Queensland University of Technology Law and Justice Journal
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LINDY WILLMOTT[∗] AND BILL DUNCAN[∗∗]
To understand the concept of equity of redemption it is necessary to
understand the influences of equity upon money lending transactions
involving
the security of real property over many centuries. Under an old system
mortgage, the legal title of the borrower was conveyed
to the mortgagee and,
upon redemption of the debt, the mortgagor was entitled to a reconveyance of the
land which had been the subject
of the security. The Court of Chancery
developed jurisdiction to set aside the legal title of the mortgagee by
compelling the mortgagee
to reconvey title to the mortgagor where the mortgagee
refused to do so, thus recognising the mortgagor’s right to redeem the
security. This jurisdiction owes its origin to the influence of the church in
endeavouring to curb the effects of usury.
Under this influence, the
Court of Chancery began to exercise jurisdiction in personam over mortgagees who
failed to restore the security
to the mortgagors after an offer was made to
redeem. Indeed, if the mortgagor was one day late in repayment under the
mortgage deed,
the legal title could vest in the mortgagee and the mortgagor
would be deprived of their land, regardless of how much remained outstanding.
That amount could still be recovered at common law from the mortgagor,
notwithstanding the forfeiture of the land. Equity therefore
from an early time
began to relieve against what was a penalty by compelling the mortgagee to use
the mortgagee’s legal title
as a mere
security.[1]
The lending of
money for usurious rates of interest in commerce was not only looked upon by
ecclesiastical authorities with suspicion,
but the Courts of Chancery also
became alert to discover a want of conscience in terms imposed by lenders.
Whilst the courts were
loathe to interfere with freedom of contract, they would
intervene in circumstances where evidence showed that terms imposed by a
mortgagee were unconscientious. To do so, they considered not only the form of
the transaction but the substance of the transaction.
Where the substance was
oppressive, relief would be
given.[2]
If it were determined
that the transaction was truly a mortgage, a court would strike down a term of
the loan which prevented a mortgagor
from getting back the property secured on
repaying what was due to the
mortgagee.[3] Whilst it was tolerably
clear that a provision in a mortgage deed which permitted the mortgagee to
become the absolute owner of the
security in any event, would be struck down,
more difficult were those cases where other conditions were attached to the loan
by
which the mortgagee gained another collateral advantage which would
effectively make the remuneration for the loan exceed a proper
rate of interest.
These principles were established when the usury laws, preventing the charging
of excessive interest, were in force.
However, Equity went beyond the limits
of the usury statutes and was prepared to consider any collateral stipulation
which it considered
unfair or oppressive, which made the security effectively
irredeemable or clogged the equity of redemption in some other
way.[4]
In more recent times,
common transactions such as those between borrower and lender have been the
subject of consumer protection legislation.
For example, in relation to the
provision of domestic finance, the Consumer Credit
Code[5] permits the court to
reopen an unjust transaction and, in doing so, directs the court to have regard
to many matters, amongst which
are those relating to the ability of the borrower
to negotiate provisions of the
contract,[6] to consider the
imposition of conditions that are unreasonably difficult to comply with but not
reasonably necessary for the protection
of the legitimate interests of the
lender[7] and, in particular, to
consider the terms of other comparable transactions in circumstances where the
injustice is alleged to have
resulted from excessive interest
charges.[8]
Similar
provisions exist in the Trade Practices Act
1974[9] which regulate the
conduct of parties to business transactions in circumstances where there have
been allegations of unconscionable
conduct. In the Consumer Credit Code
the word ‘unjust’ is defined to include unconscionable, harsh or
oppressive.[10] Apart from the
statutory inroads into business dealings, an aggrieved party to a loan
transaction still has access to a court exercising
equitable jurisdiction to
relieve against the consequences of unconscionability generally. In
Commercial Bank of Australia Ltd v
Amadio,[11] Deane J made
the following observation:
Unconscionable dealing looks to the conduct of
the stronger party in attempting to enforce, or obtain the benefit of, a dealing
with
a person under a special disability in circumstances where it is not
consistent with equity or good conscience that he should do
so. The adverse
circumstances which may constitute special disability for the purposes of the
principles relating to relief against
unconscionable conduct may take a wide
variety of forms and are not susceptible to being comprehensively
catalogued.[12]
Whilst it is
clear that the relationship of borrower and lender does not give rise, of
itself, to any presumption of special
disability,[13] there are certainly
circumstances where a necessitous borrower may be overborne by a more powerful
lender in circumstances giving
rise to unconscionability on the part of the
lender.[14] However, in ordinary,
arm’s length, commercial transactions between corporations, this situation
is unlikely to arise. In
instances such as this, where there has been a claim
by a mortgagor of a mortgagee’s clogging the equity of redemption, the
claim has generally not found favour and the transaction has been argued on a
single basis, namely upon the basis of alleged unconscionability
by the
mortgagee.
In Westfield Holdings Ltd v Australian Capital
Television[15] Young J
concluded, after considering whether there had been a clog on the equity of
redemption in an arm’s length commercial
mortgage transaction where a
mortgagee had obtained the right to purchase the whole of the mortgaged
property, that:
There does not appear to be any commercial reason why, in
1992, the court should invalidate any transaction merely because a mortgagee
obtains a collateral advantage or seeks to purchase a mortgage property. Quite
obviously, equity must intervene if there is unconscionable
conduct. Again
equity must intervene in a classic case where it can see that a necessitous
borrower it not, truly speaking, a free
borrower.[16]
Similarly, in
the case of Re Modular Design Group Pty Ltd Pty Ltd (receiver and manager
appointed) (in liq)[17] Santow
J, after reviewing the operation of an “all moneys” clause, where it
had been argued that a wide interpretation
may lead to a clog on the equity of
redemption of the mortgagor:
In contemporary jurisprudence, the doctrine
of clogging has been interpreted in a less formalistic, more substantive manner.
This
has been consonant with Equity’s wider modern remedial jurisdiction,
based on unconscionability. Thus equity will not intervene
merely by reason of
the mortgagee obtaining a collateral advantage. But it will intervene if there
is unconscionable conduct, more
readily found in a case of necessitous
borrower.[18]
It is our
contention that the stage has been reached where the principles of equity which
recognise unconscionable transactions generally,
and the application of
statutory provisions such as the Consumer Credit Code, the Trade
Practices Act 1974 and the Australian Securities and Investment
Commission Act 2001,[19] have
effectively subsumed the doctrine of clog on the equity of redemption, that the
concept is outmoded, and should be abandoned
as being irrelevant in the 21st
century in favour of the general test for unconscionability.
Historically, a mortgage given as security for a loan took the form of a
conveyance to the lender of the borrower’s legal title.
Upon repayment of
the loan, the mortgagee reconveyed legal title to the mortgagor. If the
mortgagor failed to pay on the due date
(the contractual date of redemption),
the mortgagee’s title became absolute at law. At this time, however, the
equitable right
to redeem arose. The rule against clogging or fettering the
equity of redemption relates to this equitable right. Lord Parker described
the
rule against clogging the equity of redemption in the following terms:
The rule may be stated thus: the equity which arises on the failure to
exercise the contractual right cannot be fettered or clogged
by any stipulation
contained in the mortgage or entered into as part of the mortgage
transaction.[20]
A mortgage
therefore could not contain a clause that conferred on the mortgagee an option
to buy the mortgaged property.[21]
Similarly, a clause which allowed the mortgagor only a limited time period
within which to redeem the mortgage was void as a fetter
on the
mortgagor’s right.[22] Clauses
which conferred a collateral advantage on the mortgagee, such as a
mortgagor’s promise to buy specified goods only
from the mortgagee, were
also regarded
suspiciously.[23]
Although
Torrens system mortgages constitute a charge over the borrower’s land
rather than a conveyance to the lender, the rule
against clogging the equity of
redemption and the kind of clauses referred to above apply equally to Torrens
mortgages.
The equitable jurisdiction developed a number of rules that prevented a
mortgagee from incorporating provisions in mortgage deeds
that clogged or
fettered the equitable right to redeem. There is general consensus that the
equitable maxim of “Once a mortgage,
always a mortgage” embodies the
rules that have developed to strike down offensive
provisions.[24] As these rules only
applied to a true mortgage, the courts of necessity, enquired into the true
substance of the transaction.[25]
An absolute conveyance with an agreement to repurchase on the payment of a
stipulated sum creates exactly that and would give no
right of redemption which
would bring into effect the rules relating to the protection of the
mortgagor’s equity of
redemption.[26] The question of
whether the transferor of the land intends to take advantage of the right of
repurchase is not
relevant.[27]
In the words of
Viscount Haldane, ‘If the transaction was once found to be a mortgage, it
must be treated as always remaining
a mortgage and nothing but a
mortgage’.[28] The rules which
have stemmed from this maxim have not been categorised in any consistent way.
This may be due in part to the evolving
nature of the equitable jurisdiction
‘to mould the rules which they apply in accordance with the exigencies at
the time’.[29] Nevertheless,
in Kreglinger v New Patagonia Meat and Cold Storage Co
Ltd,[30] Lord Parker undertook
an extensive review of the relevant case law and his conclusions have been cited
authoritatively as representing
the state of the law as it existed at that
time.[31] Lord Parker concluded that
it was not objectionable for the mortgage to confer a collateral advantage upon
a mortgagee. However,
a provision conferring such advantage would be
objectionable if it fell within one of the following three
categories.
Firstly, a clause giving the mortgagee a collateral advantage
would be void as a clog if it was unfair and unconscionable. This ground
was
also later considered by both the Court of Appeal and House of Lords in
Knightsbridge Estates Trust Ltd v
Byrne.[32] In that case, a
company mortgaged a number of properties in London to secure an advance from a
Friendly Society. Clause 1 of the
mortgage provided for repayment by eighty
half-yearly instalments. The mortgage further provided that if the mortgagor
paid the
instalments on the due dates and otherwise complied with the mortgage
terms, the mortgagee would not require repayment at a date
earlier than the
scheduled forty year redemption date. Six years after entering the mortgage,
the mortgagor wanted to redeem, and
claimed that Clause 1 which postponed their
equitable right to redeem for forty years was void as a clog on the equitable
right to
redeem. The Court of Appeal upheld the validity of Clause 1 (the
decision being affirmed on appeal by the House of Lords). The
Court accepted
that equity would grant relief against contractual terms that were oppressive or
unconscionable, but held that the
mortgage could not be so regarded in that
case. In assessing whether relief should be granted, all circumstances of the
case should
be considered, including the degree of mutuality. Although the
contractual right to redeem had been postponed for forty years, the
mortgagee
also covenanted not to require payment of the sum for that time. It was also
relevant that it was an arm’s length
commercial transaction upon which
each party had received legal advice.
Goff J in the Court of Chancery
also relied on this more general ground to strike down a clause in a mortgage in
Cityland and Property (Holdings) Ltd v
Dabrah.[33] The mortgage in that
case secured a debt of £2,900 owing by the mortgagor to the mortgagee. The
mortgagor covenanted to pay
the mortgagee £4,553 by monthly instalments
over a six year period. The return to the mortgagee, therefore, was in the form
of a premium rather than a specified interest rate. The mortgage also provided
that the full premium should become payable upon
the mortgagor’s default.
The premium was effectively 57% of the amount of the loan, and had the effect of
making the interest
rate upon default an amount of 38%. Relying on
Kreglinger v New Patagonia Meat and Cold Storage Co
Ltd,[34] the court found that
whilst there was no rule in equity precluding a lender from stipulating for a
collateral advantage that was
fair and reasonable, the charging of a premium of
this order had the effect of destroying the borrower’s equity in the
security,
and that such a collateral advantage was in the circumstances
unconscionable.
The second ground mentioned by Lord Parker for
challenging a provision was whether it could be construed in the nature of a
penalty
clogging the equity of redemption. He cited as an example a clause
conferring upon the mortgagee, on the mortgagor’s default,
a right to take
over the mortgaged property in satisfaction of the
debt.[35] As the right arose on the
mortgagor’s default, it was a penalty. As it operated to totally clog the
equity of redemption,
it was held to be void. It is likely that the provision
referred to earlier in Cityland and Property (Holdings) Ltd v
Dabrah[36] that provided
for payment of the full premium on the mortgagor’s default also offended
this second ground.[37]
The
third category identified by Lord Parker was a provision that was inconsistent
with or repugnant to the equitable right to redeem.
His Lordship cited
Samuel v Jarrah Timber and Wood Paving Corporation
Ltd[38] as an example of
such a provision. In that case, the loan was repayable upon thirty days notice
by either party, but the mortgagee
was given an option to purchase the mortgaged
property for twelve months. If the mortgagee exercised the option, the
mortgagor would
be unable to exercise either the contractual or equitable right
to redeem the property. Lord Parker, therefore, regarded the provision
as being
void as a clog on the equity of redemption.
Whilst in the modern
commercial setting these categories are identifiable from the facts of each
case, the courts have generally tested
the conduct of the mortgage against Lord
Parker’s first category, that is unfairness and unconscionability,
elements of which
indeed underlie the exercise of the jurisdiction to relieve
the mortgagor.
There have only been a handful of cases in Australia in the late 20th
century where a mortgagor has alleged successfully or otherwise
that the
mortgagee by agreement or conduct had clogged the equity of
redemption.
These decisions may be conveniently divided into three broad
categories. The first category concerns the effect of an assignment
of the
mortgage to another creditor of the mortgagor in the circumstances of an
“all moneys” clause where the assignee
of the mortgage claims that
the mortgage secures other debts of the mortgagor owing to that assignee. The
second category concerns
the effect of arrangements between mortgagor and
mortgagee pursuant to which the mortgagee acquires the title to the property,
and
the third category of case concerns the effect of charging an excessive
interest rate where the right of redemption has been severely
constrained, or
made almost impossible, by the substantial increase in the amount required to
redeem when compared to the actual
principal sum borrowed and the period of the
loan.
It is instructive to consider all these categories in more
detail.
In two relevant cases, Katsikalis v Deutsch Bank (Asia)
AG[39] and Re Modular Design
Group Pty Ltd (receiver and manager appointed) (in
liq),[40] the mortgages
contained clauses securing the repayment of ‘all moneys now or hereafter
to become owing or payable to the mortgagee’
and extended the terms of the
definition of mortgagee to include any of its assigns. In each case, the
mortgage was assigned to
another party who was already a creditor of the
mortgagor. When the mortgagor came to redeem the mortgage, the assignee of the
mortgage
refused to accept an amount which represented the principal and
interest then owing without taking into account the additional debt
of the
mortgagor owing to that assignee.
In Katsikalis v Deutsch Bank (Asia)
AG,[41] the decision that the
mortgage did not secure any pre-existing debt of the assignee of the mortgagee
was based solely upon the interpretation
of the “all moneys” clause.
There was a hint in the judgment of Thomas J that if there were additional
moneys owed through
a combination of other transactions there would be a
persuasive onus upon the mortgagee to show that they were so owed in order to
defeat the mortgagor’s right of
redemption.[42] There was, however,
sufficient intimation in what Thomas J said, to the effect that if pre-existing
indebtedness could be transferred
to a creditor of the mortgagor by the
assignment of a mortgage initially given to another party, thus making the
mortgage more difficult
to redeem, this fact may amount to a clog on the equity
of redemption and result in the intervention of equity accordingly. However,
this case very much rested on the interpretation of the particular “all
moneys” clause. It has been held elsewhere that
there is nothing
inherently unconscionable in a mortgagee taking advantage of a widely drafted
“all monies” clause and
such clauses have become standard in
institutional
mortgages.[43]
The second
decision, Re Modular Design Group Pty Ltd (receiver and manager appointed)
(in liq),[44] contained very
similar facts where guarantees and equitable mortgages given to a bank to secure
various debts of the mortgagor were
assigned by the bank. In each case, the
guarantees and mortgage documents contained clauses securing ‘all moneys
now or hereafter
to become owing or payable to the bank by the mortgagors’
including ‘moneys which may be due and owing by the mortgagor
to the bank
under the guarantee’. The mortgages included terms extending the
definition of bank to include any of its assigns.
The question for the court
was whether or not moneys already owing to the assignee by the mortgagor were
included as part of the
secured debt consequent upon the
assignment.
Santow J conceded that ‘it would be a startling result
for the debtor, if by the mere device of assigning charges and guarantees
to an
existing unsecured creditor, that creditor were thereby to become secured for
its previously unsecured debt, by reason of the
wording in the charge
document’.[45] Again, it was
necessary to construe the words of the mortgage and particularly the “all
moneys” clause. The mortgagor
argued that a wide interpretation of the
clause would lead to consequences where the equity of redemption would be
impeded or constrained.
However, the mortgagor recognised that such a view
would be rebuttable where the language of the instrument was sufficiently clear
and the equity of redemption not directly
clogged.[46] Santow J looked at the
wider point being the question of whether a stipulation literally capable of
permitting an accretion of a
past unsecured debt of the assignee would
constitute a clog on the equity of redemption either directly, or in the sense
of impedance
of the exercise of that equity by way of collateral
stipulation.[47]
He held that
where the original mortgage did not clearly contemplate the charging of the
mortgagor’s pre-assignment indebtedness,
permitting the charge would
impede the mortgagor in the exercise of its equity of redemption and constitute
a clog. Further, Santow
J said that it would be also unfair or unconscionable
for the assignee as mortgagee to obtain that collateral
advantage.[48]
In summary,
Santow J envisaged circumstances which could attract the intervention of equity
to prevent a mortgage document by its
terms causing prior unsecured liabilities
of an assignee to be rendered secured following the assignment of a
mortgage.
Whilst the mortgagors in each case raised the spectre of the
mortgagee clogging the equity of redemption, the decisions were effectively
grounded on different bases, namely, the interpretation of the mortgage
instruments.[49]
It is this form of advantage to a mortgagee which has attracted the
greatest curial attention in more recent times. It has been clear
since the
unequivocal statement of Lord Parker in Samuel v Jarrah Timber and Wood
Paving Corporation[50]
that where a mortgagee stipulates for an option to purchase the security,
that prima facie this option will be considered to be inconsistent
with both the
contractual and equitable right of redemption. In this respect, the court must
inquire as to whether the transaction
is truly one of mortgage or one of
sale.[51] There is judicial
recognition that if the agreement giving the option to purchase was an integral
part of the mortgage transaction,
as opposed to the obligations being contained
in two distinct contracts, then the likelihood was that there was a clog on the
equity
of redemption as the transaction was inconsistent with or repugnant to
the right of the mortgagors to redeem the mortgaged
property.[52] It has, however, been
held that even if an option to purchase is contained in a separate document from
the mortgage, the mere separation
of the documents may not be sufficient to deny
the existence by the mortgagee of a clog on the equity of redemption. It is the
transactions
themselves which must be
independent[53] and a court will
look to the chronology of the alleged independent transactions and the substance
of the whole transaction to determine
whether or not the option to purchase is
independent of the
mortgage.[54]
However, the
complexity of the transaction may occasion some difficulty in the discernment on
whether or not a transaction is truly
a mortgage or a sale and this can pose
some difficulty in the application of the
principles.[55] However,
notwithstanding an option to purchase and the mortgage may be expressed in a
separate documents, certain factors may point
to the whole transaction having
legal effect as a mortgage. For example, in Epic Feast Ltd v Mawson KLM
Holdings Pty Ltd (in liq)[56] an
option to purchase was executed on the same day as the mortgage with the option
price equalling the amount of the loan plus interest.
Further, the date for
repayment of the principal and interest evidenced the last date before which the
option could be exercised,
thus effectively denying the capacity of the
mortgagor to redeem. Regrettably, the question of whether the option to
purchase in
this case was a clog on the equity of redemption was not pursued at
the trial and the appellate court did not express a final view
on the matter but
Debelle J did comment, in dictum, that, ‘on the face of the document,
there is much which points to the conclusion
that this was an unconscionable
transaction’ particularly given the usurious rate of
interest.[57]
However, in
complex transactions involving large well-resourced commercial entities each
with independent legal advice, it may be
more difficult to discern the true
nature of the transaction.
This was the situation in Westfield
Holdings Ltd v Australian Capital
Television.[58] Briefly, the
first defendant agreed to buy television stations in Canberra, Adelaide and
Perth for $185 million to be funded as to
$130 million by the defendants taking
over a debt owed to a consortium of banks, as to $40 million by way of loan from
the plaintiff
and as to $15 million by the issue of preference shares. In
addition, inter-company debts owed by the defendants to their former,
holding
company were preserved on the understanding that they were expected to be
repaid. Initially, it was thought that this $11
million would be raised by
selling the land upon which the Canberra, Adelaide and Perth television stations
were operated to an independent
financier for $11 million and then leased back
to the operating companies which $11 million would then go to discharge the
inter-company
debts. However, this arrangement did not eventuate and, by
another agreement, the plaintiff agreed to provide $11 million for that
purpose
to be used solely to discharge those debts, the principal to be paid in full
within 10 years from the date of the loan or
upon receipt by the defendants from
the plaintiff with the relevant purchase price, consequent upon the exercise of
an option to
purchase real estate owed by the defendant.
One objection to
the option was that it was given in the same transaction as the mortgages over
the parcel of land owed by the defendants
securing the debt. Therefore, said
the defendants, the collateral advantage gained by the mortgagee, who
effectively had an option
of purchasing the mortgaged property, had the effect
of destroying the defendant’s right of redemption of the property once
the
loan was repaid. The defendant, therefore, sought to strike down the option to
purchase as being void.
The first thing that should be noted is that this
case concerned two large corporations, one being a public corporation of some
magnitude.
Secondly, it should be noted that both corporations were
independently legally advised and that this transaction was one of some
complexity in order to satisfy the payment of inter-company debts. Young J
queried, in the first instance, whether or not the transaction
was, in
substance, a mortgage or a sale. He ultimately held that the transaction should
be classified as a sale rather than a mortgage
and, thus, the doctrine relating
to clogs on the equity of redemption had no
relevance.[59]
Secondly, it
was clear that all parties were aware of the reason for this complicated
arrangement involving a large sum of money and
that it was always contemplated
that the defendants would give up ownership of the land upon which the
television stations were conducted
and take it back on leasehold with the
proceeds of the arrangement going to satisfy money due to the related
corporations.[60]
Thirdly,
even if the transaction were a mortgage, in dicta, Young J commented that the
court should not invalidate any transaction
merely because the mortgagee
obtained a collateral advantage or, indeed, sought to purchase the mortgage
property, unless this occurred
in circumstances of unconscionable
conduct.
In concluding, his Honour said:
In my view, in 1992, the
rule (allowing a court to invalidate any transaction where a mortgagee obtains a
collateral advantage or
seeks to purchase a mortgage property) only applies
where the mortgagee obtains a collateral advantage which in all the
circumstances
is either unfair or unconscionable. It may be that the court
presumes from the mere fact of a collateral advantage that the transaction
is
unconscionable unless there is evidence to the contrary, that the principle does
not extend to invalidate automatically cases
in which the mortgagee has obtained
the right to purchase the whole or part of the mortgaged property in certain
circumstances or
has obtained a collateral advantage where the circumstances
show there has been no unfairness or unconscionable
conduct.[61]
Again, the court
characterised the transaction in terms of a sale notwithstanding the sale was
sourced in an option to purchase contained
in a mortgage. In any case,
notwithstanding this, in the absence of unconscionable conduct, regardless of
the description of the
arrangement, the court would not intervene. Again, the
yardstick of conduct necessary to attract the sanction of the court was that
of
unconscionable conduct and not the nature of the transaction.
Whilst the
obiter of Young J in this case has received some
recognition,[62] being only a judge
at first instance, there has been some reluctance by other first instance courts
to overturn the accepted line
of cases which were the progeny of Samuel v
Jarrah Timber & Wood Paving Corporation
Ltd[63] and Kreglinger v New
Patagonia Meat and Cold Storage Co
Ltd.[64] This caution was noted
by Cohen J in Chase Corporation (Australia) Pty Ltd v North Sydney Brick
and Tile Co Ltd[65] where his
Honour said that in the case before him, he would require more detailed
submissions before declining to follow the accepted
House of Lords decisions
and, that, in any case the question was not necessary for him to decide.
Accordingly, it may be too early to assume that a collateral advantage
of an option to purchase mortgaged property conferred on a
mortgagee must be
accompanied by an element of unconscionability or amount to a penalty before
that collateral advantage will be
set aside. Nevertheless, it should not go
unremarked that in more recent times the courts have not needed to fall back on
the old
doctrine preferring to decide cases like these on other grounds, notably
whether the mortgagee’s conduct was unconscionable
or not.
As indicated above, the Usury Laws were abolished in
1854.[66] To ensure borrowers
continued to be protected against the charging of excessive interest, the Court
of Equity treated this practice
as a clog on the equity of redemption on the
basis that such conduct was oppressive or
unconscionable.[67] In the early
20th century, legislation was passed in each of the state parliaments of
Australia with a view to regulating money
lending.[68] The thrust of this
legislation was not particularly to stop usury, but largely to protect those
persons less able to transact business
from being disadvantaged by moneylenders
driving hard and unconscionable
bargains.[69] This legislation was
progressively repealed in all states and, subject to whether or not the loan is
regulated by the Consumer Credit Code, a lender is not limited by statute
as to the amount of interest which might be charged.
However, interest to
attract a penalty finding must indeed be excessive and not really just high. In
Charmelyn Enterprises Pty Ltd v
Klonis,[70] a provision of a
mortgage provided that, in addition to the principal sum, the mortgagor should
pay a sum calculated on a formula
based on the Consumer Price Index which gave
the mortgagees advantage of protection against inflation during the period of
the mortgage.
This was in line with the rise in the increase in the value of
the security. After consideration of the then existing
authorities,[71] the New South Wales
Court of Appeal found that the mortgagee had not acted unconscionably or
oppressively or in any manner which
may have suggested that the agreement was a
clog on the equity of redemption. In summarising views of the court,
Mahoney JA concluded:
I do not think that the present requirement
was unreasonable. I do not see anything unreasonable in the indexing of an
obligation
of the present kind ...in the context of the three year term in the
instant mortgage, there was I think nothing unreasonable in the
adoption of such
a mechanism.[72]
However,
this decision did not properly test the principles to the extent of other
decisions as the anti-inflationary interest clause
could not be said to be
usurious. However, other more recent decisions clearly draw a linkage between
usury and unconscionable conduct
in the modern context.
In Epic Feast
Ltd v Mawson KLM Holdings Pty
Ltd[73] a mortgage for $250,000
made on 9 July 1996 required the loan to be repaid with interest on or before 4
November 1996. Upon calculation,
in those four or so months, the principal and
interest to be repaid on that date amounted to $1.47 million reflecting an
effective
rate of interest of 61.5 percent per annum. The court drew the
inference that this was an unconscionable transaction ‘particularly
given
the usurious rate of
interest’.[74] There is
nothing startling about this proposition particularly when one considers the
approach taken by Goff J in Cityland and Property (Holdings) Ltd v
Dabrah[75] who struck down the
right of the mortgagee to claim an effective interest rate of 57 percent per
annum over a period of five years
in circumstances where the amount outstanding
would have been in excess of the value of the security at that time. The
conduct
of the mortgagee was held to be unconscionable and oppressive.
Apart from this South Australian case, the charging of excessive
interest seems to be the province of short term bridging finance
lenders and the
relief for the borrower seems to be founded more upon general unconscionability
than upon the basis that charging
of the excessive interest renders the right of
redemption illusory or constitutes a clog on that right.
In the more
recent case of Asia Pacific International Pty Ltd v
Dalrymple,[76] borrowers entered
into a Deed of Loan with an interest rate of 20 percent per month. The amount
of the loan was some $70,000 lent
on 10 November 1997 and due for repayment one
month later on 9 December 1997. If the borrowers paid interest on the dates
fixed,
the lenders agreed to accept the rate of 15 percent per calendar month.
The security for the loan was the third ranking bill of
mortgage over property
owed by the borrowers and there was provision for capitalisation of unpaid
interest.[77] By July 1999, the debt
including principal and interest, including capitalised interest, amounted to
$2.7 million. The borrowers
sought to have the provision relating to the
payment of interest set aside on the basis that it was unconscionable.
On
reviewing the Deed of Loan and the facts surrounding the loan,
Shepherdson J made the following findings of fact of relevance.
Having considered these recent Australian decisions, the question must be
asked whether the policy objectives underlying the doctrine
against clogging the
equity of redemption are still best served by applying the rules stated by Lord
Parker in Kreglinger v New Patagonia Meat and Cold Storage Co
Ltd.[83] The doctrine developed
to protect borrowers from unscrupulous lenders who took unfair advantage of them
by imposing oppressive terms
in the mortgage. The need to protect necessitous
borrowers against unscrupulous lenders is as relevant today as ever before.
However,
it is submitted that the application of the doctrine against clogging
the equity of redemption is not the appropriate vehicle through
which to
safeguard the interests of those in need of protection.
The doctrine is,
at the same time, both too narrow and too wide. The doctrine is too narrow
because there are circumstances in which
people other than borrowers deserve to
be protected against unscrupulous lenders. Guarantors who mortgage property to
secure advances
to others also require protection. The plethora of cases over
the past two decades illustrate the role that equity plays in this
context.[84] However, such cases
fall outside the ambit of the doctrine because guarantors do not enjoy a right
of redemption. At the same time,
the doctrine is too wide. In some lending
transactions, both parties have equal bargaining power and are independently
advised.
This is particularly so where the borrower is a large commercial
organisation. In such circumstances, the borrower cannot be regarded
as being
in need of protection. It seems incongruous that there are, in such
circumstances, restrictions on the kind of collateral
advantage that the
borrower may confer upon the lender. The folly of applying the doctrine in such
an inflexible way has been judicially
recognised.[85]
The blanket
application of the doctrine has had unfortunate results. There has been much
uncertainty in identifying mortgage provisions
which attract the application of
the doctrine. It was originally thought that no collateral advantage could be
conferred on a mortgagee
other than the payment of principal and interest. When
the courts ultimately accepted that conferral of an additional benefit was
permissible, doubt arose about whether that benefit could persist after
redemption.[86] Even today, the case
law is not entirely consistent on this point. Secondly, as the doctrine applies
only to a mortgage transaction,
in a number of decisions, technical arguments
have centred on the true nature of the
transaction.[87] If the transaction
were a mortgage, the particular provision would be void as a clog. However, if
the provision could be regarded
as forming part of another transaction or was
contained in a separate document, it might be enforced. In some cases, a clause
has
been held not to form part of a mortgage transaction despite compelling
factors to suggest that this was in fact intended by the
parties.[88] Such decisions were
reached more from the courts desire to uphold agreements voluntarily entered
into by the parties in furtherance
of their legitimate interests, rather than
from strict application of legal principle. While the outcomes in such cases
may reflect
commercial expectations, the decisions can be difficult to reconcile
on the facts.
Finally, and most significantly, the blanket operation of
the doctrine may result in provisions being struck down although they have
been
negotiated between parties of equal bargaining power, and truly represented
their best interests (at least at the time the provisions
were negotiated).
This is highlighted where a mortgagor confers on the mortgagee an option to
purchase the mortgaged property.
If the option forms part of the mortgage, the
doctrine, as it is traditionally applied, would operate to strike down that
provision.
The inflexible operation of the doctrine in this context has
attracted criticism both in the cases and in the academic
literature.[89]
No doubt as a
result of these difficulties, the doctrine is becoming less relevant in recent
times, as evidenced by less reliance
upon it being made by aggrieved borrowers.
In the modern Australian cases referred to earlier in this article, there was
remarkably
little consideration of the doctrine. Had these cases been decided
earlier last century, it is likely that the application of the
doctrine would
have played a greater role in the outcome of the cases. Instead, the courts are
increasingly basing their decisions
on other grounds. In truth, this is
appropriate. In the first class of cases, the focus was less on the principle
about a clog
or bar on the equitable right to redeem, and more on the proper
interpretation of the “all moneys” clauses. The indications
were
that had the mortgage documents contained appropriately drafted provisions, the
mortgagor may have been required to repay money
owing to the assignee of the
mortgage before being able to redeem the property. The indication was that the
doctrine of clogging
the equity of redemption would not have been a barrier. In
the second category of case regarding the conferral of an option to purchase
property, principles of unconscionability were really determinative of the
validity of the provision, not outmoded concepts of clogging
the equity of
redemption. Similarly, in the third category where the issue was the excessive
interest rate being charged, the cases
have been most recently decided on
general principles of unconscionability.
In his article considering the modern application of the rule against
clogging the equity of redemption, Devonshire comments on the
changing role of
equity. He is critical of the outcome of applying the doctrine in the context
of an option to purchase clause in
a mortgage, and argues for a more flexible
approach in that context. In his conclusion, however, Devonshire does not
suggest that
‘the clogs principle is entirely redundant’. It is at
this point that we take a different view. In commenting on the
evolution of the
equitable jurisdiction in the context of this doctrine, it has been said that
the case law:
illustrates the elastic character of equity’s
jurisdiction and the power of equity judges to mould the rules which they apply
in accordance with the exigencies of the
time.[90]
Nevertheless,
elastic can only be stretched so far. The case law demonstrates that the point
has been reached where the doctrine
of clogging the equity of redemption can no
longer stretch to serve the exigencies of our time. We need to move to
principles that
are, at the same time, both wide enough to extend to those in
need of protection, yet not so broad as to apply to those who are not
in need.
Unconscionable or oppressive mortgage transactions should no longer be treated
differently from any other transaction.
Over recent decades, principles
of unconscionability have been
expanding.[91] Principles of
unconscionability may now be relevant even in the absence of special disability.
Westfield Holdings Ltd v Australian Capital
Television[92] provides such an
example. Relief on the grounds of unconscionability was considered by the
Supreme Court of New South Wales in the
context of a multi-million dollar
business dealing between two large corporations. Given the increased
flexibility of this equitable
doctrine, it is submitted that the interests of
justice and the protection of borrowers can be accommodated in a much more
principled
way than can occur under concepts difficulty to apply and rules that
come within the ambit of the doctrine against clogging the equity
of
redemption.
It is also interesting to note that, in the Consumer
Credit Code, Parliament uses the language ‘unjust’ to include
‘harsh oppressive or
unconscionable’[93] to
proscribe conduct in a mortgagee or lender which might attract the sanction of
the courts, but nowhere in the legislation is the
concept of clogging the equity
of redemption mentioned. The same comment can be made of other similar consumer
protection
legislation.[94]
It is
submitted that Parliament, having given a lead to the courts in this somewhat
historically arcane area of modern commercial
practice, doubts concerning the
application of the doctrine should be finally laid to rest by the
courts.
Devonshire concluded in 1997 that the ‘clogs
principle’ was not entirely
redundant.[95] However, it is
apparent from the most recent case law that any argument of a mortgagor based
upon the existence of a clog on the
equity of redemption is merely of secondary
or tertiary importance after statutory or equitable remedies based upon
unconscionable
conduct have been pursued.
[∗] Associate Professor,
Member of Centre for Commercial and Property Law, Faculty of Law, Queensland
University of
Technology.
[∗∗]
Professor, Director of Centre for Commercial and Property Law, Faculty of Law,
Queensland University of Technology, Consultant,
Allens Arthur Robinson,
Solicitors.
[1] Kreglinger v
New Patagonia Meat and Cold Store Co Ltd [1913] UKHL 1; [1914] AC 25 at 35 per Viscount
Haldane LC. The equity of redemption has been defined as an interest or
equitable right inherent in the land:
Re Wells; Swinburne-Hanham v Howard
[1933] Ch 29; protection of the equity of redemption or the right to take
proceedings to redeem is recognised in the Torrens system notwithstanding
the
mortgagor retains title to the land at law and the mortgage is only a charge:
Perry v Rolfe [1948] VicLawRp 51; [1948] VLR 297; Re CL Forrest Trust [1953] VicLawRp 37; [1953] VLR 246;
Addison v Billion [1983] 1 NSW LR 586; Re Australia and New Zealand
Banking Group Ltd [1993] 2 Qd 477 at
481.
[2] Kreglinger v New
Patagonia Meat and Cold Store Co Ltd [1913] UKHL 1; [1914] AC 25 at
36.
[3] Samuel v Jarrah Timber
and Wood Paving Corporation Ltd [1904] UKHL 2; [1904] AC 323 at 329 per Lord
Lindley.
[4] Kreglinger v New
Patagonia Meat and Cold Store Co Ltd [1913] UKHL 1; [1914] AC 25 at 37 per Viscount Haldane
LC; the collateral covenant had to be part of the mortgage transaction generally
and not limited to the
terms of the mortgage instrument: Toohey v Gunther
[1928] HCA 19; (1928) 41 CLR 181 at 195-196 per Isaacs J. For a detailed consideration of this
confusing area see EI Sykes and S Walker, The Law of Securities
(5th ed, Law Book Company, Sydney, 1993)
73-77.
[5] Section 70(1); also see
s 12CB(1) Australian Securities and Investments Commission Act 2001 which
deals with unconscionable conduct in the supply of financial services. For
relevant factors to be considered see s 12CB(2) (limited to supply of services
for personal domestic or household
use).
[6] Ibid s
70(2)(d).
[7] Ibid s
70(2)(e).
[8] Ibid s
70(2)(n).
[9] Section
51AC.
[10] Section
70(7).
[11] [1983] HCA 14; (1983) 151 CLR
447.
[12] Ibid
474.
[13] National
Westminster Bank plc v Morgan [1985] UKHL 2; [1985] AC 686 at 707; this situation of
disability must be distinguished from special disadvantage in one party through
illness, ignorance, inexperience
impaired faculties, financial need or other
similar circumstances: Blomley v Ryan [1956] HCA 81; (1956) 99 CLR 362 at 415 per Kitto
J.
[14] There are a number of
considerations which might be taken into account when determining this issue
including such matters as the
identity of the mortgagor: Cityland and
Property (Holdings) Ltd v Dabrah [1968] Ch 166 at 180; whether the borrower
received independent advice from solicitors: Multi Service Book Binding Ltd v
Marden [1979] Ch 84 at 111; whether or not the transaction benefits the
mortgagor: Amoco Australia Pty Ltd v Rocca Bros Engineering Co Pty Ltd
[1975] AC 561 at 579 and similar matters. See, also, W D Duncan, ‘Caveat
Lender: Liability of Lenders Arising from Unconscionable Conduct
in the Loan
Approval Process’ (2000) 21 Qld Lawyer
18-31.
[15] (1992) 32 NSWLR
194.
[16] Ibid
202.
[17] (1994) 35 NSWLR
96.
[18] Ibid
103.
[19] Courts and Tribunals
have wide powers under these three statutes to effectively rewrite or set aside
a transaction on the basis
that it is unjust (Consumer Credit Code, ss 70
and 71) or unconscionable (Trade Practices Act 1974, s 87 and
Australian Securities and Investment Commission Act 2001, s
12GM).
[20] Kreglinger v New
Patagonia Meat and Cold Storage Co Ltd [1913] UKHL 1; [1914] AC 25 at
48.
[21] Samuel v Jarrah
Timber and Wood Paving Corporation Ltd [1904] UKHL 2; [1904] AC
323.
[22] Salt v Marquess of
Northhampton [1892] AC
1.
[23] Noakes and Co v Rice
[1901] UKHL 3; [1902] AC 24. Such trade ties are now likely to offend the Trade
Practices Act 1974.
[24] See,
for example, E A Francis and K J Thomas, Mortgages and Securities
(3rd ed, Butterworths 1986) 171; Kreglinger v New
Patagonia Meat and Cold Storage Co Ltd [1913] UKHL 1; [1914] AC 25 at 37;
Westfield Holdings Ltd v Australian Capital Television Pty Ltd
(1992) 32 NSWLR 194.
[25]
Salt v Marquess of Northhampton [1892] AC 1 (transaction held to be of a
security nature and to confer right to redeem even though it purported to be
merely an agreement of
a lender to assign a life policy in event of certain
contingencies).
[26]
Gurfinkel v Bentley Pty Ltd [1966] HCA 75; (1966) 116 CLR 98 at
111.
[27] Beckett v Tower
Assets Co [1891] 1 QB 1 at
25.
[28] Kreglinger v New
Patagonia Meat and Cold Storage Co Ltd [1913] UKHL 1; [1914] AC 25 at
37.
[29] Ibid
38.
[30] [1913] UKHL 1; [1914] AC
25.
[31] See, for example,
Charmelyn Enterprises Pty Ltd v Klovis (1980) 2 BPR [97142] per Waddell J
at first instance at 9529-9530; and by Reynolds JA in the Court of Appeal at
9535; Knightsbridge Estates Trust Ltd v Byrne [1939] 1 Ch 441 (Court of
Appeal, affirmed in the House of Lords [1940] AC 613); Cityland and Property
(Holdings) Ltd v Dabrah [1968] 1 Ch 166. Contrast the criticism of Lord
Parker’s reasoning that underpinned this categorisation: Professor G
Williams, ‘Doctrine
of Repugnancy Part III’ (1944) 60 Law
Quarterly Review
191.
[32] [1939] 1 Ch 441 (Court
of Appeal) and [1940] AC 613 (House of
Lords).
[33] [1968] 1 Ch
166.
[34] [1913] UKHL 1; [1914] AC
25.
[35] Kreglinger v New
Patagonia Meat and Cold Storage Co Ltd [1913] UKHL 1; [1914] AC 25 at 59 citing Bradley
v Carritt [1903] UKHL 1; [1903] AC 253 as an
example.
[36] [1968] 1 Ch
166.
[37] Compare Wanner v Caruana [1974] 2 NSWLR 301 where a clause which provided for the payment of principal together with interest for the full period of the loan upon the mortgagor’s default was regarded as void as a penalty. Street CJ, however, declined to decide whether that clause also constituted a clog on the equity of redemption. It was sufficient to resolve that case to find it void as a penalty.
[38] [1904] UKHL 2; [1904] AC
323.
[39] [1988] 2 Qd R
641.
[40] (1994) 35 NSWLR
96.
[41] [1988] 2 Qd R
641.
[42] Ibid
650.
[43] Re Bankrupt Estate
of Murphy; Donnelly v Commonwealth Bank of Australia (1996) 140 ALR 46 at
49. For a comprehensive consideration of all monies clauses, see Collier,
‘All Debts Clauses in Commercial Contracts &
Guarantee’ (1998)
24 Monash Law Review
7.
[44] (1994) 35 NSWLR
96.
[45] Ibid
99.
[46] Ibid
102.
[47]
Ibid.
[48] (1994) 35 NSWLR 96
at 104.
[49] In Kerr v
Ducey [1994] 1 NZLR 577, a transferee of a mortgage purported to add a
judgment debt to the secured sum. In finding against the transferee, the court
held
that the language of the mortgage would not permit this and the
“clog” argument was not
raised.
[50] [1904] UKHL 2; [1904] AC
323.
[51] Ibid at
360.
[52] Bannerman Brydone
Folster & Company v Murray [1972] NZLR 411 at 421 citing Harper v
Joblin [1916] NZLR 895 at 915-916 and Lewis v Frank Love Ltd [1961] 1
WLR 261.
[53] Kreglinger v
New Patagonia Meat and Cold Storage Co Ltd [1913] UKHL 1; [1914] AC 25 at
39.
[54] See, for example, In
re Supreme Court Registrar to Alexander Dawson Inc [1976] 1 NZLR 615 at 627
where a separate option to purchase was given to the mortgagee independently of
the mortgage, and the option
was held to be valid, and Reeve v Lisle
[1902] AC 461.
[55] The
determination of the limits of the mortgage transaction and the decision as to
whether there is one transaction or two has been
described by learned authors as
‘a metaphysical problem and one that bristles with difficulties’:
see E I Sykes and S
Walker, above n 4, 76; much depends on whether the court,
upon analysing the transaction, determines whether product is embodiment
of two
separate transactions that is a contract for loan and mortgage (the mortgage
transaction) or a contract embodying the collateral
stipulation (the contract of
loan) even though they may be in the same document: De Beers Consolidated
Mines v British South Africa Co [1912] AC 52 (held to be two
transactions).
[56] [1998] SASC 7106; (1998) 71
SASR 161.
[57] Ibid
173.
[58] (1992) 32 NSWLR
194.
[59] Ibid
198.
[60]
Ibid.
[61] (1992) 32 NSWLR 194
at 202-203.
[62] Epic Feast
Ltd v Mawson FLM Holdings Ltd [1998] SASC 7106; (1998) 71 SASR 161 at
173.
[63] [1904] UKHL 2; [1904] AC
323.
[64] [1913] UKHL 1; [1914] AC
25.
[65] (1994) 35 NSWLR 1 at
25.
[66] 17 & 18 Vic c
90.
[67] Kreglinger v New
Patagonia Meat and Cold Store Co Ltd [1913] UKHL 1; [1914] AC 25 at
61.
[68] Moneylenders and
Infants Loan Act 1905 (NSW); Moneylenders Act 1906 (Vic);
Moneylenders Act 1916 (Qld); Moneylenders Act 1912
(WA).
[69] Re Taylor; ex
parte Swan (1907) 24 WN (NSW)
159.
[70] (1980) 2 BPR [97142]
9527.
[71] Cityland and
Property Holdings Ltd v Dabrah [1968] 1 Ch 166; Multiservice Bookbinding
Ltd v Marden [1979] 1 Ch
84.
[72] Charmelyn
Enterprises Pty Ltd v Klonis (1980) 2 BPR [97142] at
9541-9542.
[73] [1998] SASC 7106; (1998) 71 SASR
161.
[74] Ibid
173.
[75] [1968] 1 Ch
166.
[76] [1999] QSC 204; [2000] 2 Qd R
229.
[77] This in itself would
not be unconscionable: General Credit (Finance) Pty Ltd v Grimm [1978] Qd
R 449 at 468.
[78] Asia
Pacific International Pty Ltd v Dalrymple [1999] QSC 204; [2000] 2 Qd R 229 at
240.
[79] Ibid
241.
[80] Ibid
243.
[81] Ibid
244.
[82] In Multispan
Constructions No.1 Pty Ltd v 14 Portland Street Pty Ltd (No 2) [2001] NSW SC
1047, a court entered judgment for a party for a principal sum and interest at
the rate of 25% per annum compounded monthly which was
the rate applicable under
relevant financing and security documents between the parties. Barrett J at
[6] said that the creditor’s
legitimate expectation would be to have
interest at the contracted rate until payment and that the interests of justice
were not
served by an outcome which sees a creditor suffer the substitution of
some lower prescribed interest rate for the contracted rate
just because the
creditor had been forced to pursue the debtor to judgment; see also State
Bank of New South Wales Ltd v Chia [2000] NSWSC 552; (2000) 50 NSW LR
587.
[83] [1913] UKHL 1; [1914] AC
25.
[84] See, for example,
Garcia v National Australia Bank Ltd [1998] HCA 48; (1998) 194 CLR 395; Ribchenkow v
Suncorp-Metway Ltd [2000] FCA 835; (2000) 175 ALR
650.
[85] Westfield Holdings
Ltd v Australian Capital Television (1992) 32 NSWLR 194 at 202; Samuel v
Jarrah Timber and Wood Paving Corporation Ltd [1904] UKHL 2; [1904] AC 323 at
325.
[86] For a historical
account of the development of the doctrine in this regard, see P Devonshire
‘The Modern Application of the
Rule Against Clogs on the Equity of
Redemption’ (1997) 5 Australian Property Law Journal 1,
3-5.
[87] For example, see
Westfield Holdings Ltd v Australian Capital Television Pty Ltd (1992) 32
NSWLR 194; Gurfinkel v Bentley Pty Ltd [1966] HCA 75; (1966) 116 CLR 98; Lewis v
Frank Love Ltd [1961] 1 WLR 261; Baker v Biddle [1923] HCA 26; (1923) 33 CLR 188;
Kreglinger v New Patagonia Meat and Cold Storage Co Ltd [1913] UKHL 1; [1914] AC
25.
[88] See, for example,
Kreglinger v New Patagonia Meat and Cold Storage Co Ltd [1913] UKHL 1; [1914] AC
25.
[89] Westfield Holdings
Ltd v Australian Capital Television Pty Ltd (1992) 32 NSWLR 194 at 202,
those comments being cited with approval in Re Modular Design Group Pty Ltd
(receiver and manager appointed) (in liq) (1994) 35 NSWLR 96 at 103;
Samuel v Jarrah Timber and Wood Paving Corporation Ltd [1904] UKHL 2; [1904] AC 323 at
325; P Devonshire, above n 86,
9-10.
[90] Kreglinger v New
Patagonia Meat and Cold Storage Co Ltd [1913] UKHL 1; [1914] AC 25 at 38 per Viscount
Haldane LC.
[91] For a recent
consideration of these issues, see T Cockburn, ‘The Boundaries of
Unconscionability and Equitable Intervention:
Bridgewater v Leahy in the
High Court’ (2000) 8 Australian Property Law Journal
143.
[92] (1992) 32 NSWLR
194.
[93] Section 70(7) Consumer
Credit Code.
[94] Contracts
Review Act 1980 (NSW), s 9; Trade Practices Act 1974, s
51AC; Australian Securities and Investments Commission Act 2001, s
12CB.
[95] P Devonshire, above n
86, 10.
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