From time to time, borrowers may turn to "lenders of last resort" for many reasons. Frequently, the reason is a short-term cash flow crisis which is seen as temporary and to be corrected by a later refinancing of the loan or an injection of cash from a sale or disposal of an asset. The interest rates on such loans are often much higher than standard bank rates and contain high penalty interest for defaults.
Such borrowers can have unexpected delays on their exit plans from these loans and later challenge the rates payable.
A recent decision of Huynh v Ledinh Sovereign Super Pty Ltd [2024] NSWCA 78 considered this issue and the impact of the unfair contract provisions of the Contracts Review Act 1980 (NSW) – ss 7, 9 .
7. PRINCIPAL RELIEF
i. Where the Court finds a contract or a provision of a contract
to have been unjust in the circumstances relating to the contract
at the time it was made, the Court may, if it considers it just to
do so, and for the purpose of avoiding as far as practicable an
unjust consequence or result, do any one or more of the
following—
a. it may decide to refuse to enforce any or all
of the provisions of the contract,
b. it may make an order declaring the contract
void, in whole or in part,
c. it may make an order varying, in whole or in
part, any provision of the contract,
it may, in relation to a land instrument, make an order for or with
respect to requiring the execution of an instrument
that—
– varies, or has the effect of varying, the provisions of the
land instrument, or
– terminates or otherwise affects, or has the effect of
terminating or otherwise affecting, the operation or effect of the
land instrument.
ii. Where the Court makes an order under subsection (1) (b) or (c), the declaration or variation shall have effect as from the time when the contract was made or (as to the whole or any part or parts of the contract) from some other time or times as specified in the order.
iii. The operation of this section is subject to the provisions of section 19.
9. MATTERS TO BE CONSIDERED BY COURT
- In determining whether a contract or a provision of a contract
is unjust in the circumstances relating to the contract at the time
it was made, the Court shall have regard to the public interest and
to all the circumstances of the case, including such consequences
or results as those arising in the event of—
a. compliance with any or all of the provisions of the contract, or
b. non-compliance with, or contravention of, any or all of the provisions of the contract. - Without in any way affecting the generality of subsection (1),
the matters to which the Court shall have regard shall, to the
extent that they are relevant to the circumstances, include the
following—
a. whether or not there was any material inequality in bargaining power between the parties to the contract,
b. whether or not prior to or at the time the contract was made its provisions were the subject of negotiation,
c. whether or not it was reasonably practicable for the party seeking relief under this Act to negotiate for the alteration of or to reject any of the provisions of the contract,
d. whether or not any provisions of the contract impose conditions which are unreasonably difficult to comply with or not reasonably necessary for the protection of the legitimate interests of any party to the contract,
e. whether or not—
i. any party to the contract (other than a corporation) was not reasonably able to protect his or her interests, or
ii. any person who represented any of the parties to the contract was not reasonably able to protect the interests of any party whom he or she represented, because of his or her age or the state of his or her physical or mental capacity,
f. the relative economic circumstances, educational background and literacy of—
i. the parties to the contract (other than a corporation), and
ii. any person who represented any of the parties to the contract,
g. where the contract is wholly or partly in writing, the physical form of the contract, and the intelligibility of the language in which it is expressed,
h. whether or not and when independent legal or other expert advice was obtained by the party seeking relief under this Act,
i. the extent (if any) to which the provisions of the contract and their legal and practical effect were accurately explained by any person to the party seeking relief under this Act, and whether or not that party understood the provisions and their effect,
j. whether any undue influence, unfair pressure or unfair tactics were exerted on or used against the party seeking relief under this Act—
i. by any other party to the contract,
ii. by any person acting or appearing or purporting to act for or on behalf of any other party to the contract, or
iii. by any person to the knowledge (at the time the contract was made) of any other party to the contract or of any person acting or appearing or purporting to act for or on behalf of any other party to the contract,
k. the conduct of the parties to the proceedings in relation to similar contracts or courses of dealing to which any of them has been a party, and
l. the commercial or other setting, purpose and effect of the contract. - For the purposes of subsection (2), a person shall be deemed to have represented a party to a contract if the person represented the party, or assisted the party to a significant degree, in negotiations prior to or at the time the contract was made.
- In determining whether a contract or a provision of a contract is unjust, the Court shall not have regard to any injustice arising from circumstances that were not reasonably foreseeable at the time the contract was made.
- In determining whether it is just to grant relief in respect of a contract or a provision of a contract that is found to be unjust, the Court may have regard to the conduct of the parties to the proceedings in relation to the performance of the contract since it was made.
FACTS
On 16 August 2018, a mortgage was executed, with CT Stone Pty Ltd (CT Stone) as borrower/debtor, Ms Thuc Tran Huynh and Mr Chau Quach as guarantors, and Ledinh Sovereign Super Pty Ltd (Ledinh or the Respondent) as lender/mortgagee. Ms Huynh and Mr Quach (the Appellants) are married and the sole directors and shareholders of CT Stone. Mr Long Ngoc Dinh is the principal of Ledinh.
A sum of $140,000 was advanced under the mortgage, with a final repayment date of 16 November 2018.
Clause 5.11 of the mortgage, provided that, after 16 November 2018, interest would accrue at 6% per month on a compounding basis. The Appellants' property in Laurina Avenue, Fairfield East (the Laurina Avenue Property), served as security under the mortgage. The Appellants sought the loan to complete the renovation of a separate property that they owned in Seville Street, Fairfield East (the Seville Street Property).
The Appellants ultimately defaulted under the mortgage.
ISSUES
The Respondent sought orders for possession of the Laurina Avenue Property, judgment for the amount owing under the mortgage ($140,000) plus interest and costs owing under the mortgage.
The Appellants filed a cross-claim, asserting that the conduct of the Respondent in delaying the bringing of proceedings was unconscionable, and that the contract was "unjust" within the meaning of the CRA.
The primary judge held that, although the interest rate of 6% per month was not, in all the circumstances unjust, the compounding element of the interest rate under the mortgage rendered the contract "unjust" and unconscionable. The primary judge held that the Respondent was entitled to:
i. possession of the Laurina Avenue Property;
ii. judgment in the sum of $140,000, with simple interest accruing at 6% per month; and
iii. the costs of the proceedings.
The appeal concerned whether the simple interest rate of 6% per month was "unjust" within the meaning of the CRA.
DECISION OF THE COURT OF APPEAL.
The Court in dismissing the appeal, held that:
- There was no inconsistency between:
a. the primary judge's finding that the combination of the very high default rate and the monthly compounding of the interest was unjust; and
b. the primary judge's finding that the 6% monthly interest rate, in itself, was not unjust. Rather, the primary judgment made it plain that it was the combination of the rate and its compounding nature which was unjust and warranted the Court's response in varying the interest provision:
Various undisputed facts and unchallenged findings made by the primary judge supported the conclusion that the simple monthly interest rate of 6% was not "unjust" for the purposes of the CRA. These included that:
i. the Appellants had experience with mortgages and refinancing;
ii. the Appellants required the loan to complete renovations on one of a number of properties in their property portfolio;
iii. the Appellants received independent legal advice;
iv. Mr Quach was aware that failure to repay the loan within 3 months would trigger monthly interest rates between 4% and 6%; and
v. Mr Quach accepted in cross-examination that he knew the risk he was undertaking, yet took that risk on the assumption that he could refinance the loan:
SUMMARY
The decision illustrates the application of the unfair contract's provisions of the Act specifically in loan transactions, and the difficulty in enforcing compound interest provisions, as well as the importance of the obtaining of independent legal advice.