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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 [2019] NSWSC 132, a decision of Justice Slattery in the Supreme Court of New South Wales (1 March 2019), sheds light on this question.

The facts

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 $524,000.

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 the loans.

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 Citigroup.

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 a Caveat.

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 commenced.

The unconscionability and the relief

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:

  1. Declare that … the Watanobbi property ... is subject to an equitable mortgage …
  2. Declare that the equitable mortgage … secures the payment … of all monies under the loan agreement ...
  3. Order that … a mortgage be executed by the Wernhards within 28 days
  4. 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 Tamworth property.
  • 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 unfairly.

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