Parties Dispute Construction of Loan Agreement

Priority Lending Australia Pty Ltd v Martinsville Pty Ltd (No 2) [2021] NSWSC 850 (14 July 2021)

Facts:

The borrower mortgaged the secured property to the first mortgagee in order to obtain a loan.  As the borrower did not have the income to repay the loan, the guarantors made the repayments.  Between July 2018 and September 2018, the first mortgagee issued default notices to the borrower.  On 20 January 2019, Mr Murray, the guarantors’ son and a finance broker at Lumley Finance & Loans Pty Ltd, sent an email to Justin Hatfield, also of Lumley Finance & Loans Pty Ltd, proposing that the borrower refinance its loan from the first mortgagee, under which $500,000 was said to be owing.  A loan term of 12 months with an option to extend for a further six months was proposed with interest to be capitalised.   The sale of a completed development of residential units in Bonnyrigg is the exit strategy.

On 27 July 2020, the lender and the receiver or collectively, the plaintiffs, commenced proceedings against the borrower, the guarantors, and the first mortgagee for recovery of monies said to be owed to it by the borrower and the guarantors, and possession of a property in Martinsville (the secured property).  On 4 September 2020, the plaintiffs filed a notice of motion for default judgment on the liquidated claim.   On 30 September 2020, the plaintiffs filed a motion for default judgment on the claim for possession, which was ordered on 1 October 2020.  On 7 October 2020, the plaintiffs sought leave to issue a writ of possession which was granted on 8 October 2020, at which time a writ was issued.  The borrower and the guarantors filed an amended notice of motion seeking that the judgment for possession of the secured property and the judgment for the liquidated claim be set aside.

Issues:

Whether there is a triable issue on the merits. 

Whether or not the interest rate provision qualifies as a penalty.

Applicable law:

Australian Consumer Law, ss 237, 243 - provides for what qualifies as terms that are unconscionable at general law. 

Australian Securities and Investments Commission Act 2001 (Cth), ss 12CA, 12CB - provides for what qualifies as terms that are unconscionable at general law. 

Civil Procedure Act 2005 (NSW) - provides for just determination of the proceedings and their timely disposal as considerations within the discretion of the court.

Contracts Review Act 1980 (NSW) - provides for the terms and surrounding circumstances which make for an unjust loan. 

Uniform Civil Procedure Rules 2005 (NSW), rr 14.3, 34.16 - provides for the Court's inherent jurisdiction to set aside default judgment. 

Kellas-Sharpe v PSAL Ltd [2013] 2 Qd R 233; [2012] QCA 371 - held that a contract which provided for an interest rate which would apply except where a discounted interest rate applied as a reward for timely performance did not amount to a penalty.

Analysis:

The construction of the Second Loan agreement was alleged by Mr Afshar to be so unclear because the terms  “Interest Rate” and the “Specified Rate” were not referred to at all in Item 4 of Schedule 1.  Mr Afshar submitted that the Second Loan was unconscionable under the general law, the Australian Consumer Law (ss 237 and 243) or under the ASIC Act (ss 12CA and 12CB) and therefore was void or could be varied or set aside by the Court.  Fourthly, in respect of the guarantors, he submitted that the Second Loan was unjust within the meaning of the Contracts Review Act.   

Where a defence under the Contracts Review Act is pleaded, summary judgment cannot generally be ordered since there will almost inevitably be triable issues of fact. 

Due to the drafting discrepancies, the present case is not a clear case of a clause which would fall into the same category as the one held as valid in Kellas-Sharpe.  As such, the interest rate provision amounts to a penalty.  Mr Pokoney argued that, in order to make commercial sense of the Second Loan, it was necessary to construe “Interest Rate” as being equivalent to “discounted rate” and “Specified Rate” as being equivalent to “interest at normal rate” and that, if the agreement was construed in that way, there was no ambiguity.  

Conclusion:

The Court found that the defences raise triable issues. The Court ordered to set aside default judgment entered on 7 September 2020 in the sum of $1,011,200.42 as well as the default judgment for possession entered on 1 October 2020 in respect of the property known as [REDACTED], Martinsville NSW 2265. 

The parties are directed to provide to my Associate, within seven days, a minute of order in respect of other judgments affected by these reasons.  Leave is granted to the first, second and third defendants to file a defence in the form of annexure “A” to the affidavit of the second defendant sworn 28 June 2021, such defence to be filed within seven days.  The first, second and third defendants are ordered to pay the plaintiffs’ costs of the notice of motion.