Money for JAMS: Statutory unconscionability principles clarified in Jams 2 Pty Ltd v Stubbings

Summary

1. In this decision, the Victorian Court of Appeal provided clarification on the principles regarding statutory unconscionability: Jams 2 Pty Ltd v Stubbings [2020] VSCA 200 (Beach, Kyrou and Hargrave JJA) (Appeal).
   
   

Background

2. The applicants (Lenders) were three companies who, in 2015, loaned $1,059,000 (Loan) to Victorian Boat Clinic Pty Ltd (Borrower), a shell company with no assets which was owned and controlled by the respondent, Jeffrey Stubbings: Jams 2 Pty Ltd & Ors. v Stubbings (No 3) [2019] VSC 150 (Trial Judgment) [1] (Robson J) (paragraph reference are to the trial judgment unless otherwise stated). 
   
   
3. The purpose of the Loan was to enable Mr Stubbings to fund the purchase of a $900,000, residential property in Fingal (Property).
   
   
4. The Loan had an interest rate of 10% per annum and a default rate of 17% per annum: [21]. It was secured by a guarantee given by Mr Stubbings and supported by mortgages over the Property and two existing properties which he owned in Narre Warren, Victoria: [21].
   
   
5. Ajzensztat Jeruzalski & Co (AJ Lawyers) acted on behalf of various lender-clients and employed a system of structuring loans in such a way as to avoid the application of the National Credit Code (Code).  They did so by advancing funds to companies: [21]. They also sought to minimise the risk of loans being set aside as unconscionable, by using Mr Zourkas as an intermediary and avoiding direct contact between the borrowers and AJ Lawyers or their lender clients: [11]. 
   
   
6. Mr Stubbings was unemployed and had nominal income, no assets (other than the Narre Warren security properties) and insufficient funds to pay the 10% deposit on the Property or service the Loan. The trial judge stated: “Any person with a modicum of intelligence, who was apprised of the actual nature of the loan and Mr Stubbings’ circumstances, would not have proceeded with the loan. It was bound to end with serious losses and damage to Mr Stubbings”: [17].
   
   
7. While AJ Lawyers did ensure that Mr Stubbings received legal and accounting advice by requiring a signed certificate, the solicitor and accountant to whom Mr Stubbings was ‘guided’ by Mr Zourkas would only be paid if the loans proceeded, which the trial judge found, incentivised them to provide certificates and undermined their independence: [312].
   
   
8. In September 2015, the Loan was advanced, the mortgages to Commonwealth Bank on the Narre Warren properties were paid out, the Property purchase was settled and Mr Stubbings moved in. He paid the first two monthly interest instalments by selling valuables that he owned, before defaulting on the instalments: [23], [45].
   
   
9. The Lenders issued demands for payment before commencing proceedings against Mr Stubbings for recovery of the guaranteed debt (which now totalled $1,149,944.56) and possession of the three security properties: [26].  After obtaining summary judgment, the Lenders took possession of and sold the two Narre Warren properties: [49]. The Lenders’ claim for recovery of the debt and possession of the Property proceeded to trial.
   
   

First instance: Supreme Court of Victoria.

10. Justice Robson dismissed Mr Stubbings’ claims under the:
    
    
    1. Code, holding that the Code did not apply to the loan pursuant to s 5(1) as the borrower was not a natural person or strata corporation, and s 7 of the code meant it did not apply to the mortgage: [245]-[246]; and
       
       
    2. ACL, holding that Mr Zourkas was Mr Stubbings’ own agent and not the agent of the Lenders or AJ Lawyers: [223].
       
       
11. However, the trial judge upheld Mr Stubbings’ claim that the Loan, mortgage and guarantee were procured by unconscionable conduct and ordered that they be set aside, on the condition that Mr Stubbings not be unjustly enriched: [317]. His Honour found that AJ Lawyers were deemed to know Mr Stubbings’ personal and financial circumstances, by virtue of their ‘wilful blindness’ in adopting a system to avoid them becoming apprised of Mr Stubbings’ personal and financial circumstances: [316]. His Honour concluded that this system involved “a high level of moral obloquy” ([313]), to adopt a phrase used by Spigelman CJ in Attorney-General (New South Wales) v World Best Holdings Ltd[1] which had come to be considered in various subsequent decisions to be a touchstone of unconscionability.[2] His Honour found that Mr Stubbings was in a position of special disadvantage in that he was: “unsophisticated, naïve and had little financial nous” and was “unrealistic in the management of his financial affairs and demonstrated a complete lack of business understanding”: [264].
    
    
12. Mr Stubbings had also brought third-party claims against, Mr Zourkas, Mr Topalidies, an accountant and Mr Kiatos, a solicitor. The trial judge:
    
    
    1. dismissed the claim against Mr Zourkas (for misleading and deceptive conduct pursuant to s 18 of the ACL): [328];
       
       
    2. upheld the claim against Mr Topalides for negligence: [339]. However, no damages were ordered against Mr Topalides because Mr Stubbings “was fully compensated by the orders made on his successful counterclaim”: Appeal, [49]; and
       
       
    3. did not deal with Mr Kiatos, as this claim was settled before the trial started.
       
       

Court of Appeal

Statutory unconscionability principles

13. On appeal, Beach, Kyrou and Hargrave JJA had regard to the 2019 High Court decision in Australian Securities and Investments Commission v Kobelt,[3] in which the High Court had dismissed ASIC’s appeal 4:3[4] and held that a book-up system was not unconscionable for the purpose of s 12CB of the ASIC Act.[5]
    
    
14. The Court of Appeal observed that, in Kobelt, “Kiefel CJ and Bell J did not make any pronouncement as to the content of the statutory prohibition against unconscionable conduct in s 12CB(1) of the ASIC Act. They decided the case on the obviously correct basis that, if conduct is unconscionable in equity, it will be unconscionable under s 12CB(1)” but that the “remaining four judges did not take such a narrow view of ASIC’s case”: Appeal, [83].
    
    
15. The Court of Appeal also noted that, in his separate judgment in Kobelt, Gageler J (who formed part of the majority) indicated that he regretted his earlier adoption of the ‘moral obloquy’ requirement in Paciocco v Australia & New Zealand Banking Group Ltd,[6] now considering that such ‘arcane terminology does nothing to elucidate the normative standard embedded in the section.’[7]
    
    
16. Ultimately, the Court of Appeal adopted the approach taken by Gageler J, Nettle and Gordon JJ and Edelman J in Kobelt (noting that only Gageler J was in the majority) as to the content of the statutory standard to be applied in assessing statutory unconscionability:

The applicable standard is a normative one involving the evaluation of whether the conduct in question is ‘so far outside societal norms of acceptable commercial behaviour as to warrant condemnation as conduct that is offensive to conscience’; in the sense that a court should only take the serious step of denouncing conduct as unconscionable when it is satisfied that the conduct is ‘offensive to a conscience informed by a sense of what is right and proper according to values which can be recognised by the court to prevail within contemporary Australian society’. [Appeal, [90], footnotes omitted.]

17. The Court of Appeal rejected the ‘moral obloquy’ requirement in favour of an evaluative judgment as to morality by reference to societal norms:

… we accept that the effect of Kobelt is that the previously accepted arcane terminology of ‘moral obloquy’ should no longer be used. But the requirement that the conduct in question be ‘so far outside societal norms of acceptable commercial behaviour as to warrant condemnation as conduct that is offensive to conscience’ should still be understood as requiring an evaluative judgment as to the morality of the allegedly unconscionable behaviour. [Appeal, [91], footnote omitted.]

Application

18. The Court of Appeal upheld the Lenders’ contention that making asset-based loans available on a ‘take it or leave it’ basis was not unconscionable in this case, just as the High Court had found that bank fees charged to customers on a ‘take it or leave it’ basis were not unconscionable in Paciocco: Appeal, [99].
    
    
19. The Court of Appeal confirmed that asset-based lending will not automatically be deemed to be unconscionable, but will simply be a ‘relevant factor in deciding whether a particular loan resulted from unconscionable conduct’ in all the circumstances of the case: Appeal, [2].  The Court of Appeal noted as follows, in finding that the trial judge had erred in characterising asset-based lending as generally involving moral obloquy:

The judge’s adverse view of the system of lending — in substance an adverse view of asset-based lending as a concept — overwhelmed (or as the first mortgagees contend ‘infected’) his determination of the unconscionability issue. [Appeal, [126].]

20. The Court of Appeal also found that AJ Lawyers were entitled to rely on the signed solicitor and accounting certificates: ‘both as evidence that Stubbings had consulted a solicitor and an accountant for advice and as to the truth of the matters stated in the certificate’ and determined that they therefore ‘should not be fixed with knowledge of Stubbings’ personal and financial circumstances such that default under the loans was inevitable, as the trial judge appears to have found”: Appeal, [132].
    
    

Concluding remarks

21. The Court of Appeal’s decision in JAMS provides much-needed clarification as to the test for statutory unconscionability following the High Court’s split decision in Kobelt.  It provides some certainty for lenders, particularly in relation to their ability to provide asset-based lending and to rely on solicitors’ and accountants’ certificates in appropriate circumstances, while at the same time serving as a warning for borrowers, guarantors and their advisors that the law will not readily intervene to protect them from a bad bargain.  Finally, it modernises the approach to be taken in evaluating statutory unconscionability, free from the ‘arcane’ test of ‘moral obloquy.’
    
    

[1] Attorney-General (New South Wales) v World Best Holdings Ltd [2005] NSWCA 261; 63 NSWLR 557, [121].  

[2] Albeit with some criticism – see, for instance, Ipstar Australia Pty Ltd v APS Satellite Pty Ltd [2018] NSWCA 15 at [278].

[3] Australian Securities and Investments Commission v Kobelt [2019] HCA 18 (Kobelt).

[4] Nettle and Gordon JJ and Edelman J dissenting.

[5] ASIC did not allege that the conduct was unconscionable within the meaning of the unwritten law for the purpose of s 12CA of the ASIC Act.

[6] Paciocco v Australia & New Zealand Banking Group Ltd (2016) 258 CLR 525, 587 (Paciocco).

[7] Kobelt, [91] (Gageler J), cited in the Appeal Judgment at [85].