Latest Supreme Court of WA decision on unconscionable conduct: Choice Constructions Pty Ltd v Janceski [No 3] [2011] WASC 358

In the second major recent decision in the Supreme Court of Western Australia¹ on the topic of unconscionable dealing, the Supreme Court of Western Australia in Choice Constructions Pty Ltd v Janceski [No 3] [2011] WASC 358 was required to consider whether the plaintiff’s second registered real property mortgage (Mortgage) could fairly and reasonably be enforced.

Background

The defendants, the Janceskis, were immigrants who arrived from Macedonia in the early 1970s. They came to Australia with little or no English and raised a family in Perth. Relevantly, over a 30 year period they borrowed, mortgaged and refinanced with a range of lenders in relation to a range of properties, including the property situated at Collingwood Street, Dianella (Property).

The Mortgage sought to be enforced secured part of the purchase price of a property in West Perth which had been acquired by the eldest son of the defendants from the plaintiff in the name of a family trust of which the defendants were beneficiaries.

The plaintiff’s case

The plaintiff’s case was that:

• the Mortgage had been lawfully procured²;
  
  
• default notices had been issued both against the son in respect of his indebtedness and the defendants in respect of their indebtedness secured by the Mortgage; and
  
  
• those notices not having been complied with, it was entitled to seek orders for possession of the Property.

Essentially, the plaintiff’s main role in the proceedings was to rebut the allegations made by the defendants.

The defendants’ case

The case brought by the defendants in opposition to the enforcement proceedings varied from time to time, but in general terms was that the Mortgage was unenforceable in equity. It was argued (among other things) that the defendants were at a ‘special disadvantage’ vis Choice³. The factors said to support this assertion included:

• the defendants’ lack of English;
  
  
• the plaintiff’s ‘failure’ to encourage them to seek independent legal advice;
  
  
• the defendants’ emotional dependence on their son;
  
  
• the length and complexity of the documentation they were asked to sign; and
  
  
• the relative bargaining positions of the parties and the harassing conduct of the plaintiff’s representative.

It was also asserted that the plaintiff had exerted actual undue influence⁴ against the defendants in circumstances where (among other things):

• the defendants did not understand the effect of the Mortgage transaction;
  
  
• the Mortgage was provided, in substance, to guarantee the obligations of their son, and was therefore not a transaction with any gain for the defendants; and
  
  
• the plaintiff was aware of this, and did not take steps to ensure these issues were addressed.

In raising this argument (albeit, it appears, in passing, in the context of closing submissions), the defendants were asking the Court to consider extending the test in Garcia from a husband – wife relationship, to a parents - son relationship.

Decision

Justice Simmonds ultimately found that the defendants had failed to make out their case that they had any special disadvantage capable of supporting their claim that the Mortgage was unenforceable.

In reaching his view Justice Simmonds made the following findings:

• age does not of itself (as distinct from in combination with other factors) represent a ‘special disadvantage’. In any event, His Honour found on the evidence that age⁵ did not make a significant contribution to any special disadvantage in this case;
  
  
• although illiteracy and lack of education often indicates special disadvantage, in this case, Mrs Janceski’s understanding and literacy was greater than the defendants had pleaded. Justice Simmonds note that she read a paragraph containing technical terms aloud in examination-in-chief without a translation;
  
  
• lack of business knowledge can be a factor weighing on special disadvantage, particularly where the transaction is not a commonplace one, such as one involving refinancing or second mortgages. His Honour found that Mrs Jacenski, in particular, did not lack the requisite knowledge, based on her history of financial transactions; and
  
  
• emotional dependence can also weigh as a factor in support of a special disadvantage, and the defendants did rely on their son in specific circumstances, but that they were not always dependant on him over the whole history of the transactions they had entered into in relation to the Property.

It was concluded that even if the case for special disadvantage had been established (which it had not), it needed to be (but was not) sufficiently evident to the plaintiff to justify setting aside the Mortgage.

In relation to the ‘Garcia’ argument His Honour found that the defendants did understand the purport of their transaction with the plaintiff and, as beneficiaries under the family trust controlled by their son which gained the benefit of the plaintiff’s financial accommodation, were therefore not volunteers. In the circumstances, His Honour found it was unnecessary to decide whether the parent – son relationship could sustain a ‘Garcia’ argument but did note that the Court in Vandenbergh had reached a ‘tentative’ view to the contrary.⁶

Lavan Comment

Although the defendants’ case did not succeed, this decision serves as a useful reminder of the Court’s equitable jurisdiction to set aside financial transactions on the basis of unconscionability. Lenders must be attuned to circumstances such as the grasp of English, age, mental state, and literacy levels of signatories of documents, particularly where multiple of these factors exist. If a borrower or guarantor can make out a prima facie case that conduct is unconscionable, the onus will be on the lender to establish the transaction was just, fair and reasonable in the circumstances.

These considerations should be given real weight when considering borrowers’ or guarantors’ circumstances, alongside lenders’ other legal obligations set out in the Code of Banking Practice, the National Credit Code and other statutes.

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