How to Claim 1,200% on a Loan
In the recent case of Dalton and Schaeffer as Executors of the Estate of the Late John Herman Schaeffer v Naegeli [2024] NSWCA 51, the New South Wales Court of Appeal dismissed the appeal by the executors of Mr Schaeffer and two companies that had guaranteed the obligations of CRB Investment Holdings Pty Limited under a Cash Funding Agreement with the respondent, Mr Naegeli. The Court also allowed the cross-appeal by Mr Naegeli and set aside the primary judge’s order that limited the liability of Mr Schaeffer’s estate to $500,000 plus interest.
Background and key issues:
Mr Naegeli, on behalf of an unincorporated association, had entered into a Cash Funding Agreement with CRB, under which he lent $500,000 to CRB in exchange for twelve monthly payments of $500,000 each plus a final payment of $500,000, equivalent to an interest rate of 1,200% per annum.
Mr Schaeffer, who had a longstanding business connection and association with Mr Blinkworth, the managing director of CRB, had encouraged Mr Naegeli to enter into the agreement and had described himself as the honorary chairman of CRB. When CRB failed to make any payments, Mr Naegeli prepared and obtained a Deed of Guarantee and Indemnity from Mr Blinkworth and Mr Schaeffer, who also guaranteed CRB’s obligations on behalf of two companies he owned and controlled.
The principal issues in the appeal were whether Mr Naegeli acted unconscionably in procuring the Guarantee, whether the Guarantee was unjust under the Contracts Review Act, and whether the primary judge erred in awarding interest at the rate of 10% as provided for in the Guarantee.
Court’s reasoning and conclusions:
The Court of Appeal rejected the appellants’ unconscionability claim, finding that Mr Naegeli did not take advantage of any special disadvantage or vulnerability on the part of Mr Schaeffer, who entered the Guarantee freely, voluntarily and unhesitatingly, and who must have had a general understanding of the nature and effect of the Guarantee.
The Court also found that the Guarantee was not unjust within the meaning of the Contracts Review Act, as there were significant factors that weighed against such a conclusion, such as Mr Schaeffer’s sophistication, confidence, involvement and interest in CRB’s business, and the fact that the terms of the Guarantee were not proposed by Mr Naegeli. The Court further held that the primary judge erred in awarding interest at the rate of 10% as this was not pleaded by Mr Naegeli, and that the appropriate order was that interest should be paid by the appellants at the prescribed rate under the Civil Procedure Act.
For more information about commercial litigation disputes, contact David Collins in the Mullane & Lindsay litigation team.
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