Bendigo & Adelaide Bank Ltd v Karamihos  NSWCA 17
New South Wales Court of Appeal
Under section 7(1) of the Contracts Review Act 1980 (NSW), the court, if it finds a contract to be unjust, may make orders to overturn the contract. The above case provides some consideration to the circumstances that would not be equivalent to an unjust contract and that may be taken into account when determining so.
A couple in their late 60s/ early 70s borrowed $1.2 million in 2007 to refinance an existing debt over a commercial property, to finance their take-away food restaurant and a $100,000 gift to their daughter. The commercial property was worth $2 million, estimated by the borrowers at the time. The borrowers defaulted on their loan with the bank seeking possession over the property. The couple claimed that the contract was “unjust” as the bank had provided the funds in circumstances where substantial hardship would occur to meet the repayments.
At First Instance
The primary judge found that the contract was unjust when considering the facts of the case and ordered that the bank return the borrowers to the position they were in prior to the contract. The judge came to this reasoning because of the following circumstances:
- the bank relied upon the borrower’s estimates of the commercial property which would be their “exit strategy” as pointed out in the lending guidelines to prevent them from needing to sell their residential property;
- the commercial value of the property when assessed in 2010 professionally was for $750,000;
- the bank did not ensure that the borrowers obtained independent legal advice;
- the age, foreign background, lack of foreign education and state of health; and
- extensive history of prior loans.
The combination of these factors persuaded the judge that the borrowers did not possess sufficient financial insight to know what was in their best interest and that the banks reliance upon the borrowers was hopeless, and hence found the contract to be unjust.
The bank appealed the decision to the New South Wales Court of Appeal and argued the contrary; that the contract was just. The Court of Appeal, reviewed the circumstances before the primary judge and concluded that many of the factors were viewed with the incorrect justification. The circumstances were held as follows:
- that the valuation was prepared after a period of time where significant factors played a role in de-valuing the commercial property, such as the Global Financial Crisis, a change in tenancy and that numerous fixtures had been removed;
- that the bank was not responsible to ensure that the borrowers had obtained sufficient legal or financial advice when obtaining the loan when the borrowers “understood the basic elements of their responsibilities”;
- that the age of the borrowers was not relevant for these purposes to determine their judgement in entering the contract, and that the extensive history of borrowing would equate to better judgement and financial understanding of the contract; and
- the court proceeded to also take into account that the borrowers understood the consequences of default, that they ran a successful business for 27 years, assisted their daughter with a portion of the loan and that they had provided an exit strategy to sell their business upon retirement (which they did not enact).
This decision by the Court of Appeal, while finding that the contract was not unjust in light of these circumstances, also provides another avenue to limit the relief that may be sought by a borrower when claiming an unjust contract. As in this particular case, should the contract have been found unjust, there was still an overarching obligation of the borrowers to have repaid the $100,000 and any benefits derived from that. This could factor into the limitation that borrowers may still be liable to some degree for certain repayments.
To see the case, click here (link is external).
If you would like to discuss this case further, you should contact our commercial team at Matthews Folbigg on 9635 7966.
Director, Property and Commercial Groups
Phone: 02 9806 7425
DISCLAIMER: This article is provided to clients and readers for their general information and on a complimentary basis. It contains a brief summary only and should not be relied upon or used as definitive or complete statement of the relevant law.