Court of Appeal Supreme Court New South Wales Medium Neutral Citation: Bendigo and Adelaide Bank Ltd v Karamihos [2014] NSWCA 17 Hearing dates: 31 October 2013 Decision date: 14 February 2014 Before: Macfarlan JA at [1]; Ward JA at [72]; Sackville AJA at [73] Decision: (1) Direct that within seven days of today's date, the appellant Bank file and serve calculations showing the amount of the judgment, inclusive of interest, to which it is entitled in accordance with the Court's reasons for judgment. (2) Direct that any response by Mr and Mrs Karamihos be filed and served within a further seven days. (3) Direct that any reply be filed within a further seven days. [Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.] Catchwords: CONTRACTS - Contracts Review Act s 7 - whether loan contract and mortgage unjust - whether borrowers had means to repay loan - relevance of lender's failure to make enquiries concerning an asset of the borrowers to be used to repay loan - whether prior loan history warranted conclusion that borrowers lacked financial acumen - whether age of borrowers indicated that unable to protect own interests - significance of absence of independent legal or financial advice - factors to be considered in relation to relief Legislation Cited: Consumer Credit (New South Wales) Act 1995 Consumer Credit (Queensland) Act 1994 Contracts Review Act 1980 National Consumer Credit Protection Act 2009 (Cth) Suitors' Fund Act 1951 Cases Cited: Beneficial Finance Corporation Ltd v Karavas (1991) 23 NSWLR 256 House v The King [1936] HCA 40; 55 CLR 499 Knezevic v Perpetual Trustees Victoria Ltd [2013] NSWCA 199 Maguire v Makaronis [1997] HCA 23; 188 CLR 449 Perpetual Trustee Company Ltd v Khoshaba [2006] NSWCA 41 Provident Capital Ltd v Papa [2013] NSWCA 36 Warren v Coombes [1979] HCA 9; 142 CLR 531 Category: Principal judgment Parties: Bendigo and Adelaide Bank Ltd (Appellant) Steve Karamihos (First Respondent) Aristea Karamihos (Second Respondent) Representation: Counsel: J Stoljar SC/R I Bellamy (Appellant) V B Hughston SC/J F Merkel (Respondents) Solicitors: Gadens (Appellant) Margiotta (Respondents) File Number(s): CA 2013/154093 Decision under appeal Jurisdiction: 9111 Citation: Steve Karamihos and Aristea Karamihos v Bendigo and Adelaide Bank Limited; Bendigo and Adelaide Bank Limited v Steve Karamihos and Aristea Karamihos [2013] NSWSC 172 Date of Decision: 2013-03-08 00:00:00 Before: Pembroke J File Number(s): SC 2012/00334829; 2009/14393 HEADNOTE [This Headnote is not to be read as part of the judgment] In 2007 Mr and Mrs Karamihos, the respondents, borrowed $1.2 million from the appellant bank ("the Bank"), secured over their home in Maroubra. They used $957,024.07 of the funds to discharge an earlier mortgage held by the Bank of Queensland, gave $100,000 to their daughter and applied the balance to their restaurant/take-away food business in Marrickville. Following their default in payment of monthly instalments, the Bank commenced the present proceedings for possession of the Karamihoses' home and judgment for the outstanding loan balance. They contended in separate proceedings that the loan contract and mortgage over their home were unjust for the purposes of the National Credit Code ("the Code") and the Contracts Review Act 1980. By judgment of 8 March 2013, the primary judge found that the loan contract and mortgage were unjust within the meaning of both the Code and the Contracts Review Act, and relieved the Karamihoses from their liabilities to the Bank, other than in respect of that portion of the loan that was used to discharge the earlier mortgage. Held (allowing the appeal, per Macfarlan JA; Ward JA and Sackville AJA agreeing): (1) The Contracts Review Act was applicable to the present loan contract and mortgage. It was unnecessary to decide whether the Code was applicable as, if applicable, it would not have provided any additional assistance to the Karamihoses' case. ([32]) (2) The Karamihoses failed to establish that the loan contract and mortgage were unjust. In particular, they did not prove that Mr Karamihos' estimate of the value of their Marrickville property, whose sale constituted their proposed means of repaying the loan when necessary, was erroneous. Accordingly, the Bank's failure to check the accuracy of that estimate could not bear on the justness or otherwise of the loan contract or mortgage as it was not shown that such an inquiry would have revealed anything of relevance. ([52]-[53]) (3) The evidence did not justify a conclusion that the Karamihoses lacked financial acumen. The circumstances surrounding their prior loan history were unexplained in the evidence, and without evidence of these circumstances the transactions were as consistent with financial maturity as the converse. ([54]-[55]) (4) The absence of independent legal or financial advice was not of significance. The Karamihoses were aware of all material legal aspects of the transaction, and it was not demonstrated that financial advice would have recommended against the borrowing. ([62]) (5) The fact that the Karamihoses were in their early 70s did not in itself indicate an inability to protect their own interests. ([63]) (6) There were no other factors that warranted the conclusion that the loan contract and mortgage were unjust. ([59]-[61], [65]) (7) When determining the relief to be granted, the primary judge should have considered whether, in light of the Karamihoses' failure to follow their exit strategy, any unjustness of the loan contract or mortgage did not contribute to their losses and whether the Karamihoses received benefits from the loan beyond the discharge of their existing mortgage. ([68]-[69]) Judgment 1MACFARLAN JA: In 2007 the respondents, Mr and Mrs Karamihos, who were then in their early 70s, had been operating through their company a restaurant/take-away food business for about 27 years at premises they owned in Marrickville. On 1 May 2007 a finance broker, Mr George Koovousis of South Western Financial Services, submitted an application on their behalf to the appellant bank ("the Bank") to borrow $1.2 million to refinance an existing loan from the Bank of Queensland secured over their home at Maroubra and to "raise additional funds for investment purposes". The loan was approved, resulting in $957,024.07 being paid to the Bank of Queensland to discharge its mortgage and the balance (net of expenses) of $237,377.68 to Mr and Mrs Karamihos. They made a gift to their daughter of $100,000 out of the latter amount and applied the remainder to their business. 2Following their default in payment of monthly instalments, the Bank commenced proceedings for possession of the Maroubra home and judgment for the outstanding loan balance. The Karamihoses responded by contending in separate proceedings that the Loan Contract and Mortgage over their home were unjust for the purposes of the National Credit Code ("the Code") and the Contracts Review Act 1980, and by claiming appropriate relief. 3Both proceedings were heard in the Equity Division of the Court by Pembroke J. By judgment of 8 March 2013, his Honour found that the Loan Contract and Mortgage were unjust within the meaning of both the Code and the Contracts Review Act and relieved the Karamihoses from their liabilities to the Bank, other than in respect of that portion of the Bank loan that was used to discharge the earlier mortgage held by the Bank of Queensland. 4The Bank appealed against that decision. For the reasons I give below, that appeal should be allowed and appropriate orders made in favour of the Bank. THE FACTUAL CIRCUMSTANCES 5Mr and Mrs Karamihos were born in Greece in 1935 and 1934 respectively. After limited school education, they came to Australia in about 1955. After their arrival, the Karamihoses worked in factories until they were able to acquire their own businesses. They commenced to operate their business in Marrickville in about 1980. 6In her affidavit sworn in 2012, their daughter said that her father is able to make himself understood in, and can read, English, but not very well, whilst her mother had very limited English, being unable to read it. 7The full extent of their borrowing and mortgaging history was not revealed by the evidence but it did show that between 1992 and 2004 they had executed some nine mortgages over their Maroubra home in favour of six different well-known institutional lenders for a variety of amounts. In January 2006 they refinanced existing debt by borrowing $966,000 from the Bank of Queensland, secured over their Maroubra home. The borrowing was for a period of 30 years with the first three years being at a fixed interest rate of 6.59 per cent and a variable rate (then 7.32 per cent) thereafter. The monthly payments were $6,163.07 for three years and $6,606.91 thereafter. 8In April 2007 they engaged Mr Koovousis as their finance broker and met with him in the company of their daughter. They had not had a previous relationship with Mr Koovousis. 9On 1 May 2007 Mr Koovousis submitted an application on their behalf to Mortgageport, as mortgage manager for the Bank, to borrow $1.2 million. The covering letter included the following: "The above clients wish to borrow $1.2 mil @ 80% LVR [loan to value of security ratio] to refinance their existing home loan and raise additional funds for investment purposes. Both clients have been running their successful business for the past 27 years. They currently own the premise[s] their business is trading from and are receiving rent from their company as well as rent from the residential unit upstairs. For serviceability, we have used the rental income from their personal tax returns. In view of clients' age, clients will have the option to sell their commercial property at Marrickville and the sale proceeds will be sufficient to clear all debts". 10There were indications in the evidence of both Mr Karamihos and his daughter that the amount of the loan applied for was more than the Karamihoses had initially contemplated borrowing but none of the parties to the proceedings attached any significance to this evidence. 11In his affidavit Mr Karamihos said that the reason "for increasing our home mortgage was to put money into our café business. After the loan was arranged we also gave $100,000 to our daughter Anne to assist her". Mrs Karamihos said that she was reliant upon her husband in relation to business and financial matters. She did not give evidence about the amount of the loan or application of its proceeds. The Karamihoses' daughter said that her father told Mr Koovousis that he wanted "to increase his home loan to raise working capital for his business" and that "[a]fter the home loan was refinanced my parents gave me the $100,000.00 out of the refinance". Mr Koovousis said that the Karamihoses told him they wanted to use the proceeds of the loan to refinance their existing loan with the Bank of Queensland and to invest in another business with their daughter and son-in-law. 12The loan application described the Karamihoses' principal assets as the Maroubra home and Marrickville business premises (estimated to have values of $1.7 million and $2.0 million respectively), and the Marrickville business itself (estimated to have a value of $500,000). Their liabilities were described as $954,097 owing to the Bank of Queensland and $750,000 owing to Australian Unity. The latter was secured over the Marrickville property and was in fact a loan from Perpetual Nominees Limited, for whom Australian Unity was an agent. Mr Koovousis indicated in evidence that the estimate of the Marrickville property's value was that of Mr Karamihos. Only the Maroubra property was offered as security for the loan sought from the Bank. 13Mr Mark Schrapel, a Senior Credit Officer with the Bank, gave evidence that he assessed the Karamihoses' application by reference to the following documents: "(a) Mr and Mrs Karamihos' loan application signed on 24 April 2007, to ascertain Mr and Mrs Karamihos' age and calculate the value of Mr and Mrs Karamihos' assets and liabilities; (b) Mr and Mrs Karamihos' individual tax returns for tax years ending 2005 and 2006, to calculate Mr and Mrs Karamihos' primary and secondary income; (c) Karamakis Pty Ltd's company tax returns for tax years ending 2005 and 2006, to calculate additional primary income earned by Mr and Mrs Karamihos as sole directors of Karamakis Pty Ltd; (d) The financial statements for Karamakis Pty Ltd for the year ending 2006; (e) Valuation of the security property, to calculate the application's loan to value ratio". 14The Karamihoses owned the shares in Karamakis Pty Ltd. It operated the business at Marrickville. For the financial years ended 30 June 2005 and 2006, it earned a net profit before tax of $78,703 and $80,760 respectively, after payment to the Karamihoses in each year of $70,000 for rent of the business premises, salaries of about $150,000 and superannuation of about $15,000. In addition, the Karamihoses received about $15,000 per annum from other tenants for the rent of the upper level of the Marrickville property. Their expenses, including mortgage interest, in relation to the Marrickville property were about $50,000 per annum. The Bank obtained a valuation of the Maroubra home but did not obtain one of the Marrickville property. In cross-examination, Mr Schrapel said it was not the Bank's practice to obtain a valuation of a property that was not to be taken as security, but that it was usual for it to attempt to identify comparable sales from the internet to give an indication of value. He could not however recall whether he did that in the present case. 15Mr Schrapel also obtained a Credit Report. This showed that there had been no recorded payment defaults by the Karamihoses. 16The Bank Credit Policy relevant to the assessment of the Karamihoses' application required borrowers to demonstrate an ability to repay principal and to pay interest and fees. It also stated: "There ... is no restriction on the maximum age of applicants however the applicant must be able to demonstrate that they are able to repay the loan within agreed contractual arrangement. An applicant's age must be considered to ensure they can repay the total debt within the agreed term. Therefore proof of future incomes, such as superannuation or income from family investments must be substantiated at the time of application, for those applicants who will rely on this income to repay the loan once they retire from existing employment. Residential loan applications where applicants are over 60 years of age the application must be approved by the [Delegated Lending Authority] level (or higher) as specified in table below (sic)". 17In his affidavit, Mr Schrapel said: "22. I overrode Mr and Mrs Karamihos' age restriction because Mr and Mrs Karamihos' total assets ... were $2,125,903.00 more than their total liabilities. This means that in the event that Mr and Mrs Karamihos retired before the end of the 25 year term, then Mr and Mrs Karamihos could have sold their commercial property located [in] Marrickville to clear all debts owing to the Bank, if their application was approved". 18Mr Schrapel was an appropriate "Delegated Lending Authority" as referred to in the Credit Policy. He said in evidence that he concluded that the Karamihoses' commitments, after taking into account repayments at the Bank's benchmark rate, were exceeded by their after tax income by an amount of $22,492 per annum. 19Following formal approval of the loan on 21 May 2007, the Karamihoses signed a Loan Contract, a Mortgage, and other documents including one entitled "Representations By Mortgagor(s)". The Loan Contract stipulated a loan term of 25 years with interest only payments for the first 10 years. Interest was to be at a variable rate which was currently 7.56 per cent. On this basis, monthly interest payments were to be $7,560. The purpose of the loan was described as "REFIN BANK OR OTHER" and "INVESTMENT PURCHASE". The Representations by Mortgagors document stated that "We have been advised to take independent legal advice before signing the mortgage and we have had an opportunity to do so". 20The Karamihoses defaulted in payment of the interest due on 31 December 2008 and further defaults occurred in the first half of 2009, resulting in the Bank serving notices requiring rectification. According to the Amended Statement of Claim (the allegations in which were admitted in the Defence), the Karamihoses sought and obtained on 10 August 2009 a three week extension of the time for compliance with the notices, but they failed to comply. The Bank took possession of the Maroubra property on 9 February 2011 but returned it to the Karamihoses pursuant to an agreement made on 8 April 2011. The Karamihoses thereafter defaulted under that further agreement. 21Mr Karamihos' evidence was that in about April 2010 he and Mrs Karamihos "considered retiring" from their Marrickville business, apparently due to Mrs Karamihos' ill-health, and had their daughter approach a real estate agent to find a suitable tenant for it. A tenant, who was "highly recommended" by the agent, entered into a lease of the ground floor of the premises at an annual rental of $83,167.86 payable by monthly instalments of $6,930.65. At that time there were tenants of the upper storey of the premises who were paying $1,920 per month. 22After two initial payments of a reduced monthly rent, the ground floor tenant defaulted. 23In his affidavit evidence, Mr Karamihos complained that his then solicitor delayed in obtaining the consent to the lease of Perpetual Nominees Ltd, the mortgagee of the Marrickville property, and did not inform the Karamihoses that the mortgagee refused to consent because their loan was in default. Mr Karamihos also complained that Perpetual's refusal of consent was unreasonable and that it led to the tenant unlawfully removing all fixtures and fittings from the premises, with the result that the premises were unable to be leased to another tenant. He also asserted that Perpetual's actions rendered the Karamihoses unable to refinance, because they had no rental stream, and that the property was sold by Perpetual at an undervalue due to the absence of a tenant. 24His affidavit described the following claims that he and Mrs Karamihos then had in respect of their losses: (1)Against the mortgagee for unreasonably refusing to consent to the lease; (2)Against an insurer for indemnity for loss resulting from the tenant's unlawful removal of fixtures and fittings; (3)Against their former solicitor for, at least, failing to obtain any personal guarantees from the directors of the tenant (which was a "$2 company"); and (4)Against the former tenant, presumably in respect of removal of the fixtures and fittings and perhaps for defaulting under the lease. 25Mr Karamihos' description of events is consistent with that contained in a letter dated 23 January 2012 written by the Karamihoses' present solicitors to the Bank's former solicitors: "We are informed that [the Bank] was advised that our clients are presently about 76 years of age. In or about April 2010, their family suggested that they take it easy. Tenants were found for their Take Away Business and were let into possession on the recommendation of a Real Estate Agent. After about two (2) months they failed to pay the rent and our clients' income suffered. A few months later in about September 2010 all fittings and fixtures (valued at over $300,000.00) were removed from our clients' premises". THE LEGISLATIVE PROVISIONS 26Section 5 of the Consumer Credit (New South Wales) Act 1995 (now repealed) rendered the Consumer Credit Code as set out in the Appendix to the Consumer Credit (Queensland) Act 1994 applicable in New South Wales. This Code only applied to contracts for the provision of credit which were "wholly or predominantly for personal, domestic or household purposes", with investment by the debtor expressly stated not to be such a purpose (s 6). The "predominant purpose" test was stated to be satisfied if the purpose was one "for which more than half of the credit [was] intended to be used". It was common ground both at first instance and on appeal that, subject to the issue referred to in [32] and [40], below, the National Consumer Credit Protection Act 2009 (Cth) rendered the National Credit Code ("the Code") applicable to the subject transaction. The Code is relevantly in the same terms as the earlier Consumer Credit Code. 27Section 76(1) of the Code empowers the court to re-open a transaction if, inter alia, it is satisfied that a contract or mortgage which gave rise to the transaction was "unjust", the word "unjust" being stated to include "unconscionable, harsh or oppressive". Section 76(2) identifies a number of matters to which regard is to be had. These include the reasonable ability of a debtor to protect his or her interests because of "age or physical or mental condition". Regard is not to be had to "any injustice arising from circumstances that were not reasonably foreseeable" when the contract was entered into (s 76(4)). 28Under the Contracts Review Act 1980, the Court may grant relief to a party where the Court finds the contract to have been unjust in the circumstances relating to it at the time it was made (s 7(1)). "Unjust" includes "unconscionable, harsh or oppressive" (s 4). Matters to be considered by the Court include that identified above in relation to the Code and, likewise, the Court is not to have regard to any injustice arising from circumstances that were not reasonably foreseeable (s 9(4)). The Act does not apply to contracts entered into "in the course of or for the purpose of a trade, business or profession carried on by the person or proposed to be carried on by the person", with some presently irrelevant exceptions (s 6(2)). 29As observed by Spigelman CJ in Perpetual Trustee Company Ltd v Khoshaba [2006] NSWCA 41: "34 The structure of s 7(1) [of the Contracts Review Act] involves a two-stage inquiry: first, was the contract unjust; secondly what, if any, orders should be made. The second stage is clearly discretionary. The first stage may more accurately be described as a judgment. ... 40 Where, as here, the first statutory step is clearly a finding of fact, albeit one involving a broadly based value judgment, it may be that the Court should invoke the principles reflected in Warren v Coombes (1979) 142 CLR 531 rather than in House v The King. Nevertheless, in most cases it is unlikely that the different tests will lead to different results." 30The approach in Warren v Coombes involves an appellate court giving effect to its own view, formed after giving respect and weight to the conclusion of the primary judge (at 551). Adoption of the principles in House v The King [1936] HCA 40; 55 CLR 499 would involve, in a case such as the present, treating the decision at first instance as if it were a discretionary decision, with the appellate court intervening only if specific error in approach were established or it took the view that the decision below was "unreasonable or plainly unjust" (at 505). In either case, "the appellate court should approach with caution the substitution of its opinion for that of the trial judge" (Beneficial Finance Corporation Ltd v Karavas (1991) 23 NSWLR 256 at 263). 31In Provident Capital Ltd v Papa [2013] NSWCA 36 Allsop P (as his Honour then was) identified as follows the fundamental issue to be addressed: 7 The broad evaluation of unjustness under the Contracts Review Act 1980 (NSW) ss 4, 7 and 9 involves the normative evaluation of the totality of relevant circumstances. Inevitably minds may differ as to conclusions about such questions. Also, it is often not fruitful to compare other cases with the particular circumstances at hand, lest one be deflected from an appropriate overall assessment by focus on particular aspects relevant to any such comparison. Central to the normative evaluation is the recognition that there is a need for the protection of some people in some circumstances, who are not able fully to protect their own interests against factors that may cause injustice. That vulnerability may come from one or more of many circumstances, such as lack of education or of intelligence, from gullibility, from the predation of fraud and greed, and also sometimes from loyalty and love. The characterisation of a contract as unjust and the sheeting home to the other contracting party of the consequences of its unjustness may be a difficult evaluative exercise. At its heart, however, is the recognition of the inadequacy of one party to protect her or his interests in the circumstances ... ". (See also Knezevic v Perpetual Trustees Victoria Ltd [2013] NSWCA 199 at [72]). 32The Bank did not argue that the Contracts Review Act was inapplicable to the present Loan Contract and Mortgage. Whilst it did argue that the Code was inapplicable (because the credit provided to the Karamihoses was not provided "wholly or predominantly for personal, domestic or household purposes" (see s 5)), in my opinion there is no presently material difference between the two sets of legislative provisions (despite the fact that there are some differences between the lists of factors to which regard is to be had). As a result, the Karamihoses would not obtain any advantage from a finding of this Court that the Code was applicable and the case may therefore be dealt with by reference to the provisions of the Contracts Review Act. THE JUDGMENT AT FIRST INSTANCE 33The primary judge referred as follows to Mr and Mrs Karamihos: "13 I am quite satisfied that the ability of Mr and Mrs Karamihos to read and understand written English was feeble. Their ability to do so in relation to detailed documents relating to the respective legal obligations of borrowers, lenders and intermediaries was virtually non-existent. Nonetheless, Mr Karamihos understood in a rudimentary way the essential elements of a loan and mortgage transaction. As did Mrs Karamihos. Both well understood the need to maintain their monthly repayments and the consequences of default. They had obtained numerous loans over the years - probably far too many - but they were unsophisticated (albeit frequent) borrowers with limited financial acumen, who operated at a relatively simple, homespun level." 34After referring to their business, his Honour said that their prior loan history did "not appear to reflect prudent and responsible financial management" (at [16]) and: "17 The frequency of these loan transactions and the waste, duplication and additional costs and charges that must necessarily have been incurred, at least raise a question as to whether Mr and Mrs Karamihos really knew what was in their best interests. BAB made credit reference enquiries and was aware of some or all of this loan history." 35His Honour concluded that "the multiple loans and overall loan history of Mr and Mrs Karamihos suggest financial immaturity rather than the reverse" (Judgment [19]). After noting that the Bank's loan approval depended upon acceptance of Mr and Mrs Karamihoses' ability to repay the loan, when necessary, by selling the Marrickville property, the primary judge said the following concerning the value of that property: "29 The only indication of the value of the Marrickville property that was available to Mr Schrapel was the bare assertion of its value by Mr Karamihos in his signed loan application. His piteously optimistic and unsupportable estimate was $2 million. Mr Schrapel accepted that figure at face value and made no attempt to verify it. It matters not that the Marrickville land was not the property over which BAB was taking security and that the bank's policy was only to obtain a valuation over the secured property. In the unique circumstances of this loan, Mr Schrapel's approval depended on a satisfactory exit strategy. That in turn depended on the sale proceeds of the Marrickville property being 'sufficient to clear all debts.' That in turn depended on reasonable inquiry as to the value of the Marrickville property. 30 Even if the fair market value of the Marrickville property was $2 million, there was no margin for error. In fact, its fair market value was far less. The property had few redeeming features. It was a nondescript two-storey retail/residential property on a major traffic artery with no on-site parking. It was in fair condition for its age but was situated directly under the flight path for aircraft landing and taking off at Kingsford-Smith Airport. Although there was no direct evidence of its value in May 2007, there was a valuation at November 2010. The fair market value at that date was $750,000. To arrive at its forced sale value, the valuer suggested that a 15% discount should be applied. I think that it is reasonable to infer that in 2007 the fair market value of the Marrickville property was of a broadly similar order to its value in 2010. Any decline that may have occurred because of the onset of the global financial crisis in 2008, or any subsequent difficulties with a tenant, is not likely, in my view, to have affected its value so substantially as to detract from this reasoning." 36His Honour concluded that the National Credit Code was applicable and continued: "42 The findings of fact that I have made lead inexorably to the conclusion that the contract of loan and mortgage entered into between Mr and Mrs Karamihos and BAB in May 2007 was unjust for the purpose of section 76(1) of the NCC [National Credit Code]. I have reached that conclusion having regard to the consequence of non compliance by Mr and Mrs Karamihos, namely the loss of their sole residence; the relative bargaining power of the parties; the absence of any negotiation at the time the transaction was entered into, and absence of any practical opportunity for there to be any negotiation. I have also had regard to the fact that Mr and Mrs Karamihos were not reasonably able to protect their interests. They were too elderly and too foolish to know what was in their best interests. And they had no independent legal or financial advice. Their daughter apparently stood to receive $100,000 from the loan proceeds but she was, in any event, in no position to dissuade her father. The finance broker, George Koovousis, had no commercial incentive to advise Mr and Mrs Karamihos that the loan was unsuitable for them. His financial incentive was entirely the opposite. 43 I am satisfied that Mr and Mrs Karamihos were not able to read and fully comprehend the typed written documents that they were required to sign. Nor did they, in my view, have any apprehension of the risks they faced in the event of unexpected illness, retirement and diminution of earnings. They were comforted by their apparent success with previous loans and were naively untroubled by the probability that all would not necessarily continue, without hitch or hurdle, in the future. 44 BAB knew that Mr and Mrs Karamihos did not have independent legal and financial advice. And it did not take any active steps to ensure that they understood the nature and implications of the transaction. I have not placed significant weight on the prior loan and mortgage transactions of Mr and Mrs Karamihos or those of their company. They were not explored in the evidence and their circumstances were unexplained. In any event, as I suggested in paragraphs [17]-[19] above, their number and frequency, and the accompanying duplication and additional expense, do not suggest financial sophistication. 45 Most importantly, BAB did not make reasonable enquiry as to whether Mr and Mrs Karamihos could meet their obligations under the loan. I have already explained in paragraphs [23] - [31] above, the false basis on which the supposed exit strategy was constructed. In the particular circumstances of this case, where approval of the loan depended on the satisfaction that there was a viable exit strategy, Mr Schrapel's reliance on the customer's estimate of $2 million for the value of the Marrickville property, was unreasonable, to put it at its lowest. 46 If Mr Schrapel had made reasonable enquiries of the value of the Marrickville property, there would have been no loan approval and no loan. This litigation would not have occurred. Mr and Mrs Karamihos should not have been put in the position in which they now find themselves. The BAB loan was a bridge too far, at too late a stage of their fast-fading lives. Its unsuitability was compounded by the bank's incompetence. This is not a case like Riz v Perpetual Trustee Australia Ltd [2007] NSWSC 1153 where it was said 'a lender is not required, in the interests of the borrower, to have a high index of suspicion for fraud by the borrower': at [78]. 47 In this case, there was no fraud by the borrower, just misplaced enthusiasm and an absence of reality. There was no evidentiary foundation for a finding that Mr Karamihos intended to deceive BAB. The bank simply did not make reasonable enquiry; when it knew that enquiry was called for; when it knew that the value of the Marrickville land was an essential element (indeed a sine qua non) of its approval. 48 For those reasons, I have concluded that the BAB Home Loan Contract was unjust for the purposes of the NCC. It was also unjust for the purpose of the Contracts Review Act. This is a conclusion of ultimate fact involving a broadly based value judgment, having regard to both the public interest and the particular matters set out in section 76(2) of the NCC and section 9(2) of the Contracts Review Act: Antonovic v Volker (1986) 7 NSWLR 151 at 154-155 (Samuels JA, Kirby P agreeing); Beneficial Finance v Karavas (1991) 23 NSWLR 256 at 270E (Samuels JA); Perpetual Trustee Company v Khoshaba [2006] NSWCA 41 at [34] - [40] (Spigelman CJ) and [106] - [111] (Basten JA); Riz v Perpetual Trustee Australia [2007] NSWSC 1153 at [51]. I am amply satisfied that my factual conclusion is justified having regard to the evidence that was adduced. 37So far as relief was concerned, the primary judge indicated that Mr and Mrs Karamihos "should be put in the same position that they would have been in if they had not taken on increased borrowings on different terms" (at [49]), with the result that the Bank of Queensland loan should be treated as if it had continued and there had been no refinancing with the appellant Bank. Orders to this effect were made on 16 May 2013. THE ISSUES ON APPEAL 38It is apparent from the above that the primary judge's finding that the Marrickville property did not have the value of $2,000,000 attributed to it in the Karamihoses' loan application was central to his conclusion that the Loan Contract and Mortgage were unjust: if it did not have that value, the Karamihoses did not have any means by which they could repay the loan when necessary. However the Bank challenged that finding as to value and submitted that, in any event, it was entitled to accept Mr Karamihos' estimate of value without making any further enquiries. It also challenged other aspects of his Honour's findings concerning unjustness. 39The Bank also disputed the primary judge's decision as to the relief to be granted. It submitted that the effect of the orders made was to confer an unwarranted benefit or windfall on the Karamihoses because the orders relieved the Karamihoses of their liability to repay part of the loan when they had received the benefit of that part (as well as of the remainder). 40Finally, the Bank challenged the primary judge's conclusion that the Code was applicable. It contended that it was inapplicable because the predominant purpose of the Loan Contract and Mortgage was to refinance a pre-existing investment loan, namely that from the Bank of Queensland (s 6 of the Code). As noted above at [32], given that the Contracts Review Act applies, it is unnecessary to determine this issue. RESOLUTION OF THE APPEAL 41As the primary judge's finding as to the value of the Marrickville property in 2007 was central to his reasoning, I address the challenge to that finding first. The value of the Marrickville property 42As the Karamihoses were in 2007 in their early 70s, it was clear to all concerned with their loan application that their future working life was likely to be limited and that prudence required that a means of repaying their loan on retirement or illness be identified, that is, that they have an "exit strategy". The strategy identified by Mr Koovousis on their behalf to the Bank was sale of their commercial property at Marrickville. If the property had had the value of $2,000,000 estimated for it by Mr Karamihos, no criticism of the strategy could fairly have been made. 43The primary judge however found that it did not have that value at the time of application in 2007. Thus he referred to the fair market value as being far less than $2,000,000 and described the $2,000,000 estimate as "piteously optimistic and unsupportable" and "unreasonable, to put it at its lowest" (Judgment [29], [30] and [45] at [35] - [36] above). 44The only evidence before the primary judge of possible relevance to the value of the Marrickville property, apart from Mr Karamihos' estimate, was a valuation as at 15 November 2010 of its forced sale value, prepared by Alcorn Lupton & Associates and obtained by Perpetual Nominees when it was exercising its power of sale. His Honour inferred that the property's fair market value in 2007 was "of a broadly similar order to its value in 2010" as identified in the valuation, notwithstanding the intervention of the global financial crisis which commenced in 2008. 45The 2010 valuation described the improvements on the 373.1m² property as comprising a two-storey building with retail premises on the ground floor and an upper floor flat. It included the following in relation to the ground floor: "There are some café and shop fittings still within [the] premises and some tiles have been damaged or removed where certain shop fittings have been removed. Also there are holes in the ceiling where the air conditioning compressors have been removed together with other portions of plant and equipment. Adjacent to the open café area is a Kitchen (full-height partitions) with a ceramic tiled floor and having an area of approximately 35m² (including Cool Rooms). All the kitchen equipment has been removed from this area with some damage to floor and walls has occurred following this removal ... ". 46This was no doubt the damage to the premises that Mr Karamihos asserted was caused by the tenant who vacated the premises in 2010 (see [23] above). 47Of the six comparable sales to which the valuers referred, five occurred in 2010 and one on 10 November 2009. The valuers also referred to comparable rentals of four properties, presumably being rentals applicable at about the time of the valuation. 48The valuers noted that there was no registered lease relating to the property but said that the upper floor was occupied although, by inference, not the ground floor. 49The valuers then made the following comments concerning the property, and the market generally: "The Sydney industrial/commercial market sectors are emerging from the Global Financial Crisis and an underperforming New South Wales economy. As a consequence asset values have faced decline and yields softening. Steadily rising interest rates are also affecting return to investors. Rents have come under significant pressure and landlords have been forced to negotiate less favourable lease terms and offer large incentives (particularly with secondary space). The retail trade generally is undergoing a substantial correction especially for non essential consumer purchases. The sale of the subject property is somewhat inhibited as it is to be valued as vacant. The investor would thus discount its value for the loss of income and cost of securing a suitable tenant (Development Consent for the property's use would also be required). Difficulties in obtaining commercial mortgage finance has also been a detriment to owner occupation and investors of such properties. The property in the valuers opinion, appears to have been adequately maintained having regard to the age of the property and the purpose to which it is used. There does not appear to be any major repair or renovation work needed to the premises apart from areas subject to the removal of air conditioning plant and also areas wherein kitchen equipment has been removed. We assume that the premises will be thoroughly cleaned throughout. The rear yard curtilage areas should be cleaned up and maintained prior to sale". 50To value the property, the valuers first adopted what they described as the accepted method of capitalisation of nett annual rental returns. They used a gross rental of $825 per week for the ground floor and $575 for the upstairs, giving annual rentals of $42,900 (plus GST) and $19,500 respectively, less annual outgoings of $9,900. Capitalised at 7 per cent, these produced a valuation of $750,000. These figures are to be contrasted with the mid-2010 annual rentals of $83,167.86 for the ground floor and $23,040 for the upper storey obtained by the Karamihoses (see [21] above). Understandably the rent for the ground floor secured by the Karamihoses earlier in 2010, with a long established and continuing business operating in it at that time, far exceeded that estimated by the valuers later in the year for the vacant premises, with fixtures and equipment removed and with damage to the premises. If regard is also had to the changes described by the valuers in business conditions as a result of the global financial crisis, it is clear that the first valuation approach in the 2010 valuation provided no support for the proposition that in 2007 (prior to the global financial crisis and when a long-standing and successful business was operating in the premises) the Marrickville property did not have the value of $2,000,000 estimated by Mr Karamihos. 51The second valuation approach adopted by the valuers was a comparison of comparable sales on "an improved property rate per square metre of area basis". As these comparable sales were in 2010, or in one case in late 2009, they also shed no light on the 2007 value, bearing in mind the intervening changes in market conditions to which the valuers referred and the property's changed state. 52For these reasons, I conclude that the primary judge's finding that the value of the Marrickville property was less than Mr Karamihos' $2,000,000 estimate was not supported by any evidence and was therefore in error. Consideration of whether the Loan Contract and Mortgage were unjust should not therefore have proceeded on the basis that this estimate was erroneous. The Karamihoses were seeking relief under the Contracts Review Act and bore the onus of proving that the Loan Contract and Mortgage were unjust and any facts, such as the value of the Marrickville property, that they relied upon to support that conclusion. They did not prove that that value was less than Mr Karamihos' estimate. 53It follows from these views that any failure of the Bank to check the accuracy of Mr Karamihos' estimate of value of the Marrickville property cannot assist the Karamihoses in their contention that the Loan Contract and Mortgage were unjust. If, as is the case here, it is not shown that a lender would have discovered something of relevance if it had made inquiries, I do not see how a failure to make those inquiries can bear on the justness or unjustness of a loan contract or mortgage. Whether the absence of any such inquiries would have been of importance if the position had been otherwise need not be determined. The Karamihoses' financial acumen 54The primary judge concluded that the Karamihoses had "limited financial acumen" and that they were "too foolish to know what was in their best interests" (Judgment [13] and [42] quoted in [33] and [36] respectively above). These conclusions appears to have been based solely on their prior loan history which the primary judge said did not appear "to reflect prudent and responsible financial management" (Judgment [16] in [34] above). He said that that history at least raised "a question as to whether Mr and Mrs Karamihos really knew what was in their best interests" and that it suggested "financial immaturity" (Judgment [17] and [19] at [34] - [35] above). 55However I do not consider that these conclusions were warranted by the limited evidence before his Honour as to that loan history. There were undoubtedly many transactions but, as his Honour said, "[t]hey were not explored in the evidence and their circumstances were unexplained" (Judgment [44] at [36] above). In the absence of evidence explaining their circumstances, the transactions were as consistent with astute attention by the Karamihoses to their financial interests as the converse. Certainly, as his Honour pointed out, the Karamihoses would have incurred substantial expenses as a result of the numerous borrowing transactions in which they engaged but it is quite possible that those costs were, or were reasonably expected to be, offset by advantages from the transactions. It could not be assumed that this was not the case without an evidentiary foundation for doing so. Other matters relied on by the primary judge 56The primary judge's conclusion that the Loan Contract and Mortgage were unjust was primarily driven by his findings as to the value of the Marrickville land and his view that if Mr Schrapel had made reasonable inquiries as to that value there would have been no loan approval and no loan (Judgment [42] - [47] at [36] above). 57In his conclusory paragraphs, the primary judge said he did not place "significant weight" on the Karamihoses' prior loan history, or that of their company (Judgment [44]). But in those same paragraphs he described the Karamihoses as "too foolish to know what was in their best interests" (Judgment [42]) which in light of his Honour's earlier reasoning must have been founded on that loan history. For the reasons I have given above, their loan history did not justify a conclusion that the Karamihoses lacked financial acumen or were "foolish". 58Other, apparently less significant, matters to which his Honour said he had regard in reaching his conclusions included the following. 59His Honour referred to "the relative bargaining power of the parties" and "the absence of any negotiation at the time the transaction was entered into, and absence of any practical opportunity for there to be any negotiation". These were not factors of significance in this case as there was no complaint here about the particular terms of the arrangements, as distinct from the fact of a borrowing occurring at all. 60The same comment applies to his Honour's finding that the Karamihoses "were not able to read and fully comprehend the typed written documents that they were required to sign" (Judgment [43]), as his Honour had earlier held that the Karamihoses understood the basic elements of their responsibilities (Judgment [13]) and no complaint is made about the detail of any of the provisions of the arrangement. Likewise his Honour's finding that the Bank "did not take any active steps to ensure that [the Karamihoses] understood the nature and implications of the transaction" (Judgment [44]) is not of significance as it is clear from his Honour's findings that they understood these. 61His Honour also said that the Karamihoses did not have "any apprehension of the risks they faced in the event of unexpected illness, retirement and diminution of earning" (Judgment [43]). It is not at all clear that this was so, as his Honour held that they understood their obligation to make monthly payments and the consequences of default (Judgment [13]). Moreover, their finance broker prudently considered and proffered to the Bank on their behalf an "Exit Strategy" designed to cover eventualities such as those mentioned. 62His Honour also indicated that the absence of independent legal or financial advice was of relevance to his assessment of unjustness (Judgment [42]). However that cannot be regarded as of significant weight here because there were no material legal aspects of the transaction of which the Karamihoses were unaware and, because it was not proved that the estimate of the value of $2,000,000 for the Marrickville property was erroneous, it was not demonstrated that financial advice would have been of any assistance to the Karamihoses. 63Finally, the primary judge referred to the Karamihoses being "too elderly ... to know what was in their best interests" (Judgment [42]). Being of an age in the early 70s cannot of itself be an indication of inability to protect one's own interests. A conclusion that that ability is absent must depend on more evidence than that. Conclusion as to unjustness 64For the reasons I have given, the factual underpinnings that the primary judge identified as supporting his conclusion that the Loan Contract and Mortgage were unjust do not withstand scrutiny. In particular, the Marrickville property, whose sale constituted the proposed exit strategy, was not shown to be of insufficient value to fulfil that role. Accordingly the Karamihoses did not demonstrate that if the Bank had made inquiries about the value of the Marrickville property, it would have ascertained that the strategy was flawed. 65In my view, there were no other matters that warranted the conclusion that the Loan Contract and Mortgage were unjust. The following indicate the contrary: * The Karamihoses were aware of their obligation to make monthly payments and understood the consequences of default. * They had sufficient financial acumen to have conducted a successful business for 27 years. The Bank's credit inquiry did not reveal any default by them. * They had the assistance of their adult daughter in relation to the transaction. Whilst she was in fact given $100,000 out of the loan proceeds, the evidence of Mr Karamihos and his daughter suggested that that was an afterthought, rather than something that was in contemplation at the time the loan application was made. At that time it appears from their evidence that the whole of the increase in borrowing was intended to be applied to the Karamihoses' business. * The loan was intended to be, and was in fact, largely used to repay an existing lender, with the balance to be applied to the Karamihoses' business. There was nothing in the evidence to suggest that the Karamihoses' intended application of the balance of the funds to their business was an irrational, foolish or uneconomic strategy. * The Karamihoses had an exit strategy which the evidence did not show was inadequate to enable them to repay the loan upon their retirement or illness. As it transpired, it appears that they chose not to use it. Mr Karamihos' evidence suggested that they attempted unsuccessfully to sell the "business" (presumably distinct from the property itself). He did not say that they attempted to sell the property. Instead, they leased the property. Their adoption of that course led to the difficulties described earlier. 66For these reasons, I consider that the primary judge erred in finding that the Loan Contract and Mortgage were unjust within the meaning of the Contracts Review Act and the Code. In short, the Karamihoses did not demonstrate that they were unable to protect their own interests or that for any other reason the Loan Contract and Mortgage were unjust. Despite the need for appellate restraint in relation to an issue such as the present (see [30] above), I must give effect to the firm view that I have formed. Accordingly, I propose that the appeal be allowed. The relief granted 67It is unnecessary to determine what orders were appropriate if, contrary to my view, the Court's jurisdiction to make orders had been enlivened by a sound finding of unjustness. It is sufficient to say that there are two matters that in my view the primary judge erroneously failed to take into account in formulating his orders. 68The first concerns the reasons that the Karamihoses defaulted in performing their obligations to the Bank and to Perpetual Nominees. When they decided to retire, the Karamihoses did not follow the exit strategy that had been outlined to the Bank by selling the Marrickville property, nor was there any evidence that they attempted to do so. Instead, they decided to sell their business and to lease the ground floor of the premises to the new proprietor. This led to problems which Mr Karamihos blamed on his former solicitor, on the mortgagee of the Marrickville property and on the new tenant the Karamihoses secured (see [23] above). It is notable that Mr Karamihos did not seek to place any part of this blame on their borrowing in 2007 from the Bank. In these circumstances, the view was open, and needed to be considered when determining the relief to be granted, that any unjustness of the 2007 Loan Contract and Mortgage did not contribute to the Karamihoses' later difficulties and losses. 69Secondly, when formulating relief, the primary judge needed to consider whether the Karamihoses had received benefits from the loan beyond the discharge of the existing mortgage. In particular the application of the balance of the loan to improvements to the Karamihoses' business and to the payment of $100,000 to their daughter may have been regarded as conferring benefits on the Karamihoses. To the extent that the Karamihoses may have received such benefits, it was not appropriate to relieve them of payment obligations (see Maguire v Makaronis [1997] HCA 23; 188 CLR 449 at 474 - 5). Otherwise, as the Bank contended, the effect of the orders would have been to confer a windfall on them. ORDERS 70For the reasons I have given, the Bank is entitled to have the Karamihoses' proceedings seeking Contracts Review Act and Code relief dismissed and, in the proceedings brought by it, the Bank should be given possession of the Maroubra property and judgment for the amount owing to it. As it is necessary for interest to be calculated, the orders to be made now should be confined to the following: (1)Direct that within seven days of today's date, the appellant Bank file and serve calculations showing the amount of the judgment, inclusive of interest, to which it is entitled in accordance with the Court's reasons for judgment. (2)Direct that any response by Mr and Mrs Karamihos be filed and served within a further seven days. (3)Direct that any reply be filed within a further seven days. 71Subject to clarification of the judgment amount, the following orders will be made in chambers: (1)Appeal allowed. (2)The orders dated 16 May 2013 of the court below set aside. (3)In lieu thereof, make the following orders: a. in proceedings 2009/14393 in the Common Law Division: (1) the defendants give possession to the plaintiff of the whole of the land comprised in folio identifier 4966/752015, known as 63 Wild Street, Maroubra NSW 2035; (2) Leave to issue a writ for possession; (3) Judgment in favour of the plaintiff against the first and second defendants for the amount of [to be determined]; (4) the defendants pay the plaintiff's costs; and b. in proceedings 2012/334829 in the Equity division: (1) judgment for the defendant; and (2) the plaintiffs pay the defendant's costs. (4)The respondents pay the appellant's costs of the proceedings on appeal. (5)The respondents to have certificates under the Suitors' Fund Act 1951, if qualified. 72WARD JA: I agree with Macfarlan JA. 73SACKVILLE AJA: I agree with the orders proposed by Macfarlan JA and with his Honour's reasons. I add the following brief observations. 74Mr Hughston SC, who appeared with Ms Merkel for the respondent ("the Karamihoses"), submitted that there is a difference between the standard of appellate review applicable to a finding that a contract is "unjust" for the purpose of s 7(1) of the Contracts Review Act 1980 and a finding that a contract is "unjust" for the purposes of s 70(1) of the Consumer Credit Code. According to Mr Hughston, the former is an evaluative decision that can be reviewed on the principles stated in Warren v Coombes [1979] HCA 9; 142 CLR 531, while the latter is a discretionary decision reviewable only if error is demonstrated in accordance with the principles stated in House v The King [1936] HCA 40; 55 CLR 499. 75It is doubtful whether the Consumer Credit Code applied to the Loan Contract and Mortgage entered into by the Karamihoses. Even if the Code did apply and even if Mr Hughston's submission as to the standard of review is correct (a matter on which I express no opinion), the finding of injustice cannot stand. As Macfarlan JA demonstrates, the finding that the relevant transactions were unjust is affected by two substantial errors. Each of these would be sufficient to warrant setting aside the finding on the principles stated in House v The King. 76The first error was the finding that the Karamihoses had given a "piteously optimistic and unsupportable estimate" of $2 million as the value of the Marrickville property. For the reasons given by Macfarlan JA, that finding cannot stand. 77The second substantial error was the absence of any evidence to support the implied finding (Primary Judgment, at [45]) that the exit strategy proposed on the Karamihoses' behalf was not viable. As Macfarlan JA points out, the Karamihoses chose not to pursue the exit strategy nominated by them, namely the sale of the Marrickville property. Their decision to adopt the alternative strategy of leasing the Marrickville property led to serious financial difficulties. Whether or not the alternative approach was wise, it was not the exit strategy upon which the Bank had based the loan. There was no evidence that, had the Karamihoses elected to pursue the exit strategy nominated by them, it would have been ineffective to discharge the loan. 78I agree with Macfarlan JA's reasons for concluding that the Karamihoses failed to establish that the Loan Contract and Mortgage were unjust, either for the purposes of the Contracts Review Act 1980 or of the Consumer Credit Code. ********** Amendments 08 April 2014 - Typographical error Amended paragraphs: [71] 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 April 2014