In this case note, we discuss Stubbings v Jams 2 Pty Ltd & Ors  HCA 6, a recent High Court decision that dealt with the important issue of whether a lender had unconscientiously exploited a special disadvantage of a guarantor in respect of certain loans.
Mr Stubbings (Appellant) was the guarantor of loans made by Jams 2 Pty Ltd, Conterra Pty Ltd and Janaco Pty Ltd (Respondents) to a company he owned, Victorian Boat Clinic Pty Ltd (VBC). Notably, at the time of the loans, the Appellant was unemployed and had no regular income. The Appellant owned two properties in Narre Warren and sought to purchase a third property in 2015. The Appellant, through VBC, borrowed money from the respondents to pay the existing mortgages over the two Narre Warren properties and purchase the third property in Fingal. The three properties were used as security for the loan.
The Respondents were involved in the business of asset-based lending. Ajzensztat Jeruzalski & Co (AJ Lawyers) acted as the agent for the Respondents. The Appellant was introduced to AJ Lawyers through Mr Zourkas, who was a consultant for AJ Lawyers. AJ Lawyers prepared a certificate of “Independent Legal Advice”, to be signed by a lawyer, and a certificate of “Independent Financial Advice”, to be signed by an accountant. Mr Zourkas gave the Appellant the certificates and a business card for a solicitor (from whom the Appellant could get legal advice), Mr Kiatos, and a phone number for an accountant (from whom the Apellant could get financial advice), Mr Topalides. The Appellant visited Mr Kiatos and Mr Topalides who signed and completed the certificates. Following this the loans were settled, and the appellant purchased the Fingal Property on 30 September 2015.
On 30 December 2015, VBC defaulted on the third month’s interest repayments. The Respondents commenced proceedings against the Appellant to enforce the guarantee and their rights as mortgagees of the three properties.
The fact that the Appellant suffered a special disadvantage was not not disputed by the Respondents. The main issue was whether Mr Jeruzalski, a partner at AJ Lawyers, had knowledge and exploited the Appellant’s special disadvantage, which could then be attributable to the Respondents. Mr Jeruzalski never dealt directly with borrowers and guarantors, rather he exclusively communicated with borrowers and guarantors through intermediaries.
The Appellant appealed the Court of Appeal’s decision stating that the primary judge should have inferred that it was unlikely that the Appellant had received truly independent advice. Additionally, the Appellant argued that the Court of Appeal did not have due regard to the primary judge’s inferences of Mr Jeruzalski’s appreciation of the danger of the loans. The Respondents submitted that Mr Jeruzalski could rely on the certificates of independent advice to show that the loans had been sufficiently explained to the Appellant and to deliberately refrain from further inquiring.
The Court held that Mr Jeruzlski’s conduct on behalf of the Respondents unconscientiously exploited the Appellant’s special disadvantage. Kiefel, Keane and Gleeson JJ referred to the authority in Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 where Mason J stated that “the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his [or her] own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party.”
It was found that Mr Jeruzalski’s conduct was unconscientious as he had “sufficient appreciation of the [A]ppellant’s vulnerability” and the likelihood of loss suffered due to the Appellant’s lack of understanding and his lack of means. Due to the language of the certificates, their Honours said it was open to infer that the certificates were mere “window dressing”. The certificates may be seen as means of preventing the inference that the Respondents were wilfully blind to the danger of the loan. It was held that the certificates “could not negate Mr Jeruzalski’s actual appreciation” of the danger of the loans and the Appellant’s “vulnerability to exploitation by the respondents”.
Gordon J in a separate judgment considered s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) and found the conduct unconscionable under s 12CB.
The decision in this case highlights that where a lender acts through intermediaries and deliberately refrains from making inquiries, this will give rise to a risk of findings that lenders had knowledge and unconscientiously exploited a special disadvantage of a guarantor in certain circumstances. Additionally, certificates of independent advice may not on their own be enough if they contain bland and standardised language.