The recent New South Wales Supreme Court decision in Provident Capital Ltd v Bortolin Papa (No 1) should bring notice to financial asset lenders granting loan agreements as to what can render a contract “unjust” under s 7 of the Contracts Review Act 1980 (NSW). The case should serve as a warning for lenders that in order to help avoid liability under the Act, lenders are to make inquiry into and have regard to the borrower’s capacity to make loan repayments and what the underlying purpose of the loan is.

Background

Provident Capital Ltd (“Provident”), a lender of investor funds advanced credit to Mrs Bortolin Papa under a low doc loan agreement and a loan variation agreement. Mrs Papa was in default and Provident sought an order for possession of Mrs Papa’s property that was put up as security, and judgement for the sum of the loan agreements. Provident relied on Mrs Papa’s representation in signing a Borrower’s Declaration that the credit was not for her sons failing gymnasium business, but wholly or predominantly for her own business or investment purposes.

Mrs Papa submitted a defence and a cross claim that the claim should be dismissed on the grounds that the circumstances of entering into the loans, namely the lack of inquiry into how the loans serviceability requirements were going to be met, rendered the loans unjust contracts under s7 of the Contracts Review Act 1980. Mrs Papa contended that due to Provident’s relationship with Community Mortgage Corporation Pty Ltd (“CMC”), an introducer company through whom the finance was arranged, it ought to have known that the loans were for her son’s in debt gymnasium business, in which she had no interest in and was not capable of servicing the loan.

Decision

The New South Wales Supreme Court held that the loan agreements were unjust in the circumstances relating to the agreements at the time they were made under s 7 of the Contracts Review Act. By reference to the criteria set out in s 9 of the Act, a finding was found in favour of Mrs Papa to be entitled to relief.

In the decision, Justice Fullerton noted the importance of balancing public interests in cases falling under the Act. Firstly, he considered the policy interests in allowing the free flow of commerce and in holding parties to their contract. Secondly, he iterated the public interest in ensuring protection of consumers of credit and safeguarding against the risk that commercially inexperienced borrowers don’t assume debt, they are incapable of servicing in reliance upon inattentive and indifferent lenders.

The decision to render the contract “unjust” was centred around Provident’s failure to make any inquiries at all into Mrs Papa’s capacity to make repayments on the loan and where the income would be generated from to do so. Justice Fullerton’s judgment was persuaded by Provident being indifferent to Mrs Papa’s ability to meet serviceability requirements because there was adequate security available in the circumstances of default.

It was held that reasonable inquiries, such as the underlying purpose of the loan would have allowed Provident to learn that the borrowing was for a “highly speculative” investment for her son’s collapsed business, and she or the business would not have been capable of servicing the repayments.

Justice Fullerton also offered the view that Mrs Papa’s lack of commercial knowledge and CMC’s ruthless steps as an introducer for Provident to ensure the loan was processed resulted in her being unable to protect her own interests and being put in an unequal bargaining position.

How does it affect you?

The outcome has significance for all financial lenders as it outlines the reality that courts have the power to review loan contracts and will hold the lender liable if the circumstances of entering into the contract render it unjust.

The decision adds to the already large body of precedent warning of the dangers for lenders to advance monies without reasonable inquiries being made into the issue of serviceability or if the borrowing is for a “highly speculative” investment.

It should be taken away that a contract can be held to be unjust if the lender is ignorant to critical factors. Despite adequate security being available, careful inquiry needs to be made as to the ability of the borrower to repay by instalments and the underlying purpose of the loan.