This is a claim for possession of land founded on a mortgage securing a debt. The plaintiff, Mr Albert Ling, seeks orders against the second defendant, Ms Yan Wu, arising from an alleged mortgage default. Mr Ling seeks judgment for possession of land located in the Sydney suburb of Mortdale (the property), together with a monetary judgment against Ms Wu. The first defendant is a company associated with Ms Wu and is the registered proprietor of the property. The two defendants were represented by the one senior counsel. For convenience, I shall refer to Ms Wu as "the defendant", as necessary.
The issues to be determined
I turn to review briefly the issues between the parties as defined by the pleadings, and as refined by the end of the oral submissions of both counsel.
By way of a statement of claim of 19 September 2012, the plaintiff asserted that he had loaned the defendant five separate sums of money, the vast bulk of which had not been repaid. He also claimed interest. He also claimed that he was entitled to possession of the property by way of a mortgage.
By way of an amended cross-claim of 14 December 2012 (and an amended defence of the same date to similar effect), the defendant asserted that it would be unconscionable for the Court to enforce her obligations to repay under each loan. That is because, it was said, the plaintiff knew or ought to have known that the defendant, with whom he had shared an intimate relationship, was seeking to borrow funds in aid of a fraudulent enterprise, and was not in a position to repay the loans without experiencing substantial hardship. As well as that, the defendant claimed that it would be unconscionable for the plaintiff to seek payment of interest (either in whole or in part) that is said to have accrued under each loan.
Separately, it was also asserted that the obligation to repay the monies (including interest) outstanding under each loan should be set aside or varied pursuant to s 7 of the Contracts Review Act 1980 (NSW) (the Act).
By way of a defence to the amended cross-claim of 1 February 2013, the plaintiff asserted that the defendant was an experienced and successful business woman. Accordingly, he had no reason to suspect that the defendant was seeking to borrow the funds to provide them to third parties in aid of a fraudulent scheme, or that she was unable to repay the loans. As well as that, he asserted that the defendant was (at all material times) able to exercise independent judgment, since he was not in an intimate personal relationship with her. With regard to the question of repayment, it was also asserted that the interest rates charged by the plaintiff were neither excessive nor unduly harsh.
Separately, by way of a second cross-claim of 8 February 2013, the plaintiff again asserted that he had loaned the defendant five separate sums of money, the vast bulk of which had not been repaid. He also claimed interest and possession of the property.
By way of a defence to that second cross-claim of 5 March 2013, the defendant repeated her assertion that, in light of the conduct of the plaintiff, it would be unconscionable for the Court to enforce her obligation to repay the monies (including interest) outstanding under each loan. As well as that, she asserted that the obligation to repay the monies (including interest) outstanding under each loan should be set aside or varied pursuant to s 7 of the Act.
In other words, although the structure of the pleadings was a little unusual, by their close it seemed that the real issues were whether Ms Wu should repay all or any of the money (including interest); whether it would be unconscionable for her to be called upon to do so; and whether the contracts should be set aside entirely or in part.
By the end of the hearing, senior counsel for the defendants made it clear that he was not resisting the repayment of the five principal sums that he accepted had been advanced by Mr Ling to Ms Wu. The refined point of contention was whether or not Ms Wu was liable to pay any interest on those loans; if so, what the rate of that interest should be.
It was submitted on behalf of Ms Wu that the quantum of any judgment should not reflect any interest; in the alternative, that the interest should be markedly reduced. It was made clear that the bases for that submission were: unconscionability; s 7 of the Act; and the law with regard to penalties.
Senior counsel did not assert that the mortgage said to be held by the plaintiff over the property should not be able to be enforced if, in due course, his client failed to repay the sum of money that I were to find that she owes Mr Ling.
Counsel for Mr Ling did not place in dispute any of the legal principles upon which Ms Wu relied with regard to those three points of contention. However, he submitted that, on the facts of this case, those principles could have no application.
In short, the issues requiring resolution by me are as follows. Should Ms Wu pay Mr Ling any interest at all on the loans? Secondly, if so, at what rate? Thirdly, can the Act have any application? Fourthly, should any interest be disallowed on the basis that it is an unlawful penalty?
Chronological background
Because there was some dispute between the parties about matters of fact, I shall first set out undisputed or indisputable matters; then turn to areas of factual dispute; and then turn to resolve those disputed matters. For reasons that I shall explain later, I shall recount here the version given by Mr Ling of what passed between him and Ms Wu at the time of each of the loans. I shall also recount here the evidence of Mr Ling as to what he thought and believed at the time.
A concise statement of the undisputed or incontrovertible facts is as follows.
Mr Ling was born in 1935, and accordingly is now aged 80 or 81 years. He is of Chinese background. He obtained a Bachelor's degree in mechanical engineering from a university in China, but had worked as a teacher in Hong Kong before coming to Australia many years ago.
Although the precise age of Ms Wu was not in evidence, it is clear that she is of middle age.
In 1988, Ms Wu, then a young woman, came to live in Australia from China. Shortly after her arrival, she began to study English at Cambridge College in Rockdale. Whilst studying there, she became acquainted with the plaintiff, a man some 30 years her senior. He was a teacher there. The pair quickly became friends. They also developed an intimate relationship, the precise details and duration of which were in dispute before me.
In 1991, the defendant became a registered nurse. Soon after that, she obtained a $12,000 loan from the plaintiff to purchase a unit located in Mortdale in the southern suburbs of Sydney. The plaintiff did not charge her interest on the loan, and she repaid the money.
In 1993, the defendant started an aged care business. It was very successful: by 2009, it employed 20 to 30 people.
Between 1996 and 2004, the defendant also purchased a number of investment properties in Sydney. She built up a substantial property portfolio. She became a person of impressive means, as I shall further detail below.
Over the years, Mr Ling and Ms Wu lost touch with each other.
Meanwhile, the plaintiff had become a person of means as well. He had accrued experience in buying and selling real estate, running businesses such as restaurants, and had played some role in moneylending.
In 2005, the defendant was seeking romantic companionship on the internet. She became acquainted with a man who claimed to be a citizen of the United States. He also purported to work in the lucrative Nigerian oil industry. He persuaded the defendant to invest over $5 million in a supposed oil trading company known as J & D Enterprise Ltd. The defendant trusted that man, and met him in person on numerous occasions, including in Nigeria.
In fact, the defendant was the victim of an elaborate and ongoing fraud that involved the use of extensive resources. There was no oil business, and there were no millions of dollars to be made. To the contrary, the defendant lost the millions of dollars that she "invested".
It took quite some time for the defendant to come to her senses and realise the truth of what was occurring. From 2005 until 2011, she was under the misapprehension that she was investing in a legitimate business.
The first loan
In early February 2009, the defendant contacted the plaintiff via telephone regarding the provision of a loan. On or about 11 February 2009, the plaintiff agreed to loan the defendant $350,000 (the first loan). That loan was secured by way of a mortgage over the property located in Mortdale. The loan was set to expire on 13 February 2010. The rate of interest on the loan was set at 9% per annum for 12 months. If the defendant defaulted on the loan, the rate of interest increased to 11% per annum. As well as that, the defendant was required to pay the whole of the interest for the 12 months in advance.
Ms Wu told Mr Ling that she had an "oil deal", and wanted to borrow $350,000. He agreed, but told her that he needed some security, not "just by word". The original approach was with regard to a loan of $300,000, but Mr Ling suggested that Ms Wu borrow more, so that she could repay interest of one year in advance. Ms Wu told Mr Ling that she was "going to make $16 million" from the oil trade. Mr Ling asked Ms Wu how she was capable of engaging in that industry. Mr Ling was surprised by the assertion that Ms Wu would make $16 million, but he believed in her because of her business experience. He enquired of her whether she could trust her business partner in Nigeria.
Although Ms Wu originally proposed an interest rate of 8%, Mr Ling sought and gained interest at 9% per annum. Having received his security, Mr Ling made no enquiries as to how Ms Wu would repay the loan when it fell due. At the time of the loan, Mr Ling was interested in good business opportunities. Although he regarded profit in the sum of $16 million as a "good investment", he did not wish to be involved because he did not know the "inside story".
So long as he was repaid, Mr Ling did not care whether the money came from the profits of oil trading in Africa, or the realisation of the security that he had obtained. Mr Ling believed that the deal that would result in a profit of $16 million to Ms Wu was "too good to be true".
On the occasion of the first loan, it was suggested to Ms Wu by the solicitor for Mr Ling that she obtain independent legal advice. Despite that suggestion, she did not seek the advice of a lawyer.
In due course, Mr Ling transferred the money into the account of a company associated with Ms Wu.
No sums of principal or interest were repaid by Ms Wu in February 2010, when the loan fell due. The only sum received by Mr Ling was the prepaid interest for the period of twelve months.
The second loan
On 25 May 2010 (that is, well over a year after the first loan), the plaintiff agreed to loan the defendant a further $50,000 (the second loan). The second loan was secured by way of a caveat over property in Croydon (the Croydon property) owned by the first defendant, Pan Pac Investments Pty Limited (Pan Pac), of which the defendant is the sole director and shareholder. The loan was set to expire on 30 June 2010. The rate of interest on the loan was set at 5% per month, payable in advance. In the event of default, the rate of interest increased to 7% per month. In other words, the standard rate of interest was 60% per annum, and the rate on default was 84% per annum.
At that time, Mr Ling had seen none of the repayments of the first loan that he had been promised by Ms Wu. He was cautious about lending more money, and required further security. He ended up with a caveat over the real property. At the time, Ms Wu told Mr Ling that the need for an advance of $50,000 was "very urgent". At the time of the second loan, and indeed at the time of every loan, Mr Ling warned Ms Wu to "be careful".
At the time of the second loan, Mr Ling did not seek any documents from Ms Wu to demonstrate that the oil business was proceeding well, or that she would be able to repay the loan.
The second loan was not repaid when it fell due after one month. Accordingly, at that latter stage Ms Wu was in default of both the first and second loans.
The third loan
On or about 31 August 2010 (that is, only a little over three months after the second loan), the plaintiff agreed to loan the defendant a further $65,000 (the third loan). The third loan was set to expire on 30 September 2010. The rate of interest on the loan was 10% per month, or 120% per annum.
At the time of the third loan, Ms Wu told Mr Ling that, if he did not provide her with the money, she would lose "16 million profit". Mr Ling was concerned that something could be going wrong with the oil transaction. Mr Ling was also concerned about whether Ms Wu could repay the loan from any such transactions. Ms Wu provided Mr Ling with a certificate of title to the Croydon property. It was clear to Mr Ling that Ms Wu needed the funds extremely urgently, and was "desperate for finance". He was aware that she was unable to obtain funds from her bank.
This loan was not repaid when it fell due.
The fourth loan
On or about 14 September 2010 (that is, two weeks after the third loan), the plaintiff agreed to loan the defendant a further $115,000 (the fourth loan). The loan was set to expire on 14 November 2010. The rate of interest on the loan was 10% per month, or 120% per annum.
Mr Ling gave evidence that Ms Wu begged him for this loan. It was not repaid when it fell due.
The fifth loan
On or about 12 October 2010 (that is, less than one month after the fourth loan was entered into, and one month before its expiry), the plaintiff agreed to lend the defendant a further $90,000 (the fifth loan). The fifth loan was set to expire on 30 November 2010. The rate of interest on the loan was 10% per month, or 120% per annum.
By that stage, Mr Ling was extremely worried that the oil business was a "scam". Nevertheless, he advanced the substantial sum of $90,000 to Ms Wu. He suspected that in truth the oil "business" was not legitimate. He enquired of Ms Wu whether she knew what she was doing, and whether she was being cheated. She informed Mr Ling that she had invested millions of dollars in the deal. At the time, Mr Ling believed that it was possible that Ms Wu would lose that sum as a result of her being defrauded. By that stage, Mr Ling was "really worried". Again, Ms Wu did not repay the loan when it fell due.
Other undisputed evidence in the trial
It was not disputed that there were negotiations between the plaintiff and the defendant about repayment of the loans. Eventually, the defendant repaid neither interest nor principal, except for two sums of $29,700 and $4,000, for which Mr Ling gave her receipts that were placed in evidence. Eventually, Mr Ling commenced the proceedings that came before me.
Disputed facts
I turn to outline a number of areas of factual dispute between the plaintiff and the defendant.
First, Ms Wu gave evidence that Mr Ling had told her that, if the Nigerian oil business did not succeed, she would not be required to pay any interest on the loans whatsoever. Mr Ling firmly rejected that proposition in the witness box. Ms Wu accepted in the witness box that that asserted oral assurance of Mr Ling was not consistent with the documents surrounding the transactions. Nor was it ever mentioned in the documents that she filed in these proceedings when she was acting for herself.
Secondly, in her evidence in the witness box, Ms Wu denied that she had ever been married. When shown by counsel for Mr Ling an elaborate invitation to a wedding ceremony that she had sent to Mr Ling many years ago, Ms Wu gave evidence that that was merely a ruse designed to stop Mr Ling from pestering her after the end of their romantic relationship. She maintained that position even when it was pointed out to her that the invitation was in both English and Chinese, even though she well knew that Mr Ling was a native reader of the latter language.
Thirdly, it was put to Mr Ling in cross-examination that one of the reasons for him advancing the loans to Ms Wu was in an attempt to rekindle their romantic relationship from many years before. Mr Ling rejected that proposition, and riposted "What for? I got my wife".
Resolution of disputed facts
All of the following findings are made by me on the balance of probabilities.
First, I reject the assertion by Ms Wu that Mr Ling stated that she could repay the loans with no interest whatsoever unless her putative investments succeeded. I say that because, as I have discussed above, in the documents that Ms Wu prepared when she was acting for herself, she said nothing about that. And yet, if her assertion were correct, it surely would have formed the starting point of her resistance to the claim of Mr Ling.
Furthermore, my assessment of Mr Ling in the witness box is that he is a very astute businessman who would not have lent such large sums of money to a former lover who had become a mere acquaintance without substantial interest being charged. In saying that, I have not forgotten the undisputed position that Mr Ling had done exactly that for Ms Wu many years before; but that was in a rather different context.
Quite apart from the impression Mr Ling made on me in the witness box, the surrounding circumstances (such as preparation of documents, the involvement of a lawyer and so forth) are not consistent with transactions with regard to which no interest was to be payable.
As well as that, the proposition that Mr Ling would charge no rate of interest at all if the oil business did not succeed, but very high rates of interests if it did succeed, has a certain internal incoherence.
In short, I am not satisfied on the balance of probabilities that Mr Ling ever said that there would be any circumstances in which Ms Wu would not have to pay any interest on the loans.
Secondly, I reject the explanation given by Ms Wu for the wedding invitation. I do not believe that she went to such remarkable lengths to divest herself of a former lover who was bothering her. Nor do I think that she can cogently explain why the invitation was not in Chinese alone, if that was its only purpose.
Although I suspect that the wedding invitation was in fact prepared to advance dishonestly the immigration position of Ms Wu, I am not satisfied of that on the balance of probabilities. I am unable to determine whether in truth she has ever been married.
Thirdly, I do not believe that, at the time of the transactions, Mr Ling was seeking to rekindle the romantic relationship with Ms Wu. I consider that the transactions were directed towards helping an acquaintance to some degree, and, to a greater degree, realising a handsome profit.
Credibility matters
Because I have rejected the evidence on oath of Ms Wu about what Mr Ling said about interest, and the question of interest is the central issue in the hearing, I experienced substantial concerns about her credibility. I approach any assertion that she makes that is not against her own interest, or accepted by Mr Ling, or corroborated by documents or other surrounding evidence, with caution. It is for that reason that I have recounted above the evidence of Mr Ling about the circumstances of the provision of the five loans, and about his own state of mind at the time.
I regret to say that I take the same approach to the credibility of the evidence of Mr Ling. That is because it seems to me that he was not being fully candid in the witness box about a number of matters. They include the sending of cards by himself to Ms Wu, and the question of whether or not he owned real property in a suburb of Sydney. As for the former topic, in the witness box he came only very grudgingly to accept that a signature was his, when I consider that he well knew that to be the case. As for the latter topic, when recalled for supplementary cross-examination, he admitted that his original answers on oath had not been truthful. Again, I approach his evidence with caution, unless it is against his own interest, accepted by Ms Wu, or objectively corroborated.
It is because of my concerns about the credibility of Ms Wu that, to the extent that later in this judgment I make assessments of the conduct and states of mind at various stages of Mr Ling, I do so on the basis of his own version of events, not the version given by Ms Wu.
Findings of fact relevant to the defences relied upon
Again, I am satisfied of the following matters on the balance of probabilities.
There can be no doubt that Ms Wu is a highly experienced businesswoman who has found significant success in the aged care industry. She has also built up a property portfolio that is impressive indeed. I assessed her in the witness box as having a forceful and determined character. When she entered into the loans with Mr Ling, she was by no means naive with regard to financial matters; quite the contrary.
However, I do consider that, somewhat surprisingly, this experienced businesswoman had been thoroughly duped by a fraudster. No doubt the time, money and effort that was put into the deception by a number of persons played a part in that. I also accept her explanation that she had sought romantic companionship on the internet, and things developed from there, eventually spiralling out of control. By the time of the very first loan, I consider that Ms Wu was thoroughly unable to see what would have been apparent to a fully informed, objective onlooker: that she had been dragged into a deception, and every sum of money that she advanced was simply making things worse.
I also find that, from a very early stage, Mr Ling, whom as I have said I assess to be a very astute business person, seriously doubted the wisdom of the putative investment in oil fields in Nigeria by a woman based in Sydney who was experienced in the provision of aged care.
I accept that he believed that Ms Wu had found success in her business in Sydney, along with her real estate portfolio. But I also consider that, from the first moment that Ms Wu spoke of herself as entering into a joint venture with regard to oil in Africa with an eye to making a profit of something in the order of $16 million, alarm bells were ringing in the mind of Mr Ling. And I say that even accepting that, being an older gentleman, he may not be as familiar as others are with the notorious "Nigerian scams" that are common on the internet.
Certainly by the time of the provision of the fifth loan, I consider that Mr Ling affirmatively believed that Ms Wu was being defrauded. That finding is based on a number of factors.
First, none of the money advanced had been repaid in a timely manner.
Secondly, Ms Wu was expressing the need for the money as being more and more urgent.
Thirdly, the time between the provision of one loan and the request for the next one was (generally) becoming shorter and shorter.
Fourthly and most importantly, not so much as $16,000 of profit had come into the hands of Ms Wu to the knowledge of Mr Ling, let alone $16 million.
Submissions of the plaintiff
The plaintiff submitted in a nutshell that there was nothing unconscionable about the full rates of interest being enforced, for the following reasons.
Ms Wu was an experienced businesswoman who decided to embark upon this ill-fated venture without the slightest encouragement from Mr Ling. Mr Ling was entitled to rely upon his knowledge of Ms Wu as an experienced and successful businesswoman. He was also entitled to protect himself by way of rates of interests substantially higher than those that would be charged by a traditional financial institution. On at least one occasion, Mr Ling and his lawyer asked Ms Wu to obtain her own legal advice. Once things soured, the failure of Ms Wu to repay at least some of the principal (her liability for which, as I have said, was ultimately not in dispute before me) is suggestive of a lack of good faith. The defendant had not demonstrated that there would be any unconscionability in enforcing the rates of interest; nor could the Act be called in aid to resist those rates.
In short, the sums of interest agreed upon by two experienced business people, each of whom had the opportunity to obtain legal advice, should be enforced.
Turning to legal principle, counsel for Mr Ling was content for me to confine my analysis with regard to the question of unconscionability to the two leading decisions of the High Court of Australia: Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; 151 CLR 447; and Kakavas v Crown Melbourne Ltd [2013] HCA 25; 298 ALR 35.
As for reliance upon the Act, counsel submitted that Ms Wu was prohibited from any such reliance because of s 6. That section is as follows:
6 Certain restrictions on grant of relief
(1) The Crown, a public or local authority or a corporation may not be granted relief under this Act.
(2) A person may not be granted relief under this Act 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 or proposed to be carried on by the person, other than a farming undertaking (including, but not limited to, an agricultural, pastoral, horticultural, orcharding or viticultural undertaking) carried on by the person or proposed to be carried on by the person wholly or principally in New South Wales.
[Emphasis added.]
Counsel for Mr Ling submitted that it is quite apparent that these loans were advanced to a natural person, Ms Wu, for the purpose of a business proposed to be carried on by Ms Wu, that being investment in oil production in Nigeria. Whatever may have been the formalities of the names on the accounts into which the loans were paid, I would not accept that these sums were advanced to a company associated with Ms Wu that was in the business of the provision of aged care in New South Wales. And the fact that the business in Nigeria was non-existent is not to the point, he submitted: the statute focuses on the existence of a business purpose, not the business itself.
Finally, as for the argument about penalties, he accepted that the distillation of principle by White J in the judgment of Bay Bon Investments v Selvarajah [2008] NSWSC 1251 at [47] could form the focus of my legal analysis. There his Honour said:
The agreement to pay interest as damages for late repayment attracts the doctrine of penalties if, as a matter of substance, the sum payable is not a genuine pre-estimate of the loss the plaintiff may suffer by being kept out of its money, but is in the nature of a punishment (Acron Pacific Ltd v Offshore Oil NL (1985) 157 CLR 514 per Deane J at 520). The moneys are payable as a consequence of a breach of contract rather than as the withdrawal of an incentive. This distinguishes this case from those where a mortgage stipulates a higher rate of interest reduceable to a lower rate if instalments are paid on time.
Applying that principle to the facts of this case, counsel submitted that the rates of interest on default did not constitute penalties; rather, they were reasonable provisions made against Mr Ling being kept out of his money.
Submission of the defendant
In a nutshell, senior counsel for the defendant submitted that it would be unconscionable to enforce the interest rates charged by Mr Ling because they were usurious. That was said to arise not just from the rates themselves, but also from the circumstances in which they came to be charged.
In the alternative, it was submitted that if on some basis I came to the view that the rates did not offend against the principle of unconscionability, then I should interfere with the contracts pursuant to the Act.
The submission about unconscionability was expanded upon as follows.
First, the plaintiff suspected or had serious doubts about the commercial efficacy and legitimacy of the involvement of the defendant in the Nigerian oil business, and yet proceeded, including with regard to very high rates of interest on the second loan and thereafter.
Secondly, the advances had a flavour of asset lending, in that the plaintiff did not really believe that Ms Wu would be in a position to repay the loans, but also believed that his position was protected by his security regardless.
Thirdly, the plaintiff made no enquiries as to how the defendant would repay the loans.
Fourthly, all of the rates of interest charged, apart from that attaching to the first loan, were inherently usurious.
As for legal principle, there was no dispute on the part of senior counsel for the defendant that my focus with regard to unconscionability should be upon the decisions of Amadio and Kakavas; that s 6 of the Act would need to be analysed as a preliminary step prior to any determination pursuant to that Act; and that the judgment of White J in Bay Bon Investments correctly encapsulates the test with regard to the question of penalties.
Determination - unconscionability
Applicable legal principles
The elements of the equitable doctrine of unconscionability are not overly controversial. In Amadio, Mason J said at 461 that:
Historically, courts have exercised jurisdiction to set aside contracts and other dealings on a variety of equitable grounds. They include fraud, misrepresentation, breach of fiduciary duty, undue influence and unconscionable conduct. In one sense they all constitute species of unconscionable conduct on the part of a party who stands to receive a benefit under a transaction which, in the eye of equity, cannot be enforced because to do so would be inconsistent with equity and good conscience. But relief on the ground of "unconscionable conduct" is usually taken to refer to the class of case in which a party makes unconscientious use of his superior position or bargaining power to the detriment of a party who suffers from some special disability or is placed in some special situation of disadvantage...
In similar terms, Deane J at 474 (with whom Wilson J agreed) set out the elements of the doctrine of unconscionability as follows:
The jurisdiction is long established as extending generally to circumstances in which (i) a party to a transaction was under a special disability in dealing with the other party with the consequence that there was an absence of any reasonable degree of equality between them, and (ii) that disability was sufficiently evident to the stronger party to make it prima facie unfair or 'unconscientious' that he procure, or accept, the weaker party's assent to the impugned transaction in the circumstances in which he procured or accepted it. Where such circumstances are shown to have existed, an onus is cast upon the stronger party to show that the transaction was fair, just and reasonable.
The categories of special disability or disadvantage that may induce a court of equity to set aside a transaction are various and resist strict clarification: Blomley v Ryan [1956] HCA 81; (1956) 99 CLR 362, 405 (Fullagar J). The examples given by Fullagar J in Blomley v Ryan of the circumstances adversely affecting a party included poverty, sickness, age, infirmity of body or mind, and lack of assistance or explanation where such is necessary. However, as Mason J stated in Amadio at 461:
[T]he situations mentioned are no more than particular exemplifications of an underlying general principle which may be invoked whenever one party by reason of some condition or circumstance is placed at a special disadvantage vis-à-vis another and unfair or unconscientious advantage is then taken of the opportunity thereby created. I qualify the word "disadvantage" by the adjective "special" in order to disavow any suggestion that the principle applies whenever there is some difference in the bargaining power of the parties and in order to emphasize that the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party.
In Kakavas, the High Court said in a unanimous judgment at [118] that:
Essential to the principle stated by both Mason J and Deane J in Amadio is that there should be an unconscientious taking advantage by one party of some disabling condition or circumstance that seriously affects the ability of the other party to make a rational judgment as to his or her own best interests. It may well be that an unconscientious taking of advantage will not always be manifest in a demonstrated inequality of bargaining power or in a demonstrated inadequacy in the consideration moving from the stronger party to the weaker; but the abiding rationale of the principle is to ensure that it is fair, just and reasonable for the stronger party to retain the benefit of the impugned transaction.
It was also said at [161] that:
Equitable intervention to deprive a party of the benefit of its bargain on the basis that it was procured by unfair exploitation of the weakness of the other party requires proof of a predatory state of mind. Heedlessness of, or indifference to, the best interests of the other party is not sufficient for this purpose. The principle is not engaged by mere inadvertence, or even indifference, to the circumstances of the other party to an arm's length commercial transaction. Inadvertence, or indifference, falls short of the victimisation or exploitation with which the principle is concerned.
In the same judgment, and in similar vein, it was emphasised at [155] that, due to the fact that unconscionability is a species of equitable fraud, concepts of "constructive knowledge" have no role to play. Having said that, "wilful ignorance" can play a role: at [156]. I infer that that is because, in truth, a person who deliberately shuts his or her eyes to a state of affairs deep down knows of, or believes in, those circumstances.
In short, there was no dispute between the parties about the legal test that I need to apply to the facts as found by me. It is as follows. First, has the defendant (being the moving party in resistance to the loan contracts) satisfied me on the balance of probabilities with regard to any or all rates of interest attaching to the loans that the defendant was in a position of special disadvantage vis-à-vis the plaintiff? Secondly, if so, has she persuaded me that, because of that position of special disadvantage, the defendant was incapable of making decisions in her own best interests? Thirdly, if so, has she persuaded me that, at the time of any agreement about the interest rate, the plaintiff, either knowing of it or wilfully ignorant of the position of special disadvantage of the defendant, took advantage of it?
Application of legal principle to facts found
At the time of the first loan, I consider that Mr Ling, an astute businessman, suspected that Ms Wu was, at the least, out of her depth. I consider that he held that suspicion because he knew that she, a woman of Chinese heritage living in Sydney with no experience whatsoever in the resources industry of Africa, was intending to invest a large sum of money in that industry. I also consider that Mr Ling suspected that she was making a serious error of judgment. I also consider that, at that early stage, Mr Ling suspected that there was some possibility that Ms Wu was being defrauded, and was misguided in her belief that she would profit to the tune of $16 million.
However, I do not find that, at that initial stage, Mr Ling actually knew of, or believed in, or shut his eyes to, the fact that Ms Wu was in a position of special disadvantage.
And in any event, I do not consider that, at the stage of the first loan, Mr Ling took advantage of the special disadvantage of Ms Wu. I say that because I regard a rate of interest of 9% per annum as eminently reasonable.
For those reasons, I do not propose to interfere with the default rate of interest of 11% attaching to the first loan on the basis of unconscionability. I shall turn to consider the question of whether it constitutes a penalty later.
But I consider that things had changed by the time of the second loan. It will be recalled that, on that occasion, the rate of interest charged jumped from 9% per annum to 60% per annum. The first loan had not been repaid at all. Mr Ling had had a chance to reflect on the whole situation. The demeanour and presentation of Ms Wu, I am satisfied, was more desperate when she spoke of things being "very urgent".
I consider that the defendant has established that, at the time of the second loan and thereafter, she was suffering from a special disadvantage that meant she was incapable of protecting her own best interests; namely, her complete inability to see that she was in the process of being defrauded in a very damaging way. I also find that, by the time of the second loan, Mr Ling had come to believe that that was what was occurring, or, at the very least, was deliberately shutting his eyes to the fact that that was what was occurring. The defendant was in a position of special disadvantage with regard to the plaintiff because she was blind to what was occurring whereas he was, at the least, wilfully blind to it. By charging a rate of interest of 60% per annum, I consider that Mr Ling took advantage of the debilitated position of the defendant. I consider that it would be unconscionable to permit Mr Ling to enforce that rate of interest against Ms Wu. That is because it would not be fair, just and reasonable for Mr Ling to have the benefit of that rate of interest.
Having said that, I have already rejected the proposition that at any stage Mr Ling agreed that there would be no interest charged if there were no profit made. I also reject the submission of senior counsel for the defendant that it would be appropriate for me enter a judgment that reflects no interest at all, or only a nominal rate of interest. On the contrary, Mr Ling was granting a short term loan in a reasonably informal setting and in circumstances in which he was entitled to be protected by an interest rate far greater than the one that, for example, a bank would charge on a home loan. I consider that, seeking to enforce a loan that is conscionable from the perspective of both parties, interest should be charged at a rate of 20% per annum on the second loan.
I am of the same view with regard to the subsequent loans, for the same reasons. I consider that the defendant has established unconscionability with regard to the interest rate attaching to the third, fourth, and fifth loans. Indeed, the case for unconscionability becomes stronger with regard to each further loan, because I consider that Mr Ling came to see (or, at least, deliberately not see) more and more clearly what was happening.
In those circumstances, I have considered whether the rates of interest allowable on each subsequent loan should be reduced, in order to reflect the growing unconscionability of that state of affairs. But on reflection, I consider that so to order would be in the nature of a punishment of Mr Ling. That is not the purpose of the doctrine; rather, its purpose is merely relief from unconscionability. I consider that, instead, I should impose a rate of interest that it would not be unconscionable for Mr Ling to receive and for Ms Wu to pay. I consider that Mr Ling should have interest on the third loan at the rate of 20% per annum.
I take the same approach with regard to the fourth and fifth loans. Indeed, by the stage of the fifth and final loan, I consider that Mr Ling affirmatively believed that Ms Wu had been and was being defrauded; that she would never see any profits; and that she was in the process of losing a great deal of money. In those circumstances, it would again be unconscionable for Mr Ling to have, with regard to the fourth and fifth loans, interest greater than at the rate of 20% per annum.
In short, I do not consider that there was any unconscionable conduct on the part of Mr Ling with regard to the first loan. In contrast, in light of what he at least shut his eyes to, I consider that he behaved unconscionably, in all the circumstances, towards Ms Wu with regard to the second, third, fourth, and fifth loans. The longer the situation pertained, and the clearer it became to Mr Ling that the defendant was incapable of protecting her own financial interests, the more unconscionable his conduct became. Nevertheless, I consider that there should be no further reduction in interest rates in order to reflect that growing unconscionability. The rate of interest payable on the second to fifth loans should be 20% per annum.
Determination - penalties
As can be seen, this submission of the defendant only needs to be considered with regard to the interest rate on the first loan, in light of my adjustment of the interest rates on subsequent loans that featured a rate on default.
I have already explained my determination that the interest rate with regard to the first loan was not unconscionable. I also consider that Mr Wu was entitled to charge a somewhat higher rate of interest in the circumstance of default on the first loan. After all, he was advancing a very large sum in unusual and informal circumstances. Applying the test that the parties agreed before me was apposite, I consider that the increase in the rate of interest from 9% to 11% is a reasonable reflection of his enforcement and other costs in the event of default, and a reasonable pre-estimate of the cost of him being kept out of his money, as indeed he has been for years.
It follows that I reject the submission that I should disallow the interest rate on default with regard to the first loan on the basis that it is a penalty.
Ancillary determination - Contracts Review Act
It has been recognised in the past that, because of the flexibility of the Act, it is more difficult for a party who is seeking to resist compliance with a contract to succeed pursuant to principles of unconscionability than it is to succeed pursuant to the Act: see Spina v Permanent Custodians Ltd [2009] NSWCA 206 at [74] (Young JA, with whom Tobias JA and Campbell JA agreed); and Bakarich & Ors v Commonwealth Bank of Australia [2007] NSWCA 169 at [89] (Hodgson JA, with whom Santow JA and Campbell JA agreed).
Because I have already found that Ms Wu should succeed by way of the principles of unconscionability, it is accordingly not strictly necessary for me to analyse the Act. Still and all, as against the possibility that I have somehow misunderstood or misapplied the principles of unconscionability, I turn to provide a brief contingent analysis as to whether or not the Act can have any application to this matter.
I have already extracted s 6 of the Act at [77] above. It can be seen in a nutshell that Parliament provides no relief to natural persons who have entered into contracts (including loan contracts or mortgages) that have been for business purposes. And yet, perhaps anomalously, it seems that Parliament does not extend that prohibition on reliance upon the Act in circumstances where the contract has been entered into by a corporation for business purposes, and thereafter liability attaches to a natural person, by way of a guarantee and the like: see, for example, May v Brahmbhatt [2013] NSWCA 309.
It was accepted on behalf of Ms Wu that the loans from Mr Ling had been advanced for a business purpose; that is, investment in oil in Nigeria. But she resisted the prohibition in the section against reliance on the Act on the basis that the loans had been made to her company, and it was the company that possessed the business purpose. She drew my attention to the evidence that the loans had been banked to accounts in the name of Pan Pac, and the evidence that the registered proprietor of the mortgaged land of which Mr Ling now seeks possession is Pan Pac, not Ms Wu. In other words, it was submitted, because the loans were made to a corporation and not to Ms Wu, s 6 could have no application, with the result that she could rely on the Act to interfere with the rates of interest of the loans.
I reject that submission. I consider that the loans were advanced to Ms Wu, not to a company or companies. I do not accept that the companies that had been created by Ms Wu for her legitimate, orthodox and successful business dealings in New South Wales fell prey to the fraudster from Nigeria. I consider that the reality is that it was Ms Wu who fell prey to that person. The result was that Ms Wu, in order to fund her ill-conceived "investment", approached Mr Ling, not on behalf of the companies, but on her own behalf. And it was Ms Wu who lost very significant sums of money, not her companies. Whilst it is true that the sums were paid into the accounts of her companies, I do not consider that I am inappropriately piercing the corporate veil in the above analysis.
It follows that, if I were wrong in my analysis of the principles of unconscionability, and Ms Wu had been forced to rely upon the Act, I would have denied her relief pursuant to that statute, on the basis of the prohibition contained in s 6 of the Act.
Conclusion
I proceed to summarise my findings for convenience.
Mr Ling behaved unconscionably against Ms Wu with regard to the interest rates that were set with regard to the second to fifth loans, but not the first loan.
The interest rate on default of the first loan does not offend against the law against penalties. Accordingly, no aspect of the first loan will be the subject of interference by me, and my orders should reflect the rate on default of 11% per annum.
On the second, third, fourth and fifth loans, Mr Ling is entitled to a rate of interest of 20% from the date of default of each loan.
If I were wrong in my analysis of the principles of unconscionability, I would not permit Ms Wu to rely on the Act, due to the prohibition contained in section 6 thereof.
Aspects of orders
Rather than me seeking to engage in detailed mathematical calculations, I would be obliged if senior counsel for the defendant could provide me, on the next occasion, with draft orders that reflect the above findings (if possible, with the concurrence of counsel for the plaintiff). The draft orders should of course reflect the repayments already made.
The parties should have liberty to approach my Associate within two weeks of today for the making of formal orders. Some time should be set aside in case there is any dispute about mathematics; if so (without making formal orders) I would be obliged to receive brief written submissions from each party by 5 PM two days before the hearing; if not, I would be obliged to receive draft consent orders at that time and date.
As I have said, it was made clear at the hearing that Ms Wu accepts that she must repay the capital sums. I have also found that she must pay interest on those sums, though not at the rates for which Mr Ling contended.
As I have also indicated, at no stage of the hearing did I understand senior counsel for the defendant to dispute that, if the loans plus assessed interest are not repaid timeously, Mr Ling should be able to enforce his mortgage. It will be recalled that the first order sought in the originating process of the plaintiff is for possession of the property at Mortdale.
There is obvious force in the proposition that, if Ms Wu does not pay the judgment debt promptly, Mr Ling should be able to enforce his mortgage, including by taking possession of the subject property.
Nevertheless, I consider that it is appropriate that Ms Wu have some time to place her financial affairs in order; if necessary to realise assets; and to pay the judgment debt in its entirety, before the mortgage should be enforced by way of Mr Ling having possession. In order to permit that to happen (again, without making formal orders at this stage) I propose to permit Mr Ling to return to this Court four months from the date of the next hearing (at which the precise quantum of the judgment debt is determined), if the judgment debt has not been played in full.
Costs
I rejected the contention of Ms Wu that she was not liable to pay any interest at all to Mr Ling. To be weighed against that is the fact that she enjoyed a substantial degree of success in resisting the rates of interest for which Mr Ling contended. Unless I receive written notification from the parties of any matter that they submit should alter the position with regard to costs before the next occasion, I consider it appropriate that on the next occasion I order that Mr Ling pay 75% of the costs of Ms Wu of the proceedings.
Orders
I make the following orders:
1. Judgment for the plaintiff against the second defendant in a sum to be determined.
2. The parties have liberty to approach my Associate within two weeks of today for the making of formal orders.
3. Senior counsel for the defendants is to bring in draft orders to give precise effect to the findings contained in this judgment.
4. Costs reserved until the next date.
[3]
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Decision last updated: 30 June 2015