(b) FMA
32 Although it is a little difficult to discern, the claim made against FMA by the Defendants appears to be derived from the principle as expressed in such cases as Collier v Morlend Finance Corporation (Victoria) Pty Ltd (1989) 6 BPR 13,337; (1989) NSW ConvR 55-473 which ordinarily requires a borrower obtaining relief under the Contracts Review Act to give credit for any sums paid to discharge a pre-existing obligation of the borrower. The Cross-Claims alleging that the prior obligation, evidenced by the mortgage to FMA, was itself unjust seems to be a pre-emptive strike against Bankwest's calling in aid that principle to say that, at the very least, the Defendants should not have relief to the extent of $571,171. However, I consider that such an approach is misconceived.
33 A consideration of what orders should be made and what relief is given to the borrower occurs at the second stage of the proceedings. The first stage is whether the contract was unjust having regard to the matters referred to in s 9: Mizzi v Reliance Financial Services Pty Ltd [2007] NSWSC 37 at [39] and the cases there cited. The second stage is said to be truly a discretionary power to be exercised if the Court "considers it just to do so, and for the purpose of avoiding as far as practicable an unjust consequence or result": Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41 at [109] per Basten JA. One of the considerations in the exercise of that discretion involves a consideration of any benefit that the borrowers obtained as a result of the unjust contract. That is why, in the ordinary case, the discharge of a pre-existing mortgage by the payment of part or all of the proceeds of the loan agreement held to be unjust would result in an order that ultimately required repayment of that sum to the new lender.
34 However, that will not necessarily be so. If it can be shown that the pre-existing liability was itself unenforceable or unjust in whole or in part, the discretionary order made in respect of the unjust contract sued upon would take account of that unenforceability or that unjustness. To do so, there would be no necessity to join the prior mortgagee because no order or relief would be sought, nor would need to be sought, against that mortgagee. Because that loan agreement has been fully performed and discharged, and because any pre-existing mortgage has itself been discharged, there is no longer a justiciable issue between the borrower and the prior mortgagee/lender.
35 No doubt the borrowers in such a case will lead evidence suggesting reasons that the pre-existing mortgage/loan agreement was unenforceable or unjust, and that the discharge of that arrangement by the incoming lender was not a benefit to the borrowers for that reason. One can envisage also that the incoming borrower may need to counter that evidence, by calling evidence from the outgoing mortgagee/lender to answer the claims of unenforceability or unjustness. But none of that justifies the joining of the outgoing mortgagee/lender, because it has no legal or equitable interest to protect.
36 Some support for this can be found in the Court of Appeal's decision in St George Bank Ltd v Trimarchi [2004] NSWCA 120 in a not dissimilar situation to the present. In that case the son of elderly migrant parents obtained a loan from National Mutual Trustees Ltd for an amount of about $2.6 million by forging their signatures and misrepresenting their financial position. That resulted in a loan for his benefit but on the security of his parents' property.
37 When he got into difficulties in relation to the repayment of the National Mutual loan, he persuaded his parents to sign the necessary documents to obtain a loan from St George Bank for $2,675,000, $2.6 million of which paid out National Mutual. Indeed, even prior to the National Mutual borrowings, there had been earlier borrowings from Westpac for the benefit of the son, and those borrowings were paid out by the loan from National Mutual. In the proceedings brought by St George Bank the parents challenged the transaction with St George Bank as well as the successively earlier transactions with National Mutual and Westpac.
38 In relation to the National Mutual transactions, Mason P (with whom Sheller JA and Cripps AJA agreed) said:
[21] The parties also joined issue as to the enforceability, in light of the Act, of the National Mutual transaction as regards the respondents.
[22] The perceived relevance of examining the unjustness of the 1994 transaction [with National Mutual] was that the appellant argued that its conduct could not be unjust within s 9 of the Act because it resulted in the respondents being discharged from their obligations to National Mutual. These were obligations as principal borrowers vis-à-vis National Mutual, whatever might be their rights of recoupment against their son, the principal debtor (Grounds B-C).
[23] Alternatively, it was argued that avoidance of the respondents' mortgages was an excessive and disproportionate remedy in so far as the respondents had obtained the discharge of the earlier mortgages.
[24] The direct relevance of the respondents' position vis-à-vis National Mutual to the issues joined between the present parties is not immediately apparent. Certainly, the fact that the St George money discharged the National Mutual debt is not conclusive (as the appellant contended: see Grounds B-C).
[25] The Act requires separate attention to be given to the transaction being sought to be enforced and the "justness" of that contract. Simply because the money advanced by St George went to discharge the earlier mortgage transaction involving National Mutual did not mean that relief had to be withheld , a fortiori where the respondents were effectively guarantors of their son's primary obligation, to the knowledge of the appellant through Mr Briggs; where the earlier transaction was tainted as regards the respondents; and where one element of the unjustness of the present transaction was the absence of independent legal advice as to the respondents' rights to challenge the National Mutual loan or financial advice as to the consequence of committing to the St George Bank transaction (J62-63).
[His Honour then set out the trial judge's findings in relation to the advance by National Mutual, and continued]:
[27] The appellant raised various grounds of appeal in relation to these findings about the National Mutual Mortgage (Grounds D-I). It submitted that the primary judge erred in finding that the National Mutual Mortgage would itself have been liable to be set aside under the Act as regards the respondents (Ground D). Grounds E-I advanced particular challenges to this ultimate finding. (emphasis added)
39 Mason P then considered the challenge to the primary judge's findings and held that the primary judge had been correct in his view that the National Mutual contract was unjust.
40 His Honour returned to the same point again when considering the circumstances of the entry into the St George Bank transaction where he said:
[39] The effect of the respondents' entry into the St George Bank transaction was to commit themselves as "borrowers" and mortgagors (offering their three properties as security) in respect of an advance of $2,675,000. Apart from $75,000, this was the sum paid by the appellant to National Mutual to discharge the debt and mortgages held by that company under the 1994 transaction that had been in substantial default since mid 1995.
[40] The respondents were jointly liable (together with their son and daughter-in-law) to National Mutual for this sum. But four qualifications to this statement need to be stated immediately:
(a) The respondents were substantially in the dark about the scope and implications of this indebtedness, due to the inadequate explanations received from Messrs Matiussi and Demasi.
(b) National Mutual's right to enforce the debt against the respondents and their properties was itself subject to the rights conferred on the respondents by the Act. As indicated, Dunford J correctly held that the National Mutual contracts could have been avoided at the suit of the respondents.
(c) The relationship between the respondents and their son Anthony was that of surety (the respondents) and principal debtor (the son) having regard to the fact that the respondents had entered into the National Mutual transaction at the request of and for the benefit of the son for whose purposes the borrowing was made.
(d) Unlike the appellant's Mr Briggs, the respondents were ignorant of the extent of the default under the National Mutual transaction (see J8, 16). (emphasis added)
41 It is to be noted also that it was in the context of Dunford J considering the principle that I have identified from Collier v Morlend Finance that he held that the National Mutual contracts could have been avoided at the suit of the borrowers. Because his Honour found that the National Mutual mortgage was also a unjust contract he held that Collier was thereby distinguishable.
42 It is notable that in Trimarchi, not only was National Mutual not a party, but no order was made under the Contracts Review Act or otherwise in relation to the National Mutual contract and mortgage. Rather, what was determined was that that contract and mortgage was liable to be set aside on the basis of the unjustness and, for that reason, the Plaintiff was not entitled to claim that the borrowers had the benefit of the amount that paid out that National Mutual mortgage.
43 Where there is an issue about the unjustness of a contract or mortgage paid out by an incoming mortgagee who is the Plaintiff in proceedings, the issue is not determined by joining that prior mortgagee as a party to the proceedings. Rather, the issue is determined in the context of the discretionary order at the second stage of the Contracts Review Act proceedings. That is so, because the issue forms part of the controversy between the Plaintiff and the Defendants. The justiciable issue is what order should be made in circumstances where the contract made between the Plaintiff and the Defendants is held to be unjust. There is no justiciable issue between the Defendants and the mortgagee/lender whose contract has been completed and whose mortgage has been discharged.
44 Additionally, s 148 Credit Act 1984 cannot apply to FMA for the reasons I gave in respect to ING. Nor can s 74 of the Consumer Credit Code apply, both because of the time limit contained in s 73 and because FMA is not "a person other than a credit provider or a mortgagee".
45 The problem with the claims made by the Defendants against FMA are not matters of pleading. They are matters of substance. There is no claim, and can be no claim, against FMA arising out of the facts pleaded. Again, the matter easily satisfies the test in General Steel Industries.