Chilcott v HomeSec Finance Express Pty Ltd

Federal Court of Australia|2011-06-28|Before: Marshall ACJ

REASONS FOR JUDGMENT 1 Lake Barrington is a picturesque waterway nestled at the base of the Forth River Valley about 40 kilometres south of Devonport in Northern Tasmania. It is a popular venue for water-skiers. The applicants, Mr and Mrs Chilcott, enjoy water-skiing. During Easter 2009 they observed a property for sale which contained a shack close to the lake. On 11 April 2009, the Chilcotts signed a contract to purchase that property ("the Wilmot property"). The purchase price was $135,000. The Chilcotts paid a deposit of $6,750 and sought funding from the National Australia Bank ("NAB") for the balance. NAB refused to fund the purchase. The Chilcotts engaged the first respondent, HomeSec Finance Express Pty Ltd ("HomeSec") to seek to secure funding for the purchase of the Wilmot property. HomeSec ultimately, through its agent Mr Justin Goodwin, arranged for the Chilcotts to take out a short term loan from the second respondent, Xpress Loan Company Pty Ltd ("Xpress") to complete the purchase of the Wilmot property. Mr Goodwin was unable to secure a long term loan for the Chilcotts. The loan from Xpress remains unpaid and is accumulating interest at a high rate, threatening the solvency of the Chilcotts.

The trade practices claim against HomeSec 2 The Chilcotts seek damages against HomeSec for what they allege is the misleading or deceptive conduct of Mr Goodwin. They rely on ss 52 and 82 of the Trade Practices Act 1974 (Cth) ("the Act"). They also seek orders under s 87 of the Act requiring HomeSec to indemnify them in respect of amounts paid or payable to Xpress in excess of any amount that would have been payable in the event that the Xpress loan was subject to the provisions of the Consumer Credit (Tasmania) Code, or the difference between the amounts payable and those which would have been payable under a loan agreement for long term financing at commercial rates. 3 In written submissions filed after the hearing of the evidence in the proceeding, counsel for the Chilcotts, Mr McElwaine, stated that the Chilcotts now confine their case against HomeSec to the allegations made at paragraph 6 of their statement of claim under the heading "misleading and deceptive conduct". Those same written submissions contend that the critical issues in the proceeding as between the Chilcotts and HomeSec are as follows: • The business declaration purpose point; [and] • the short term financing point: or … whether [the Chilcotts] were misled into entering the loan agreement with [Xpress] upon the basis that their liability would not extend beyond one month. 4 The pleading concerning an alleged breach of s 52 of the Act alleges that Mr Goodwin made certain oral representations regarding the two critical issues referred to above. The first claimed representation is that set out at paragraph 3.2(i) of the statement of claim which says: On or about 4 June 2009 [HomeSec], by Justin Goodwin, made the following oral representations to the [Chilcotts]; …. (i) the [Chilcotts] should state that the purpose of acquisition of the Wilmot property was as an investment and not as a holiday shack 5 The second claimed representation is contained in paragraph 3.3 of the statement of claim, which alleges that: (a)cting in reliance upon the…representations, the [Chilcotts] advised [HomeSec], by its agent Justin Goodwin, that they would agree to accept short term financing as arranged by him for a period of one month…to complete the purchase contract (for the Wilmot property).

(i) the business declaration purpose issue 6 For reasons which follow, the Court rejects the submissions of Mr McElwaine on what he has described as the "business declaration purpose point". 7 It is not in dispute that when Mr Chilcott approached Mr Goodwin about securing funding for the purchase of the Wilmot property he told Mr Goodwin that: he wanted to buy a shack; and the shack was near a lake where he and his family water-skied. 8 When asked why, in several loan applications, he signed declarations stating that the loan was for investment purposes, Mr Chilcott said that Mr Goodwin told him to say the loan was for "investment purposes" because it was "easier to get the money a lot quicker". Mr Goodwin asked Mr Chilcott to obtain a real estate appraisal about what rent could be achieved from the Wilmot property. Mr Chilcott was happy to oblige and go along with the charade that he was buying the Wilmot property as an investment. He didn't challenge the need to obtain a rental appraisal. He gave evidence that he didn't think it was "a big deal" or that "there was any difference". 9 To the extent that it was false and misleading for Mr Goodwin to say that the Chilcotts should state that their purpose for the acquisition of the shack was for investment purposes, it was a false situation in which the Chilcotts were happy to knowingly participate. The Chilcotts desire was to obtain a loan to fund their dream holiday shack. They did not care if they had to put down on paper, when seeking to finance their purchase, that they would use the land for investment or business purposes. It was the end that mattered to the Chilcotts, not the means. It was not a case about being misled as to the purpose of the loan. In any event, the Chilcotts would not have been able to obtain the loan from Xpress had they not agreed that the loan was for investment purposes. It is also conceivable that Mr Goodwin genuinely viewed the loan as in the nature of an investment because the Wilmot property was a second property for the Chilcotts, their family home being located in Penguin ("the Penguin property"). 10 For the foregoing reasons the Court does not accept that Mr Goodwin misled or deceived the Chilcotts into obtaining a loan for the purchase of the Wilmot property by telling them to state the purpose of the acquisition was for an investment. The Chilcotts were content to apply for the loan in full knowledge that to achieve their purpose they had to say the loan was for investment purposes. Otherwise HomeSec could not help them and they understood that fact. The Chilcotts were not misled or deceived in this respect but were willing participants in a charade.

(ii) the short term finance issue 11 Were the Chilcotts misled by Mr Goodwin into entering the loan agreement with Xpress upon the basis that their liability would not extend beyond one month? That is the short point that underlies this issue. 12 To understand that short point, it is essential to examine the entire relationship between the Chilcotts and Mr Goodwin. 13 Before Mr Chilcott rang HomeSec on 15 May 2009 and spoke to Mr Goodwin, NAB had refused to finance the purchase of the Wilmot property. NAB considered that the Chilcotts could not service the loan. It also had concerns regarding aspects of the Chilcotts' credit history. NAB had received a valuation from Esk Property Group ("Esk"), dated 17 April 2009, which valued the Chilcott's Penguin property at $350,000 ("Esk Valuation"). NAB appeared to have concerns about the lack of equity which the Chilcotts had in the Penguin property based on the Esk Valuation. 14 In the telephone discussion on 15 May 2009, Mr Chilcott did not tell Mr Goodwin about the Esk Valuation. Mr Chilcott was aware of the Esk Valuation at that time, although he did not receive a copy of it until 19 November 2009. Between becoming aware of the Esk Valuation and seeking finance through HomeSec, Mr Chilcott obtained a market appraisal of the Penguin property from a real estate agent, Best Properties. Best Properties considered that the Penguin property would sell for between $560,000 to $580,000. 15 Mr Chilcott knew that the higher the value placed on the Penguin property the more likely it was that he would be able to obtain finance to purchase the Wilmot property. When asked by Mr Goodwin, in their initial telephone conversation, what the Penguin property was worth, Mr Chilcott referred to the Best Properties appraisal but not to the Esk Valuation. Mr McElwaine contends that the Best Properties appraisal is irrelevant because no putative lender relied on the appraisal and each of them made their own inquiries about the value of the property. However, counsel for HomeSec, Mr Woolley, submits that had Mr Chilcott told Mr Goodwin about the Esk Valuation, Mr Goodwin would not have contemplated arranging the short term loan from Xpress. Mr Woolley also submits that Mr Goodwin would not have contemplated encouraging the Chilcotts to take up a short term loan if he had been informed by Mr Chilcott of the fact that NAB had declined finance, in part, because of defaults and judgments recorded on the Chilcotts' credit files. There were two relevant credit matters that were of concern to NAB: a judgment for a debt to Goodyear Tyres against Mr Chilcott (despite the fact that he had paid the debt), and a debt for a $50 dental bill in Mrs Chilcott's name. Mr Goodwin was only informed of these credit related matters in his telephone conversation with Mr Chilcott on 15 May 2009. 16 On 25 May 2009, Mr Goodwin sent Mr Chilcott a generic loan application form. In substance, this amounted to a proposal to finance the purchase of the Wilmot property by refinancing an existing home loan on the Penguin property with NAB. It also involved paying out a business overdraft of $50,000 with NAB and a credit card debt to the Commonwealth Bank of $15,500. Ultimately, the proposed lender, Resimac, classified the loan as one for investment purposes. The Chilcotts acknowledged that to be the case by signing a declaration to that effect. 17 On or about 18 June 2009, Mr Goodwin sought finance for the Chilcotts from Resimac. Resimac offered conditional approval subject to a valuation which Resimac would obtain. Resimac was unable to obtain a valuation until after 30 June 2009 and the vendor of the Wilmot property was not prepared to extend the settlement date for that property beyond 30 June 2009. 18 Mr Goodwin then advised the Chilcotts that if they wished to complete the purchase of the Wilmot property they had the option of taking out a short term loan (also known as a caveat loan). Mr Goodwin told Mr Chilcott that such loans were intended to provide short term finance to borrowers for business or investment purposes using equity available in a borrower's existing property. He also explained that such loans attracted high rates of interest. Mr Chilcott considered that he had little choice but to seek the short term loan to secure the Wilmot property. Mr Goodwin informed Mr Chilcott that long term financing should become available with Resimac if Mr Chilcott was confident about his valuation of $560,000 based on the Best Properties appraisal. 19 On 24 June 2009, HomeSec arranged for Elders to perform a valuation of the Penguin property with a view to a short-term finance application. The Elders valuation was $430,000 to $440,000. Xpress considered that valuation sufficient to provide a positive assessment of an application for short term finance. Mr Goodwin was not told about the Elders valuation. He gave evidence that had he known about that valuation he would not have advised the Chilcotts to go ahead with the short term finance proposal with Xpress. At no time prior to the 30 June 2009 settlement date for the Wilmot property did Mr Goodwin tell Mr Chilcott that he had obtained approval to refinance the Penguin property and to finance the purchase of the Wilmot property. The exit strategy from the short-term loan was the Resimac refinancing. However, that depended entirely on the valuation received by Resimac on the Penguin property. Based on the valuation appraisal given to Mr Goodwin by Mr Chilcott, Mr Goodwin had no reason to lack confidence that Resimac would provide long term finance to Mr Chilcott. However, Mr Chilcott had not told Mr Goodwin of the Esk Valuation or of the Elders valuation by HomeSec. 20 The short-term loan provided by Xpress was for one month. Mr Chilcott understood that within that month, an 'exit strategy' of long term refinancing was required, and that the one month loan was in effect to bridge the gap between settlement of the Wilmot property and an approval for long term refinance. 21 On 26 June 2009, Mr and Mrs Chilcott received independent advice regarding the loan from Xpress from a Burnie solicitor, Ms Joanne McGrath. In a meeting that lasted about half an hour, Ms McGrath explained the effect of the loan agreement with Xpress to the Chilcotts. When giving evidence, Ms McGrath admitted that she had a limited recollection of the meeting. However, her file contains declarations signed by Ms McGrath confirming that at the meeting she explained to the Chilcotts the effect of defaulting on the short term loan, and that she informed the Chilcotts that if they had any doubts about the viability of the transaction that they should get independent financial advice. The Chilcotts, in turn, signed declarations stating that they had understood the explanation of the documents provided by Ms McGrath. With the short term loan used to finance the purchase, the Wilmot property settled on 30 June 2009. 22 Unfortunately, the Resimac valuation was only $375,000. Accordingly, on 6 July 2009, Resimac rejected the Chilcotts' long term loan application. Mr Chilcott then arranged for a further valuation from Cradle Coast Valuers. On 14 July 2009 Cradle Coast valued the Penguin property at $480,000. This new valuation was sent to Resimac so that it may reconsider the loan application in light of this new development. 23 By 20 July 2009, Resimac had not given its decision on the reconsideration request, so Mr Goodwin applied to Prompt Capital for long term refinancing on the basis of the Cradle Coast valuation. Prompt Capital gave conditional approval on 3 August 2009. However, Prompt Capital rejected the application because the Penguin property was three acres over the maximum allowable area allotted by Prompt Capital's lending policy. 24 Soon thereafter on 18 August 2009, Mr Goodwin became aware of two additional credit issues arising in respect of the Chilcotts. These were matters which were not referred to by Mr Chilcott in his 15 May 2009 telephone conversation with Mr Goodwin. On 19 August 2009, Mr Chilcott provided explanations for the newly revealed credit issues. Mr Goodwin then applied via Mortgage Mart for a long term refinancing loan with La Trobe Financial ("La Trobe"). 25 On 7 September 2009, La Trobe provided an indicative offer which the Chilcotts signed on 11 September 2009. La Trobe obtained a valuation of $475,000 and on that basis was only prepared to lend the Chilcotts $356,200. On 30 September 2009, Mortgage Mart, on behalf of La Trobe, expressed concern about the Chilcotts' credit history. Two of the matters raised were news to Mr Goodwin. Although both matters were explained by Mr Chilcott, it would have been much better for Mr Goodwin to have full instructions about the Chilcotts credit issues from the outset of their dealings so as to properly advise them about finance prospects. La Trobe ultimately rejected the Chilcotts' applications. 26 Having regard to the foregoing, the Court rejects the proposition that the Chilcotts were misled by Mr Goodwin into entering the loan agreement with Xpress upon the basis that their liability would not extend beyond one month. The Chilcotts were made aware by Mr Goodwin that the long term refinancing proposal with Resimac, as at 30 June 2009, depended on the valuation which Resimac would put on the property. Mr Chilcott had told Mr Goodwin of the $560,000 to $580,000 Best Properties appraisal but had not told Mr Goodwin about the $375,000 Esk Valuation. The Chilcotts were made aware that refinancing on a long term basis was needed by the end of July 2009. The Xpress loan documents provided that a default rate of interest would apply after one month. That was a risk which the Chilcotts must be understood to have taken by entering into a short term loan given that there was, and could be, no certainty that a long-term loan could be secured in one month. Valuation was a critical issue and one on which Mr Chilcott withheld crucial information from Mr Goodwin, being the Esk Valuation. 27 Based on the above findings, the Court rejects the Chilcotts' claim that Mr Goodwin, on behalf of HomeSec, misled them into entering the short-term loan with Xpress on the basis that their liability would not extend beyond one month. Consequently the claim by the Chilcotts against HomeSec must be dismissed.

The claim against Xpress 28 The Chilcotts claim against Xpress is that Xpress engaged in unconscionable conduct with respect to them, in breach of s 51AA of the Act. Section 51AA(1) of the Act provides: (i) A corporation must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories. As can be seen from s 51AA(1), unconscionable conduct includes conduct considered to be "unconscionable" in accordance with principles recognised by the common law of Australia. 29 In ACCC v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51 at [5], Gleeson CJ referred to the second reading speech given in Parliament on 3 November 1992 when s 51AA was introduced, where the following was said: Unconscionability is a well understood equitable doctrine, the meaning of which has been discussed by the High Court in recent times. It involves a party who suffers from some special disability or is placed in some special situation of disadvantage and an 'unconscionable' taking advantage of that disability or disadvantage by another. The doctrine does not apply simply because one party has made a poor bargain. In the vast majority of commercial transactions neither party would be likely to be in a position of special disability or special disadvantage, and no question of unconscionable conduct would arise. Nevertheless, unconscionable conduct can occur in commercial transactions and there is no reason why the Trade Practices Act should not recognise this. 30 At [7] in Berbatis, Gleeson CJ observed that: In everyday speech, "unconscionable" may be merely an emphatic method of expressing disapproval of someone's behaviour, but its legal meaning is considerably more precise. After referring to Blomley v Ryan (1956) 99 CLR 362, his Honour observed at [8] that factual circumstances which involve unconscionable conduct are wide and varied and that: The common characteristic of such circumstances is that they place one party at a serious disadvantage in dealing with the other. Although his Honour made clear at [11] that "relevant disadvantage", does not follow "simply because of inequality of bargaining power." 31 At [14], Gleeson CJ said: Unconscientious exploitation of another's inability, or diminished ability, to conserve his or her own interests is not to be confused with taking advantage of a superior bargaining position.. His Honour considered that the first but not the second element above was of legal consequence under s 51AA. Chief Justice Gleeson's judgment in Berbatis is consistent with the other majority judgments in that case. 32 The Chilcotts allege in their statement of claim at paragraph 8.5 that: [Xpress] engaged in conduct whereby it unconscionably exploited the necessitous circumstances of the applicants in order to extort from them exorbitant interest rates, and in particular exorbitant capitalised interest rates, pursuant to the loan agreement. 33 Paragraph 8.1 of the statement of claim refers to the following interest rate characteristics of what the Court has described above as the short term loan provided by Xpress and arranged by Mr Goodwin pending search for long term finance for the Chilcotts: it is specified at a standard rate of 15% per month, with an annual rate of 180% per annum; it is reducible to the concessional rate of 8% per month and is thereby 96% per annum; in the event of default, at the election of Xpress, it may be capitalised (although this did not occur); it is to be calculated daily on the balance outstanding from time to time; and it is to be charged on the last day of each month. 34 Mr McElwaine submits that the amount of interest charged by Xpress does not reflect the risk which it undertook on an asset lending transaction. He contends that Xpress had no expectations that its loan would be re-paid by principal and interest instalments. 35 Xpress concedes that the rates of interest set out in the loan agreement are high but refers to evidence of Mr Paul Stone of HomeSec that they were the prevailing rates for short term loans of that type in June 2009, albeit at the upper end. Xpress submits that the nature of the loan required high interest rates. It contends that the loan was made with expedition, the application having been received on 25 June 2009, considered and approved that day, with documentation drawn for consideration and approval by the Chilcotts and Ms McGrath, with execution on 26 June 2009 and the distribution of funds to the Chilcotts' conveyancer on 29 June 2009 to allow settlement on the Wilmot property. 36 Xpress submits that there was a great risk to it in making the loan. It observes that more than the full purchase price of the Wilmot property was being loaned and the proposed second mortgage over the Penguin property was not able to be registered until August 2010. 37 Xpress submits, through its counsel Mr Wallace, that the Chilcotts were not under any special disability or disadvantage of which it took advantage. Mr Wallace refers to the evidence that at the time the short term loan was made, there was an expectation in the Chilcotts that they would obtain long term finance from HomeSec. Mr Wallace observes that the long term finance was being sought but had not been put in place in time for settlement on the Wilmot property. He contends that the fact that the Chilcotts were seeking short term finance to complete their purchase of the Wilmot property did not mean that they were at a special disadvantage. Mr Wallace submits that the only disadvantage of the Chilcotts was their desire to take possession of the Wilmot property. He stresses that the Chilcotts were under no obligation to complete the contract to purchase the Wilmot property. They may have simply elected to lose their deposit. In effect, Mr Wallace contends that the Chilcotts chose, instead of walking away from the Wilmot property, to enter into a short term loan contract at high interest rates which Mr Chilcott said were pointed out to them by Ms McGrath as high, on the prospect that long term finance would soon follow. Mr Wallace says, in his written submissions: …it is only because of the failure to obtain long term finance and the [Chilcotts] being unable to execute the exit strategy from the short term loan that the unfortunate circumstances and continuing liability to Xpress arose past the 29th July 2009. 38 Mr Wallace submits that the Court may find, "that the failure to obtain long term funding was due to the [first] applicant's misrepresentations or failure to convey all relevant factors to Mr Goodwin." To the extent that the submission refers to failures to convey all relevant factors it is correct, as evidenced by the findings in that part of the judgment above dealing with HomeSec. 39 The abovementioned submissions of Mr Wallace are persuasive. The situation in which the Chilcotts found themselves in late June 2009 when they entered into the short term contract involved them making a conscious choice between walking away from the Wilmot property and forfeiting their $6,750 deposit, or entering into a short term loan at obviously high interest rates in the hope that a long term loan would be just around the corner. Although the high interest rates may seem unfair, in the absence of the securing of long term financing, the Chilcotts were required to seek out a lender of last resort like Xpress if they wished to persist with their desire to obtain the Wilmot property. 40 Xpress did not engage in unconscionable conduct. It did not seek to capitalise the interest under the loan. It did no more than carry on its usual business as a lender of last resort at transparently high interest rates to people who had a choice not to go ahead with the transaction at the risk of losing their deposit on the Wilmot property. The Chilcotts were not placed at a serious disadvantage simply because of the high interest rates charged by Xpress. There was no unconscientious exploitation by Xpress of the Chilcott's inability to conserve their own interests. The Chilcotts had a choice. They were able to walk away from the Wilmot transaction and not enter a short term loan. They entered the short term loan after Mr Goodwin had said to Mr Chilcott that a long term loan should follow if Mr Chilcott was confident about his expectations for a valuation of the Penguin property. 41 Mr McElwaine submits that unconscionability independently arises from Xpress drawing up loan documentation with capitalisation of interest. He contends that the capitalisation of interest provision, of itself, justifies a finding of unconscionable conduct. He refers to Planet Securities Unit Trust v Dalrymple [1999] QSC 204 at [58] to [59]. 42 Mr Wallace responds that HomeSec, not Xpress, drew up the documentation and that Dalrymple is distinguishable. In Dalrymple the borrower was held to be under a special disadvantage of which the lender took advantage. No such special circumstances exist in the instant case where the borrowers had a choice whether to enter the short term loan agreement. There was unconscientious taking of advantage of the borrower in Dalrymple but that is a factor lacking from the instant circumstances. 43 In any event, as Mr Wallace's reply submissions demonstrate, cl 4.2 of the loan agreement required an election to be made by Xpress to capitalise any unpaid interest. Notice of that election was required under cl 14 of the agreement. No such notice was ever given and hence no unpaid interest capitalised. It is therefore unnecessary to deal with the submission that capitalisation of unpaid interest per se is not unconscionable as being "common parts of mortgage lending" in Tasmania. 44 Mr Wallace further submits that had the Chilcotts obtained long term finance and repaid the short term loan, there would have been no debate about whether Xpress had engaged in unconscionable conduct. So much is accepted. The short term loan cannot be considered to evidence unconscionable conduct simply because long term financing was not secured, when no such issue would have been raised had long term finance ensued. 45 The Court also rejects the submission of the Chilcotts that the loan was unjust because it constituted asset lending without regard to the ability of the Chilcotts to repay the loan. Xpress, the Chilcotts and HomeSec, through Mr Goodwin, all expected the Chilcotts to repay the loan on the basis of long term financing which Mr Goodwin was working to secure but, through various problems and issues discussed earlier in these reasons, did not eventuate. 46 Having regard to the foregoing the Court dismisses the Chilcotts claims against Xpress. It is unnecessary, therefore, to deal with the cross claim in the proceeding made by Xpress against HomeSec. It is dismissed without an adjudication of its merits. It did not add in any material way to the costs involved in the matter.

Orders 47 As the Court has dismissed all claims of the Chilcotts and not found it necessary to deal with Xpress's cross claim, it will order as follows: 1. The application is dismissed. 2. The cross claim of the second respondent is dismissed without an adjudication of its merits. 3. The applicants pay the respondents' costs of the substantive proceeding to be taxed in default of agreement. 4. There is no costs order on the cross claim. I certify that the preceding forty-seven (47) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Marshall.

Trade Practices Act 1974(Cth)ss 51AA, 52, 82, 87

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