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Credit law toolkit

Unjustness (ss. 76 - 81 NCC)

Main Points

  • If a contract is found to be unjust, it can be re-opened and the obligations varied.
  • There are a range of factors to be considered to determine whether a contract is unjust in all the circumstances.
  • EDR can consider unjust contracts disputes.
  • Consumers can go to EDR even after legal proceedings have commenced, but not after judgment.
  • If you are disputing a contract as unsuitable under the responsible lending provisions, you should also argue that it is unjust.
  • You can also dispute a change of interest rate, establishment fees and early termination or exit fees as unconscionable.
  • You can also dispute a change of interest rate, establishment fees and early termination or exit fees as unconscionable.

What is unjustness?

Definition of unjust: “Unjust includes unconscionable, harsh or oppressive” (s. 76(8) NCC). This means that unjustness is defined very widely. Even though unjustness is defined widely, it is difficult to prove that a credit transaction is unjust. The reason for this is that the court is reluctant to interfere in a contract between two parties unless there is a clear injustice.

There are two sections of the NCC dealing with unjust transactions. They are:

  • Section 76 – court may reopen unjust transactions
  • Section 78 – court may review unconscionable interest and other charges

When is a contract unjust?

Section 76 – court may reopen unjust transactions

A credit contract, mortgage, or guarantee can be reopened if the court is satisfied that the contract is unjust.

In determining whether a contract is unjust at the time the contract was entered into or changed the court must consider the public interest and all the circumstances of the case. The public interest – this is widely defined but matters that may be relevant are whether the credit provider is:

  • The consequences of compliance or non–compliance with the contract
  • The relative bargaining positions of the parties
  • Whether the contract was subject to negotiation
  • Whether the borrower was realistically able to reject or renegotiate any of the contract provisions
  • If the contract imposes conditions that are unreasonably difficult to comply with or not reasonably necessary to protect the legitimate interests of a party to the contract
  • Whether the consumer (or their representative) was reasonably able to protect their own interests because of their age, physical or mental condition
  • The form of the contract and how it is expressed
  • Whether the consumer received independent legal advice or other expert advice
  • Whether the contract was explained to the consumer and whether they understood that explanation
  • Whether unfair tactics or pressure were used on your client
  • Whether the credit provider explained the consequences of the contract to the consumer
  • Whether the credit provider knew or could have reasonably ascertained by reasonable inquiry at that time that the consumer could not repay the loan, or could not pay it without substantial hardship
  • Whether the terms of the transaction or the conduct of the credit provider is justified in light of the risks undertaken by the credit provider
  • Whether any part of a mortgage is void other another section of the NCC
  • Whether in comparison with other similar loans the interest and fees are excessive
  • Any other relevant factor

The court can consider these factors or can consider other factors. It is only a guide.

Principles to consider in determining whether the contract is arguably unjust:

  • The consumer does not need to show any unjust conduct by the credit provider. The contract itself may be unjust.
  • The factors to consider when deciding whether the contract is unjust are those that were present when the contract was being entered into or changed. Any circumstances that were not reasonably foreseeable at the time the contract was entered (such as that someone subsequently became ill or separated from their partner) cannot be considered when deciding whether a contract is unjust.
  • The contract can be unjust because of the way it operates in relation to the consumer, or the way it was made, or both.
  • A contract will not be unjust simply because one of the factors to consider applies. The factors must be considered in the light of all of the circumstances of the case.
  • It is possible for a contract to be unjust when none of the factors to consider apply, but in all the circumstances the contract is still unjust.
  • A Court may find a contract unjust even if the credit provider was unaware of the circumstances that made the loan unjust (eg misleading information supplied by a broker without the consumer’s knowledge). However, a Court is less likely to grant a remedy that relieves injustice at the expense of the credit provider, if the credit provider is innocent of the cause of the injustice.

Other matters to consider

  • Proceed very carefully if it is possible that the consumer has lied to get the loan. Get advice.
  • Always get all relevant documents first before launching an unjustness dispute.
  • Always get a (at least a brief) statement from the consumer about what happened when they got the loan.

Working out a remedy

This is the most important part of an unjustness case. The nature of the likely remedy will help you decide how to run the case.

Remember an unjustness remedy is discretionary. The remedy will vary depending on the circumstances of the case. The principles below are a guide only. The examples are simplifications of complex calculations but do give a guide on the likely remedy.

The court usually works on the following principles in unjustness cases (EDR will apply the same principles):

  • If the consumer received a benefit, they (almost always) need to repay that benefit. Some examples:
    • Example 1 – If the consumer buys a house (but cannot afford the loan), then, if they want to keep the house, they still need to repay the loan amount that covered the purchase of the house.
    • Example 2 – If the consumer refinances a home loan (but cannot afford the new loan), then, they received the benefit of the refinance, and this amount needs to be repaid.
    • Example 3 – The consumer buys a house (but cannot afford the loan) and the house has been sold, the consumer still received the benefit of living in the house. The value of this benefit will be set off against any losses.
    • Example 4 – The consumer buys a car and gets a loan they cannot afford to repay. The consumer received the benefit of the use of the car.
  • The consumer should be put back in the position they should have been in but for the unjust transaction. Some examples:
    • Example 1– Consumer bought a car and a loan was arranged for the car. Consumer could not afford the car loan and was misled about the features of the car. Consumer should not have got the loan. Car needs to be surrendered. Car payments made are then offset against use of the car. The shortfall should not be payable.
    • Example 2 – Consumer refinanced into a home loan they cannot afford to repay. They surrender the home. All fees associated with the set up of the loan are not payable. Interest is payable on the amount of home loan refinanced.

Interest is usually payable on the use of money where the consumer got a benefit. Although interest may not be payable in certain circumstances for example, if a high interest rate is one of the factors that contributed to the unjustness of the loan, then the interest rate may be reduced.

EDR and unjustness

There are difficulties with running an unjustness dispute in EDR. The problems are:

  • EDR schemes cannot take evidence on oath. So if the best evidence of the unjustness is from the consumer it may be difficult to get a fair outcome from EDR.
  • EDR schemes have varying ways of dealing with unjustness. For example, FOS applies “maladministration in the decision to lend” and CIO does not. In practice, this will make less difference for credit contracts entered after 1 July 2010 because there is considerable overlap between the new responsible lending obligations and maladministration as applied by FOS.
  • The Credit Law did not give any particular powers to EDR. The EDR Scheme’s ability to consider a dispute comes from its rules or terms of reference. It is possible for remedies to be available under the Credit Law that are not available in EDR.
  • The EDR time limits are slightly different from the Credit Law. It is possible to be unable to go to EDR because a time limit has expired but still be able to go to court and vice versa.

These problems should not dissuade you from going to EDR if the dispute is within the relevant time limit. It is free and a good opportunity to resolve the dispute. You do need to be aware of the limitations of EDR, which are a particular problem in cases of unjustness. Get legal advice immediately if you are struggling with an unjustness case in EDR.

Be aware that time limits can affect how you approach the case.

Time limits for EDR (for unjustness)

For those aspects of credit disputes that relate to hardship applications, unjust transactions and unconscionable interest and other charges under the National Credit Code, the later of either:

  • two years from when the credit contract is rescinded, discharged or otherwise comes to an end; or
  • two years from when a final response is given at IDR.
If the loan has been refinanced beware of the time limit expiring on any previously refinanced loans.

Time limits for court

  • The time limit for an unjust contract application to court is 2 years from when the contract ends
  • There is a 6-year time limit to take action in court for a breach of the responsible lending conduct provisions

There may be situations where you can apply to the court but you are out of time for EDR. There may also be situations where you can argue unjust contracts even though the responsible lending (or maladministration) time limit has expired or vice versa.

Unconscionable fees and interest

(s. 78 NCC)

There are four types of fees and charges that the consumer may be able to reduce or annul.

They are:

  • A change in the annual percentage rate or rates
  • An establishment fee or charge
  • A fee or charge payable on early termination of the loan contract
  • Fee or charge for the prepayment of an amount under the credit contract

Each of the above types of problem is dealt with below:

Change to the annual percentage rate (s. 78(2) NCC)

This section only applies to changes in the annual percentage rate. It cannot be used to challenge interest rates that appear to be unfairly high from the outset. (In those situations, the only option is to argue that the contract is unjust.)

As a guide, to satisfy a court or tribunal that the change is unjust or unconscionable, the consumer would need the following information:

  • The advertised interest rates at or before your client entered the loan contract.
  • Representations made by the credit provider or their agent (for example the car dealer). For example, the credit provider may have represented that the interest rate would stay in line with a particular rate or promotional material may have represented that an interest rate would always be “low”.
  • The current interest rate on other similar loan contracts.

Establishment fee (s. 78(3) NCC)

The question here is whether the establishment fee is equal to the credit provider’s reasonable costs to determine the application for credit and the initial administrative costs of providing the loan. It is difficult to approximate the credit provider’s reasonable costs but a particularly high establishment fee compared to other credit providers for similar loans would be a good indicator that the establishment fee may be unconscionable and liable to review.

Early termination and prepayment fees and charges (s. 78(4) NCC)

There are three types of fees:

  1. Fixed rate break costs
  2. Deferred establishment fees (mortgages)
  3. Early repayment fees and deferred establishment fee (non-mortgages)
Fixed rate break costs

It is fairly well established that where the rate is fixed for the term of the contract then the credit provider is entitled to compensation for the difference between the interest rate payable under the contract and the current market rate at which the money is likely to be lent out at, although the method of calculating the amount payable should be clearly disclosed in the contract and should not exceed the credit provider’s loss

Deferred Establishment fees (mortgages)

There has been a ban in place for all mortgage exit fees since 1 July 2011.

As a guide, the early termination and/or prepayment fees must not exceed a reasonable estimate of the credit provider’s loss arising from the early termination or prepayment, including the credit provider’s reasonable administrative costs. It is difficult to state when a termination fee may be unjust. If the fee appears to be very large as a percentage of the loan, it is worth comparing the fee to other, comparable loans then seek legal advice for your client.

It is fairly well established that where the rate is fixed for the term of the contract then the credit provider is entitled to compensation for the difference between the interest rate payable under the contract and the current market rate at which the money is likely to be lent out at, although the method of calculating the amount payable should be clearly disclosed in the contract and should not exceed the credit provider’s loss. In recent years, however, some credit providers are also charging significant exit fees on variable rate contracts. The principles in this area are less well established and you should get legal advice.

If an unconscionable fee or interest rate case is successful, the remedy could be:

  • The fee is reduced
  • The fee is not payable
  • The fee is reversed (if it has been charged)
  • The interest rate change is void and interest is recalculated

What about court?

Unjustness is an area of law where court proceedings may still be necessary because:

  • In some cases the relevant time limit for applying to EDR may have expired
  • The EDR Scheme may decide that it cannot hear the dispute if they deem that the charge (or fee) is a “commercial decision” of the credit provider (which can be excluded from jurisdiction)
  • Even if it can be shown that the fee change had been misrepresented or unconscionable, the EDR schemes may take a very conservative view of the law (successful unconscionable fee challenges under s. 72 of the Code - now s. 78 of the NCC - have rarely been successful, if ever, at EDR)
  • Some remedies may not be available at EDR such as voiding terms of the contract

If it seems like court may be the consumer’s only option, or the case is proceeding badly in EDR, get legal advice. There are many risks associated with court proceedings and only contracts under $40,000 will be able to use the new small claims procedure for any of the issues covered in this chapter. This means that almost all home loans are excluded by definition, even if the dispute is only about a fee (such as an exit fee) and the consumer will risk having to pay the full costs of the proceedings for both parties if they are unsuccessful.

ASIC’s powers

ASIC can take action under ss. 76, 77, & 78 in relation to a class of contracts. If you are dealing with a systemic problem in relation to unjust contracts or fees, consider complaining to ASIC. (See Complaining to ASIC.)

Other available arguments to challenge fees

There may be other possible arguments available to challenge fees, for example that a fee is not permitted under the contract, was not clearly disclosed in the contract, has been calculated incorrectly or unfairly applied, or constitutes a breach of an interest rate or cost cap in those States where caps are in force. Although not covered in this toolkit, you may also want to consider arguing that the charging of the fee is an unfair term of the contract or constitutes a penalty. Unfair terms can be challenged under amendments to the ASIC Act that commenced on 1 July 2010. All of these arguments can be made in EDR, although the EDR approach to unfair terms remains to be seen.