Establishing a payment default – minimum requirements for evidentiary certificates

Financiers take note. Proving a payment default may not be as straightforward as one would have you believe. The recent case of RHG Mortgage Corporation Ltd v Summerfield [2019] NSWCA 44 provides some helpful guidance on the minimum requirements for evidentiary certificates in establishing a payment default under a loan agreement.

The facts

The brief background to this case is as follows:

• Mr and Mrs Summerfield (the Summerfields) entered into a loan agreement with RHG Mortgage Corporation Ltd (which was then known as RAMS Mortgage Corporation Ltd) (RHG) for the purpose of purchasing a property in Alfords Point, NSW. The loan was secured by a mortgage over that property.
• The Summerfields’ loan repayments fell into arrears and RHG obtained possession of the property on account of this payment default.
• Negotiations ensued between the parties and RHG agreed to return possession of the property to the Summerfields on the proviso that certain conditions were met, namely, that the outstanding arrears of $51,544 be paid in full and other fees and charges amounting to $24,978 be paid by December 2014.
• The amount of $51,544 was punctually paid by the Summerfields but the amount of $24,978 was not paid until after proceedings were instituted.
• RHG issued a further default notice in January 2015 (the 2015 Default Notice), for an amount of $7,491, referring to a failure to pay five instalment payments between November 2014 and January 2015. These instalments had in fact been paid by the Summerfields. The alleged arrears arose because in September 2014 RHG unilaterally debited to the Summerfields’ account an amount of $11,473 attributable to “penalty interest” in respect of the period before June 2014, which had not previously been debited to the account.

At first instance, Justice Adams (N Adams J), found that RHG had not established a default, and therefore had no entitlement to possession of the property or to a monetary judgment.

On appeal, among other grounds, RHG claimed to be entitled to possession of the property on account of the payment default identified in the 2015 Default Notice.

RHG’s appeal – judicial commentary

In dismissing this basis of appeal, the Court of Appeal referred to N Adam J’s decision at first instance, which ultimately turned on the absence of any satisfactory explanation for the adjustment entry made in September 2014 to the Summerfields’ account, upon which the existence of the arrears depended.

In reaching this conclusion, N Adams J considered clause 28 of the loan agreement which provided as follows:

“We may give you a certificate or formal statement about a matter or about an amount payable in connection with this agreement. This is sufficient evidence of the matter or amount, unless it is proved to be incorrect.”

The judicial commentary at first instance on what constitutes a certificate under the loan agreement of the kind contemplated by clause 28 is instructive. According to his Honour, the certificate would:

• need to identify itself as such;
• draw the reader’s attention to the fact that RHG was giving the certificate pursuant to clause 28 of the loan agreement;
• need to identify an amount payable in connection with the loan agreement;
• identify what part or parts of the loan agreement in respect of which the amount was payable; and

• include a statement noting that RHG would rely upon the certificate as “sufficient evidence of the matter or amount unless it is proved to be incorrect”, although his Honour noted that the absence of such a statement may not affect its validity.

In addition, N Adams J concluded that a periodical statement to a borrower issued from time to time in the ordinary course of business containing a statement of what RHG said was due, does not amount to a certificate under the loan agreement which would have the effect of shifting the onus of proving that the amount stated in the certificate was incorrect to the borrowers.

On appeal, RHG contested these requirements on the basis that they went beyond what clause 28 of the loan agreement required.

The Court of Appeal affirmed the decision at first instance and concluded that:

• a “certificate or formal statement” under clause 28 of the loan agreement implied, as a minimum, a document which certifies, or formally states in a manner analogous to a certificate, the relevant matter;
• the requirements of a “formal statement” might arguably be satisfied by a document authenticated by an authorised officer of RHG with that authorised officer’s signature and a statement to the effect:

I state that the amount of arrears outstanding under the loan agreement as at this date is $xxx.

• a computer-generated routine periodical monthly statement of account, which involves no authorised officer taking responsibility for its accuracy and authenticating it, does not qualify as a “formal statement” for these purposes; and
• N Adams J was correct to hold that there was no relevant “certificate or formal statement” that could have the effect of displacing the onus of proof in accordance with clause 28 of the loan agreement.

Implications

This case is a timely reminder to financiers to consider the terms in their loan agreements around evidentiary certificates and highlights the importance of providing a satisfactory explanation of arrears to a borrower in establishing a payment default under a loan agreement.