The Evaluative Judgment
144The primary Judge's finding that the FMI Mortgages were unjust rested on a number of matters set out in the Primary Judgment (at [372]). It was not suggested that his Honour failed to take account of any of the relevant statutory criteria. Rather, FMI submitted that the evaluation of injustice overlooked or gave insufficient weight to a number of circumstances.
145Mr Bell placed greatest reliance on the certificate signed by the respondents on 6 December 2006, in which they acknowledged that they had received legal advice on the matters identified in the certificate. Mr Bell cited Provident Capital Ltd v Papa [2013] NSWCA 36; 84 NSWLR 231, where it was held, in the circumstances of that case, that a lender was not responsible for the inadequacy of independent legal advice given to a borrower: at [7], per Allsop P (with whom Sackville AJA agreed); at [114], per Macfarlan JA.
146In Provident Capital v Papa, Allsop P (at [7]) stressed the importance of considering the individual circumstances of each case:
"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."
147The circumstances of this case are different from Papa. The primary Judge found (at [79]) that the respondents had not selected the Firm to give them advice concerning the FMI Mortgages. An email from Ms Locke to Ms O'Callaghan of 6 December 2006 indicated that Ms Locke arranged the appointment "so that Basil [Pittman] and Neil [Webster] can sign the documents". The email makes it clear that Mr Wilson was aware that the Firm had acted for Ms Locke or her companies on the Skyfarm loan. Indeed, Mr Wilson accepted in cross-examination that he knew that the Firm had previously acted for Ms Locke.
148In addition, Mr Wilson acknowledged in his cross-examination that the loan from FMI related to a property development that Ms Locke was undertaking. When it was put to him that he must have known that the Firm was not independent of Ms Locke, his response was that he did not know how many lawyers the Firm had, so that the respondents may have received independent advice. (Correspondence in FMI's files from the Firm showed that it had only four partners.) The following exchange then occurred:
"Q. It stands to reason, doesn't it, Mr Wilson, that if a firm has acted for Ms Locke previously, that advice given to Mr Pittman and Mr Webster in respect of a development that plainly was going to benefit Ms Locke, that there may be a potential conflict of interest, correct?
A. We are not dealing with potentialities. It never occurred to me at all. As I say, they have been told to get independent legal advice. The solicitor's certificate says that they received independent legal advice. It could have been one of the ten solicitors in the office, one of two. I don't know. It is [sic: not] for me to say.
Q. But the firm was not independent, was it?
A. I imagine not, no."
149FMI also had information available to it indicating that the certificate signed by the respondents could not have been correct. The certificate included the following:
"(e) that I am/we are satisfied that our obligations to you will not adversely impact on our ability to meet all my/our other financial obligations (including living expenses) as and when they fall due.
(f) that l/we confirm that I/we can comfortably afford all repayments resulting from this loan without incurring substantial financial hardship."
150The respondents' Asset and Liability Statement supplied to FMI disclosed no interest in the Razorback development or indeed any real property other than the Land. Even if the respondents had an income of $470,000 per annum between them (as the falsified Statement of Personal Particulars suggested), they would not have been able to repay a loan of $1,900,000 from their own resources, except by selling the Land. The Statement of Personal Particulars signed by the respondents did not disclose their ages, but said that they had lived at their current address for 68 years (Mr Webster at that stage was in fact 65). The source of their income was not stated, other than through the notation that they were "self-employed".
151Mr Wilson testified that the capacity of a borrower to repay a loan was a relevant factor in FMI's consideration of a loan application, but he accepted that the only step taken by FMI to assess that capacity was to send the borrower to an independent solicitor for advice. In particular, no efforts were made to obtain copies of tax returns or to obtain a report from the respondents' accountants.
152Mr Wilson also gave evidence that the primary source for the repayment of the loan was seen by FMI as the completion of the development project and the sale of the lots comprised in it. But beyond undertaking a Google Earth search to locate the Razorback development, FMI made no inquiries about the viability of the project or the likely returns, if any. No title search was undertaken to ascertain the proprietors of the land being developed. Moreover, except for a telephone call between Mr Wilson and the respondents, to which I shall return, FMI made no attempt to ascertain whether the respondents had any interest in the development. Indeed, FMI had information provided to it by Ms Locke in connection with her application for the Skyfarm loan asserting that one of her companies owned the Razorback land.
153The primary Judge asked Mr Wilson a series of questions, the answers to which showed how little attention was paid to the risks associated with the Razorback project.
"Q. Mr Wilson, I am just listening to the evidence and I would be helped if you could answer this, it strikes me what counsel is putting to you about the Razorback development is two separate issues; one is as with every development there is a financial issue?
A. Correct.
Q. Will the development realise the profits that are anticipated within the time anticipated?
A. Yes.
Q. And that is a risk with every development?
A. Correct, yes.
Q. And as I understand your evidence at no time before the loan was advanced in 2006 did you have any material, any facts to enable you to assess the extent of that financial risk in this particular case?
A. Correct.
Q. The second proposition that counsel I think was putting to you is that with this particular loan there was a question as to what the legal interest or entitlement was of Mr Pittman and Mr Webster to the proceeds of that development?
A. Correct.
Q. That's not always the case in loans because often it is the developer who is coming to you for the loan?
A. Yes.
Q. And you take security over the land which is the subject of the development?
A. Correct.
Q. That was clearly not happening in this case?
A. No.
Q. So, there was a risk touching upon the legal interest of Mr Pittman and Mr Webster to have any entitlement at all to the proceeds of the development which would have enabled them to repay the loan?
A. Yes.
Q. And am I right also in understanding, please tell me if I don't understand this correctly, that so far as that legal risk was concerned, if I can call it that, you had no documents at all prior to the loan being advanced which could have satisfied you that Mr Pittman and Mr Webster had a legal entitlement to any of the proceeds of the development?
A. Correct, we left it in the hands of their legal advisor that we sent the documents to.
Q. Is the answer you had no documents which were capable of demonstrating to you the extent of that risk?
A. Correct, yes."
154This is not merely a case of lack of interest on the part of a lender as to a borrower's capacity to repay or the borrower's role in a project. FMI had information available that, if given more than cursory attention, would have demonstrated that the financial information supposedly supplied by the respondents was almost certainly wrong. FMI had valuations of each of the three Lots. Nobody reading the description of each Lot, one of which comprised the respondents' home, could have responsibly concluded that the Land was capable of generating an income of $470,000 per annum for the respondents, or anything like that sum. For example, the valuation of Lot 23 showed that it was vacant land with essentially worthless improvements, while the valuation of Lot 9 revealed a poor quality cottage rented for $50 per week.
155There was nothing in the evidence that explained how FMI could have accepted that the respondents were earning $470,000 per annum as self-employed persons when (as a form sent by them to FMI disclosed) neither was registered for GST. On the contrary, Mr Wilson, when his attention was drawn to the documents relating to registration for GST, said that it would have indicated to him that the respondents were earning less than the GST threshold (a fraction of $470,000 per annum). But he also said that even the possibility that the respondents had lied about their income would not have troubled him sufficiently to make further inquiries.
156Mr Bell submitted that the telephone conversation of 1 December 2006 between Mr Wilson and the respondents demonstrated that FMI had taken steps to ensure that the respondents had an interest in the development. Mr Wilson's note of the conversation was as follows:
"Spoke to [Webster] who is quite aware of the refinance. When asked if they were completing the subdivision - he indicated that they had been developing this for a long time and it will be worthwhile to them to complete and take profit. They use Christopher Edwards Solicitor. Told them they need to obtain independent advice for these documents. Spoke to [Pittman] (negative guy) he also advised that they would benefit financially from the Razorback development. Orchard farming too hard with no water and bushfires threatening."
157The background to this conversation is that Mr Wilson asked Ms Locke the previous day to organise the call because it was "a requirement that [he] speak to each borrower on each loan". Mr Wilson recognised in his evidence that by entertaining an application for finance from Ms Locke, notwithstanding that she was neither the borrower nor a finance broker, FMI was contravening its own Manual (as his Honour found at [311]).
158There was evidence that the conversation with the respondents lasted four and a half minutes. Mr Wilson said that he took from the conversation the proposition that the development project was a "joint venture" or "shared development" between the respondents and Ms Locke, although the note does not include either expression. Apparently Mr Wilson did not inquire as to the nature or extent of the respondents' interest in the development; the likely returns from the project; whether there was any documentation recording their interest in the project; or why Ms Locke and her companies were not providing their own properties as security. It is quite possible that the respondents were referring in the conversations to the relatively small sums offered to them by Ms Locke in late 2006 in return for their co-operation in extending the loans, but this possibility was not explored by Mr Wilson. (There is no evidence that the respondents received any of the money promised by Ms Locke.)
159Mr Boyce, the Compliance Officer of FMI, said that he had seen Mr Wilson's note of the conversation in which Mr Pittman said that the respondents would benefit from the Razorback development. Mr Boyce accepted that, other than its location, he had no knowledge whatsoever about the Razorback development and no way of assessing the risks associated with the project. Nor did he have any documentation that could have satisfied him as to the nature of the respondents' interest in the project. Mr Wilson and presumably Mr Boyce were aware that Total Property, the company that received the surplus funds after the Flamanda Mortgage had been paid out, was Ms Locke's company, but no inquiry was made as to why the funds were going to that company.
160In these circumstances, his Honour was justified in finding (at [321], [330]) that the conversation did not provide a basis from which to conclude that the respondents were engaged in a joint venture with Ms Locke, such as to provide a commercial rationale for borrowing over $2 million on the security of the Land (even taking into account the discharge of the existing Flamanda Mortgages). FMI was lending a large sum of money to borrowers whose income was massively overstated (as rudimentary inquiries would have revealed), to support a project in which they had no financial interest (as rudimentary inquiries would also have revealed).
161FMI's submission that it acted in accordance with its own Manual does not take its case further. As the primary Judge found (at [311]) there were significant contraventions of the procedures laid down by the Manual.
162In addition, FMI failed to observe its own procedures requiring attention to an "exit strategy" for a loan in the event of default. This was not a requirement imposed by the Manual, since it only required inquiries as to the serviceability of regulated loans, which this was not. But Mr Wilson said in his affidavit that in the case of the loan to the respondents
"the primary consideration [was] the exit strategy and in this instance the sale of [the respondents'] land sub-divisional development at Razorback."
163In fact, the Credit Analysis Report prepared by Mr Wilson on 1 December 2006, although it referred to his conversation with the respondents that day, did not record any details in the space provided for "Exit Strategies". Neither Mr Wilson nor Mr Boyce knew anything about the Razorback development, other than its location. (Mr Wilson, in his evidence appeared to suggest that an exit strategy was not required for a "joint venture", but the distinction he drew between a direct loan to a developer and a joint venture loan is difficult to follow and was not accepted by the primary Judge as a legitimate distinction).
164The primary Judge gave cogent reasons for concluding that the FMI Mortgage was unjust in the circumstances. Since I have rejected FMI's criticisms of that conclusion, there is no basis for setting it aside.
165In essence, this is a case where a serious injustice was perpetrated on unsophisticated and vulnerable borrowers who placed their entire assets at risk to benefit development projects undertaken by a person unconnected to them otherwise than by a supposed friendship. FMI had information available that should have alerted it to the very real possibility, if not likelihood, that the respondents were being taken advantage of. Despite this, FMI did not undertake even the simplest inquiries that would have revealed that false information had been supplied purportedly on behalf of the respondents and that there was no commercially rational basis for them to enter into the FMI Mortgage, even allowing for the discharge of the existing borrowings. Moreover, FMI should have known that Ms Locke was in a position of conflict of interest and that the supposedly independent solicitor providing advice to the respondents was not truly independent.
166I add a further observation. Mr Bell's submissions appeared to assume that if FMI adhered to its own Manual, it would be rendered immune from a finding that the FMI Mortgages were unjust. A contravention of guidelines does not necessarily involve a departure from prudent lending practice: Khoshaba, at [42]. Equally, adherence to guidelines does not necessarily demonstrate compliance with prudent lending practice. Guidelines might themselves constitute a departure from prudent lending practice, for example if they dispense (as did FMI's Manual) with the need for any inquiry as to the capacity of borrowers to service a loan. There is no need to pursue the point further, since FMI departed in material respects from its own Manual. But even if FMI had complied with its Manual a finding of injustice might still have been made.