Huynh v Ledinh Sovereign Super Pty Ltd

1. [1]

   BELL CJ: This appeal arises from a mortgage executed on 16 August 2018 by CT Stone Pty Ltd (CT Stone) as borrower/debtor, Ms Thuc Tran Huynh and Mr Chau Quach as guarantors, and Ledinh Sovereign Super Pty Ltd (Ledinh or the Respondent) as lender/mortgagee. Ms Huynh and Mr Quach (the Appellants) are the sole directors and shareholders of CT Stone. Mr Long Ngoc Dinh (Mr Dinh) is the principal and a director of Ledinh.

2. [2]

   The principal amount advanced under the mortgage was $140,000 with 3 months’ pre-paid interest in the amount of $15,000 as well as certain other costs deducted from the principal amount. The Appellants’ joint fee simple interest in a property in Laurina Avenue, Fairfield East (Laurina Avenue Property), served as security under the mortgage. The loan was due to be repaid by 16 November 2018 (the Final Repayment Date), that is to say, within 3 months of the execution of the mortgage and the advance of the principal amount.

3. [3]

   The mortgage also provided for interest after the Final Repayment Date at the rate of 6% per month, compounding monthly. The interest regime, referred to in Schedule A to the mortgage as the “Specified Interest Regime”, and identified as “Interest Regime A (clause 5.11)”, was set out in cl 5.11 of a memorandum entitled “Ayoub Lawyers 2017 Memorandum” (the Memorandum).

4. [4]

   By amended statement of claim filed on 4 September 2023, the Respondent sought orders for possession of the Laurina Avenue Property, and judgment for the amount owing under the mortgage plus interest and costs owing under the mortgage.

5. [5]

   By statement of cross-claim filed on 3 April 2023, the Appellants asserted that: (i) the conduct of the Respondent in delaying the bringing of proceedings was unconscionable; and (ii) that the contract was “unjust” within the meaning of the Contracts Review Act 1980 (NSW) (CRA). The Appellants also sought orders under ss 232 and 237 of the Australian Consumer Law (ACL), although it was subsequently accepted that any appropriate statutory relief lay not under the ACL but under ss 12CA and 12CC of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).

6. [6]

   Davies J (the primary judge) held that, although the interest rate of 6% per month was not, in all the circumstances unjust, the compounding element of the interest rate under the mortgage rendered the contract unjust and unconscionable: Ledinh Sovereign Super Pty Ltd v CT Stone Pty Ltd [2023] NSWSC 1079 at [76]-[78]. The primary judge held that the Respondent was entitled to: (i) possession of the Laurina Avenue Property; (ii) judgment in the sum of $140,000, with simple interest accruing at 6% per month; and (iii) the costs of the proceedings (PJ [117]-[118]).

7. [7]

   By amended notice of appeal, dated 15 February 2024, the Appellants raised 11 grounds of appeal, which were categorised under two headings, being the “Unjust Contract Appeal” and “Indemnity Appeal”. This second category related to the Respondent’s reliance on a provision under the mortgage requiring the Appellants to meet its costs in relation to the mortgage. In the course of the hearing, after some questioning from the Bench, Mr Allen, who appeared for the Appellants, indicated that he did not press grounds 7 to 11 in relation to this issue.

8. [8]

   Before considering the remaining appeal grounds, it is desirable to set out some further background.

Background

1. [9]

   Ms Huynh, the first appellant, was born in 1978 in Vietnam. She left school at the end of year 12 in Vietnam in 1996, and moved to Sydney in 2000. Ms Huynh subsequently worked as a salesperson in a fish market in Cabramatta until 2010.

2. [10]

   Mr Quach, the second appellant, was born in 1977 in Vietnam, and moved to Australia when he was 11 years old. He finished school in Australia, and studied Engineering at Wollongong University, graduating in 2001. Mr Quach subsequently worked for 10 years as a planning engineer at Crane Copper. In 2014 or 2015, Mr Quach left Crane Copper to work at CT Stone with his brother-in-law.

3. [11]

   Ms Huynh and Mr Chau married in 2002, and have two daughters, born in 2005 and 2009. Ms Huynh ceased full-time employment to raise the children, and returned to work at CT Stone in 2015.

4. [12]

   In 2001, Mr Quach purchased the Laurina Avenue Property, initially in his own name, before he was married. After Mr Quach married Ms Huynh, the property was transferred jointly into his and Ms Huynh’s name. The Appellants have mortgaged the Laurina Avenue Property and have also purchased and mortgaged other properties.

5. [13]

   In 2017, the Appellants purchased a property in Seville Street, Fairfield East (Seville Street Property), for a consideration of $931,200 through funds that were accumulated by remortgaging other properties and through a mortgage loan in the sum of $780,000 from National Australia Bank, signed on 7 February 2017.

6. [14]

   In April 2017, the Appellants applied to the Fairfield East Local Council for consent to commence demolition and construction works at the Seville Street Property. Following permission being granted, Mr Quach acted as the owner builder – overseeing the management of the demolition and construction of that project.

7. [15]

   The Appellants demolished the Seville Street Property and built a new home on the land, but required further funds to complete the project. The Appellants had previously, in 2018, entered into two short-term loans from Azura Management Services Pty Ltd and Mr Thi Lai Bui, to complete the building of the Seville Street Property.

8. [16]

   Ms Huynh, on behalf of the Appellants, sought further finance through a broker, Mr Minh Hoang Tran (also known as Henry). Mr Tran organised for the Respondent, Ledinh, to provide finance to the Appellants in the sum of $140,000. Mr Tran was paid $3,500 by the Appellants for locating the source of finance.

9. [17]

   Mr Dinh, as already noted, is a director of the Respondent. Ledinh primarily manages a superannuation fund and lends money.

10. [18]

    By email on 16 August 2018 at 12.50pm, Mr Norman Ayoub, the lawyer representing the Respondent at the time, sent various loan documents to Mr Tran (copying Mr Dinh):

11. [19]

    On 16 August 2018, Ayoub Lawyers also sent the Appellants a letter, which enclosed several documents, which were collectively referred to as the “security documents”:

12. [20]

    By email on the same day at 2.35pm, Mr Tran emailed Mr Ke Toai Le, a solicitor, forwarding the email he had received from Mr Ayoub, and suggesting that he contact the Appellants to “sign a loan”.

13. [21]

    By email on the same day at 2.45pm, Mr Le responded to Mr Tran, enquiring as to the nature of the matter and who he would be representing.

14. [22]

    By email on the same day at 3.00pm, Mr Tran explained to Mr Le that:

15. [23]

    On 16 August 2018, both the Appellants attended the office of Mr Le to execute the mortgage and related documents.

16. [24]

    Mr Quach gave evidence in cross-examination that, at the beginning of the Appellants’ appointment with Mr Le, Ms Huynh physically provided the loan documentation to Mr Le.

17. [25]

    Mr Quach’s affidavit evidence, filed on 3 April 2023, asserted that their meeting with Mr Le was as brief as five minutes. The primary judge noted that this was the “only aspect” of Mr Quach’s evidence that his Honour did not accept: PJ [24]. The primary judge positively assessed the Appellants’ credibility as “frank and honest”. In regard to Mr Quach’s evidence as to the duration of the meeting with Mr Le, his Honour explained that he did “not think [Mr Quach] was being dishonest, but his recollection was faulty”: PJ [24].

18. [26]

    In the course of this meeting, both Appellants separately signed a document, entitled “Schedule 1A: Declaration by Borrower”, which declared that:

19. [27]

    The Appellants also separately signed a document entitled “Schedule 2A: Declaration by Guarantor”, which declared that:

20. [28]

    The Appellants also signed a document entitled “Cheque Directions”, which authorised Ayoub Lawyers to pay the “Principal Amount” of $140,000 to Mr Quach’s Westpac bank account. Notably, the Cheque Directions document, which is one page in length, provides for certain “key terms”, including that: the higher and lower interest rate is “6% pm” and “4% pm” respectively, and that the term of the loan is “4 months”. It is noted that the true term of the loan was 3 months.

21. [29]

    The Appellants also separately signed a document entitled “Schedule D: Debtor’s Advice Declaration”, which provided the following:

22. [30]

    Mr Le signed a document entitled “Schedule E: Australian Legal Practitioner’s Certificate”, which confirmed that:

23. [31]

    The Appellants also signed a document entitled “Schedule F: Guarantor’s Advice Declaration”, which provided that:

24. [32]

    The mortgage, with title reference 323/1038622, contained the following key terms:

25. [33]

    Schedule A to the mortgage repeated many of the same details. One such important detail repeated was that the “Specified Interest Regime” is “Interest Regime A (clause 5.11)”. A footnote to Schedule A of the mortgage provided that:

26. [34]

    Schedule B to the mortgage provided various fees which could be incurred by the Appellants in certain events such as default. A footnote to Schedule B of the mortgage was also attached, which provided in almost identical phrasing that the schedule was to be interpreted as though all “provisions set out in the Memorandum are set out at length in this Schedule”.

27. [35]

    Neither the mortgage nor Schedules A or B specified which of the higher or lower rates of interest applied, nor whether the interest rates were on a simple or compounding basis. Furthermore, despite Schedule B’s detailed breakdown as to the various costs that would be incurred in the case of the Appellants’ default, no reference was made to the costs of interest accruing.

28. [36]

    Turning to the Memorandum, as the primary judge noted at PJ [39]:

29. [37]

    Clause 5.3 of the Memorandum provided that:

30. [38]

    As noted above, the mortgage, and Schedule A to the mortgage provided that the “Specified Interest Regime” was “Interest Regime A (clause 5.11)”. Clause 5.11 of the Memorandum provided that:

31. [39]

    When Ms Huynh was questioned in cross-examination about whether she had read the loan documents prior to meeting with her solicitor, she provided the following response:

32. [40]

    In cross-examination, Mr Quach acknowledged that Mr Le did make him aware of certain key terms of the loan:

33. [41]

    Mr Quach also acknowledged in cross-examination that he had considered how he might repay the loan, despite the applicable interest rate:

34. [42]

    Mr Quach also gave the following evidence, when questioned about “Schedule D: Debtor’s Advice Declaration” (see [29] above):

35. [43]

    On 11 December 2018, the Appellants made a payment of $11,000 which was credited against interest payable for December 2018.

36. [44]

    By email sent at 5.23pm on 7 February 2019, Mr Ayoub advised Mr Le of the Respondent’s intention to commence proceedings against the Appellants if they failed to make the full payment of the outstanding loan by 8 February 2019.

37. [45]

    By email sent on 8 May 2019, Ms Penelope Cable of Hunt & Hunt Lawyers (the solicitors acting for Ledinh) informed Mr Quach of their intention to take action to recover the outstanding loan:

38. [46]

    By email on 9 May 2019, Mr Quach informed Ms Cable that he was attempting to obtain finance to repay the Respondent, and that if the Respondent sold the Laurina Avenue Property, the proceeds would be insufficient to discharge the debt owed.

39. [47]

    By email on 12 June 2019, Mr Quach requested further time to repay the outstanding interest owed to Mr Dinh.

40. [48]

    By email on 26 June 2019 at 12.25pm, Ms Cable emailed Mr Quach informing him of the Respondent’s intention to immediately commence proceedings to recover the outstanding loan.

41. [49]

    By email on the same day at 3.08pm, Mr Quach asked Ms Cable to wait until his solicitor could correspond with her. Ms Cable responded, informing Mr Quach of the Respondent’s intention to commence proceedings by statement of claim unless Mr Quach made the interest payments referred to in an email dated 18 June 2019.

42. [50]

    On 11 July 2019, CT Stone made a payment in the sum of $10,000 which was credited against interest due and payable to the Respondent.

43. [51]

    Further demands for payment were made through to at least October 2020. They were unavailing and no further payments of interest or principal was made.

44. [52]

    On 2 March 2022, Ms Cable addressed a notice to the Appellants, pursuant to s 57(2)(b) of the Real Property Act 1900 (NSW), demanding $494,160 (including $309,440 in interest) and advising that non-compliance would result in the commencement of legal proceedings, seeking judgment for this amount and possession of the mortgaged property. Proceedings were in fact commenced by statement of claim on 9 September 2022.

45. [53]

    As the primary judge noted at PJ [41], the mortgage as signed by the Appellants was registered on 13 September 2019, and given a dealing number AP532585. However, the day before the hearing was due to commence, the Respondent sought leave to amend its statement of claim, because, as the primary judge explained at PJ [44], the mortgage registered through the PEXA Exchange Online Lodgement Property and Settlement Platform: (i) misidentified the mortgagors; and (ii) purported to incorporate “memorandum Q860000”, rather than Schedules A and B, and the Memorandum.

46. [54]

    The discrepancy between the mortgage as signed and the mortgage as registered was rectified by the Respondent, who lodged for registration a mortgage which varied the mortgage that had previously been registered. On the second day of the hearing, the Respondent’s counsel informed the primary judge that the newly lodged mortgage had been registered, with dealing number AT403743, and that the previously registered mortgage had been discharged: PJ [47].

Primary judgment

1. [55]

   The primary judge rejected the Appellants’ contention that the Memorandum did not form part of the documents sent to them before they met Mr Le; that the mortgage had no operative terms; and that the interest claimed at the higher rate was a penalty.

2. [56]

   The primary judge also rejected the Appellants’ contention that the Respondent acted unconscionably, contrary to the ASIC Act, by waiting until 19 September 2022 to seek possession of the Laurina Property, despite the mortgage falling into default on 16 November 2018.

3. [57]

   It was put that the compounding interest rate at 6% per month was arbitrary, and not commensurate with the Respondent’s risk under the loan. In this sense, the Appellants claimed that s 9(2)(d) of the CRA was engaged because the interest rate was “not reasonably necessary for the protection of the legitimate interests of the [Respondent]”: PJ [55]. The Appellants further claimed that s 9(2)(g) and (i) of the CRA were engaged because the Respondent did not explicitly bring the interest clause in the Memorandum to the Appellants’ attention, including details such as the rate and compounding nature of the interest: PJ [56].

4. [58]

   The primary judge rejected the Appellants’ contention that the loan’s rate of interest in itself was relevantly unjust or unconscionable: see PJ [63]-[75]. His Honour noted that Mr Quach accepted that Mr Le had told the Appellants about the rate of interest: see [40] above.

5. [59]

   The primary judge noted that a high interest rate was not, of itself, unconscionable or unjust: PJ [64]. In this regard, his Honour made reference to Guardian Mortgages Pty Ltd v Miller [2004] NSWSC 1236; (2004) 12 BPR 22,833 (Miller), where Wood CJ at CL held at [104] that an interest rate of 12% per month did not “of itself” constitute an unconscionable or unjust provision. His Honour also referred to: Mizzi v Reliance Financial Services Pty Ltd [2007] NSWSC 37 at [42] (Mizzi); Takemura v National Australia Bank Ltd [2003] NSWSC 339; (2003) 11 BPR 21,185 at [21]-[24] (Takemura); and Driat Pty Ltd v Thomas [2012] NSWSC 683 at [26] (Driat) as examples of other cases where similarly high monthly interest rates had not been found to be unjust in the circumstances of those particular cases.

6. [60]

   His Honour continued:

7. [61]

   The primary judge rejected the notion that the interest rate “was a punishment”, accepting Mr Dinh’s evidence that he believed the loan would be paid on time, and that he was not indifferent the Appellants’ ability to refinance the loan: PJ [70]-[71]. In turn, his Honour explained at PJ [72] that he inferred from Mr Dinh’s evidence:

8. [62]

   The primary judge noted that Ayoub Lawyers did not expressly notify the Appellants of the interest provisions in their communications: PJ [73]. However, his Honour explained that the Respondent was not obliged to provide specific reference to the interest provisions because the Respondent had insisted that the documents be executed before a solicitor, and required that certificates be signed by Mr Le which provided that he had:

9. [63]

   Despite the primary judge’s finding that the high interest rate was not of itself unjust or unconscionable, his Honour held that the combination of the high interest rate and its compounding nature was unconscionable, referring in this regard to the decision of McDougall J in Haiqin Lu v Qindi Shen; Weiren Jin v Qindi Shen [2018] NSWSC 560 at [114]-[116]. At PJ [77], the primary judge said:

10. [64]

    In turn, his Honour held, pursuant to s 7 of the CRA, that the contract should be varied to remove the reference to compound interest:

11. [65]

    The primary judge held that the Respondent was entitled to judgment for possession of the Laurina Avenue Property and judgment for a sum comprising the principal sum of $140,000, simple interest at the default rate of 6% per month, and costs and expenses: PJ [117]. His Honour also held at PJ [118] that:

12. [66]

    In turn, on 26 September 2023, the following final orders were made:

Grounds of appeal

1. [67]

   The six grounds of appeal which were pressed were as follows:

Applicable legislative requirements

1. [68]

   Section 7 of the CRA provides that:

2. [69]

   As acknowledged in Nemeth v Australian Litigation Funders Pty Ltd [2014] NSWCA 198 at [97], s 7 of the CRA involves a three-step analysis (see also Perpetual Trustee Company Limited v Albert and Rose Khoshaba [2006] NSWCA 41; (2006) 14 BPR 26,639 at [99], [106]):

3. [70]

   Section 9 of the CRA details a non-exhaustive set of matters which the Court can consider when determining whether a contract is unjust pursuant to s 7:

Grounds 1 to 6: The unjust contract appeal

1. [71]

   The Appellants submitted that the appeal in relation to the CRA involved the following question:

2. [72]

   The Appellants raised 7 arguments to advance their claim that the primary judge erred in finding that the 6% interest rate was itself unjust within the meaning of the CRA.

3. [73]

   First, they contended that there was an inconsistency between the primary judge’s determination that “the combination of the very high default rate of interest and the monthly compounding of that interest makes the contract unjust” (the unjust contract finding) (PJ [76]), and his Honour’s earlier finding that the 6% monthly interest rate was not unjust. There was no such inconsistency or tension in the reasoning. His Honour’s judgment could not have been clearer in this regard. He made it plain that it was the combination of the rate and its compounding nature which was unjust and warranted the Court’s intervention in varying the interest provisions in the Memorandum. Indeed, as the Respondent pointed out, at first instance, Mr Allen expressly put to the primary judge in closing submissions:

4. [74]

   Secondly, the Appellants contended that the primary judge misapplied the CRA by erroneously splitting the provision for the payment of interest (under cl 5.11 of the Memorandum) into two, treating rate and capitalisation separately. The Appellants submitted that such a bifurcated approach led to his Honour failing to act upon his unjust contract finding, thereby also failing to make appropriate orders to relieve against injustice. This contention suffers from a number of vices including that it was contrary to the very submission that was advanced at first instance, as set out above. The primary judge did not engage in any illegitimate bifurcation in his analysis or approach. He considered the impugned clause and assessed its operation as a whole. There was nothing impermissible or wrong in his Honour first making the observations he did about the headline rate of interest before considering it in combination within the compounding aspect of cl 5.11.

5. [75]

   Thirdly, the Appellants contended that the primary judge made inconsistent findings as between PJ [68]-[69], and PJ [72] in respect of whether simple interest at 6% per month was unjust. The primary judge’s reasoning at PJ [68]-[69] was as follows:

6. [76]

   There is no inconsistency. As emerged in oral argument, this limb of the argument was based on Mr Allen’s contention that the first sentence of PJ [68] – “[t]he complaint that the rate was arbitrary does not point to unconscionability or unjustness” – was a finding by the primary judge. That contention was utterly unfounded, and flies in the face of his Honour’s language which plainly was describing the argument that had been advanced by the Appellants at first instance. The first sentence of PJ [68] was a reference back to PJ [55] when the primary judge summarised the Appellants’ case, as advanced in their cross-claim.

7. [77]

   Fourthly, the Appellants argue that the abovementioned “adverse findings” in PJ [68]-[69] were “improperly influenced” by distinguishable and outdated authorities, being: Mizzi; Takemura; Miller; and Driat. This aspect of the argument is partly answered by the fact, noted above, that the primary judge did not make any finding that the interest rate was arbitrary. Moreover, there was nothing illegitimate or improper in his Honour referring to the various cases noted above. His Honour’s purpose in doing so was to note the fact that there were many examples in relatively recent case law where high interest rates were not per se treated as rendering an impugned contract as unjust within the meaning of the CRA.

8. [78]

   Fifthly, the Appellants attacked the primary judge’s reasoning at PJ [68] that the “complaint that the rate was arbitrary does not point to unconscionability or unjustness”. Rather, the Appellants contend that the arbitrariness of the interest rate is relevant to s 9(2)(d) of the CRA, which includes as a relevant circumstance whether the contractual term is “not reasonably necessary for the protection of the legitimate interests of any party to the contract”. The higher rates of interest only applied in the event that the loan was not repaid within its three month term. There was nothing arbitrary about the interest rate increasing in this eventuality, especially given the self-evident increased risk to the lender in this circumstance. The Respondent had a legitimate interest in protecting its capital, including a powerful inducement for repayment of the principal following default.

9. [79]

   Sixthly, the Appellants contended that the primary judge erred when observing at PJ [68] that:

10. [80]

    The submission that the primary judge incorrectly assumed that the Respondent was a “lender of last resort” was not developed orally and it was not made plain how it infected the primary judge’s reasoning. In any event, such a characterisation was more than open to the learned primary judge on the facts of the case.

11. [81]

    Seventhly, the Appellants contended that the 6% interest rate was unjust because the rate was not reasonably necessary for the legitimate protection of the Respondent, and yet, was “unreasonably burdensome” on the Appellants, who did not appreciate the burden’s severity.

12. [82]

    The Respondent was correct to respond to the Appellants’ submissions by pointing to “undisputed facts and unchallenged findings” by the primary judge, including:

13. [83]

    In addition to these matters, as seen in the extract of Mr Quach’s cross-examination at [41] above, Mr Quach knew that he was taking a risk in entering into the transaction but proceeded on the basis (incorrect as he found out) that, with the principal amount advanced, he would be able to complete outstanding renovations and refinance the loan. The fact that that outcome was not achieved did not render the contract unjust beyond the compounding aspect of the interest payment obligations.

Conclusion

1. [84]

   For all of the above reasons, the appeal should be dismissed with costs.

2. [85]

   PAYNE JA: I agree with the Chief Justice.

3. [86]

   KIRK JA: I agree with Bell CJ.