No Money for JAMS: the High Court lays down the law on unconscionable conduct
Stubbings v Jams 2 Pty Ltd  HCA 6
In 2015, Jams 2 Pty Ltd and two other companies (Lenders) loaned $1,059,000 (Loan) to Victorian Boat Clinic Pty Ltd (Borrower), a shell company with no assets which was owned and controlled by Jeffrey Stubbings: Jams 2 Pty Ltd & Ors. v Stubbings (No 3)  VSC 150 (Trial Judgment)  (Robson J) (paragraph references in this section are to the trial judgment unless otherwise stated).
The purpose of the Loan was to enable Mr Stubbings to fund the purchase of a $900,000 residential property in Fingal (Property).
The Loan had an interest rate of 10% per annum and a default rate of 17% per annum: . 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: .
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: . They also sought to minimise the risk of loans being set aside as unconscionable, by using a ‘consultant’ named Trayan Zourkas as an intermediary and avoiding direct contact between the borrowers and AJ Lawyers or their lender clients: .
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”: .
AJ Lawyers did ensure that Mr Stubbings received legal and accounting advice by requiring a signed certificate. However, the solicitor and accountant to whom Mr Stubbings was ‘guided’ by Mr Zourkas would only be paid if the relevant loans proceeded, which the trial judge found both incentivised them to provide certificates and undermined their independence: .
In September 2015, the Loan was advanced, the existing mortgages 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: , .
The Lenders issued demands for payment before commencing proceedings against Mr Stubbings for recovery of the guaranteed debt (which then totalled $1,149,944.56) and possession of the three security properties: . After obtaining summary judgment, the Lenders took possession of and sold the two Narre Warren properties: . The Lenders’ claim for recovery of the debt and possession of the Property proceeded to trial.
First instance: Supreme Court of Victoria.
At first instance, Justice Robson dismissed Mr Stubbings’ claims under the Code, holding that the Code did not apply to the loan 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: -. His Honour also dismissed the claims under the Australian Consumer Law (ACL), holding that Mr Zourkas was Mr Stubbings’ own agent and not the agent of the Lenders or AJ Lawyers: .
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: . 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: . His Honour concluded that this system involved “a high level of moral obloquy” (), to adopt a phrase used by Spigelman CJ in Attorney-General (New South Wales) v World Best Holdings Ltd which had come to be considered in various subsequent decisions to be a touchstone of unconscionability. 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”: .
Mr Stubbings had also brought third-party claims against Mr Zourkas, Mr Topalidies (an accountant) and Mr Kiatos (a solicitor). The trial judge dismissed the claim against Mr Zourkas (for misleading or deceptive conduct contrary to s 18 of the ACL): . His Honour upheld the claim against Mr Topalides for negligence but made no order as to damages because Mr Stubbings “was fully compensated by the orders made on his successful counterclaim”: . His Honour did not deal with Mr Kiatos, as this claim was settled before the trial started.
Court of Appeal
On appeal, Beach, Kyrou and Hargrave JJA had regard to the 2019 High Court decision in Australian Securities and Investments Commission v Kobelt, in which the High Court had dismissed ASIC’s appeal 4:3 and held that a ‘book-up’ system was not unconscionable for the purpose of s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).
The Court of Appeal observed at  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”.
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 and New Zealand Banking Group Ltd, now considering (at  of Kobelt) that such “arcane terminology does nothing to elucidate the normative standard embedded in the section.”
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), finding at : “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’”. The Court of Appeal also rejected, at , the “moral obloquy” requirement in favour of an evaluative judgment as to morality by reference to societal norms.
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, .
The Court of Appeal found at  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. The Court of Appeal noted as follows at , 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”.
The Court of Appeal also found at  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”.
High Court of Australia
The High Court granted special leave to Stubbings on 12 February 2021, heard oral arguments on 16 October 2021 and handed down its unanimous decision (in three separate judgments) on 16 March 2022, allowing the appeal.
In finding that the Lenders had acted unconscionably in all the circumstances, the High Court at - provided a handy summary of the unconscionability principles distilled from earlier High Court judgments. In short, unconscionability (at general law) requires special disadvantage, knowledge of it by the stronger party and unconscientious exploitation of it to the weaker party’s disadvantage.
Applying those principles, the High Court found at  that Stubbings “was incapable of understanding the risks involved in the transaction’ and ‘was unable to perform simple calculations, such as 10 per cent of $130,000.” The Court noted at  that:
The inevitable outcome of the transaction was, objectively speaking, that the appellant’s equity in his properties would be taken by the respondents by way of interest payments, including at default interest rates. The dangerous nature of the loans, obvious to Mr Jeruzalski but not to the appellant, was central to the question whether the appellant’s special disadvantage had been exploited by the respondents.
The High Court concluded at  that the Lenders’ conduct was unconscionable because “Mr Jeruzalski had sufficient appreciation of the appellant’s vulnerability, and the disaster awaiting him under the mortgages, that his conduct in procuring the execution of the mortgages is justly described as unconscientious.”
The existence of signed solicitor and accounting certificates was not sufficient to cure the unconscionability. The High Court had regard to their “bland boilerplate language” and “artificiality” before concluding that “it is open to draw the inference that the certificates were mere ‘window dressing’ [and] a precautionary artifice designed to prevent an inference that the respondents were wilfully blind to the obvious danger to [Stubbings]”: .
In finding that the general law unconscionability threshold had been met, the majority did not go on to consider Stubbings’ alternate statutory unconscionability claim under s 12CB of the ASIC Act: . That prompted Justice Gordon to “write separately because I consider that the respondent lenders’ system of conduct was contrary to s 12CB of [the ASIC Act]”: . Her Honour had regard to the considerations in s 12CC of the ASIC Act, which “assist in evaluating whether the conduct in question is ‘outside societal norms of acceptable commercial behaviour [so] as to warrant condemnation as conduct that is offensive to conscience.’” Her Honour also confirmed that special disadvantage is not a prerequisite to a finding of unconscionability under the statutory regime, noting at : “[t]here does not need to be loss or disadvantage for a system to be unconscionable.”
It is important to note that the practice of asset-based lending was not on trial in this case, and both parties were in agreement that “there is nothing inherently unconscionable about asset-based lending”: . Rather, this case turned on its own facts and, as the majority ultimately found: “[e]quitable intervention was justified in this case ‘not merely to relieve the [appellant] from the consequences of his own foolishness … [but] to prevent his victimisation.’”
In any event, the High Court’s decision provides much-needed clarification of the test for statutory unconscionability following the High Court’s earlier 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 appropriately worded and obtained solicitors’ and accountants’ certificates, while at the same time serving as a warning for borrowers, guarantors and their advisors that the law will not, without more, intervene to protect them from a bad bargain.
 (2005) 63 NSWLR 557;  NSWCA 261 at .
 Albeit with some criticism – see, for instance, Ipstar Australia Pty Ltd v APS Satellite Pty Ltd  NSWCA 15 at .
 Jams 2 Pty Ltd v Stubbings  VSCA 200 (Appeal).
  HCA 18 (Kobelt).
 (2016) 258 CLR 525, 587 (Paciocco).
 Stubbings v Jams 2 Pty Ltd  HCA 6 (HCA Judgment).
 Commonwealth Bank v Amadio (1983) 151 CLR 447, Kakavas v Crown Melbourne Ltd (2013) 250 CLR 392; Blomley v Ryan (1956) 99 CLR 362
 HCA Judgment at , per Gordon J, citing Kobelt at 40 .
 HCA Judgment at  per Kiefel CJ, Keane and Gleeson JJ, citing Louth v Diprose (1992) 175 CLR 621 at 638.