On 16 March 2022, the High Court (on appeal from the Court of Appeal of the Supreme Court of Victoria) delivered a judgment reinforcing and further clarifying the equitable and statutory concepts of unconscionable conduct: Stubbings v Jams 2 Pty Ltd  HCA 6.
This judgment should be of keen interest to those involved in the negotiation and enforcement of contracts where there is an asymmetry of advantage between the parties.
Whilst this case arose from the business of ‘asset-based lending’ where the appellant (borrower) was in a position of vulnerability, the judgment has broader application to the negotiation and enforcement of agreements giving rise to legal rights in many areas.
In this case, the appellant owned two houses, was unemployed and had no regular income at the time he was approached by the agent of the lender (who was a consultant to a law firm which provided a service facility involving the making of secure loans to clients).
The appellant secured a loan which he personally guaranteed and in which his two properties were mortgaged as security. The loan documentation included a certificate of independent legal advice to be signed by a lawyer and a certificate of independent financial advice to be signed by an accountant. The accountant and the lawyer who signed those certificates were referred to the appellant by the agent.
The certificates were signed and provided, the loans were settled, the mortgages were given by the appellant and the loan monies were advanced. The appellant defaulted and the respondents commenced proceedings to enforce the guarantee and rights as mortgagee over the security properties.
The primary judge (Robson J) found that the loans were procured by unconscionable conduct, ordered the mortgages be discharged and declared that the guarantees were unenforceable. In so doing, the primary judge found a special disadvantage and vulnerability on the part of the appellant because he had no capacity to fund the loan repayments and the transaction posed significant risks to him. The primary judge further found that the respondents had knowledge of that disadvantage (through the agent), and that the solicitor and accountant who provided the certificates of advice were not truly independent.
Court of Appeal
The Court of Appeal (Beach, Kyrou and Hargrave JJA) overruled the primary judge’s decision and many of the central findings of fact. The Court of Appeal expressed the view that the certificates of advice were sufficiently independent, could be relied upon, and made it reasonable for the respondents to proceed with the loan without making further enquiries of the appellant’s circumstances.
The High Court upheld an appeal from the judgment of the Court of Appeal. The High Court made orders consistent with those of the primary judge and the central findings of fact made by the primary judge, in respect of which the High Court found there was no error.
The majority (Kiefel CJ, Keane and Gleeson JJ) held that a case for relief against an unconscionable attempt to enforce legal rights was established by the appellant because the respondents had a sufficient appreciation of the appellant’s vulnerability and risk to justify the execution of the mortgage and guarantee as unconscientious.
The majority reinforced and followed previous decisions of the Court on the topic of unconscionable conduct, focussing in particular on the following concepts:
- Special disadvantage means something that ‘seriously affects the ability of the innocent party to make a judgment as to his [or her] own best interests’. While the factors relevant to an assessment of special disadvantage have not been exhaustively listed, Fullagar J in Blomley v Ryan considered that special disadvantage may be inferred from ‘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’. No particular factor is decisive, and it is usually a combination of circumstances that establishes an entitlement to equitable relief (at ).
- The knowledge and exploitation by the respondents of the appellant’s special disadvantage. Citing Commercial Bank of Australia Ltd v Amadio, the Court found (at ) that knowledge and exploitation occurs when ‘the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his [or her] own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party.’ The Court found unconscionable conduct was established in this case because the respondents had sufficient appreciation of the appellant’s vulnerability and ‘the disaster awaiting him under the mortgages’ (at ).
- The deployment of certificates of independent and financial advice in respect of which the Court was particularly critical (at -):
‘48 The certificates contained nothing to suggest that the appellant had actually turned his attention to the difference between the cost of his existing borrowings with Commonwealth Bank and the proposed loans, or to how he would service the proposed loans. The absence of even the most general reference in the certificates as to the existence and terms of the company’s business plan or as to how the Fingal property zoning problem (of which Mr Jeruzalski was aware) might be resolved is eloquent of their artificiality.
49 In addition, given the bland boilerplate language of the certificates and the statement therein of the purpose of the loan (which Mr Jeruzalski must have known to be inaccurate), it is open to draw the inference that the certificates were mere “window dressing”. A similar inference may be drawn in relation to the commercially unnecessary interposition of the company as borrower, a step calculated to prevent or impede scrutiny of the fairness of the transaction under the Code. The certificates might also be seen to have been a precautionary artifice designed to prevent an inference that the respondents were wilfully blind to the obvious danger to the appellant. But however one views the certificates, they could not negate Mr Jeruzalski’s actual appreciation of the dangerous nature of the loans and the appellant’s vulnerability to exploitation by the respondents. Indeed, one might regard the deployment of such artifices in a context where the lender or its agent deliberately distances itself from evidence that must confirm the dangerous nature of the transaction for the borrower or its guarantor as evidence pointing to an exploitative state of mind on the part of the lender.
- In separate judgments, Gordon and Steward JJ reached the same conclusion as the majority, but from similar but distinctive reasoning. Gordon J (who found that the application of the equitable principle of unconscionability was sufficient to determine the appeal) provides a useful parallel analysis from the application of section 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). Her Honour identified that the ASIC Act prohibits persons in the supply of financial services in trade or commerce from unconscionable conduct and can apply ‘to a system of conduct or pattern of behaviour, whether or not a particular individual is identified as having been disadvantaged by the conduct or behaviour’ … Because a specific person need not be identified, ‘special disadvantage of an individual is not a necessary component of the prohibition’’ (at ) (emphasis in original).
- Whilst Gordon J’s reasoning is consistent with the majority in relation to a system of unconscionable conduct, her Honour observed (at - and ):
‘76 Two separate but related points should be made at the outset. First, “[c]onduct can be unconscionable even where the innocent party is a willing participant; the question is how that willingness or intention was produced” (emphasis in original). Second, “a system of conduct or pattern of behaviour may be unconscionable, even though not every individual affected by the conduct or behaviour is or has been disadvantaged by the conduct or behaviour”. There does not need to be loss or disadvantage for a system to be unconscionable.
77 What can be significant is that the conduct targeted a group to take advantage of their likely, although not certain, vulnerability or, as in this case, that the lenders recognised a likely, although not certain, vulnerability and yet designed a system of lending against a guarantor’s property, suspecting that they had no income or capacity to service the loan, and deliberately avoiding information as to the guarantor’s financial or personal circumstances in order to “immunise” themselves from knowledge of the vulnerability.
79 The assessment of whether conduct is unconscionable within the meaning of s 12CB involves the evaluation of the conduct – here a system of conduct – by reference to the values and norms recognised by the statute, a normative standard of conscience which is permeated with accepted and acceptable community standards.’
The key outcomes of the judgment are as follows:
- Whether or not a person is at a ‘special disadvantage’ or suffering some vulnerability which would invoke the principles of unconscionability in equity or under statute will depend upon the circumstances of each case, but those principles can extend to a person who apparently willingly enters into a contract.
- A key element of any unconscionability will be an assessment of the knowledge (directly or through an agent) of the party seeking to enforce the legal right of the other party’s special disadvantage or vulnerability.
- Certificates of legal and financial advice (particularly if formulaic or boilerplate) will not on their own be sufficient to answer unconscionable conduct and in some circumstances may be seen as artifice or window dressing for such conduct.
- Certificates of legal and independent advice ought to be genuine, tailored to the particular circumstances, and provided by advisors who are truly independent of the party seeking to enforce the legal right.
- While the conscionability of asset based lending per se was not put at issue, it may be inferred from the judgment that failure by lenders and their agents to consider a borrower’s exit avenues may jeopardise enforceability
This article is intended to provide a general summary only and does not purport to be comprehensive. It is not, and not intended to be, legal advice.
© YPOL Pty Limited