Borrowers obtained two loans to finance the purchase of a motel. One permitted deferral of interest and principal for max of 12 months. The other required repayment in 6 months.
The borrowers defaulted and complained to the Australian Banking Ombudsman. An agreement was entered into providing for monthly instalments and repayment of the loan in 6 months, and a reduction in the amount owing.
After a further default the bank appointed receivers, sold the properties and sued for the shortfall.
The borrowers claimed damages for unconscionable conduct by virtue of the bank:
- allegedly representing it would not enforce the requirement to repay, as extension was a “mere formality”; and
- refusal to capitalise interest.
The court made the following findings:
- the borrowers were not in a position of special disadvantage at all of which the defendant unconscientiously took advantage and mere disadvantage in bargaining power is not enough.
The court found the borrowers ‘well experienced in commerce. At worst they were in an inferior bargaining position in the sense that they were so keen to obtain finance in order to buy the motel but their financial position was so weak that they could not secure finance on generous terms…the fact that the plaintiffs were in an inferior bargaining position did not mean they lacked the capacity to make a judgment about their own best interests and they were not under any disabling condition which affected their ability to make a judgment as to their own best interests.’;
- the bank did not represent that the loan would be extended, only that the bank would consider an extension if they were attempting to sell their property, the hotel was trading profitably and the loan accounts were in order;
- the borrowers failed to establish that the bank knew that it was not possible for the borrowers to sell within six months.
The court noted that ‘the bare fact that the plaintiffs failed to sell the property within six months is not evidence that it was impossible, or that the defendant knew it was impossible, to sell the property within that period.’
The court said:
The strong impression arising from the evidence is that as the borrowers came to regret their acquisition of the motel, and the financial problems it caused them, they increasingly came to blame the bank rather than their own poor judgement for the position in which they found themselves.
The interest deferral clause was in the following terms:
Provided you obtain the prior written approval of the Bank you may defer the payment of interest and repayments of principal for a period or periods not exceeding twelve (12) months in aggregate during the term of the Facility.
The court noted that the above clause was an exception to the norm and specifically required the lender’s prior written approval.
The court did not find the refusals unreasonable.
The court found that none of the bank’s conduct put the borrowers in a position of disadvantage and that the bank did not unconscientiously take advantage of such disadvantage.
Although unnecessary to do so, the court then considered that lender’s argument that the borrowers were not entitled to relief in any event because the resolution of their complaint to the Ombudsman in the form of the agreement constituted a release or an accord and satisfaction and thus a complete defence to the plaintiffs’ claim.
The essence of accord and satisfaction is the acceptance by a potential plaintiff of something in place of a potential cause of action. It is necessary to construe the agreement in issue to see whether its effect is to discharge the potential cause of action absolutely so that the potential plaintiff can never sue on it. The agreement contained no words that it was in substitution of other rights such as a cause of action against the bank over its allegedly unconscionable conduct. There were no words to the effect that the agreement was entered into in satisfaction of any dispute between the parties and no term implied by the agreement that it constituted a release or accord and satisfaction. The court held that the agreement would not have constituted a successful defence if the borrowers’ claim had been established.
The borrowers’ claim was dismissed and the court gave judgment for the lender for the amount owing to it.
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