Gray v Latter

The relevance of the public interest: s 9(1) of the Contracts Review Act 101The Act specifically makes the public interest and the circumstances of the case mandatory relevant considerations in the determination of whether a contract or provision of a contract is unjust: s 9(1). 102The Act followed the draft Bill contained in the Peden Report (John R Peden, Harsh and Unconscionable Contracts: Report to the Minister for Consumer Affairs and Co-operative Societies and the Attorney-General for New South Wales, (1976)). The author identified the purpose of the reference to public interest in the draft Bill as being to: "direct the courts' attention to the underlying purpose of the Bill, namely to prevent unjust dealings which offend against community standards of business morality" John R Peden, The Law of Unjust Contracts, (1982, Butterworths) at 122 (Peden). 103The Peden Report is relevant extrinsic material that may be considered in the interpretation of "public interest" in s 9(1): s 34(2)(b) of the Interpretation Act 1987 (NSW). In my view it confirms the ordinary meaning (s 34(1)(a) of the Interpretation Act) and the intended breadth of the operation of the Contracts Review Act. It follows that ome consideration of community values and standards is required, to give effect to the Act as a whole, and to the words "public interest" in s 9(1) in particular. 104Although the Contracts Review Act has features that are not replicated in the laws of other States, and in some respects is of wider and more general application, it belongs to the category of laws referred to by the Full Federal Court (Allsop CJ, Jacobson and Gordon JJ) in Australian Competition and Consumer Commission v Lux Distributors Pty Limited [2013] FCAFC 90 at [23]: These laws of the States and the operative provisions of the ACL [Australian Cosumer Law] reinforce the recognised societal values and expectations that consumers will be dealt with honestly, fairly and without deception or unfair pressure. 105I consider that the public interest identified in the Peden Report of preventing unjust dealings which offend against community standards of business morality militates in favour of a determination that the transaction was unjust. Ms Perkins' view was, in substance, that an asking price sought in circumstances where there was a personal relationship between the putative vendor and purchaser, which was substantially closer than arms length, ought not be in excess of what could reasonably be regarded as a fair market value. A vendor would be entitled to specify a price in the upper end of the range in the expectation that there could be some negotiation to reduce the figure but ought not nominate an exorbitant asking price. I do not consider her view to be at odds with community standards of business morality. 106A substantial disparity between price and value (sometimes referred to in the authorities in terms of "inadequate consideration") is a not uncommon symptom of unfairness and may, indeed, be an indication of it. The relevance of the factor is explained in Peden at 26-27: " . . . a gross inadequacy of consideration remains an important element in the determination of whether a transaction as a whole is fair. Thus, where the inadequate consideration is linked with some element of procedural unconscionability it may demonstrate that the unequal exchange has resulted from a positive abuse of superior bargaining position. In Blomley v Ryan (1956) 99 CLR 362 at 405 Fullagar J explained: "inadequacy of consideration, while never of itself a ground for resisting enforcement, will often be a specially important element in cases of this type. It may be important in either or both of two ways - firstly as supporting the inference that a position of disadvantage existed, and secondly as tending to show that an unfair use was made of the occasion. Where, as here, intoxication is the main element relied upon as creating the position of disadvantage, the question of adequacy or inadequacy of consideration is, I think, likely to be a matter of major, and perhaps decisive, importance." 107In Blomley v Ryan, the defendant sold his rural property for a gross undervalue. In the instant case, the defendants purchased the property for a gross overvalue. Although such disparity does not of itself prove unfairness it tends to show that unfair use was made of an occasion, as indeed I consider occurred in the present case.

Other relevant factors: s 9(2) of the Contracts Review Act 108The matters listed in s 9(2) of the Act must be taken into account to the extent to which they are relevant. I do not consider that there was any particularly material inequality in bargaining power between the plaintiffs and the defendants. The contract to sell the property was the subject of negotiation. It was reasonably practicable for the defendants to reject any of the provisions of the contracts and not proceed with the purchase. Indeed, had they appreciated that the price was grossly in excess of its value, they would not have entered into the transaction. 109As to s 9(2)(d) of the Act, in my view, the condition that the defendants repay the whole principal sum owing on 7 January 2013, coupled with the setting of a purchase price which was grossly in excess of the market value of the property, was unreasonably difficult for the defendants to comply with since their equity was likely to remain negative for much longer than the two-year period. The setting of a purchase price which was almost 50% higher than the true value of the property was not reasonably necessary for the protection of the plaintiffs' legitimate interests. The plaintiffs had a legitimate interest in capitalising on the increased land that the survey revealed but they had no legitimate interest in obtaining an indemnity for all their costs and expenses of their relocation from Queensland to New South Wales, together with a sizeable profit margin. 110I do not consider s 9(2)(e) or (f) (which concern age, mental or physical incapacity, economic circumstances, educational background or literacy) to be relevant. Nor do I consider s 9(2)(g) to assist the defendants since the contract was reasonably clear and in plain English and they understood its legal, although not its practical or financial, effect. 111Section 9(2)(h) and (i) are relevant. Although no complaint in respect of the legal advice obtained was made, no financial advice was obtained by the defendants. Had they obtained such advice, they would have been advised that the transaction was improvident. They did not understand that the practical effect of the contracts was to bind them to an agreement to purchase a property so far in excess of its market value that they would be unable to obtain refinance within the stipulated period. 112Section 9(2)(j) refers to undue influence, unfair pressure and unfair tactics. The defendants did not press the allegation of undue influence. I do not consider that unfair pressure was exerted by the plaintiffs against the defendants. Although I am not necessarily satisfied that the word "dishonest", which was used by Ms Perkins to describe the plaintiffs' conduct, is apposite, I consider that the plaintiffs used "unfair tactics" in their dealings with the defendants. 113In my view, the plaintiffs took advantage of the belief they had engendered in Ms Perkins particularly, that they were trustworthy and that they would not seek to take advantage of the relationship that they had developed with Mr Latter to ask for an exorbitant price which could not, on any view, be justified as being in the realm of fair market value. To borrow the words of Fullagar J in the passage from Blomley v Ryan cited above, "an unfair use was made of the occasion" by the plaintiffs. 114In any event, the plaintiffs did not seek in the proceedings to justify the price as being the value of the property: they asked for it because it was the amount of money they wanted for their property. Any rationalisations they engaged in to come to the figure of $240,000 required extraneous matters to be included, including expenses and profit. 115Mr Gray's representation to the defendants that they should consider the plaintiffs to be a "really nice, friendly bank" gave the defendants, in my view, a false sense that there was some assessment, albeit a rudimentary one, by the lender that they could actually afford the borrowings, that there was a prospect of their being able to refinance on commercial terms after two years and that the purchase price was broadly commensurate with the value of the property. The plaintiffs packaged the exorbitant purchase price within a transaction that the defendants could perform for the first two years by reference to a weekly amount that Ms Perkins adjudged that they could afford. I do not consider that the plaintiffs did so knowingly; the plaintiffs appeared to have no appreciation that their "victory" in obtaining a purchase price which gave them a complete indemnity for their costs and expenses and a profit element (depending on what allowance was notionally made for the increased land) was likely to be a Pyrrhic one in that default in January 2013 was probable, if not inevitable. 116There was, however, some chance that the defendants, by their expenditure and as a result of Mr Latter's labour, would improve the property in the two years in which they would have been in occupation before they were required to refinance. The plaintiffs were protected by their right to possession and sale although, because of the exorbitance of the sale price, and the corresponding loan, it was not realistic for them to expect to recover the whole of the outstanding principal from the proceeds of sale of the property. 117Section 9(2)(k) is not relevant since the parties have not had any other relevant commercial dealings. 118I consider s 9(2)(l) to be relevant. The effect of the contracts has been sufficiently described above. It is a significant factor. 119Although the plaintiffs may not have actually set out to trick the defendants, they exploited their trust and the associated vulnerability. This occurred in circumstances where the defendants were not able to protect their own interests since they did not have the capacity to assess the true commercial effect of the contract in circumstances where the discrepancy, of which they were unaware, between the contract price and the value of the property was so substantial. Conclusion 120For the foregoing reasons, I find the transaction, constituted by the contract for sale and the mortgage, to be unjust within the meaning of the Contracts Review Act. The determination that a contract, or as in the present case, the effect of two contracts, is unjust involves, as appears from the above reasons, a consideration of many factors. The effect of the orders I propose to make will be to deprive the plaintiffs of a substantial portion of the price for which they agreed to sell their home to the defendants. I have set out in detail above the matters which have led to my conclusions. 121In summary, the most significant of these are: (1)The plaintiffs knew, from their friendship with Mr Latter, that he was unsophisticated and would pay whatever they wanted for the property as long as he could afford the deposit and weekly payments. (2)The plaintiffs appreciated that Ms Perkins was treating them on a closer than arms length basis because she knew that they had developed a personal relationship with Mr Latter and that she trusted them for that reason. (3)The plaintiffs knew that the defendants' finances were constrained and that they were only able to afford a deposit of $5,000 and weekly payments of $300. The plaintiffs also knew that there was so little latitude in the defendants' circumstances that they were anxious to halve their legal costs by sharing the plaintiffs' solicitor for the conveyance. (4)The plaintiffs also knew that Mr Latter and Ms Perkins had to vacate their rental property in January 2011 and were, at that time, unable to purchase a property because their circumstances precluded bank finance. (5)The plaintiffs insisted on a purchase price for the property that they had no basis for believing would be other than grossly in excess of its value having regard to what they had paid for it and taking into account its increased area as revealed by the survey. (6)The agreed purchase price was in fact grossly in excess of the value of the property. (7)The plaintiffs also knew that Ms Perkins would not agree to any transaction which she foresaw would put her and Mr Latter in a position of default, which is why they agreed to weekly payments of $300 for the two-year period of vendor finance. (8)The plaintiffs exploited the defendants' trust, and most particularly Ms Perkins' trust, for what they perceived to be their own interests. (9)The period of vendor finance was wholly insufficient for the repayments of principal to be sufficient to bridge the gap between the exorbitant purchase price and the value of the property. (10)The prospects of the defendants' refinancing the property, having regard to the exorbitant purchase price, were illusory and that, accordingly, default after two years was nigh inevitable.

Whether relief should be granted and the nature of such relief 122Section 7(1) authorises the Court, if it considers it just to do so, and for the purpose of avoiding as far as practicable an unjust consequence or result, to declare the contract void (s 7(1)(b)), refuse to enforce the contract (s 7(1)(a)), vary the contract (s 7(1)(c)) and, in respect of a land instrument, make orders requiring execution of an instrument that varies, terminates or affects the land instrument or its operation (s 7(1)(d)). Section 7 is subject to s 19 (1) which provides: "An order made under section 7(1) (b) or (c) has no effect in relation to a contract so far as the contract is constituted by a land instrument that is registered under the Real Property Act 1900 ." 123The parties accept that the prohibition in s 19 of the Contracts Review Act would not prevent my making an order that the parties execute a variation of the mortgage in registrable form. 124I am not persuaded by Mr Young's principal submission that, even if I found the contracts to be unjust, I ought not grant relief. Having found the contracts unjust, I am disposed to grant relief under the Act. 125The parties accepted that the discretion to grant relief was wide and that I could fashion relief otherwise than precisely in accordance with the parties' submissions. However, in the course of the hearing I invited submissions on the following three forms of relief: (1)The defendants transfer the property to the plaintiffs and that any payments already made by the defendants and work done by them on the property be taken as sufficient to discharge their obligations under the mortgage in full; (2)The defendants refinance the mortgage such that they obtain an advance of $140,000 from an external lender, who would become the first mortgagee, to pay out the plaintiffs and that the balance of, say, $69,800 be secured by a second registered mortgage in favour of the plaintiffs on terms that would require them to repay the plaintiffs at a rate of $250 per week until the debt was fully repaid; and (3)The consideration for the sale contract be reduced from $240,000 to $167,500, being the value of the property at the time the defendants purchased it and that account be taken of payments already made in reduction of the principal to reduce the amount owing to an amount in the order of $140,000 and that the defendants be permitted time to refinance this debt to enable them to pay out the plaintiffs and retain the property. 126The plaintiffs submitted that, although they opposed the grant of relief altogether, they would rank these options in descending order of preference: (1), (2) and (3). The defendants' preference is for (3).

Scenario (1): re-transfer to the plaintiffs 127The relief proposed in scenario (1) above has the advantage for the defendants of extinguishing a debt which substantially exceeds the value of the property. However, the benefit they will have obtained from their payments of $300 per week will be limited to their right to occupy the land. The only evidence of the market rent for the property is what the plaintiffs charged the defendants by way of a licence fee for the period between exchange and settlement, which was $150 per week. The defendants will obtain no benefit for any monies expended and work done on the property. However, the plaintiffs will obtain no benefit from such improvements since they have not increased the value of the property. 128Scenario (1) has the advantage for the plaintiffs of permitting them to exercise their legal rights over the property as soon as the transfer is registered. However, the payments made to the plaintiffs by the defendants over the three years since the transfer exceed commercial rates of interest on the real value. 129In my view, scenario (1) is that it is too advantageous to the plaintiffs and insufficient to redress the injustice of the transactions as far as the defendants are concerned.

Scenario (2): refinance arrangement that retains the total loan amount 130As I see it, the difficulty with scenario (2) is that it does not provide any real relief to the defendants and carries with it a substantial risk of imminent default. It also ties the plaintiffs to the defendants in a long-term transaction (unless the defendants can refinance the whole of the debt, which appears unlikely, having regard to the discrepancy between the debt and the value of the property) whereas the original transactions had the effect that the plaintiffs would have their money back by January 2013.

Scenario (3): variation of the purchase price and loan amount 131I consider that scenario (3) provides the appropriate basis for relief since it, of all scenarios postulated, redresses the features of the transaction that made it unjust. 132In my view, the appropriate course is to vary the consideration for the purchase of the property from $240,000 to $167,500, being its true value. Since a deposit of $5,000 was paid, the adjusted balance is $162,500. 133I note that in the outline of relief ultimately relied upon by the defendants, in a document marked MFI4, they calculate the amount outstanding by substituting the original principal sum of $235,000 with $167,500. This seems to me to be an obvious error in that the second figure ought be $162,500, being the agreed value of $167,500 less the deposit of $5,000, for which credit ought be given, as it has been in the setting of the $235,000 which is the contract price of $240,000 less the deposit of $5,000. 134If one applies the $300 per week and adopts the parties' split of principal and interest ($150/$150), the amount of principal repaid as at 28 February 2014 is in the order of $24,600 (164 weeks x $150 per week), leaving an outstanding principal of $137,900. The total interest paid to that date is, given the equivalence of principal and interest, $24,600. 135One can test the commerciality, or reasonableness, of this result in various ways. 136Payments of $300 per week, if treated as interest only, give rise to an effective interest rate on the new initial outstanding principal of $162,500 of 9.6%, which is, in my view, in excess of commercial interest rates for home loans. If one adopts the split agreed by the parties, and applies $150 per week to interest, the rate becomes 4.8%, which is below commercial interest at the time of the advance. However because the repayment terms agreed did not take account of the diminishing principal, the interest rate effectively becomes higher over the term of the loan because the interest payable is constant but the principal diminishes over time. 137Alternatively, one can test the proposed result by adopting a more orthodox commercial approach. If one applies an interest rate of, say, 5.5% to an initial principal of $162,500 over a period of, say, three years from 7 January 2011 to 7 January 2014, the principal outstanding as at 7 January 2014 would be $140,606 and a total amount of $25,023 would have been paid in interest. The parties' agreement, if the purchase price is adjusted to make it accord with the agreed value of the property at the time of purchase, is, accordingly, broadly in line with what might have been available by way of Bank finance at the time of the contract. I have used the calculation based on 5.5% as a check only. There is insufficient evidence for me to determine prevailing interest rates. 138I consider that it is preferable to vary the parties' agreement to the minimum extent necessary to redress the injustice, which is why I have adopted the 50/50 split between principal and interest for the repayments of $300 per week as set out above. This method gives the plaintiffs a higher rate of interest on the reduced amount than they were prepared to agree to on the higher amount when they entered into the contract.

Alternative remedy if the defendants are unable to refinance on the basis of the principal relief proposed 139I do not consider that the plaintiffs should be obliged to remain in an extended contractual relationship with the defendants when this was not their agreement. An end to the relationship can be achieved by requiring the defendants, if they wish to retain title to the land, to pay the plaintiffs the outstanding amount of principal within 90 days of the date of the orders in these proceedings in full satisfaction of their debt to the plaintiffs. 140If they fail to do so, then the plaintiffs will be entitled to possession of the property for the purposes of exercising their power of sale, or to have title to the property transferred to them. However, in that event, in my view the plaintiffs ought be obliged to pay to the defendants a sum equivalent to $150 per week by way of restitution for monies paid in excess of an occupation fee of $150. The figure of $150 for an occupation fee appears to me to be reasonable since it was the figure that the parties agreed for the defendants' occupation between exchange and completion. Justice to the plaintiffs 141I have considered whether this result would be, in all the circumstances, unjust to the plaintiffs. After all, on one view, they were simply "trying it on" and it might be said that they ought not have to bear the consequences of being met with such little resistance. It is easy to say, with hindsight, that had the defendants, or at least Ms Perkins, performed relatively basic calculations and made simple inquiries, they might have realised that they would be unlikely to be able to refinance the loan in January 2013. 142For example, had Ms Perkins, before executing the mortgage enquired how much of the $300 would be allocated to principal and how much to interest, she would have appreciated that the outstanding principal that would have to be refinanced in January 2013 would have been $219,400 ($235,000 less $15,600). She could, with that information, have worked out that, unless they were able to increase their weekly payments from $300, any interest rate above 6.6% would mean that they could not meet even their interest repayments. Ms Perkins might also have appreciated that, assuming the property was still worth the $240,000 that they had paid for it, their equity would not even amount to 10%, since their equity would be only $20,600 ($5,000 for the deposit plus the $15,600 of principal repayments). 143However, for the reasons given above, the real injustice arose from the gross disparity between price and value. The plaintiffs were the ones who knew of the disparity; indeed they were its progenitors. The defendants did not. The defendants were, on one view, too polite and too trusting and, on another view, insufficiently impertinent to interrogate the plaintiffs, to whom they believed themselves to be closer than arms length, about what they had paid for the property, what they had spent on it and why there was such a disparity between the asking price and what they had paid for it. 144In a different context, Gleeson CJ, in Henville v Walker [2001] HCA 52; 206 CLR 459 at [13] said the following of victims of misleading or deceptive representations made in contravention of the Trade Practices Act 1974 (Cth): "It will commonly be the case that a person who is induced by a misleading or deceptive representation to undertake a course of action will have acted carelessly, or will have been otherwise at fault, in responding to the inducement. The purpose of the legislation is not restricted to the protection of the careful or the astute." 145In the present case, the defendants were, in my view, neither at fault, nor careless. However, Gleeson CJ's observation about the purpose of the Trade Practices Act is apposite, in my view, to the Contracts Review Act. I do not regard the remedy I propose to order as being in any way unjust to the plaintiffs, or more than is appropriate under the Contracts Review Act.

Proposed orders 146I have not heard the parties on the form of orders arising from these reasons. The orders I propose are as follows, but I will hear the parties on the form of the orders unless agreement can be reached. (1)Order that the price nominated in the contract for sale between the plaintiffs as vendors and the defendants as purchasers for the property known as129 Davis Road, Swan Bay be varied from $240,000 to $167,500 and that clause 39 be amended accordingly. (2)Direct the parties to execute a variation of the mortgage in registrable form to vary the principal sum advanced from $235,000 to $162,500. (3)Order the plaintiffs to deliver up a discharge of mortgage in registrable form to the defendants, if: (a)the defendants pay to the plaintiffs the sum of $137,900, less any amounts paid after 28 February 2014 in reduction of that sum in accordance with (2)(b) below, within 12 weeks of 28 February 2014, being 23 May 2014; and (b)the defendants continue to pay to the plaintiffs $300 per week, being $150 for interest and $150 in repayment of principal until the earlier of: (i)payment of the outstanding principal sum in accordance with order (2)(a) above; and (ii)23 May 2014. (4)If the conditions provided for in (3)(a) and (b) are not met, order: (a)Judgment for possession of the property in favour of the plaintiffs. (b)Grant leave to issue writ of possession of the property such writ to issue at any time on and from 24 May 2014. (c) Judgment for the defendants against the plaintiffs in an amount of $24,600 plus the sum of any payments of $150 per week made by way of interest since 28 February 2014 until the date on which the defendants vacate the premises. (5)Grant liberty to apply on three days' notice.

Costs 147I have not heard the parties on costs. My preliminary view is that, as the defendants have had substantial success, the plaintiffs ought pay the costs of the proceedings but, as I have not heard the parties, I shall reserve the question of costs.

Orders 148I make the following orders: (1)Direct the parties to make any submissions as to the form of the proposed orders or as to costs in writing addressed to my associate on or before 4 pm 5 March 2014. (2)Grant liberty to apply on 2 days' notice to my associate to restore the matter before me in the event that the parties want to address me orally on the form of orders or the appropriate costs orders.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 27 February 2014