[2012] VSC 275 (Zammit AsJ)

CONSUMER CREDIT - Re-opening transactions - Unjust terms - Unconscionability - Terms not unjust - No unconscionability.

1 Permanent Custodians Limited ('Permanent') holds a first registered mortgage over a property in Pascoe Vale ('the Property') securing a loan of $323,000 by Permanent to the appellant, Mr Wolfe, and his former partner, Ms Gayle Breasley.

2 Mr Wolfe and Ms Breasley separated in November 2007. Both Mr Wolfe and Ms Breasley are parties to the loan agreement. The mortgage was given by Ms Breasley as the sole registered proprietor of the Property.

3 Mr Wolfe and Ms Breasley entered into terms of settlement in relation to their separation. It was agreed that the Property would be transferred to Mr Wolfe upon the sale of an adjoining property. It is unclear whether that transfer ever occurred.

4 In 2008 there was default on the loan. In August 2009 Permanent obtained default judgment for the full amount of the loan against Mr Wolfe, and default judgment for the loan and for possession of the Property against Ms Breasley. A warrant of possession was issued to enforce the judgment for possession. At that time Mr Wolfe was living at the Property. Eviction by the Sheriff was scheduled for the round of evictions in the week commencing 4 December 2009.

5 In an attempt to salvage the situation, Mr Wolfe made an arrangement with Permanent on 1 December 2009. The arrangement was constituted by, or recorded in, a letter of that date from Permanent's solicitors, Gadens, to a solicitor then acting for or assisting Mr Wolfe, George Erlichster.[1]

6 Under the terms of the arrangement made, Mr Wolfe was to pay a specified sum (being 'arrears', fees and costs, and '2 months payments in advance') and to ' ... then maintain all future repayments as and when they fall due'. Permanent was to 'stay the eviction'. The arrangement included the following terms:

... all payments made will be accepted by our client [Permanent] without prejudice to its rights to rely on the existing Judgment and Warrant for Possession ...

... if ... your client [Mr Wolfe] defaults in repayments from February 2010, then our client [Permanent] reserves its rights to proceed with further legal action including obtaining a fresh eviction date for the Security Property without further notice.

7 Mr Wolfe did default on the repayment due in February 2010. That occurred because a direct debit form which he had submitted to Permanent had not been properly completed by him and accordingly had not been processed by Permanent.

8 The task of processing the direct debit form which Mr Wolfe had submitted was to be undertaken on behalf of Permanent by a mortgage manager named Australian Mortgage Securities Ltd ('AMS'). It was also AMS on whose instructions Gadens advised they were acting in the letter of 1 December 2009.

9 It was uncontested at the trial, and on the appeal, that the direct debit form had not been properly completed by Mr Wolfe and could not have been processed. Most significantly, the form was not signed by Mr Wolfe's mother, who was one of the account holders of the account from which the direct debits were to be drawn.

10 Staff at AMS attempted to contact both Mr Wolfe and Ms Breasley by telephone in relation to the deficiencies in the direct debit form on 14 December 2009. Both phone numbers which they used in their attempts to contact the borrowers had been disconnected. AMS did not make any further attempts to contact the borrowers. In the course of dealing with Mr Wolfe when reaching the arrangement constituted by or recorded in the letter of 1 December 2009, Gadens had been given Mr Wolfe's then current mobile phone number and also had been given contact details for the solicitor then acting for or assisting him.

11 Default then occurred in February 2010 because the direct debit form had not been processed. Mr Wolfe did not himself check to see if the payment had been made and was unaware of the default until March 2010 when Gadens on behalf of Permanent sent him a written demand that he vacate the property.

12 Permanent took possession of the Property on 22 April 2010. Mr Wolfe made payments in an endeavour to rectify the position for a time. On the hearing of the appeal we were told no payments have been made since June 2010 and that the Property remains in Permanent's possession unsold.

13 On 5 May 2010, Mr Wolfe instituted this proceeding seeking, amongst other things, a declaration that the terms of the arrangement concerning default were 'unenforceable'. The trial was heard over three days before an Associate Judge beginning on 9 May 2012.

14 In a comprehensive judgment the Associate Judge set out all of the relevant facts in detail, and addressed the many issues and contentions raised by the parties. She dismissed Mr Wolfe's claim. Mr Wolfe now appeals from that dismissal relying upon three grounds. They are:[2]

1. The Associate Judge ought to have reopened the 1 December 2009 arrangement and made orders under s 76 and s 77 of the National Consumer Credit Code 2010 on the ground that the term as to the consequence of default from February 2010 was unjust.

2. The Associate Judge ought to have found that the conduct of Permanent, after the arrangement had been made, concerning the direct debit form and the February default was in breach of Permanent's contractual obligation to do all that was necessary on its part to enable Mr Wolfe to have the benefit of the arrangement.

3. The Associate Judge ought to have found that Permanent's conduct concerning the direct debit form and the February default was unconscionable under s 12CB of the Australian Securities and Investment Commission Act 2001 ('ASIC Act').

15 There were many other claims made and arguments put to the Associate Judge at trial, and in the original notice of appeal and written submissions on the appeal. In the end, only the three grounds set out above were relied upon.

16 On the appeal, Permanent made submissions in support of the Associate Judge's conclusions on the three issues raised by the appellant, but also contended that the Associate Judge had been in error in finding that the credit legislation applied to the arrangement at all. It contended that the credit legislation did not apply because the 1 December 2009 arrangement was not a 'contract' as no consideration had moved from Mr Wolfe to Permanent, and because the 1 December 2009 arrangement, if it was a contract, did not involve the provision of 'credit' within the meaning of the relevant legislative provisions.

17 Leaving to one side the issue of application of the credit legislation, the short answer on the appeal is that the term as to default was not unjust, and Permanent's conduct was neither unconscionable nor in breach of the contractual duty to co-operate, for the reasons given by the Associate Judge. In deference to the submissions put on the appeal, we will separately address the three grounds relied upon.

18 On the appeal, both parties submitted that the correct analysis of the interaction between the National Credit Code, which commenced on 1 July 2010, and the Consumer Credit (Victoria) Code, which was in operation when the 1 December 2009 arrangement was made and when the default under that arrangement occurred, was as set out by Croft J in Knowles v Victorian Mortgage Investments Ltd & Anor.[3]

19 In substance, if the Consumer Credit (Victoria) Code applied to the 1 December 2009 arrangement then relief could be sought under the National Credit Code. Accepting this, the Associate Judge was correct to determine the issue of whether the credit legislation applied to the 1 December 2009 arrangement by reference to the provisions of the Consumer Credit (Victoria) Code, but, having found that it did apply, she ought to have then addressed the issue of re-opening the transaction on the basis that the contract was unfair by reference to s 76 of the National Credit Code, not by reference to s 70 of the Consumer Credit (Victoria) Code as it seems she has, or may have, done.[4]

20 It makes no difference because s 70 of the Consumer Credit (Victoria) Code and s 76 of the National Credit Code are relevantly the same. It was not suggested that anything turned on the fact that her Honour referred to s 70 rather than s 76.[5]

21 On the appeal counsel on behalf of Mr Wolfe submitted that the terms which permitted Permanent to enforce the judgment for possession upon any subsequent payment default without further notice are unjust. They constitute what counsel described as a 'Sword of Damocles hanging over the appellant's head' for the many years that the 1 December 2009 arrangement might run. In addition to the matters raised below, on the appeal reference was made to the decision of the Court of Appeal of New South Wales in West v AGC (Advances) Ltd and Others,[6] a case which concerned s 7(1) of the Contracts Review Act 1980 (NSW).

22 In her judgment below the Associate Judge referred to the requirement under the legislation to have regard to all the circumstances, and then listed those of the enumerated matters in the legislation upon which Mr Wolfe relied. She referred to relevant authorities on the legal principles to be applied, none of which are relevantly affected by West in our view. She addressed in detail each of the enumerated factors relied upon, before assessing all the circumstances and concluding that the terms were not unjust. In substance, her Honour concluded that given Mr Wolfe's credit history, and the 'last chance' character of the arrangement, the default and notice provisions of the 1 December 2009 arrangement, whilst onerous, were not unjust.

23 On the appeal no specific criticisms of her Honour's analysis of the various factors that she had considered were made. Rather, what was put was that the severity of the potential consequences of execution under the terms (the loss of Mr Wolfe's home), and the automatic application of those consequences without notice pursuant to the terms (the 'Sword of Damocles'), ought to have led to the conclusion that the terms were unjust.

24 We agree with the Associate Judge. Though the terms complained of were onerous, they must be understood in the circumstances in which the arrangement was made. Permanent had obtained default judgment after substantial and long standing default under the loan agreement. A Writ of possession had been issued. Permanent agreed to stay execution and to allow Mr Wolfe to retain possession of his home providing he did not default in the future. The position was aptly characterised as being 'one last chance'. In those circumstances the onerous terms were not unjust.

25 In his written submission on the appeal the appellant conceded that the respondent did not have a positive duty to assist him in completing the direct debit form and conceded that he had made errors in completing the form. However, relying on Butt v McDonald[7] it was submitted that Permanent's implied contractual duty to co-operate extended to doing all that was necessary to ensure that the direct debit facility operated as the appellant had intended. The failure to ensure that the facility was operational, it was submitted, resulted in the appellant's loss of any real benefit under the arrangement. In oral submissions on the appeal, emphasis was placed on Permanent's failure to alert Mr Wolfe to the known deficiencies in the form as submitted. In addition to the authorities relied upon before the Associate Judge, reference was made to State of New South Wales v Banabelle Electrical Pty Ltd and Others.[8]

26 The Associate Judge said the following in relation to the direct debit facility:[9]

1. The evidence is that Mr Wolfe knew of his obligations to ensure payments were made. He transferred just in excess of $10,000 into an account from which the monthly payments were to be directly debited in Permanent 's favour. This amount exceeded the amount Mr Wolfe was required to pay in his first repayment in February 2010. Permanent provided Mr Wolfe with the necessary form. At the top of each page of the form was a 1300 number that Mr Wolfe could call if he had any difficulties with the form.
2. Mr Wolfe said that he was not really good at filling out forms and that he obviously misread the form in relation to the requirement that both account holders had to sign it. Mr Wolfe agreed that there was nothing which Permanent did that caused or contributed to him misreading the form. Nor did Permanent give any advice to Mr Wolfe about completing the form. Mr Wolfe did not check on 26 February 2010 when the payment was due or any time prior to being notified about the default to see whether the moneys had been removed from the account by Permanent .
3. Mr Wolfe completed and returned the form to Permanent which was received by Permanent prior to 14 December 2009. On 14 December 2009 the Mortgage manager for Permanent attempted to call Ms Breasley and Mr Wolfe by phone to inform them of the issues with the form. However, the telephone numbers on the file were disconnected.
4. Mr Wolfe submits that in all his dealings with Ms Grech [Gadens' employee] he always provided his mobile number and that Permanent at least had that information. He further submits, Permanent had from 14 December 2009 when it received the form until 2 March 2010, when Gadens wrote to Mr Erlichster advising of the default and of the impending fresh eviction, to contact him and this was not done.
5. The difficulty for Mr Wolfe is that he wants the Court to impose a positive duty on Permanent in relation to the form. It was not Permanent 's obligation to complete the form or assist Mr Wolfe to complete the form. The duty to co-operate does not extend to being "nice". Mr Wolfe had access to legal advice and a number he could call if he was had [sic] difficulties completing the form. Mr Wolfe knew that filling in forms was not his strong point and that in the past Ms Breasley had completed forms for him. Permanent was not at any stage aware that Mr Wolfe had difficulties completing forms or that he may have needed some assistance. Mr Wolfe did not check that the payments had been made. Mr Wolfe had sufficient commercial acumen to obtain help in the past when he required it. Mr Wolfe sought the assistance of his solicitor, Mr Erlichster, and from "Larry" at Aussie Home Loans to draft the 27 November 2009 letter to Permanent when negotiating the Agreement.
6. Finally, Permanent attempted to notify Mr Wolfe and Ms Breasley about the form on 14 December 2009. The phone number was disconnected. True it is that Permanent did not go a step further and try to contact Ms Breasley or Mr Wolfe on any mobile number or write to Mr Erlichster about the form prior to the default. It is regrettable that this did not occur, however I do not consider it amounts to a breach of the implied terms as pleaded at paragraphs 15(e) and (d) of the Statement of Claim.

27 The reference to being 'nice' was a reference to her Honour's earlier consideration of relevant authorities and in particular to Gyles J's observation in Council of the City of Sydney v Goldspar Australia Ltd[10] that the duty of co-operation does not extend to being nice. Her Honour also referred to Butt v McDonald,[11] Secured Income Real Estate (Australia) v St Martins Investments Pty Ltd,[12] Moorgate Tobacco Co Ltd v Phillip Morris Ltd (No 2),[13] Australis Media Holdings Ltd v Telstra Corp Ltd,[14] and W L Marshall and Another v The Colonial Bank of Australia.[15]

28 Although the duty to co-operate is broadly stated in Butt v McDonald, the scope of the duty is defined by what has been promised under the contract; it is not a general duty to ensure another party obtains an anticipated benefit.

29 In Secured Income Mason J (as he then was), with whom all the other members of the Court agreed, said:[16]

It is easy to imply a duty to co-operate in the doing of acts which are necessary to the performance by the parties or by one of the parties of fundamental obligations under the contract. It is not quite so easy to make the implication when the acts in question are necessary to entitle the other contracting party to a benefit under the contract but are not essential to the performance of that party's obligations and are not fundamental to the contract. Then the question arises whether the contract imposes a duty to co-operate on the first party or whether it leaves him at liberty to decide for himself whether the acts shall be done, even if the consequence of his decision is to disentitle the other party to a benefit. In such a case, the correct interpretation of the contract depends, as it seems to me, not so much on the application of the general rule of construction as on the intention of the parties as manifested by the contract itself.

30 What was required under the 1 December 2009 arrangement was that all future repayments be made on time. It was not fundamental to the performance of this obligation that the payments be made by direct debit, although it is clear that that mode of payment is what was contemplated by the parties.

31 In the circumstances, we do not accept that Permanent's duty of co-operation extended to ensuring that the appellant submitted a correctly completed form. The task of completing the form in a way that was sufficient to enable the setting up of the direct debit facility lay with Mr Wolfe. The co-operation of Permanent was not required in order for Mr Wolfe to complete this task.

32 As the Associate Judge observed, it is regrettable that Permanent did not make greater efforts to alert Mr Wolfe to the errors he had made. But we do not think that the failure to do more constituted a breach of the implied contractual duty to co-operate. We agree with the Associate Judge's analysis.

33 On the appeal reliance on unconscionability was confined to s 12CB of the ASIC Act. Section 12CB relevantly provides that a person must not in connection with the supply of financial services engage in conduct that is, in all the circumstances, unconscionable.

34 Before the Associate Judge it was submitted that Permanent's conduct was unconscionable because it evicted Mr Wolfe after the February default in circumstances where it had known the previous December that he had incorrectly completed the form, where it should have realised that he would have assumed the February payment would be made with the direct debit, where it had been within Permanent's 'power' to alert him to the fact that the form had been incorrectly completed before the default, and where Permanent was aware that not notifying him that he had incorrectly completed the form had caused the default.

35 On the appeal the matter was put in a similar way. It was submitted that once Permanent discovered that it could not process the form as submitted, Mr Wolfe was placed in a position of 'situational disadvantage', in that he thought the direct debit facility was in place but Permanent knew that it was not. It was submitted that it was contrary to 'good conscience' for Permanent to have failed to inform him that the direct debit facility was not in place and to then proceed to execute on the judgment after default inevitably had occurred. It was submitted that Permanent ought to have made reasonable attempts to contact Mr Wolfe about the incorrect form but had failed to do so. It was submitted that Permanent had 'exclusive control' over the direct debit form and the establishment process and that Mr Wolfe had no way of finding out about the errors in the form except via Permanent.

36 The Associate Judge reviewed a number of authorities concerning unconscionability in the statutory context. This Court has recently reviewed those authorities in some detail in Director of Consumer Affairs v Scully & Ors.[17]

37 Scully dealt with the concept of unconscionability in the context of s 8 of the Fair Trading Act 1999 (Vic), as it then stood. The observations made apply equally, in our view, to unconscionability under s 12CB of the ASIC Act as applicable here. We adopt the analysis of unconscionability in Scully.

38 The Court in Scully, after reviewing the authorities, including those to which her Honour referred in the judgment below, made a number of general observations which are of significance here. The Court observed that unreasonableness and unfairness are not to be regarded as automatically rendering conduct unconscionable,[18] and that a distinctive quality of unconscionable conduct as against unreasonable or unfair conduct is that it is unethical.[19] Unreasonableness or unfairness may form the basis of a conclusion that conduct is unconscionable but there must also be, adopting the words of Allsop P in Tonto Home Loans Australia Pty Ltd v Tavares,[20] at least 'some degree of moral tainting in the transaction of a kind that permits the opprobrium of unconscionability to characterise the conduct of the party.'[21]

39 In concluding that Permanent's conduct in the relevant respects was not unconscionable the Associate Judge considered that, on analysis, what occurred after the February default was a reversion to Permanent's pre-existing rights. The Associate Judge observed that in the circumstances which had occurred, further indulgence may have been the 'decent' thing to do but, in those circumstances, Permanent's reliance upon its legal rights was not unconscionable. She observed that awareness of the consequences to Mr Wolfe by enforcement of its legal rights could not in itself be sufficient to constitute unconscionability.

40 We agree with the Associate Judge's conclusion that Permanent's conduct was not unconscionable. It seems to us that its conduct, in the circumstances, was harsh, and could be appropriately characterised as 'unfair'. It lacked, however, the 'moral taint' and the inconsistency with the dictates of good conscience which a finding of unconscionability requires. Completion of the form correctly was not Permanent's responsibility. The failures in that respect were entirely the fault of Mr Wolfe. Permanent could have done more to notify him of his errors, but Permanent did make some attempt to notify him.

41 The contemporaneous documentation which is in evidence, and in particular Gadens' letter of 15 March 2010, strongly suggests that what occurred may well have been a case of Permanent's 'left hand' (Gadens) not knowing what its 'right hand' (AMS) had done. But it has never been suggested that Permanent's failure to do more to alert Mr Wolfe to the mistakes which he had made involved anything beyond an unwillingness or disinclination in the relevant staff of AMS to conduct more detailed enquiries as to how Mr Wolfe might be contacted.

42 What occurred was unfortunate and it had significant consequences for Mr Wolfe. But the fundamental cause of those consequences were mistakes which he had made (in completing the form), against a background of circumstances which had arisen for which he and his former partner were responsible (the long standing substantial defaults and the judgment), and which had drastic consequences because of the terms of the arrangement to which he had agreed (the 'last chance' default provisions). Permanent could, and in one sense perhaps should, have done more to alert him to the mistakes he had made. But their failure to do so was not, in the circumstances here, unconscionable.

43 By an amended notice of contention filed and served pursuant to leave granted during the course of the hearing of the appeal the respondent raises two matters concerning the application of the relevant credit legislation. First, it is contended that the Associate Judge was wrong in concluding that the arrangement made on 1 December 2009 was a 'contract' because, relying on the rule in Foakes v Beer,[22] the Associate Judge ought to have found that no consideration moved from Mr Wolfe to Permanent. If there was no 'contract' the credit legislation could not apply. Second, it is contended that the credit legislation does not apply because a judgment debt is not a 'debt' within the meaning of that legislation and accordingly deferral of that debt pursuant to the 1 December 2009 arrangement cannot be the provision of 'credit' under the applicable legislation.

44 Given our conclusions on the grounds of appeal relied upon on behalf of the appellant, it is unnecessary to deal with these contentions. Our failure to do so should not be taken as endorsement of the conclusions reached by the Associate Judge on those two issues. Each of the issues the subject the notice of contention raises a matter of complexity and significance. The issue as to consideration was raised as a contention only during the course of argument and the submissions made have, as a consequence, not been as full or as detailed as might otherwise have been the case. In the circumstances, it is preferable to leave those matters to be determined in a case which is a more appropriate vehicle.

[1] The judgment below describes the agreement as being 'embodied' in the 1 December 2009 letter. At trial there were disputes about that but those disputes were not pursued on the appeal.

[2] The three matters set out record the grounds as argued. Pursuant to leave granted during the hearing of the appeal, an amended notice of appeal was filed which deleted grounds no longer relied upon (grounds 1, 2, 4, 6, 7(b), 8, 9, 10, 11 - save to the extent that they reflect the three grounds in the amended notice of appeal), which re-formulated one ground - amended ground 2 reformulating previous ground 5, and which in substance repeated two grounds, 3 and 7(a) and (c), as new grounds 1 and 3.

[3] [2011] VSC 611, [16]-[20]. The parties confirmed this joint position in supplementary written submissions filed and served at the Court's invitation after hearing of the appeal. The appellant's supplementary submission and the respondent's supplementary submission were each filed on 25 October 2013 ('the supplementary submissions').

[4] On the appeal both parties adopted this analysis of what ought to have been the approach. They each confirmed it in the supplementary submissions. There is confusion on this issue in the judgment. In the published judgment of her Honour the Catchwords refer to the 'National Credit Code'; but they then specify ss 4, 6, 70 and 80 which must be references to the Consumer Credit (Victoria) Code. The expression 'the Code' is defined in para [81] as the 'Consumer Credit Code', presumably a reference to the Consumer Credit (Victoria) Code, and the references to particular provisions throughout the judgment seem to be invariably references to provisions of the Consumer Credit (Victoria) Code. The heading above para [154] is an exception, but the text immediately below the heading seems to contradict it. Mr Wolfe's case, even in the Second Further Amended Statement of Claim dated 10 May 2012, was pleaded by reference to the provisions of the Consumer Credit (Victoria) Code.

[5] In the supplementary submissions the appellant submitted there was 'little practical difference'. The respondent submitted the provisions were identical 'save for a few very minor difference'. Having compared the applicable provisions, there are no differences which have significance in this case, as both parties submitted.

[8] [2002] NSWSC 178; (2002) 54 NSWLR 503.

[9] See also her Honour's discussion at [60]-[67].

[10] [2006] FCA 472 [162].

[12] (1979) 144 CRL 596 ('Secured Income').

[13] [1984] HCA 73; (1983) 156 CLR 414.

[14] (1998) 43 NSWLR 40.

[15] [1904] HCA 31; [1904] 1 CLR 632.

[17] [2013] VSCA 292 ('Scully'). The parties addressed the Court of Appeal judgment in the supplementary submissions.

[20] [2011] NSWCA 389.

[21] [2013] VSCA 292, [48].

[22] (1884) UKHL 1, (1884) 9 App Cas 605.