Hoho Property Pty Ltd v Bass Finance No 37 Pty Ltd

Finance documents

1. The Guarantee and Indemnity is straightforward, comprising 11 pages. I was not taken to any particular provision which was said to be unjust. In short, Ms Ly and Mr Ho guaranteed Hoho Property's performance of its obligations under the "Finance Documents" and incorporated by reference the provisions of the Senior Facility Agreement between Hoho Property and the Lender. "Finance Documents" was defined in the Senior Facility Agreement as inter alia the Senior Facility Agreement, the General Security Agreements, the mortgages granted over the Liverpool and Cabramatta properties, the Guarantee and Indemnity and the "Builder Multiparty Deed." (The latter deed is - I say with some trepidation - not in evidence and, so far as the evidence reveals, was never executed).
2. Turning to the mortgage granted by Ms Ly and Mr Ho over their Cabramatta home, the documentation comprises a three-page mortgage together with a memorandum of common provisions (21 pages), to be read together with the Senior Facility Agreement (87 pages). Again, I was not taken to any particular provision of the mortgage or the memorandum of common provisions which was said to be unjust. Both documents appeared unremarkable.
3. Any injustice must arise from the nature and extent of Hoho Property's obligations to the Lender under the Senior Facility Agreement - the performance of which was guaranteed by the couple and secured over their home by the mortgage - to which I now turn.

Senior Facility Agreement

1. Under the Senior Facility Agreement, the Lender made available to Hoho Property a facility of up to $9,496,500 (inclusive of all capitalised interest and fees) for 15 months: clause 2.1; Items 5 and 7, Schedule 1. The facility could be used to refinance the existing Ajax loan and then fund Approved Development Costs in connection with the Liverpool property development, where the costs were apparently set out in the Agreed Drawdown Profile (which, again I venture, is not in evidence): clause 2.2; clause 1.1; Item 1, Schedule 1.
2. The agreement anticipated monthly drawdowns, subject to a number of conditions, including evidence that all Authorisations necessary for the carrying out of the Works had been obtained: clause 3.2(b). Noteworthy, at the time that the finance documents were executed, Hoho Property had yet to obtain a construction certificate. Hoho Property agreed to fund any Costs Overrun from its own financial resources: clause 4.4. "Costs Overrun" meant the amount by which the cost to complete the project exceeded the drawdowns anticipated in the Agreed Drawdown Profile: clause 1.1.
3. Further, the borrower was obliged, at the request of the Lender, to contribute the Contingent Equity to the project as determined by the Lender as reasonably necessary to complete the Project: clause 13(t). "Contingent Equity" was the amount by which the construction costs exceeded the contract sum in the building price, being $628,145 as at the date of the agreement: clause 1.1. (A quantity surveyor report then indicated that the cost of construction would exceed the contract sum in the building contract).
4. Hoho Property authorised the Lender to deduct from the first advance inter alia an Establishment Fee, the Broker Fee and all interest that would accrue on the facility from drawdown until repayment: clause 4.3. 1. The Establishment Fee was 3% of the Facility Limit, that is, $284,895. 2. The Broker Fee was 1.6% of the Facility Limit, being $151,944. 3. As to interest, the intersection of clauses 4.3, 5.2 and 5.3 is not easy to follow, but I take it to be 15 months' interest at the Lower Rate, that is, $860,620.30: see [13]. All amounts were exclusive of any GST: clause 24.1.
5. The fact that the Establishment Fee was payable from the first advance, and calculated as a percentage of the Facility Limit, had the result that the fee was payable in full whether or not the borrower proceeded to make further drawdowns and avail itself of the full amount of the facility. Although the agreement did not state this specifically, clause 6.7 provided that all fees payable under the Senior Facility Agreement were non-refundable. The description of the fee also indicated that it was paid on establishment of the facility.
6. Likewise, clause 5.6 of the Senior Facility Agreement provided that all interest payable under the agreement was non-refundable. It followed that if, for example, Hoho Property had repaid or refinanced the facility before the expiry of the 15 month term, interest paid by the first advance would not be repaid. As much was confirmed by clause 7.5, which provided: (emphasis in original) 7.5 Minimum Earn Amount (a) … on any date that the Borrower repays the Secured Money in full or the Facility is cancelled in full, the Borrower must pay to the Lender an amount equal to the Minimum Earn Amount less the aggregate amount of all interest paid by the Borrower before the date (excluding any interest accrued at the Higher Rate and the Intensive Loan Management Fee). … For the avoidance of doubt, the Establishment Fee paid by the Borrower in accordance with clause 6.1 is excluded in the calculation of the Minimum Earn Amount.
7. The Minimum Earn Amount was calculated by applying the Lower Rate to the Facility Limit for 15 months, that is, $860,620.30: Item 15, Schedule 1.
8. The borrower was also obliged to pay monthly fees, being a Line Fee of 2.25% per annum of the Facility Limit, that is, $213, 671.25 per annum (or $17,805.94 a month): clause 6.3; Item 10, Schedule 1.
9. The Senior Facility Agreement provided that interest was payable at the Higher Rate of 11.25% per annum or, for so long as no Event of Default subsisted, at the Lower Rate of 7.25% per annum: clause 5.1; Items 13 and 14, Schedule 1. Somewhat at odds with this, clause 5.5 provided that the Higher Rate applied where Hoho Property failed to pay an amount on the due date or if an Event of Default occurred. In the latter scenario, the Higher Rate continued to apply "until the Secured Money was fully and finally repaid," that is, potentially after an Event of Default had been rectified.
10. Events of Default were expansively listed in clause 15, including such matters as an Insolvency Event occurring in respect of the Builder, a Government Agency taking action which the Lender considered to have a Material Adverse Effect, the damage or destruction of all or a material part of the Liverpool project, or the death or incapacity of a guarantor: clause 15.1(j), (e) (second appearing), (i) (second appearing). The wide range of Events of Default is understandable, entitling the Lender to exercise a range of rights. The fact that default interest may continue to apply even if that default was remedied, given the terms of clause 5.5, seems harsh.
11. In addition to the Higher Rate, an Intensive Loan Management Fee was payable "If a Potential Event of Default, an event that has a Material Adverse Effect with respect to the Borrower or an Event of Default, occurs and, for so long as that event is subsisting": clause 6.5(a). The fee was payable monthly and was 5% per annum on the Facility Limit, that is $474,825 per annum or $39,568.75 a month plus GST: clause 6.5(b); Item 12, Schedule 1.
12. "Potential Event of Default" was defined as "any event, thing or circumstance which with the giving of notice or passage of time or the fulfilment of any condition (or any combination of the above) would become an Event of Default": clause 1.1. Given the extensive catalogue of Events of Default in clause 15, the scope of Potential Events of Default is truly large. Whilst the Intensive Loan Management Fee commends itself by being charged only whilst the Potential Event of Default subsists, the Lender's ability to impose this hefty fee is extremely broad.
13. Likewise, "Material Adverse Effect" meant a material adverse effect on: (a) the business, operation, property or condition (financial or otherwise) of an Obligor; (b) the ability of an Obligor or the Builder to perform its obligations under the Transaction Documents to which it is a party; (c) the value, marketability or performance of the Property; (d) the effectiveness or priority of any Security Interest granted by an Obligor under any Finance Document; or (e) the validity or enforceability of the whole or any part of any Finance Document or any rights or remedies of the Lender under the Finance Documents.
14. Obligor meant each of Hoho Property, Ho Ho Top Foods, Ms Ly or Mr Ho. Property meant the land and improvements in Liverpool and Cabramatta: clause 1.1; Item 2, Schedule 1. Again, the Lender's ability to impose the Intensive Loan Management Fee should, say, the marketability of the Liverpool or Cabramatta property degrade, was wide.
15. Clause 13 imposed a series of obligations on Hoho Property in respect of the Liverpool property development, including to ensure that the project was completed on or before the Project Sunset Date, being 13 months after the first advance: clause 13(d); clause 1.1.

Submissions

1. The plaintiffs' submissions on the Contracts Review Act were summarised in Hoho at [407]. For ease of reference, the plaintiffs submitted that the terms of the finance documents were unjust within the meaning of section 7 of the Contracts Review Act such that the Court would not enforce them. There was said to be a material inequality of bargaining power between the plaintiffs and the Lender, where the terms of the finance documents were unable to be negotiated, in particular, as to the duration of the loan. The Senior Facility Agreement was said to impose conditions that were harsh and oppressive, including as to interest, fees and the minimum earn amount. These terms were said to amount to a penalty. The plaintiffs were said to be unable to protect their interests in the circumstances.
2. The Lender did not address the Contracts Review Act claim in written submissions. Orally, the Lender submitted that there was nothing unfair about the circumstances in which the loan was entered into, nor was there anything unfair about the contractual terms. Nor was there anything unfair in the circumstances in which the documents were signed, where Ms Ly and Mr Ho were given legal advice by Mr Solari. This was not a case where a certificate of advice from the solicitor was "window dressing": Stubbings v Jams 2 Pty Ltd [2022] HCA 6; (2022) 399 ALR 300 at [18]-[19], [48]-[49] (per Kiefel CJ, Keane and Gleeson JJ). All the solicitor needed to do was to explain that the borrower would be paying a certain amount of interest, that there was a lower and higher rate, that fees were payable that that the fees were a percentage of the total amount borrowed. The Court ought conclude from Mr Solari's file notes and the highlighted copies of the finance documents (where Mr Solari explained the highlighted provisions) that these subjects were covered. Where Ms Ly and Mr Ho had previously borrowed money for their home and borrowed money from Ajax, all they really needed to be told was the items concerning the fees and interest.
3. The Lender submitted that the couple did not in fact need a Vietnamese interpreter (I found otherwise in my primary judgment). Further, the couple did in fact negotiate parts of the deal, including by reducing their equity contribution from $700,000 to $50,000. Whilst the couple's request in the meeting with Mr Simon to increase the term of the loan was not passed on by the Broker to the Lender, this was hardly surprising where extending the term of the loan to such an extent would have dramatically increased the cost of the project and changed the feasibility of the deal. Further, the couple's own actions in misstating their assets to the Lender told against granting any relief.

Principles

1. For ease of reference, I also repeat my initial consideration of the principles in Hoho at [409]-[410]. Ms Ly and Mr Ho may not be granted relief in relation to a contract "so far as the contract was entered into in the course of or for the purpose of a trade, business or profession carried on by the person": section 6(2). This exception has been construed narrowly: N C Seddon and R A Bigwood, Cheshire & Fifoot Law of Contract (11th edition) at 15.27. Where the business is carried out by a company, it is the company and not its directors who carry out the business for the purpose of section 6(2): Toscano v Holland Securities Pty Ltd (1985) 1 NSWLR 145 at 149 (McLelland J); Quikfund (Australia) Pty Ltd v Airmark Consolidators Pty Ltd [2014] FCAFC 70; (2014) 222 FCR 13 at [134]-[137] (per Allsop CJ, White and Wigney JJ). The presence of a 'family element' in the transaction, such as a mortgage given by family members to secure a corporation's obligation, may bring the contract within the scope of the Act: see, for example, Australian Guarantee Corp Ltd v McClelland (1993) ATPR 41-254.
2. Continuing that analysis in light of the documents in question, the contracts were entered into for the purpose of Hoho Property undertaking a property development. Whilst Mr Ho was the sole director of Hoho Property and, through his shareholding in the corporate shareholder of Hoho Property, the ultimate owner of Hoho Property, it was Hoho Property and not Mr Ho who carried out the business of property development for the purpose of section 6(2). Mr Ho is not precluded from a grant of relief under the Contracts Review Act. Ms Ly is even further removed from the business in question, where she was neither a director nor shareholder of Hoho Property, although presumably stood to benefit if the property development was successful. Of course, "all the circumstances of what might be the close relationship between the person, the business and the company can still be explored in resolving the issues as to whether the contract was unjust and, if it is, what relief, if any, should be granted": Quikfund at [136].
3. Section 7 of the Contracts Review Act provides: Principal relief (1) Where the Court finds a contract or a provision of a contract to have been unjust in the circumstances relating to the contract at the time it was made, the Court may, if it considers it just to do so, and for the purpose of avoiding as far as practicable an unjust consequence or result, do any one or more of the following - (a) it may decide to refuse to enforce any or all of the provisions of the contract, (b) it may make an order declaring the contract void, in whole or in part, (c) it may make an order varying, in whole or in part, any provision of the contract, (d) it may, in relation to a land instrument, make an order for or with respect to requiring the execution of an instrument that - (i) varies, or has the effect of varying, the provisions of the land instrument, or (ii) terminates or otherwise affects, or has the effect of terminating or otherwise affecting, the operation or effect of the land instrument. … (3) The operation of this section is subject to the provisions of section 19.
4. The registered mortgage over the Cabramatta property is a "land instrument" within the meaning of the Act: section 4(1). Section 19(1) provides that 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 (NSW). Thus, to give effect to an order under section 7(1)(d), the Court may order the mortgagee to execute an instrument that varies or discharges the mortgage or direct the execution of a deed that operates between the parties to vary the terms of the registered mortgage: Toscano at 152 (per McLelland J); Capital Securities XV Pty Ltd (in liquidation) v Calleja [2020] NSWSC 301 at [141] (per Adamson J (as her Honour then was)).
5. Section 4(1) defines "unjust" to include "unconscionable, harsh or oppressive." As McHugh JA observed in West v AGC (Advances) Ltd (1986) 5 NSWLR 610, the definition of "unjust" is not exclusive nor limited to a contract or terms which are unconscionable, harsh or oppressive, where "The Contracts Review Act 1980 is revolutionary legislation whose evident purpose is to overcome the common law's failure to provide a comprehensive doctrinal framework to deal with 'unjust' contracts": at 620-621. As such, although I concluded that the Lender did not engage in unconscionable conduct, it does not follow that the claim for relief under the Contracts Review Act also fails.
6. Section 9(1) requires the Court to have regard to the public interest and to all the circumstances of the case, including the consequences of compliance or non-compliance with any provisions of the contract. As to the public interest, the general policy of the law is that people should honour their contracts: Baltic Shipping Co v Dillon (1991) 22 NSWLR 1 at 9 (per Gleeson CJ). If banks and other lenders cannot rely on adherence to this policy, then funds will not be forthcoming to buy homes, run businesses or explore new business opportunities, such that society suffers overall.
7. The public interest has been considered in the case of asset lending, where loans are made without regard to the borrower's ability to repay the loan but secured against real property: WFM Motors Pty Ltd v Bar M Pty Ltd [2022] NSWSC 1500 at [120]-[128] (per Kunc J). In Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41; (2005) 14 BPR 26,639, Basten JA considered that, where the security was the sole residence of the borrower, there is a public interest in treating such contracts as unjust where the borrowers demonstrated an inability to reasonably protect their own interests; "That does not mean that the Act will permit intervention merely where the borrower has been foolish, gullible or greedy. Something more is required": at [128]. In Riz v Perpetual Trustee Australia Ltd [2007] NSWSC 1153; (2007) ANZ ConvR 615, Brereton J (as his Honour then was) observed at [70]: Although asset lending is not necessarily unjust, such contracts have the potential for injustice. … if the loan is not serviceable, then it is not in substance a loan but an asset sale, in which the lender risks nothing but the borrower risks the asset. … The substantive unfairness lies in the imbalance of risk. Where that is voluntarily accepted, such a transaction may not be unjust. But where in the circumstances in which the transaction is made - particularly where the family home is involved - the borrower has a less than full appreciation of the risks or consequences, or is under some misapprehension or pressure, so as to provide an element of procedural unfairness, such a loan may be unjust. And even apparent comprehension of the transaction and its legal and practical effect and voluntariness is not entirely prophylactic: the purposes of the Contracts Review Act include protection of those who are not able to protect themselves, and while the Act is not a panacea for the greedy, it may come to the aid of the gullible. Whilst this is not a case of asset lending, the judicial approach remains illustrative.
8. The matters to which the Court may have regard in determining whether a contract is unjust under the Contracts Review Act are non-exhaustively set out in section 9(2), of which the plaintiffs relied on the following: (a) whether or not there was any material inequality in bargaining power between the parties to the contract, (b) whether or not prior to or at the time the contract was made its provisions were the subject of negotiation, (c) whether or not it was reasonably practicable for the party seeking relief under this Act to negotiate for the alteration of or to reject any of the provisions of the contract, (d) whether or not any provisions of the contract impose conditions which are unreasonably difficult to comply with or not reasonably necessary for the protection of the legitimate interests of any party to the contract, … (f) the relative economic circumstances, educational background and literacy of - (i) the parties to the contract … (g) where the contract is wholly or partly in writing, the physical form of the contract, and the intelligibility of the language in which it is expressed, (h) whether or not and when independent legal or other expert advice was obtained by the party seeking relief under this Act, (i) the extent (if any) to which the provisions of the contract and their legal and practical effect were accurately explained by any person to the party seeking relief under this Act, and whether or not that party understood the provisions and their effect, (j) whether any undue influence, unfair pressure or unfair tactics were exerted on or used against the party seeking relief under this Act - (i) by any other party to the contract, (ii) by any person acting or appearing or purporting to act for or on behalf of any other party to the contract, or (iii) by any person to the knowledge (at the time the contract was made) of any other party to the contract or of any person acting or appearing or purporting to act for or on behalf of any other party to the contract, … (l) the commercial or other setting, purpose and effect of the contract.
9. In West, McHugh JA usefully categorised these matters as going to substantive or procedural injustice at 620: More often, it will be a combination of the operation of the contract and the manner in which it was made that renders the contract or one of its provisions unjust in the circumstances. Thus a contract may be unjust under the Act because its terms, consequences or effects are unjust. This is substantive injustice. Or a contract may be unjust because of the unfairness of the methods used to make it. This procedural injustice. Most unjust contracts will be the product of both procedural and substantive injustice. Here, the plaintiffs contended that the finance documents were the result of both procedural and substantive injustice, where Ms Ly and Mr Ho were unable to protect their interests in all the circumstances.
10. In addition to these matters, section 9(4) and (5) requires the Court to have regard to the following matters: (4) In determining whether a contract or a provision of a contract is unjust, the Court shall not have regard to any injustice arising from circumstances that were not reasonably foreseeable at the time the contract was made. (5) In determining whether it is just to grant relief in respect of a contract or a provision of a contract that is found to be unjust, the Court may have regard to the conduct of the parties to the proceedings in relation to the performance of the contract since it was made.
11. It is relevant here to record that, in my primary judgment, I found that the defendants' knowledge of the circumstances differed in respect of Ms Ly and Mr Ho's lack of proficiency in English: Hoho at [363]-[369]. The extent to which the Court may take into account circumstances which were not known to the party against whom relief is sought, even though the circumstances existed when the contract was made, was considered by McHugh JA in West, who concluded that the effect of sections 9(1), 9(2) and 9(4) is that the Court may have regard to any circumstance existing at the time of the contract, whether or not a party was aware of that circumstance. However, a lack of knowledge may render the circumstance of less materiality than if the party was aware of it: at 620. Put another way, if the contract is found unjust by reason of circumstances not known to one of the contracting parties, it does not automatically follow that relief will be given to remedy that injustice: Kowalczuk v Accom Finance Pty Ltd (2008) 77 NSWLR 205; [2008] NSWCA 343 at [88] (per Campbell JA).
12. As to how the Court should approach a claim such as this, Allsop P explained in Provident Capital Ltd v Papa [2013] NSWCA 36; (2013) 84 NSWLR 231 at [7]: 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. … 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. …

Consideration

1. The matters listed in sub-section 9(2) and (5) of the Contracts Review Act are similar to the considerations listed in section 12CC(1) of the ASIC Act; my observations in respect of the latter in my primary judgment remain apposite and are re-stated here where relevant for ease of reference: Hoho at [389]-[401]. That said, the focus of section 12CC is on conduct and whether it is unconscionable within the meaning of the statute, whilst the focus of the Contracts Review Act is on the contract: West at 621 (per McHugh JA).

"material inequality in bargaining power"

1. There was a disconformity between the term of the loan and the expected time frame for construction of the development. Ms Ly and Mr Ho sought a longer loan term by email from their solicitor, Mr Hammoudi, on 21 December 2020: Hoho at [221]. The Lender's solicitors did not reply, being instructed by Mr Goh to ignore Mr Hammoundi's email: Hoho at [231]. In part, this was caused by confusion as to whether Mr Hammoudi was still retained by the plaintiffs at the time. The plaintiffs made the same request when the finance documents were explained to them by their new solicitors on 22 December 2020, but the Broker did not pass the request onto the Lender. Whilst I accept that extending the term of the loan would affect the financial metrics of the proposed loan, the fact that the plaintiffs' requests were simply ignored points to a material inequality in bargaining power.
2. The Lender was clearly in a stronger bargaining position than the plaintiffs. Whilst the Lender did agree, shortly before settlement, to a reduced payment by the plaintiffs - from $700,000 to $50,000 - and to defer payment of its fees until the following month, this appears to have been born of necessity in order to ensure that the loan transaction completed on the designated date rather than by reason of any bargaining power of the plaintiffs.

"whether … its provisions were the subject of negotiation"

1. The provisions of the contract were not the subject of negotiation prior to or at the time the contract was made. Before his retainer was terminated, Mr Hammoudi had not requested any amendments to the finance documents: he had yet to review the documents. Mr Solari and Mr Simon were retained on the same day that the finance documents were to be signed. They appear to have been focussed on reviewing the documents for the purpose of giving advice to Ms Ly and Mr Ho. As far as the evidence reveals, neither Mr Solari or Mr Simon engaged in any negotiation of the provisions of the finance documents.

"whether … reasonably practicable … to negotiate for the alteration of or to reject … the provisions"

1. So far as the commercial terms were concerned - such as the period or amount of the loan - it was reasonably practicable for the plaintiffs to negotiate these terms, where they had a broker communicating with the Lender on their behalf.
2. As to the provisions of the finance documents, however, I do not consider that it was reasonably practicable for the plaintiffs to negotiate for the alteration of or to reject any of the provisions of the documents, where the finance documents were only provided shortly before settlement. Further, the Lender insisted that the plaintiffs change their solicitor shortly before settlement, such that the new solicitors' ability to engage with the material and seek substantive changes was severely limited. This matter is something for which the Lender bears significant responsibility, given its threat that it would not provide the loan if the plaintiffs continued to use Mr Hammoudi.

"whether … conditions … unreasonably difficult to comply with or not reasonably necessary for the protection of the legitimate interests"

1. The plaintiffs pointed to the following conditions: the unduly short term of the loan and excessive interest and fees.
2. As to the term of the loan, it will be recalled that Hoho Property was obliged to ensure that the project was completed by the Project Sunset Date, being 13 months after the first advance: see [21]. Obviously, it was going to be very difficult for Hoho Property to comply with this provision. The quantity surveyor report estimated that construction would take 16 months, including contingencies. The valuations obtained by the Lender referred to a construction program of 18 months and a selling period of six months. Hoho Property had yet to obtain a construction certificate. While the Lender had both the quantity surveyor report and the valuations to hand, the Lender's internal credit paper included a development timeline which stated that practical completion would be achieved in 12 months, being by February 2022. The basis for this assessment is neither known nor obvious.
3. Presumably, this requirement was imposed by the Lender in order to make the deal 'add up'. Of course, the Lender was not obliged to provide a loan for a longer period if it had the consequence that the loan was financially unattractive to the Lender.
4. Mr Ho was clearly aware of this provision and requested a longer timeframe, but received no response. Being fully aware of this provision, and its inherent impracticality from the plaintiffs' perspective, Mr Ho nonetheless proceeded to execute the finance documents. As such, I attach little weight to this matter.
5. Turning to the second matter, the plaintiffs - in their pleadings, at least - suggested that the interest and fees were a penalty. The plaintiffs did not seek any specific relief on the basis that the relevant clauses of the Senior Facility Agreement fell within the ambit of the penalty doctrine. Rather, the suggestion that the interest and fees clauses are penalties appeared in a list of matters ostensibly going to the factors set out in section 9(2) of the Contracts Review Act. In the absence of any specific relief sought on the basis that interest or fees are penalties, I consider it unnecessary to digress into a consideration of the law of penalty in Australia. Rather, I will treat the parties' submissions on this point as going to whether the interest rates and fees were necessary for the protection of the interests of the lender, in accordance with section 9(2)(d) of the Contracts Review Act. However, to do so is not to conflate section 9(2)(d) with the test for whether a clause of a contract is a penalty.
6. The Lender's legitimate interest was to make money, including by ensuring an adequate return on funds outlaid. As noted in Hoho at [398]-[399], on the limited material available in these proceedings, the interest rates charged by the Lender were competitive but the fees were high, in particular, the Intensive Loan Management Fee. The Minimum Earn Amount was also potentially onerous, albeit Ajax had also charged a minimum 12 months' interest even if the loan was repaid early.
7. More specifically, interest was charged at the Lower Rate of 7.25% per annum or, in default, the Higher Rate of 11.25% per annum. Both interest rates were lower than those of the incumbent financier, Ajax, which charged 9.9% per annum or, on default, 19.9% per annum: Hoho at [58]. It cannot be said that the Lender's interest rates were unreasonable. However, the Lender's apparent ability to continue to charge the Higher Rate after an Event of Default had been rectified falls into a different category, albeit I accept that this may not have been intended by the Lender but due to a drafting infelicity: see [15]-[16]. I consider that continuing to charge the Higher Rate after an Event of Default has been remedied is not reasonably necessary for the protection of the Lender's legitimate interests.
8. The Establishment Fee and Line Fee were high. The Lender charged 3% of the Facility Limit as its Establishment Fee, being an increase from the 2% initially proposed: Hoho at [95], [106]. I note that Ajax had earlier charged an establishment fee of 0.5%, La Trobe does not appear to have proposed to charge such a fee, while Prime Capital proposed to charge an establishment fee of 2.2% of the Facility Limit: Hoho at [398]. The Line Fee was 2.25% per annum of the Facility Limit. There is no evidence that Ajax, La Trobe or Prime Capital charged such a fee. That said, the fees charged by these three lenders could hardly be regarded as a representative sample of comparable lenders. Overall, there is insufficient evidence to conclude that these fees were not reasonably necessary for the protection of the Lender's interests.
9. The Minimum Earn Amount appears to have been specifically directed to ensuring that the Lender, in fact, enjoyed the returns expected from the transaction. In effect, the Minimum Earn Amount held both parties to their bargain: to lend and borrow specified funds for a specified period at a specified cost. If the borrower wished to be released from this bargain, then the provision required the borrower to compensate the Lender for the return it would otherwise have enjoyed if the contract had been performed. Of course, the Lender may enjoy a windfall gain if it was able to lend the funds to another borrower and earn similar returns but, equally, another deal on similar terms may not be found. Again, there is insufficient evidence to conclude this was not reasonably necessary, particularly where a similar provision was contained in the Ajax loan.
10. A fee akin to the Intensive Loan Management Fee was not charged by Ajax, La Trobe or Prime Capital. The fee was higher than any other fee charged by the Lender and - by the nature of the fee - would likely be charged in circumstances where the borrower was also paying the default rate of interest.
11. If the Intensive Loan Management Fee was only payable in an Event of Default, then I would say that it was not unreasonably difficult to comply with the provision: Hoho Property simply had to perform the Senior Facility Agreement, not commit any Events of Default and progressively draw down the facility in accordance with the Agreed Drawdown Profile. However, the fact that the Intensive Loan Management Fee was also payable on a Potential Event of Default, or an event that had a Material Adverse Effect, had the consequence that the fee could be charged by the Lender by reason of matters over which Hoho Property had no control.
12. The description of the fee suggests that the charge related to additional costs incurred by the Lender in managing the loan in the circumstances in which the fee could be levied. I note, however, that the Lender was already entitled to recover its costs and expenses associated with enforcement or any Default: clauses 17, 19.
13. It is difficult to see how such a large fee of $40,000 a month was reasonably necessary for the protection of the legitimate interests of the Lender, particularly where the Lender was already compensated by the Higher Rate in the Event of Default and separately entitled to recover its costs and expenses associated with enforcement or any Default. That is, the borrower had already agreed to pay the Lender a risk premium in an Event of Default and, further, to reimburse the Lender for any specific costs and expenses incurred. I conclude that the additional Intensive Loan Management Fee was not reasonably necessary for the protection of the legitimate interests of the Lender.

"relative economic circumstances, educational background and literacy"

1. As noted in Hoho at [342], Ms Ly and Mr Ho ran a butchery business, which had substantial turnover and modest profit. Their Cabramatta home was unencumbered. Ms Ly also owned an investment property in Bankstown, subject to a mortgage. The couple appear to have owned some property in Vietnam. In this sense, the couple are unusual plaintiffs in a Contracts Review Act matter, as they were not without financial substance. As mentioned in my principal judgment, the fact that the couple ventured into property development at all, purchasing the Liverpool property for $2.4 million, entering into a building contract for some $8 million, and raising finance from the Lender of some $9.5 million, bespeaks their economic substance.
2. As to education and background and literacy, I have found that Ms Ly and Mr Ho's ability to read or write in English was poor. They spoke English, but needed a Vietnamese interpreter to ensure that they understood legal documents.
3. Ms Ly and Mr Ho also had some business literacy, in the sense that the couple had acquired some familiarity in matters of commerce, having operated a business for some eight years from two retail shops together with a wholesale business: Hoho at [342]. They were, however, inexperienced in matters of finance and property development: Hoho at [341].

"the physical form of the contract, and the intelligibility of the language"

1. The finance documents in toto were extensive and complex, as recognised by the solicitors engaged to review and explain the material, and the time they took to do so: Hoho at [356].

"whether … and when independent legal or other expert advice was obtained"

1. Independent legal advice was obtained on 22 December 2020, when the couple came to Mr Solari's office and executed the documents, after receiving advice from Mr Solari and, by telephone, from Mr Simon. The advice was given in English with no Vietnamese interpreter.
2. It does not appear that other expert advice was obtained, although I note that Ms Ly asked the Broker to call her accountant on 4 December 2020, as he had some questions: Hoho at [343].

"the extent … to which the … contract and … legal and practical effect were accurately explained … and whether or not that party understood"

1. As noted in Hoho at [358], Mr Solari and Mr Simon's file notes are not particularly informative as to the advice given. I note, however, that the couple spent some four hours at Mr Solari's office. According to Mr Solari's file note, the only issue raised by the couple concerned the term of the facility, "They wanted longer". The couple also raised this matter with Mr Simon.
2. I have no reason to think that the legal and practical effect of the finance documents was not accurately explained to the couple. I have also found that the couple likely did not understand some of the explanation given. I was unable to say with more precision - at least, having regard to the couple's evidence or the solicitors' file notes - which clauses the couple understood and which they did not.
3. Consideration of the provisions of the Senior Facility Agreement enables me to infer whether the legal and practical effect of the contract was understood, where the provisions of the contract were themselves unclear. It is likely that the couple did not understand when the Higher Rate could be charged, as the Senior Facility Agreement is unclear in this regard. The circumstances in which the Intensive Loan Management Fee could be charged depend on complex definitional provisions. Where any explanation of this fee was given in English, it is likely that the couple did not appreciate the very wide range of circumstances in which this fee could be charged. They may not have appreciated that the Establishment Fee was payable in full, whether or not they proceeded to draw down the whole facility, where the agreement did not state this specifically.
4. The couple did have some experience with a provision akin to the Minimum Earn Amount, from their dealings with Ajax. On Ms Ly becoming aware of these provisions in the Ajax loan, the couple obtained specific advice from Mr Hammoudi: see Hoho at [68]. When Mr Solari explained the Minimum Earn Amount to them, albeit in English, I expect the couple would have recognised that the Senior Facility Agreement contained a similar provision to that which had caused them such difficulty with the Ajax loan. The couple likely understood the effect of this provision, if not its detail.

"undue influence, unfair pressure or unfair tactics"

1. This is a relevant matter, given the Lender's conduct as summarised in Hoho at [390]-[395]. In short, the Lender (wrongly) concluded that Mr Hammoudi was engaged in delaying tactics by insisting on an interpreter. The Lender then insisted on the borrower and guarantor retaining a new solicitor in order to settle the transaction on its chosen date. The Lender threatened not to provide the loan unless this was done, being a threat that was both an exaggeration and audacious in the circumstances: Hoho at [392]. I consider that the Lender's actions in this regard may be described as 'unfair tactics.' There was just no good reason to proceed in this manner. The Lender was simply fixated on completing the transaction before Christmas, where "Closing deals overcomes everything" and "this is how Bass rolls": Hoho at [130], [258].

"commercial or other setting, purpose and effect of the contract"

1. The Ajax loan was not due to be paid out until 28 January 2021. The Lender's insistence that the plaintiffs execute the finance documents by the artificial deadline of 22 December 2020, failing which, the loan would not be provided at all, created two problems for the plaintiffs. First, it had the practical consequence that they were given legal advice without a Vietnamese interpreter. This result was unnecessary, where more than enough time remained for an interpreter to be arranged and advice given before 28 January 2021. Second, early repayment of the Ajax loan did not entitle Hoho Property to any rebate on interest accruing before that date. Refinancing the facility in December 2020 might have had some advantages, but economy was not one of them.

whether injustice arises from circumstances not reasonably foreseeable

1. The circumstances which have arisen were reasonably foreseeable. Where the finance documents were explained without a Vietnamese interpreter, were complex and imposed onerous obligations, including in respect of fees and interest, it was foreseeable that problems would emerge once the implications of these provisions came to be understood. It was also reasonably foreseeable that Hoho Property would default, where the term of the loan was inadequate to complete construction within the required timeframe. That said, Hoho Property did not default by failing to complete the construction within the required timeframe but does not appear to have progressed the development at all.

Conclusion

1. In summary, there was material inequality in bargaining power and no negotiation of the provisions of the Senior Facility Agreement. Nor was it reasonably practical to negotiate the provisions given the Lender's insistence that the plaintiffs change their solicitor shortly before settlement, such that the new solicitors' ability to seek substantive changes was severely limited. The fact that the couple were receiving advice from a new solicitor was at the Lender's insistence, in order to settle the transaction on its chosen date and where the Lender threatened not to provide the loan unless this was done. The Lender did this in the face of an email from the couple's solicitor that they needed an interpreter. The Lender was aware that the couple received advice without an interpreter. It was wholly unnecessary to proceed in this manner.
2. Of the conditions about which the plaintiffs complained, I am satisfied that the words in clause 5.5 - "until the Secure Money was fully and finally repaid" - are not reasonably necessary for the protection of the Lender's legitimate interests, where it may have the consequence - at odds with clause 5.1 - that default interest continues to be charged following rectification of an Event of Default. I am also satisfied that the Intensive Loan Management Fee was unreasonably difficult to comply with and not reasonably necessary for the protection of the Lender's legitimate interests.
3. Ms Ly and Mr Ho were persons of financial substance and business experience, but their proficiency in English was limited such that they needed a Vietnamese interpreter to ensure that they understood legal documents. They were inexperienced in matters of finance and property development. The Lender was aware of these matters, save that it had received conflicting information on the subject of the couple's English proficiency. (When considering whether the Lender had engaged in unconscionable conduct, I found that the Lender had constructive notice of the couple's lack of English proficiency, being notice of facts that might lead on enquiry to the discovery of the existence of the special disadvantage).
4. The contracts were complex. The couple received independent legal advice in English with no Vietnamese interpreter. It is likely that the couple did not understand when the Higher Rate could be charged, as the Senior Facility Agreement was unclear in this regard. It is likely that the couple did not understand the circumstances in which the Intensive Loan Management Fee could be charged, given the complexity of the provision and its embedded definitions.
5. There is nothing "unjust" per se with Ms Ly and Mr Ho giving a mortgage over their home to secure Hoho Property's borrowings, where it is apparent from the application forms completed by the Broker in November 2020 that the value of the Liverpool property was then less than the amount owed to Ajax. That is, the Liverpool property alone was unlikely to be acceptable security to an incoming financier. Further, the couple presumably stood to benefit from the development of the Liverpool property via Mr Ho's interest in Hoho Property. Nor is there anything "unjust" per se with Ms Ly and Mr Ho giving a guarantee of Hoho Property's performance of its obligations.
6. However, injustice did arise in the circumstances, given the nature and extent of Hoho Property's obligations to the Lender under the Senior Facility Agreement, the performance of which was guaranteed by the couple and secured by a mortgage over their home. The Senior Facility Agreement was not unjust in toto. There was nothing unjust with the Lender advancing finance to the Borrower to pay out an existing lender and fund construction of a property development: the borrower had applied for such finance. By and large, I am not satisfied that the provisions of the Senior Facility Agreement were unjust, notwithstanding that the term of the loan was likely to be insufficient to be enable the Borrower to complete the construction of the property development, let alone complete the sale of the apartments from which, the loan was to be repaid. I am not satisfied that the Establishment Fee, the Line Fee or the Minimum Earn Amount were unjust provisions, given the limited evidence of fees charged by comparable lenders. However, I am satisfied that the provisions in respect of the Higher Rate and the Intensive Management Fee were unjust: see [70].

Relief

1. The next question is whether relief should be granted. The subsequent conduct of the parties is relevant to whether relief should be granted: section 9(5). As noted in Hoho at [400], this consideration favours the Lender, as it tried to work with the plaintiffs some time after the initial drawdown to progress the project, including by considering providing further finance. Hoho Property, on the other hand, did not comply with the terms and conditions of the finance documents and does not appear to have done anything after completion to progress the development.
2. The plaintiffs point to Lender's notices of default as favouring a grant of relief, in particular, where a notice of default was issued on 29 April 2021, the day after the Broker lodged a caveat over the Liverpool and Cabramatta properties in respect of its unpaid fee.
3. The Lender issued a notice of default in April 2021, citing Cost Overruns, an LVR breach, project delays and the borrower's failure to remove the caveat lodged by the Broker. Under the Senior Facility Agreement, the guarantors could not allow any caveat to be lodged in respect of inter alia the Cabramatta property unless the caveat was a Permitted Encumbrance. A Permitted Encumbrance did not include the Broker's right to lodge a caveat, conferred by the plaintiffs' contract with the Broker. The Guarantors were obliged to procure the removal of any such caveat as soon as possible after becoming aware of the caveat or being requested by the Lender to do so: clause 12.4. It is not clear to me why issuing a notice of default citing the Broker's lodgement of a caveat is disentitling conduct. The purpose of this clause was to protect the Lender's ability to enforce its security, if need be.
4. In any event, where I have concluded that only some provisions of the Senior Facility Agreement were unjust, it is sufficient to avoid any unjust consequence of those provisions to refuse to enforce those provisions to make an order declaring the contract void in part. The consequence of such an order is that the couple's guarantee does not extend to performance of those provisions, and nor does the mortgage secure payment of monies due as a consequence of those provisions.

Further orders

1. For these reasons, I make the following further orders: 1. Pursuant to section 7(1) of the Contracts Review Act 1980 (NSW), declare the following provisions of the Senior Facility Agreement between the first plaintiff, the second plaintiff and the first defendant dated 22 December 2020 void: 1. in clause 5.5, the words "until the Secured Money was fully and finally repaid"; and 2. clause 6.5.

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: 11 May 2023