re: Planet Securities Unit Trust v Dalrymple [1999] QSC 204

(i) that the interest rate pursuant to the loan agreement namely 20 per cent per month:

(b) was unconscionable conduct within the meaning of the Trade Practices Act 1974 and in breach of s 51AA of that Act;

(c) was not reasonable for the protection of the legitimate interests of the defendants;

(d) was a rate grossly in excess of that for which similar loans could have been obtained.

(ii) that the agreement in so far as it provided that interest would accrue not only on the loan but also upon any interest or other moneys which might be payable pursuant to the terms of the Deed of Loan:

(b) was unconscionable conduct within the meaning of the Trade Practices Act 1974 and in breach of s 51AA of that Act;

(c) was not reasonable for the protection of the legitimate interests of the plaintiff.

3 The counter-claim also alleged payment by the plaintiff of a secret commission of $1,000 approximately but this claim was not pursued at trial.

4 The trial of the action and counter-claim began on 6 August 1999. It was adjourned part heard to 23 August 1999 when the hearing ended.

5 On 6 August 1999, I gave the defendants leave to amend their defence and counter-claim conditional on their paying into court the sum of $70,588 by 4 pm on 12 August 1999. This condition was not met and the action has been tried on the basis of the plaintiff's claim and the defendants original defence and counter-claim.

6 On the first day of the trial the plaintiff called one witness - Bruce Hackett - a director of the plaintiff. The Deed of Loan (Exhibit 1) was prepared by the plaintiff's solicitors Messrs Brown & Fowler of Southport.

(a) the loan and the amount of the loan was $70,588;

(b) the date on which the loan was advanced was 10 November 1997;

(c) the loan was due for repayment on 9 December 1997;

(d) the interest rate which the defendant as borrowers agreed to pay in advance was 20 per cent per calendar month provided that if the defendant should "on the dates herein fixed for payment of instalments of interest and the debt pay to the lender the said instalments and the debt" the lender would accept interest at the rate of 15 per cent per calendar month in lieu of interest at 20 per cent per calendar month; (see "SCHEDULE" to Deed of Loan)

(e) security for the loan and interest was taken, that security being [according to the schedule] a registered third ranking bill of mortgage over property owned by the defendants at 135 Weemala Road, Terrey Hills, NSW;

(f) by clause 5(a) of the Deed of Loan the defendants agreed to pay to the plaintiff interest in advance upon the loan or so much thereof as should from time to time be outstanding at the rate set out in the Schedule in Australian dollars [that rate appears in sub-para (d) above] and "such interest shall accrue on the loan and upon any interest or other monies which may be payable" under the Deed of Loan and shall be calculated from the date upon which the loan was advanced or the date upon which any other moneys become payable under the Deed of Loan;

8 There is no dispute that the loan of $70,588 was not repaid on 9 December 1997, the date on which in terms of the Deed of Loan it was contractually due to be repaid. There is no dispute that since then no moneys at all have been paid under the Deed of Loan.

9 Exhibit 2 shows that as at 9 July 1999 the debt (including principal and interest and interest on unpaid interest) owing by the defendants to the plaintiff under the loan agreement was $2,706,174.23.

10 This huge increase in the indebtedness of the defendants to the plaintiff in such a short time has occurred for a number of reasons. First, apart from an initial interest payment of $10,588 deducted from the loan of $70,588 at the time the loan was advanced (see Exhibit 13) the defendants have paid no moneys at all to the plaintiff - the $10,588 was part of the loan. Secondly, the effect of the interest rate of 20 per cent per month combined with effective capitalisation of unpaid interest payments has caused the total indebtedness to rise like a skyrocket. The debt as at 23 August 1999 is said to be $3,247,407.07. This amount is readily calculated from Exhibit 2.

11 Before the advance was made the plaintiff's solicitors obtained two documents (Exhibit 3) each described as "solicitor's certificate for use in certification of the solicitor's explanation to a borrower". In this exhibit which was tendered by consent of the parties each certificate was signed by Judith Patricia Kaine, a principal of the firm A.C. Knibb Kaine & Associates, solicitors of Sydney. One certificate shows that in conference she attended William Scott Dalrymple, of 135 Weemala Road, Terry (sic) Hills ("the borrower"). The other certificate shows she attended in conference Pamela Gwenneth Dalrymple of 135 Weemala Road, Terry (sic) Hills ("the borrower"). It is quite apparent that Mrs Kaine consulted with both defendants at the same time.

12 In each of the two certificates she certifies that on 10 November 1997 from 11.40am to 12.15pm the following documents were produced to her:

1. Loan agreement between Asia Pacific International Pty Ltd ("the lender") and the borrower.

2. Mortgage over property situated at 135 Weemala Road, Terrey Hills.

I shall later mention some differences between the Deed of Loan and Mortgage as to terms of payment. Mrs Kaine certified on each document in Exhibit 3 that there was produced to her a certain numbered driving licence "to identify the borrower as the person so referred to in the documents". Clause 5 of the certificate reads - it is printed as part of a printed form:

"5. I ADVISED THE BORROWER BEFORE ANY OF THE DOCUMENTS WERE SIGNED."

13 In each of the two documents comprising Exhibit 3, Mrs Kaine certified that she was not acting for the lender in relation to the documents and she signed what is called a solicitor's certificate certifying that "the information contained in this certificate is true and correct". Each solicitor's certificate comprising Exhibit 3 is dated 10 November 1997.

14 Relevant to the two certificates (Exhibit 3) signed by Mrs Kaine is Exhibit 8 a typed document signed by both defendants and dated 10 November 1997. It is entitled "acknowledgement" and is addressed to the plaintiff who is thereafter called "Asia". Exhibit 8 shows the above named defendants to be "the borrowers" and describes the security being a registered third ranking bill of mortgage which I have already mentioned. The acknowledgement states:

"I HEREBY CONFIRM that my solicitor who is giving the attached certificate has fully explained the terms and conditions of the Loan Agreement, Bill of Mortgage granted by me to Asia as referred to above and in particular I fully understand that:

1. The bill of mortgage secures the repayment of all moneys owing from time to time by the borrowers to Asia;

2. I am fully liable under the loan agreement and bill of mortgage for the repayment of all moneys owing to Asia from time to time."

15 Exhibit 9 is another document dated 10 November 1997 signed by the defendants and headed "Borrowers/Guarantors Authorities and Undertakings". It is addressed to the above named plaintiff (described as "Asia") and to Brown & Fowler solicitors. It relates to a proposed loan of $70,588 to the above named defendants who are described as "mortgagor". It describes the security as a registered third ranking bill of mortgage which I have mentioned earlier. Apart from giving certain undertakings and an authority which are unnecessary to detail, Exhibit 9 contained the following:

"I/we acknowledge that I/we have read understand and accept the terms and conditions set out in the Loan Agreement and other abovementioned documents executed by us in connection with this transaction, copies of which have been provided to me/us.

I/we agree to use the Loan for business and investment purposes."

16 Exhibit 10 which is called "Consumer Credit Code Declaration" was signed by both defendants on 10 November 1997. In it the defendants declared that the credit to be provided to them was to be provided wholly or predominantly for business or investment purposes (or for both purposes).

17 Exhibit 11 is a certificate from John Beresford Godfrey, a company director of 45 Woodville Avenue, Wahroonga. He certified the relevant documents viz the loan agreement guarantee and registered third ranking bill of mortgage were signed and dated before him, that he identified the parties before the documents were signed, that he asked the parties whether the documents were being signed voluntarily and the answer was "Yes", that he asked the parties whether they understood the nature and effect of the documents and the answer was "Yes" and that he asked the parties whether they had compared their obligations and responsibilities to [the plaintiff] with those of any other person named in the documents and whether they had considered the consequences to them should there be any default in those obligations and responsibilities and that the answer was "Yes".

18 It is apparent from the above series of exhibits that Brown & Fowler were meticulous in ensuring, as far as they could do so, that before the loan was advanced, the defendants had obtained independent legal advice from their solicitor and especially had obtained the defendants acknowledgements to Mr Godfrey of their understandings and awareness of consequences as appears from Exhibit 11.

19 It remains to say that Exhibit 13 is an authority signed by the defendants addressed to Brown & Fowler and to L.S. Davis & Associates Lawyers of Sydney (who appear to have been Sydney Agents of Brown & Fowler) authorising the mortgage advance of $70,588 to be drawn as follows:

1. Interest (to be retained by Brown & Fowler) $10,588.

20 This authority directed Brown & Fowler to transmit telegraphically the cheque for $56,499.93 to the account of W.S. Dalrymple with the Advance Bank. (bank and account number given)

21 The calculation in Exhibit 2 of the quantum of the debt claimed by the plaintiff to be due and owing is not challenged other than by the defendants relying upon the "unconscionable conduct" defence. This is relied on both from an equitable stand point and from what is said to be a breach of s 51AA of the Trade Practices Act 1974.

22 There is no doubt and I find that at the material time the plaintiff was involved in the business of lending money and particularly lending money on short term, generally for about one month although on two occasions it had lent on 60 day terms. The transaction with the defendants was not the plaintiff's first venture into bridging finance on short term. I accept the evidence of Mr Hackett that the plaintiff had had no earlier dealings with or knowledge of the defendants.

23 The evidence shows the circumstances leading to the execution by the defendants of the Deed of Loan and third bill of mortgage and other documents to have been as follows:

24 On 31 October 1997 the plaintiff received by facsimile transmission a letter dated 31 October 1997 (together with enclosures thereto) (Exhibit 4) from Allied Mortgage Corporation Limited - described as mortgage bankers - of Sydney. This letter followed telephone conversations with the plaintiff and sought approval of a loan of $60,000 to the defendants. Exhibit 4 said "The purpose behind the need to raise urgent bridging accommodation has come about by a protracted exchange on a substantial aged care unit complex at Wahroonga". The letter Exhibit 4 described the loan as "new business". Page 1 of the letter included the following:

Interest pre-payment: $9,000 to be deducted at settlement for the first 30 days

Security: 3rd URM/Caveat over substantial residence on 4.5 acres at 135 Weemala Crescent, Duffy's Forest

1st Mortgagee ...................... $1,300,000 9% - 18 months remaining

"Available equity to secure Planet facility now sought, as follows:

25 Exhibit 4 contained considerable detail as to the events which led to the loan of $60,000 being sought. Exhibit 4 also advised that Mrs Kaine was the defendants' solicitor.

26 Exhibit 5 is a copy of the valuation report on 135 Weemala Road, as at 5 November 1996 and this valuation was faxed to the plaintiff on 31 October 1997. Exhibit 6 contains financial statements for Willandra Village Pty Ltd for the year ended 30 June 1996, and an asset and liabilities statement of the defendants as at 2 November 1997. Exhibit 6 was faxed by Allied Mortgage Corporation Limited to the plaintiff on 3 November 1997.

27 Exhibit 5 shows that in the opinion of the valuer, K.D. Wood, 135 Weemala Road was valued at $1.95M as at 5 November 1996.

28 Exhibit 4, in stating in October 1997 that the defendant's equity in 135 Weemala Road was worth $450,000 - obviously relied on Mr Woods valuation albeit that that opinion was as to value a year earlier.

29 The material placed before the plaintiffs in October and early November 1997 and tendered in evidence before me, showed that the defendants had been actively involved in development of "a substantial aged care unit complex at Wahroonga" and the need to raise urgent bridging finance had arisen in the course of this development. Exhibit 4 (at p iii) detailed "repayment sources to provide comfort" to the plaintiff.

30 The financial statements for Willandra Village Pty Ltd (part of Exhibit 6) showed that as at 5 August 1996 the directors of that company were JB Godfrey and WS Dalrymple and that during the year ended 30 June 1996 the principal activities of the company were retirement village proprietors, retirement village construction and retirement village management and that the net profit in that period was $587,482 and that as at 5 August 1996 the company was in effect solvent. As I have mentioned, Exhibit 6 included a statement of assets and liabilities of the defendants as at 2 November 1997. This statement disclosed among the assets a loan to Willandra Village Pty Ltd of $473,236 and showed the defendants to be worth (on the figures appearing in the statement) $1.548M.

31 I have mentioned these matters for two reasons. First to show the written material presented to the plaintiff before it decided to make the loan to the defendants, showed that the male defendant in particular was a man of commerce and apparently well experienced in property development of a certain type and a man of sufficient substance to justify the plaintiff's decision to make the loan sought.

32 The second reason relates to the claim by Mr Hackett in the witness-box that short term loans as made by the plaintiff were very high risk investments. When asked why the rate of interest 20 per cent per month was so high Mr Hackett replied:

"Well firstly it is a very high risk business and also it was common to the market practice. There were two other organisations that we knew that were making bridging finance loans using the same rate. We heard of another one although I don't know the name it was reported to us by a broker. There was a firm in Melbourne that was providing bridging finance at an even higher rate than that. I believe the figure mentioned was 30 per cent."

33 Mr Hackett was aware of these rates before entering into the transaction with the defendants. I thought Mr Hackett was a candid and honest witness, and I accept his evidence that inability to obtain a first mortgage increased the risk factor in the loan to the defendants. The plaintiff was offered an unregistered third mortgage (see Exhibit 4) and the material put before the plaintiff (also in Exhibit 4) claimed that the defendants' equity in the property was worth some $450,000. I should at this stage say that it appears from Exhibit 12, the mortgage signed by the defendants, that that mortgage may not have been unregistered although Brown & Fowler's documents state it was registered. I proceed on the basis that the third mortgage was registered and thus provided the plaintiff with some security for the loan. To be certain on this point, I have been advised by counsel since 23 August 1999 that the third mortgage was registered.

34 I find that when offering the $70,588 loan to the defendants, the plaintiff was satisfied with the proposed source of moneys to repay the loan as had been submitted by the defendant's broker. After having heard Mr Hackett, I find that had the plaintiff not been so satisfied no loan would have been offered.

35 I accept Mr Hackett's definition of "high risk" as meaning there was a high risk that the short term loan would not be repaid as agreed. I accept also that loans generally made by the plaintiff were for a period of about a month and that on only two occasions did the plaintiff make loans for 60 days and that in each case the interest charged was 20 per cent per month reducing to 15 per cent per month if paid on time.

36 I have not been referred to any statute which suggests that the interest rate specified in the loan agreement between the parties being 20 per cent per month compounding is illegal. If the Consumer Credit Code of the State of Queensland to which the parties referred is capable of applying to the present transaction between the parties, the Code cannot apply to the loan by the plaintiff to the defendants. I am satisfied this is so because:

(a) the Code applies only to credit provided or intended to be provided wholly or predominantly for personal, domestic or household purposes (s 6(1)(b) of the Code);

(b) credit is presumed not to have been provided wholly or predominantly for personal, domestic or household purposes if the debtor declares before entering into the credit contract, that the credit was to be applied wholly or predominantly for business or investment purposes (s 11(2) of the Code).

37 The evidence shows that in the present case the defendants, before entering into the Deed of Loan declared in writing that the loan was to be applied "wholly or predominantly for business or investment purposes".

38 I must say I doubt very much if the loan advanced to the defendant came within the definition of "credit" in s 4(1) of the Code. It is unnecessary to comment further on this aspect.

39 I am unaware of other legislation applying to the loan between the present parties and particularly the rate of interest charged. The Money Lenders Acts 1916-1986 were repealed by the Credit Act 1987 (s 178) and there is no suggestion the Credit Act 1987 applies to the loan made by the plaintiff to the defendant. The loan is not a regulated contract or a regulated mortgage and the provisions of the Credit Act 1987 as to reopening of regulated contracts and regulated mortgages (ss 148 and 149) do not apply.

40 Having said that, the defendants seek to have me vary the interest rate charged in the Deed of Loan on the basis that the interest rate actually charged namely 20 per cent per month combined with the right (given by the Deed of Loan) to capitalise interest and charge interest at 20 per cent per month on such capitalised interest clearly discloses unconscionable conduct on the part of the plaintiff. The defendants rely very heavily upon the fact that within a space of some 21 months the debt owing by the defendants under the Deed of Loan has gone from $70,588 to more than $3,000,000.

41 Both counsel before me recognise that, independently of s 51AA of the Trade Practices Act 1974, there is a well developed jurisdiction in equity to set aside unconscionable bargains. However, the present case is not one where it is sought to set aside the Deed of Loan.

42 I turn now to well known statements concerning the jurisdiction to set aside bargains on the basis of unconscionable conduct. In Blomley v Ryan [1956] HCA 81; (1956) 99 CLR 362, Fullagar J said (at p 405):

"The circumstances adversely affecting a party, which may induce a court of equity either to refuse its aid or to set a transaction aside, are of great variety and can hardly be satisfactorily classified. Among them are poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary. A common characteristic seems to be that they have the effect of placing one party at a serious disadvantage vis-a-vis the other. It does not appear to be essential in all cases that the party at a disadvantage should suffer loss or detriment by the bargain."

43 Blomley v Ryan was a case in which intoxication was the main element relied upon as creating the position of disadvantage.

"This is a well known head of equity. It applies whenever one party to a transaction is at a special disadvantage in dealing with the other party because illness, ignorance, inexperience, impaired faculties, financial need or other circumstances affect his ability to conserve his own interests, and the other party unconscientiously takes advantage of the opportunity thus placed in his hands."

45 In Commercial Bank of Australia Limited v Amadio [1983] HCA 14; (1983) 151 CLR 447, a case where the guarantee given to the plaintiff bank was set aside unconditionally, Mason J (as he then was) said at p 461:

"... 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 e.g. a catching bargain with an expectant heir or an unfair contract made by taking advantage of a person who is seriously affected by intoxicating drink. Although unconscionable conduct in this narrow sense bears some resemblance to the doctrine of undue influence, there is a difference between the two. In the latter the will of the innocent party is not independent and voluntary because it is overborne. In the former the will of the innocent party, even if independent and voluntary, is the result of the disadvantageous position in which he is placed and of the other party unconscientiously taking advantage of that position."

"It goes almost without saying that it is impossible to describe definitively all the situations in which relief will be granted on the ground of unconscionable conduct."

His Honour then cited the above extracts from the judgments of Fullagar and Kitto JJ in Blomley v Ryan and at p 462 said:

"It is not to be thought that relief will be granted only in the particular situations mentioned by their Honours. It is made plain enough, especially by Fullagar J, that the 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-a-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 emphasise 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, where the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party.

Because times have changed new situations have arisen in which it may be appropriate to invoke the underlying principle. Take, for example, entry into a standard form of contract dictated by a party whose bargaining power is greatly superior. ... In situations of this kind it is necessary for the plaintiff who seeks relief to establish unconscionable conduct, namely that unconscientious advantage has been taken of his disabling condition or circumstances."

"Unconscionable dealing looks to the conduct of the stronger party in attempting to enforce, or retain the benefit of, a dealing with a person under a special disability in circumstances where it is not consistent with equity or good conscience that he should do so. The adverse circumstances which may constitute a special disability for the purposes of the principles relating to relief against unconscionable conduct may take a wide variety of forms and are not susceptible to being comprehensively catalogued.

48 His Honour then referred to part of the earlier quoted extract from the judgment of Fullagar J in Blomley v Ryan.

"In most cases where equity courts have granted relief against unconscionable dealing, there has been an inadequacy of consideration moving from the stronger party. It is not however essential that that should be so ... Notwithstanding that adequate consideration may have moved from the stronger party, a transaction may be unfair, unreasonable and unjust from the view point of the party under the disability ... ."

50 I refer finally to a passage in the judgment of Deane J in the Commonwealth of Australia v Verwayen (1990) 170 CLR 394 at pp 440-441 where, under the heading "Unconscientious Conduct" His Honour said:

"The doctrine of estoppel by conduct is founded upon good conscience. Its rationale is not that it is right and expedient to save persons from the consequences of their own mistake. It is that it is right and expedient to save them from being victimised by other people (cf Allcard v Skinner (1887) 36 Ch.D.145 at p 182). The notion of unconscionability is better described than defined (see per Mahoney JA Antonovic v Volker (1986) 7 NSWLR 151 at p 165); Taylors Fashions [1982] 1 QB at pp 151-152); and generally, per Cooke P Nichols v Jessup [1986] NZCA 84; [1986] 1 NZLR 226 at pp 227-229). As Lord Scarman pointed in National Westminister Bank Plc v Morgan [1985] UKHL 2; [1985] AC 686 at p 709), definition 'is a poor instrument when used to determine whether a transaction is or is not unconscionable: this is a question which depends upon the particular facts of the case.' The most that can be said is that 'unconscionable' should be understood in the sense of referring to what one party 'ought not, in conscience, as between [the parties], to be allowed' to do (see Story, Commentaries on Equity Jurisprudence, 2nd Eng Ed (1892), par. 1219; Thompson v Palmer (1933) 49 CLR at p 537). In this as in other areas of equity-related doctrine, conduct which is 'unconscionable' will commonly involve the use of or insistence upon legal entitlement to take advantage of another's special vulnerability or misadventure (cf Stern v McArthur [1988] HCA 51; (1988) 165 CLR 489 at pp 526-527) in a way that is unreasonable and oppressive to an extent that it affronts ordinary minimum standards of fair dealing. That being so, the question whether conduct is or is not unconscionable in the circumstances of a particular case involves a 'real process of consideration and judgment' (cf Harry v Kreutziger (1978) 95 DLR (3d) 231, at p 240) in which the ordinary processes of legal reasoning by induction and deduction from settled rules and decided cases are applicable but are likely to be inadequate to exclude an element of value judgment in a borderline case such as the present."

51 Mr Campbell in support of his submission that the defence must fail has relied on the following passage of Sir John Salmond in Brusewitz v Brown [1923] NZGazLawRp 219; [1923] NZLR 1106 at 1110:

"The law in general leaves every man at liberty to make such bargains as he pleases and to dispose of his own property as he chooses. However improvident, unreasonable or unjust such bargains or dispositions may be, they are binding on every party to them unless he can prove affirmatively the existence of one of the recognised invalidating circumstances such as fraud or undue influence."

52 I should say now that in my view those views of the law have to some extent been overtaken by the equitable doctrine of granting remedies for unconscionable conduct, the boundaries of which have never been and cannot be stated.

1. At the time the defendants entered into the Deed of Loan they did not appear to be in a desperate financial position and the exhibits which give some details of their assets and liabilities show that they were comfortably off. [As to this comment, I note that the need for the bridging loan appeared urgent, if not desperate]

2. Neither defendant has entered the witness-box and consequently, I know nothing as to whether their financial positions have since altered, and whether or not they are unable to repay the money borrowed. Nor do I know whether at the time they signed the documents the defendants appreciated that capitalisation of unpaid interest combined with the very high interest rate could cause their debt to skyrocket.

3. At the time the loan was made the plaintiff had no knowledge of and nothing to indicate that the defendants' financial position was other than that set out in the relevant documents produced to it.

4. The loan transaction was a commercial one made at arms length with the arrangement for the loan having been made through the defendants' third party mortgage broker.

5. There is no indication other than that the defendants voluntarily entered into the transaction - the choice of the plaintiff as lender was apparently made by the defendants in an open market - the defendants, by their agent, sought out the plaintiff and requested the loan from the plaintiff.

7. The defendants and especially the male defendant were experienced in the commercial world.

8. The interest rate charged by the plaintiff was, on the evidence of Mr Hackett, commercial in the sense that similar rates were charged by other companies providing short term bridging finance - indeed as Exhibit 4 shows the defendants offered to pay 15 per cent per month for the term of the loan sought, namely one month. That this is so is quite apparent from the letter Exhibit 4 and the statement that $9,000 interest was in effect offered to be paid for the one month loan.

9. There are no cases cited in which courts have found that high interest alone is sufficient to show unconscionable conduct. Mr Campbell argues that there must be some other circumstance to show that the bargaining position between the parties was so unequal as to make the bargain entered into unfair and worthy of the court's interference.

54 In summary, Mr Campbell submits that the loan agreement, although providing for an unusually high interest rate of 20 per cent per month compounding, was not unconscionable. He further submits that there is no evidence to indicate that the plaintiff "took advantage" of the defendants.

55 I should at this stage mention that during argument on 23 August, I indicated to counsel that I was concerned to know exactly what advice Mrs Kaine had given the defendants on 10 November 1997 when, as she said in Exhibit 3 she had advised them before any of the documents were signed. I informed counsel I was concerned to know what she had said to the defendants about the provisions for capitalisation of interest. After a short adjournment to enable the plaintiff's solicitors to speak by telephone with Mrs Kaine, I returned to Court to be told by Mr Stone, counsel for the defendants, that his instructions were that his clients did not agree to Mrs Kaine giving evidence via telephone hookup. Apparently Mrs Kaine was prepared to accept those instructions. I did inform Mr Stone that in my opinion any legal professional privilege touching on the advice given on 10 November 1997 had been lost once Mrs Kaine signed the certificate Exhibit 3 (for use by the plaintiff) to the effect that she had advised the defendants. I then permitted Mr Brown, solicitor for the plaintiff to give oral evidence concerning the telephone conversation he had had with Mrs Kaine on 23 August 1999. I accept Mr Brown's evidence that he spoke to Mrs Kaine, a partner with A.C. Knibb Kaine & Associates at Wahroonga. In evidence he said:

"I stated to Miss (sic) Kaine that His Honour was placing some pressure upon us to call evidence from her in relation to the advice that she had given to Mr & Mrs Dalrymple at the time that she signed the certificate of advice which was in evidence before the court. I stated to her that our attitude to whether we would call her or not would be determined by her response to a couple of very straightforward questions and they were: firstly whether she had advised Mr and Mrs Dalrymple of the nature of the interest rate in that it was 20 per cent per month reducing to 15 per cent per month and secondly whether she had advised them as to the fact that the effect of that interest was compounding each month if the moneys were not paid on the due date. Her response to me was 'I would have to say yes'. I then stated to her that in those circumstances I anticipated we would require her to give evidence and I would contact her in relation to the arrangements for a telephone hookup. She then said 'before we do that I need to speak to Mr Stone of counsel' and I indicated to her that I could convey that message to Mr Stone which I did."

56 I might add that after a short adjournment Mr Stone did not cross-examine Mr Brown.

57 There is not the slightest doubt that the transaction between the parties was at arms length and that the plaintiff's solicitors were at pains to ensure that the defendants were properly advised as to the terms of the Deed of Loan and understood the consequences to them should there be any default in their obligations under the Deed of Loan (see Exhibit 11). The one provision in the Deed of Loan which I find was oppressive and unreasonable is the provision for capitalisation of interest read in conjunction with the interest rate of 20 per cent per month. In my view there is no doubt that the defendants were in a situation where they urgently needed a loan of $60,000 for a short term of one month. They were prepared to pay $9,000 interest in return for that loan - 15 per cent per month. The plaintiff in effect agreed to make the loan and in doing so, not only did the plaintiff increase the interest rate to 20 per cent per month, albeit with a reduction to 15 per cent per month if the interest were paid on time, but it included in the loan and mortgage documents provisions which entitled it to capitalise unpaid interest. The arithmetical and practical effect has, in the circumstances of this case, been to increase the loan debt astronomically.

58 I am satisfied, and particularly so in the absence of the defendants from the witness-box, that Mrs Kaine did explain to the defendants that there was a provision in the deed of loan for capitalisation of interest. Whether the defendants realised at the time they signed the Deed of Loan and mortgage documents that failure to repay the loan of $70,588 could and would have the effect of increasing the loan debt in the manner set out in Exhibit 2 I do not know. In their absence from the witness box, I infer that they did. I draw this inference from their absence, from the fact of the male defendants commercial experience and the certification by Mr Godfrey in Exhibit 11. (See first sentence in para 58 (ante)). In my view, I should look at the end result objectively. When I do that, I come to the conclusion that the insertion into the Deed of Loan and bill of mortgage (which provided for interest at 20 pr cent per month albeit reducible to 15 per cent per month if paid on time) of an agreement to pay interest on unpaid interest has taken advantage of the defendants' special vulnerability. Exhibit 4 shows they were in urgent need of this loan of $60,000 - and the above insertion in the agreement is in my view "unreasonable and oppressive to an extent that it affronts ordinary minimum standards of fair dealing" (per Deane J in Verwayen (supra)). There is an element of value judgment in this case. I realise that it is important that courts do not as a general rule interfere in transactions entered into at arms length between men of commerce. Nevertheless, in the circumstances of this particular case I feel very strongly that there has been unconscionable conduct on the part of the plaintiff by the insertion into the Deed of Loan of provisions enabling unpaid interest to be capitalised and then bear further interest at the rate of 20 per cent per month. This case shows that a lender can be extremely careful to ensure, as far as he can, that the borrower has competent independent advice and understands well the nature of the obligation entered into and its general consequences, yet the contract of loan may amount to an unconscionable dealing.

59 I do not propose to set aside the Deed of Loan. Such a step is not sought and could not be taken. I do not propose to interfere with the payment of interest for the first month at the rate of 15 per cent per month. Such a payment was in accord with the application made by the defendants to the plaintiff in the letter Exhibit 4 (see paragraph 26 ante). I realise that the Deed of Loan stipulated 20 per cent per month reducible to 15 per cent per month if paid on time. I propose to declare that the Deed of Loan and the collateral bill of mortgage be read and construed as if any reference to payment of interest on unpaid interest or capitalisation of interest were deleted from each of those documents. In my view the defendants should be held to a bargain whereby they agreed to pay interest on the unpaid loan of $70,588. Such interest should be calculated on $70,588 at monthly rests from the date of the loan - although the matter of monthly rests is, in the circumstances where the capitalisation of interest will have gone, irrelevant. The question now is - what rate of interest? Mr Campbell has, with some justification, urged upon me that the interest should be calculated at the rate of at least 15 per cent per month because that is the rate which the defendants were prepared to pay for the loan initially made for a period of one month. His strongest point is the fact that on 10 November 1997 Mrs Kaine did explain the interest provisions to the defendants, one of whom was, as I have said, experienced in commerce and the defendants gave Mr Godfrey the answers appearing in Exhibit 11.

60 Mr Stone has submitted that I should allow interest at the rate of 10 per cent per annum simple interest. He bases this on the statutory provision s 47 of the Supreme Court Act 1995 whereby interest on judgment sums is calculated at a rate which is presently 10 per cent per annum.

61 I reject his submission. I am satisfied that in this case there was, on the material presented to the plaintiff before it agreed to make the loan, a risk - but not a high risk - that the defendants would not repay the loan by the stipulated date 9 December 1997. The plaintiff has the personal covenant of the defendants to repay the loan in both Deed of Loan and mortgage (although the mortgage provided for repayment on 17 December 1997). The third mortgage was registered and it provided some security for repayment of the debt. If the plaintiff attempted to exercise its power of sale under the mortgage, at best it would be able to sell the defendants' equity of redemption and any purchaser would buy subject to the prior first and second mortgages and accepting the defendants' liability under the mortgages. Whether, on attempted sale by the plaintiff as third mortgagee, any buyer would have been found, appears now to be doubtful. I am really not in any position to comment further and I say simply the third mortgage provided some security the quality of which is not known. Because the plaintiff has not attempted to exercise its power of sale but has instead sued on the personal covenant it may be inferred now that the value of the security is doubtful. Of course the ballooning debt (see Exhibit 2) appears to have completely extinguished the value of the equity - assuming that equity to be still about $450,000. Given the size of the debt the value of the security now is irrelevant. In my view, I should fix a rate of interest having regard to the fact that the plaintiff did obtain a registered third mortgage in respect of a loan of $70,588 for one month where the equity of redemption was valued at some $450,000 about one year earlier and having regard to the further facts the last sentence of which appear in paragraph 60 ante. The debt in Exhibit 2 was not initially wholly unsecured - it appears that at present it may be partly secured but very largely unsecured. In the particular circumstances of this case, where, as I have said the defendant was initially prepared to pay interest at 15 per cent per month for the one month loan, and where the terms of the loan as to repayment and interest were explained by their solicitor to them, quite independently of the plaintiff, I see no reason why the interest on the unpaid principal should not be greater and considerably greater than the 10 per cent simple interest for which Mr Stone contends.

62 I have taken judicial notice of the fact that interest on debts owing on bank credit cards is of the order of 15-16 per cent per annum and that such debts are unsecured. In addition interest on unsecured credit permitted by well known stores such as David Jones is of the order of 20 per cent per annum. I have considered these matters.

63 I have considered interest at a rate of some 20 per cent per annum. In the end, taking into account the matters which I have mentioned and also the bargain into which defendants entered in an arms length transaction, I have concluded that the rate of interest should be 15 per cent per month. I have rejected 20 per cent per month, which rate appears in the Deed of Loan and Mortgage. I do so because of the security which the plaintiff obtained by its third mortgage.

64 As to the form of order I propose to make, I first point out that the drafting of Item 7 in SCHEDULE to the Deed of Loan (Exhibit 1) appears not to accord with the bargain between the parties. That bargain was that the defendants would pay the plaintiff "the debt and all interest accruing thereon on or before the date stipulated in Item 5" (of SCHEDULE). That date stipulated was 9 December 1997. Nevertheless, Item 7 which deals with "interest rate" stated:-

"Twenty percent (20%) per calender (sic) month ("the higher rate") PROVIDED HOWEVER that if the Borrower shall on the dates herein fixed for payment of instalments of interest and the debt pay to the lender the said instalments and the debt..."

65 There was only one date fixed for payment of the debt - 9 December 1997. Item 7 contains a degree of ambiguity.

I mention now differences between the Deed of Loan (Exhibit 1) and the registered third mortgage (Exhibit 12). These two documents were executed in respect of the same debt - the $70,588 advance. However the Bill of Mortgage was dated 18.11.1997 and provided for payment on 17.12.1997 of the $70,588 advance. The Deed of Loan was dated 10.11.1997 and provided for payment on 9.12.1997 of the $70,588 advance. Both documents were witnessed by Mr Godfrey.

As far as I can see the third mortgage does not specifically provide for capitalization of unpaid interest as does the Deed of Loan.

The case before me was conducted in reliance by the plaintiff on the Deed of Loan it being the principal security. Indeed the Mortgage is endorsed by the NSW Treasury as "collateral to Primary instrument".

Finally, the Mortgage contained a specific covenant (absent from the Deed of Loan) that the Mortgagor defendants would pay interest of 20 per cent per month reducible to 15 per cent per month on any judgment on which the covenant for payment of the principal sum should become merged.

1. I declare the provisions in the Deed of Loan and mortgage made between the plaintiff and the defendants in so far as those provisions require payment by the defendants of interest at a rate of 20 per cent per month and permit capitalisation of unpaid interest and payment of interest on unpaid interest to be unconscionable.

2. I order that the Deed of Loan made between the plaintiff and the defendants and dated 10 November 1997 (Exhibit 1) be read and construed as if:

(a) Item 7 in the SCHEDULE therein appearing were deleted and the following substituted:

"Item 7 - Interest Rate: Fifteen per cent (15%) per calendar month."

(b) In Clause 5(a) in the Deed of Loan the words "and upon any interest" appearing in the third line were deleted and after the word "monies" appearing in the third line of Clause 5(a) the following words appeared "but excluding interest".

3. I order that the Mortgage made between the plaintiff and the defendants and dated 18 November 1997 (Exhibit 12) be read and construed as if clause "Thirdly" thereof were deleted and the following substituted:-

"The Mortgagor will pay interest in advance on the principal sum or so much thereof as shall from time to time be outstanding at the rate of fifteen percent (15%) per calendar month such interest to be calculated from 10 November 1997."

4. I give judgment for the plaintiff against the defendants in the sum of $292,936.

67 The sum of $292,936 is calculated on principal of $70,588 unpaid plus 21 instalments each of $10,588 for interest due and payable on the 9th of each month from 9.12.1997 to 9.8.1999, both dates inclusive. As interest is payable in advance the judgment debt includes interest to 9.9.1999.

68 I shall hear from the parties on the question of costs.

I should add that I found it unnecessary to consider s 51AA of the Trade Practices Act 1974 but I make the following comments.

Section 51AA provides that "(1) A corporation must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law, from time to time of the States and Territories." In my view, the equitable principles concerning unconscionable conduct to which I have already referred fall within "the unwritten law" and apply to s51AA.

69 I note also that in Zoneff v Elcom Credit Union Ltd (1990) 94 ALR 445 Hill J said:-

"... in general terms, it may be said that conduct will be unconscionable where the conduct can be seen in accordance with the ordinary concepts of mankind to be so against conscience that a court should intervene. At the least the conduct must be unfair. It invites comparison with doctrines of equity: cf Blomley v Ryan [1956] HCA 81; (1956) 99 CLR 362 and Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447; 46 ALR 402 where inequality of bargaining power or absence of the ability to bargain freely will be relevant to the finding that there has been an unfair advantage taken by one person of the other."

In addition, no consideration has been given to the question whether the provisions for capitalisation of interest combined with the interest rate of 20 per cent per month had the effect of clogging the equity of redemption of the third mortgage. I raised this question on the first day of the trial but the matter did not proceed further.