Court of Appeal Supreme Court New South Wales

• Medium Neutral Citation: May v Brahmbhatt [2013] NSWCA 309
• Hearing dates: 15 July 2013
• Decision date: 18 September 2013
• Before: Beazley P at [1]; Basten JA at [46]; Bergin CJ in Eq at [57]

Decision

(1) Refuse leave to appeal on ground 1 of the notice of appeal;

(2) Grant leave to appeal on ground 2 of the notice of appeal;

(3) Appeal dismissed with costs.

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

• Catchwords: APPEAL - civil - leave to appeal - whether arguable case - jurisdiction under the District Court Act 1973; APPEAL - civil - leave to appeal - whether trial judge denied applicant procedural fairness; CONTRACTS - general contractual principles - harsh and unconscionable contracts and statutory remedies - Contracts Review Act 1980, s 6(2) - whether contract entered in the course of or for the purpose of a trade, business or profession; CONTRACTS - general contractual principles - harsh and unconscionable contracts and statutory remedies - Contracts Review Act 1980, s 7 - whether contract was unjust at the time it was made
• Legislation Cited: Contracts Review Act 1980; District Court Act 1973; Local Court Act 2007; Supreme Court Act 1970
• Cases Cited: Australia and New Zealand Banking Group v Karam [2005] NSWCA 344; 64 NSWLR 149; Australian Guarantee Corporation Ltd v McClelland (1993) ASC 56-230; Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413; 11 BPR 20,841; Hogan v Howard Finance Limited (1987) ASC 55-594; Kowalczuk v Accom Finance Pty Ltd [2008] NSWCA 343; 252 ALR 55; Perpetual Trustee Company Limited v Khoshaba [2006] NSWCA 41; 14 BPR 26,639; Riz v Perpetual Trustee Australia Ltd [2007] NSWSC 1153; NSW ConvR 56-198; West v AGC (Advances) Ltd (1986) 5 NSWLR 610
• Category: Principal judgment
• Parties: Stephen May (Appellant); Rajesh Brahmbhatt (First Respondent); Sheema Rajesh Brahmbhatt (Second Respondent)
• Representation: Counsel: In person (Appellant); R White (Respondents)
• File Number(s): CA 2012/7389

Decision under appeal

• Jurisdiction: 9101
• Citation: Rajesh Brahmbhatt and Sheema Brahmbhatt v Stephen May
• Date of Decision: 2011-12-09 00:00:00
• Before: Olsson DCJ
• File Number(s): 2010/131109

HEADNOTE

[This headnote is not to be read as part of the judgment]

On 9 December 2011, Olsson DCJ gave judgment for the respondents in the sum of $98,546.30 against Stephen May (the applicant), being in respect of rental payments that the applicant had guaranteed under a lease entered into between Belltree Constructions Pty Limited (Belltree Constructions) and the respondent.

The applicant sought leave to appeal the decision of Olsson DCJ on two grounds:

(1) the District Court did not have jurisdiction to determine the proceedings; and

(2) the trial judge had denied him procedural fairness because she failed to consider his submission that the guarantee was invalid under the Contracts Review Act 1980.

The summons for leave to appeal was heard concurrently with the appeal.

Leave to appeal granted in part and appeal dismissed

By the Court: Leave to appeal refused in respect of ground 1 because the District Court had jurisdiction to determine the proceedings: [3], [46], [57].

By the Court: Leave to appeal granted in respect of ground 2 because the trial judge failed to deal with the applicant's submission that the guarantee was invalid under the Contracts Review Act 1980: [4]-[5], [46], [57].

Held per Beazley P and Bergin CJ in Eq: The respondents failed to establish that the applicant entered into the guarantee in the course of or for the purpose of a trade, business or profession carried on by him or proposed to be carried on by him as required by the exception in the Contracts Review Act 1980, s 6(2): [31], [57].

Considered: Contracts Review Act 1980, s 6(2)

Held per Basten JA: Relief is not available under the Contracts Review Act 1980 because the contract was entered into in the course of or for the purpose of a trade, business or professional carried on by the applicant: [48], [53].

Applied: Contracts Review Act 1980, s 6(2)

Held by the Court: The evidence and available inferences to be drawn from the evidence do not justify a conclusion that the guarantee was unjust at the time it was made so as to enliven the Court's jurisdiction under the Contracts Review Act 1980, s 7: [44], [54], [57].

Considered: Contracts Review Act 1980, ss 7, 9. Australia and New Zealand Banking Group v Karam [2005] NSWCA 344; 64 NSWLR 149; West v AGC (Advances) Ltd (1986) 5 NSWLR 610

Cited: Australian Guarantee Corporation Ltd v McClelland (1993) ASC 56-230; Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413; 11 BPR 20,841; Hogan v Howard Finance Limited (1987) ASC 55-594; Kowalczuk v Accom Finance Pty Ltd [2008] NSWCA 343; 252 ALR 55; Perpetual Trustee Company Limited v Khoshaba [2006] NSWCA 41; 14 BPR 26,639; Riz v Perpetual Trustee Australia Ltd [2007] NSWSC 1153; NSW ConvR 56-198

Judgment

1 BEAZLEY P: On 9 December 2011, Olsson DCJ gave judgment for the respondents in the sum of $98,546.30 against Stephen May, being in respect of rental payments that Mr May had guaranteed under a lease entered into between Belltree Constructions Pty Limited (Belltree Constructions) and the respondents. Mr May has sought leave to appeal against the judgment. The summons for leave to appeal has been listed for a concurrent hearing with the appeal, should leave to appeal be granted.

2 In his proposed notice of appeal, the appellant raised two grounds. In ground 1, the appellant pleaded that the District Court did not have jurisdiction to determine the proceedings, as the amount was less than the amount in respect of which the Court has jurisdiction. In ground 2, the appellant alleged that he had been denied procedural fairness because the trial judge had failed to consider his submission that the guarantee was invalid under the Contracts Review Act 1980.

3 Leave to appeal should be refused in respect of proposed ground 1. Pursuant to the District Court Act 1973, s 44, the District Court has jurisdiction to hear and dispose, inter alia, of any action of a kind which, if brought in the Supreme Court, would be assigned to the Common Law Division. A claim such as brought by the appellant would, in the normal course, be assigned to the Common Law Division: see the Supreme Court Act 1970, s 53(1). Ground 1 was presumably based upon the fact that the Local Court has jurisdiction, relevantly, for claims up to an amount of $100,000: Local Court Act 2007, s 29(1)(a). However, that jurisdiction does not deprive the District Court of jurisdiction for matters encompassed within s 44.

4 However, I am of the opinion that leave to appeal should be granted in respect of ground 2. Although the appellant's defence did not expressly plead the Contracts Review Act, para (6), in particular, by its reference to the guarantee being signed without independent legal advice, was, presumably, an intended reference to relief being sought under the Act. That this was an intended reference to the Contracts Review Act is reinforced by the fact that the appellant made submissions to her Honour on the basis that he was entitled to relief under the Act and the respondents did not oppose the appellant doing so.

5 The trial judge did not, however, deal with that argument. In my opinion, her Honour should have done so, as relief under the Act was clearly in issue between the parties. I am also of the opinion that this Court should deal with that aspect of the defence. The respondents did not object to the appellant arguing the matter on the appeal. They submitted, however, first, that the appellant was precluded by s 6(2) from relying upon the Contracts Review Act and, secondly, that in any event, the appellant had not established the contract was unjust at the time it was made.

Background facts

6 The background facts, insofar as they were established by, or may be inferred from, the pleadings or the evidence, were as follows.

7 The house subject of the lease was part of a display village operated by HomeWorld IV Pty Limited (HomeWorld IV). The land was subject to a covenant (the covenant) requiring it to be occupied by Belltree Constructions or another building company and was required to be used as a display for the duration of the exhibition period.

8 It appears that the house on the property was built by Belltree Constructions. Belltree Constructions had occupied the house built on the land since its completion in August 2003, in accordance with the requirements of the covenant. The display village was scheduled to close in August 2007, although there was provision in the "village agreements" that allowed the display village to be extended for an extra year. The village could also be closed earlier should builders of houses in the village vote to do so.

9 The guarantee of the rental payments upon which the respondents sued was incorporated into a lease between the respondents and Belltree Constructions. Although there was no evidence of this, the appellant stated, during the course of his argument on the appeal, that he was an employee of that company.

10 The first contract for sale was between Landcom and Franc and Ana Mikel ATF Belltree Homes Superannuation Fund (Belltree Homes) and Bella Ink Pty Limited (Bella Ink). The appellant was a director of Bella Ink. The second contract for sale was between the Mikels and Bella Ink as vendors and the respondents as purchasers. Settlement of the second contract took place on 1 September 2006, which was also the last day for settlement of the first contract under a notice to complete which had been issued by Landcom to Bella Ink.

11 The lease and the guarantee are each dated 24 November 2006, which on the evidence appears to be the date of execution. Mr May said in the course of argument that the guarantee was required by the solicitors for HomeWorld IV at the time of exchange of contracts. There was, however, no evidence to support this statement.

12 The contract for sale between the Mikels and Bella Ink and the respondents had been exchanged for a purchase price of $792,000 and on the basis that Belltree Constructions would lease the property from the respondents until 30 September 2008 at a rental of 7 per cent of the purchase price, with an option to extend until August 2009 at a rental of 7.5 per cent of the purchase price. According to the respondents, HomeWorld IV required that the property be leased to Belltree Constructions, or another builder, so that it could be used as a display home to promote their construction business.

13 The lease was for a period of 2 years 8 months and 13 days, with a terminating date of 31 August 2009. Notwithstanding the stated term of the lease, Item 19 of the Schedule to the lease provided:

"In this Lease, notwithstanding what is specified on page 1 as being the Terminating Date of this Lease, this Lease shall terminate upon the expiration of the Village Promotion Period pursuant to the Exhibition Village Investors Agreement as executed by the Lessor, the Lessee and HomeWorld IV Pty Limited."

14 The quantum of the appellant's guarantee was "unlimited" pursuant to item 10(b) of the Schedule to the lease. However, the appellant's "unlimited" exposure must be read in conjunction with cl 13 of the lease, which specified the extent of the guarantor's liability. Pursuant to that clause, the guarantee extended to all of the lessee's obligation under the lease, being the payment of rent and all other outgoings on the land. In addition, the appellant was liable for any damage that the lessors suffered should the lessee, Belltree Constructions, become insolvent.

15 The appellant, in his affidavit of 26 August 2011, stated, at para (7), that he was "self acting" at the time of exchange of contracts. At para (8), he said that the solicitors responsible for drafting the HomeWorld IV documents were Cutler Hughes & Harris and that he requested Mr Smith, a solicitor from that firm, to handle the settlement for him and Mr Smith agreed to do so. The appellant said that he forwarded Mr Smith the documents necessary for the transaction to be finalised.

16 The appellant stated that the documentation, including the lease with the personal guarantee, was forwarded to him approximately four days prior to exchange, although it is likely that he was referring to the settlement on 11 September 2011. The appellant said he objected, both as to the extent of his exposure as guarantor and as to the period of the lease. He said, however, that Cutler Hughes & Harris would not allow the sale to proceed unless the guarantee was signed without any alterations to the term of the lease and without any limitation of the extent of his exposure.

17 The appellant stated that he was under duress at this time. Landcom had refused to provide any additional time for settlement of its contract with Bella Ink and had indicated they would rescind that contract if settlement was not finalised on 1 September 2006. There was additional duress, on the appellant's case, when the time came for settlement, in that he was advised that the respondents were "only paying $762,000" or they would not proceed with the purchase. This involved a reduction of $30,000 in the purchase price.

18 As a matter of history, it should be recorded that the respondents had not sought a personal guarantee from the appellant of Belltree Constructions' obligations under the lease and were not aware of the existence of the guarantee until three months after the lease was signed. The respondents, in an unsworn statement admitted into evidence before the trial judge, stated that they had no say in the preparation and execution of the lease. According to them, that was the sole responsibility of the appellant and Belltree Constructions.

The Contracts Review Act

19 As I have indicated, the appellant had sought relief under the Contracts Review Act. Section 7 provides, relevantly:

"7 Principal relief

(1) Where the Court finds a contract or a provision of a contract to have been unjust in the circumstances relating to the contract at the time it was made, the Court may, if it considers it just to do so, and for the purpose of avoiding as far as practicable an unjust consequence or result, do any one or more of the following:

(a) it may decide to refuse to enforce any or all of the provisions of the contract,

(b) it may make an order declaring the contract void, in whole or in part,

(c) it may make an order varying, in whole or in part, any provision of the contract,

(d) it may, in relation to a land instrument, make an order for or with respect to requiring the execution of an instrument that:

(i) varies, or has the effect of varying, the provisions of the land instrument, or

(ii) terminates or otherwise affects, or has the effect of terminating or otherwise affecting, the operation or effect of the land instrument."

20 Section 9 specifies the matters to be considered by the Court in determining whether a contract of provision thereof is unjust for the purposes of the Act. Section 9(1) provides:

"9 Matters to be considered by Court

(1) In determining whether a contract or a provision of a contract is unjust in the circumstances relating to the contract at the time it was made, the Court shall have regard to the public interest and to all the circumstances of the case, including such consequences or results as those arising in the event of:

(a) compliance with any or all of the provisions of the contract, or

(b) non-compliance with, or contravention of, any or all of the provisions of the contract."

21 Section 9(2) specifies a list of matters to which the Court, to the extent relevant, and without limiting the generality of subs (1), must have regard. Although the appellant did not refer to any of the provisions of subs (2) in his argument before the Court, the paragraphs that may, on the evidence, be relevant, include:

"(a) whether or not there was any material inequality in bargaining power between the parties to the contract,

(b) whether or not prior to or at the time the contract was made its provisions were the subject of negotiation,

(c) whether or not it was reasonably practicable for the party seeking relief under this Act to negotiate for the alteration of or to reject any of the provisions of the contract,

...

(e) whether or not:

(i) any party to the contract (other than a corporation) was not reasonably able to protect his or her interests, or

(ii) any person who represented any of the parties to the contract was not reasonably able to protect the interests of any party whom he or she represented,

because of his or her age or the state of his or her physical or mental capacity,

...

(h) whether or not and when independent legal or other expert advice was obtained by the party seeking relief under this Act,

...

(j) whether any undue influence, unfair pressure or unfair tactics were exerted on or used against the party seeking relief under this Act:

(i) by any other party to the contract,

(ii) by any person acting or appearing or purporting to act for or on behalf of any other party to the contract, or

(iii) by any person to the knowledge (at the time the contract was made) of any other party to the contract or of any person acting or appearing or purporting to act for or on behalf of any other party to the contract,

...

(l) the commercial or other setting, purpose and effect of the contract."

22 Section 9(5) provides:

"In determining whether it is just to grant relief in respect of a contract or a provision of a contract that is found to be unjust, the Court may have regard to the conduct of the parties to the proceedings in relation to the performance of the contract since it was made."

23 Section 6 specifies certain restrictions on the grant of relief under the Act. Relevantly, s 6(2) provides:

"A person may not be granted relief under this Act in relation to a contract so far as the contract was entered into in the course of or for the purpose of a trade, business or profession carried on by the person or proposed to be carried on by the person, other than a farming undertaking (including, but not limited to, an agricultural, pastoral, horticultural, orcharding or viticultural undertaking) carried on by the person or proposed to be carried on by the person wholly or principally in New South Wales."

Does s 6(2) apply to preclude relief to the appellant under the Contracts Review Act?

24 It is convenient in the first instance to deal with the respondents' submission that s 6(2) applies in this case to preclude the appellant from relief under the Act.

25 The respondents contended that the lease was entered into by Belltree Constructions, a builder, in the course of its business, and that the appellant entered into the guarantee for the purpose of his business or trade. In support of the submission, the respondents relied upon the appellant's evidence that he was the "trustee" of Bella Ink, which was one of the two co-owners of the property at the time it was sold to the respondents and at the time he entered into the guarantee. In essence, the respondents' argument was that Bella Ink, Belltree Constructions and the appellant were "entwined". That, of course, is not an assertion of a legal relationship. There was no evidence that there was any legal relationship between the two companies. Nor was there evidence that the appellant was an officer of Belltree Constructions. The evidence was that the appellant's father, William Stephen May, was the sole director of that company. The appellant was a director of Bella Ink, which was a trust company. (The appellant was not a trustee of that company as the submission asserted.)

26 It may be accepted that the appellant had a connection with each of the companies in the sense that he was a director of Bella Ink and, as he informed the Court, an employee of Belltree Constructions. However, the relevant contract in the present case is the contract of guarantee. The only evidence as to why the appellant entered into that contract was because his guarantee was required by HomeWorld IV. Although, as I mention below, there are plausible reasons why HomeWorld IV required the guarantee, there was no evidence as to why that was so.

27 Nor was there any evidence that the appellant was carrying on a trade, business or profession. The material evidence before her Honour made reference to the appellant being the person physically occupying the property and in control of the keys. The respondents also made reference in their affidavit to the appellant having the "ownership rights" of the design plans for that property. The appellant did not seek to refute that evidence.

28 On the material admitted into evidence, therefore, it can be inferred that the appellant had some connection with this building project, although in this regard, the evidence does not disclose whether he was a builder, a draftsman, a manager or simply a minder of this project for his father. It should be noted in this regard that the lease was signed by the appellant's father. In my opinion, having regard to the unrefuted evidence that the appellant had 'ownership rights' of the display plans, an inference can be drawn that he has an interest in the business relating to this house in the display village which extends beyond his being only an employee of Belltree Constructions.

29 There was a reference in the material to the existence of Village contracts, which appeared to have been entered into by builders who occupied the Village. There was no express evidence that there was a Village contract between HomeWorld IV and Belltree Constructions although that is likely having regard to the correspondence between the appellant and HomeWorld IV and the role that HomeWorld IV played in requiring the lease and the guarantee.

30 As I have said, there was no evidence as to why the guarantee was required, although there are logical reasons which suggest themselves, including that HomeWorld IV would not want houses in the village unoccupied. A partially empty display village would not be a good advertisement for the building industry. There was also no evidence as to why the appellant, as opposed to his father or some other person, was required to sign the guarantee.

31 In my opinion, the respondents have not established that the appellant entered into the guarantee in the course of or for the purpose of a trade, business or profession carried on by him or proposed to be carried on by him. It may be that the appellant was engaged in a trade or business connected with the building and/or occupation of a display house in the HomeWorld IV Display Village. If that was the case, it may be that he entered into the guarantee for the purpose of a trade or business carried on by him. However, there is no evidence to that effect, nor any evidence from which that inference can be drawn. The respondents' assertion that the appellant had "ownership rights" of the display plans is too vague to allow any such inference to be drawn, and the source of their knowledge or understanding is unknown. As I have said, the appellant equally may have been minding the project for his father.

Was the contract unjust at the time the contract was entered into?

32 I have stated above that there was no evidence of any legal, corporate or contractual relationship between Bella Ink and Belltree Constructions. On the evidence, the only connection between them was through the appellant, although the nature of his relationship with each was very different. In relation to Bella Ink, the appellant was a director and in relation to Belltree Constructions, he was an employee. There must also have been some arrangement whereby Belltree Constructions was entitled to occupy the property. However, the evidence does not disclose whether that arrangement was made with Landcom as the original vendor, or with Bella Ink and Belltree Homes, or with both.

33 The appellant contended that at the time he signed the guarantee, he was under duress, as the contract for the land was due for settlement on that day. He also relied upon the insistence of the solicitors, Cutler Hughes & Harris, that the guarantee be signed without any amendment, otherwise they would not allow the sale to proceed. In addition, the respondents would not proceed with the sale unless the vendors accepted a lower price on settlement. The appellant said he agreed to give the guarantee without the requested amendments because of this duress. There was no explanation in the evidence as why the respondents acted as they did in demanding a reduction in the purchase price. Nor was there any challenge to the appellant's evidence to which I have referred.

34 The evidence thus established that the appellant was subjected to a stressful situation in each of the ways mentioned: the pressure to settle on 1 September; the pressure to sign the guarantee; and the pressure from the respondents offering less than the contract sum, whatever their reason for doing so. Although the respondents were only responsible for the last of these matters, the Contracts Review Act does not require that any unjustness in the terms of the contract at the time it was made be the result of conduct of the other party to the contract. For that reason, I consider it is appropriate to have regard to all of the matters to which reference has been made in determining whether the appellant is entitled to relief under the Act. Having said that, it is important to note there was no evidence as to the impact the respondents' conduct had on the financial position of the appellant, insofar as that was affected by his obligations as guarantor.

Case law

35 In West v AGC (Advances) Ltd (1986) 5 NSWLR 610 McHugh JA stated, at 620:

"Under s 7(1) a contract may be unjust in the circumstances existing when it was made because of the way it operates in relation to the claimant or because of the way in which it was made or both. Thus a contractual provision may be unjust simply because it imposes an unreasonable burden on the claimant when it was not reasonably necessary for the protection of the legitimate interests of the party seeking to enforce the provision: cf s 9(2)(d). In other cases the contract may not be unjust per se but may be unjust because in the circumstances the claimant did not have the capacity or opportunity to make an informed or real choice as to whether he should enter into the contract: cf s 9(2)(a), 9(2)(e), 9(2)(f), 9(2)(g), 9(2)(i), 9(2)(j). More often, it will be a combination of the operation of the contract and the manner in which it was made that renders the contract or one of its provisions unjust in the circumstances. Thus a contract may be unjust under the Act because its terms, consequences or effects are unjust. This is substantive injustice. Or a contract may be unjust because of the unfairness of the methods used to make it. This is procedural injustice. Most unjust contracts will be the product of both procedural and substantive injustice."

36 In the later case law, it has been observed that "justness" is both a "general and inherently variable" notion which Parliament undoubtedly intended to respond to contemporary community standards: see Perpetual Trustee Company Limited v Khoshaba [2006] NSWCA 41; 14 BPR 26,639 at [64] per Spigelman CJ (with whom Handley JA agreed). Spigelman CJ also observed, at [65], that there had been suggestions in the case law that there had been an evolution of community standards over the period since the legislation was enacted: see Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413; 11 BPR 20,841 at [79].

37 It has also been pointed out that a party is not necessarily entitled to relief merely by establishing circumstances that fall into one or other of the factors specified in s 9(2): Hogan v Howard Finance Limited (1987) ASC 55-594 at 57,539 (Hope JA, Street CJ agreeing); Australian Guarantee Corporation Ltd v McClelland (1993) ASC 56-230 at 58,389. It must be established that the contract was unjust. This is a question of fact, although there are broadly-based value judgements involved in the ultimate factual determination: Riz v Perpetual Trustee Australia Ltd [2007] NSWSC 1153; NSW ConvR 56-198 at [51]; Kowalczuk v Accom Finance Pty Ltd [2008] NSWCA 343; 252 ALR 55, at [87]; Khoshaba at [34]-[40] per Spigelman CJ; [106]-[111] per Basten JA. Further the grant of relief is a matter of judicial discretion: Khoshaba at [34]-[36] per Spigelman CJ; [107] per Basten JA.

38 The operation of the Contracts Review Act, in circumstances where a party alleges a form of economic duress, was considered by this Court in Australia and New Zealand Banking Group v Karam [2005] NSWCA 344; 64 NSWLR 149. The Court observed, first, at [44], that relief under the Contracts Review Act was not confined to equitable concepts, such as undue influence and unconscionable conduct, although the circumstances may, although need not, fall into those categories in order for the Court to grant relief. The Court also observed, at [47], that care needed to be taken in the use of phraseology such as 'economic duress', which may have a wider connotation as a matter of ordinary use than its legal meaning. The Court then reviewed the case law relating to undue influence and unconscionable conduct. The Court concluded, at [66], that the concept of duress should be limited to threatened or actual unlawful conduct and continued:

"66 ... if the conduct or threat is not unlawful, the resulting agreement may nevertheless be set aside where the weaker party establishes undue influence (actual or presumptive) or unconscionable conduct based on an unconscientious taking advantage of his or her special disability or special disadvantage, in the sense identified in Amadio ... Pursuant to ... the Contracts Review Act, the relative strengths of the bargaining positions of the parties, and their ability to negotiate terms, will be relevant. However, it does not follow that because, for the purposes of s 9(2)(a) of the Contracts Review Act, there was a material inequality of bargaining power, a contract between such parties will necessarily be set aside. ...

67 On the other hand, if the Court is satisfied that the provisions of the contract were not 'reasonably necessary for the protection of the legitimate interests' of the stronger party, a concept adopted by ... the Contracts Review Act, an important strand favouring intervention may have been established. The statutory adoption of the term 'legitimate' in relation to the commercial interests of one party, tends, if anything, to strengthen the argument against use of the generic term 'illegitimate pressure', so as to avoid confusion between the legitimacy of 'pressure' on the one hand and of commercial interests on the other.

68 Where the statutory definitions operate, there is no necessary condition prescribed, but merely a range of factors to be taken into account. These factors require the Court to look at the situation of each party, their relationship and the terms of the transaction. The fact that one party is in financial difficulties, of which the other party is aware ... will be relevant, but not sufficient to establish unconscionable conduct on the part of the stronger party. Something more is required and may be sought in the terms of the particular transaction. However, even unusual terms will not necessarily demonstrate taking unconscientious advantage of the situation of the weaker party. The greater the financial risk, the greater the justification for increased security." (citations omitted)

39 In the present case, the appellant, as guarantor, seeks relief in respect of his obligations under a guarantee signed by him with full knowledge of its terms and his liability under it. The guarantee was in favour of the respondents, who did not request the guarantee but have taken the full benefit of it, as they have been legally entitled to do. The guarantee was required by a third party, whose connection with the parties and the property is not clear, although, as I have discussed, certain assumptions are reasonably apparent as to why the guarantee was demanded. The appellant executed the guarantee in circumstances where there was no evidence that he would benefit from the lease being performed according to its terms.

40 By the same token, there was no evidence that there was unlawful pressure exerted on the appellant by Cutler Hughes & Harris in respect of the guarantee or by the respondents. For that reason, the appellant has not established that the guarantee should be set aside as unjust due to economic duress: see ANZ v Karam at [47]. Further, there was no evidence that there was any material inequality of bargaining power between the parties to the contract of guarantee: see s 9(2)(a). The fact that the settlement had to be finalised on 1 September does not create an inequality of bargaining power within the meaning of the section. Many transactions are entered into in circumstances where one party is under financial pressure, although there was no evidence that the appellant was in financially difficult circumstances. The pressure he said he was under related to the pressure to settle on 1 September. The appellant was not successful in being able to negotiate different terms of the contract of guarantee. However, the terms of the guarantee were not exceptional or onerous: s 9(2)(b) and (c).

41 Nor was there any evidence that the appellant did not understand the terms of the guarantee. Indeed, the evidence indicates that the appellant had a clear understanding of the terms of the guarantee. That is why he wanted to change its terms.

42 It may be arguable that there was something unfair in the respondents settling for an amount less than the purchase price. However, there is no evidence to assist the court as to the circumstances in which this was done.

43 Finally, the commercial setting in which the guarantee was executed was not unusual or exceptional. It is not unusual to have a rental guarantee in a lease and there was nothing unjust in the terms of this guarantee to warrant any interference by the Court. As I have indicated, the terms of the guarantee were usual terms found in commercial arrangements between parties. There was no evidence that its terms were not appropriate to secure the rights of the respondents as lessors.

Conclusion

44 Although there were some features of the transactional history of this matter which would readily lead to a conclusion that the appellant was placed in a difficult position at the time he executed the guarantee, the evidence and such inferences that may be drawn from the evidence does not justify a conclusion that the guarantee was unjust at the time it was made so as to enliven the Court's jurisdiction under s 7 of the Act.

45 The orders I propose are as follows:

(1) Refuse leave to appeal on ground 1 of the notice of appeal;

(2) Grant leave to appeal on ground 2 of the notice of appeal;

(3) Appeal dismissed with costs.

46 BASTEN JA: I agree with the orders proposed by Beazley P and, subject to what follows, with her reasons.

47 The case concerns enforcement against the applicant as guarantor of a debt owed by a company as lessee of a residential home, being non-payment of rent due under a lease. The case was run in the District Court by the parties themselves, on deficient pleadings and with little attention to the need for evidence to establish relevant facts.

48 The primary basis of the applicant's challenge to his liability under the guarantee, which was not addressed at all by the trial judge, was that the contract of guarantee was unjust within the terms of the Contracts Review Act 1980 (NSW). However, relief is not available under that Act in relation to a contract entered into in the course of or for the purpose of a trade, business or profession carried on by the person seeking relief, being in this case the applicant: s 6(2). Despite the paucity of evidence as to relevant facts, the preferable conclusion is that the exclusion is engaged.

49 The lease was granted at the end of a period of development of what must have been a greenfield estate. The original owner of the land was Landcom which, the Court is entitled to take judicial notice of, is an agency of the State government responsible for developing residential housing. Landcom entered into a contract in 2003 with two entities, which bought the land as tenants-in-common in equal shares. The first entity was comprised of two persons, being Franc and Ana Mikel, acting as trustees for the Belltree Homes Superannuation Fund. The other party was Bella Ink Pty Ltd, a company of which the applicant was the director and shareholder. There was a delayed settlement of the sale, which was presumably intended to allow for the construction of a residential home on the land, which would then be sold, permitting the owners under the contract with Landcom to complete their purchase. The land, with the constructed home, was ultimately sold to Rajesh and Sheema Brahmbhatt (the respondents).

50 There was a further complication, the precise details of which are obscure on the materials before the Court. The land on which the home was constructed was apparently part of a "village" development controlled by an entity known as HomeWorld IV Pty Ltd ("HomeWorld"). Although the underlying documentation was not before the Court, it was accepted that there was a covenant registered on the title which required that the home be occupied by a builder as a "display home" until the expiration of a specified period. For that reason, the respondents were required to lease the property to Belltree Constructions Pty Ltd, or another builder. Accordingly, the respondents leased the land to Belltree Constructions, of which the applicant was an employee and his father the sole director and company secretary.

51 It was not in dispute that the lease documentation was prepared by solicitors for HomeWorld and included a personal guarantee of the obligations of Belltree Constructions, to be given by the applicant.

52 There can be little doubt that the requirement for a guarantee, which emanated from HomeWorld and not the purchasers, reflected a commercial interest of HomeWorld to ensure that the builder remained in occupation in accordance with the covenant on the title of the display home. Why the applicant was required to give the guarantee is not disclosed in the evidence. He claims that he first saw the guarantee four days before settlement was due. As he was not otherwise a party to any of the transactions, it would be surprising if the solicitors had named him as the individual required to give the guarantee merely as an employee of the builder and lessee, Belltree Constructions, or, more implausibly, because he was merely the agent of Bella Ink in arranging settlement of the purchase and sale of the land.

53 Mr May supplied evidence by way of affidavit in the District Court. In his affidavit of 26 August 2011, he gave his occupation as "builder". He also described himself as "the Trustee of a company Called Bella Ink Pty Ltd" [sic] which owned a half share in the property. He also described Belltree Constructions as "the builder". The appellant was a director (or possibly the sole director) and a shareholder (or possibly the sole shareholder) of Bella Ink. It may be inferred that Bella Ink and Belltree Homes were jointly involved in the development and contracted with Belltree Constructions to build the home. The involvement of these parties in the development was clearly a commercial or business arrangement. There is nothing to suggest that the applicant's involvement (as director and shareholder of Bella Ink and as an employee of Belltree Constructions) was otherwise than in the course of carrying out the commercial development for their financial or business interest. For example, he dealt with Landcom in an attempt to extend the settlement period and he appears to have negotiated the sale price of the land with the respondents. To the extent that he claimed to act under economic duress, he equated his interests with those of the corporate entities he represented. In these circumstances the Contracts Review Act was not engaged.

54 If this conclusion is not accepted, the applicant did not demonstrate that the guarantee, viewed in isolation or as part of the overall commercial arrangement, was unjust. I would adopt the reasoning of Beazley P, except that I would not place significance on the statements extracted from Australian and New Zealand Banking Group v Karam [2005] NSWCA 344; 64 NSWLR 149. That is not because I wish to depart from my responsibility for the reasoning in that case, but because the passages relied on were not concerned to construe the Contracts Review Act, which does not use the term "economic duress".

55 However, the real problem for the applicant in establishing economic duress was that unless he had a financial interest in the outcome of the dealings, he was under no duress. That is, if he were unable to negotiate acceptable terms for the guarantee he could walk away from the transaction. If he did have a financial interest in the outcome, it would seem that the guarantee was entered into "in the course of" and "for the purposes of" his trade or business. In that event, the Contracts Review Act was not engaged.

56 There were other difficulties with the applicant's claim to the under "economic duress" at the time he was required to enter into the guarantee. Because the full documentation is not before the Court, it is not clear whether a term of the contract of sale to the respondents by Bella Ink and its associate required the applicant to enter into the contract of guarantee. If it did, then, on his own evidence, he was acting for himself at that time and the solicitors for HomeWorld were not involved and his claims of objections being overruled by them were not pertinent. If, on the other hand, the arrangements with respect to the guarantee were not put in place until the lease was executed, at a later date, then complaints that the respondents had demonstrated his vulnerability by extracting a reduction in the purchase price at the time of settlement were of limited relevance. Although the issue was not explored, and he gave no evidence of such considerations, it may possibly have been known to him at the time that he entered into the guarantee that Belltree Constructions was in danger of going into liquidation, in which case his personal liability would be engaged. The fact that Belltree Constructions was forced to sell at a lower price than had originally been negotiated may have accentuated the risk. In any event, no such connection was relied on by the applicant. Nor was there any suggestion that the duress he claimed to suffer was other than purely economic.

57 BERGIN CJ in Eq: I agree with Beazley P.

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Decision last updated: 18 September 2013