Bendigo and Adelaide Bank Ltd v Karamihos [2014] NSWCA 17

Upon default, they claimed the mortgage was unjust for the purposes of the National Credit Code and the Contracts Review Act because the bank loaned when they had an inadequate exit strategy if they retired or took ill.

For an exit strategy the husband had nominated the sale of the business premises. These he said were worth $2m and this was accepted by the bank at face value. The primary judge agreed with the borrowers and relieved them from that portion of the loan not used to refinance their earlier mortgage. The bank appealed.

The Court of Appeal decided the case under the Contracts Review Act and said that in view of their identical provisions it was unnecessary to decide whether the Code applied.

The Court of Appeal found the loan and mortgage were not unjust because the borrowers failed to prove that the husband’s estimate was incorrect at the time. The value of the business premises was critical to the lower court’s finding that the borrowers did not have means to repay their loan and mortgage and was unjust.

The Court of Appeal found that the 2010 valuation evidence (which valued the property at $750,000 not $2m) did not go to its value at 2007 because of the intervening GFC and the tenant’s subsequent removal of fixtures. Accordingly the borrowers had not proved that they had an inadequate exit strategy.

The Court rejected the lower court’s finding that it was reasonable to infer a broadly similar value in 2007 from the 2010 valuation despite the GFC and the tenant’s actions.

Hence the Court of Appeal held that the borrowers failed to establish that any failure by the bank to check the accuracy of the husband’s estimate and accept their estimate would have revealed an inadequate exit strategy and so establish that the loan or mortgage would not have occurred and was unjust. The Court of Appeal also found no evidence to support the judge’s findings that the loan or mortgage was unjust on the basis of their age or their lack of financial acumen and said:

  1. Being of an age in the early 70s cannot of itself be an indication of inability to protect one’s own interests. The Court of Appeal found they had sufficient financial acumen and were able to protect their own interests.
  2. The borrowers loan history was equally consistent with financial maturity as the converse (financial unsophistication, which the lower court found).

Further the Court of Appeal found that a number of the lower court’s findings, namely the relative bargaining power of the parties and the absence of any negotiation at the time, the fact that the borrowers were not able to read and fully comprehend what they signed, did not obtain independent legal or financial advice and the bank knew this and did not take active steps to ensure they understood the loan and mortgage were not significant factors because the borrowers were aware of the material legal aspects of the mortgage and it was not proved that financial advice would have assisted them.

As regards the issues of causation and damage, the Court of Appeal noted that the borrowers failed to follow their own exit strategy and leased the business instead of selling the business and the premises and accordingly it was not established that the alleged unjustness (a flawed exit strategy) caused their losses. Further the Court of Appeal noted that the lower court failed to consider whether the borrowers received benefits beyond the discharge of their existing mortgage.

The Court of Appeal allowed the appeal and granted the bank possession and judgment for the balance.

Click here to read the full judgment

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