mr Kingston said that he would not have had any figures as to her income and so would not have been able to provide any figures to Mr Tilley (T95.10). He said that it was possible that an income figure of $50,000 would have been discussed with Mr Tilley but that it would have been purely speculation (T96.2). He could not recall who proposed that the borrower should be Joanna Kitas but stated that it would have been "all about the asset and whose particular name that asset was in" (T97.4). 28The representations made by Scott Kitas to Mr Kingston as to the security property were calculated to create the impression that, although the property was in his sister's name, he nonetheless had some authority or moral right to deal with it. It appears to have been false for Scott Kitas to say that he bought the property for his sister, although I accept that the evidence on that issue is inconclusive. It was certainly not the whole truth to say that he had been contributing to the existing mortgage. I am satisfied that his payments to Perpetual were made on account of his own borrowings. 29There was no written loan application in evidence. It appears that the only documents provided in support of the application were the latest loan statements from Perpetual in respect of the first mortgage and a rates notice. 30The Perpetual statements revealed a number of dishonoured payments as a result of which interest was often charged at the default rate under the facility. However, Mr Kingston stated in his affidavit that he had no reason at the time to believe there had been a default on the Perpetual loan. When pressed on that issue in cross-examination, he readily acknowledged that he may have noticed the defaults. He said, however, that he was not concerned as to whether Joanna Kitas could service the existing loan by herself, as he had been told by Scott Kitas that Scott was contributing to the mortgage (T98-100). 31In any event, Mr Kingston frankly acknowledged that he was primarily considering the application on the strength of the asset (T101.5). He described it as "an asset loan", noting that interest and all fees and expenses were to be pre-paid from the amount advanced (T108.28). He understood that the loan was to be repaid through a refinance of the security property, which Scott Kitas said he was in the process of negotiating. 32On the whole, I accepted Mr Kingston as an honest and fairly reliable witness. The only issue as to which I doubted the frankness of his evidence was the question of his understanding as to the purpose of the loan. 33The letter of approval for the loan, prepared by Mr Kingston, stated: You have informed us that the loan is strictly for working capital. This offer is based on that representation. 34In his affidavit, Mr Kingston did not give evidence of any representation in those terms having been made by either Scott or Joanna Kitas. He acknowledged that he may not have even spoken to Joanna Kitas at all before the loan was made (T105.14). 35Under cross-examination, Mr Kingston said that the money was required urgently "for a family reason". Initially, he did not suggest that Scott Kitas had used those words. He said (at T90.8): What I put there in terms of the second mortgaged money I just deemed it as being for family purposes. 36He said that was an assumption he made. Asked whether "family purposes" could include assisting in the purchase of a residential property, he said (at T90.18): That was never highlighted, the actual nature of the loan was never highlighted, certainly not specific like that, no. 37Curiously, Mr Kingston twice volunteered that the practice of making inquiries of the borrower as to the purpose of the loan depends on "who the funder is" (at T91.3-12). He did not explain the connection between those matters. The only connection I can think of is the statutory regulation of lenders in the provision of consumer credit (that is, credit provided wholly or predominantly for personal, domestic or household purposes). 38When pressed further as to his understanding of the purpose of the loan, Mr Kingston asserted (for the first time) that Scott Kitas had in fact said to him words to the effect that the loan was "for business purposes" as well as being for family reasons (T91.35). 39I found Mr Kingston's evidence on that issue unsatisfactory. I suspect that the purpose of the loan was deliberately not explored and was euphemistically labelled "working capital" to avoid the legal complications of providing consumer credit. However, I accept that would be a finding of some seriousness and it was not put to Mr Kingston. Further, I must accept the possibility that Scott Kitas, who evidently lied to him about other matters, did represent to Mr Kingston that the loan was for business purposes, albeit with no specific information to support that assertion. In the circumstances, I cannot be satisfied that Mr Kingston positively knew that the loan was not for business purposes. However, I am not satisfied that he held a positive belief that it was. 40Mr Tilley could not recall what Mr Kingston told him about the purpose of the loan. He said, "it was meant to be used for business purposes, business or investment purposes" (at T21.21). However, when pressed as to whether Mr Kingston told him that, he said "he told me, or I told him that that's the only way we'd advance the money" (at T21.30). Mr Tilley said, with some defiance (as if it were a point in his favour), that he wasn't concerned where the money went (T51.47). I am satisfied that Mr Tilley neither knew nor cared whether the loan was in fact for business purposes and was concerned only that the loan should be documented in those terms for the protection of Big Kahuna. I acknowledge that that was not put to Mr Tilley but it is a conclusion that necessarily follows from his evidence. True purpose of the loan 41Although Scott Kitas did not give evidence, his true purpose in seeking the loan is nonetheless clearly established in my view. I am satisfied that he required the funds advanced by Big Kahuna to facilitate the purchase of a home at Vaucluse for him and his family. 42Documents tendered by Joanna Kitas (Exhibit 6) show that the Vaucluse property was to be bought by Catalina Nominees Pty Ltd, a company of which Helen Kitas was the sole director. The vendor was Evelyn Aroney. The purchase price in the original contract for sale was $2.8 million with a deposit of $140,000 (5%). The date for completion of the purchase was 21 February 2007, the day before Scott Kitas contacted Mr Kingston. The contract stipulated that time was of the essence. 43On 23 February 2007, a solicitor acting for Catalina Nominees wrote to the solicitor for the vendor seeking "an extension of time for the payment of $140,000, being a further 5% of the purchase price". The solicitor for the vendor responded granting an extension only until 5.00 pm on 23 February 2007 (affidavit of Adam Tilley sworn 29 September 2010 at pages 56 and 57). Failing payment of the further amount by that time, the vendor proposed to compel completion of the sale the following Monday. In the event that the payment was made, the vendor agreed to postpone settlement for a further week. On the strength of those documents, it may be inferred that Catalina Nominees was unable to complete the purchase by 21 February 2007 and that the vendor had sought a further 5% deposit as the price of extending the completion date. 44At the settlement of the loan to Joanna Kitas on 23 February 2007, Big Kahuna paid $140,000 by bank cheque to "J Aroney". The rest of the principal of $160,000 went in the payment of Big Kahuna's fees and legal costs and prepaid interest, with a balance of $4,113.50 paid to Joanna Kitas. 45On the strength of that evidence, I am satisfied on the balance of probabilities that Scott's purpose in seeking the loan was to enable him to pay the further deposit evidently required by the vendor of the Vaucluse property to forestall termination of the contract for failure to complete. For the reasons that follow, however, I cannot be satisfied that either Mr Kingston or Mr Tilley was aware of that specific purpose of the loan. 46Mr Kingston stated in his affidavit, that, prior to February 2007, he had organised or facilitated several other loans for Scott Kitas and his wife, Helen Kitas (also known as Helen Giovanis). One of the transactions Mr Kingston referred to was an application to the National Australia Bank for finance for the purchase of "a home at Vaucluse". He stated that the property was to be bought by Helen Kitas with a loan guaranteed by Scott Kitas. Mr Kingston (acting on behalf of Hunt Pacific) facilitated the application to the National Australia Bank. 47Evidently, Mr Kingston's purpose in referring to that transaction in his affidavit was to lend force to his asserted view (presumably as at the date of the loan application, 22 February 2007) that Scott and Helen Kitas were "financially sound". He said that he had considered all of the financial information provided for the application and had supplied the information to the National Australia Bank. He further stated that the National Australia Bank is, in his experience, "very particular as to due diligence inquiries and to the financial substance of the individuals to whom they are lending". He stated that the fact that the National Australia Bank approved the loan confirmed his view that Scott Kitas "and his family" were of substance (affidavit of Andrew Kingston sworn 10 March 2011 at paragraph 3). 48However, in cross-examination, Mr Kingston said (at T87.32) that he was not sure whether the National Australia Bank loan was approved before or after 22 February 2007. When shown the contract for sale with a completion date of 21 February 2007, he said, "possibly there was another contract that superseded this one" (at T87.22). My initial reaction was to regard that evidence with scepticism, because I thought Mr Kingston was seeking to distance himself from any knowledge of the purchase of the Vaucluse property as at the time the loan to Joanna Kitas was approved. However, it turned out that he was correct. The original contract for sale was rescinded on 10 March 2007 and a new contract entered into on that date (Exhibit 6). 49Upon further reflection, I am satisfied that Mr Kingston was probably not aware of the Vaucluse purchase at the time he considered Scott Kitas' application for a loan to Joanna Kitas. Mr Kingston generally presented as a good witness and I accept that he gave an honest account of his recollection when he was cross-examined. It follows, however, that he was probably wrong (at the time he prepared his affidavit) in thinking that he had relied on his knowledge of the application to the National Australia Bank in assessing Scott Kitas' financial soundness at that time, and that his evidence was unreliable to that extent. So far as the evidence before me reveals, there was no reliable basis for Mr Kingston to accept that Scott Kitas was financially sound at the time he sought the loan to Joanna Kitas. 50Mr Tilley's evidence as to his knowledge of the purchase of the Vaucluse property was vague and unhelpful. He initially suggested that he had no knowledge of the transaction whatsoever, evidently overlooking the fact that he had annexed the solicitor's correspondence concerning the requirement to pay an additional deposit of $140,000 to his own affidavit sworn only months earlier (T76). 51Mr Tilley then asserted that the first time he became aware of the purchase of the Vaucluse property was when he began compiling his evidence (T78.24). When confronted with a letter dated 14 March 2007 sent by him to Catalina Nominees concerning the proposed purchase (Exhibit 5), he was forced to concede that he was aware of it as at that date and that he or Mr Kingston (who answered to him) was acting as finance broker for Catalina (at T79.7). Mr Tilley then volunteered that the transaction brokered by Hunt Pacific "obviously never proceeded". However, other correspondence from the same source as that annexed to Mr Tilley's affidavit suggests that it did (see letter dated 23 March 2007, part of Exhibit 6). 52Notwithstanding Mr Tilley's unsatisfactory evidence on that issue, however, the contemporaneous documents point to the conclusion that Hunt Pacific probably became involved as finance broker for the purchase only when Helen Kitas needed a bridging loan to meet the deferred settlement date under the second contract for sale. There is no clear evidence that Hunt Pacific was aware of the purchase of the Vaucluse property before settlement of the loan to Joanna Kitas. Further, I cannot exclude the possibility that Scott Kitas, who appears to have told other lies to various people at various times, misrepresented or at least failed to disclose the true purpose of the loan to Mr Kingston and Mr Tilley. Approval of the loan and the letter of offer 53Mr Kingston formed the view that the property was valued in excess of $900,000. On that basis, and noting that interest for the proposed term of the loan (one month) was "borrowed up front", he obtained Mr Tilley's approval and prepared a letter of offer for Joanna Kitas to sign. The letter was addressed to Joanna Kitas and sought her signature. 54Three versions of that letter were in evidence before me. One was a facsimile received on 22 February 2007 by Mr Adams, the solicitor retained by Big Kahuna, evidently by way of instructions to act on the loan (Exhibit H). That version is unsigned. The second is an identical copy of that facsimile, apparently signed by Joanna Kitas (annexed at page 20 of the affidavit of Mr Tilley sworn 29 September 2010). Ms Kitas expressed some doubt as to whether the signature was hers. For the reasons explained below, I am satisfied that the letter was among a suite of documents signed by her the following day and that the signature is hers. Each of those versions refers to a loan advance in the sum of $170,000. 55The third version of the approval letter in evidence is an original document bearing an original signature (Exhibit 3). That version of the letter identifies Mr Adams as the solicitor for the lender and has the correct loan amount of $160,000, which prompts me to think that it was prepared after the version faxed to Mr Adams (Exhibit H). Since the letter is addressed to Joanna Kitas, the signature is attributed to her according to the terms of the document. However, it is plainly not hers. No party suggested otherwise. It looks like the signature of Scott Kitas in his own name (compared with a mortgage he signed in 1995, a copy of which is exhibited to Joanna Kitas' affidavit at page 4). It does not appear to have been an attempt to forge the signature of Joanna Kitas. 56The most likely position, in my view, is that Scott Kitas openly signed that document on 22 February 2007, presumably at the request of someone on behalf of Big Kahuna. The fact that Big Kahuna held a copy of the letter of offer signed by Scott Kitas reinforces my impression that Mr Kingston and Mr Tilley dealt with him as if he had authority to act on behalf of Joanna Kitas, even though they took no steps to confirm whether that was so. Execution of the loan documents 57Mr Adams prepared the mortgage and other transaction documents. He could not recall who collected the unexecuted documents from his office. The overwhelming likelihood is that it was Scott Kitas. I am satisfied that is what occurred. 58The first Ms Kitas knew of the proposed loan to her was on 23 February 2007 when Scott called her at work. He asked her if she could leave work as he needed to see her urgently. 59Joanna Kitas says, and I accept, that she and Scott had the following conversation when she arrived at his office: He said, 'I'm in a bad situation. Can I borrow $160,000 from you. I know you are going to freak out about this but unless I get this money I am ruined. I have the kids to think about. I have the papers here for it. You need to sign them now or I am finished.' She said 'why do you need the money?'. He said 'I have been completely fucked over. Everybody has used me and left me to pick up the pieces'. She said 'you have not repaid the first lot of money that you borrowed from me.' He said 'in the next three months you will have all your money back. I only need this money for three months.' She said 'how are you going to repay me?' He said 'look at all the property I own. I will sell some property'. 60According to Joanna Kitas, Scott showed her a letter stating that the loan was repayable in three months. In her affidavit, she said "somehow, I found this reassuring" (paragraph 55). 61All of the versions of the letter of offer from Big Kahuna in evidence before me (affidavit of Adam Tilley sworn 29 September 2010, AT2, page 20 and Exhibit 3) provide for a term of only 30 days. I am nonetheless satisfied that the letter Joanna Kitas remembers being shown was probably the letter of offer (annexed at page 20 of the affidavit of Mr Tilley sworn 29 September 2010). 62Joanna Kitas wanted to call her mother to discuss Scott's request. He discouraged her from doing so, saying: Mum is a worrywart. You don't need to tell her. If you do you will only make her sick with worry. Don't call her. You know what it will do to her if you do. The decision is whether you want to do this now or I am finished. 63She said that Scott then began to cry and was shaking on the floor on his knees pleading with her. She said that Scott is usually "very confident and cocky" and that she was shocked to see him in that state. 64Joanna Kitas agreed to sign the documents Scott wanted her to sign. She says that, at the time she did so, she was worried that someone was threatening Scott; she was concerned for his mental wellbeing, thinking he was suicidal; she was very concerned that his children may suffer in some way and that she believed his promise that he would repay the money. At that time, she thought Scott owned a penthouse in Rose Bay, his office building (called "Othello") and a number of other properties. 65I am satisfied that Joanna Kitas signed the following documents that morning: (a)the letter of offer dated 22 February 2007 (page 20 of Mr Tilley's affidavit sworn 29 September 2010). A facsimile header on that document prompts me to conclude that Mr Adams simply included a copy of the facsimile received by him from Hunt Pacific (Exhibit H) among the unexecuted documents collected by Scott Kitas for execution by Joanna Kitas; (b)an authority to complete blanks (page 23 of Mr Tilley's affidavit); (c)a statement accepting the offer and declaring the credit to be predominantly for business or investment purposes (page 24 of Mr Tilley's affidavit); (d)a caveat noting Big Kahuna's interest as unregistered second mortgagee (pages 25-26 of Mr Tilley's affidavit); (e)the mortgage (pages 27-43 of Mr Tilley's affidavit); (f)a declaration as to independent legal advice (page 44 of Mr Tilley's affidavit). As to that declaration, for the reasons explained below, I am satisfied that the document was signed by Ms Kitas at Scott Kitas' office but not declared in accordance with the Oaths Act 1900 as required on the face of the document; (g)a Consumer Credit Code declaration (page 45 of Mr Tilley's affidavit). I am satisfied that that document was also signed at Scott's office but not declared; (h)a receipt for two bank cheques (which had not in fact been received when the document was signed by Joanna Kitas) (page 48 of Mr Tilley's affidavit). 66As to two of the signatures, Ms Kitas was uncertain whether they were hers. They were the signature on the letter of offer and the signature on the receipt for the two bank cheques. Having regard to the circumstances in which the other documents were signed and the fact that Joanna Kitas frankly acknowledges she signed all of the documents Scott asked her to sign, I am satisfied on the balance of probabilities that the two documents as to which Joanna Kitas doubts the appearance of her signature were also signed by her. 67After signing the documents in Scott's office, Joanna Kitas went home to obtain a copy of her driver's licence and passport. Scott collected her from home and then took her to the office of the solicitor, Mr Adams. Ms Kitas says that Scott then took her to the office of Raine & Horne Real Estate agents in Potts Point and, finally, to an office in Double Bay (presumably the office of Hunt Pacific). Attendance at the office of Big Kahuna's solicitor 68Mr Adams appears to have received his initial instructions by the facsimile to which I have already referred (Exhibit H). There is no suggestion that he gave advice to Joanna Kitas, or that he was asked to at any stage. Although there were some inconsistencies between his evidence and that of Joanna Kitas, their evidence was reasonably consistent as to the critical issues. 69Mr Adams stated that, when Scott and Joanna Kitas brought the signed documents to his office, he said words to the effect: this is inadequate ... you need to have a declaration and you need independent legal advice. Once you've done that, can you let me have copies of the documents ... if this is not done then the monies will not be able to be drawn upon. 70It was Mr Adams' recollection that those words were said in the presence of Joanna Kitas in his reception area, which he described as being a small area. Joanna Kitas denied that a conversation took place in those terms (T136.23). However, she recalled that Mr Adams "advised Scott to make sure he got something else sent off within the hour", but could not recall what it was (affidavit sworn 24 January 2011 at paragraph 77). 71I am satisfied that Mr Adams' recollection as to what he said is correct. As already noted, the loan transaction documents he had provided to Scott Kitas included two documents drawn as declarations required to be made in accordance with the Oaths Act. They were: (a)the Consumer Credit Code declaration that the credit to be provided under the loan secured by the second mortgage was to be applied wholly or predominantly for business or investment purposes; (b)the declaration by the borrower that she had received independent legal advice and that, after receiving that advice, had freely and voluntarily signed the mortgage, caveat (noting the interest of Big Kahuna as second mortgagee) and the Consumer Credit Code declaration. 72For the reasons explained above, I am satisfied that the loan was not in fact to be applied wholly or predominantly for business or investment purposes. It was to be applied towards the purchase of a home at Vaucluse by a company controlled by Scott Kitas' wife. I am further satisfied that Joanna Kitas was not aware of that fact. 73It was undisputed at the hearing that Ms Kitas did not in fact receive independent legal advice in respect of the transaction before she signed the suite of documents presented to her by Scott Kitas. I am satisfied that she did not. 74It is clear enough that Joanna Kitas nonetheless signed the two documents drawn as declarations when they were presented to her for signature by Scott. Versions of those documents, signed but not declared, were produced at the hearing from Mr Adams' file, evidently in the form in which they were brought to him by Scott Kitas (Exhibits F and G; and see T130.22). Having regard to Joanna Kitas' description as to the manner in which she signed documents put before her by her brother earlier that day, I am satisfied that Scott Kitas simply overlooked the requirement to have the two declarations made in accordance with the Oaths Act. I am satisfied that, in the first instance, the documents were signed by Joanna Kitas (along with all of the other documents presented to her) and were not the subject of a declaration in the proper form witnessed by an authorised person such as a Justice of the Peace. 75On the strength of that evidence, I accept Mr Adams' evidence that he sent Scott Kitas away to have the two intended declarations executed properly. However, on the strength of the evidence of Joanna Kitas, I am also satisfied that Mr Adams did not direct his remarks to her. I accept that she either did not hear or did not absorb what he said on that issue. 76Mr Adams acknowledged that, after noting that the declaration as to independent legal advice had not been completed properly, he understood that Joanna Kitas could not have had independent legal advice (at T125.17). Attendance at the office of Raine & Horne 77After leaving Mr Adams' office, Scott Kitas took Joanna Kitas to the office of Raine & Horne Real Estate Agents in Potts Point, presumably in response to Mr Adams' instruction. He introduced her to Ms Rachelle Conway Thau. Joanna Kitas provided Ms Thau with her passport and driver's licence. 78According to Joanna Kitas' version of events, Ms Thau signed the documents as witness to the signatures of Joanna Kitas, even though Joanna Kitas did not sign the documents (again) in the presence of Ms Thau. Joanna Kitas maintained that the only documents she signed were signed in Scott Kitas' office (T185.6-30; T185.50; T190.34). 79At 2.30 pm that afternoon, Mr Tilley sent to Mr Adams a six-page facsimile consisting of a cover sheet; the Consumer Credit Code declaration purportedly duly executed by Ms Kitas in the presence of Ms Thau; the declaration as to independent legal advice also purportedly executed by Ms Kitas in the presence of Ms Thau; photocopies of the driver's licence and passport certified as true copies by Ms Thau; and a receipt for the two cheques signed by Ms Kitas purportedly in the presence of Rebecca O'Connell (Exhibit 4 and affidavit of Adam Tilley sworn 29 September 2010, pages 44-48). 80The possibilities are that Ms Kitas is wrong as to having signed documents only in Scott's office and that she did in fact make the two declarations by signing them in the presence of Ms Thau or that Ms Kitas is right, from which it would follow that Ms Thau signed the two declarations without requiring Ms Kitas to sign them in her presence. 81The existence of the versions of the two documents (signed but not declared) produced from Mr Adams' file and tendered at the hearing (Exhibits F and G) tends to suggest that Ms Kitas is wrong. Having noticed that the documents had not been properly executed, it seems unlikely that Mr Adams would have taken a copy of that version before handing the wrongly executed originals back to Scott Kitas for false witnessing. It seems more likely that he would have provided fresh, un-executed copies at that point, although his evidence was silent on that issue. 82The plaintiff did not call Ms Thau as a witness. It is not unheard of for a Justice of the Peace to sign purportedly as witness to a signature that is already on the document when it is presented for "witnessing". However, noting that Ms Thau evidently took care to obtain certified copies of photograph identification of Joanna Kitas, I am satisfied that Joanna Kitas probably did sign the two declarations again in the presence of Ms Thau. However, I accept that Ms Kitas has no recollection of doing so, which reinforces her contentions as to the absence of independent advice and the haste with which the loan contract was entered into. Collection of the cheques from Hunt Pacific 83Joanna and Scott Kitas next went to the office of Hunt Pacific at Double Bay. She states, and I accept, that she stayed at the car and had a cigarette while Scott went inside. 84The transaction documents relied upon by Big Kahuna include a copy of a receipt bearing a signature attributed to "Joanne (sic) Kitas" purportedly witnessed by Rebecca O'Connell. The document purports to be Joanna Kitas' acknowledgment of receipt of the two bank cheques to which I have already referred. 85As to that document, Joanna Kitas was uncertain whether the signature was hers. For the reasons already stated, I am satisfied on balance that it does bear her signature. However, she further states, and I accept, that if the signature is hers, she did not sign the document in the presence of Rebecca O'Connell. 86Evidence was led on behalf of Big Kahuna from its solicitor, Mr Whitfield, as to his attempts to obtain an affidavit from Rebecca O'Connell and to locate her for the purpose of the hearing. Mr Whitfield very properly gave a full account of the difficulties he encountered seeking to obtain evidence from Ms O'Connell. He began by sending her a copy of the part of Joanna Kitas' affidavit in which she stated that the receipt was not signed by her in the presence of Rebecca O'Connell. Ms O'Connell initially disputed that statement, with some indignance. However, when Mr Whitfield sent her an affidavit drafted in accordance with what she had told him on the telephone, she became more difficult to pin down. 87Eventually, Mr Whitfield received the affidavit back from Ms O'Connell but she had only signed it. She had not sworn it in the presence of a Justice of the Peace or a solicitor, notwithstanding Mr Whitfield's clear instructions in that respect. That in itself is significant. Mr Whitfield made several further polite attempts to have the affidavit properly sworn. In the end, Ms O'Connell responded: I agree that it is my signature that witnessed the document but I cannot remember her there on the day so I do not feel comfortable stating I did in court, I now want nothing to do with this process and can no longer be of assistance. Please stop calling me and emailing me, it is feeling like harassment for something I can't remember 100%. The document you have that I signed is not valid as it is not witnessed so I don't know how you can present that in court? I want nothing further to do with this. 88I should record that nothing Mr Whitfield had said or written to Ms O'Connell could conceivably be construed as amounting to harassment. His conduct was entirely proper and courteous, notwithstanding the recalcitrance with which he met. 89In the result, however, I have no confidence whatsoever that Ms O'Connell placed her signature on the receipt in the presence of Joanna Kitas. Mr Kingston and Mr Tilley acknowledged that they were not present when the cheques were handed over (T104.46; T83.2). Mr Tilley said "the girl (apparently a reference to Ms O'Connell) went down to the bank and organised it all herself". In the absence of any evidence from Scott Kitas, I am left unpersuaded that the bank cheque to J Aroney was handed to Ms Kitas. I am satisfied that she signed the receipt well before any funds were advanced and that it was counter-signed by Ms O'Connell when she handed the two cheques to Scott Kitas in the absence of Joanna Kitas. Authority to advance the funds 90The threshold issue raised in opposition to Big Kahuna's claim is whether, apart from the sum of $4,113.50 received by Joanna Kitas, the loan was made to her at all. 91The evidence relied upon by Big Kahuna on that issue was: (a)an email from Mr Adams to Mr Tilley sent at 10.31 am on 23 February 2007 (Exhibit C). There is no evidence that Mr Adams had spoken to Joanna Kitas by that time and I am satisfied that he had not. The email said: We advise that cheques are to be drawn as follows subject to your approval: (1)$6,400 - interest (TBA) (2)$7,040 - establishment fee (3)$601 - stamp duty (4)$1,765 - Adams & Co Lawyers Total $15,885.50 Balance available: $144,113.50. (b)an email from Mr Adams to Mr Tilley sent at 1.10 pm on 23 February 2007 headed "Kitas - cheque direction" (Exhibit B). The email listed payments in the amounts of the bank cheques referred to below. There is no evidence that Joanna Kitas in fact gave directions in accordance with that email; (c)two receipts for bank cheques purchased at 2.19pm by Big Kahuna, one for J Aroney in the sum of $140,000 and one for J Kitas in the sum of $4,113.50 (Exhibit A). 92In light of Exhibit A, the defendant accepted that Big Kahuna did in fact advance the sum of $144,113.50 (the sum of the two bank cheques). She also accepted that there was prepaid interest in the sum of $6,400. As to the balance of $9,486.50, the defendant submitted that there was no evidence that the plaintiff advanced that money. The items that make up that amount, according to Mr Adams' email (Exhibit C), are the establishment fee, stamp duty and Mr Adams' fees. Whilst it is true that no financial record proved the payment of those amounts, I think the defendant's point on that issue was a technical one without merit. It was not put to either Mr Tilley or Mr Adams that the amounts in question had not been paid. I do not think there is any force in the defendant's submissions on that issue. 93Separately, the defendant submitted that there is no evidence that she gave authority or directions in respect of the cheque of $140,000 to J Aroney. First, it was submitted, correctly in my view, that the email from Mr Adams does not constitute written authority from the defendant. Further, as submitted on behalf of the defendant, there was no evidence that she gave directions orally on that issue. No such evidence was led from Mr Adams and it was not put to Joanna Kitas. As already indicated, I am not satisfied that the bank cheque to J Aroney was handed to Ms Kitas or otherwise distributed in accordance with any express authority from her. 94Neither party referred me to any authority as to the existence of a requirement for express instructions from a borrower regarding the distribution of loan funds or as to the significance of their having been distributed without such express instructions. I do not think it follows, as a matter of law, that without express directions, instructions or authority, the amount of $140,000 is not a loan by the plaintiff to the defendant, as submitted on her behalf. My reason for reaching that conclusion is that, in my view, it is clear in the circumstances that Joanna Kitas gave her implied authority to Big Kahuna to distribute the funds as directed by Scott Kitas. She frankly acknowledged that she was "signing away" on all documents he put before her. Implicitly, she left the mechanics of the transaction to him. 95Curiously (in light of the fact that the vendor of the Vaucluse property was "Evelyn Aroney"), the plaintiff's written submissions make reference to the fact that the sum of $140,000 was paid to "Mr Aroney". So far as I have been able to ascertain, the evidence before me does not reveal that "J Aroney" was a male. However, in the absence of more information, it is inappropriate for me to speculate on that issue. 96In any event, the fact that Joanna Kitas never saw the cheque and had no idea of the purpose of the loan (or even who "J Aroney" was) is in my view an important feature of the transaction for the purpose of determining whether the contract was unjust. That issue is considered below. Contracts Review Act - principles 97The principal point on which the claim was defended was the contention that Joanna Kitas is entitled to relief under the Contracts Review Act. It is appropriate to deal with that point first: cf Spina v Permanent Custodians Ltd [2009] NSWCA 206 at [74] per Young JA; Tobias and Campbell JJA agreeing at [1] and [2] respectively. 98The first task is to make a finding as to whether the contract or a provision of the contract was unjust in the circumstances relating to the contract at the time it was made: s 7 of the Act; Riz v Perpetual Trustees Australia Ltd [2007] NSWSC 1153 at [51] per Brereton J; approved in Kowalczuk v Accom Finance [2008] NSWCA 343 at [87] per Campbell JA, Hodgson and McColl JJA agreeing at [1] and [2] respectively. 99As stated in those authorities, the second task (which only arises if the first is resolved in favour of the defendant) is to determine whether any and if so what relief should be granted, which involves the exercise of a judicial discretion. 100In determining the question posed by s 7 of the Act, the Court is to have regard to the public interest and all of the circumstances of the case, including the matters listed in s 9(2) of the Act. 101Mr Zipser, who appeared for the defendant, reminded me of the helpful analysis of the first task by McHugh JA in West v AGC (Advances) Ltd (1986) 5 NSWLR 610 at 620E-621C (Hope JA agreeing at 618A). Although the relevant passage is long, it warrants full citation: 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 interest of the party seeking to enforce the provision: cf s 992)(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. 102The defendant's submissions cited a lengthy series of considerations, including instances of both procedural and substantive injustice, to support the contention that the contract was unjust in the sense comprehended in those principles. Those matters and the plaintiff's responses are considered below. There was a measure of overlap in the defendant's submissions and I have accordingly not addressed them precisely in the terms raised. Was the contract unjust? 103In entering into the loan agreement and mortgage, Joanna Kitas acquired all of the liability, obtained practically none of the benefit and put her home at risk. The loan was initiated by Scott Kitas entirely for his own personal purposes. To the extent that Joanna Kitas obtained a benefit (in the receipt of the sum of $4,113.50), she neither sought nor expected it. 104Those considerations are plainly relevant to an assessment of the circumstances relating to the contract at the time it was made but do not of themselves necessarily produce the result that the contract was unjust. As explained by McHugh JA in West, the Contracts Review Act regulates contracts, not investments. The likelihood that enforcement of the mortgage would lead to the loss of Joanna Kitas' home is not of itself sufficient to render it unjust: Esanda Finance Corp Ltd v Tong [1997] 41 NSWLR 482 at 491E per Handley JA (Santow A-JA and Simos A-JA agreeing at 493F). Defendant's understanding of the transaction 105The first matter relied upon by the defendant was the fact that she received no independent legal advice in respect of the loan. Mr Zipser invoked the principles stated by Young JA in Spina at [51] to [54] where his Honour reiterated the importance of ensuring advice is obtained in cases where the lender can see the possibility of emotional subservience between the person who will obtain the benefit of the borrowing and the person whose property is being mortgaged. His Honour said (at [51]): Decisions of this and other courts over the last 30 years have shown that transactions where a third party puts up his or her house as guarantor for a child or niece or nephew's business purposes are ones in which the guarantor needs to be seen personally and needs to understand the ramifications of the transaction or else it may be set aside. 106Mr Zipser submitted that this was a case in that category. 107The decision in Spina was concerned with the case of a loan to a mother and son for the benefit of the son and secured by the mother's only asset. Although the mother was a borrower, Young JA described the transaction as being "very similar to a guarantor situation" (at [54]). In my view, that reasoning applies a fortiori in the present case. Joanna Kitas was not a guarantor, but that was purely a function of the fact that Mr Kingston and Mr Tilley were astute to the advantages of nominating her as a borrower. I am satisfied that they did so only because "the asset" was in her name. What was sought in substance by Scott Kitas was a loan to him with Joanna Kitas as guarantor, but the contract offered by Big Kahuna enabled him to escape liability altogether. 108It must be acknowledged that Joanna Kitas was "seen personally" by Mr Adams on behalf of the lender, in the sense that he met her. This is not in the category of cases where the guarantor understands nothing of the primary transaction whatsoever. Further, there was no real contest as to the fact that Joanna Kitas understood that she was signing a mortgage to secure a loan in the sum of $160,000 and that if the loan was not repaid, the lender could take her house. I am satisfied that she did, and that is a significant factor. 109However, I am satisfied that Joanna Kitas did not fully understand the ramifications of the transaction. She did not know the purpose of the loan or the manner in which the funds were to be distributed. She knew nothing of the exorbitant interest rates. She did not know what fee was to be charged by Big Kahuna. She knew that the loan was a short-term loan. However, the fact that she found that "comforting" reveals an absence of understanding of the risk she was taking. She did not know that Scott Kitas was required to make a payment of $140,000 that day to forestall termination of a contract for the purchase of a home at Vaucluse (and, presumably, the loss of the deposit already paid). She was unaware of the representations that had been made by Scott Kitas to Big Kahuna that the loan would be repaid by refinancing the loans secured by the existing mortgage on her home - she thought those borrowings were to be repaid in full by Scott from other resources within the term of the loan. She did not know that part of the amount being borrowed represented up-front payment of interest. An explanation of those matters would undoubtedly have assisted her to assess the wisdom of granting the mortgage. 110Further, although Joanna Kitas personally attended the office of Big Kahuna's solicitor (Mr Adams), he frankly acknowledged that, after he saw the way in which the declaration as to independent legal advice had been executed, he understood that she had not in fact obtained legal advice. Having recognised that difficulty, Mr Adams took the unwise course of again leaving it to Scott Kitas to attend to execution of the declaration. The fact that Scott Kitas had already presented the document to Mr Adams signed but not properly declared by Joanna Kitas ought to have brought home to Mr Adams the high likelihood that Joanna Kitas was acting at the behest of her brother and had not even read the documents she had signed, let alone understood them. He ought to have appreciated the substantial risk when he sent Scott and Joanna Kitas away together that it would happen again. Big Kahuna must be taken to be fixed with his knowledge of those matters. Pure asset lending 111The second matter relied upon by the defendant is the contention that the plaintiff engaged in "asset lending" in the sense discussed by Basten JA in Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41 at [128]. 112The term "pure asset lending" was used by his Honour to describe the practice of lending money "without regard to the ability of the borrower to repay by instalments under the contract, in the knowledge that adequate security is available in the event of default". His Honour expressed the view that: At least where the security is the sole residence of the borrower, there is a public interest in treating such contracts as unjust, at least in circumstances where the borrowers can be said to have demonstrated an inability reasonably to protect their own interests, for the purposes of, for example, s 9(2)(e) or (f). 113The defendant's contention that the loan to her falls within that class requires careful consideration. The case is not on all fours with the circumstances in Khoshaba and raises competing public interests. In particular, it may be noted that Basten JA expressly contained his remarks to circumstances where the borrowers can be said to have demonstrated an inability reasonably to protect their own interests. 114I am satisfied that Big Kahuna advanced the funds without regard to the ability of Joanna Kitas to repay the loan, within the term of one month or at all. It may have been proceeding on the basis that Scott Kitas would be the one to repay the loan but the structure of the loan offered imposed no liability on him. In any event, I am satisfied that Big Kahuna had no real regard to Scott's ability to repay the loan either, taking it on faith on the basis of appearances with no prudent analysis. In my view, the evidence admits of no other conclusion. 115As already noted, Mr Kingston frankly described the loan as an asset loan and was plainly entirely fixed on satisfying himself as to the value of the asset. 116Mr Tilley resisted that characterisation of the loan. He did not accept that, as at 22 February 2007, he had no idea whether or not Joanna Kitas would be able to refinance the combination of the first loan to Perpetual and Big Kahuna's loan at a commercial rate (T40.12). However, when pressed on that issue, he accepted that he had seen no evidence as to her income. He then volunteered the fact that "the client had at least one investment property" (as to which he knew nothing at the time) and asserted that "with the families assistance $10,000 [per year in additional loan repayments] didn't seem difficult to achieve" (T41.14). On that basis he asserted that "we could always see clear exit strategy". I do not accept that Mr Tilley turned his mind to any of those considerations at the time the loan agreement and mortgage were entered into. I reject as disingenuous Mr Tilley's retrospective attempt to characterise the loan as anything other than asset lending. 117As noted in Kowalczuk at [96], however, the question whether "pure asset lending" in the sense discussed by Basten JA in Khoshaba is in the circumstances of any particular case unconscionable or unjust depends on other considerations in addition to the mere fact that the loan was made on the basis that it could adequately be repaid from the security provided. In Khoshaba, the elderly borrowers had been persuaded to use their home as security for an investment which turned out to be a pyramid selling scheme. Their ability to repay the loan was dependent upon their receiving the returns they anticipated from that undertaking. 118The loan in the present case, although not for the benefit of the borrower, was at least for the genuine benefit of a member of her family. The risk of the transaction was that he would be unable (or unwilling) to repay the loan within a month. Big Kahuna could undoubtedly have taken further steps to assess that risk, but so could Joanna Kitas. That is a significant consideration in assessing her ability reasonably to protect her own interests. She knew that Scott Kitas had already failed to repay her earlier loan to him of $200,000 within the term of six months promised, whereas Big Kahuna was given to believe (by Scott Kitas) that, if anything, Joanna Kitas was indebted to Scott Kitas and not the other way around. I accept, as submitted on behalf of the plaintiff, that Joanna Kitas made an assessment that Scott Kitas would repay the loan. 119Conversely, Big Kahuna knew that Scott Kitas had represented he was in the process of refinancing the existing borrowings, whereas Joanna Kitas did not have that information. Big Kahuna could, and in my view should, have sought evidence of that contention including correspondence from the proposed financier. 120Mr Tilley asserted that, if Scott Kitas did not refinance the loan, the alternative "exit strategy" was that he (Mr Tilley) would refinance the loan himself. However, at the time he approved the loan, he had seen absolutely no financial information from Joanna Kitas as to her capacity to service any loan. The only financial documents he had seen were the statements from Perpetual, which revealed a large liability. The regular repayments on those facilities did little more than service interest. Mr Tilley knew Joanna Kitas was not making those repayments herself. He had no knowledge of her assets (apart from the security property), her income or her expenses. In that circumstance, I do not understand how he could responsibly have formed the opinion he professed (that he would be able to refinance the loan) and I do not accept it as being well founded. 121The defendant relies on the fact that Mr Tilley and Mr Kingston had seen the account statements from Perpetual as a further consideration pointing to the unjustness of the contract. Mr Zipser submitted that the statements disclosed multiple dishonoured payments and interest charged at default rates, which would have been a "red light" to a reasonable person in the position of Big Kahuna indicating that Joanna Kitas was having difficulty servicing the existing mortgage. 122I do not place much weight on that consideration. I accept, as explained by both Mr Kingston and Mr Tilley, that it was reasonable for them to take the view that the statements disclosed that the Perpetual borrowings were poorly set up but did not necessarily reveal a poor repayment history such as to cause concern. The fact remains, however, that they had no basis for holding any confidence as to Joanna Kitas' ability either to repay the loan or to refinance it. Mr Tilley's reliance on the prospect of assistance from "the family" hardly supported any such assessment, and served only to highlight his cavalier approach to the whole undertaking. Big Kahuna simply had no reliable information whatsoever as to the financial position of Joanna Kitas. Constructive knowledge of conduct of Scott Kitas 123The next consideration relied upon by the defendant was the conduct of Scott Kitas in procuring Joanna Kitas' execution of the transaction documents. Mr Zipser submitted that Big Kahuna had constructive knowledge of that conduct on the basis of the principle stated by Santow J in Burke v State Bank of NSW (1994) 37 NSWLR 53 at 78 (approved on appeal: State Bank of NSW Ltd v Burke (1997) NSW ConvR 55-814 per Priestley JA; Cole JA and Grove AJA agreeing), where his Honour said: the principle of constructive notice should apply to any situation where the 'surety reposes trust and confidence in the principal debtor in relation to his financial affairs' (Barclays Bank Pty Ltd v O'Brien [1994] 1 AC 180 at 198) so long as the likelihood of that is or should be known to the creditor, in circumstances where the transaction of guarantee was not to the guarantor's advantage... 124Mr Zipser submitted that the plaintiff had effectively conceded that it had constructive notice of Scott Kitas' wrongdoing (defendant's closing written submissions at paragraphs 33 and 55). However, that submission was clearly based on a misreading of the plaintiff's submissions. At the hearing, Mr Gracie strongly resisted the proposition that, having left it to Scott Kitas to have the documents executed, Big Kahuna was fixed with his knowledge (T238.1-240.21). It is accordingly necessary to consider whether the test in Burke is satisfied. 125I am satisfied that Joanna Kitas placed trust and confidence in Scott Kitas in relation to her financial affairs. She believed that he was "a successful property developer" (her affidavit at paragraph 10). She had asked him to organise the line of credit for her renovations, and had lent him $200,000 through that facility, trusting that he would repay it. She trusted that he would repay the present loan, and would not have agreed to it otherwise (T170.34). 126It is more difficult to determine whether the likelihood of such trust and confidence was or should have been known to Big Kahuna. That issue is complicated by the fact that Big Kahuna knew so little about Joanna Kitas due to the haste with which the transaction was completed. 127On balance, I have concluded that Big Kahuna should have been aware of the likelihood that Joanna Kitas placed such trust and confidence in Scott Kitas. From his initial conversation with Scott Kitas, Mr Kingston must have appreciated that Scott evidently regarded Joanna Kitas' property as an asset that was available to him for his own purposes. He knew that Joanna Kitas was Scott's sister. He was told that Scott had bought the property for Joanna Kitas and had been contributing to the mortgage, indicating a measure of financial reliance. He was also told that Scott Kitas was arranging the refinancing of the property, suggesting a measure of control of her affairs. In those circumstances, and knowing that the loan was for Scott's benefit, Mr Kingston ought to have appreciated the substantial risk of wrongdoing if execution of the documents was entrusted to Scott Kitas. 128Mr Gracie submitted, however, that any difficulty was cured by the direction given by Mr Adams in the presence of Joanna Kitas "to go away and get legal advice" (T240.7). I do not accept that submission. In the first instance, as already recorded, I am not satisfied that Mr Adams directed that remark to Joanna Kitas. Mr Adams was uncertain as to whether he had (T127.1-127.17). Based on my assessment of both Mr Adams and Joanna Kitas, I do not have any difficulty whatsoever accepting her evidence that he spoke principally to Scott Kitas. 129I am not satisfied that Big Kahuna took reasonable steps such as to avoid being fixed with constructive knowledge: cf Burke at 78C. The result is that Big Kahuna must be taken to be fixed with knowledge of the circumstances in which the transaction documents were executed. Absence of Scott Kitas as a witness 130That conclusion, however, raises a further complexity. It was submitted on behalf of Big Kahuna that Joanna Kitas' evidence as to the circumstances in which she was prevailed upon to sign the transaction documents should be viewed with circumspection, since she did not call Scott Kitas as a witness to corroborate her account. Mr Gracie submitted that the Court should draw an inference that his evidence would not have assisted her, in accordance with the principles stated in Jones v Dunkell. 131Mr Zipser submitted that Scott Kitas cannot be regarded as being in the defendant's camp in light of their poor relationship following the events giving rise to these proceedings. It was further submitted that the way in which Scott Kitas treated Joanna Kitas on 23 February 2007 explained her decision not to call him. Plainly, there is a measure of circularity in that reasoning. Nonetheless, the fact remains that Scott Kitas does appear to have betrayed the trust of both Joanna Kitas and Big Kahuna. I am not persuaded that any adverse inference should be drawn against either party as a result of their not calling him as a witness. 132It does not follow that I accept all of the evidence of Joanna Kitas unequivocally. I have assessed her evidence carefully having regard to the risk that her recollection as to what she felt when she signed the documents may be coloured by hindsight. 133I accept that Big Kahuna had constructive knowledge of the following matters relied upon by the defendant. First, that Scott Kitas put some emotional pressure on Joanna Kitas to sign the documents. I broadly accept the evidence of Joanna Kitas on that issue, but I acknowledge the likelihood that the degree of pressure has become magnified in her mind as she has reflected upon the decision she made. In particular, I accept that Scott Kitas told her that if she didn't sign the documents he was "finished" and that he became upset at that time. It follows that Big Kahuna was aware that Scott Kitas put some emotional pressure on Joanna Kitas to sign the documents. 134Secondly, Scott Kitas knew that Joanna Kitas signed the documents without reading them. Thirdly, he knew that she signed the documents without obtaining independent legal advice. 135The defendant relied on several other matters of constructive knowledge which, in my view, are of no weight against Big Kahuna (one of which I should own up was suggested by me at T241.14). It was submitted that Scott Kitas deliberately refused to tell Joanna Kitas the true purpose of the loan (T237). However, I see no reason why she could not have insisted on that information, if it was important to her. 136It was further submitted that he dissuaded her from ringing her mother to discuss his request. I have difficulty accepting that Ms Kitas took any great dissuading in that respect. She had previously lent him money and had chosen to keep it from her mother (see her affidavit at paragraph 50). 137Finally, it was submitted that Scott Kitas had no reasonable basis for thinking he could repay the money. There is simply no reliable evidence from which I can draw any conclusion one way or the other on that question. I accept that his subsequent bankruptcy tends to suggest the submission is right, but that is not an adequate basis for the conclusion. Haste with which the transaction was concluded 138A further factor relied upon in support of a finding that the contract was unjust is the plaintiff's awareness that the contract proceeded in unusually great haste because Scott Kitas required the funds urgently. Mr Zipser relied upon the decision of the Court of Appeal in Lopwell Pty Ltd v Clarke [2009] NSWCA 165 at [57] where the Court said: The haste involved in the transaction, and in particular in the obtaining of guarantees and mortgages from the Clarkes, was a factor which would have pointed in the mind of a reasonable person in the position of Mr Sharkey against the likelihood of the Clarks having had the opportunity to give proper consideration to, and having obtained proper advice in relation to, their entry into the transaction. 139Mr Adams acknowledged that, as at the time Scott and Joanna Kitas came to his office (which was late morning at the very earliest, and more probably after midday) he understood that she had not obtained independent legal advice. Two cheques were handed over within hours of that meeting. I consider that to be a significant factor. Interest rates 140Finally, the defendant relies upon the high interest rates under the contract. In my view, in the face of the complete absence of any evidence to support the expectation that Scott Kitas would be in a position to repay the loan within the term of one month, the default interest rate of 96% per annum was truly extortionate. As already noted, after the conclusion of the proceedings Big Kahuna conceded its claim to the extent of indicating that it would accept an interest rate of 24% per annum. Whilst that concession was commendable and reflects a responsible approach by the plaintiff to its obligations under s 56 of the Civil Liability Act 2002, it remains the fact that the interest rates under the mortgage were excessive, which is relevant to an assessment of the justness of the contract in the circumstances in which it was entered into. I am satisfied that, under some pressure from her brother and in the absence of independent advice, Joanna Kitas had no real opportunity to consider the ramifications of entering the contract at those rates. Countervailing factors 141A critical factor relied upon by the plaintiff is the fact that the defendant's position was brought about because she signed the transaction documents. In particular, she signed the mortgage knowing that, if the loan of $160,000 sought by her brother was not repaid, her home could be sold. 142It is a well-recognised policy of the law that contracts should be honoured: Baltic Shipping Co v Dillon [1991] 22 NSWLR 1 at 9 per Gleeson CJ. As submitted on behalf of the plaintiff, the starting point is that, even though a person has not read or understood the document, to sign it demonstrates a willingness to take the chance of being bound by its contents: No Fuss Finance Pty Ltd v Miller [2006] NSWSC 630 at [66] per Barrett J. There is plainly a public interest in upholding those principles. 143Separately, the plaintiff submitted that Joanna Kitas should not be regarded as a person under any special disability. I accept that submission. She is not too old or too young to understand a contract of the kind she entered into. She is not infirm by reason of any physical or mental disability. She is well-educated and evidently reasonably intelligent. Conclusion as to the Contracts Review Act 144I have concluded that the contract was unjust in the circumstances. The principal considerations which have led me to that conclusion are the fact that Joanna Kitas was rushed into signing the documents under the compelling influence of her trust and respect for her elder brother and the manipulative pressure he placed her under; the fact that those matters contributed to her not obtaining independent advice in respect of the contract; the short term of the contract; the exorbitant interest rates of which she was unaware and the plaintiff's knowledge of all of those circumstances. I have, of course, considered all of the factors discussed above but those are the principal considerations. Appropriate relief 145The next task is to consider whether it is just, for the purpose of avoiding as far as practicable an unjust consequence or result, to grant relief of the kind specified in s 7(1) of the Contracts Review Act. 146With some reluctance, I have concluded that it would not be just to relieve Joanna Kitas of the principal debt. Although she was rushed and pressured into signing the documents, ultimately it must be accepted that she made a choice, not labouring under any disability in the making of choices, to grant the mortgage to secure a debt in the sum of $160,000 for the benefit of her brother. 147However, I consider it just to vary the interest rates under the loan agreement. As already noted, Big Kahuna openly offered to accept unpaid interest calculated at the rate of 2% per month. I do not think that is enough to avoid an unjust result in the circumstances. 148Mr Tilley insisted that he could, at any point, have refinanced the loan at commercial rates, which he identified as being in the order of 7% (T41). A frustration for the plaintiff is its contention that the defendant has declined several offers to refinance of the loan at such rates. However, in light of the parties' competing positions in the proceedings, and her professed inability to service the loan in any event, it is difficult to see how she could have constructively engaged on that issue before the determination of these proceedings. I do not think that is a factor that militates against my granting the relief I consider to be otherwise appropriate. 149I consider it just to vary the loan agreement so as to provide for interest at the commercial rate nominated by Mr Tilley. The appropriate order, in my view, is to vary the interest rate under the loan agreement to 7% from 25 March 2007, the date on which the loan was due to be repaid. I have considered whether the rate should be varied from an earlier point in time. However, since Ms Kitas was aware that the amount to be borrowed was $160,000, and aware of the consequences of not repaying that sum, I have concluded that she should not be relieved of any part of that principal sum, even though it includes an amount representing prepaid interest at the rate that I propose otherwise to vary. 150In light of the conclusion I have reached in respect of the claim for relief under the Contracts Review Act, I do not consider it necessary to determine the other grounds for relief relied upon by the defendant. The foregoing analysis should reveal that no better result could have been obtained by the defendant under any of the alternative defences. I did not understand her to contend otherwise. 151It is, however, necessary to deal with one discrete point. The defendant contended that, if the Consumer Credit Code applies to the loan, the plaintiff is not permitted to continue enforcement proceedings, since notice was not given in accordance with s 80 of the Code (paragraphs 22 and 23 of the Amended Defence). Mr Zipser very properly noted competing authority on that issue in the decisions of Permanent Mortgages Pty Ltd v Cook [2006] NSWSC 1104 at [70] per Patten AJ and Bank of Queensland v Dutta [2010] NSWSC 574 at [132]-[160]. 152I would respectfully prefer and adopt the analysis of Davies J on that issue. His Honour said (at [154]): Where there is a genuine issue in proceedings about whether a loan has been provided wholly or predominantly for personal, domestic or household purposes, and that issue has been determined against the credit provider in such a way that the Code is held to apply to a loan, s 80 does not have the result that a failure by the credit provider to have served a notice prior to the commencement of the proceedings will result in the proceedings being dismissed. Two policy reasons point against that result. First, if the only way the credit provider could avoid such an outcome was to serve a s 80 notice just in case, the effect of the service of the notice was likely to result in an admission by the credit provider that the Code applied although that was an issue in the proceedings. Secondly, and as I noted earlier, it would be in no party's interest for it to be determined after a full hearing that the borrower had made out no defences under the Code but that the proceedings had to be dismissed simply so that notice could be served and then new proceedings commenced to decide the same issues. The position might be different if at an early stage an application was made to strike out the proceedings for failure to serve a s 80 notice. However, even in that case if the real issue was whether or not the Code applied that would scarcely be an appropriate use of the summary dismissal provisions of the Rules. 153The same reasoning applies in the present case. Orders 154It will be necessary for the parties to bring in short minutes of order to reflect the terms of this judgment. As to the defence, the order I propose is that the interest rate identified in the loan agreement at page 20 of the affidavit of Mr Tilley sworn 29 September 2010 be varied so as to provide for payment of interest at 7% per annum from 25 March 2007. It will be necessary for the plaintiff to recalculate on that premise the amount in which judgment is sought. 155I will hear the parties as to costs and as to the appropriate orders to be made as to possession of the property. ********** 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: 08 June 2012