Recent Court Guidance on Asset Lending and Relief Under the Contracts Review Act

The facts

Mrs Knezevic obtained a loan from Perpetual Trustees Victoria Limited (“Perpetual”) secured by a registered mortgage over Mrs Knezevic’s home. This loan was the third loan that had been obtained by Mrs Knezevic. The first loan was invested in a failed property development. The second loan was used to refinance the first loan, and finally, Perpetual’s loan was to refinance this second loan and provide a further $70,000 for Mrs Knezevic to provide to her daughter.

Mrs Knezevic defaulted on the Perpetual loan and proceedings were commenced by Perpetual to recover possession of Mrs Knezevic’s home. Mrs Knezevic defended these proceedings on the basis that the Perpetual loan was an “unjust” contract and relief should be granted under the Contracts Review Act 1980 (NSW) (“CRA”).

The decision

The matter was heard before three judges in the Court of Appeal, Basten JA, Meager JA and Ward JA. The Court unanimously upheld the decision of the judge at first instance that Mrs Knezevic was not entitled to relief under the CRA.

The reasoning

The Court recognised that to determine whether a contract is unjust there must be a broad evaluation having regard to the public interest and all of the relevant circumstances of the matter. The decision acknowledges that transactions will not be set aside simply because money has been lent where the borrower seemingly did not have capacity to repay the funds.

A party seeking relief under the CRA must demonstrate there are other factors present that rendered them unable to protect their own interests. They must show they were at a special disadvantage in the transaction.

In the present case, Mrs Knezevic failed to satisfy the Court that she was at any special disadvantage. The Court upheld the trial judge’s finding that Mrs Knezevic “knew what she was doing and voluntarily undertook a commercial risk, the extent of which she was in a good position to assess”.

The Court acknowledged that Mrs Knezevic’s financial position, after the failure of her investment, may have been precarious. However this alone was not held to be a sound basis to find that she was unable to make judgments in her own best interest.