Must borrowers act
conscionably towards their lender?
Lenders must act fairly in their dealings with borrowers.
But must borrowers act fairly (according to conscience) in
their dealings with lenders?
The recent decision of Citigroup Pty Ltd (ACN 004 325
080) v Wernhard  NSWSC 132, a decision of Justice
Slattery in the Supreme Court of New South Wales (1 March
2019), sheds light on this question.
In October 2005, Citigroup added a further line of credit
to two existing lines of credit it had provided to Guy and
Eunice Wernhard, which increased the total credit limit to
The Wernhards provided three properties as security,
namely their home at Watanobbi, and their investment
properties at South Tamworth and Raymond Terrace. The
mortgages were first mortgages which were
cross-collateralized, and so the three properties secured
In July 2012, the Wernhards requested Citigroup to
release the security over the Raymond Terrace property, to
allow a sale to proceed.
It is at this point the facts became unusual.
By mistake, the solicitors acting for Citigroup
handed over on settlement not only the Certificate of Title
and Discharge of Mortgage for the Raymond Terrace property,
but also the Certificates of Title and Discharges of
Mortgage for the South Tamworth and Watanobbi properties. It
was a mistake because after the proceeds of sale from the
Raymond Terrace property of $190,556 were applied, a net
outstanding amount of $309,701 remained outstanding to
Not long after settlement, the Wernhards became aware of
Citigroup’s mistake: They received a letter from Citibank
which referred to a ‘partial release of security’ and listed
as ‘remaining securities’ both the Watanobbi property and
the South Tamworth property.
But the Wernhards decided to not tell Citigroup of its
mistake. And they took advantage of it by selling the South
Tamworth property in May 2013, without Citigroup’s consent.
The sale price was $160,000. They used the proceeds of sale
to pay other debt and to make interest payments on their
Citigroup loan accounts.
In 2016, Citigroup discovered its mistake. On 21
September 2016, Citigroup’s solicitors wrote to the
Wernhards to request they re-execute a mortgage over the
Watanobbi property. They did not do so. Citigroup registered
In May 2017, Citigroup suspended the re-draw facility on
the loan accounts. In July 2017, the Wernhards ceased to
make re-payments. In September 2017, proceedings were
The unconscionability and
Citigroup’s claim was based on the doctrines of
unilateral mistake. According to Justice Slattery:
Here acting against conscience founds the personal
equity. For the Wernhards to treat the Watanobbi
property as unencumbered is inconsistent with good
conscience … They were aware of Citigroup’s mistake
when they so dealt with the South Tamworth property
[and] sold it contrary to good conscience.
… the giving of an erroneous instruction at
settlement [in July 2012] … was more than a
misadventure. It is a mistake contrary to Citigroup’s
rights under the mortgages and Loan Agreements [for the
Wernhards] to retain the Certificates of Title. It is a
classic basis for the exercise of the Court’s
jurisdiction to relieve for mistake.
In crafting the relief, Justice Slattery paid heed to the
maxim of equity: He who seeks equity must do equity.
He ordered Citigroup to do equity by granting it
relief on condition that it provided accounts, to enable the
Wernhards to know the precise amount payable.
This was the relief Justice Slattery ordered:
- Declare that … the Watanobbi property ... is subject
to an equitable mortgage …
- Declare that the equitable mortgage … secures the
payment … of all monies under the loan agreement ...
- Order that … a mortgage be executed by the Wernhards
within 28 days
- Citigroup is to provide an account of (a) all
advances of principal and interest under the loan
agreement; and (b) all amounts credited to principal and
interest under the loan agreement; within 21 days as a
condition of order no. 3.
The assertions that the
bank had acted unfairly
The Wernhards asserted that Citigroup had acted unfairly.
But the Court found that:
- Citigroup did not engage in unfair lending practices
by not correcting their mistake for four years because
the Wernhards had kept Citigroup in ignorance of its
mistake, during which time they dealt with the South
- Citigroup was justified in suspending the re-draw
facility in May 2017 because the Wernhards were in
breach of their loan agreements by acting inconsistently
with the terms of the loan agreements by withholding
security, and by not applying the proceeds of sale of
the South Tamworth property against the debt.
In loan recovery proceedings, it is common for the
borrower to assert that the lender has acted unfairly. The
Wernhards made this assertion, but failed.
In this case, the lender asserted that the borrower had
acted unconscionably by taking advantage of the lender’s
mistake. The Court found for the lender.
As a result, the Wernhards must re-mortgage their home at
Watanobbi (a town on the Central Coast north of Sydney) as
security for payment of the loan amount (which they
calculate is $313,000). And they must pay Citigroup its
legal costs in the proceedings, which can be estimated as
between $75,000 and $100,000.
This decision has potential to be used by lenders in
situations where borrowers fail to disclose a material fact
while a loan is current. Particularly as a counter to
assertions by the borrower that the lender has acted