Permanent Trustee Company Limited v Gillian O'Donnell Permanent Trustee Company Limited v Di Benedetto Tonto Home Loans Australia Pty Ltd v Tavares

Did the loans amount to asset lending? 376 Before advancing to the claims for relief, it is convenient to consider whether the loans to the cross-claimants amounted to asset lending. Stephen Keen in his report of 22 August 2007 explained at [10.1]: " Asset-based loans in general are those where the loan has been extended primarily or solely on the basis of the valuation of the asset over which the loan is secured, irrespective of the borrowers' capacity to meet the loan commitments." 377 During his oral testimony, Mr Brewster told me that Lo Doc lending is not asset lending. He said: (T523 L 6-15 8/4/09) " Q. Why is it in your opinion the case that low doc lending is not asset lending? A. This is in terms of the low doc application, other aspects of, as I've endeavoured to portray, evidence of strength to determine the first way out, i.e. the serviceability side, albeit based on a written assertion by the borrower as to their income and financial position. That's fundamentally why they look at it. There is something on the first way out that you are building a case around as opposed to merely taking an asset and saying what's that worth, I will lend 60 or 65 per cent of that value, no further questions."

378 The plaintiffs contended that the loans in each of the proceedings did not amount to asset lending. I accept that the Flexi Express Home Loans and the FirstMac Lo Doc loans were not intended to be asset-based loans. The income declared by intending borrowers was required to meet the debt serviceability requirements of the lenders. To overcome this hurdle Streetwise falsified the incomes of the cross-claimants. The failures by Mr Lougoon and Mr Wright to follow the lending guidelines indicated that they were not much concerned about the cross-claimants' employment status and were content to lend on the security provided and mortgage insurance. Moreover, the plaintiffs possessed the knowledge of Streetwise as to the true financial position of the cross-claimants. The cross-claimants did not have the capacity to meet the loans commitments, however, their equity in their family homes met the LVR requirements of the loans. I conclude that the loans to the cross-claimants were asset-based loans and amounted to asset lending. 379 As Professor Keen noted at [10.2] asset-based lending is not necessarily a problem. For example, a 'Reverse mortgage' which provides capital for older members of the community with limited incomes on the security of the family home fulfils a legitimate role in mortgage lending practices. Whether an asset-based loan is considered unjust or unconscionable depends on the circumstances of the case. 380 In Kowalczuk v Accom Finance Pty Ltd (2008) 252 ALR 55, Campbell JA (with whom Hodgson and McColl JJA agreed) noted at [96]: " It can be accepted the pure asset lending described by Basten JA in Khoshaba at [128] as being "to lend money without regard to the ability of the borrower to repay by instalments under the contract, in the knowledge that adequate security is available in the event of default" - is in at least some circumstances unjust within the meaning of the Contracts Review Act, or unconscionable … However whether lending on the basis that the loan can adequately be repaid from the security, is in the circumstances of any particular case unconscionable or unjust, depends on other matters as well. Thus, in Elkofairi [v Perpetual Trustee Co Ltd (2003) 11 BPR 20, 841] the facts that neither the applicant nor her husband had any income, the loan in question was for 5 years, and the security was over the applicant's only asset (involving the proposition that the applicant had no other resources from which to service the loan) and that the secured property was the applicant's home, were all relevant matters in reaching the conclusion that the transaction was both unconscionable and unjust. In Khoshaba, other factors relevant to the conclusion of injustice were that the applicants were a husband and wife, one of whom earned $43,000 pa and the other of whom was a pensioner, the lender had no information at all about the purpose for which the loan was being sought, and the security was over their home." 381 The vice in asset lending was explained by Brereton J in Riz v Perpetual Trustee Australia Ltd [2007] NSWSC 1153 at [70]: "The substantive unfairness is said to be found in the "asset lending" element. Although asset lending is not necessarily unjust, such contracts have the potential for injustice. The perceived injustice in "asset lending" is sourced in what is described in Khoshaba by Basten JA (at [128]) as the futility of the exercise: 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. Such a transaction involves no risk to the lender, but considerable risk to the borrower, given the likely inability of the borrower to perform and the probability if not certainty of resort to the security, with the lender being in a better position to protect itself against loss. 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." 382 Whether the asset lending in the circumstances of each of the proceedings was unjust or unconscionable will be further considered when dealing with the claims for relief. The claims for relief under the Contracts Review Act 1980

Argument 383 I propose to deal with the Contracts Review Act (the CRA) before turning to unconscionability: Spina v Permanent Custodians Limited [2009] NSWCA 206 per Young JA at [74-75]. As the parties' submissions on the claim for relief under the CRA were extensive, I will summarise them. 384 The cross-claimants submitted that each of the loan and mortgage contracts are unjust within the CRA because: (a) of the circumstances in which Streetwise tricked and cajoled the borrowers to enter into the loan and mortgage; (b) Streetwise was the relevant agent of Tonto and Tonto is thereby responsible for Streetwise's actions in carrying out its task as agent; (c) of Tonto's own involvement in the transactions, including its involvement in using Streetwise to introduce borrowers to it with a clear conflict of interest; (d) of Tonto's own breach of its guidelines in connection with a Lo Doc loan, particularly its failure to ensure that the borrowers were eligible applicants; (e) Tonto used a broker with a clear conflict of interest which thereby exposed the borrowers to a serious risk of fraud; (f) the loan was truly an asset lend, secured over the borrowers' family home. 385 In a letter dated 23 October 2006, the cross-claimants notified the plaintiffs of their reliance upon ss 9(2)(a)(b)(f)(g)(h)(i)(j)(k) and (l) of the CRA. 386 Amended particulars were filed on 20 April 2009 which provided in addition to the particulars previously supplied that reliance was placed upon ss 9(2)(c)(d) and (e) of the CRA. 387 ASIC supported the claim for relief under the CRA. Particular emphasis was placed upon the consideration of "public interest" under s 9(1) of the CRA. The aspects of public interest engaged in these proceedings included promoting certainty in commercial transactions, promoting efficiency, and in particular the efficient allocation of credit in the Australian financial system, promoting market integrity and consumer protection. ASIC put to me that in the present cases, the public interest considerations that militate in favour of the conclusion that the loan agreements and mortgages were unjust include: (a) The lenders were content to, and did, engage effectively in asset lending, taking security over the borrowers' homes and sole substantial asset when the borrowers lacked the capacity to repay and were incapable reasonably of looking after their own interests because of the nature of the 'low doc' loan being given to them, the relationship between Streetwise and the lenders and the lenders' reliance upon Streetwise to carry out important tasks on their behalf. (b) The losses were brought about by Streetwise's fraudulently obtaining the loans and the lenders choosing to conduct business in a way, and offering products that elevated the risk of that fraud occurring. The lenders were in a better position both to appreciate and to eliminate or manage that risk than the borrowers. (c) The lenders lent to borrowers who could not afford to repay, without independent verification of income or examination of the purpose of the loan to ensure that repayments could be made. The borrowers were at worst commercially naïve and disadvantaged by the lenders' processes. The lenders were prepared nonetheless to lend provided they had sufficient security and mortgage insurance. This is likely to involve the inefficient allocation of credit and is harmful to the Australian financial system. It also permitted the fraud which came to pass, to the detriment of the individual borrowers if the transactions are permitted to stand. 388 The plaintiffs contended that none of the loan agreements should be set aside under the CRA. None of the loans agreements was unjust. West v AGC (Advances) Ltd (1986) 5 NSWLR 610 was cited where McHugh JA at 621 made the important distinction between unjust contracts and unjust transactions; and emphasised that the CRA regulates contracts, not investments. It was pointed out that the plaintiffs were not involved in the cross-claimants' decisions to enter into the joint ventures. The plaintiffs argued that the proceedings concern the attempt by the cross-claimants to use the CRA to save them from the consequences of their investment decisions to enter into joint ventures upon the terms agreed with Streetwise. The cross-claimants' claims should be characterised only as procedural injustice. 389 It was put to me that in the letter dated 23 October 2006 the cross-claimants had indicated that the matters they relied upon to allege that the subject loans and mortgage were contrary to the public interest were the same as the matters relied upon to allege that the loans were advanced in circumstances where prudent lending practices were not followed. It was not open to the cross-claimants or ASIC to enlarge that case. The plaintiffs argued that the submissions by ASIC as to the considerations of public interest went beyond the pleaded case and should not be considered. The plaintiffs submitted that the cross-claimants had not established that prudent lending practices were not followed. There should be no doubt that the cross-claimants were able to look after themselves in entering into the loan transactions and mortgages and understood the nature and effect of the transactions. They all appreciated the lender's reliance upon the information contained in the loan application and supporting documents. They should be taken also to have understood the importance of providing relevant information to support their loan applications honestly and with care. They should be found to have accepted the risk that Streetwise would not continue to make payments into their accounts so as to facilitate the making of the loan repayments. The plaintiffs submitted that even allowing for the beneficial objects (for consumers) of the CRA, the cross-claimants should not be allowed to deploy the CRA as a means of erasing the consequences of their investment decisions. 390 The plaintiffs submitted that as to asset lending the vice of the conduct as explained by Brereton J in Riz - the imbalance of risk between lender and borrower - may not apply where it is voluntarily accepted by the borrower, even where the family home is involved. The plaintiffs contended that in all three proceedings the borrowers knew that the lender was advancing a substantial amount of money in reliance upon their representations that the proceeds would be advanced for investment purposes without the lender taking any security in the asset acquired through the investment. On that basis alone, the plaintiffs argued the imbalance of risk was not present, such that there is no real asset lending.

Were the contracts unjust? 391 The cross-claimants seek declarations that the loan agreements and mortgages are unjust contracts within the meaning of s 7 of the CRA. They ask for an order pursuant to s 7(1)(b) declaring the loan agreements and mortgages to be void or pursuant to s 7(1)(a) for an order refusing to enforce all of the provisions of the loan agreement and mortgages. Section 7(1) the CRA is as follows: "7 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."

392 In determining whether a contract is unjust in the circumstances relating to the contract at the time it was made, the court must, in accordance with s 9(1) of the CRA, have regard to the public interest and to all the circumstances of the case. Section 9(2) without in any way affecting the generality of subsection (1) directs the court to have regard to certain specific matters to the extent that they are relevant to the circumstances. The specific matters described in s 9(2) are not exhaustive and each case must be determined on its own facts: Spina at [104]. 393 Section 9(2) provides: " Without in any way affecting the generality of subsection (1), the matters to which the Court shall have regard shall, to the extent that they are relevant to the circumstances, include 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, (e) whether or not: (i) any party to the contract (other than a corporation) was not reasonably able to protect his or her interests, or (ii) any person who represented any of the parties to the contract was not reasonably able to protect the interests of any party whom he or she represented, because of his or her age or the state of his or her physical or mental capacity, (f) the relative economic circumstances, educational background and literacy of: (i) the parties to the contract (other than a corporation), and (ii) any person who represented any of 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, (k) the conduct of the parties to the proceedings in relation to similar contracts or courses of dealing to which any of them has been a party, and (l) the commercial or other setting, purpose and effect of the contract." 394 Section 4 of the CRA defines the term "unjust" to include "unconscionable, harsh or oppressive". 395 The consideration for relief under s 7 of the CRA involves a three stage process. As was said by Handley JA in Khoshaba at [2006] NSWCA 41 [99]: "I agree that a case under the Contracts Review Act involves a three stage process - the making of findings of primary fact where these are disputed, the formation of an evaluative judgment as to whether or not the contract is unjust, and why, and then, if necessary, the exercise of the Court's discretionary power to grant relief and determine its extent."

396 The primary facts have been found throughout this judgment. Before proceeding to deal with the second stage in the process, I will refer to some general principles which are relevant to the assessment of unjustness under the CRA and are uncontroversial. 397 The relevant time for assessing that the contract was unjust is at the time the contract was made: s 7(1) of the CRA. Section 9(1) permits the court to have regard to the consequences or result arising from compliance or non-compliance with the contract: CIT Credit Pty Ltd v Keable [2006] NSWCA 130 per Spigelman CJ at [65]. Further, under 9(4) of the CRA, the court shall not have regard to any injustice arising from circumstances that were not reasonably foreseeable at the time that the contract was made. An evaluation of injustice requires that regard be had to the position of all the contracting parties: West at 626; Riz at [75]. 398 The plaintiffs referred to the observations of McHugh JA in West where his Honour referred to a distinction between a contract which was "unfair" and one that was "unjust". His Honour said at 622: "… a contract will not be unjust as against a party unless the contract or one of its provisions is the product of unfair conduct on his part either in the terms which he has imposed or in the means which he has employed to make the contract." 399 Spigelman CJ pointed out in Khoshaba at [73] that McHugh JA's observations are to be understood as identifying relevant considerations entitled to significant weight but not as if they are rules. 400 In the present proceedings, the cross-claimants do not complain about the terms and conditions of the loan agreement and the mortgage. The cross-claimants' complaint is one of procedural injustice: West per McHugh JA at 620. The injustice is said to arise because of fraudulent conduct of Streetwise, who was the agent of Tonto and Tonto's own involvement in the transactions, including its use of Streetwise and its failure to follow the lending guidelines. 401 Campbell JA in Kowalczuk at 78 [102] summarised what Spigelman CJ had said in Khoshaba as to the significance of the lender's departure from its lending guidelines in that case: " In Khoshaba Spigelman CJ at [80]-[82] regarded a lender's failure to observe its own lending guidelines as entitled, in the circumstances of that particular case, to significant weight. The way in which it was relevant was twofold. First, while the guidelines were designed to enable the lender to assess and minimise its own risk, and thus were for the purpose of protecting the lender rather than the borrower, following the guidelines conferred an indirect benefit on the borrower through risky loans not being made, and one of the legislative purposes of the Contracts Review Act was to protect people not able to look after themselves. The second way in which it was relevant was, in the circumstances where the lender had no idea for what purpose the loan was being borrowed, the failure to observe the lending guidelines assisted the inference that the lender was lending on the value of the security." 402 A further matter must be mentioned. It is not the injustice of the joint venture agreements which is to be determined but the injustice of the loan agreement and the mortgage in each case.

The O'Donnell proceedings 403 I will now consider in the O'Donnell proceedings the circumstances relating to the loan agreement and mortgage when they were made. Mr and Mrs O'Donnell were neither sophisticated nor naïve in financial matters. Before their dealings with Streetwise commenced they understood what it meant to provide a mortgage and that a possible consequence of default in repaying a loan was the sale of the property secured by the mortgage. Before the first meeting with Streetwise Mr O'Donnell rang ASIC, the Department of Fair Trading and the ACCC to enquire about Streetwise and Mr Bangaru. Mrs O'Donnell showed the joint venture agreement to a solicitor who was a friend. Their accountant did a company search of Streetwise, circled the directors' names and told them to be careful. 404 Mr O'Donnell was 54 years old and Mrs O'Donnell was 47 years old. Section 9(2)(e) of the CRA directs the court to consider whether a party was reasonably able to protect his or her interests because of his or her age or the state of his or her physical or mental capacity. There is nothing to suggest that the O'Donnells were incapable of protecting their interests because of these factors. 405 Although they were rushed and not provided with the opportunity to consider the loan applications in any detail by Streetwise, Mr and Mrs O'Donnell were careless when they signed the partially completed loan application. Mr O'Donnell was also careless in signing the income declaration form in blank. By doing so, the O'Donnells exposed themselves, Tonto and Permanent to the risk of fraud by Streetwise. Section 9(4) of the CRA requires the court not to have regard to any injustice arising from circumstances that were not reasonably foreseeable at the time the contract was made. Whilst the O'Donnells were careless, they could not have reasonably foreseen that Streetwise would insert in the loan application and income declaration false details of their assets and income. It was not suggested by the plaintiffs nor does the evidence establish that the risk of fraud by Streetwise could reasonably have been foreseen by Mr and Mrs O'Donnell. 406 Streetwise did not inform the O'Donnells that they were applying for a Lo Doc loan or what the income declaration forms meant. They were not told of the particular reliance that the lender placed upon the information provided in the loan application and the income declaration when assessing an application for a Lo Doc loan. Mr Bangaru misled the O'Donnells when he informed them that the loan was being provided by Streetwise. He persuaded them there was no need to obtain their own lawyers. 407 Mr and Mrs O'Donnell did not have sufficient income to service a loan of $500,000 with an interest rate of 6.95 per cent per annum and a loan term of 30 years. An undisclosed person or persons at Streetwise inserted false information in the loan application form and Mr O'Donnell's income declaration as Streetwise knew that truthful disclosure of the O'Donnells' assets and income would not meet the lending guidelines either under the Origin or FirstMac lending programs. In particular Mr and Mrs O'Donnell's income did not meet the loan serviceability requirements of the lending programs. But for the fraud of Streetwise the loan would not have been approved. Had the O'Donnells known that the lender did not take into account the promise of Streetwise to contribute to the loan repayments when considering the loan application and that their financial position truthfully stated did not meet the lending guidelines, they would not have proceeded. All of these matters are relevant to the consideration of the circumstances identified in s 9(2)(d), s 9(2)(h) and s (9)(2)(j) of the CRA and I take them into account. The direction in s 9(2)(h) is to have regard to whether or not and when independent legal or expert advice was obtained. Not only were the O'Donnells persuaded not to obtain legal advice about the loan application but were convinced by Streetwise at the time of the signing of the loan agreement and mortgage that they did not need their own lawyers. I am mindful that when considering s 9(2)(h), the persuasion by Streetwise for Mr and Mrs O'Donnell not to obtain independent legal advice is to be balanced against the discussions which the O'Donnells had with a solicitor and an accountant before they commenced their dealings with Streetwise. 408 The letter from Hunt and Hunt enclosing the loan agreement, mortgage and memorandum of mortgage was received by Mr and Mrs O'Donnell on or about 7 January 2003. When they signed the loan agreement and mortgage at the office of Streetwise on 10 January 2003, no-one explained to them the provisions of the documents and their legal and practical effect. This is a circumstance to be considered under s 9(2)(i) of the CRA. Although the signing of the documentation was deliberately rushed by Mr Bangaru and the other Streetwise employees, Mr and Mrs O'Donnell had had the opportunity of considering the loan agreement and mortgage prior to the meeting and knew they were giving a mortgage over the Harbord property to Permanent and that they were liable to Permanent irrespective of their arrangements with Streetwise. They understood that their property was at risk if the loan was not repaid. Their understanding of the gist of what they were signing detracts from the consideration of the injustice which arises under s 9(2)(i). Because of the high-pressured and convincing presentations by Streetwise and its impressive offices, the O'Donnells' belief was that there was little risk that Streetwise would not meet its promise to pay most of the mortgage instalments. 409 Neither Tonto nor Permanent was a party to the joint venture agreement and no direct advantage was received by them from the loan agreement and mortgage other than that specified in the loan agreement. Tonto, however, had chosen to conduct its business with Streetwise in the way that it did for its own commercial advantage. 410 An important consideration is that by signing the documents, Mr and Mrs O'Donnell had expressed that they were willing to be bound by their contracts. As was observed by Gleeson CJ in Baltic Shipping Co v Dillon (1991) 22 NSWLR 1 at 9: "…The general policy of the law is that people should honour their contracts. That policy forms part of our idea of what is just." 411 Another consideration is the public interest in ensuring certainty in commercial relations: Suncorp-Metway Ltd v Bellairs [2009] NSWSC 135 per Rothman J at [75]. I give these considerations of public interest significant weight. 412 I take into account (as I do in all of the proceedings) a possible consequence to the plaintiff arising from a finding of injustice will be the loss of the monies that were lent with accrued interest. 413 These considerations and the considerations which arise from the carelessness of the O'Donnells when signing the loan application form and of Mr O'Donnell when he signed the income declaration are to be weighed against the circumstances pointing to injustice to which I have referred and the following further circumstances: (i) The contracts arose from the unfair pressure, deception and fraudulent conduct of Streetwise which was acting on behalf of Tonto and Permanent and was their agent: s 9(2)(j) of the CRA. (ii) Section 9(2)(a) directs attention to the existence of any material inequality in the bargaining power between the parties to the contract. By the way in which Tonto conducted its business with Streetwise, Tonto exposed Mr and Mrs O'Donnell to a serious risk of fraud which was reasonably foreseeable at the time the contracts were made: s 9(4) of the CRA. Whilst not financially naïve, they were susceptible to the charms and inducements of Mr Bangaru and the Streetwise salespersons. Furthermore, the branding of the loan application form as a Streetwise document assisted Mr Bangaru to mislead Mr and Mrs O'Donnell. The branding of that document and the letters as Streetwise supported the impression that Streetwise was a business of substance with whom they could enter a joint venture and borrow on the security of the family home for that purpose. The O'Donnells were in a position of disadvantage compared to Tonto and Permanent when they came to negotiate the terms of the contracts. Tonto was in a much better position both to appreciate and to manage the risk of fraud by Streetwise than Mr and Mrs O'Donnell. (iii) The Origin lending guidelines were not followed in the following respects: (a) No ABN searches were made. (b) A certificate of business registration or financial statements for Mr O'Donnell were not obtained. (c) Mr and Mrs O'Donnell were not self-employed persons who were not in a position to provide full financial documentation at the time of the loan application. The application for the Lo Doc loan should not have been made. (d) What was expressed to be the loan purpose, that is, " Purchase Investment Property ", did not comply with a purpose described in the Flexi Express Home Loan . (iv) The special condition requiring that any "cash out" component in excess of $100,000 was to be "fully documented" was not complied with. (v) Tonto and Permanent possessed the knowledge of Streetwise as to Mr and Mrs O'Donnell's true financial position. The O'Donnells did not have the income to service the loan and the obligation imposed upon them by the contracts to make the mortgage payments of $2,895.83 per month was unreasonably difficult to comply with: s 9(2)(d) of the CRA. Their equity in their home met the LVR requirements of the lender and this was asset lending. As to the plaintiff's argument that an imbalance of risk was not present, the O'Donnells were not aware that the money was being advanced upon the fraudulent information supplied by Streetwise. If they had known that the fraud had been committed they would not have proceeded with the loan. They did not know that the contribution to the loan repayments by Streetwise was not taken into account when the loan was approved. Because of the fraud and deception of Streetwise, Mr and Mrs O'Donnell were unaware of the reality of the risk involved when they mortgaged their home, which was their primary asset, to Permanent. The transaction involved no risk to Permanent as its loan was protected by the security and mortgage insurance. There was an imbalance of risk and I reject the plaintiff's argument.

414 I have remarked at [322] above upon the added importance of adherence by a lender to its own guidelines where prospective borrowers are exposed to a serious risk of fraud. The loose attitude that was adopted to the lending guidelines indicates that the lender was not much concerned about the purpose of the loan and the self-employment of the borrowers and was content to lend on the security of the Harbord property and mortgage insurance. In Khoshaba Spigelman CJ remarked upon the relevance of the purpose of a loan. The Chief Justice said at [68-69]: " In my opinion, the purpose for which a loan is advanced is a relevant circumstance. This is confirmed by s 9(2)(l) which includes, amongst the matters to which a court shall have regard in determining whether a contract is unjust: 'The commercial or other setting, purpose and effect of the contract.' The purpose of a loan is a concern of a lender, because it is usually a material consideration in determining whether the particular [borrower] is able to service and repay the loan ." 415 The failure by the lender to follow its own lending guidelines and special "cash out" condition made it easier for the fraud by Streetwise to remain undetected. In all the circumstances of this case, the asset lending was unjust. 416 An argument advanced by the plaintiffs was that Khoshaba could be distinguished as one of the legislative purposes of the CRA was to protect people not able to look after themselves. It was said that all of the cross-claimants were able to look after themselves in entering into the loan agreements and mortgages. Where the asset lending has arisen because of the fraud and deception of the lender's agent and the borrowers are unaware that the reality of the lending is on the value of their home, in my opinion, it makes little difference to considerations of injustice under the CRA that the borrowers are persons who normally are able to look after themselves. After all, a purpose of the CRA is to protect persons from unfair pressure or unfair tactics when they enter into contracts. 417 Another argument was that once it was accepted that Tonto had no knowledge of or involvement in the fraudulent conduct this would be a factor of significant weight in its favour in resisting a finding of injustice: Khoshaba at [77]; Riz at [81]-[82]. So too, it was argued, was the fact that misinformation was provided to Tonto by the borrowers and the borrowers' joint venturer and mortgage broker: Riz at [82]. The plaintiffs further submitted that any fraudulent conduct directed against the borrowers occurred when the borrowers were deprived of a legal or secured interest in the property to which the loan proceeds were intended to be applied of which the lender had no knowledge. 418 This last submission is not factually correct. The fraudulent conduct of Streetwise commenced at the time the borrowers were persuaded to sign the loan applications and income declarations. As to the second contention, it was not the borrowers who supplied false information to Tonto but its agent, Streetwise. As to the first submission, Tonto possessed the knowledge of Streetwise and by the way it conducted its business with Streetwise exposed itself and the borrowers to a serious risk of fraud. 419 There is, as the cross-claimants submit, a public interest in ensuring that prudent lending practices are followed. Prudent lending practice, to my mind, includes the conduct of the relationship between loan provider/mortgage manager and finance broker. This must be the case in Lo Doc lending where reliance is placed by the lender on the accuracy of the information provided in the loan application documentation. Prudent lending practice requires adherence by the lender to Lo Doc lending guidelines when the finance broker has been entrusted with the first stage of the loan application process. An agreement for commercial self-interest not to contact a broker's client until after the settlement of the loan does nothing to ensure the integrity of the material supplied. The public interest against unjust asset lending was referred to in Khoshaba and Kowalczuk. I consider that it is unnecessary to consider ASIC's submissions on public interest. 420 I have concluded that the loan agreement and mortgage were unjust in the circumstances relating to the contracts at the time that they were made. The Di Benedetto proceedings 421 I propose now to consider in the Di Benedetto proceedings the circumstances relating to the loan agreement and mortgage when they were made. Like Mr and Mrs O'Donnell, the Di Benedettos were neither sophisticated nor naïve in financial matters. Their lack of sophistication in matters financial is demonstrated by the failure to ensure that a joint venture agreement was entered into with Streetwise before the settlement of the loan. Nevertheless, they understood before Mr Fassos came to their home in 2002 what it meant to provide a mortgage and that a possible consequence of default in repaying a loan was the sale of the secured property. Unlike the O'Donnells, they made no enquiries about Streetwise before their dealings commenced. There is nothing, however, which suggests that Mr and Mrs Di Benedetto were incapable of protecting their interests either because of their age or the state of their physical or mental capacity: s 9(2)(e) of the CRA. They were each 37 years old. 422 Mr and Mrs Di Benedetto were pressured by the salesmanship of Streetwise into signing the loan application and income declaration forms which were in blank and about which their understanding was limited. They had neither been informed that the application was for a Lo Doc loan nor been made aware of what the income declaration forms meant. They had not been told of the particular significance that the information provided as to their income had in Lo Doc lending. Nevertheless, they were careless when signing these documents in blank. They exposed themselves, Tonto and Permanent to the risk of fraud by Streetwise. As in the case of the O'Donnells, the evidence does not establish that the risk of fraud by Streetwise was reasonably foreseeable by them at the time the loan agreement and mortgage were made: s 9(4) of the CRA. 423 They did not have sufficient income to service a loan of $500,000 with an interest rate of 6.95 per cent per annum and a loan term of 30 years. An undisclosed person or persons at Streetwise inserted false information in the loan application form and income declarations as Streetwise knew that truthful disclosure of Mr and Mrs Di Benedetto's assets and income would not meet the lending guidelines either under the Origin or FirstMac lending program. In particular, their income did not meet the loan serviceability requirements of the lending programs. The loan would not have been approved without the fraud of Streetwise. The Di Benedettos were unaware that the loan had been approved upon the fraudulent material inserted by Streetwise. Mrs Di Benedetto had been assured by Mr Bangaru that Kim Cannon knew that Streetwise was paying the loan and that Streetwise did this all the time. If they had known that the lender did not take into account the promise by Streetwise to contribute to the loan repayments when considering the application and that their financial position truthfully stated did not meet the lending guidelines, Mr and Mrs Di Benedetto would not have proceeded with the loan. These matters are relevant to the consideration of the circumstances identified in s 9(2)(d) and s 9 (2)(j) of the CRA and I take them into account. 424 The loan agreement, mortgage and direct debit authority were forwarded by Hunt and Hunt under cover of letter dated 13 February 2003 direct to Streetwise. Hunt and Hunt were Tonto's solicitors and were panel lawyers for the Origin program. By sending the documentation to Streetwise, the solicitors breached the procedures stipulated in the Origin "Document and Procedures Manual". The failure to comply with Origin's service requirements placed the loan documentation in the hands of Streetwise thereby assisting Mr Bangaru and Mr Fassos to rush Mr and Mrs Di Benedetto into signing the loan agreement and mortgage without the Di Benedettos having the opportunity to consider the documents. 425 When Mr Bangaru and Mr Fassos came to the Di Benedetto home with these documents, Mr and Mrs Di Benedetto were in a position of disadvantage. They were persuaded not to obtain their own legal advice: s 9(2)(h) of the CRA. No one explained to them the provisions of the documents and their legal and practical effect: s 9(2)(i) of the CRA. They understood, however, that they were responsible for the loan repayments, that they were giving a mortgage over their home as security for the loan and their property was at risk if the payments were not made. Their understanding of the gist of what they were signing detracts from the consideration of the injustice which arises under s 9(2)(i). They, like Mr and Mrs O'Donnell, had been seduced by Mr Bangaru and by high-pressured and clever salesmanship into believing that they could place their trust in Streetwise and that there was little risk of default in repaying the loan as Streetwise had agreed to make the payments into Mr Di Benedetto's bank account. 426 Neither Tonto nor Permanent was a party to the joint venture agreement and no direct advantage was received by them from the loan agreement and mortgage other than that specified in the loan agreement. Tonto, however, had chosen to conduct its business with Streetwise in the way that it did for its own commercial advantage. 427 By signing the documents, Mr and Mrs Di Benedetto had expressed that they were willing to be bound by their contracts. As in the O'Donnell proceedings, I give significant weight to the considerations of public interest that people should honour their contract and in ensuring certainty in commercial relations. These considerations and the considerations which arise from the carelessness of Mr and Mrs Di Benedetto when they signed the loan application form and income declarations are to be weighed against the circumstances pointing to injustice to which I have referred and the following further circumstances: (i) The contracts arose from the unfair pressure, deception and fraudulent conduct of Streetwise which was acting on behalf of Tonto and Permanent and was their agent: s 9(2)(j) of the CRA. (ii) By the way in which Tonto conducted its business with Streetwise, Tonto exposed Mr and Mrs Di Benedetto to a serious risk of fraud which was reasonably foreseeable at the time the contracts were made: s 9(4) of the CRA. The Di Benedettos were susceptible to the charms and inducements of Mr Bangaru and the Streetwise salespersons. Furthermore, the branding of the loan application form and letters as Streetwise supported the impression that Streetwise was a business of substance with whom they could enter a joint venture and borrow on the security of the family home for that purpose. In comparison to Tonto and Permanent, they were in a position of disadvantage when they came to negotiate the terms of the contracts. Tonto was in a much better position than Mr and Mrs Di Benedetto to appreciate and to manage the risk of fraud by Streetwise. There was a material inequality in the bargaining power between the parties to the contract: s 9(2)(a) of the CRA. (iii) The Origin lending guidelines were not followed in the following respects: (a) No ABN search was made. (b) A certificate of business registration or financial statements were not obtained. (c) Mr and Mrs Di Benedetto were not self-employed persons who were not in a position to provide full financial documentation at the time of the loan application. The application for a Lo Doc loan should not have been made. (d) What was expressed to be the loan purpose, that is, " free up equity for investment purposes ", did not comply with a purpose described in the Flexi Express Home Loan. (iv) Tonto and Permanent possessed the knowledge of Streetwise as to Mr and Mrs Di Benedetto's true financial position. Mr and Mrs Di Benedetto did not have the income to service the loan and the obligation imposed upon them by the contracts to make the mortgage payments of $2,895.83 per month was unreasonably difficult to comply with: s 9(2)(d) of the CRA. Their equity in their home met the LVR requirements of the lender and this was asset lending. The Di Benedettos were not aware that the money was being advanced upon the fraudulent information supplied by Streetwise. If they had known that the fraud was committed they would not have proceeded with the loan. They did not know that the contribution to the loan repayments by Streetwise was not taken into account when the loan was approved. Because of the fraud and deception of Streetwise, Mr and Mrs Di Benedetto were unaware of the reality of the risks involved when they mortgaged their home, which was their primary asset, to Permanent. The transaction involved no risk to Permanent and there was an imbalance of risk. 428 The loose attitude that was adopted to the lending guidelines indicated that the lender was not much concerned about the purpose of the loan and the self-employment of the borrowers and was content to lend on the security of the Narraweena property and mortgage insurance. The failure by the lender to follow its own guideline as to loan purpose made it easier for the fraud by Streetwise to remain undetected. I have referred to further arguments advanced for the plaintiffs and considerations of public interest at [418] - [419] above. The asset lending in this case was unjust. 429 I find that the loan agreement and mortgage were unjust in the circumstances relating to the contracts at the time that they were made.

The Tavares and Rowe Proceedings 430 I turn to consider the circumstances relating to the loan agreement and mortgage when they were made in the Tavares and Rowe proceedings. Ms Rowe was employed as a tollbooth operator and also had a casual position as a swimming instructor. She was not much experienced in financial matters. Nevertheless, Ms Rowe had been party to the borrowing and the granting of a mortgage when the home unit at Lane Cove and the Castle Hill home were purchased. Mr Tavares had been self-employed in the music industry and was more experienced in matters financial than Ms Rowe. Neither of them, however, was sophisticated in such matters nor were they naïve. Before they commenced their dealings with Streetwise they understood what it meant to provide a mortgage and that a possible consequence of default in the loan repayments was the sale of the secured property. After Bevan Lydement met with Mr Tavares and Ms Rowe at their home in early January 2003, Mr Tavares rang ASIC and the ACCC to enquire whether there were any bad marks against Streetwise to which enquiries he received negative responses. 431 Mr Tavares was 53 years old and Ms Rowe was 39 years old. There is nothing which suggests that either Mr Tavares or Ms Rowe was incapable of protecting their interests either because of their age or the state of their physical or mental capacity: s 9(2)(e) of the CRA. 432 Mr Tavares and Ms Rowe were persuaded by Streetwise that it was in order for them to sign the loan application and income declaration forms although these forms were only partially completed. They did not know that the application was for a Lo Doc loan nor had they been informed of what the income declaration forms meant nor of the particular significance that the information provided as to their income had in Lo Doc lending. They were assured by Mr Bangaru that it was not necessary to obtain legal advice. These matters are relevant to the consideration of the circumstances identified in s 9(2)(d), s 9(2)(h) and s 9(2)(j) of the CRA and I take them into account. Notwithstanding these matters, the signing of the partially completed documents was careless. They exposed themselves and Tonto to the risk of fraud by Streetwise. As in the cases of the other cross-claimants, the evidence does not establish that the risk of fraud by Streetwise was reasonably foreseeable by them at the time the loan agreement and mortgage were made: s 9(4) of the CRA. 433 They did not have sufficient income to service a loan of $500,000 with an interest rate of 6.95 per cent per annum and a loan term of 30 years. An undisclosed person or persons at Streetwise inserted false information in the loan application form and Mr Tavares's income declaration as Streetwise knew that truthful disclosure of the assets and income of Mr Tavares and Ms Rowe would not meet the lending guidelines under either the Origin or Firstmac lending programs. In particular, their combined income did not meet the loan serviceability requirements of the lending programs. The loan would not have been approved without the fraud of Streetwise. Mr Tavares and Ms Rowe were unaware that the loan had been approved upon the fraudulent material inserted by Streetwise. If they had known that the lender did not take into account the promise by Streetwise to contribute to the loan repayments when considering the loan application and that their financial position truthfully stated did not meet the lending guidelines, they would not have proceeded. These matters are relevant to the consideration of the circumstances identified in s 9(2)(d) and s 9(2)(j) of the CRA and I take them into account. 434 The letter from Hunt and Hunt enclosing the loan agreement, mortgage and memorandum of mortgage was received by Mr Tavares and Ms Rowe on or about 15 May 2003. When they attended the office of Streetwise on 22 May 2003, they were pressured and rushed into signing the loan agreement and mortgage and no-one explained to them the provisions of the documents and their legal and practical effect: s 9(2)(i) of the CRA. They were persuaded not to obtain their own legal advice: s 9(2)(h) of the CRA. They understood, however, that they were giving a mortgage over their home as security for the loan and their property was at risk if the payments were not made. As in the cases of the other cross-claimants, their understanding of the gist of what they were signing detracts from the consideration of the injustice which arises under s 9(2)(i). In a manner similar to the other cross-claimants they had been seduced by Mr Bangaru and by high-pressured and clever salesmanship into believing that they could put their trust in Streetwise and that there was little risk of default in repaying the loan as Streetwise had agreed to pay $2,200 each month into their bank account. 435 Tonto was not a party to the joint venture agreement and no direct advantage was received by Tonto from the loan agreement and mortgage other than that specified in the loan agreement. Tonto, however, had chosen to conduct its business with Streetwise in the way that it did for its own commercial advantage. 436 By signing the contracts, Mr Tavares and Ms Rowe had expressed that they were willing to be bound by their contracts. I give significant weight to the considerations of public interest that people should honour their contract and in ensuring certainty in commercial relations. These considerations and the considerations which arise from the carelessness of Mr Tavares and Ms Rowe when signing the loan application and Mr Tavares when signing the income declaration are to be weighed against the circumstances pointing to injustice to which I have referred and the following further circumstances: (i) The contracts arose from the unfair pressure, deception and fraudulent conduct of Streetwise which was acting on behalf of Tonto and was Tonto's agent: s 9(2)(j) of the CRA. (ii) By the way in which Tonto conducted its business with Streetwise, Tonto exposed Mr Tavares and Ms Rowe to a serious risk of fraud which was reasonably foreseeable at the time the contracts were made: s 9(4) of the CRA. Like the other cross-claimants, Mr Tavares and Ms Rowe were susceptible to the charms and inducements of Mr Bangaru and the Streetwise salespersons. Furthermore, the branding of the loan application form and letters as Streetwise supported the impression that Streetwise was a business of substance with whom they could enter a joint venture and borrow on the security of their home for that purpose. When compared to Tonto, they were in a position of disadvantage when they came to negotiate the terms of the contracts. Tonto was in a much better position than Mr Tavares and Ms Rowe to appreciate and to manage the risk of fraud by Streetwise. There was a material inequality in the bargaining power between the parties to the contract: s 9(2)(a) of the CRA. (iii) The FirstMac lending guidelines were not followed in the following respects: (a) No ABN search was made. (b) No enquiries were made to confirm that Mr Tavares was a self-employed person who had for a minimum of two years been trading in his current business. (c) Mr Tavares and Ms Rowe were not self-employed persons who were not in a position to provide full documentation at the time of the loan application. The application for a Lo Doc Loan should not have been made. (iv) Tonto possessed the knowledge of Streetwise as to the true financial position of Mr Tavares and Ms Rowe. They did not have the income to service the loan and the obligation imposed upon them to make the mortgage payments of $2,753.70 per month was unreasonably difficult to comply with: s 9(2)(d) of the CRA. Their equity in their home met the LVR requirements of the lender and this was asset lending. Mr Tavares and Ms Rowe were not aware that the money was being advanced upon the fraudulent information supplied by Streetwise. If they had known that the fraud was committed they would not have proceeded with the loan. They did not know that the contribution to the loan repayments by Streetwise was not taken into account when the loan was approved. Because of the fraud and deception of Streetwise, Mr Tavares and Ms Rowe were unaware of the reality of the risks involved when they mortgaged their home, which was their primary asset, to Tonto. The transaction involved no risk to Tonto and there was an imbalance of risk. 437 The loose attitude that was adopted to the lending guidelines indicates that the lender was not much concerned about the self-employment of the borrowers and was content to lend on the security of the Castle Hill property and mortgage insurance. I have referred to further arguments advanced for the plaintiffs and considerations of public interest at [418] - [419] above. The asset lending in this case was unjust. 438 I find that the loan agreement and mortgage were unjust in the circumstances relating to the contracts at the time that they were made.

Relief under the CRA 439 I now turn to the third stage of the process which is the question whether relief should be granted and, if so, the extent of the relief. Section 7(1) of the CRA requires the court to consider whether it is "just" to grant relief "for the purpose of avoiding as far as practicable an unjust consequence or result". 440 The plaintiffs submitted that the court should not exercise its discretion to set the loan agreements aside as to do so would relieve the borrowers from their own admitted carelessness. It was recognised that a significant factor in the exercise of the discretion was whether Streetwise was found to be Tonto's and Permanent's agent as knowledge of the circumstances of injustice is highly relevant to the exercise of the discretion: Khoshaba at [77], [122]; Beneficial Finance Corp Ltd v Karavas (1991) 23 NSWLR 256 per Meagher JA at 278; Nguyen v Taylor (1992) 27 NSWLR 48 per Sheller JA at 71F. 441 Tonto and Permanent possessed the knowledge of Streetwise their agent. The lending guidelines were not followed and Tonto conducted its business with Streetwise in such a way as to expose the cross-claimants to a serious risk of fraud. Neither of the plaintiffs could be regarded as an innocent party to the transactions.

442 The unjust consequence or result that is be avoided in the O'Donnell proceedings is that Mr and Mrs O'Donnell must repay a loan of $500,000 with an interest rate of 6.95 per cent per annum or they will lose their home. As at 20 March 2009 the total amount payable to Permanent was $690,471.61.

443 The unjust consequence or result that is to be avoided in the Di Benedetto proceedings is that Mr and Mrs Di Benedetto must repay a loan of $500,000 with an interest rate of 6.95 per cent per annum or they will lose their home. As at 20 March 2009 the total amount payable to Permanent was $692,094.16.

444 The unjust consequence or result that is to be avoided in the Tavares and Rowe proceedings is that Mr Tavares and Ms Rowe must repay a loan of $416,000 with an interest rate of 6.95 per cent per annum or they will lose their home. As at 20 March 2009, the total amount payable to Tonto was $532,508.27. 445 The plaintiffs put to me that as an alternative to setting aside the loan agreements in their entirety, it would be open for the court to set them aside in part. It seems to me that if I was to accede to this submission an unjust consequence or result would not be avoided as the contracts arose from the fraudulent conduct of Streetwise and the cross-claimants received no benefit from the loan monies save for the sum of $50,872.76 which was used by Mr Tavares and Ms Rowe to discharge their mortgage with the ANZ bank. 446 I make the following orders in the matter of Permanent Trustee Company Limited v Gillian O'Donnell and John Robert O'Donnell (the O'Donnell proceedings): 1. The plaintiff's claim be dismissed. 2. Pursuant to s 7(1)(b) of the Contracts Review Act declare that each of: (a) The loan agreement dated 10 January 2003 and made between Permanent Trustee Company Limited as lender and Gillian O'Donnell and John Robert O'Donnell as borrowers, and (b) Mortgage registered No 9386484P between Gillian O'Donnell and John Robert O'Donnell as mortgagors and Permanent Trustee Company Limited as mortgagee affecting the land in certificate of title Folio Identifier 62/7912

is void in whole. 3. Pursuant to s 7(1)(d) of the Contracts Review Act , order that Permanent Trustee Company Limited execute and deliver to Gillian O'Donnell and John Robert O'Donnell any instrument relating to the mortgage registered No 9386484P which they shall reasonably require to enable them to cause the notation or memorial of registration of that mortgage to be removed from certificate of title Folio Identifier 62/7912. 4. Grant liberty to apply on seven days notice in relation to any question arising in relation to order 3. 5. Order that the plaintiff pays the defendants'/cross-claimants' costs of the proceedings. 447 I make the following order in the matter of Permanent Trustee Company Limited v Lawrence Di Benedetto and Maria Di Benedetto (the Di Benedettto proceedings): 1. The plaintiff's claim be dismissed. 2. Pursuant to s 7(1)(b) of the Contracts Review Act declare that each of: (a) The loan agreement dated 19 February 2003 and made between Permanent Trustee Company Limited as lender and Lawrence John Di Benedetto and Maria Di Benedetto as borrowers, and (b) Mortgage registered No 9457518F between Lawrence Di Benedetto and Maria Di Benedetto as mortgagors and Permanent Trustee Company Limited as mortgagee affecting the land in certificate of title Folio Identifier 5/23820 is void in whole. 3. Pursuant to s 7(1)(d) of the Contracts Review Act , order that Permanent Trustee Company Limited execute and deliver to Lawrence Di Benedetto and Maria Di Benedetto any instrument relating to the mortgage registered No 9457518F which they shall reasonably require to enable them to cause the notation or memorial of registration of that mortgage to be removed from certificate of title Folio Identifier 5/23820. 4. Grant liberty to apply on seven days notice in relation to any question arising in relation to order 3. 5. Order that the plaintiff pays the defendants'/cross-claimants' costs of the proceedings. 448 I make the following orders in the matter of Tonto Home Loans Australia Pty Ltd v Jose De Carvalho E Rego Tavares and Kim Lee-Anne Rowe (the Tavares and Rowe proceedings): 1. The plaintiff's claim be dismissed. 2. Pursuant to s 7(1)(b) of the Contracts Review Act declare that each of: (a) The loan agreement dated 22 May 2003 and made between Tonto Home Loans Australia Pty Ltd as lender and Jose Tavares and Kim Lee-Anne Rowe as borrowers, and (b) Mortgage registered No A9709341 between Jose De Carvalho E Rego Tavares and Kim Lee-Anne as mortgagors and Tonto Home Loans Australia Pty Ltd as mortgagee affecting the land in certificate of title Folio Identifier 60/240036 is void in whole. 3. Pursuant to s 7(1)(d) of the Contracts Review Act order that Tonto Home Loans Australia Pty Ltd execute and deliver to Jose De Carvalho E Rego Tavares and Kim Lee-Anne Rowe any instrument relating to the mortgage registered No A9709341 which they shall reasonably require to enable them to cause the notation or memorial of that mortgage to be removed from certificate of title Folio Identifier 60/240036. 4. In exchange for the instrument or instruments which are referred to in order 3, Jose De Carvalho E Rego Tavares and Kim Lee-Anne Rowe are to pay to Tonto Home Loans Australia Pty Ltd the sum of $50,872.6 with interest at the rate of 6.95 per cent per annum calculated on that sum from 31 July 2005 until the date of payment. 5. Grant liberty to apply on seven days notice in relation to any question arising in relation to orders 3 and 4. 6. Order that the plaintiff pays the defendants'/cross-claimants' costs of the proceedings. 449 Having made these orders under the Contracts Review Act, it is unnecessary to consider the further claims for relief.

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