Legal development

The High Courts latest word on unconscionable conduct

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    What you need to know

    • Whether special disadvantage is a necessary component of statutory unconscionability remains unresolved.
    • Systems, practices or procedures are likely to be unconscionable where they are deliberately orchestrated to avoid knowledge or an appreciation of a party's financial or personal circumstances, vulnerabilities or disadvantages that would create unconscionable conduct risk.
    • A certificate of independent legal or financial advice will not necessarily 'immunise' you from a finding of unconscionable conduct where there is otherwise evidence of exploitation of a special disadvantage.

    What you need to do

    • You should monitor developments in this area as the law of unconscionable conduct continues to mature, particularly in relation to systems of conduct.
    • While the case turned on uncommon and strong facts, you may wish to:
      • review any systems, practices or procedures relevant to lending, to ensure that they could not be characterised as designed to avoid knowledge of a special disadvantage; and
      • consider whether templates for certificates relating to independent legal and financial advice are adequate, and policies relating to when further inquiries should be made before relying on such certificates.

    The High Court has unanimously overturned a Victorian Court of Appeal decision and set aside a $1.2 million loan and mortgage on the basis that the lenders' conduct was unconscionable in equity.

    The case turned on its own, relatively strong, facts, but demonstrates the continued development of the law of unconscionable conduct, including in relation to systems of conduct and reliance on certificates of independent advice.

    Unconscionable conduct

    A party's conduct may be unconscionable in equity, and under sections 12CA of the ASIC Act and 20 of the Australian Consumer Law, where there is an unconscientious exploitation of a special disadvantage by another party.

    Conduct can also be unconscionable under sections 12CB of the ASIC Act, 991A of the Corporations Act or 21 of the Australian Consumer Law. Statutory unconscionability is broader than in equity and may include a system of conduct or pattern of unconscionable behaviour, whether or not a particular individual is identified as having been disadvantaged by that conduct or behaviour.

    Factual background

    Mr Stubbings was a 60 year old unemployed man, with limited financial literacy and no assets apart from two rental properties at Narre Warren with a combined equity of approximately $530,000.

    Mr Stubbings wanted to purchase a new property and hoped to use the equity in his two Narre Warren properties to achieve this.

    An intermediary arranged for Mr Stubbings to obtain a loan through a law firm, Ajzensztat Jeruzalski & Co (AJ Lawyers) that specialised in asset based lending for their clients. AJ Lawyers was willing to advance loans of approximately $1.2 million on behalf of its clients, on security of Mr Stubbings' Narre Warren properties and a property worth approximately $900,000 in Fingal.

    As part of the transaction, Mr Stubbings saw an accountant and lawyer who signed certificates of independent financial advice and independent legal advice.

    The loans were facilitated through a carefully orchestrated system in which AJ Lawyers:

    • only ever organised loans to companies to avoid the operation of the National Credit Code;
    • required borrowers to be secured by a guarantor and their land;
    • never met a borrower or guarantor and facilitated all communication through an intermediary;
    • did not seek and deliberately avoided any information about the borrower or guarantor's purpose or capacity to pay the loan;
    • prepared pro-forma certificates of independent legal advice and independent financial advice; and
    • provided the certificates to the intermediary who would arrange for a solicitor and accountant to provide the advice (who were only paid if the transaction proceeded).

    The loans to Mr Stubbings were offered at interest rates of 10% p.a. to 17% p.a. (18% to 25% p.a. on default) on an interest only basis for 12 months.

    Mr Stubbings paid the interest for the first two months before defaulting, at which point the lenders sought possession of all three properties. The Court found that it was inevitable, as matter of objective fact, that Mr Stubbings would default on his loans and lose his equity in his properties by way of interest payments.


    The primary judge, Robson J, found that the conduct was unconscionable, by reason of the exploitation of a special disadvantage arising from Mr Stubbings' unemployment, poor financial literacy and absence of income to service the loans. Mr Jeruzalski, a partner at AJ Lawyers, acted as an agent for its clients and his knowledge was attributed to them.

    The Victorian Court of Appeal disagreed, including on the basis that Mr Jeruzalksi was entitled to rely on the certificates of independent advice to establish that Mr Stubbings understood and was aware of the risks of the transaction.

    The High Court unanimously overturned the Victorian Court of Appeal decision and set aside the loans and mortgages on the basis of unconscionable conduct. The Court delivered three separate judgments essentially affirming the trial judge's findings.

    Special disadvantage

    The High Court did not directly address the question of whether statutory unconscionability under section 12CB of the ASIC Act requires a special disadvantage, with the majority focusing on unconscionable conduct in equity. It was conceded on appeal that Mr Stubbings laboured under a special disadvantage, with the key issue being Mr Jeruzalski's knowledge.

    The uncertainty created by the differing views expressed in ASIC v Kobelt (2019) 267 CLR 1 therefore remains unresolved at High Court level. The Full Federal Court held in ACCC v Quantum Housing [2021] FCAFC 40 that special disadvantage is not a necessary component of statutory unconscionability (see our update here) but this view is likely to be tested further, and the scope of any expanded doctrine defined, as the law of consumer protection continues to develop.

    Knowledge and systems of conduct

    A key issue on appeal was whether AJ Lawyers knew enough to support a finding of unconscionable conduct, given their limited knowledge of Mr Stubbings' circumstances and the certificates of independent advice which were obtained.

    The majority accepted that Mr Jeruzalski did not have actual knowledge that Mr Stubbings would inevitably default and lose his equity in the properties by taking the loans. However, Mr Jeruzalski had sufficient appreciation of Mr Stubbings' vulnerability, and the "disaster awaiting him under the mortgages" to support a finding of unconscionable conduct.

    For Steward J, Mr Jeruzalski's suspicion that Mr Stubbings had no income and knowledge that the transactions were risky and dangerous were sufficient. The fact that he had not obtained further information, by reason of a system of conduct orchestrated to prevent such knowledge arising, did not change this position. Indeed, the use of such a system in the particular case amounted to wilful blindness.

    Gordon J agreed, but in a separate judgment would have also found statutory unconscionability under s 12CB of the ASIC Act, by virtue of the system of conduct being designed to avoid AJ Lawyers obtaining information which would enable the court's jurisdiction to set aside unconscionable transactions, in circumstances where this suggested an appreciation that some borrowers would be vulnerable. While the other judges did not express a view on this question, her Honour's judgment highlights the potentially broader scope of statutory unconscionability arising from systems of conduct: meaning that an appreciation of the risks to and vulnerability of Mr Stubbings in particular would not have been necessary for the transactions to be set aside.

    Independent legal and financial advice

    The High Court found that the certificates of independent legal and financial advice were not sufficient to displace the finding of unconscionable conduct.

    Such certificates are a common part of lending practice and, in most cases, play an important role in evidencing that the borrower or guarantor has had proper advice.

    Here, however, the certificates:

    • Did not suggest that Mr Stubbings had actually turned his mind or had his attention drawn to how he could service the loan.
    • Did not show that obvious issues with the proposed transaction had been the subject of advice.
    • Contained boilerplate language which gave them the appearance of mere "window dressing".
    • In the case of the financial certificate, related only to the company set up as the borrower under the transaction and not to Mr Stubbings as guarantor.

    These red flags meant that the certificates could not negate the actual appreciation of Mr Stubbings' vulnerability and the risks in the transactions – indeed, in that context obtaining the certificates looked more like a "precautionary artifice" which supported the inference of unconscionable conduct.

    While fact specific, the case highlights the importance of substance over form in relation to certificates of independent legal and financial advice: the mere obtaining of such certificates may not be sufficient, where concerns or suspicions about vulnerability (including a lack of appreciation of risk) arise and the certificate does not clearly indicate that those matters were the subject of advice.

    Authors: Mark Bradley, Partner; Lucinda Hill, Partner; Nick Porter, Senior Associate; and Kyle Dolbey, Lawyer.

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.


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