Which case won?

The case for Mr S
  • I was in a vulnerable position and the lenders exploited that. I was unemployed, had no income and had limited financial literacy to understand the commercial implications of the loan arrangement.
  • The loan arrangement was incredibly complex and risky. There was no way that I could have realistically serviced these loans.
  • The "independent advice" certificates were a sham. I was not given any meaningful explanation of the risks I was taking on.
  • The lenders deliberately avoided finding out about my true financial situation. They did not want or seek any further information about my personal or financial circumstances or my capacity to repay the loan.
  • Given the above, the lenders’ conduct was unconscionable and amounts to predatory lending. They should not be allowed to enforce the mortgages against me.
The case for the lenders
  • We operate a system of asset-based lending, which is an established business practice. There is nothing inherently wrong with this type of lending, as Mr S himself has acknowledged. Making a loan to Mr S exclusively by reference to the security value of his assets is therefore not unconscionable.
  • Mr S signed all the necessary paperwork, including certificates of independent legal and financial advice. We were entitled to rely on these as evidence that the nature and consequences of the loans had been sufficiently explained to Mr S and that he understood the transaction.
  • Because we had the certificates, we weren’t required to make further inquiries.
  • Given the above, we did nothing unconscionable that should prevent us from enforcing the mortgages against Mr S.

So, which case won?

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Case A won. You were right!

How people voted
case a47%
case b53%

Expert commentary on the court's decision

Clayton Davis
Clayton DavisPrincipal Lawyer
“If you're considering taking out a loan, especially one secured against your home, ensure you fully understand the terms, including interest rates and what happens if you default. You should also seek genuine independent advice from legal and financial professionals you trust, not just those suggested by the lender.”
High Court finds in favour of borrower

In Stubbings v Jams 2 Pty Ltd [2022] HCA 6, the High Court of Australia found in favour of the borrower, Jeffrey William Stubbings. The court ruled that the lenders, Jams 2 Pty Ltd, were guilty of unconscionable conduct and that they should not be allowed to enforce their rights under the mortgages.

The court acknowledged that asset-based lending is not inherently unconscionable. However, in this case, the specific circumstances and the system of lending employed by the lenders crossed the line into unconscionable conduct.

Relationship with lenders placed borrower at special disadvantage

Referring to previous caselaw, the court noted that unconscionability involves a relationship that places one party at a “special disadvantage” vis‑à‑vis the other, knowledge of that special disadvantage by the stronger party, and unconscientious exploitation by the stronger party of the weaker party’s disadvantage.

According to the court, “special disadvantage” means something that “seriously affects the ability of the innocent party to make a judgment as to his [or her] own best interests”.

The court agreed that Mr Stubbings was incapable of understanding the risks involved in the transaction, emphasising that he could not even perform simple calculations such as 10 per cent of $130,000.

On appeal, even Jams accepted the primary judge’s findings that Mr Stubbings was at a special disadvantage vis‑à‑vis them.

Exploitation of borrower’s special disadvantage was “good business” for lenders

Given Mr Stubbings’ special disadvantage, the question before the court was whether the lenders’ appreciation of that special disadvantage was such as to amount to an exploitation of that disadvantage. The court concluded that it was.

The court noted witheringly that the lenders had “sufficient appreciation of Mr Stubbings vulnerability and the disaster awaiting him under the mortgages” but that “the prospect of obtaining the profit to be made by the taking of [Mr Stubbings’] equity by way of interest payments made the exploitation of [his] disadvantages good business for the respondents”.

Certificates of advice did not reflect truly independent advice

Jams had argued that it was entitled to rely on the certificates of independent legal and financial advice as evidence that Mr Stubbings understood the transaction.

The primary judge rejected this argument, finding that the certificates did not reflect truly independent advice.

The Court of Appeal reversed this finding, saying that the lenders were entitled to rely on the certificates and so did not need to make any further inquiries.

The High Court disagreed with the Court of Appeal. The court noted that the certificates contained nothing to suggest that Mr Stubbings had turned his attention to how he would service the loans.

Characterisation of loan as “commercial” casts further doubt on certificates of advice

In addition, the statement that the purpose of the loan was commercial, which the lenders knew was inaccurate, made it open to draw an inference that the certificates were “mere window dressing”.

The court also noted that in a context where the lenders deliberately distanced themselves from evidence confirming the dangerous nature of the transaction to Mr Stubbings, this could itself be regarded as evidence pointing to their exploitative state of mind.

Lessons for lenders and borrowers

This case serves as a warning to lenders that they cannot turn a blind eye to borrowers’ circumstances, even in asset-based lending.

Further, lenders should be mindful that while certificates of independent advice can be useful, they should not be treated as a foolproof shield against claims of unconscionable conduct and predatory lending.

Lenders should ensure that these certificates are meaningful and address the real risks of the transaction.

For borrowers, this case highlights the dangers of entering complex financial arrangements without truly understanding the risks.

If you’re considering taking out a loan, especially one secured against your home, ensure you fully understand the terms, including interest rates and what happens if you default.

You should also seek genuine independent advice from legal and financial professionals you trust, not just those suggested by the lender.

NOTICE: This article is accurate as at the time of publication and does not constitute legal advice. Please see our legal notices page for more information. Information related to coronavirus can be outdated very quickly.

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