Before the Global Financial Crisis (GFC) in 2008, we may have seen a return to some of the more dubious 1980's lending practices.
It seems that subsequent to the GFC there may be a return to 1980's banking and finance litigation (possibly due to harsh economic times).
In Choice Constructions Pty Ltd v Janceski [No 3]  WASC 358, the Supreme Court of Western Australia was called on to look into an allegation of unconscionable conduct by a mortgagee, along the lines of the Garcia and Amadio decisions.
The defendants, Mr and Mrs Janceski moved from their native Macedonia to Perth, Australia in the 1970’s. Therefore, they were of a non-English speaking background. Neither husband nor wife had received any formal education in English, and Mrs Janceski had only received formal education to grade 4 level. However, both defendants could read, write and speak a little English.
They had been involved in a series of property transactions prior to entering into the mortgage with Choice Constructions Pty Ltd. The mortgage in question came about due to their purchase, with their son, of a 3 storey town house developed by the mortgagee as builder/developer. They could not pay the full purchase price, and the vendor agreed to finance their purchase.
In this proceeding, the defendants (representing themselves) claimed that the mortgagee had acted unconscionably, based the principles set out in the High Court decisions of Commercial Bank of Australia v Amadio (1983) 151 CLR 447 and National Australia Bank Limited v Garcia (1998) 194 CLR 395. As a result, they sought a declaration that the mortgage was unenforceable.
Readers will recall that in Amadio, the High Court held that a contract (the mortgage) will be unenforceable where one party to it is at a special disadvantage and because of that special disadvantage it would be unconscionable for the other party (the bank) to take a benefit from the transaction.
Garcia took the argument one step further, deciding that it is unconscionable to enforce a guarantee against a married woman (a professional in that case) in circumstances of undue influence. The particular guarantee in that case was to repay her husband’s debts in circumstances where:
- the wife did not understand the effect of the transaction, and was not receiving a benefit from it;
- the lender was aware that the wife did not understand the transaction; and
- the lender did not take steps to ensure that the wife had the transaction explained to her.
These decisions led to a change in lending practices that resulted in guarantors being required to prove that they had received independent legal advice before entering into the proposed guarantee (by providing an independent solicitor's certificate).
It seems that before the GFC, some lenders had again taken to lending in dubious (high risk) circumstances, on the basis that it was a rising property market, and the value of the security property being offered would protect the lender against all possible risks. The GFC confirmed how foolhardy that attitude was!
Simmonds J ultimately found in favour of the mortgagee/developer, on the basis that the defendants were not at a special disadvantage and that the mortgagee had taken adequate steps to ensure they received appropriate and translated advice.
His Honour made several comments in his decision on the factors relevant to a finding of special disadvantage:
- whilst age in itself is not a special disadvantage, when combined with other factors it may give rise to a special disadvantage;
- emotional dependence (here the defendants alleged they were dependent on their son) is often an indicator of special disadvantage but will not amount to special disadvantage without the presence of other factors;
- a lack of literacy, education or comprehension of the English language are significant factors indicating special disadvantage; and
- a lack of business knowledge may also be a contributing factor.
His Honour specifically declined to decide whether the Garcia principle extended to the relationship between aged parents and children.
The case ran for over 20 days, and the defendants represented themselves. Those facts alone show the significant cost of this case to the mortgagee. Therefore, the Janceski decision is a reminder to lenders about the importance of ensuring that potential borrowers and especially third party guarantors obtain independent legal advice, and an independent solicitor's certificate about that advice.