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[2011] NSWCA 389
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Tonto Home Loans Australia Pty Ltd v Tavares; FirstMac Ltd v Di Benedetto; FirstMac Ltd v O'Donnell [2011] NSWCA 389 (21 December 2011)
Last Updated: 10 January 2012
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Case Title:
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Tonto Home Loans Australia Pty Ltd v Tavares;
FirstMac Ltd v Di Benedetto; FirstMac Ltd v O'Donnell |
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Medium Neutral Citation:
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Hearing Date(s):
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Decision Date:
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Jurisdiction:
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Before:
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Bathurst CJ at 1 Allsop P at 2 Campbell JA at
303 |
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Decision:
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(1) As to appeal number 2009/00298570 (formerly
40454 of 2009) being the Tavares and Rowe appeal: (a) Allow the appeal in
part. (b) Set aside order 2(b) made by the Supreme Court on 26 February 2010
(as set out in [448] of the primary judge's reasons) and in
lieu thereof order
that the mortgagee Tonto Home Loans Australia Pty Ltd deliver up to Jose De
Carvalho E Rego Tavares and Kim Lee-Anne
Rowe a registrable discharge of
mortgage, but only on condition that Mr Tavares and Ms Rowe pay or have paid to
the mortgagee or
at its direction the sums referred to in order 4 made by the
Supreme Court on 26 February 2010. (c) The appellant pay the respondents'
costs of the appeal. (2) As to appeal number 2009/00298571 (previously 40455
of 2009) being the Di Benedetto appeal: (a) Allow the appeal in part.
(b) Set aside order 2(b) made by the Supreme Court on 26 February 2010 (as
set out in [447] of the primary judge's reasons) and in
lieu thereof order that
the mortgagee, Permanent Trustee Company Limited ("Permanent"), or to the extent
that it has acceded to that
company's rights, FirstMac Limited, deliver up to
Lawrence Di Benedetto and Maria Di Benedetto a registrable discharge of
mortgage.
(c) The appellant pay the respondents' costs of the appeal.
(3) As to appeal number 2009/00298572 (previously 40456 of 2009) being the
O'Donnell appeal: (a) Allow the appeal in part. (b) Set aside orders 2
and 5 made by the Supreme Court on 26 February 2010 (as set out in [446] of the
primary judge's reasons) and
in lieu thereof order: (i) The loan agreement
dated 10 January 2003 and made between Permanent as lender, or to the extent
that it has acceded to that company's
rights, FirstMac Limited, and Gillian
O'Donnell and John Robert O'Donnell as borrowers be varied to reduce the
principal loan from
$500,000 to $125,000 such variation to take effect from 1
August 2005, with the effect that thereafter the responsibility for payment
of
interest and principal be referable to a principal sum of $125,000. (ii) The
security provided by registered mortgage numbered 9386484P between Mr and Mrs
O'Donnell and Permanent, or to the extent that
it has acceded to Permanent's
rights, FirstMac Limited, be limited in effect accordingly such that upon
payment of the sum or sums
sufficient to repay said loan as varied the
O'Donnells be entitled to receipt of a registrable discharge of mortgage.
(iii) The plaintiff pay 75 per cent of the defendants'/cross-claimants'
costs of the proceedings. (c) The appellant pay 75 per cent of the
respondents' costs of the appeal. [Note: The Uniform Civil Procedure
Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a
judgment or order is taken to be entered when it is recorded in the Court's
computerised
court record system. Setting aside and variation of judgments or
orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in
particular note the time limit of fourteen days in Rule 36.16.] |
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Catchwords:
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CONTRACT - unjust - Contracts Review Act 1980
(NSW) - operation of Act where lender uses mortgage originators which in turn
use sub-introducers to bring forward potential borrowers
- sub-introducers
engaged in fraud by falsifying relevant information concerning assets and
earnings of borrowers in relation to
low documentation lending secured by
mortgage over borrowers' homes - lenders had no knowledge of fraud - relevant
enquiry for the
purposes of the Act, ss 7 and 9 is whether contract is unjust in
all the circumstances of the case and whether it is just to grant relief - low
documentation lending
not unjust of itself but carries inherent systemic risk -
principal safeguard against risk in present cases was vigorous application
by
lender of lending guidelines - lending guidelines not followed - just in all
circumstances to grant relief notwithstanding carelessness
of
borrowers. AGENCY - nature of relationship - agency is a consensual
arrangement whereby one party undertakes to act for or on behalf of another
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centrality of conception of identity or representation of the principal -
entrusting of organisational or enterprise tasks to another
party not of itself
sufficient to constitute relationship of agency - no relationship of agency
between mortgage originator and sub-introducer. UNCONSCIONABLE CONDUCT -
requirement of moral obloquy or that conduct is irreconcilable with what is just
and reasonable - necessary
to characterise relevant contracting party's conduct
as unconscionable and not that of a third party - unconscionability not made
out
in absence of knowledge of contracting party of fraud of third party -
Australian Securities and Investments Commission Act 2001 (Cth), ss 12CB and
12CC considered. |
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Legislation Cited:
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Australian Securities and Investments Commission
Act 2001 (Cth), ss 1, 5, 12A, 12BAA, 12BAB, 12CA, 12CB, 12CB, 12CC, 12CC, 12GD,
12GH and 12GMAustralian Securities and Investments Commission Regulations
2001 (Cth), Reg 2B Consumer Protection Act 1967 (British Columbia), s
18 Contracts Review Act 1980 (NSW), ss 6, 7, and 9Corporations Act 2001
(Cth), s 1330Fair Trading Act 1987 (NSW), s 43German Civil Code
(BGB) Industrial Arbitration Act 1940 (NSW), s 88F Trade Practices Act
1974 (Cth), ss 51AB and 51ACUnconscionable Transactions Relief Act 1990
(Ontario), s 2
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Cases Cited:
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Texts Cited:
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G E Dal Pont Law of Agency (2nd Ed, LexisNexis,
2008) F E Dowrick "The Relationship of Principal and Agent" (1954) 17 Modern
Law Review 24P Finn Fiduciary Obligations (LawBook Co, 1977) P Finn
"Unconscionable Conduct" (1994) 8(1) Journal of Contract Law 37R P Meagher,
J D Heydon and M J Leeming (eds) Meagher, Gummow and Lehane's Equity: Doctrines
and Remedies (4th Ed, LexisNexis, 2002) J R Peden Harsh and Unconscionable
Contracts: Report to the Minister for Consumer Affairs and Co-operative
Societies and the Attorney-General
for New South Wales, 1976 J R Peden The
Law of Unjust Contracts (Butterworths, 1982) F M B Reynolds, W Bowstead and M
Graziadei Bowstead and Reynolds on Agency (17th Ed, Sweet & Maxwell,
2001) F M B Reynolds and W Bowstead Bowstead and Reynolds on Agency (16th Ed,
Sweet & Maxwell, 1996) W A Seavey "The Rationale of Agency" (1919-1920)
29 Yale Law Journal 859J Story "Contract" (1832) 9 Encyclopaedia Americana
156 P Watts and F M B Reynolds Bowstead and Reynolds on Agency (19th Ed,
Sweet & Maxwell, 2010) P Watts, "Imputed Knowledge in Agency Law -
Excising the Fraud Exception" (2001) 117 Law Quarterly Review 300 |
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Category:
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Parties:
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2009/298570 Tonto Home Loans Australia Pty Ltd
(Appellant) Jose De Carvalho E Rego Tavares (First Respondent) Kim
Lee-Anne Rowe (Second Respondent) Australian Securities and Investments
Commission (Third Respondent) 2009/298571 FirstMac Limited
(Appellant) Lawrence Di Benedetto (First Respondent) Maria Di Benedetto
(Second Respondent) Australian Securities and Investments Commission (Third
Respondent) 2009/298572 FirstMac Limited (Appellant) Gillian
O'Donnell (First Respondent) John Robert O'Donnell (Second
Respondent) Australian Securities and Investments Commission (Third
Respondent) |
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Representation
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A Leopold SC, D F C Thomas (FirstMac Limited and
Tonto Home Loans Australia Pty Ltd) P Menzies QC, A Fernon (Jose De Carvalho
E Rego Tavares, Kim Lee-Anne Rowe, Lawrence Di Benedetto, Maria Di Benedetto,
Gillian O'Donnell
and John Robert O'Donnell) R J Wright SC, J A Arnott
(Australian Securities and Investments Commission) |
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- Solicitors:
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Gadens Lawyers (FirstMac Limited and Tonto Home
Loans Australia Pty Ltd) Champion Legal (Jose De Carvalho E Rego Tavares ,
Kim Lee-Anne Rowe, Lawrence Di Benedetto, Maria Di Benedetto, Gillian O'Donnell
and John Robert O'Donnell) Australian Securities and Investments Commission
Litigation Counsel (Australian Securities and Investments Commission) |
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File number(s):
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2009/298570, 2009/298572, 2009/298571 |
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Decision Under Appeal
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- Court / Tribunal:
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- Before:
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- Date of Decision:
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- Citation:
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Permanent Trustee Company Limited v Gillian
O'Donnell; Permanent Trustee Company Limited v Di Benedetto; Tonto Home Loans
Australia
Pty Ltd v Tavares [2009] NSWSC 902 |
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- Court File Number(s)
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2006/12148; 2006/12147; 2005/15644 |
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Publication Restriction:
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JUDGMENT
- BATHURST
CJ: I agree with Allsop P.
- ALLSOP
P: These three appeals principally concern the operation of the Contracts
Review Act 1980 (NSW) (the " CRA ") in circumstances where a lender
uses contracted so-called "mortgage originators" which in turn use their own
networks of so-called
"sub-introducers" to find and bring forward potential
borrowers and one of those sub-introducers engages in deceptive, indeed
dishonest,
conduct that leads to the borrowers borrowing funds from the lender
and providing mortgage securities in return. In each case, the
borrowers, after
a body of conduct directed towards them involving a mixture of falsehoods and
pressure and their own imprudence,
entered the borrowing arrangements and
provided the funds obtained to a company associated with the sub-introducer,
which funds were
ultimately lost. The primary judge set aside the loans of all
borrowers thereby relieving them of any obligations to the lenders
in question:
Permanent Trustee Company Limited v Gillian O'Donnell; Permanent Trustee
Company Limited v Di Benedetto; Tonto Home Loans Australia
Pty Ltd v Tavares
[2009] NSWSC 902 . The appeals also concern the operation of the
Australian Securities and Investments Commission Act 2001 (Cth) (the "
ASIC Act "), ss 12CB and 12CC.
- The
judgment of the primary judge and the submissions discuss phrases or concepts of
"asset lending" and "Lo Doc Lending". At the
outset, it is important to stress
that such labels should be eschewed as determinative of legal reasoning. That
said, the widespread
use of the commercial structure of the lending in this case
has led the Australian Securities and Investments Commission ("ASIC")
to
intervene in these appeals under the Corporations Act 2001 (Cth), s 1330.
Structure of these reasons
- These
reasons have been organised as follows:
Factual background to the borrowings [5]-[90]
The O'Donnells [ 5 ]
The Di Benedettos [54]
Mr Tavares and Ms Rowe [ 71 ]
The structure and operation of the lending arrangements: the Origin
Program and the FirstMac Program [ 91 ]-[151]
General outline of structure [ 91 ]
The Origin Program [92]
The FirstMac Program [ 99 ]
Some commercial incidents of the lending structure [101]
The place of the loan introducer [ 103 ]
The lending guidelines [106]
Origin Program guidelines [107]
FirstMac Program guidelines [ 113 ]
Failure to follow the guidelines by Tonto HL [ 122 ]
The relationship between Tonto and Streetwise [129 ]
The terms of the arrangement [130]
The role played by Streetwise and the risks of the arrangements
[133]
The question of Streetwise (S Loans) as agent for Tonto HL [ 141 ]
The imputation of Streetwise's knowledge to the lenders [147]
Asset lending [ 152 ] - [ 155 ]
The application of the CRA [156]-[167]
The O'Donnell Loan [157]
The Di Benedetto Loan [ 163 ]
The Tavares and Rowe Loan [164]
Relief [165]
The appeal [168]-[298]
Agency [170]-[213]
Introductory remarks on agency [170]
The Introduction Deed [181]
Conclusion on agency [ 195 ]
Aspects of the primary judge's reasoning as to agency [ 198 ]-[213]
Streetwise's part in the administrative process [ 198 ]
The joint venture agreements [199]
Tonto HL's knowledge of Streetwise [ 201 ]
Imputation of knowledge [ 206 ]
The other grounds of the appeal [ 214 ]-[250]
Giving manifestly insufficient weight to the misleading conduct of the
borrowers [215]
Other relevant factual errors asserted [229]
Erroneous finding of borrowers not exposing lenders to risk of fraud [
236 ]
Erroneous finding that the borrowers obtained no benefit
[238]
The question of legal advice [246]
Asset lending [ 248 ]
Reconsideration of the CRA and the notice of contention
[ 251 ]-[281]
Reapplication of the CRA [251]
Whether the contracts were unjust [ 252 ]
Public interest [269]
Relief [ 273 ]
Notice of contention - other statutory relief [ 282 ]-[298]
Orders [299]
Factual background to the borrowings
The O'Donnells
- The
first two borrowers, John O'Donnell and Gillian O'Donnell, were registered
proprietors as joint tenants of their home at Harbord
in Sydney. The home had
been purchased in 1984 with the assistance of a bank loan. On about 10 January
2003, the O'Donnells entered
into a loan agreement for an advance of $500,000
with Permanent Trustee Company Limited ("Permanent"). The security was a first
registered
mortgage over their home. The loan was settled on 7 February 2003.
- The
primary judge described the facts concerning and leading up to the borrowing by
the O'Donnells at [29]-[95] of his reasons. I
will seek to distil what occurred.
- In
September 2002, Mr O'Donnell was 54 years of age. He had been unemployed for 18
months after selling a small business which he
had run from 1993 to 2001 with
the assistance of his wife. The O'Donnells had borrowed $100,000 on the security
of their home to
buy that business. Mrs O'Donnell was employed as a customer
service officer at a bank, earning about $23,000. The primary judge described
them as follows at [32]:
"Mr and Mrs O'Donnell were neither sophisticated nor na i ve in financial
matters. Before they commenced their dealings with Streetwise
they understood
what it meant to provide a mortgage and that a possible consequence of default
in the loan repayments was the sale
of the secured property."
- In
2002, there was very little owing on their home, which was worth about $750,000.
They had savings, superannuation and shares of
under $300,000. Mr O'Donnell had
some experience in share market trading and had managed the family
superannuation fund for a few
years.
- In
September 2002, Mr O'Donnell was approached in a shopping mall by a young woman
employed by one of the companies in what can be
called for present purposes the
"Streetwise Group". At this stage, I will not seek to differentiate the various
Streetwise companies.
It suffices at this point to say that one of the
Streetwise companies (to which I will refer as "S Loans" when needing to be
precise)
carried on business as a finance broker and was a sub-introducer of
loans to the mortgage schemes to which I will come. Another Streetwise
company
(to which I will refer as "S Property" when needing to be precise) carried on
the business of land development.
- The
young woman asked Mr O'Donnell if he was interested in using the equity in his
home to fund a property investment. She took Mr
O'Donnell's contact details. A
few days later, Mr Downs from Streetwise rang and arranged a meeting at the
O'Donnells' home.
- Before
the meeting took place, Mr O'Donnell made a telephone call to ASIC about
Streetwise. He was told there was nothing negative
known. He considered bringing
his accountant to the meeting, but decided against that because of the cost.
- The
first meeting took place on 11 October 2002 at the home of the O'Donnells. Mr
Downs attended. He asked the O'Donnells about assets,
liabilities and income and
was told the matters that I have described. He sought to explain a scheme
whereby, using 75 - 80 per cent
of the equity in their home, they could partner
Streetwise in a joint venture building project, splitting the profits on sale,
and
buy (or build) a second property as an investment property. It would all
cost $500,000. To Mrs O'Donnell's statement that they could
not afford to borrow
$500,000 and she did not want to lose their house, Mr Downs said:
"'It's okay. Streetwise will pay the majority of the loan. You can borrow
about $500,000. We'll use about $52,000 of this as a deposit
for the house and
land package. The rest will be used to enter the joint venture with Streetwise.
We will get a good house and land
package for you.
...
Your portion of the payments should be about $300 to $400 per month.'"
- During
the meeting, Mrs O'Donnell said:
"I don't know how you'll get a loan on my income."
- Mr
Downs responded by saying:
"That's not a problem. We'll get the loan."
- At
the meeting, Mrs O'Donnell took detailed notes. Mr Downs made notes which he
left with them. The O'Donnells gave Mr Downs a cheque
for $495 for a so-called
financial strategy. Another meeting was arranged at premises of Streetwise. Mr
Downs told them that they
would have to then pay $2,500 to ensure that they
would be given a project.
- After
the meeting, Mrs O'Donnell spent some time explaining to her husband how she
understood that the investment would work.
- Also
after the meeting, a letter from Streetwise Financial Strategies Pty Ltd bearing
the Streetwise logo dated 11 October 2002 and
signed by Mr Luke Hajje was sent
to the O'Donnells. It appointed 2 pm on 17 October for the next meeting. The
letter stated:
"Thank you for choosing Streetwise as your value-adding partner to work a
proven financial strategy for wealth creation and tax reduction.
As one of Streetwise's valued clients, the rewards that you will realise
through methodical application of the strategy combined with
reasonable cash
flow discipline, will put you and your family in a stronger financial position.
We are preparing your financial strategy based on the information you
furnished your streetwise client advisor.
...
Our aim is for you both to have a thorough understanding of our proposal and
the mechanics involved in the structure. We, at Streetwise,
feel this is
essential before we can progress any further."
The letter requested the O'Donnells to bring to the meeting various documents
that gave information about income, including recent
pay slips, mortgage or
other loan statements, rental statements from any rental property, council
rates, PAYE group certificates
or full tax returns for the last two years or
self-employed or corporate tax returns or partnership accounts for the last two
years.
- The
second meeting took place on 17 October 2002, at Streetwise offices in Milsons
Point, Sydney. Mr and Mrs O'Donnell met Mr Downs
and Mr Hajje. Mrs O'Donnell
took a number of the documents requested in the letter of 11 October: her pay
records and council rate
notices. The primary judge at [40] of his reasons
described how the scheme was explained using a white board:
"At the meeting Mr Hajje gave a presentation as to how the O'Donnells could
invest $500,000 of which $50,000 was to be used as a deposit
on a house and land
package in either Narre Warren or Shell Cove. The rest of the money would be
used to enter a joint venture agreement
to develop a block of land in Botany
with six townhouses on it."
- Mrs
O'Donnell once again said that they could not afford the loan, as Mr O'Donnell
was not working and that she did not want to lose
their house. This time Mr
Hajje said:
"It's okay because Streetwise pays the majority of the loan."
- At
the meeting, the O'Donnells were given a document entitled "Irrevocable
authority to act as co-ordinator and Project Manager".
This was the joint
venture agreement that they later signed. It was a document that was said to
represent a "formal agreement" with
Streetwise Property & Projects Pty Ltd
(S Property). The O'Donnells took it away with them. Mrs O'Donnell recalled that
either
Mr Downs or Mr Hajje asked whether their accountant could come to the
next meeting.
- The
primary judge succinctly described the joint venture agreement at [42] of his
reasons:
"The O'Donnells were given a document called an ' Irrevocable authority to
act as co-ordinator and Project Manager '. The document provided inter alia
that the agreement was expressed to be 'binding and irrevocable' and that
Streetwise Property
was irrevocably appointed as co-ordinator and project
manager on the O'Donnells' behalf to locate and develop a ' suitable '
site. The document further stated that:
'Streetwise will, whether through Streetwise Home & Investment Loans
Pty Ltd or through an external financier, obtain necessary
finance for the
original purchase and construction of the proposed development.
All external costs, including government statutory charges, legal,
finance, construction costs as well as the financing of the borrowed
funds, will
be the responsibility of John and Gillian O'Donnell'."
The company mentioned, Streetwise Home & Investment Loans Pty Ltd, was S
Loans.
- The
extent of the advice sought by the O'Donnells was described by the primary judge
at [43]-[45] of his reasons, as follows:
"[43] Sometime after the meeting, Mrs O'Donnell showed the document to Ms
Liddle, a solicitor, who was a friend. Ms Liddle told her
there was no escape
clause once she had signed on the dotted line, but 'otherwise it seems okay'.
Mrs O'Donnell did not otherwise
seek advice from Mrs Liddle in relation to
Streetwise or the investment generally.
[44] On around 18 October 2002, the O'Donnells attended the office of their
accountant Mr Burchall principally for the completion
of their taxation returns.
The accountant was handed a booklet entitled 'Streetwise Financial Strategy'
which had been given to them
by Mr Hajje. Mr Burchall did a company search of
Streetwise and circled the directors' names and said:
'There's been a few. Just be careful.'
[45] When asked by the O'Donnells if he would come to their next meeting with
Streetwise, the accountant advised it would cost them
about $300 per hour and
that he did not think it was worthwhile for him to come."
- Thus,
at this point, it is to be noted that the O'Donnells were in effect told they
could bring their accountant to a meeting, were
given the joint venture
agreement to take away, had and took the opportunity to consult an accountant
and solicitor, but declined
to retain them, it can be inferred because of
considerations of cost.
- The
third meeting took place at Streetwise's offices in Clarence Street, Sydney on
23 October 2002. The O'Donnells met with Mr Downs,
Mr Hajje, Mr Bassili and Mr
Bangaru. The primary judge made the following findings about this meeting at
[47]-[54] of his reasons:
"[47] Mr Hajje explained to them that Streetwise was having difficulties with
the Botany project and the Narre Warren house and land
package was discussed. Mr
O'Donnell recalled that Mr Hajje told them they had to sign some papers. When
they hesitated signing, Mr
Downs left the room and returned with Kovelan
Bangaru. Mr Bangaru said:
'I will personally guarantee your money'
and
'We provide the loan and do everything in-house. You can use our
solicitors.'
[48] It seems that the joint venture agreement was signed at this meeting.
[49] Mr O'Donnell in his affidavit gives an account of being provided with a
loan application form by Mr Bassili.
[50] Paras 70-73 are as follows:
'Jill and I were handed documents by Mr Bassili which appeared to be a
loan application form. I did not read the document, however,
I did observe that
some information had already been handwritten on this form, including my name
and address. The section concerning
my income was left blank, as I had already
informed them that I was unemployed. I also noticed that there were figures
concerning
our assets, however, I did not get the chance to look at the document
in detail as everyone in the room kept talking about the projects.'
There were various conversations going on at the same time. They seemed
keen to progress quickly and were rushing us.
I recall Jill saying words to the effect of:
"It's a bit high"
I was talking to someone else at the time however, and did not hear the
rest of the conversation.
I signed the document while everyone was still talking. A copy of the loan
application is at pages 117-120 of exhibit JR01. It is
not in my handwriting.'
[51] Mrs O'Donnell recounts in para 66 of her affidavit that she looked down
at the paperwork and saw the heading ' Streetwise Home and Investment Loans'
. She asked Mr Bangaru:
'...are we getting the loan from you?'
To which he replied:
'Yes. We like to keep everything in house.'
[52] Mr Bassili told Mrs O'Donnell that [Streetwise] preferred to use its own
solicitors and there was no need for other solicitors.
Mrs O'Donnell understood
that they would be using Streetwise solicitors as it all needed to be done
quickly and that there was no
time for other lawyers.
Mr Bangaru said, Mrs O'Donnell recounts:
'I will personally guarantee your mortgage. Streetwise will pay the bulk
of the repayments.'
[53] Mrs O'Donnell told him that she did not want to lose their house and was
assured by Mr Bangaru that they would not.
[54] Mrs O'Donnell recalls at para 70 of her affidavit of 5 October 2007:
'After Mr Bangaru left the room, I briefly looked down at the paper work
regarding the application again. Mr Downs and Mr Bassilli
kept talking to Johnno
and I while I looked at the application. It was already filled out with my name,
income and my assets. I noticed
that Johnno's income was blank however this made
sense as he was unemployed. I also noticed that some of the figures regarding
our
assets were larger than John and I had estimated at our earlier meeting,
particularly our furniture and superannuation. I said words
to the effect of
"It's a bit too much"
Either Mr Downs or Mr Hajje said words to the effect of:
"Most people underestimate their assets"
Johnno and I had never independently checked the estimates that we had
earlier given them regarding our assets or referred to any
paper work, so we
accepted what they said. We thought they knew what they were doing. I did not
have time to read the document in
detail as Mr Downs and Mr Bassili continued to
talk to Johnno and I while we signed."
- The
two page loan application form, with a Streetwise logo, had, as Mrs O'Donnell
apparently noticed, "Streetwise Home & Investment
Loans Pty Ltd" printed at
the bottom of both pages. The document consisted of one and a half pages of
boxes for relevant information,
a credit card authorisation and a detailed
declaration by the O'Donnells.
- The
loan application form was largely blank when the O'Donnells signed it. It had
only their names, address and basic details including
driver's licence numbers.
Many of the boxes could legitimately have been left blank as not applicable.
Both Mr and Mrs O'Donnell
were cross-examined by Mr Adam Bell SC, counsel for
the lenders below. The questions were pointed (but fair) and were answered
frankly.
They were set out by the primary judge at [63] and [64] of his reasons.
Importantly, they reveal that the O'Donnells knew that this
was a document that
the lender would look at in assessing the loan (for $500,000), that it was (with
hindsight) careless and that
they were leaving it to Streetwise to fill in. It
was not put to them that they intended to mislead the lender or that they should
have appreciated that the lender would or might be misled. It is also important
to understand that, at this point, the O'Donnells
had been told, falsely, that S
Loans was the lender.
- The
primary judge recorded at [59] the false information put in the form by someone
at Streetwise:
"It is evident that the loan application form after it had been signed by the
O'Donnells was altered by an undisclosed person or persons
at Streetwise
inserting in the box headed 'Current Occupation & Employer' that John
O'Donnell was a ' Self-Employed - Sole Trader Coffee Shop ' for ' 5
years ' and in the box provided for 'Salary' a fortnightly income of $3,500.
The form also disclosed superannuation to the value of $241,000,
cash to the
value of $60,000 and furniture to the value of $60,000. All of this material was
untrue and was inserted without the
knowledge of Mr and Mrs O'Donnell."
- The
above finding that the disclosed values of superannuation ($241,000), cash
($60,000) and furniture ($60,000) were placed on the
form after the event was
not correct. These figures were placed on the form at the meeting. They were
incorrect. The O'Donnells had
previously told Mr Downs the figures of $165,000 -
$179,000 (superannuation), $40,000 (cash) and $40,000 (furniture). Mrs O'Donnell
gave evidence about these figures in para 70 of her affidavit (see [ 24 ]
above).
- The
information concerning Mr O'Donnell referred to in the first half of [59] of his
Honour's reasons, set out above, was apparently
placed there later by someone at
Streetwise. It was false and contrary to what Streetwise was told by the
O'Donnells.
- Mrs
O'Donnell was cross-examined to the effect that she was careless signing a form
with incorrect information. She was not cross-examined
to the effect that she
intended to mislead the lender.
- The
loan product written on the first page was "1 st Run Lo Doc" loan; and the loan
purpose was recorded as being "Purchase Investment
Property".
- The
declaration was one by "Applicant and Guarantor". It was thirty lines of close
type that commenced:
"I/We have made an application for credit from Nationale Limited ABN ...
trading as Tonto Home Loans (Tonto)"
Tonto was then mentioned a number of times in the text. At the bottom of the
declaration above the signature panels, there appeared
the following:
"I/We declare that to the best of my/our knowledge and belief, the facts,
information and statements set out in this application are
true and correct, and
that no information, which might affect the decision of the credit provider, has
been withheld. Unless indicated
below I/We consent to Tonto using and disclosing
information about me/us for the purposes of direct marketing and agree to being
contacted by Tonto and its business partners to be informed about products and
services that I/We may be interested in."
- Below
the signature panels for Mr and Mrs O'Donnell was a declaration by the
"Introducer or Introducer's Agent", as follows:
"I declare that I have sighted and validated and/or will sight and validate
all the original documents of all copies of documents
associated with this loan
application forwarded or to be forwarded to Tonto Home Loans and I declare that
I have given to the Applicant/s/Guarantor/s
a copy of the Tonto Home Loans
Personal Information Collection Statement."
- The
O'Donnells also signed a one page document also under Streetwise logo entitled
"Declaration as to Purpose of Credit". This contained
a declaration and warning
as follows:
"I/We declare that the credit to be provided to me/us by the credit provider
is to be applied wholly or predominantly for business
or investment purpose (or
for both purposes).
Important
You should not sign this declaration unless this loan is wholly or
predominantly for business or investment purposes. By signing this
declaration
you may lose your protection under the Consumer Credit Code."
The O'Donnells signed immediately below this. The document also had an
authority to Tonto Home Loans to discharge the pre-existing
mortgage. The
O'Donnells also signed immediately below this.
- The
O'Donnells also each signed a document, again under the Streetwise logo, with
"Streetwise Home & Investment Loans Pty Ltd"
printed at the bottom of the
page and entitled "Borrower Income Declaration for the First Run & Flexi
Range of Lo Doc Loans".
That signed by Mrs O'Donnell stated in handwriting
$25,000 (which was substantially accurate); that signed by Mr O'Donnell
contained
a declaration of $91,000. The primary judge made the following
findings about Mr O'Donnell's declaration at [67] of his reasons:
"It is plainly the case that when Mr O'Donnell signed the document the space
provided for the insertion of income had been left blank.
The false income
figure of $91,000 was subsequently inserted by an undisclosed person at
Streetwise without Mr O'Donnell's knowledge."
- Each
of these forms had the following acknowledgments printed on it:
"I acknowledge that Permanent and FirstMac have relied upon the information
contained in the application for credit including the
following information
provided by me in or with the application in assessing whether to approve the
application.
...
I acknowledge that neither Permanent nor FirstMac have independently verified
the information relating to my personal income provided
by me in or with the
application. I declare that the information provided in or with the loan
application is true and correct and
that I can afford to make the loan
repayments without any undue financial hardship."
- The
O'Donnells were not given copies of the documents they signed. The primary judge
made the following findings about this meeting
at [68] of his reasons:
"Mr and Mrs O'Donnell were not told by Streetwise that the loan application
was for a Lo Doc loan or what a Lo Doc Loan was. They
were not informed of the
particular significance that the information provided as to their income had in
Lo Doc Lending. They were
rushed by Streetwise into signing the incomplete loan
application and income declaration and at the time believed that Streetwise
knew
what it was doing. Mr and Mrs O'Donnell acknowledged what they did was careless.
Regrettably, it exposed themselves, Tonto and
Permanent to the risk of fraud by
Streetwise."
- A
document under Streetwise logo headed "Irrevocable Authority to act as
Co-ordinator & Project Manager" in the form of the document
taken away by
them from the second meeting that was signed by the O'Donnells also bears the
date 23 October 2002. It records that
upon signing they will pay an
"Establishment Fee" of $2,000.
- A
week later, on 30 October, after the O'Donnells returned from Melbourne, having
been flown there, with Mr Bassili, by Streetwise
to inspect the land at Narre
Warren, they signed another document, again under Streetwise logo, entitled
"Irrevocable letter of intent
and authority to act". In this document, the
O'Donnells acknowledged that S Property had proposed the Narre Warren property
and that
they were proceeding with the purchase of that property at a price of
$261,000. The document authorised Streetwise Financial Strategies
Pty Ltd to
appoint a solicitor to act on their behalf to effect a transfer and settlement
and further authorised the financial institution
providing the mortgage finance
to forward the mortgage documents direct to Streetwise. They paid a "deposit" of
$2,000.
- On
or shortly after 7 November 2002, the O'Donnells received a preliminary approval
letter bearing that date under Streetwise logo
from S Loans. It commenced, "Dear
Customer" and stated:
"We are pleased to indicate the basis on which a loan will be made to you
..."
Whilst the borrowers were identified, no lender was, though there was
reference to the "Lenders". The product was called a "FirstRun
LoDoc Variable".
Indicative payments were $2,895.83 per month (over 30 years). Interest only was
payable for the first five years.
There was a special condition about cashing
out stated to be as follows:
"Any cash out component in excess of $100K is to be fully documented and the
purpose considered acceptable by the Funder and Mortgage
Insurer."
Insurance of various kinds was mentioned:
"We recommend that all borrowers carry risk cover and life insurance to at
least the value of their loan commitments. A representative
from our insurance
department will call you to offer an extremely attractive package.
Lenders mortgage insurance may be required. Lenders mortgage insurance
protects the lender against loss in certain circumstances.
Lenders mortgage
insurance does not protect the Borrower."
The following was stated as to solicitors:
"If the proposed loan is approved, we will instruct our solicitors who will
prepare and forward documents to you or your solicitors."
- To
all intents and purposes, the letter appeared to reflect what had been said at
the meetings - that Streetwise was lending the funds.
S Loans was certainly
acting to arrange the funds and it was not holding itself out as representing
the interests of anyone but Streetwise.
- After
preliminary approval of the loan, Mr O'Donnell received enquiry from someone at
Streetwise about whether he had an ABN. The
evidence was unclear. He told the
person or persons who enquired that he and Mrs O'Donnell had deregistered their
ABN after sale
of their business. An ABN in the name of Mrs O'Donnell appears to
have been re-registered. Mrs O'Donnell, who had provided Streetwise
with the
expired number, denied having sought to re-activate it. The primary judge
concluded (at [74] of his reasons) that she did
not do so, finding that the
re-activation of the ABN and its provision to the lender (as Mr
O'Donnell's ABN) was a deception by Streetwise on the lender.
- On
or shortly after 7 January 2003, the O'Donnells received a final approval letter
bearing that date, again under Streetwise logo,
and again from S Loans. The
letter commenced, "Dear Customer" and stated:
"We are pleased to inform you that the following loan has been approved."
Again no lender was mentioned, but a "Mortgage Manager" was identified:
"Tonto Home Loans Limited". (This company, which will be referred
to as Tonto
HL, was the mortgage manager for the two lending programmes to which I will
come.) It will be recalled that the close
print of the declaration in the loan
application form commenced "I/we have made an application for credit from
Nationale Limited
ABN ... trading as Tonto Home Loans ('Tonto')." The
information was otherwise, broadly, as contained in the preliminary approval
letter, including the same cash out condition.
- As
to the identity of the lender, Mrs O'Donnell gave evidence that she thought
Streetwise was the lender (at least up to and at the
point of receiving the
final approval letter).
- On
or shortly after 7 January 2003, Hunt and Hunt, who acted for Permanent and
Tonto, prepared a letter bearing that date addressed
to Mr and Mrs O'Donnell.
Before turning to its terms, it is to be noted that the primary judge found
(after a contest in the evidence)
that the letter, which enclosed the loan
agreement, mortgage and memorandum of mortgage, was sent direct to the
O'Donnells, and not
to Streetwise. This letter was clearly inconsistent with
Streetwise being the lender. The subject matter of the letter was described
as
follows:
"LENDER: PERMANENT TRUSTEE COMPANY LIMITED
MANAGER: TONTO HOME LOANS LIMITED
PROPERTY: ....."
The letter commenced:
"We act for the Lender and the Manager."
Under the heading "How to sign the documents", the following appeared:
"Please read the documents carefully to ensure they agree with your
understanding of the transaction. If you have any queries, please
ask before you
sign. The lender is keen to ensure that you understand the transaction.
You may decide whether or not to obtain independent legal advice. You must
sign the box on the last page of the Loan Agreement to
confirm which option you
chose."
Under the heading "Independent legal advice", the following appeared:
"Remember, you are free to contact your own solicitor for explanation of the
documents at any stage. If you have any doubts or want
more information, contact
your government consumer agency or get legal advice."
- The
O'Donnells signed all relevant transaction documents. In the loan agreement,
they signed the box on the last page of the loan
agreement which specifically
stated that they had chosen not to obtain legal advice. The primary judge made
the following findings
about Mrs O'Donnell at [84]:
"Mrs O'Donnell agreed in cross-examination that she had the opportunity in
her home to read the documents before she signed them but
said she had not read
them in their entirety. She agreed that she observed the lender was Permanent,
the originator was Tonto, that
she and her husband were the borrowers, that they
were contracting to make payments monthly during the facility term and that a
mortgage
was being given over their property as security for the loan. Mrs
O'Donnell further agreed that she understood what the interest
rate was and knew
that she was liable to the lender irrespective of what their arrangements with
Streetwise were. She agreed that
she understood that by giving a mortgage over
their property it was at risk if the loan was not repaid. Mrs O'Donnell agreed
that
they had the right to obtain independent legal advice if they required it."
This involved a rejection of the legitimate continuation of any belief in Mrs
O'Donnell, which might hitherto have been engendered
by Streetwise and the
correspondence that Streetwise was the lender. Mr O'Donnell was cross-examined
to the same effect. An answer
in cross-examination of Mr O'Donnell recorded by
the primary judge at [87] of his reasons reflected the position they both were
in
with some clarity:
"Q. You took the risk of giving a mortgage to the lender because you believed
Streetwise would make those repayments; is that fair?
A. Yes, of course."
- The
actual signing of the documentation took place at a meeting on 10 January 2003
in Streetwise's boardroom with Mr Bangaru and Mr
Downs. At the meeting there was
discussion about a change of site from Botany to Seaforth for the property joint
venture. The O'Donnells
gave evidence, which the primary judge accepted, that
they were rushed in signing the documents at the meeting. The primary judge
summarised the circumstances of signing as follows at [92] of his reasons:
"Although the signing of this documentation was deliberately rushed by Mr
Bangaru and the other Streetwise employees at the meeting,
Mr and Mrs O'Donnell
had had the opportunity of considering the loan agreement and mortgage prior to
the meeting and understood,
I am satisfied, the gist of what they were signing.
They both appreciated that they could obtain independent legal advice but were
persuaded not to do so. The impressive Streetwise offices, high pressured and
convincing presentations undoubtedly impacted upon
the prudence of their
considerations and their common belief was that there was little risk that
Streetwise would not meet its promise
to pay most of the mortgage instalments ."
- The
primary judge found the following at [91] of his reasons:
"Mr Bangaru assured them during the meeting that their profit from the Battle
Boulevard property joint venture should be about $60,000
and it would take 12 to
18 months to complete."
- The
primary judge crisply summarised the overall circumstances of the taking out of
the loan as follows, at [93] of his reasons:
"Mr and Mrs O'Donnell, however, had been dishonestly misled by Streetwise
about their investment. Furthermore, Streetwise had fraudulently
completed the
loan application form and Income declaration as Streetwise knew that truthful
disclosure of the O'Donnells' assets
and income would not meet the lending
guidelines either under the Origin Program or the FirstMac securitised lending
program. But
for the fraud of Streetwise, the loan would not have been approved.
Mr and Mrs O'Donnell were unaware that the loan had been approved
upon the
fraudulent material inserted by Streetwise. If they had known that the lender
did not take into account the promise by Streetwise
to contribute to the loan
repayments when considering the application and that their financial position
truthfully stated did not
meet the lending guidelines, I am satisfied on the
balance of probabilities that the O'Donnells would not have proceeded with the
loan application."
(I will explain the "Origin Program" and "FirstMac securitised lending
program" in due course.)
- One
of the documents signed by the O'Donnells on 10 January was a direction to Hunt
and Hunt authorising them to disburse all the
funds on settlement to "Streetwise
Property and Projects Pty Ltd". This occurred at settlement on 7 February 2003.
- On
or shortly after 11 February 2003, the O'Donnells received a letter of that date
on Streetwise letterhead thanking them for "choosing
Streetwise Home &
Investment Loans Pty Ltd to provide your recent funding". It was signed (or
purported to be signed) by Mr Kim
Cannon on behalf of that company. In fact Mr
Cannon was an officer of Tonto. This was found by the primary judge to be a
mistake.
- The
primary judge described the fate of the O'Donnells' loan and interest thereafter
and their lack of any financial benefit at [95]-[96]
of his reasons, as follows:
"[95] Following the settlement of the loan, Streetwise paid $2,345.86 into
Mrs O'Donnell's St George account whilst the O'Donnells
paid $319.89. The total
amount was withdrawn by Tonto. It appears that Streetwise with interest
variations made deposits into the
St George account until June 2005. During that
time Mr and Mrs O'Donnell had received various assurances from Streetwise about
the
progress of the Battle Boulevard joint venture and the completion of the
Narre Warren property all of which proved to be untrue.
They were also assured
at a meeting in April 2004 that Mr Bangaru would write a cheque for $6,000 to
cover the repayments for the
Narre Warren property until the joint venture was
completed. The cheque was never received.
[96] Property searches undertaken after Streetwise went into liquidation
revealed that Mr and Mrs O'Donnell had neither received security
over the Narre
Warren property nor the property at Battle Boulevard. Mr and Mrs O'Donnell
obtained no financial benefit whatsoever
from their investment with Streetwise."
- There
was no evidence dealing in any detail with the affairs of Streetwise, and in
particular the specific use of the O'Donnells'
funds.
The Di Benedettos
- The
history of the Di Benedettos' involvement with Streetwise and the borrowing from
Permanent was similar to the O'Donnells' and
was set out at [97]-[136] of the
primary judge's reasons. Mrs Di Benedetto met a Streetwise representative in
Warringah Mall in late
October 2002 and gave the person her contact details. A
Mr Steve Fassos came to their home and informed them that Streetwise did
property joint ventures and suggested a consultation. The Di Benedettos, who
operated a smallgoods business, and whose tax returns
disclosed modest taxable
income, gave Mr Fassos information at this meeting which reflected their modest
financial worth and which
the primary judge set out at [101] of his reasons:
"Income: $45,000 (combined average for the past two years)
House: $600,000
Business: $25,000 (purchase price)
Cash $25,000 (in name of business)
Furniture $25,000 to $30,000
Grace Bros Card: $750 (limit)
No Superannuation"
They provided Mr Fassos with the name of their accountant.
- The
primary judge described the Di Benedettos at [100] of his reasons, as follows:
"Mr and Mrs Di Benedetto were neither sophisticated nor na i ve in financial
matters before they commenced their dealings with Streetwise.
They understood
what it meant to provide a mortgage and that a possible consequence of default
in the loan repayments was the sale
of the secured property."
- Meetings
then occurred in January 2003, described by the primary judge at [103]-[104] as
follows:
"[103] In early January 2003, Mr and Mrs Di Benedetto met Luke Hajje at the
Streetwise office in Clarence Street. Mr Hajje explained
how they could use the
equity in their home as a deposit in a Streetwise development at Shell Cove.
When asked questions by Mr Fassos
about their business and income, Mrs Di
Benedetto provided him with the same figures with which he had been previously
provided.
At the end of the meeting, the Di Benedettos met Kovelan Bangaru who
told them:
'Streetwise are a one-stop shop. We do everything. We get the loan and you
can use our legals.'
[104] On the following Saturday, Mr and Mrs Di Benedettos met Mr Bangaru and
Trevor Downs at the Streetwise Clarence Street office
where they discussed a
joint venture arrangement in connection with a property at Battle Boulevard
Seaforth. This was the same Battle
Boulevard property which was the subject of
Mr and Mrs O'Donnell's joint venture with Streetwise. Mr Bangaru informed them
that Streetwise
paid the loan payments each month and that Streetwise was in the
process of buying the property. After inspecting the property and
returning to
the Streetwise office, the Di Benedettos were informed that it would cost them
$500,000 to participate in the joint
venture."
- At
this second meeting, the Di Benedettos said they could not afford a loan of
$500,000. They were assured by Mr Bangaru that Streetwise
would pay all the
interest (on the interest only loan). After saying that "Tonto" would be used,
Mr Bangaru said:
"... Tonto knows all about this. The director of Tonto, Kim Cannon knows what
we do. He knows we pay the loan. We do this all the
time."
- After
some hesitation, the Di Benedettos then signed a loan application (in the same
form as the O'Donnells') in blank, not knowing,
the primary judge found, what it
was. It was said to be a form to "get the loan underway" which "we'll fill out
later". The Di Benedettos
did not read the forms.
- The
fate of the blank application form was described by the primary judge at [109]
of his reasons, as follows:
"It is evident that the application was subsequently falsely completed by an
undisclosed person or persons at Streetwise. Mr and Mrs
Di Benedetto's income
was inserted as each having income of $55,000 per annum. The business was valued
at $125,000 when the estimation
provided was $25,000. Although the Di Benedettos
had no superannuation an amount for superannuation was inserted as being
$30,000.
Furniture was valued at $75,000 notwithstanding Mrs Di Benedetto's
estimation of $25,000-$30,000. The value of shares was inserted
as being $10,000
when no value for shares was provided by Mrs Di Benedetto. All of this false
information was inserted without the
knowledge of Mr and Mrs Di Benedetto."
- Once
again the loan product applied for was a "First Run Lo Doc" loan of $500,000.
The purpose of the loan was stated to be "free
up equity for investment
purchase". The Di Benedettos were not told or given a copy of the form of the
application as it was submitted
by Streetwise.
- In
cross-examination, the Di Benedettos conceded that they appreciated that the
document related to the loan application and that,
looking back, it was careless
to sign in blank.
- They
each also signed income declaration forms in blank in the same form as those
signed by the O'Donnells. Each form falsely stated
an annual income of $55,000.
The primary judge found the following at [114]-[115] about the circumstances of
these signings:
"[114] It is plain that Mr and Mrs Di Benedetto were pressured by the
salesmanship of Streetwise into signing the loan application
and income
declaration forms which were in blank and about which their understanding was
limited. They did not know that the application
was for a Lo Doc loan nor had
they been informed of the particular significance that the information provided
as to their income
had in Lo Doc lending. Nevertheless with their experience in
financial matters which included operating a small business and the
borrowing
and granting of mortgages on earlier occasions, the signing of these documents
in blank, even without the benefit of hindsight,
was careless. They exposed
themselves, Tonto and Permanent to the risk of fraud by Streetwise.
[115] Mr Bangaru told Mr and Mrs Di Benedetto that they would make between
$50,000 to $70,000 on the Seaforth property and Streetwise
would make the
repayments which would be deducted from their share of the profit."
- The
Di Benedettos received letters from Streetwise dated respectively 31 January and
13 February 2003 informing them of preliminary
and final approval for the loans,
in the same terms, mutatis mutandis , as received by the O'Donnells.
- Shortly
thereafter, Mr Fassos and Mr Bangaru came to their home with the loan agreement,
mortgage and direct debit authority. These
had been sent by Hunt and Hunt to the
Di Benedettos care of Streetwise, in the circumstances which are discussed
below. Mrs Di Benedetto
did, however, also receive in the mail directly a letter
from Hunt and Hunt enclosing, at least a copy of, the loan agreement. Mrs
Di
Benedetto said she kept the loan agreement and may have read it. The primary
judge made the following comments at [123] of his
reasons about the failure of
Hunt and Hunt to send the transaction documents directly to the Di Benedettos:
"Hunt and Hunt had been appointed to the Origin program panel for documenting
mortgage loan transactions in June 1997. The firm's
failure to comply with
Origin's service requirements placed the loan documentation in the hands of
Streetwise thereby assisting Mr
Bangaru and Mr Fassos to rush Mr and Mrs Di
Benedetto into signing the loan agreement and mortgage without the Di Benedettos
having
the opportunity to consider the documents."
- The
Di Benedettos signed the transaction documents at their home during the visit of
Mr Fassos and Mr Bangaru. The Di Benedettos did
not read them; the documents
were not explained to them; Mr Bangaru told them that they did not need legal
advice. In cross-examination,
Mrs Di Benedetto accepted that she looked at the
first page, saw they were described as borrowers of $500,000, noticed who the
other
parties were and what the interest rate was. It was her understanding that
Streetwise was going to pay the interest to them and they
would pay Tonto. She
understood that she was giving a mortgage over her home as security for the
loan.
- In
his cross-examination, Mr Di Benedetto made similar concessions, though he said
that he thought that the lender was Tonto. He accepted
that he left it to his
wife to make the decision, and that he did not read the documentation because he
was relying on Streetwise
to fund the interest payments from their account.
- Settlement
took place. The funds were directed to S Property in accordance with an
authorisation signed by the Di Benedettos. The
Di Benedettos were notified as
described by the primary judge at [125] of his reasons:
"The first letter Mr and Mrs Di Benedetto received from Tonto was dated 21
February 2003 and advised of a variation in some of the
loan terms and
conditions. By a letter dated 27 February 2003, Streetwise informed the Di
Benedettos that the loan settled on 26
February 2003. Ms Lau from Streetwise in
a telephone conversation confirmed the settlement of the loan and that they were
now part owners of the Seaforth property . On or after 7 March 2003, the
Di Benedettos received a letter from Tonto advising of the settlement of the
loan."
- A
little later, the Di Benedettos realised that they had no proof of any
investment with Streetwise. They then signed a document in
circumstances
described by the primary judge in [126] of his reasons, as follows:
"... Mr Bangaru came to their home after Streetwise had been contacted
bringing a document entitled "Deed of Investment " ... The Deed recorded
that Mr and Mrs Di Benedetto had entered into a joint venture with Streetwise
Property to acquire and develop
the Battle Boulevard property for the purpose of
resale and purported to set out the Framework of the joint venture. The
Framework includes the incorporation of a "property investment vehicle"
and that Mr and Mrs Di Benedetto "are to raise capital via a mortgage
(refinance/redraw) from the equity of their property(ies)" namely $487,660.41 as
capital. The Deed, inter alia, authorised the "Trustee
and/or the Directors" to
borrow monies "for and on behalf of the Investment vehicle." Mr and Mrs Di
Benedetto signed the agreement
which is dated 5 March 2003. This was the joint
venture agreement which Mr and Mrs Di Benedetto entered into with Streetwise."
- Streetwise
made the interest payments into the Di Benedettos' account until mid-2005. At
[127] of his reasons, the primary judge found:
"... A title search made by Mrs Di Benedetto after the collapse of Streetwise
disclosed that Streetwise was not the registered proprietor
of the Battle
Boulevard property. Mr and Mrs Di Benedetto obtained no financial benefit
whatsoever from their investment with Streetwise.
They had been dishonestly
misled by Streetwise about their investment."
- Mrs
Di Benedetto rang Tonto in July 2005, at which time she learnt that Tonto did
not know of the arrangement that Streetwise would
pay the interest and that she
and her husband were liable for the loan payments. The primary judge did,
however, find Mrs Di Benedetto's
evidence of her understanding of the effect of
the loan agreement and mortgage to be less than satisfactory: see [132] of the
reasons.
It was clear from later ASIC interviews that she always understood that
their home was at risk under the mortgage, but they relied
on Streetwise to pay
it for them: see [131] of the reasons. The primary judge's essential conclusions
about the Di Benedettos' entry
into the arrangements were set out at [134]-[136]
of his reasons, as follows:
[134] Although at the time of signing Mr and Mrs Di Benedetto did not have
the opportunity to closely consider the loan agreement
and mortgage, I am
satisfied on the balance of probabilities they knew at that time that they were
responsible for the loan repayments
and their property was at risk if the
payments were not made. They understood the gist of what they were signing. They
considered,
however, that there was little risk of default as Streetwise had
agreed to make the payments. For this reason, neither of them took
the time to
read the documentation after it had been left at their home. Unfortunately they,
like Mr and Mrs O'Donnell, had been
seduced by Kovelan Bangaru and by high
pressured and clever salesmanship into believing that they could place their
trust in Streetwise.
[135] Mr and Mrs Di Benedetto had been dishonestly misled by Streetwise and
persuaded not to seek independent legal advice. Streetwise
had fraudulently
altered the loan application form and income declaration as Streetwise knew that
truthful disclosure of the assets
and income of Mr and Mrs Di Benedetto would
not meet the lending guidelines either under the Origin Program or the FirstMac
securitised
lending program. The loan would not have been approved without the
fraud of Streetwise.
[136] The Di Benedettos were unaware that the loan had been approved upon the
fraudulent material inserted by Streetwise. If they
had known that the lender
did not take into account the promise by Streetwise to contribute to the loan
repayments when considering
the application and that their financial position
truthfully stated did not meet the lending guidelines, I am satisfied on the
balance
of probabilities that Mr and Mrs Di Benedetto would not have proceeded
with the loan application."
Mr Tavares and Ms Rowe
- The
history of Mr Tavares' and Ms Rowe's borrowing was set out at [137]-[185] of the
reasons of the primary judge. In December 2002,
Mr Tavares and Ms Rowe were also
approached by a Streetwise representative at a shopping centre at Castle Hill.
They were persuaded
to provide their contact details.
- Mr
Tavares was 53 years old, a self-employed musician, creator and publisher of
music, with an income of $33,000 - $46,000 per annum.
Ms Rowe was employed as a
toll booth operator and casual swimming instructor whose income in 2002 was
about $28,000. They had a home
at Castle Hill, with $40,000 owing; Mr Tavares
had superannuation of $35,000. Their financial experience was limited to buying
land
or a home. The primary judge described them at [140] of his reasons, as
follows:
"Of all the cross-claimants in the three proceedings, Ms Rowe had the least
financial experience. She had not been self-employed in
a small business.
Nevertheless, Ms Rowe had been party to the borrowing and the granting of a
mortgage when the home unit at Lane
Cove and the Castle Hill home were
purchased. Mr Tavares and Ms Rowe were neither sophisticated nor na i ve in
financial matters.
Before they commenced their dealings with Streetwise they
understood what it meant to provide a mortgage and that a possible consequence
of default in the loan repayments was the sale of the secured property."
- Sometime
in January 2003, Mr Bevan Lydement from Streetwise came to their home. He
suggested a joint venture with Streetwise and in
answer to the statement that
they could not afford that he said:
"You can use the equity in your home. You can go into joint venture with
Streetwise to build a house. The property will be finished
in about 18 to 24
months. We get you the loan and Streetwise will make most of the payments for
you. When it is sold we will split
the profits. I myself, have property with
Streetwise."
- Mr
Tavares rang ASIC and the Australian Competition and Consumer Commission (the
"ACCC") and received no negative responses to his
enquiries about Streetwise.
- Another
meeting occurred shortly thereafter at their home at which, the primary judge
found, Mr Lydement:
"... was informed by Mr Tavares that his salary was about $36,000, that Ms
Rowe's salary was about $28,000, their cars were worth
$20,000 and their
furniture was insured for $30,000."
Mr Lydement assured them that Streetwise would pay the "majority of the
monthly payments", leaving them to fund the same amount they
were presently
paying in respect of the loan on the house.
- In
early February 2003, they went to Streetwise's Clarence Street office, seeing Mr
Lydement and meeting Mr Bangaru and Mr Hajje.
After various blandishments by Mr
Bangaru, they were handed a document describing a project and were told that
Streetwise would get
the loan for them from "Tonto" with whom they dealt all the
time.
- At
a further meeting they discussed properties.
- Mr
Tavares and Ms Rowe were persuaded to sign loan applications in blank and were
told that they would be filled in later and that
they (Mr Tavares and Ms Rowe)
could use Streetwise's lawyers. Mr Tavares said he was not concerned because he
did not think they
would get any loan.
- The
primary judge's findings about the filling in of the loan application at [152]
were as follows:
"Mr Tavares's annual salary was subsequently inserted in the loan application
form as being $120,000 and Ms Rowe's as $38,000. The
value of other assets was
overstated. Motor vehicles were valued at $50,000. At the time the combined
value of their two vehicles
was $20,000. Furniture was valued at $120,000 when
its insured value was $30,000. Mr Tavares's annual income at the time was
approximately
$36,000 and Mrs Rowe's was approximately $28,000. As with the
applications the subject of the other proceedings, it is evident that
the false
information was inserted in the loan application form by an undisclosed person
or persons at Streetwise after it had been
signed. This was done without the
knowledge of Mr Tavares and Ms Rowe."
- Again,
the loan was a "Lo Doc" loan for $500,000, the purpose of the loan being stated
as "property investment".
- The
primary judge found at [153]:
"... Mr Tavares and Ms Rowe were not provided with a copy of the loan
application or the Tonto Home Loans Personal Collection Statement.
They were not
told that the application was for a Lo Doc loan nor had they been told what a Lo
Doc loan was."
- Both
Mr Tavares and Ms Rowe were frank in their cross-examination on these documents.
They recognised at the time a lender would look
at the loan application and
income forms and they were (looking back) careless.
- The
primary judge found the following at [158] about the signing of these documents:
"Mr Tavares and Ms Rowe, it is evident, were persuaded by Streetwise that it
was in order for them to sign the loan application and
income declaration forms
although these forms were partially completed. They did not know that the
application was for a Lo Doc loan
nor had they been informed of the particular
significance that the information provided as to their income had in Lo Doc
lending.
Nevertheless, they were not totally inexperienced in financial matters
and the signing of these partially completed documents, even
without the benefit
of hindsight, was careless."
- Mr
Tavares and Ms Rowe attended a third meeting at Streetwise's offices at which
they were pressured into signing documents concerned
with the loan. Later, Mr
Lydement, "in a rush" (see [166] of the reasons) came to their home with more
documents to be signed. Mr
Tavares signed and Mr Lydement drove to the toll
booth for Ms Rowe to sign which she did (while cars waited behind Mr Lydement's
car).
- The
primary judge made the following findings about these signings at [170] of his
reasons:
"The loan agreement is dated 22 May 2003 and the signatures of Mr Tavares and
Ms Rowe on the document are stated as being witnessed
by Ms Lau. The mortgage is
dated 30 May 2003 and the signatures of the cross-claimants are again stated as
being witnessed by Ms
Lau. The different dates which the documents bear may be
explained by the settlement of the loan on 30 May 2003. I am satisfied of
the
probabilities that the loan agreement and mortgage were signed at the third
meeting at the office of Streetwise which took place
on 22 May 2003. The terms
of the loan agreement and mortgage had been identified at paras [21-22] above.
Other documents signed on
that day included an authorisation to Hunt and Hunt to
disburse the balance of the loan funds to Streetwise Administration ."
- Mr
Tavares and Ms Rowe were sent letters dated 10 and 29 April and 13 May 2003
being preliminary and final approval letters (for some
reason there were two
preliminary approval letters). These were in the same form ( mutatis mutandis
) that had been sent to the O'Donnells and the Di Benedettos. The final
approval identified "Tonto Home Loans" as mortgage manager.
The loan was for
$416,000.
- There
was a dispute as to whether the loan agreement and mortgage were sent by Hunt
and Hunt to Streetwise or directly to Mr Tavares
and Ms Rowe. The primary judge
was not prepared to conclude that they had been sent to Streetwise (see [180]).
Precisely what happened
is not clear, but the following findings were made by
the primary judge at [178]-[181]:
"[178] It follows that at the least Mr Tavares had the opportunity of
considering the loan agreement and the mortgage shortly after
[sic: before] the
meeting on 22 May 2003.
[179] ... My overall impression of the evidence given by Ms Rowe was that she
was endeavouring to distance herself as much as possible
from an understanding
of the loan agreement and mortgage and her denial that the letter was received
must be considered with a deal
of circumspection.
[180] A significant consideration is Mr Thorne's evidence that the system
provided for the re-addressing of a letter to be recorded
on that letter. As I
have observed, the Di Benedetto letter was addressed care of Streetwise
whereas the letter dated 15 May 2003 was not. It seems to me unlikely that
an instruction which was received by email on 9 May 2003
would be attended to by
the re-addressing of an envelope and not the letter itself some six days later.
Whilst the documents produced
do not by themselves establish that the letter was
received by the cross-claimants they provide some support for this contention.
I
am not satisfied on the balance of probabilities that the letter was sent by
Hunt and Hunt to Streetwise.
[181] Although Mr Tavares and Ms Rowe had an opportunity to consider the loan
agreement and the mortgage they were persuaded by Streetwise
not to obtain
independent legal advice. Streetwise had fraudulently altered the loan
application form as Streetwise knew that truthful
disclosure of the assets and
income of Mr Tavares and Ms Rowe would not meet the lending guidelines either
under the Origin Program
or the FirstMac securitised lending program. The loan
would not have been approved without the fraud of Streetwise. Mr Tavares and
Ms
Rowe were unaware that the loan had been approved upon the fraudulent material
inserted by Streetwise. If they had known that
the lender did not take into
account the promise by Streetwise to contribute to the loan repayments when
considering the loan application
and that their financial position truthfully
stated did not meet the lending guidelines, I am satisfied on the balance of
probabilities
that Mr Tavares and Ms Rowe would not have proceeded with the loan
application."
- The
loan was settled on 30 May 2003, distribution of funds being $50,872.76 to
Australian and New Zealand Banking Group Ltd ("ANZ")
and $352,824.53 to S
Property.
- One
of the documents that Mr Tavares and Ms Rowe signed was a "Deed of Investment"
in a form similar to that signed by the Di Benedettos.
As the primary judge
found at [184]:
"The document recorded that Mr Tavares and Ms Rowe wished to enter into a
joint venture with Streetwise Property to acquire and develop
residential
property for the purpose of resale and purported to set out the Framework
of the joint venture. The Framework included the incorporation of a
"Property Investment vehicle" and that Mr Tavares and Ms Rowe "are to raise
capital via a mortgage
(refinance/redraw) from the equity of their
property(ies)" namely $355,000 as capital and $2,500 for costs associated with
the setting
up of the company. The Deed, inter alia, authorised the "Trustee
and/or the Directors" to borrow monies "for and on behalf of the
Investment
vehicle". There is no dispute that Mr Tavares and Ms Rowe signed the agreement
which on the first page is dated 14 May
2003. Curiously the cover page bears the
date of 22 May 2003. This was the joint venture agreement which Mr Tavares and
Ms Rowe entered
into with Streetwise."
- The
later events and the predicament of Mr Tavares and Ms Rowe were described by the
primary judge at [185] of his reasons as follows:
"Following settlement of the loan, Streetwise paid approximately $2,200 each
month into the ANZ joint account until July 2005. During
that month Streetwise
went into liquidation. From the time of the second meeting at the office of
Streetwise in 2003, Mr Tavares
and Ms Rowe on occasions visited the property at
Kellyville Ridge to monitor the progress of the building work. They had,
however,
been dishonestly misled by Streetwise about their investment. After the
collapse of Streetwise, property searches revealed that they
had not received
security over the Kellyville Ridge property. Mr Tavares and Ms Rowe obtained no
financial benefit whatsoever from
their investment with Streetwise."
The structure and operation of the lending arrangements: the Origin
Program and the FirstMac Program
General outline of structure
- The
two lenders were Permanent (to the O'Donnells and the Di Benedettos) and Tonto
Home Loans Australia Pty Ltd ("Tonto HLA"). (FirstMac
Ltd has taken over the
litigation from Permanent in circumstances that were not explored, but may,
perhaps, be presumed.) The existence
of two lenders reflects the fact that two
wholesale lending programmes were in existence. These two programmes were called
the "Origin
Program" (in respect of which Permanent was the lender to the
borrowers) and the "FirstMac Program" (in respect of which Tonto HLA
was the
lender to the borrowers). (Confusion may arise if I refer to the now appellant
in the O'Donnell and Di Benedetto proceedings
as FirstMac Ltd because those
loans were under the Origin, and not the FirstMac, programme.)
The Origin Program
- Under
the Origin Program the ANZ provided the wholesale funds for lending under an
arrangement in which Permanent was the lender of
record, fulfilling a custodial
function. ANZ, through one of its businesses, Origin Mortgage Management
Services ("Origin"), provided
delegated authority to Tonto HL to assess each
loan application and to make a credit decision on lending. Relevantly, that
delegated
authority was $500,000.
- Tonto
HL was a mortgage originator or mortgage manager. The documentation that
governed the relationship between Origin and Tonto
HL comprised a "Mortgage
Origination and Management Deed" (the "MOMD") and a document entitled "Third
Party Management Deed", (the
"TPMD") referred to by the primary judge as a
"Sub-Introducer Deed". This nomenclature has a degree of confusion, deriving as
it
does from the presence of another party, Queensland State Home Loans Pty Ltd
("QSHL") which managed the programme when it was funded
by ANZ's predecessor,
Primary Industry Bank of Australia Ltd ("PIBA"). The relevant portions of these
documents are as follows (I
have used the original form of the document
inserting in brackets the relevant parties where appropriate):
MOMD
"3. INTRODUCTION OF LOANS
3.1 Introduction
The Manager [QSHL and then Tonto HL] will endeavour to introduce Loans to
PIBA [Origin] which comply with the Terms in accordance
with the provisions of
this Deed and the procedures specified from time to time by PIBA [Origin]. The
Manager [QSHL/Tonto HL] must
provide in writing to PIBA [Origin] all information
reasonably relevant to considering an Approval. The Manager [QSHL/Tonto HL] must
use its best endeavours to ensure that information is accurate.
3.2 No obligation to Lend
PIBA [Origin] is under no obligation to give any Approvals or to give an
Approval to any particular Loan or to make any Loan.
...
4. SETTLED LOANS
4.1 Introduction and Management
(a) The Manager [QSHL/Tonto HL] must at its own cost introduce Loans and
manage Settled Loans in an efficient and business like manner
and in accordance
with sound business practices, irrespective of any alleged or actual default of
PIBA [Origin] or the Trustee. The
Manager [QSHL/Tonto HL] must take such steps
and maintain such procedures as would be taken and maintained by a reasonably
prudent
mortgagee in connection with each Loan including action consequent upon
any default of any Settled Loan. The Manager [QSHL/Tonto
HL] must comply with
all laws relating to the conduct of its business including the Privacy Act.
(b) The Manager [QSHL/Tonto HL] is responsible for the conduct of all its
employees, agents, and contractors and any other person
connected with
introduction and management of Loans by The Manager [QSHL/Tonto HL] to PIBA
[Origin]. The Manager [QSHL/Tonto HL]
must ensure that all those persons comply
with the obligations of The Manager [QSHL/Tonto HL] under this Deed.
TPMD
2.3 Sub-Manager's obligations
The Manager [QSHL] must ensure that the Sub-Manager [Tonto HL] complies with
all obligations imposed by the MOMD on The Manager [QSHL].
[Tonto HL] undertakes
to perform all obligations delegated to it in an efficient, honest and diligent
manner.
...
3.1 General Indemnity
The Manager, the Sub-Manager and the Guarantor [Mr Cannon and Nationale
Equity Corporation Pty Ltd] indemnify the Funder [ANZ] against
all actions,
claims, demands, losses, damages, liabilities, costs and expenses of any nature,
including (without limitation) civil
and criminal penalties, (the Loss)
sustained or incurred at any time actually or contingently by the Funder arising
directly or indirectly
from any failure by the Sub-Manager or any Sub-Manager's
Agent to comply with any provision of this deed or of any law of any state
or
territory of Australia or any similar or replacement legislation in respect of
or in connection with the MOMD.
...
6.1 Definitions
In this deed unless the context otherwise requires:
Sub-Manager's Agents means each agent and employee of the Sub-Manager
and any other person who is any way directly or indirectly concerned with the
introduction
or management of loans introduced or by the Sub-Manager under the
Program."
(QSHL was "The Manager" for the MOMD and the introduction of Tonto HL in its
place was effected by the TPMD.)
- Clause
9.11 of the MOMD provided the following about the relationship:
"9.11 Relationship
The Manager is not the agent of the Trustee or PIBA but is an independent
contractor."
- For
relevant purposes in this litigation, PIBA and QSHL can be ignored. Under the
Origin Program, Origin retained Tonto HL as its
Mortgage Manager or Originator,
though because of the place of QSHL it was from time to time referred to as a
Sub-Introducer. Despite
cl 9.11, there was no argument that Tonto HL was not
relevantly the agent of Permanent as lender. This was so because Tonto HL under
the operation of the relevant delegated authority made the lending decisions in
question here.
- As
a mortgage manager, Tonto HL had employees who had delegated lending authorities
and who worked under credit guidelines that were
also provided by Origin. It
will be necessary to refer in some detail to these authorities and guidelines in
relation to the approval
of the three loans.
- Tonto
HL did not, however, seek to attract borrowers directly. Rather, it recruited
and retained introducers who in turn referred
loan applications to it for
assessment. S Loans was one of Tonto HL's introducers.
- A
major issue in the appeal is the correctness of the primary judge's conclusion
that S Loans, as an introducer, was the agent of
Tonto HL.
The FirstMac Program
- The
FirstMac Program developed from 2000. This was a lending programme funded by the
Tonto Group. It operated similarly to the Origin
Program. Tonto HL would use its
introducer or broker base (of which S Loans was one) to source loan applications
from prospective
retail borrowers. Operating guidelines were developed for
decision-making in the loan process that were similar to the Origin guidelines.
- The
Tavares and Rowe loan was placed under the FirstMac Program with Tonto HLA as
lender. The O'Donnell loan was initially placed
under the FirstMac Program, but
transferred to the Origin Program, after funding reached a relevant limit on the
FirstMac Program.
The Di Benedetto loan was placed under the Origin Program.
Some commercial incidents of the lending structure
- As
Mr Paul O'Donnell (formerly the general manager of Tonto and no relation to Mr
O'Donnell, the borrower) said, some features of
this lending model were that
they permitted the funder to stay in the background (and, presumably, to lower
its business costs) and
gave a funder greater flexibility as to sourcing loan
funds - whether through deposits taken from the public or through
securitisation.
- Through
the use of such loan programmes, a lender was able to reach a significant number
of potential borrowers without the need to
employ staff directly, or to build or
maintain physical infrastructure. By this means, a lender was able to build a
substantial loan
book quickly, using intermediaries (mortgage managers and
introducers) to bring forward, approve and manage loan applications and
loans.
The place of the loan introducer
- The
importance of the introducers in the position of Streetwise is obvious. They
were the vehicle to bring forward the retail customers
who desired to borrow
money. Much of the evidence before the primary judge was couched in terms of
conclusory expressions thought
to be in the interests of the party leading the
evidence. Thus, in the appellants' evidence and in their submissions, the
parties
occupying the position of Streetwise were referred to as brokers -
whether finance or mortgage brokers. It will be necessary to examine
the
position of S Loans by reference to the evidence of its particular contractual
and business arrangement. Nevertheless, some matters
of general comment can be
made arising out of the evidence that are uncontentious.
- First,
for the prudent operation of the programmes, introducers of loan applications,
such as S Loans should be reputable. Fraud can
be seen as an obvious systemic
risk. Depending on the precise function undertaken by such introducers, the
lending process was necessarily,
to a degree, reliant on the introducer being
honest and businesslike in the choice of customer, the extraction of relevant
information
from the customer and the choice of loan product suitable to the
customer.
- Secondly,
whilst enquiries as to probity and competence could be carried out about
introducers, the drawing up and the administration
of proper lending guidelines
was the essential systemic check to avoid lending to unsuitable borrowers. Such
guidelines can be seen
as part of the business structure of the programme
manager (Origin and FirstMac) and mortgage manager (Tonto HL) in the interests
of the funds provider and the programme manager. They can be seen also,
indirectly, as some protection of putative borrowers who
might apply for loans
in amounts or under terms unsuitable to them. Such is not to say, however, that
the funders owed any legal
duty to act in the interests of prospective
borrowers. No such submission was put.
The lending guidelines
- Before
turning to the position of S Loans, and its relationship with Tonto, it is
appropriate to say something of the guidelines and
how they were applied here.
The primary judge dealt with the issue at [186]-[261] of his reasons.
Origin Program guidelines
- The
primary judge set out and described a number of the provisions of the
guidelines. The Origin Program guidelines were relevant
to the approval of the
Di Benedettos' loan.
- The
Origin Program guidelines placed responsibilities upon Tonto HL, cl 1.5
providing:
"Lending guidelines set out 'how' Mortgage Managers and Origin staff are to
prepare loan applications and manage loans funded under
the residential mortgage
origination program.
All loans submitted through ORIGIN under the residential mortgage origination
program must comply with the specific requirements of
ORIGIN lending guidelines
for Mortgage Managers."
- Clause
1.6 set out the responsibilities of the "Mortgage
Manager/Sub-Introducer/Broker", in this context Tonto HL. They included a
"Sales
& Loan Interview". This was to be undertaken as follows:
"
Conducts a loan interview, discusses loan options and determines the most
suitable loan product for the customer.
Advises the customer about the approval process and provides them with
appropriate information.
Assists customer with the preparation of the loan application.
Obtains all original documents supporting the loan application and checks
their authenticity then signs and notes copies as to having
"sighted the
originals.
Sends all copies of documents to the authorised officer with loan
application."
(This clause assumes some importance, because these tasks were not undertaken
by Tonto HL employees, but in effect by the introducers,
such as S Loans.)
- Clause
1.8 dealt with the precedence of lending guidelines, product guidelines and the
mortgage insurance policy.
- The
guidelines for and features of the types of loans made here being "Lo Doc" loans
called "Flexi Express Home Loans" were set out
at [194]-[195] of the reasons:
"
Fully featured variable or fixed rate home loan to assist with the purchase
of owner-occupied or investment residential property.
Available for self-employed applicants only, who are not in a position to
provide full financial documentation at time of application.
...
A maximum loan amount of $500,000 between 60 per cent and 80 per cent of
formal valuations with Lenders Mortgage Insurance (LMI).
Security of 1 st registered mortgage over standard residential property being
purchased or refinanced.
The purpose of the loan being for the purchase or refinance of owner occupied
property or investment residential purposes.
Special Conditions which provide, inter alia, 'Must have a signed 'Borrower
Income Declaration' and 'Express' does not waive the requirement
to confirm
employment as per Origin lending guidelines.
- There
were also "Delegated Lending Authority Guidelines" that applied to a credit
manager of Tonto HL who had such an authority. These
included in cl 7 a
requirement relating to employment as follows (set out at [196] of the reasons):
"
Certificate of Business registration or incorporation or financial statements
for self-employed.
For self-employed persons, self-employment for 2 years and satisfaction that
the business will continue for the term of the loan,
otherwise the loan term
must be reduced to fit expectations or the application be rejected altogether.
For a new self-employed customer, a certification of business registration
for sole proprietor or partnership and certificate of incorporation
for a
company."
FirstMac Program guidelines
- These
guidelines were relevant to the Tavares and Rowe loan, as well as the O'Donnell
loan (although the O'Donnells were thereafter
transferred to the Origin
Program).
- Clause
2.0 described the role of the guidelines:
"The manual should not be interpreted as inflexible rules, but as a set of
guidelines, to go hand in hand with prudent lending and
common sense. Every
application should be assessed individually on its own merit.
Loans that do not comply with the guidelines may be considered if there are
other inherent strengths to the transaction and Lender's
Mortgage Insurance is
available. Such loans must be referred to FirstMac Underwriting Managers for
approval."
- The
responsibilities on the mortgage manager, Tonto HL, were similar to those in the
Origin guidelines.
- Clause
7 dealt with the purpose of a loan:
"To assist in the determination of a loan's Code status (refer Consumer
Credit Code section of the Program Overview), applicants must
provide full
details of the loan purpose."
- The
acceptable purposes for loans of the kind made here (being described as "Tonto
FirstRun LoDoc" loans) were as follows in the relevant
product guidelines:
"You can use your FirstRun LoDoc variable loan to purchase or refinance your
home or an investment property, or to access the equity
in your property for any
worthwhile personal or investment purpose. Maximum cash out restrictions may
apply."
- Clause
18.0 dealing with employment was dealt with by the primary judge at [202] of the
reasons:
"Clause 18.0 provided for employment confirmation. In the Table (at p 284)
which described " the types of employment and minimum term that is
acceptable" appears the following:
'Self employed / minimum 2 years trading in the current business.'"
- The
guidelines also set out how such employment confirmation was to occur:
"Where the loan is Lo Doc the Originator/Manager must either contact the
borrower's accountant to confirm the borrower is self-employed
(income
confirmation is not required) or alternatively conduct an ABN search to confirm
the existence of the business operation.
The ABN search can be additionally
utilised to confirm the authenticity of the PAYG borrower's employer where there
is doubt in this
regard, eg no telephone listing of the employer."
- The
Di Benedetto and O'Donnell loans were insured by an insurer whose guidelines
provided the following in relation to "Lo Doc" loans:
"
Eligible borrowers are self-employed and/or are unable to provide up to date
financial information.
PAYG borrowers are only allowed as co-borrowers (secondary borrowers).
The maximum loan to value ratio (LVR) is 80 per cent.
The loans can be used for an investment purpose.
Verification of self-employment was required.
For self-employed borrowers, verification of ABN, BAS and/or Business
registration/status details was required together with evidence
of
self-employment for a minimum of two years in the same business or industry."
- The
Tavares/Rowe loan was insured by another insurer whose guidelines included the
following:
"
For self-employed persons, at least two years trading in the current
business.
Confirmation of current employment must be obtained by the lender.
For Lo Doc loans above 65 per cent of LVR, cash out is restricted to the
borrower to $100,000. For loans to 65 per cent LVR, there
is no restriction on
funds released to the borrower.
For self-employed applicants for all proposals the last two years business
and personal tax returns and latest available tax assessment
notice was
required."
Failure to follow the guidelines by Tonto HL
- All
of the loans were in fact approved by the one person, Mr Geoffrey Lougoon, under
the FirstMac lending manual and guidelines.
- The
primary judge made the following findings (see generally [215]-[218]):
(a) No check was made as to whether the borrowers qualified for Lo Doc loans
"as being owner-occupiers or investors who had limited
income verification and
had been self-employed for two years" ([217] of the reasons).
(b) No searches or enquiries were made in relation to any ABN numbers.
(c) No enquiries were made to confirm that the borrowers were self-employed
trading in the same business for a minimum of two years.
- There
was a contest in the evidence about the reasonableness or not of the conduct of
Tonto HL in this and other respects in the loan
approval process and of its
causative effect. The primary judge made a number of findings:
(a) As to the investigation of employment status, at [226] he said:
" ... The failure to comply with cl 18.0 of the FirstMac Manual
indicates that Mr Lougoon was not much concerned about the cross-claimants'
employment status and was content to lend on the security
provided and the
mortgage insurance."
(b) As to the O'Donnells' position and the reactivated ABN, his Honour said
at [227]:
" ... If an ABN search in the name of Mr O'Donnell had been made by Tonto the
deregistration of the ABN in July 2001 would have been
revealed. An ABN search
in Mrs O'Donnell's name, if it had been made by Tonto, would have disclosed its
recent reactivation. To a
reasonably prudent lender, these disclosures would
have plainly indicated that the description of Mr O'Donnell's occupation as
self-employed
coffee shop sole trader for 5 years was at the very least
unreliable and required further investigation. It is of concern that in
such
circumstances PMI provided mortgage insurance."
(c) As to the ABN searches, at [228] his Honour said:
"Whilst I accept that non-compliance with lending guidelines does not
necessarily mean a departure from prudent lending practices,
I accept Mr
Robertson's opinion that a prudent lender would have made in the circumstances
of each of the loan applications an ABN
search. "
(d) As to reasonableness and a GST search, at [229] his Honour said:
"In his affidavits in reply, Mr Robertson was of the opinion that a
reasonableness test to loan approval could not be completed without
having first
obtained an ABN and GST registration search. Whilst I accept his opinion as to
the ABN search, there was no requirement
in the lending guidelines in 2003 about
checking for GST registration which Mr Robertson conceded in cross-examination.
I do not
accept that a reasonableness test could not be completed without a GST
registration search."
(e) Mr Wright, the Origin credit manager, reviewed the O'Donnell and Di
Benedetto loans. He did not check that the borrowers qualified
for Lo Doc loans.
He did not make any enquiries to verify any ABNs; he assumed that the insurer
had done this. His approach was summarised
by the primary judge at [236]:
"I am satisfied from the absence of indication in the lending files of
enquiries being made that no steps were taken to obtain a certificate
of
business registration or financial statements for Mr O'Donnell and Mr and Mrs Di
Benedetto. I am also satisfied Mr Wright was
content to rely on the prior loan
approvals by Mr Lougoon and PMI and that he did not take any action to confirm
the self-employment
of the loan applicants. In these respects when the loans to
the O'Donnells and Di Benedettos were approved, the Origin lending guidelines
and the Origin DLA were not followed."
(f) The primary judge found the following about Mr Wright's failure to follow
the relevant guideline at [239]:
"The Origin DLA required Mr Wright to obtain certificates of business
registration or financial statements for self-employed persons,
to confirm
self-employment for 2 years and satisfaction that the business would continue
for the term of the loan. He took no steps
to confirm any of those matters. As
Mr Robertson emphasised, the fact that a loan became insured '[did] not abrogate
the prudent
processing responsibilities of a lender'. A reasonably prudent
lender, in my opinion, would not rely on enquiries that might have
been made by
PMI or Mr Lougoon but would have undertaken those tasks in accordance with the
DLA. The failure to comply with cl 7
of the Origin DLA indicates that Mr Wright
was not much concerned about the cross-claimants' employment status and was
content to
lend on the security provided and the mortgage insurance."
(g) Mr Wright also overlooked the fact that the purposes of the loans to the
O'Donnells and Di Benedettos were described in a manner
contrary to that
permitted in the guidelines: see [240] of the reasons.
(h) The primary judge found that the O'Donnell loan document contained a
special condition as to cashing out:
"Any cash out component in excess of $100K is to be fully documented and the
purpose considered acceptable by the Funder and Mortgage
Insurer."
Streetwise provided documentation described at [243] of the reasons in
support of the cashing out that was inadequate: [247] of the
reasons.
- With
the exception of [125(a) and (h)], none of these findings in [124] and [125] was
challenged.
- As
I have already said, Hunt and Hunt held settlement authorities to pay the
balance of all loan proceeds to S Property. The primary
judge made no criticism
of Hunt and Hunt in this respect, saying at [258]-[260]:
"[258] ... There was no evidence adduced by the cross-claimants of an expert
nature which suggested that the practices adopted by
Hunt and Hunt did not
accord with practices of reasonably competent solicitors in 2003. Mr Robertson
was not qualified to express
an opinion of that nature.
[259] It should not be overlooked that Hunt and Hunt were acting in
accordance with the cross-claimants' directions. The cross-claimants
were
content at the time of the loan settlement in each case to have the money paid
to Streetwise to enable the joint venture to
proceed. It is apparent that if the
settlement monies had been paid directly to them, they would have paid the money
to Streetwise.
Furthermore, if the solicitors had gone behind the written
authority and sought confirmation from the cross-claimants of their directions,
I have no doubt that at the time of settlement Hunt and Hunt would have been
directed by the cross-claimants to pay the money to
Streetwise.
[260] I am not persuaded that Hunt and Hunt should have disobeyed the mandate
provided by the borrowers. I am not satisfied that the
solicitors breached the
guidelines to solicitors by acting in accordance with the written instructions."
- There
was no evidence of any pressure on Mr Lougoon or Mr Wright by Streetwise.
- The
primary judge found that the failure to follow the lending guidelines made it
easier for the fraud of Streetwise to remain undetected.
Indeed, had the
guidelines been followed with some rigour, it is difficult to see how the loans
would have been made.
The relationship between Tonto and Streetwise
- The
primary judge dealt with this matter at [262]-[375] of his reasons.
The terms of the arrangement
- There
was a body of contested evidence about the retention of S Loans by Tonto HL. The
primary judge found (at [307]) that the arrangements
were contained in an
Introduction Deed dated 10 April 2002 (the terms of which are discussed below)
and in various conversations,
principally between Mr Narramore (of Tonto) and Mr
Bangaru. These additional aspects of the relation were set out by the primary
judge at [307] of his reasons:
"(b) In addition to the terms of the Introduction Deed, Tonto agreed:
(i) not to contact borrowers introduced by Streetwise until after the loan
had settled.
(ii) to brand loan application forms and letters confirming preliminary and
final approval of loans as Streetwise. For this purpose,
a jpeg file containing
the Streetwise Group's logo was placed on the loan application form by Tonto and
loaded onto Tonto's web-based
system.
(iii) that Streetwise would have absolute administrative control of the loan
applications. For this purpose, Streetwise was provided
with a 'live' window
into Tonto's processing system which enabled Streetwise staff to make enquiries
about the progress of the loan
applications made by Streetwise clients and to
communicate those enquiries into the Tonto system.
(iv) to pay commission to Streetwise on each approved loan introduced by
Streetwise. For this purpose, Streetwise signed a "Recipient
Created Tax
Invoice" which enabled Tonto to pay tax invoices on behalf of Streetwise in
relation to commissions payable to Streetwise.
(v) that Streetwise could recommend valuers for the Tonto panel.
(c) Tonto offered to answer telephone calls from Streetwise's clients in the
name of Streetwise. Tonto also required Streetwise to
have professional
indemnity insurance.
(d) I am satisfied that Tonto knew that Streetwise was a property developer
whose main business was to build and develop properties
for sale to its
clients."
- Apart
from these findings, there was evidence, in particular from Mr Narramore, that
he had chased Streetwise as a target for some
time (approximately 18 months) as
a potentially lucrative source of business bringing persons who were doing
business with Streetwise
in relation to property development to Tonto for
finance.
- The
Introduction Deed between Tonto HL and S Loans included the following provisions
(S Loans was referred to as "the Introducer"):
" BACKGROUND
A. TONTO is a manager for a number of mortgage origination programs (the
Programs ).
B. The Introducer has expertise in identifying prospective borrowers and
wishes to introduce borrowers to TONTO for participation
in the Programs.
OPERATIVE PROVISIONS
1. Definitions and Interpretation
...
Funders means the company providing loans and includes the scheme
manager or any other company which pays TONTO for the introduction of Loans;
Introducer's Agents means any employee or contractor of the
Introducer, or any other person who is in any way directly or indirectly
concerned with the
introduction of Loans by the Introducer to TONTO;
Loans means a transaction which has a mortgage as its primary
security;
Terms means the terms and conditions for Loans as specified by TONTO
from time to time;
...
2. INTRODUCTION OF LOANS
2.1 Introduction of loans
The Introducer will endeavour to introduce Loans to TONTO which comply with
the Terms. The Introducer must provide in writing to TONTO
all information
required by TONTO from time to time to consider an application for a Loan. The
Introducer must use its best endeavours
to ensure that information is accurate.
2.2 Approval of loans
TONTO will endeavour to obtain approval for Loans through one of the
Programs. No obligation to make a Loan must be created until
a formal loan
approval is obtained.
...
2.4 Conduct business properly
(a) The Introducer must introduce all Loans in an efficient and businesslike
manner and in accordance with sound business practices.
The Introducer must take
such steps and maintain such procedures as would be taken and maintained by a
reasonably prudent mortgagee
in connection with the introduction of each Loan.
In particular, the Introducer must ensure that prospective borrowers and
guarantors
are not misled or misrepresented to in any way.
(b) The Introducer must comply with all the laws relating to the conduct of
its business including the Privacy Act. The Introducer
must obtain any licences
necessary for the conduct of its business.
2.5 Comply with the directions
The Introducer must comply with all reasonable directions of TONTO in
performing its duty as an introducer of loans. The Introducer
must promptly
provide TONTO with any information regarding a Loan required by TONTO from time
to time.
2.6 Not create obligations on TONTO
The Introducer must not without the prior written consent of TONTO create any
legally binding obligation on TONTO in relation to an
actual or proposed loan or
otherwise. Without limitation, the Introducer will not issue any binding loan
approvals. All loan approvals
will be issued by TONTO.
2.7 No churning
The Introducer must not encourage borrowers to repay a Loan early or to
refinance a Loan.
2.8 Introducer's Agents
The Introducer's must ensure that all the Introducer's Agents comply with the
terms of this Deed imposed on the Introducer.
2.9 No fees from applicants
The Introducer undertakes that the Introducer and the Introducer's Agents
will not receive any commissions, charges or fees from an
applicant in respect
of the Loan other than those approved in writing by TONTO.
3. RELATIONSHIP OF PARTIES
3.1 No partnership
Nothing in this deed creates the relationship of partnership or servant or
agent.
3.2 Confidentiality
The parties must maintain confidential the terms of this deed and the
arrangement between TONTO and the Introducer. The parties may
disclose details
of this deed to any mortgage insurer, any Funder, as required by a Program, to
any professional advisers as required
by law or to anyone approved in writing by
the other party.
4. REMUNERATION
4.1 Fees payable by Funders
TONTO will be solely entitled to all fees payable by the Funders.
4.2 Fees payable to Introducer
(a) TONTO must pay introduction fees and management fees to the Introducer as
agreed in writing from time to time.
...
5. INDEMNITY
5.1 General indemnity
The Introducer indemnifies TONTO against any loss, damage, cost and expenses
suffered or incurred by TONTO as a result of any action
of the Introducer or the
Introducer's Agents in respect of the introduction of Loans under this
Agreement."
The role played by Streetwise and the risks of the arrangements
- The
primary judge made certain findings at [308]-[310] concerning the role played by
S Loans in these loans:
"[308] In each of the proceedings Tonto did not deal with the cross-claimants
until the loan had settled. By agreeing not to contact
borrowers until after the
loan had settled, Tonto had entrusted in Streetwise the responsibility under the
Origin lending guidelines
and FirstMac Lending Manual of:
(a) conducting the loan interview, discussing the loan options and
determining the suitable loan product for the customer;
(b) advising the customer about the loan approval process and providing the
customer with the appropriate information;
(c) assisting the customer with the preparation of the loan application; and
(d) obtaining the supporting documentation.
[309] Nobody at Streetwise explained to the cross-claimants that they were
applying for a Lo Doc loan or what was meant by a Lo Doc
loan. There was no
discussion about other loan options or loan products. Streetwise did not make
enquires of or make loan applications
on behalf of the cross-claimants to
lenders other than Tonto. No attempt was made by Streetwise as a finance broker
to find the best
deal for its clients.
[310] It is apparent from the evidence of Mr Lougoon and Mr Wright that no
effort was made by Tonto to determine if the cross-claimants
were eligible for
the Origin or FirstMac Lo Doc loans as being self-employed applicants who were
not in a position to provide 'full
financial documentation' at the time of the
loan application. I am satisfied that Tonto relied upon Streetwise to determine
whether
the cross-claimants were eligible for Lo Doc loans and assumed because
the loan applications were made through Streetwise that the
cross-claimants fell
within the product guidelines of eligibility for Lo Doc loans. The true position
was that the cross-claimants
were able to provide copies of income tax returns
and other financial documentation. A Lo Doc loan was not a suitable loan product
for them. The applications for Lo Doc loans should not have been made on behalf
of the cross-claimants to Tonto."
- Mr
Paul O'Donnell was cross-examined about the aspects of the arrangements that
Streetwise had insisted on, in particular that Tonto
would not contact
prospective borrowers before settlement. The risk created by that arrangement
was discussed by the primary judge at [311]
as follows:
"As is evident from the passage of cross-examination of Paul O'Donnell by Mr
Menzies quoted at [305] above, Tonto was aware that its
agreement with
Streetwise created a risk in respect of compliance with the lending guidelines
and the reliability of the information
provided in Lo Doc loan applications.
Tonto knew that Streetwise was a property developer whose main business was to
build and develop
properties for sale to its clients. Furthermore Tonto was
aware that loan applicants might be misled but nevertheless proceeded with
the
arrangement."
- As
to the arrangement as to "branding" the correspondence with Streetwise logo, the
primary judge said at [314]:
"It is more likely than not that the branding of the documentation as
Streetwise supported the impression that all the cross-claimants
had that
Streetwise was a business of substance with whom they could enter into a joint
venture and borrow on the security of their
family homes for that purpose."
(It should also be added at this point that it reinforced the fact that
Streetwise was promoting its own business interests and not
acting as an outward
representative of Tonto or any external lender.)
- As
to the question of restricting Tonto's contact with Streetwise customers, the
primary judge said the following at [349]:
"It is unclear whether such an agreement was a common industry practice at
the time. I do accept, however, that there was general
industry support for
allowing brokers better "ownership" of their customers. What is clear is that Mr
Bangaru imposed as a condition
of the agreement with Tonto that Tonto was not to
contact borrowers introduced by Streetwise. Tonto agreed to this condition to
obtain
the loans which would be introduced by Streetwise."
- Importantly,
the primary judge was not satisfied that Tonto had told Streetwise that it would
approve all its applications or that
Tonto knew that Streetwise was contributing
to the loan payments. Further, there was no suggestion that anyone at Tonto was
aware
that Streetwise was falsifying loan applications.
- Considerable
debate took place before the primary judge as to the significance of the
relationship between Tonto and Streetwise and
whether it exposed the borrowers
to the risk of fraud: At [320]-[321] the primary judge found:
"[320] ... At the time each of the loan applications in these proceedings was
made, Tonto knew that Streetwise was not only a broker,
but was a property
developer whose main business was to build and develop properties for sale to
its clients. Tonto knew that the
business of Streetwise was not confined to
being a loan introducer. It seems to me that it would have been obvious to a
reasonably
prudent lender possessed of that knowledge that Streetwise as a
broker had a clear conflict of interest. The agreement between Tonto
and
Streetwise, moreover, extended beyond the Introduction Deed. By not agreeing to
contact Streetwise's clients until after settlement,
Tonto removed itself from
the face-to-face interview process and confined its ability to seek verification
or clarification from
prospective borrowers of the material in the loan
applications. Mr O'Donnell as I have found at [311] above was aware of the risk
that the agreement created with compliance with the lending guidelines and the
reliability of the information provided.
[321] ... In the circumstances where Streetwise had a clear conflict of
interest, it would have been evident, in my opinion, to a
reasonably prudent
lender in Tonto's position that in applications for Lo Doc loans the risk of
fraud was significantly enhanced
by the agreement not to contact Streetwise's
clients. I accept the cross-claimants' submission that Tonto used a broker with
a clear
conflict of interest which thereby exposed the cross-claimants to a
serious risk of fraud."
- These
conclusions did not, in the primary judge's view, give rise to either a
fiduciary relationship or a duty of care between Tonto
and the borrowers, but it
had an effect on the significance of the loan guidelines. The primary judge said
at [322]:
"Whilst it might be for the lender to determine what enquiries it should make
to verify information given in support of a loan application
... , it seems to
me that adherence by a lender to its own guidelines has added importance where
prospective borrowers are exposed
to a serious risk of fraud."
- In
this context, however, the primary judge recognised at [323] that the borrowers,
by signing blank or partially completed documents,
exposed both themselves and
the lender to the risk of fraud by Streetwise.
The question of Streetwise (S Loans) as agent for Tonto HL
- After
a review of the evidence, in particular the terms of the arrangement between
them, the primary judge concluded at [359] that:
"Streetwise was Tonto's agent for those duties which Tonto had entrusted in
Streetwise."
These duties were set out by the primary judge at [308] of his reasons (see [
133 ] above) and elaborated by his Honour at [350],
as follows:
"The responsibilities which Tonto entrusted in Streetwise included the
conducting of the loan interview, the determination of the
eligibility of the
prospective borrowers for Lo Doc loans and the assistance of the customer with
the preparation of the loan application.
Although Tonto may have considered that
it was in the commercial interests of itself and Streetwise (Mr O'Donnell's
value proposition ) to agree not to contact a Streetwise client prior to
settlement, the consequence was that Streetwise represented and acted for Tonto
in the performance of these duties. These were duties of particular significance
in Lo Doc lending as full financial documentation
supporting the loan
application was not required and reliance was placed by Tonto upon the
information in the loan applications and
upon the declarations in the borrower
income declaration forms. Both Mr Lougoon and Mr Wright relied on what was
stated in the loan
applications and income declarations as being true statements
of the loan applicants' financial positions."
- There
was no issue that Tonto HL was the agent of Tonto HLA.
- Nor
was there any issue on appeal that Tonto HL was Permanent's agent in accepting a
loan application under delegated lending authority.
The primary judge concluded
that if S Loans was the agent of Tonto HL its appointment was within the
authority of Tonto HL and thus
S Loans in such circumstances was the agent of
Permanent: see [362] of the reasons.
- The
reasons of the primary judge for his conclusion that S Loans was Tonto HL's
agent were in substance as follows. The primary judge
construed the Introduction
Deed and collateral arrangements and concluded (at [350]) that Tonto HL
entrusted responsibilities to
S Loans. His Honour found S Loans to have a duty
to ensure borrowers it introduced were eligible and that information was correct
([353]). His Honour found the agreement to badge the loan application forms and
letters as supporting "the inference that Tonto intended
that Streetwise
represent and act for it" ([355]). His Honour found that the conduct of S Loans
was not that of an independent finance
broker, saying at [356]:
"The conduct of Streetwise was not that of an independent finance broker. The
cross-claimants were not advised of any potential lender
other than Tonto nor
were any steps taken to ascertain alternative loan sources. Streetwise was more
than a loan introducer. Streetwise
played, as ASIC submitted, ' an integral
part on behalf of Tonto and Origin in their loan approval and credit assessment
process '. In my opinion the facts of all three proceedings go beyond the
cases cited by the plaintiffs and they may be distinguished."
- The
primary judge rejected the involvement of S Property tending to the conclusion
that S Loans was the borrowers' agent, saying at
[357]:
" ... A particular focus of this argument was the agreement in the joint
ventures that Streetwise would obtain the necessary finance
for the
developments. The joint venture agreements with the cross-claimants were entered
into after the agreement between Streetwise
and Tonto had been reached and any
arrangement to obtain finance for the cross-claimants was in reality subject to
that agreement.
At no stage did Streetwise disclose to the cross-claimants the
terms of its agreement with Tonto."
- The
primary judge concluded at [358] as follows:
" ... The facts and circumstances of these proceedings displace, in my view,
the prima facie characterisation of a finance broker as the agent for the
borrower. I have considered the possibility that Streetwise was the agent
for
both the lender and the borrower but do not make such a finding. Because of its
confidentiality agreement with Tonto, Streetwise
could not make it clear to a
prospective borrower that it had been engaged as agent for the lender and obtain
the borrowers' consent
to its acting on both sides of the loan transaction.
Streetwise could not serve two principals."
The imputation of Streetwise's knowledge to the lenders
- The
primary judge rejected the appellants' arguments that even if Streetwise were to
be considered Tonto HL's agent, the relevant
knowledge of Streetwise about the
borrowers should not be imputed to Tonto HL. This involved a rejection of the
proposition that
the fraud of Streetwise should prevent such attribution of
knowledge. The knowledge said to be attributed to the lenders was as described
in [364] of the reasons, where the primary judge recounted the relevant part of
the borrowers' submissions:
" ... Tonto thereby clearly knew the actual financial position of each of the
cross-claimants and that they could not afford or satisfy
the repayment
obligations of the respective loan agreements and mortgages. Tonto, it was
submitted, thereby knew that the only manner
in which the loan could be repaid
was by the sale of the cross-claimants' family homes that had been provided as
security. Tonto
therefore knew that the loans were asset loans secured by family
homes, being the only substantial asset of the respective cross-claimants."
- The
reasoning of the primary judge is contained at [366]-[375]. His Honour accepted
that Streetwise fraudulently inserted false financial
information in the loan
applications and income declarations of which Tonto HL had no knowledge ([367]).
Tonto HL had, however, authorised
Streetwise to conduct the loan interviews and
assist with the preparation of the loan applications and thus Streetwise
committed
the fraud within the scope of its authority ([368]). Tonto was aware
of the risk of entrusting these duties in Streetwise and was
answerable for the
manner in which Streetwise conducted itself ([368]). Referring to von Doussa J
in Beach Petroleum NL v Johnson [1993] FCA 283; (1993) 43 FCR 1 at 31-32; [1993] FCA 283; 115 ALR 411 at
574, the primary judge said that to the extent to which the fraud exception
exists to the imputation of knowledge of an agent,
the acts must be in total
fraud of the principal (here Tonto HL).
- The
primary judge rejected the appellants' reliance upon the statement of principle
in Bowstead and Reynolds on Agency (16 th Ed, Sweet & Maxwell, 1996)
at 533 cited by this Court in Beach Petroleum NL v Kennedy [1999] NSWCA
408; 48 NSWLR 1 at 99 [475] referring to the moral certainty of the information
not being passed on to the principal as the basis of the so-called fraud
exception
to the rule that an agent's knowledge would be imputed to its
principal. The cited passage in Bowstead and Reynolds (16 th Ed) is as
follows:
"In knowledge cases, however, the presumption that information will be passed
on may also be nullified by proof that the agent was
defrauding the principal in
that transaction, whether or not the third party knew this: it can, in such a
case, be said that there
was a moral certainty that the information would not be
communicated, or that communication would require disclosure of the very
fraud
being practised upon the agent by the principal, or that the agent was not
acting for the principal when he received the information."
- The
primary judge's essential reasoning is contained at [373]:
"I do not accept that Tonto did not benefit from the fraud of Streetwise.
Loan moneys were advanced to the cross-claimants upon which
interest was payable
and the advances were secured by mortgages over their family homes. The reality
is that the cross-claimants
did not benefit from the fraudulent conduct of
Streetwise. It is not irrational to impute the knowledge of Streetwise to Tonto.
By
the agreement which Tonto had reached with Streetwise in its own commercial
interests, Tonto had placed Streetwise in the position
where the fraud could
readily be committed. The correct information from the cross-claimants of their
financial circumstances was
received by Streetwise when acting as agent for
Tonto and there was no moral certainty that this information would not be
communicated.
It is the knowledge of Streetwise of the true financial position
of the cross-claimants which is to be imputed to the plaintiffs.
In the
circumstances of the present proceedings, reasons of justice and commonsense, to
my mind, require that the knowledge of Streetwise
of the true financial position
of the cross-claimants be imputed to the plaintiffs."
- The
primary judge highlighted the importance of this finding at [374]-[375] of his
reasons:
"[374] Without derogating from the significance of the information that
Streetwise possessed of the assets of the cross-claimants,
it is helpful at this
point to summarise the cross-claimants' income:
Mr and Mrs O'Donnell :
Mr O'Donnell had not been working for 18 months since the business had been
sold and had no income.
Mrs O'Donnell was employed by St George Bank with an annual income of about
$23,000.
- The application
was for a Lo Doc loan of $500,000 with an interest rate of 6.95 per cent per
annum and a loan term of 30 years.
Mr and Mrs Di Benedetto:
Their combined average annual income for the past two years was $45,000 from
the smallgoods business known as 'LB Foodservices'.
The application was for a Lo Doc loan of $500,000 with an interest rate of
6.95 per cent per annum and a loan term of 30 years.
Mr Tavares and Ms Rowe :
Mr Tavares's annual income from JT Business was about $36,000.
Ms Rowe's salary was about $28,000
The application was for a Lo Doc loan of $500,000 with an interest rate of
6.9 per cent per annum and a loan term of 30 years. The
amount of the loan that
Mr Tavares and Ms Rowe entered into with Tonto was $416,000 with an interest
rate of 6.95 per cent per annum.
[375] Mr Robertson stated that he did not know of a lender who would have
approved any of the loans under the lender's normal affordability
assessment
criteria on the basis of the cross-claimants' income. As I have found,
Streetwise knew that truthful disclosure of the
cross-claimants' assets and
income would not meet the lending guidelines. Streetwise, in particular, knew
that the income of the
cross-claimants, would not meet the loan serviceability
requirements of the Origin and FirstMac lending programs. Tonto (in all three
proceedings) and Permanent (in the O'Donnell and Di Benedetto proceedings)
possessed this knowledge."
Asset lending
- The
primary judge then, at [376]-[382] dealt with a question that he phrased at
[376]:
" ... whether the loans to the cross-claimants amounted to asset lending."
- His
Honour took from one of the expert's reports the following characterisation as
relevant:
"Asset-based loans in general are those where the loan has been extended
primarily or solely on the basis of the valuation of the
asset over which the
loan is secured, irrespective of the borrowers' capacity to meet the loan
commitments."
- The
primary judge accepted that the two types of loans ("Flexi Express Home Loan"
from the Origin Program and the "FirstMac Lo Doc
Loan" under the FirstMac
Program) were not intended to be lendings against assets without regard to the
capacity of the borrower
to repay. At [378], however, he said:
" ... The failures by Mr Lougoon and Mr Wright to follow the lending
guidelines indicated that they were not much concerned about
the
cross-claimants' employment status and were content to lend on the security
provided and mortgage insurance. Moreover, the plaintiffs
possessed the
knowledge of Streetwise as to the true financial position of the
cross-claimants. The cross-claimants did not have
the capacity to meet the loans
commitments, however, their equity in their family homes met the LVR
requirements of the loans. I
conclude that the loans to the cross-claimants were
asset-based loans and amounted to asset lending."
- Referring
to Kowalczuk v Accom Finance Pty Ltd [2008] NSWCA 343; 77 NSWLR 205 at
227 [96] and Riz v Perpetual Trustee Australia Ltd [2007] NSWSC 1153 at
[70], the primary judge said that consequences, if any, of the lending being so
characterised depended on all the circumstances.
The application of the CRA
- The
primary judge granted relief under the CRA . He did not need to consider
any other ground of relief. The primary judge's reasoning in granting relief was
as follows.
The O'Donnell Loan
- At
[405] the primary judge dealt with the application of the CRA, s 9(4) to the
O'Donnells, as follows:
"Although they were rushed and not provided with the opportunity to consider
the loan applications in any detail by Streetwise, Mr
and Mrs O'Donnell were
careless when they signed the partially completed loan application. Mr O'Donnell
was also careless in signing
the income declaration form in blank. By doing so,
the O'Donnells exposed themselves, Tonto and Permanent to the risk of fraud by
Streetwise. Section 9(4) of the CRA requires the court not to have regard to any
injustice arising from circumstances that were not
reasonably foreseeable at the
time the contract was made. Whilst the O'Donnells were careless, they could not
have reasonably foreseen
that Streetwise would insert in the loan application
and income declaration false details of their assets and income. It was not
suggested by the plaintiffs nor does the evidence establish that the risk of
fraud by Streetwise could reasonably have been foreseen
by Mr and Mrs
O'Donnell."
- The
primary judge then considered the following circumstances:
(a) the matters upon which the O'Donnells were misled by Streetwise ([406]);
(b) the lack of income to service the loans ([407]);
(c) the fraud of Streetwise (not making any distinctions as to corporate
form) without which the loan would not have been made ([407]);
(d) the lack of legal advice and the persuasion by Streetwise that the
O'Donnells did not need their own lawyers, balanced against
the opportunity (not
taken up) to see a lawyer and an accountant ([407]);
(e) the lack of full explanation of the contract and mortgage documents
balanced against the opportunity the O'Donnells had to read
them ([408]);
(f) the O'Donnells' understanding of the gist of what they were doing
([408]);
(g) Tonto HL and Permanent not being parties to the joint venture ([409]);
(h) the general policy to hold people to their bargains and to provide
certainty in commercial relations ([410]-[411]);
(i) the fact that the contracts arose from unfair pressure, deception and
fraudulent conduct of Tonto HL's agent Streetwise ([413(i)]);
(j) the fact that by the way Tonto HL conducted its business with Streetwise,
Tonto HL exposed the O'Donnells to a serious risk of
fraud which was reasonably
foreseeable at the time the contracts were made ([413(ii)]);
(k) that the branding of the loan application and letters assisted Mr Bangaru
to mislead the O'Donnells, supporting the impression
that Streetwise was a
business of substance ([413(ii)];
(l) that the O'Donnells were in a position of disadvantage compared to Tonto
and Permanent when they came to negotiate the terms of
the contracts. Tonto was
in a much better position both to appreciate and to manage the risk of fraud by
Streetwise than Mr and Mrs
O'Donnell ([413(ii)]);
(m) the failure to follow the Origin lending guidelines, in particular the
failure to make an ABN search or obtain a certificate of
business registration
or financial statements ([413(iii)]);
(n) with Streetwise's knowledge imputed to Tonto HL, the characterisation of
the lending as asset lending ([413(iii)]); and
(o) that failure to follow the cash out condition made it easier for the
fraud to remain undetected ([415]).
- The
primary judge emphasised at [414] the consequences of the loose attitude to
lending guidelines:
" ... The loose attitude that was adopted to the lending guidelines indicates
that the lender was not much concerned about the purpose
of the loan and the
self-employment of the borrowers and was content to lend on the security of the
Harbord property and mortgage
insurance."
- The
importance of the finding of agency can perhaps best be seen in how the primary
judge dealt at [416] and [418] with the submission
that the O'Donnells were not
people unable to look after themselves in entering a transaction such as that
offered by Streetwise:
"[416] ... Where the asset lending has arisen because of the fraud and
deception of the lender's agent and the borrowers are unaware
that the reality
of the lending is on the value of their home, in my opinion, it makes little
difference to considerations of injustice
under the CRA that the borrowers are
persons who normally are able to look after themselves. After all, a purpose of
the CRA is to
protect persons from unfair pressure or unfair tactics when they
enter into contracts.
...
[418] ... The fraudulent conduct of Streetwise commenced at the time the
borrowers were persuaded to sign the loan applications and
income declarations.
... [I]t was not the borrowers who supplied false information to Tonto but its
agent, Streetwise. ... Tonto
possessed the knowledge of Streetwise and by the
way it conducted its business with Streetwise exposed itself and the borrowers
to
a serious risk of fraud."
- Finally,
at [419], the primary judge considered the public interest:
"There is, as the cross-claimants submit, a public interest in ensuring that
prudent lending practices are followed. Prudent lending
practice, to my mind,
includes the conduct of the relationship between loan provider/mortgage manager
and finance broker. This must
be the case in Lo Doc lending where reliance is
placed by the lender on the accuracy of the information provided in the loan
application
documentation. Prudent lending practice requires adherence by the
lender to Lo Doc lending guidelines when the finance broker has
been entrusted
with the first stage of the loan application process. An agreement for
commercial self-interest not to contact a broker's
client until after the
settlement of the loan does nothing to ensure the integrity of the material
supplied. The public interest
against unjust asset lending was referred to in
Khoshaba and Kowalczuk. I consider that it is unnecessary to
consider ASIC's submissions on public interest."
- He
concluded at [420]:
"I have concluded that the loan agreement and mortgage were unjust in the
circumstances relating to the contracts at the time that
they were made."
The Di Benedetto Loan
- The
reasons of the primary judge for concluding at [429] that the loan agreement and
mortgage were unjust in all the circumstances
were set out at [421]-[428] and
were similar to the reasons dealing with the O'Donnells, which I have outlined.
The Tavares and Rowe Loan
- Once
again the reasons at [430]-[438] were similar.
Relief
- In
dealing with relief, the primary judge set the whole loan agreements aside.
- Once
again, the importance of the agency finding was referred to by the primary
judge: [440]-[441] of his reasons.
- In
rejecting an argument that the loan agreements should be set aside in part, his
Honour said at [445]:
" ... It seems to me that if I was to accede to this submission an unjust
consequence or result would not be avoided as the contracts
arose from the
fraudulent conduct of Streetwise and the cross-claimants received no benefit
from the loan monies save for the sum
of $50,872.76 which was used by Mr Tavares
and Ms Rowe to discharge their mortgage with the ANZ bank."
The appeal
- Central
to the appeal are the primary judge's conclusions on agency and imputation of
knowledge.
- Depending
upon the outcome of those grounds of appeal, three broad areas of debate were
raised by numerous other complaints:
(a) the insufficiency of weight said to have been given to the conduct of the
borrowers and its capacity to mislead the lenders;
(b) the characterisation of this as asset lending; and
(c) numerous asserted factual errors.
Agency
Introductory remarks on agency
- Before
turning to the evidence it is appropriate to say something of the ultimate issue
that is being addressed. The word agency is
one apt to cause difficulty, in
significant part, because of its broad usage in business: Kennedy v De
Trafford [1897] AC 180 at 188; Colonial Mutual Life Assurance Society Ltd
v Producers and Citizens Co-operative Assurance Co of Australia Ltd [1931]
HCA 53; 46 CLR 41 at 50; Scott v Davis [2000] HCA 52; 204 CLR 333 at 338
[4], 408 [227] and 435 [299]. It is a common business expression with a
potentially wide and varying meaning.
- The
core conception of agency as a legal concept was expressed by the High Court in
International Harvester Co of Australia Pty Ltd v Carrigan's Hazeldene
Pastoral Co [1958] HCA 16; 100 CLR 644 at 652:
"Agency is a word used in the law to connote an authority or capacity in one
person to create legal relations between a person occupying
the position of
principal and third parties. But in the business world its significance is by no
means thus restricted."
The relevant question in that case was whether the manufacturer of goods (or
its Australian subsidiary) was a party to a contract
for sale of equipment sold
through one of its distributing "agents", so-called. The question was whether
the so-called agent had
capacity to make the manufacturer (or its local
subsidiary) a party to the contract for sale of goods, and so bind its
interests.
The answer was, no. The distribution agent was a business in its own
right, not in any way acting on behalf of the manufacturer in
the sale
transaction in question.
- As
will be seen from the provisions of the Introduction Deed, S Loans had no
authority to bind Tonto HL, and, through it, the lender,
to acceptance of any
loan.
- One
needs to consider the purpose for which one is asking the question whether A is
P's agent: Kirkpatrick v Kotis [2004] NSWSC 1265; 62 NSWLR 567 at 581
[86], per Campbell J (as his Honour then was). The question that must be
addressed here by the factual and legal analysis is whether Tonto
HL appointed S
Loans to undertake tasks for it, short of creating a binding loan agreement,
such that knowledge gained, or conduct
engaged in, by S Loans in the performance
of such tasks was knowledge to be imputed to Tonto HL, or conduct for which
Tonto HL was
to be held legally responsible by some form of vicarious
attribution.
- The
appellants' first submission was that this could not be so because the
expression of the matter in International Harvester was the limit of any
relevant concept of agency known to the common law. If S Loans had no capacity
to create legal relations between
the third party and the principal by binding
the lender to a loan, it could not, in law, be an agent. This is too narrow a
conception
of agency. The High Court in International Harvester was
concerned with the question of the creation of legal rights. Other cases
contemplate a possibly broader role for agents. See for
example the place of an
insurance canvasser in Colonial Mutual at 48-51.
- The
conception and central elements of agency were discussed helpfully by Finn J in
South Sydney District Rugby League Football Club Ltd v News Ltd [2000]
FCA 1541; 177 ALR 611 at 645-647 [131]- [137], in P Watts and F M B Reynolds
Bowstead and Reynolds on Agency (19 th Ed, Sweet & Maxwell, 2010) at
1-10, in G E Dal Pont Law of Agency (2 nd Ed, LexisNexis, 2008) at 4-8
and 26-28 and see also W A Seavey "The Rationale of Agency" (1919-1920) 29
Yale Law Journal 859. Recognising, at once, the wisdom of what the
authors of Bowstead and Reynolds on Agency (19 th Ed) say at 2 [1-003] as
to the limited utility of reasoning from conceptual or presupposed definitions,
it is to be borne in
mind that the concept of agency is not merely functional,
whereby something that is necessary to be done for P and that could be
done by P
itself is done by A under some arrangement; rather it is a consensual
arrangement, a relationship, whereby A is to be taken
as, or as representing, P.
In South Sydney v News at 646 [136], Finn J referred to the authoritative
character of the expressions of the relationship in Art 1 of Bowstead and
Reynolds on Agency (an earlier edition) and Art 1 of the Restatement,
Second, on Agency , these expressions being as cited by Finn J:
"'[1] Agency is the fiduciary relation which results from the manifestation
of consent by one person to another that the other shall
act on his behalf and
subject to his control, and consent by the other so to act.'
I would note in passing that the definition proposed in the Restatement,
Third, Agency , Tentative Draft No 1, [1.01] proposes no material departure
from the above. Bowstead and Reynolds' definition is that:
'Agency is the fiduciary relationship which exists between two persons, one
of whom expressly or impliedly consents that the other
should act on his behalf
so as to affect his relations with third parties, and the other of whom
similarly consents so to act or
so acts.'
- It
is appropriate to set out the whole of Art 1 from Bowstead and Reynolds on
Agency (19 th Ed) at 1 [1-001] since Art 1(4), in particular, posits a form
of agency of some relevance here - one in which the agent has
no power to create
or affect legal relations:
"(1) Agency is the fiduciary relationship which exists between two persons,
one of whom expressly or impliedly manifests assent that
the other should act on
his behalf so as to affect his relations with third parties, and the other of
whom similarly manifests assent
so to act or so acts pursuant to the
manifestation. The one on whose behalf the act or acts are to be done is called
the principal.
The one who is to act is called the agent. Any person other than
the principal and the agent may be referred to as a third party.
(2) In respect of the acts to which the principal so assents, the agent is
said to have authority to act; and this authority constitutes
a power to affect
the principal's legal relations with third parties.
(3) Where the agent's authority results from a manifestation of assent that
he should represent or act for the principal expressly
or impliedly made by the
principal to the agent himself, the authority is called actual authority,
express or implied. But the agent
may also have authority resulting from such a
manifestation made by the principal to a third party ; such authority is called
apparent
authority.
(4) A person may have the same fiduciary relationship with a principal where
he acts on behalf of that principal but has no authority,
and hence no power, to
affect the principal's relations with third parties. Because of the fiduciary
relationship such a person may
also be called an agent."
(Footnotes omitted.)
- These
expressions of the central characteristics of the relationship reveal the
closeness of identity that is required for the relationship
to exist. Not every
independent contractor performing a task for, or for the benefit of, a party
will be an agent, and so identified
as it, or as representing it, and its
interests. Agency is a consensual relationship, generally (if not always)
bearing a fiduciary
character, in which by its terms A acts on behalf of (and in
the interests of) P and with a necessary degree of control requisite
for the
purpose of the role. Central is the conception of identity or representation of
the principal: Colonial Mutual at 48-49; Seavey op cit at 859.
Examples and contexts may be infinite, and any arrangement must be understood
and characterised by reference to its legal
terms in context. In McKenzie v
McDonald [1927] VLR 134 at 144 Dixon AJ, in saying that not every agent
stands as a fiduciary, was recognising that the word "agent" is used in many
senses
and is apt to mislead, citing Kennedy v De Trafford at 188. That
is, however, no more than to say that the word "agent" has a potentially wide
and varying meaning in life and business
and that, on some occasions, the
business description will be given to someone who is not a fiduciary. See also
Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64;
156 CLR 41 at 71-72 (per Gibbs CJ), cf at 96-97 (per Mason J), Boardman v
Phipps [1966] UKHL 2; [1967] 2 AC 46 at 127, F E Dowrick "The Relationship of Principal and
Agent" (1954) 17 Modern Law Review 24 and R P Meagher, J D Heydon and M J
Leeming (eds) Meagher, Gummow and Lehane's Equity: Doctrines and Remedies
(4 th Ed, LexisNexis, 2002) at 191-192 [5-195]. It is sufficient to
recognise that the essential characteristic is that one party
(A) acts on the
other's (P's) behalf, and that this will generally be in circumstances of a
requirement or duty not to act otherwise
than in the interests of P in the
performance of the consensual arrangement. Bowstead and Reynolds on Agency
, the Restatement and Seavey op cit at 863 include in the
conception of agency the characteristic of fiduciary duty. The duty will, of
course, conform with the extent
and scope of the agency and thus be of
potentially varied content, recognising that context (in particular, perhaps, a
market or
commercial context) may attenuate the rigour or content of the
fiduciary duty: Birtchnell v The Equity Trustees, Executors and Agency Co Ltd
[1929] HCA 24; 42 CLR 384 at 408; In re Goldcorp Exchange Ltd [1994] UKPC 3; [1995]
1 AC 74 at 98; Meagher, Gummow and Lehane (4 th Ed) at 161-162 [5-010]);
Finn J in South Sydney v News at [136], and in his text Fiduciary
Obligations (LawBook Co, 1977) at 201. The necessary good faith implicit in
a fiduciary character in the relationship reflects the character of
identity or
representation that the relationship essentially carries.
- That
the concept of agency may properly extend to canvassers and those seeking to
bring business to another party should not be controversial.
In a helpful
discussion at 9-10 [1-019], the authors of Bowstead and Reynolds on Agency
(19 th Ed) refer to Art 1(4) as "incomplete agency" directed in particular
to the "canvassing" or "introducing agent". The following
is useful and
relevant:
"Article 1(4) seeks to achieve completeness by taking in a well-established
type of intermediary who makes no contracts and disposes
of no property, but is
simply hired, whether as an employee or independent contractor, to introduce
parties desirous of contracting
and leaves them to contract between themselves.
In effecting such introductions he is remunerated by commission, which he may
sometimes
take from both parties. Such a person is a common figure in most
western legal systems and may well be referred to as an agent. The
most obvious
example of such an intermediary in the English cases is the estate agent, who
introduces purchasers to vendors and tenants
to lessors of houses and vice versa
... Canvassing agents are on the fringe of the central agency principles used by
the common law,
since their powers to alter their principals' legal relations
are at best extremely limited. They often, however, have authority
to receive
and communicate information on their principals' behalf, and in so doing have
the capacity to alter their principals'
legal position. They also usually act in
a capacity which may involve the repose of trust and confidence, and hence may
be subject
in some respects to the fiduciary duties of agents towards their
principals."
(Footnotes omitted.)
- It
is appropriate to turn to the particular facts of this case to ascertain whether
S Loans agreed to act in the manner described
by the authors of Bowstead and
Reynolds on Agency to receive and communicate information and otherwise act
on Tonto HL's behalf in a capacity which has the necessary character to permit
the characterisation of agency.
- There
was no challenge to the findings at [362] that Tonto HL was the agent of the
lender in each case and that any appointment by
Tonto HL of S Loans as its agent
was within the scope of Tonto HL's authority, and, thus, if S Loans were Tonto
HL's agent, it was
also the agent of Permanent and Tonto HLA.
The Introduction Deed
- I
turn to the Introduction Deed. Two clauses should be dealt with at the outset:
cl 3.1 (no agency) and cl 2.6 (no power to bind).
- Clause
3.1 (see [ 132 ] above) is not determinative. The true character of the parties'
relationship is to be gathered from an examination
of all the surrounding
circumstances, including, in particular, the provisions of the deed. Though
agency is consensual, it is sufficient
that the parties have agreed to what
amounts in law to such a relationship. The labelling of the relationship as not
agency does
not determine the question, though, unless a sham, the relevant
provision is to be given proper weight. There was no dispute about
the relevant
governing principles in this regard: see South Sydney v News at 645-646
[133]-[134] per Finn J; NMFM Property Pty Ltd v Citibank Ltd (No 10)
[2000] FCA 1558; 107 FCR 270 at 408-409 [629] per Lindgren J.
- Clause
2.6 (see [ 132 ] above) was said to strike at the core of agency. Reliance was
placed on International Harvester . Whilst the clause is sufficient to
deny to S Loans the authority to bind Tonto HL, for the reasons already adverted
to, that is
not the end of the agency enquiry.
- The
relationship between Tonto HL and Streetwise was contained in the Introduction
Deed and the collateral arrangements as to non-contact
by Tonto HL of loan
applicants, rebadging and access to Tonto HL's computer system.
- The
relationship must be set in its commercial context. Tonto HL appreciated that
Streetwise, and thus S Loan, had its own customers.
Indeed, the expectation that
there would be many customers of Streetwise was the reason why Streetwise was
targeted as an introducer.
Thus, the Introduction Deed must be construed against
the background of the recognition of the parties that S Loans would have
customers
on whose behalf and in whose interests it was obliged to act carefully
and in good faith.
- Turning
to the clauses in that light, the principal obligation in cl 2.1 was to
"endeavour" to introduce loans which complied with
the terms and conditions as
specified by Tonto HL from time to time. The word "endeavour" means to try, no
doubt imparting an element
of reasonable conduct. That is not, as the appellants
submitted, an empty or illusory promise. S Loans was obliged to endeavour to
introduce such loans. In the recognition that S Loans had a client base, such an
obligation would not require S Loans to sacrifice
the interests of its customers
if another funder or programme were more attractive. No reasonable reading of
"endeavour" would require
that; and the Court would hesitate before giving such
a meaning. Further, a reasonable endeavour would not necessarily require S
Loans
to sacrifice its own interests to Tonto HL by introducing loans in circumstances
where they could obtain higher commission
elsewhere. Reasonable endeavour is not
sacrifice of one's own interests: cf Transfield Pty Ltd v Arlo International
Ltd [1980] HCA 15; 144 CLR 83, where "best endeavours" to sell the Arlo pole
did not impliedly restrict the promisor from selling competing poles.
- The
obligation of "endeavour", thus understood, may lead to elements of assessment
and choice as to whether S Loans should, conformably
with its obligations to its
customers, to Tonto HL and taking into account its own interests, refer any
particular loan application
to Tonto HL. These are not obligations to act in the
interests of Tonto HL, and not ones of a fiduciary character.
- If
the circumstances are such that its obligation to endeavour to introduce loans
to Tonto HL leads to an application being submitted,
the balance of cl 2.1
requires all information required by Tonto HL to be provided. Clause 2.4 is also
directed to the introduction
of loans. Clause 2.5 places S Loans under the
reasonable directions of Tonto HL, not as to the conduct of its business in
general,
but in performing its "duty as an introducer of loans", that is once
the performance of an introduction has commenced. Clause 2.7
attaches only once
an introduction has been accepted by Tonto HL and a loan has been made. Clause
2.9 restricts Streetwise in how
it is to be remunerated should it introduce a
loan to Tonto HL.
- No
provision requires that S Loans will represent Tonto HL. Not only is that not
contemplated, but S Loans was contractually forbidden
from disclosing the terms
of the deed or the arrangement: cl 3.2. This position was reinforced by the
collateral arrangement that
Tonto HL not contact applicants until after
settlement. The fact that S Loans did not hold itself out as working for, or
being in
some way connected with, Tonto or Permanent or the relevant loan
programme makes it plain that the facts could not give rise to ostensible
or
apparent authority in S Loans. That is not, however, the limit of the relevance
of that fact. It also assists in the conclusion
that S Loans was not
representing Tonto HL in any real business sense in what it (S Loans) was doing.
It was, as between it and prospective
borrowers, canvassing for itself,
apparently. This could not deny any conclusion of agency as between S Loans and
Tonto HL if the
agreement between them otherwise dictated that conclusion. It
removed, however, any suggestion that S Loans did in fact act as a
representative of Tonto HL in dealing with third parties.
- No
provision purported to regulate how S Loans conducted its business prior to the
point of introduction of loans, except cl 2.4,
which only required the
maintenance of sound business practices according to law.
- Taken
as a whole, the Introduction Deed and the other agreed arrangements did not
provide for an arrangement under which S Loans would
act on behalf, and in the
interests, of Tonto HL in the respects found by the primary judge. The reasoning
of the primary judge commenced
with the recognition that Tonto HL did not
undertake interviews with the prospective borrowers and played no part in
collecting and
submitting relevant information. All those tasks, in respect of
these borrowers, and any others introduced to Tonto HL by S Loans
were done by S
Loans. Thus, there was an entrusting of the organisational or enterprise tasks
in that respect to S Loans. In these
circumstances, and given the obligations of
the deed, the primary judge saw no room for S Loans to act for its own
customers.
- That
approach has two principal flaws. First, it elevates the organisational or
enterprise structure of the relevant business and
activity as a key factor in
determining agency. Tonto HL, as the instigator of the business structure, is
seen to have placed Streetwise
in the position of collecting all relevant
information for the conduct of the lending enterprise. Therefore the tasks that
are part
of the operation of the organisation or enterprise are to be viewed as
entrusted with S Loans as agent: see generally Seavey op cit at 883-885;
the discussion in F M B Reynolds, W Bowstead and M Graziadei Bowstead and
Reynolds on Agency (17 th Ed, Sweet & Maxwell, 2001) at 21-22, and Lord
Wilberforce in dissent in Branwhite v Worcester Works Finance Ltd [1969]
1 AC 552 at 585-586. This approach deflects attention from the correct task -
ascertainment of the legal content of the consensual agreement
between the
parties.
- Secondly,
the approach fails to place the Introduction Deed in its commercial context. It
was an agreement between two entities each
of which had its own business. One
was to endeavour to introduce business from its own customer base for the mutual
commercial advantage
of both.
- Agency
is to be determined by an analysis of the consensual legal relations between the
parties, it is not merely a conclusion drawn
from the performance by A of a
function important, even necessary, to the operation or functioning of the
business enterprise of
P in question.
Conclusion on agency
- The
primary judge was wrong to characterise the relationship between Tonto HL and S
Loans as agency.
- This
conclusion does not, however, mean that when one turns to the application of the
CRA , one ignores the history and detail of the relationship between
Tonto HL and S Loans. They were not commercial strangers; they were
intimate
commercial counterparties, the latter performing functions that were integral to
the operation of the former's business
and the lending enterprises.
- This
conclusion makes it unnecessary to deal at any length with some of the
particular complaints made about the primary judge's reasoning
as to agency. It
is appropriate to deal with some, however, in order that this Court's evaluation
of the circumstances for the operation
of the CRA can take place on the
correct factual foundation.
Aspects of the primary judge's reasoning as to agency
Streetwise's part in the administrative process
- Particular
challenge was made to the primary judge's finding (at [307 (b)(iii)]) that
Streetwise would have "absolute administrative
control of the loan
applications". That challenge was to any proposition beyond the matters
explained by Mr Narramore: that the live
window was provided to Streetwise to
upload required documents and to monitor the status of the application. The
primary judge's
finding went no further than this. Taken together with the
agreement by Tonto HL not to contact prospective borrowers, and the ability
of
Streetwise to have read only access to the progress of any application,
Streetwise had a degree of control over the administrative
process once an
application was lodged. I do not take his Honour's finding of Streetwise playing
an "integral part on behalf of Tonto
and Origin in their loan approval and
credit assessment process" ([356]) as going further than that. This can be seen
from the primary
judge's findings at [261] that neither Mr Lougoon nor Mr Wright
was contacted by Mr Bangaru or anyone at Streetwise when approving
the loan
applications in question. If the primary judge is to be understood as going
further, any such finding was not supported
by the evidence.
The joint venture agreements
- A
central submission of the appellants as to the error in the conclusion of agency
concerned the relevant joint venture agreements.
The appellants submitted that
the primary judge fundamentally misconceived the place of the joint venture
agreements. The joint venture
agreements were formal and binding, appointing S
Property as "co-ordinator and project manager on our behalf to locate and
develop
a suitable site" in a "profit share arrangement". As the primary judge
found at [330], S Property promised in the agreement that
either through
Streetwise Home & Investment Loans Pty Ltd (that is, S Loans) or through an
external financier, it would obtain
necessary finance on the basis that the
"financing of the borrowed funds" would be the responsibility of the O'Donnells,
Di Benedettos
or Mr Tavares and Ms Rowe. S Property undertook to advise the
respondents. Thus, it was submitted that before Tonto HL or the lender
was
approached, the respondents had assumed contractual obligations to develop land.
Thus, it was submitted, there could be no conflict
between the interests and
duties of S Loans (the party to the Tonto HL Introduction Deed). In the joint
venture agreement, the respondents
agreed that S Property would act on their
behalf to obtain finance. This was done, it was submitted, by S Property
delegating this
task to S Loans to obtain funds from external financiers. Thus,
S Loans, acting on behalf of S Property to effect the latter's obligation
to the
respondents to obtain finance to fulfil their obligations under the joint
venture agreements, can be seen as acting for the
respondents.
- This
is a legitimate legal and factual analysis of what occurred, though it is
unnecessary to be this precise. These borrowers were
enticed to Streetwise. They
entered agreements with S Property and, through their involvement with
Streetwise, became persons for
whom S Loans undertook tasks. I have already
concluded that S Loans was not Tonto HL's agent. The fact of agency or not is
not conclusive
or determinative as to the attribution of responsibility here
within an analysis under the CRA , a subject to which I will return.
Tonto HL's knowledge of Streetwise
- It
is convenient at this point to the deal with the challenge to the primary
judge's findings at [320] (see [138] above) that Tonto
HL knew that Streetwise
was "not only a broker, but was a property developer" and that "the business of
Streetwise was not confined
to being a loan introducer" and that "it would have
been obvious to a reasonably prudent lender possessed of that knowledge that
Streetwise as a broker had a clear conflict of interest". It was submitted that
it was wrong to conflate the companies in the Streetwise
group. One undertook
property development; the other was a finance broker. It was wrong in law, it
was submitted, to analyse the
position otherwise than by reference to the
interests of S Property and the duties of S Loans. Further, it was submitted
that the
timing of the joint venture agreements meant that there was no conflict
because the respondents knew from the joint venture agreements
that S Property
would seek finance for them, either from an internal company or externally.
Indeed, they had bound themselves to
this process.
- With
respect, these submissions of the appellants have an air of unreality and
formalism. What Tonto HL could see (as Mr Paul O'Donnell
accepted in
cross-examination, reflecting on it) was that an apparently closely held group
ran a land developing business, had a
finance broking operation and had a
significant interest in having loans approved to gain access to loan funds,
through the borrowings
of individuals dealing with the so-called broking arm of
the group, which had in fact bound itself to Tonto HL in the form of the
Introduction Deed. This was more than the usual interest of a broker in a
commission. There was a powerful incentive for Streetwise
to see loans given to
borrowers. The description of this as "conflict" is reasonable. There was a
plain and obvious incentive for
Streetwise to put forward loans to obtain money
for its customers and through them its property business, which interest might
conflict
with duties to Tonto HL or to its customers if the commercial interest
overwhelmed care or honesty. The relevant point was what could
reasonably be
perceived by Tonto HL. The companies in the group were seen by Mr Paul O'Donnell
as "effectively the same".
- The
property development business of S Property and the prospective borrowers
generated by Streetwise were the attractions for Tonto
HL. Mr Narramore said at
para 19 of his affidavit of 15 April 2008:
"Streetwise ... was the typical type of target client that I was employed to
chase. They were multi-tiered and vertically integrated
in selling property:
they would have a division that would generate a lead with a particular investor
market, a separate division
would then make a sale and a further division again
would organise the finance on behalf of those investors to fund that purchase."
Mr Paul O'Donnell gave similar evidence. Tonto HL viewed Streetwise as a
group and as a potentially lucrative "target client to chase".
This was because
of the volume of anticipated lending to people introduced by S Loans to fund
their arrangements with S Property.
- The
primary judge's findings of a "conflict of interest" able to be perceived by
Tonto HL rested on an assumption that any Streetwise
entity acting as a broker
had a potentially powerful conflicting interest if its duty to a prospective
borrower required caution
or advice as to the suitability of borrowing. To that
extent and so understood the finding was open. Tonto HL knew that S Loans would
bring people to the lending programme in order to provide funds to invest in
business offered by Streetwise. That was the commercial
attraction of
Streetwise. It bespoke the real risk that any duty that S Loans may have to a
borrower would or might give way to the
interest in Streetwise as a property
developer for funds.
- The
timing of the joint venture agreements and of the approach to Tonto HL did not
affect this commercial position and the reality
of the potential for conflict
that was apparent to Tonto HL.
Imputation of knowledge
- The
conclusion that S Loans was not the agent of Tonto HL makes it unnecessary to
consider whether, on the assumption that there were
an agency relationship, the
so-called fraud exception would prevent the imputation of knowledge held by
Streetwise employees to Tonto
HL and through to the lenders.
- Knowledge
acquired through an agent is dealt with in Bowstead and Reynolds on Agency
(19 th Ed) in Art 95 at 514 [8-207]:
"(1) The law may impute to a principal knowledge relating to the
subject-matter of the agency which the agent acquires while acting
within the
scope of his authority.
(2) Where an agent is authorised to enter into a transaction in which his own
knowledge is material, knowledge which he acquired outside
the scope of his
authority may also be imputed to the principal.
(3) Where the principal has a duty to investigate and make disclosure, he may
have imputed to him not only facts which he knows but
also material facts of
which he might expect to have been told by his agents.
(4) Knowledge is not attributed to the principal where it is acquired by an
agent who is defrauding the principal in the same transaction."
(Footnotes omitted.)
The authors express the exception in Art 95(4) with the same clarity of
expression as did Buckley LJ in Belmont Finance Corporation Ltd v Williams
Furniture Ltd [1979] 1 Ch 250 at 261-262:
"But in my view such knowledge should not be imputed to the company, for the
essence of the arrangement was to deprive the company
improperly of a large part
of its assets. As I have said, the company was a victim of the conspiracy. I
think it would be irrational
to treat the directors, who were allegedly parties
to the conspiracy, notionally as having transmitted this knowledge to the
company;
and indeed it is a well-recognised exception from the general rule that
a principal is affected by notice received by his agent that,
if the agent is
acting in fraud of his principal and the matter of which he has notice is
relevant to the fraud, that knowledge is
not to be imputed to the principal."
- Notwithstanding
this apparent clarity, the rule is not without controversy. The authors of
Bowstead and Reynolds on Agency (19 th Ed) express the view that the
existence of and justification for the rule is open to question: at 523 [8-213],
citing the illuminating
article of one of the authors (Prof Watts) in (2001) 117
Law Quarterly Review 300. That said, as Prof Watts makes clear in the
article, the rule appears to have been applied for over 150 years, having its
roots in
the decision of Lord Brougham in Kennedy v Green [1834] EngR 1072; (1834) 3 My
& K 699; 40 ER 266. Glazebrook J and Robertson J in the New Zealand Court of
Appeal have expressed the view that the exception is not soundly grounded
in
authority: Nathan v Dollars & Sense Finance Ltd [2007] NZCA 177;
[2007] 2 NZLR 747 at 770 [99].
- The
rule is not limited to circumstances where the principal is suing the agent.
There imputation of knowledge is irrelevant. It extends
to circumstances where
it becomes relevant to know the state of knowledge of the principal by reference
to what the agent knew in
relation to the claims or rights of third parties.
- The
rationale of the exception is said to be twofold: the existence of the fraud
rebutting a presumption of communication of information:
Turner VC in Hewitt
v Loosemore [1851] EngR 952; (1851) 9 Hare 449; 68 ER 586; or as taking place outside or as
severing the agency relationship: Espin v Pemberton [1859] EngR 264; (1859) 3 De G & J
547 at 554-555; [1859] EngR 264; 44 ER 1380 at 1383. Certainly, the latter foundation is
difficult to sustain after Lloyd v Grace, Smith & Co [1912] UKHL 1; [1912] AC 716.
- No
party put submissions that the exception did not exist. It was said not to apply
for the reasons given by the primary judge: that
S Loans' actions were not
"acting totally in fraud" of Tonto HL (see Beach Petroleum v Johnson [1993] FCA 283; 43
FCR 1 at 31; [1993] FCA 283; 115 ALR 411 at 574 and Morlea Professional Services Pty Ltd v
Richard Walter Pty Ltd (In liq) [1999] FCA 1820; 96 FCR 217 at 229 [46]) and
there was no "moral certainty" of lack of disclosure (see Bowstead and
Reynolds on Agency (16 th Ed) cited in Beach Petroleum v Kennedy ).
- I
would agree with the primary judge that the transaction was not totally in fraud
of Tonto HL. The lenders are, after all, seeking
to enforce the very transaction
and security that have given them monetary return even though the engagement was
brought about by
the fraud in question. The lenders and Tonto HL obtained a
benefit - the deployment of the funds at interest upon a valuable security.
Lies
brought it about, but they were not the victims of a theft or depredation. They
maintain the validity of that very transaction.
- There
is much to be said for not applying the exception to a case such as the present
where Tonto HL and the lenders have chosen (on
this hypothesis) the agent who
was undertaking the very tasks required of it, albeit exhibiting dishonesty, to
the immediate benefit
of both it and the principal and, further, where the
ultimate principal seeks to enforce the very transaction. That said, it is
unnecessary
to express a final view on the rule.
The other grounds of the appeal
- Given
my view that the primary judge erred in his conclusion about agency, it must be
concluded that his Honour's conclusions as to
relief under the CRA were
flawed, requiring the powers under the CRA , ss 7 and 9 to be examined
and, if necessary, re-exercised by this Court in the light of the notices of
contention that have been
filed. The other complaints made by the appellants are
relevant to examine, because the resolution of them will inform this Court's
approach to the re-application of the CRA.
Giving manifestly insufficient weight to the misleading conduct of the
borrowers
- The
appellants drew particular attention to the misleading character of the
borrowers' conduct in the way they applied for the loans.
Emphasis was placed on
the incompleteness of the documents that were signed and the fact that some of
the information in the O'Donnells'
forms was false, to their knowledge. Thus, by
leaving blank sections (and the O'Donnells by allowing wrong information to
remain
in the document) the borrowers misled the lenders. Further, the
declarations that they could afford to make the loan repayments without
undue
financial hardship were false: they could not, without the Streetwise
contribution.
- The
conduct was objectively misleading and it was a cause of inducing the loan
facility. The conduct was, it was submitted, careless,
misleading and reckless
and directly facilitated the fraud.
- The
primary judge recognised that the borrowers' conduct exposed the lenders and
themselves to the risk of fraud: [68], [323] and
[405] of the reasons. The
submission that the primary judge gave manifestly insufficient weight to the
circumstances need not be
dealt with insofar as a consideration of the primary
judge's reasoning does not assist in any re-exercise of the powers under the
CRA . It is helpful, however, to analyse the complaints so as to throw up
the correct approach for this Court in the re-exercise of power.
- First,
the appellants complained that the primary judge understated the conduct by his
Honour by merely calling it "careless". It
was said to be reckless, intentional
and grossly misleading conduct, which had a direct consequence on the conduct of
Tonto and the
lenders. To the extent that reckless and grossly misleading seek
to import a notion of intention or perception of the risk to others,
the primary
difficulty standing in the way of the submission is that senior counsel
appearing for the appellants at first instance
did not put this matter to the
borrowers in cross-examination. That is not a criticism of his
cross-examination. The conduct of the
borrowers, in its carelessness, speaks for
itself. As to whom they actually perceived might be misled by this depended, in
significant
part, upon who they thought the lenders were at the time they were
doing things. The failure to press the borrowers with notions
of intentionally
misleading conduct and actual perception of risk of others puts it out of the
hands of the appellants now to rely
on such submissions.
- There
can be no doubt that the borrowers were careless and careless in a significant
degree. But they were misled with blandishments
and worse. They thought they
were dealing with a substantial organisation, perhaps they should not have done
so. They expected Streetwise
to deal honestly with their applications and there
is no evidence that they actually anticipated any fraud. It can be accepted
that,
as a matter of objective fact, they left the forms concerned in a
misleading state. That they were aware that they were misleading
people or may
mislead lenders was not put to them. In any re-exercise of power, the cause or
place of the plain carelessness of the
borrowers is to be given significance,
which conclusion will involve the capacity of the forms to mislead the lender
should they
be filled in incorrectly or falsely by Streetwise. However, given
the way the matter was conducted, it is not to be found that the
borrowers
intentionally misled anyone or were conscious of the risk of doing so.
- The
truly misleading conduct was that of Streetwise inserting false information
without the borrowers' knowledge; though their careless
conduct objectively
permitted the conduct of Streetwise to mislead the lenders.
- The
second complaint as to the manifestly inadequate weight given to the borrowers'
conduct was that the primary judge discounted
the significance of the
carelessness on the basis of his finding ([68] and [405]) that the respondents
were rushed by Streetwise
into signing the incomplete documents. It was
submitted that the primary judge should not have found that the fact that
Streetwise
rushed the borrowers into signing was an excuse for making false and
misleading declarations to the appellants. However, the findings
as to being
rushed were plainly open to the primary judge. If there were a misleading of the
lenders by the borrowers, it may not
excuse it. However, as discussed earlier,
the misleading of the lenders was by the fraudulent conduct of Streetwise. His
Honour was
entitled to take into account the objective facts he found about the
pressure placed upon the borrowers as to time. How it falls
out in an ultimate
re-exercise of power will be dealt with later.
- The
third complaint was that his Honour mitigated the findings as to carelessness by
what was said to be an erroneous conclusion that
the fraud of Streetwise was not
reasonably foreseeable by the respondents. This conclusion led his Honour, it
was submitted, to treat
as irrelevant the circumstance that the conduct by the
borrowers exposed the appellants to the risk of fraud. This finding was said
to
have been bound up with a misapplication of the CRA , s 9(4) in that the
primary judge failed to take into account at all the injustice to the appellants
which the carelessness caused.
- For
present purposes the important question is whether or not the primary judge was
correct (and this Court can apply a similar finding)
that the fraud of
Streetwise was not reasonably foreseeable by the respondents. This is not a tort
case. It can be readily accepted,
for the purpose of argument, that if one gives
a signed document to a stranger (or someone of whom one has little knowledge)
with
blank sections to be filled in, which document is to be given to a third
party for a business purpose, it is reasonably foreseeable
that if the person is
dishonest or careless the wrong information may be placed on the documents. That
objective analysis is readily
acceptable. The primary judge was engaged,
however, in a more subtle exercise. He was assessing the people before him and
characterising
their conduct. All these borrowers trusted Streetwise. In
particular with the benefit of hindsight, they should not have done so.
Other
people in the community may have been more cautious. His Honour found them to be
careless. They were careless because they
were giving open documents signed by
them to commercial persons they had just met. The finding as to lack of
reasonable foreseeability
was based on the trust of ordinary people who had
accepted the blandishments of rogues. That is how his Honour's findings should
be understood; they were open and should not be disturbed.
- In
due course, I will say something as to the systemic risk inhering in a business
organisation and structure whereby Tonto HL placed
the gaining of all relevant
information in the hands of Streetwise. The reasonable foreseeability of Tonto
HL is that of business
people assessing the risk in the structure and running of
their enterprise. This is a quite different matter from the reasonable
foreseeability of honest, trusting, but careless people such as these borrowers
acting under the blandishments and lies of Streetwise.
Seen in the above light,
I do not think that his Honour's findings as to lack of reasonable foresight in
the respondents of the risk
that Streetwise would engage in fraud are open to
criticism.
- The
fourth complaint was that in evaluation of the injustice the primary judge found
that Tonto HL "was in a much better position
both to appreciate and to manage
the risk of fraud by Streetwise" than were the respondents: [413(ii)]. It was
submitted in this
regard that the various declarations and acknowledgements
contained in the application forms and declaration were prudent measures
for
Tonto to take in order to avoid the risk of fraud. It was submitted that it was
the borrowers who facilitated the fraud in the
face of those measures and absent
their conduct the fraud would not have occurred. At this point the appellants
emphasised that the
fraudulent party (Streetwise) was the agent of the
borrowers, not the lenders.
- I
will deal with these submissions more fully in due course. However the
fundamental point made by his Honour was a good one. Tonto
HL had chased and
finally won a property development group to act through its finance broking arm
as a loan introducer. The commercial
risks (and rewards) involved in that choice
have been adverted to and will be the subject of further consideration in the
re-exercise
of power. The fact that S Loans was not the agent of Tonto HL does
not mean that all the surrounding facts as to how S Loans came
to be an
introducer and the terms of the arrangement, including, in particular, the
agreement by Tonto HL not to approach customers
before settlement, should not be
taken into account. The clear inhering business risk of sub-contracting the
important process of
information collection and choice of appropriate loan
product to a land developer to assist in obtaining funds for people doing
business
with it and so effectively providing a source of funding for its
projects should be taken into account in understanding how the fraud
occurred.
In any such business enterprise, appropriate safeguards were necessary to
minimise the risk of fraud. They were administered
loosely, to the direct risk
of the lenders and the indirect risk of the prospective borrowers. Agreeing not
to contact prospective
borrowers before settlement and agreeing to mislead them
if they rang by answering the telephone as Streetwise were hardly risk
minimisation
strategies. The guidelines for loan approval were fundamental to
avoiding the risk of fraud. None of this is to say that anyone at
Tonto HL
actually knew or suspected that Streetwise was fraudulent. The point his Honour
was making was that in undertaking a business
enterprise of this character,
Tonto HL, as a professional mortgage manager, was in a much better position to
appreciate the risk
of fraud or mismanagement, than were the borrowers. Putting
declarations in the fine print of application forms is not an entirely
adequate
response in the other circumstances to which I have made reference. I will deal
with this more fully in due course.
- Fifthly,
the appellants submitted that the primary judge should have followed the
approach of McDougall J in Perpetual Trustees Victoria Ltd v Longobardi
[2009] NSWSC 654 in relation to borrowers who sign documents in blank. His
Honour said that such borrowers should bear the responsibility for fraud
because
they permitted it to happen. Judges are not obliged to follow other judge's
findings of fact. One needs to understand all
the facts in any case to form
relevant views as to their importance. In Longobardi the factual
circumstances were different. The Longobardis signed application forms in blank
and saw documents before the loan was
completed which, had they read them, would
have told them that the lender was proceeding upon an incorrect understanding of
their
income.
- None
of the above is to deny that the objective fact that the documents were signed
in blank is an important matter to take into account
in circumstances where it
has facilitated fraud.
Other relevant factual errors asserted
- Amended
appeal ground 16 concerns the asserted error of the primary judge in finding
that the preliminary and final approval letters
and the application, having been
"branded" as "Streetwise" assisted Streetwise dishonestly to mislead the
respondents: [312]-[314]
and [413(ii)]. It was submitted that these documents do
not support such a conclusion. In support of this, detailed textual expressions
are focused upon in the preliminary and final approval letters and in the
application forms. With great respect, these submissions
are somewhat
unrealistic. What the learned primary judge found was plainly open. Indeed, it
was the very commercial advantage and
circumstance that Tonto and Streetwise
understood at the time. The branding (and the agreement not to speak to
prospective borrowers
by Tonto HL) was to assist the introducer in fostering a
belief that it had a connection with the lender or the making of the loan.
It
was to facilitate the development of a business connection of the making of the
loan with the introducer's name and operation.
It enabled Streetwise to
represent that it was closer to the loan than it really was. This enabled
Streetwise, as happened here,
to persuade people that the filling in of forms
was a matter of formality, it (Streetwise) having been given all relevant
information.
Of course the forms, if read carefully, make clear the importance
of their being filled in fully and accurately and carefully, but
this aspect of
the conduct of the two businesses (of Tonto HL and Streetwise) did justify the
primary judge's conclusion that it
facilitated Streetwise misleading the
respondents into a view that Streetwise was either the lender or closely related
to the lender.
It may be a common practice. Nevertheless, to the extent that
such impression can lead to difficulty, it is designed to permit the
introducer
to represent its connection with the loan. It is to be recalled that Tonto HL in
its standard form Introduction Deed had
a provision forbidding S Loans
disclosing the terms of the deed or the arrangement with Tonto HL. Tonto HL and
the lenders wanted
to "stay in the background". That is, if they desire it, a
legitimate commercial position. What the primary judge was saying, and
it was
entirely justified, was that the branding and the "ownership" given to the
introducer enabled the introducer to have the borrower
believe that it was
closely connected with the loan to the extent that such might be relevant to a
deception.
- Appeal
grounds 9 and 11 complain about erroneous findings as to Tonto HL exposing the
respondents to a serious risk of fraud. At [311]
and [320]-[321] the primary
judge found that Tonto's agreement with Streetwise not to speak to borrowers and
to answer telephone
calls from Streetwise clients in the name of Streetwise
created a risk in respect of compliance with lending guidelines and the
reliability
of information provided in applications and that Tonto was aware
that loan applicants might be misled. This was relevant to his Honour's
findings
that the way Tonto conducted its business with Streetwise exposed the
respondents to a serious risk of fraud which was reasonably
foreseeable.
- First
it was said that the conclusion was tainted by a misconceived finding as to
"conflict of interest". I have already dealt with
this question of conflict of
interest. In my view, Tonto HL was plainly aware of the character of
Streetwise's business and the inhering
risk that someone in the business of
Streetwise might misuse its position in order to obtain funding for its own
projects through
selling products or involving itself with members of the
public. Further, the primary judge was entitled to give weight to answers
in
cross-examination by Mr Paul O'Donnell about the relationship with Streetwise
and risk.
- Secondly,
it was submitted that the answer of Mr O'Donnell as to risk referred only to the
ordinary risk of brokers fulfilling the
function of interviews and information
collection. That is not the case. Mr O'Donnell was being cross-examined by Mr
Menzies SC about
the heightened risk brought about by Tonto HL disentitling
itself from communicating with prospective borrowers. That undoubtedly,
as the
primary judge correctly found, undermined the capacity of Tonto HL to carry out
its tasks by diligently applying the guidelines
insofar as that might require,
in any given case, contact with the prospective borrower.
- Thirdly,
complaint was made about the finding in the last sentence of [311] that Tonto HL
was aware that loan applicants might be
misled by the badging of Streetwise, but
nevertheless proceeded with the arrangement. It was submitted that the
cross-examination
did not squarely put this matter to Mr Paul O'Donnell. Looking
at the cross-examination of Mr Menzies, I do not accept that criticism.
Mr
Menzies was cross-examining Mr O'Donnell about badging of the documentation and
the agreement not to speak to prospective borrowers.
The relevant
cross-examination is set out in [306] of the reasons. The answer by Mr O'Donnell
was to a direct question to the effect
that there was some consideration to the
possibility that persons would be misled or confused about the process.
Evidently Tonto
did go ahead nevertheless. The finding of his Honour was open.
- Fourthly,
it was submitted that the primary judge did not properly take clause 2.1 of the
Introduction Deed into account in his finding
that Tonto exposed the borrowers
to a serious risk of fraud. The Introduction Deed of course required all
information to be accurate.
I do not think that this is a fair criticism of his
Honour. He was well aware of the deed. What his Honour found created a risk was
the taking on of an introducer such as Streetwise with the risks inhering in
that in circumstances where, in particular, Tonto HL
put it out of its hands to
rigorously pursue its guidelines to the extent that such required contact with
the prospective borrower
before settlement of the loan.
- These
considerations should not be taken as part of any conclusion that Tonto HL could
not retain S Loans as an introducer. They do
however mean that a commercial
party in Tonto HL's position should appreciate the inhering risks involved, as
his Honour correctly
found. The consequence of this should be to apply guideline
checks with rigour.
Erroneous finding of borrowers not exposing lenders to risk of fraud
- The
appellants complained that the primary judge did not at [415] take into account
the findings, otherwise properly made, that the
borrowers by signing blank or
partially completed documents exposed themselves and the lenders to the risk of
fraud.
- Given
the necessity to re-examine and re-exercise the power under the CRA it is
strictly unnecessary to deal with the point. The borrowers were careless. Their
actions created, to a degree, the risk of fraud.
The primary judge's conclusion
as to the lack of reasonable foreseeability of fraud (at [405]) should be
understood in the way that
I have described earlier.
Erroneous finding that the borrowers obtained no benefit
- At
one level of analysis there is force in the appellants' contention that the
borrowers received a benefit from the loans. Their
obligations under the joint
venture agreements were satisfied. Thus, a financial benefit was obtained from
the agreement said to
be unjust. That, however, was not the point being made by
the primary judge. The investment was worthless.
- It
was submitted that this finding about the worthlessness of the investment was
irrelevant. It was not. It was relevant to all the
circumstances that might go
to relief, should the contracts be held to be unjust.
Erroneous finding as to non-compliance with special condition
- At
[247], [413(iv)] and [415] of his reasons, the primary judge found that the
"cash out" special condition in the O'Donnells' application
was not complied
with, and that the approach of Tonto HL made it easier for the fraud to go
undetected.
- The
complaint is that the special condition was not a condition at all of the loan
agreement. The primary judge should have worked
on the basis that there was no
special condition.
- There
is some confusion with this special condition. It appeared in the preliminary
approval letter of 7 November 2002, the approval
letter of 6 January 2003 issued
under the FirstMac Program, and the approval by Origin on 30 January 2003 of the
application submitted
by Tonto HL on 29 January 2003. Thereafter, the special
condition was removed. It is unclear why this occurred. The closeness in
time of
the (second) final approval letter (31 January 2003) may bespeak a decision
around this time to remove the condition.
- The
primary judge did not refer to this complexity. In the circumstances, it is
difficult to draw any conclusion relevant to the causal
consequences of what
might, nevertheless, be seen to be a failure to follow guidelines.
- One
possible reason for the removal of the condition in the agreement was that it
had been satisfied (by the inadequate information).
- To
the extent that the special condition was in the documentation put forward by
Tonto HL for approval, the guidelines were breached.
It was a matter for the
appellants to explain in evidence the irrelevance of the information to satisfy
it. At the very least, the
inadequate information reflects a lack of attention
to the guidelines when the condition was stated to be relevant. That said it
is,
perhaps, problematic what causal effect it had.
The question of legal advice
- Whilst
the appellants do not challenge the finding at [407] that the O'Donnells were
"persuaded" or "convinced" by Streetwise not
to obtain legal advice, it was
submitted that the primary judge erred in failing to take into account the
O'Donnells' signing of
a legal advice acknowledgement certificate. It was
submitted that the certificate was misleading if they had been "convinced" not
to do so because the certificate use the word "chosen". With respect the
submission thus put is semantic and pedantic.
- More
to the point is the fact that it told the lenders that the borrowers had had the
opportunity to seek legal assistance. The facts
otherwise found by his Honour
make clear the choice they made - both as to legal and accounting advice. These
are matters of some
significance.
Asset lending
- The
primary judge found at [378] that the loans to the borrowers were "asset-based
... and amounted to asset lending." A critical
aspect of that conclusion was his
findings of agency and imputation of knowledge. Such findings were wrong.
- Also
relevant to the conclusions were the breaches of the guidelines set out at
[413(iii)], which findings were not challenged. Complaint
was made, however,
about the findings in respect of the assessment of each of the loans that the
loose attitude adopted to the lending
guidelines indicated that those examining
the application were not much concerned about the purpose of the loans and
whether the
borrowers were self-employed and were content to lend on the
security of the properties and mortgage insurance: [414], [428] and
[437] of the
reasons.
- The
appellants referred to all the steps taken by Mr Wright and Mr Lougoon in their
approval processes and submitted that it is unfair
to them, in the absence of
the finding having been put to them in terms, to conclude as his Honour did. I
disagree. There can be
little doubt that their attention to the guidelines was
inadequate. There was a clear preparedness to rely upon what had been assumed
to
be done by others. The overall impression of Mr Lougoon and Mr Wright in the
light of their work of applying the guidelines makes
it difficult for this Court
to interfere with the primary judge's conclusion. To adopt the language of the
submissions of ASIC as
another way of putting what his Honour did: the lack of
regard for the borrowers' capacity to pay can be inferred from the failure
to
follow the relevant guidelines, the agreement not to contact the borrowers
before settlement, the preparedness to rely upon the
mortgage insurers' assumed
assessment, the paltry information accepted and perfunctory enquiries as to loan
purpose and the lack
of verification of information, all set against the
otherwise scrupulous care and perspicacity with which independent valuations
and
valid first mortgages were taken. Failure to verify information relevant to
capacity to service the loans, in particular ABNs
and certificates of business
registration and, in relation to Mr Tavares, confirmation that he had been self
employed in the same
business for two years, lead inexorably to the conclusion
his Honour made.
Reconsideration of the CRA and the notice of contention
Reapplication of the CRA
- The
principles concerning relief under the CRA were recently restated by
Campbell JA in Kowalczuk . There was no substantive debate as to the
relevant principles. It was their application that was in contest.
Whether the contracts were unjust
- The
first stage of analysis is whether the contracts were unjust as between the
parties in the circumstances in which they were made.
Of particular relevance
here is the element of procedural injustice. The agreements for loan and
mortgage were unexceptional. They
contained no harsh or unjust terms of
themselves. The unjustness of the contracts arises from the deception and fraud
practised by
Streetwise in the arrangement of the agreements.
- For
the reasons that follow, the circumstances in each case lead to the conclusion
that the contracts were unjust. I will not re-iterate
all the facts. The
following features are to be emphasised.
- The
central feature that brought about the loan agreements and mortgages was the
dishonest conduct of Streetwise in the filling in,
and submission of, the
various forms and information to Tonto HL. This brought about the contracts
which would not have been entered
without false information. This was done for
the financial advantage of S Property and the principals of Streetwise, to the
distinctly
possible (at the time) detriment of the lenders and the borrowers.
- That
S Loans was not in law the agent of Tonto HL does not mean that for the purpose
of evaluating the operation of the CRA , the position of Streetwise, how
it came to take its place in the overall enterprises of the lending programmes
and the objective
perceptible risk of fraud arising from its position should not
be considered.
- The
perpetrator of the fraud was not a stranger to Tonto HL. It was a retained
introducer. It was a sought-after commercial counterparty
put in place by Tonto
HL for the purpose of hoped for introduction of business. It was part of the
"shopfront" of the retail business
of the enterprise, albeit sub-contracted, and
branded as Streetwise. Its role was to introduce business, obtain information in
respect
of suitable products and bring forward applications. The characteristics
of the group of companies to which it belonged gave it its
commercial
attractiveness to Tonto HL. As a broking arm of a group engaging in property
development it had the attraction to Tonto
HL of members of the public as
customers engaging in property development or buying property from the group and
seeking money so
to do. It was obvious commercially that Streetwise was
obtaining sources of funding for members of the public going into or doing
business with it (all funds at settlement being directed to S Property) and thus
providing funding directly or indirectly for its
projects. One need not be too
specific about this. It is sufficient to recognise that S Loans had a
significant incentive (beyond
the obtaining of commission) for successful
applications, and that this was objectively evident to a commercial party in the
position
of Tonto HL. In a structure based on independent contract without the
control over employees, there was an inherent or systemic risk
of exaggeration
and fraud which came to pass. This was only heightened by the agreement not to
contact prospective borrowers until
after settlement, which necessarily weakened
Tonto HL's ability to apply its own credit guidelines under both programmes with
appropriate
commercial vigour.
- One
legitimate way of analysing the facts is that through S Property, S Loans was
the agent of the borrowers. If S Loans had been
worth powder and shot any
suggestion that it was not acting for the borrowers would have been shortly
dealt with. Nevertheless, this
legal position should not be over emphasised in
the whole commercial context in which the lending took place, in particular the
place
and function of S Loans in the commercial enterprise of the lending
programmes.
- Whilst
the effect of the "badging" of the approvals with the Streetwise logo and name
should also not be overstated, its capacity
(correctly recognised by the primary
judge) to mislead or confuse should not be ignored. As was apparently common in
the industry,
Streetwise was assisted through the badging (reinforced by the
agreement of Tonto HL not to contact prospective borrowers before
settlement) to
represent itself as closely connected with the lending and as a company of
substance. This permitted some of the borrowers
to think, at least up until the
final loan and mortgage documentation was sent to them, that Streetwise was the
lender. Thus, a sense
of completeness of disclosure in the customers was brought
about, irrespective of the formalities in the various documents that were
shown.
Once again, this capacity to mislead was created by the structure and operation
of the commercial arrangement put in place
by Tonto HL.
- The
only clear organisational checks and precautions were the guidelines. Not only
were they not followed, but they were disregarded
in a way found by the primary
judge to reflect a lack of real concern for aspects that underpinned
serviceability and the suitability
of the borrowers. Of course, lending
guidelines such as these are principally the relevant tool to protect the
lender's interests.
However, as recognised by Spigelman CJ in Perpetual
Trustee Company v Khoshaba [2006] NSWCA 41 at [80]- [82] and Campbell JA in
Kowalczuk at 228 [102], following the guidelines confers a direct benefit
on a prospective borrower by identifying risky loans and preventing
fraud. The
failures can be seen to be material in permitting the fraud to occur.
- There
can be no doubt that, to varying degrees, these borrowers were preyed upon by
Streetwise, through the blandishments and lies
of apparently sophisticated and
skilful people. The written page can never fully reflect, in recalled snippets
of conversations,
the effects of personality, charm, pressure and deception in a
carefully orchestrated body of persuasion of ordinary people. That
is not to say
that the borrowers were not careless, to a degree, foolish and gullible. They
all succumbed to the lure placed before
them of monetary gain, the lure being
made more respectable by its characterisation as the provision for their future
and "wealth-building"
for their later years. Greed would be too strong a word,
and unfair perhaps. But such caution as was initially revealed by them dissolved
under the persuasion of, and trust in, Streetwise. These matters went, in
particular, to the collateral joint venture transaction.
To complete the
exercise of deception, a group of lies directed to obtaining the contracts in
question was necessary.
- The
above said, the behaviour of the borrowers to a degree militates against any
conclusion of injustice. The signing of incomplete
or blank documents was
careless, giving the opportunity for the fraud. The carelessness also extended
to the degree to which the
documents were misleading; though, to a significant,
indeed overwhelming, degree the causative deception occurred through the
dishonesty
of Streetwise.
- I
will not repeat the detail of the coming of each couple to the borrowing set out
above and more fully by the primary judge. Read
with that detail the following
is necessary to say. The O'Donnells were the most deeply involved in the
analysis of the property
venture put to them by Streetwise. Mrs O'Donnell spent
time analysing what was said to her, making notes and explaining matters to
her
husband. They visited Melbourne to view the property. They considered the
retention of a lawyer and accountant, but chose not
to do so because of cost and
the persuasion of Streetwise. They were prepared to, and did, bind themselves to
S Property under the
joint venture agreement. Yet, as those at Streetwise must
have known, the undertaking was fraught with risk and imprudence. The
O'Donnells'
judgment was influenced and impressed by Streetwise's apparent
substance and its lies and persuasions. The loan, although one which
they
clearly had applied for, was, however, effected by the fraudulent conduct of
Streetwise.
- The
same conclusions follow in relation to the loan and mortgage contracts of the Di
Benedettos and Mr Tavares and Ms Rowe. The Di
Benedettos were subject to greater
pressure than the O'Donnells. They did not have the advantage of having the loan
and mortgage
documentation sent to them directly to enable them to consider it.
Tonto HL sent it to them via Streetwise. They were somewhat less
deliberate in
their assessment of what they were being persuaded of than were the O'Donnells.
Mr Tavares and Ms Rowe were the least
sophisticated of the three couples. They
paid the least attention to what was happening. They were persuaded, pressured
and lied
to and their loan, like the others, was effected through fraud.
- The
position of the lenders should not be judged as detached third parties, distinct
and separate from what happened. Nor should they
be seen as complicit with, or
actually knowing of, Streetwise's deception, fraud and predatory conduct towards
the borrowers. Whilst
not having actual knowledge or actual notice of
Streetwise's behaviour, the lenders' position should be assessed by reference to
the reality of the significant responsibility of those structuring the elements
of the lending programmes or, in the case of Permanent,
those providing the
wholesale funds. The mortgage manager (Tonto HL) with delegated lending
authority operated the guidelines loosely
and in a way which reflected a lack of
concern with the suitability of the borrowers and serviceability. The mortgage
manager brought
into the roles of interviewing and selecting prospective
borrowers an intermediary whose commercial attractiveness bespoke the inhering
risks to which I have referred, heightened by Tonto HL's agreement not to
contact prospective borrowers before settlement. These
considerations materially
facilitated the ability of Streetwise to effect these frauds.
- In
all the circumstances, these considerations are relevant to conclude that the
unjustness of the contracts can be seen as unjustness
affecting Tonto HL and the
lenders. This conclusion is relevant to the assessment of unjustness and the
extent to which the lenders
should be viewed as bearing responsibility for what
happened and in applying the broad considerations contained in the CRA ,
founded as they are in justice and fairness. Looking at these events as brought
about primarily by the fraud of Streetwise, a fair
assessment is that the
business structure put in place by the lenders in how it operated was
significantly responsible for the preying
upon these people by Streetwise. That
is not to ignore the basis upon which the trial and appeal proceeded, that "Lo
Doc Lending"
per se was not unjust. Nor is it to introduce an enterprise concept
of agency; rather it is to recognise that a sub-contracted lending
structure of
the kind here, in which persons such as Streetwise are "chased" to become the
introductory agents, should have guidelines
enforced with real vigour to deal
with the obvious objective risks of fraud and deception. No one criticised these
guidelines. Their
operation was loose, and affected by the attitude found by his
Honour. It is only fair and just to recognise the significant responsibility
of
the lenders in these circumstances.
- Unjustness
is a not concept or word with immutable or unvarying content. The degree of
unjustness here stems primarily from the fraud
and procedural injustice of
Streetwise. Though not the agent in law of Tonto HL or Permanent, it was, as I
have explained, the link
in the business enterprise for which, in the sense I
have discussed, the lenders, through Tonto HL, should take significant
responsibility.
- What
order ought be made for the purpose of "avoiding an unjust consequence or
result" for the CRA , s 7(1) will depend in part on the competing matters
bearing on the conclusion of injustice and the content of that injustice.
- Before
turning to relief it is necessary to say something about the public interest.
Public interest
- The
public interest is the subject of particular reference in the CRA , s
9(1). One aspect of the public interest recognised early is keeping people to
their freely entered bargains: Baltic Shipping Co v Dillon (1991) 22
NSWLR 1 at 9. By stating the importance of this aspect of the public interest
shortly, I should not be thought to be consigning it as a matter
of mere note
only. It is fundamental, indeed it inheres in the CRA itself. It is an
aspect of society that is of vital importance. As Story J said, writing
extra-judicially ("Contract" (1832) 9 Encyclopaedia Americana 156),
"confidence in promises is ... essential to the existence of social intercourse
among men ...". Its strength as an operative
legal norm that can be seen as
fundamental is directly related to circumstances which give it strength - the
just and free circumstances
that give rise to the bargain. As Finn J said,
writing extra-judicially in "Unconscionable Conduct" (1994) 8(1) Journal of
Contract Law 37 at 49, if parties are to be held to their bargains once
made, the law should act with vigour to promote the conditions necessary
to make
the freedom of contract effective, free and just.
- Another
aspect of the public interest is the advancement of the protection, which the
CRA manifestly intends to give, to those not able fully to protect
themselves and to those preyed upon by dishonesty, trickery and other
forms of
predation. The Peden Report (J R Peden Harsh and Unconscionable Contracts:
Report to the Minister for Consumer Affairs and Co-operative Societies and the
Attorney-General
for New South Wales , 1976) said that the reference to
public interest "would direct the courts' attention to the underlying purpose of
the Bill, namely
to prevent unjust dealings which offend against community
standards of business morality": J R Peden The Law of Unjust Contracts
(Butterworths, 1982) at 122.
- ASIC
sought to draw into the public interest contemplated by s 9(1) aspects of the
aims, functions and powers of ASIC in performing
its duties under the ASIC
Act . By the ASIC Act , s 1(2)(a) in performing its functions and
exercising its powers ASIC must strive, amongst other things, to promote and
facilitate
commercial certainty and efficiency of the economy; and by s 12A it
has the function of promoting market integrity and consumer protection
in
relation to the Australian financial system. These concepts can be seen as
relevant to the public interest, not because of the
direct operation of the
Commonwealth statue, but by their inherent appropriateness to the concept of
public interest in respect of
financial contracts and the operation of the
financial market insofar as an individual contract is concerned. Procedures that
promote
suitable borrowings and operate as checks against fraud should be seen
not only as matters for the lenders to comply with or not
as they choose, but as
indirect guards against conduct that can produce injustice to members of the
public and thus undermine confidence
in the free and fair operation of financial
markets. That said, it is not part of the purpose of the CRA to promote
an efficient banking system or to lay down rules for good banking practice: cf
Cook v Permanent Mortgages Pty Ltd [2007] NSWCA 219 at [14].
Nevertheless, to the extent that the organisation of lending programmes, through
sub-contracted intermediaries, has the capacity
to generate risk of lending to
duped, misled or inappropriate borrowers and such structures are administered
without clear operational
regard for the lending guidelines, it is in the public
interest to administer the CRA to protect such people. Such protection
will, in the public interest, encourage the recognition by lenders that the
safeguards in
such structures to avoid or minimise fraud or misleading conduct
should be rigorously applied. For example, here, it was not good
enough to be
precise and perspicacious only about the taking of security and its value. Care
must be taken not to misuse a statute,
designed for the protection of
individuals, by employing it to regulate the financial system. But when people
are duped, misled,
defrauded or taken advantage of by participants in the
financial system by means that have been, in significant part, facilitated
by
inhering obvious risk and lax operation of appropriate safeguards, it conforms
to the public interest to take into account such
systemic and operational
failure in order to assist to promote conditions that will make it more
difficult for such conduct to exist,
and thus encourage circumstances more
conducive to free and just contracts.
- Such
considerations here militate in favour of a finding of unjustness and in favour
of granting relief to the borrowers. This is
so because the structure of the
enterprise, the retention of Streetwise with its evident interests, the lack of
attention to safeguards
and the act of the retained intermediary (albeit not an
agent) played a significant and material part in creating the conditions
for
Streetwise's fraud to flourish and for these loans to be effected.
Relief
- Section
7(1) authorises the Court, if it considers it just to do so, and for the purpose
of avoiding as far as practicable an unjust
consequence or result, to declare
the contract void (s 7(1)(b)), refuse to enforce the contract (s 7(1)(a)), vary
the contract (s
7(1)(c)) and, in respect of a land instrument, make orders
requiring execution of an instrument that varies, terminates or affects
the land
instrument or its operation (s 7(1)(d)). Section 7 is subject to s 19,
sub-section (1) of which says:
"An order made under section 7(1) (b) or (c) has no effect in relation to a
contract so far as the contract is constituted by a land
instrument that is
registered under the Real Property Act 1900 ."
- It
is necessary to amend the orders of the primary judge. Section 19(1) meant that
he could not declare the registered mortgages void.
If, as his Honour found, the
loan agreements were to be declared void, that meant that there was no
indebtedness over which the mortgages
could operate. Thus, the appropriate order
to make was that the mortgagees deliver up a discharge of mortgage in
registrable form
to the borrowers.
- Of
course, as the primary judge provided for, Mr Tavares and Ms Rowe were required
to give credit for the indisputable benefit of
the receipt of $50,872.76
together with interest.
- The
relief to be given in accordance with the direction of s 7(1) permits the Court
a wide choice based on its evaluation of the circumstances
and of the injustice,
to avoid the relevant unjustness. In circumstances such as the present, where
the primary source of the unjustness
is the fraud of a third party, avoidance of
the unjustness calls for an evaluation of the respective positions of the
parties. Relevant
to that is the degree and extent to which the parties can be
seen to have responsibility for what happened and the extent to which
it is just
that such responsibility should be reflected in the extent of remedial relief.
Also of particular relevance is the capacity
and context of the respective
participation of the parties. The borrowers were all the subject of the kind of
predation that the
CRA was designed to relieve, in appropriate
circumstances. The predation occurred in circumstances that were objectively
facilitated by
the structure and operation of the lending enterprises. I do not
wish to repeat what I have already said about this, except to emphasise
that it
was the chosen commercial counterparty of Tonto HL which committed the fraud,
and in circumstances where the objective risk
of placing the functions of
interview and information collection in that party's hands were evident and
exacerbated by the arrangements
not to speak to borrowers and by the loose
attention to operational checks by the guidelines.
- In
respect of the Di Benedettos, Mr Tavares and Ms Rowe, the order that is
appropriate, in all the circumstances of the unjustness,
including the public
interest to which I have referred, is to relieve them of liability as the
primary judge did (recognising the
repayment by Mr Tavares and Ms Rowe and
amending the orders about the mortgages).
- From
the evidence as to their resources, a substantive share of responsibility for
the loans could well deprive them of their homes.
In the circumstances of their
being misled and preyed upon by Streetwise and all the other circumstances, such
a result would be
unjust.
- The
O'Donnells are in a somewhat different position. The evidence reveals that Mrs
O'Donnell, in particular, expended considerable
effort in understanding what the
property venture was. Their decision to enter all the transactions was
significantly more the result
of the exercise of free will than the decisions of
the Di Benedettos and Mr Tavares and Ms Rowe. The assessment is not an easy one
to make; but I am left with the positive persuasion that it would involve a
degree of injustice to the lender to remove all consequences
of responsibility
for what happened from the O'Donnells. It is, of course, to be remembered that
it is the loan agreement that was
unjust because of the fraud of Streetwise.
Further, Mrs O'Donnell was to a degree misled about the identity of the lender.
Nevertheless,
they wanted this borrowing to effectuate their considered decision
to enter into the arrangement with Streetwise, they having chosen
not to make
use of their available advisers (accounting and legal).
- In
my view, an unjust consequence (both to the O'Donnells and the lender) would be
avoided by relieving them of three quarters of
the financial consequences of the
loan agreement. To do more would be unjust to the lender.
- It
is to be noted that no issue was pleaded or argument run invoking the CRA
, s 6(2).
Notice of contention - other statutory relief
- The
borrowers and ASIC also maintained that the orders made by the primary judge
should be supported by:
(a) the ASIC Act , ss 12CB and 12CC;
(b) the Trade Practices Act 1974 (Cth) (" TPA "), ss 51AB and
51AC; and
(c) the Fair Trading Act 1987 (NSW) (" FTA " ) , s 43
- Each
of these provisions operates on a prohibition of "conduct that is, in all the
circumstances, unconscionable".
- In
argument, it became common ground that the loans in question here involve the
provision of a financial service as defined in the
ASIC Act , s 12BAB.
This made the TPA and FTA provisions irrelevant.
- The
provisions of the ASIC Act relied upon by ASIC, ss 12CB and 12CC were, at
the relevant time, in the following terms:
" 12CB Unconscionable conduct
(1) A person must not, in trade or commerce, in connection with the supply or
possible supply of financial services to a person, engage
in conduct that is, in
all the circumstances, unconscionable.
(2) Without limiting the matters to which the Court may have regard for the
purpose of determining whether a person (the supplier ) has contravened
subsection (1) in connection with the supply or possible supply of services to a
person (the consumer ), the Court may have regard to:
(a) the relative strengths of the bargaining positions of the supplier and
the consumer; and
(b) whether, as a result of conduct engaged in by the supplier, the consumer
was required to comply with conditions that were not
reasonably necessary for
the protection of the legitimate interests of the supplier; and
(c) whether the consumer was able to understand any documents relating to the
supply or possible supply of the services; and
(d) whether any undue influence or pressure was exerted on, or any unfair
tactics were used against, the consumer or a person acting
on behalf of the
consumer by the supplier or a person acting on behalf of the supplier in
relation to the supply or possible supply
of the services; and
(e) the amount for which, and the circumstances under which, the consumer
could have acquired identical or equivalent services from
a person other than
the supplier.
(3) A person is not taken for the purposes of this section to engage in
unconscionable conduct in connection with the supply or possible
supply of
financial services to another person merely because the person:
(a) institutes legal proceedings in relation to that supply or possible
supply; or
(b) refers a dispute or claim in relation to that supply or possible supply
to arbitration.
(4) For the purpose of determining whether a person has contravened
subsection (1) in connection with the supply or possible supply
of financial
services to another person:
(a) the Court must not have regard to any circumstances that were not
reasonably foreseeable at the time of the alleged contravention;
and
(b) the Court may have regard to conduct engaged in, or circumstances
existing, before the commencement of this section.
(5) A reference in this section to financial services is a reference to
financial services of a kind ordinarily acquired for personal,
domestic or
household use.
12CC Unconscionable conduct in business transactions
(1) A person must not, in trade or commerce, in connection with:
(a) the supply or possible supply of financial services (see subsection (6))
to another person (other than a listed public company);
or
(b) the acquisition or possible acquisition of financial services (see
subsection (7)) from another person (other than a listed public
company);
engage in conduct that is, in all the circumstances, unconscionable.
(2) Without in any way limiting the matters to which the Court may have
regard for the purpose of determining whether a person (the
supplier )
has contravened subsection (1) in connection with the supply or possible supply
of financial services to another person (the service recipient ), the
Court may have regard to:
(a) the relative strengths of the bargaining positions of the supplier and
the service recipient; and
(b) whether, as a result of conduct engaged in by the supplier, the service
recipient was required to comply with conditions that
were not reasonably
necessary for the protection of the legitimate interests of the supplier; and
(c) whether the service recipient was able to understand any documents
relating to the supply or possible supply of the financial
services; and
(d) whether any undue influence or pressure was exerted on, or any unfair
tactics were used against, the service recipient or a person
acting on behalf of
the service recipient by the supplier or a person acting on behalf of the
supplier in relation to the supply
or possible supply of the financial services;
and
(e) the amount for which, and the circumstances under which, the service
recipient could have acquired identical or equivalent financial
services from a
person other than the supplier; and
(f) the extent to which the supplier's conduct towards the service recipient
was consistent with the supplier's conduct in similar
transactions between the
supplier and other like service recipients; and
(g) if the person is a corporation-the requirements of any applicable
industry code (see subsection (11)); and
(h) the requirements of any other industry code (see subsection (11)), if the
service recipient acted on the reasonable belief that
the supplier would comply
with that code; and
(i) the extent to which the supplier unreasonably failed to disclose to the
service recipient:
(i) any intended conduct of the supplier that might affect the interests of
the service recipient; and
(ii) any risks to the service recipient arising from the supplier's intended
conduct (being risks that the supplier should have foreseen
would not be
apparent to the service recipient); and
(j) the extent to which the supplier was willing to negotiate the terms and
conditions of any contract for supply of the financial
services with the service
recipient; and
(k) the extent to which the supplier and the service recipient acted in good
faith.
(3) Without in any way limiting the matters to which the Court may have
regard for the purpose of determining whether a person (the
acquirer )
has contravened subsection (1) in connection with the acquisition or possible
acquisition of financial services from a person (the
business supplier ),
the Court may have regard to:
(a) the relative strengths of the bargaining positions of the acquirer and
the business supplier; and
(b) whether, as a result of conduct engaged in by the acquirer, the business
supplier was required to comply with conditions that
were not reasonably
necessary for the protection of the legitimate interests of the acquirer; and
(c) whether the business supplier was able to understand any documents
relating to the acquisition or possible acquisition of the
financial services;
and
(d) whether any undue influence or pressure was exerted on, or any unfair
tactics were used against, the business supplier or a person
acting on behalf of
the business supplier by the acquirer or a person acting on behalf of the
acquirer in relation to the acquisition
or possible acquisition of the financial
services; and
(e) the amount for which, and the circumstances in which, the business
supplier could have supplied identical or equivalent financial
services to a
person other than the acquirer; and
(f) the extent to which the acquirer's conduct towards the business supplier
was consistent with the acquirer's conduct in similar
transactions between the
acquirer and other like business suppliers; and
(g) if the person is a corporation-the requirements of any applicable
industry code (see subsection (11)); and
(h) the requirements of any other industry code (see subsection (11)), if the
business supplier acted on the reasonable belief that
the acquirer would comply
with that code; and
(i) the extent to which the acquirer unreasonably failed to disclose to the
business supplier:
(i) any intended conduct of the acquirer that might affect the interests of
the business supplier; and
(ii) any risks to the business supplier arising from the acquirer's intended
conduct (being risks that the acquirer should have foreseen
would not be
apparent to the business supplier); and
(j) the extent to which the acquirer was willing to negotiate the terms and
conditions of any contract for the acquisition of the
financial services with
the business supplier; and
(k) the extent to which the acquirer and the business supplier acted in good
faith.
(4) A person is not taken for the purposes of this section to engage in
unconscionable conduct in connection with:
(a) the supply or possible supply of financial services to another person; or
(b) the acquisition or possible acquisition of financial services from
another person; merely because the person institutes legal
proceedings in
relation to that supply, possible supply, acquisition or possible acquisition or
refers a dispute or claim in relation
to that supply, possible supply,
acquisition or possible acquisition to arbitration.
(5) For the purpose of determining whether a person has contravened
subsection (1) in connection with the supply, possible supply,
acquisition, or
possible acquisition of financial products:
(a) the Court must not have regard to any circumstances that were not
reasonably foreseeable at the time of the alleged contravention;
and
(b) the Court may have regard to circumstances existing before the
commencement of this section but not to conduct engaged in before
that
commencement.
(6) Subject to subsection (8), a reference in this section to the supply
or possible supply of financial services is a reference to the supply or
possible supply of financial services to a person whose acquisition or possible
acquisition of the
financial services is or would be for the purpose of trade or
commerce.
(7) Subject to subsection (9), a reference in this section to the
acquisition or possible acquisition of financial services is a reference
to the acquisition or possible acquisition of financial services by a person
whose acquisition or possible acquisition
of the financial services is or would
be for the purpose of trade or commerce.
(8) A reference in this section to the supply or possible supply of financial
services does not include a reference to the supply
or possible supply of
financial services at a price in excess of $3,000,000, or such higher amount as
is prescribed.
(9) A reference in this section to the acquisition or possible acquisition of
financial services does not include a reference to the
acquisition or possible
acquisition of financial services at a price in excess of $3,000,000, or such
higher amount as is prescribed.
(10) For the purposes of subsections (8) and (9):
(a) subject to paragraphs (b), (c), (d) and (e), the price for:
(i) the supply or possible supply of financial services to a person; or
(ii) the acquisition or possible acquisition of financial services by a
person;
is taken to be the amount paid or payable by the person for the financial
services; and
(b) if a person:
(i) was supplied financial services pursuant to a purchase; or
(ii) acquired financial services by way of purchase;
together with other property or services, or with both other property and
services, and a specified price was not allocated to the
services in the
contract under which they were purchased, the price of the services is taken to
have been:
(iii) the price at which, at the time of the supply or acquisition, the
person could have purchased the services from the supplier
without the other
property or services; or
(iv) if, at the time of the purchase, the services were only available for
purchase together with the other property or services but,
at that time,
services of the kind purchased were available for purchase from another supplier
without other property or services-the
lowest price at which the person could,
at that time, reasonably have purchased services of that kind from another
supplier; or
(v) if, at the time of the purchase, services of the kind purchased were not
available for purchase from any supplier except together
with other property or
services-the value of the services at that time; and
(c) if a person is supplied with financial services otherwise than pursuant
to a purchase, the price of the services is taken to have
been:
(i) the price at which, at the time of the supply, the person could have
purchased the services from the supplier; or
(ii) if, at the time of the supply, the services were not available for
purchase from the supplier, or were available only together
with other property
or services, but, at that time, services of the kind supplied were available for
purchase from another supplier-the
lowest price at which the person could, at
that time, reasonably have purchased services of that kind from another
supplier; or
(iii) if services of the kind supplied were not available, at the time of the
supply, for purchase from any supplier, or were not
available except together
with other property or services-the value of the services at that time; and
(d) without limiting by implication the meaning of the expression services
in subsection 12BA(1):
(i) the obtaining of credit by a person in connection with the supply of
financial services to the person is taken to be the acquisition
by the person of
a service; and
(ii) any amount by which the amount paid or payable by the person for the
services is increased by reason of the person's so obtaining
credit is taken to
be paid or payable by the person for that service; and
(e) the price for the supply or possible supply, or the acquisition or
possible acquisition, of services comprising or including a
loan or loan
facility is taken to include the capital value of the loan or loan facility.
(11) In this section:
applicable industry code , in relation to a corporation, has the same
meaning as it has in subsection 51ACA(1) of the Trade Practices Act 1974
.
industry code has the same meaning as it has in subsection 51ACA(1) of
the Trade Practices Act 1974 .
listed public company has the same meaning as it has in the Income Tax
Assessment Act 1997."
Those provisions were relied upon in the alternative. Section 12CB applied
only in circumstances set out in s 12CB(5), being supply
of financial services
of a kind ordinarily acquired for personal, domestic or household use. If the
loans did not fit that description
s 12CC applied, but only if the supply of the
financial services was to someone whose acquisition or possible acquisition of
the
financial services is or would be for the purpose of trade or commerce: s
12CC(6). ASIC and the respondents submitted that one or
other of s 12CB or 12CC
applied. The appellants submitted that neither applied and the only provision
that was operative was s 12CA
which required unconscionability "within the
meaning of the unwritten law". This would have taken the matter back to
equitable principle.
Only faint reliance was made by ASIC or the respondents
upon s 12CA in submissions.
- It
is unnecessary to resolve finally the question as to the operation of either s
12CB or s 12CC because, in my view, the conduct
of Tonto HL, and through it the
lender, cannot be described as "unconscionable". Section 12CA also therefore
should not apply.
- The
conduct of Streetwise was undoubtedly unconscionable. Little time needs to be
spent reaching that conclusion. If the correct view
were that S Loans was the
agent of Tonto HL equally little time would be required to reach the conclusion
that Tonto HL, and through
it the lender, would have had its conduct so
characterised. No so-called fraud exemption would operate here. This would be
the attribution
of conduct from an agent to a principal, on this hypothesis,
within the scope of the agency. That, however, is not the position.
The
attribution of corporate state of mind by agency is dealt with in the ASIC
Act , s 12GH. That provision works on the premise of the existence of a
"director, employee or agent" of the body corporate. There was
no argument that
"agent" here was different to that found at general law.
- The
person whose conduct is to be characterised as unconscionable is Tonto HL and
through it the lenders. It is important to bear
this in mind. It is not a matter
of concluding that a contract induced by fraud of Streetwise is unjust and
assessing whether in
all the circumstances that unjustness should be seen to
taint the agreement such that relief should flow against the lenders. It
is the
conduct of the lenders, through Tonto HL that is to be attributed with the
characterisation as unconscionable. The submissions
of ASIC and the respondents
recognised this. This unconscionability could, of course, arise from the actions
and knowledge of the
lenders. Notice of the conduct of Streetwise may well have
led to the conclusion that Tonto HL and the lender acted unconscionably.
That,
however, was not shown.
- The
notion of unconscionable in this context finds its origin in the general law,
equity and concepts underpinning provisions such
as articles 2-302 and 5-108 of
the Uniform Commercial Code and the German Civil Code (BGB) para 138, the
Consumer Protection Act 1967 (British Columbia), s 18, the
Unconscionable Transactions Relief Act 1990 (Ontario), s 2, various money
lenders legislation, hire purchase legislation, the Industrial Arbitration
Act 1940 (NSW), s 88F and other particular legislation: see generally Peden
The Law of Unjust Contracts at 3-81 and the Peden Report.
- ASIC
pressed the argument that the meaning of "unconscionable" in the ASIC Act
should take its content in part from provisions dealing with ASIC's
functions such as ss 1(2) and s 12A. One should be cautious about
acceding to a
submission that would see subtly different meanings given to cognate provisions
in legislation such as the ASIC Act and the TPA (and FTA ).
It suffices to say that the context of "unconscionable" in the ASIC Act
does not give it a distinct or different meaning from its equivalent
provisions in the TPA or FTA . All three sets of provisions have
similar purposes in the protection of consumers and the promotion of just and
fair markets.
- Aspects
of the content of the word "unconscionable" include the following: the conduct
must demonstrate a high level of moral obloquy
on the part of the person said to
have acted unconscionably: Attorney General of New South Wales v World Best
Holdings Ltd [2005] NSWCA 261; 63 NSWLR 557 at 583 [121]; the conduct must
be irreconcilable with what is right or reasonable: Australian Securities and
Investments Commission v National Exchange Pty Ltd [2005] FCAFC 226; 148 FCR
132 at 140 [30]; Australian Competition and Consumer Commission v Samton
Holdings Pty Ltd [2002] FCA 62; 117 FCR 301 at 316-317 [44]; Qantas
Airways Ltd v Cameron [1996] FCA 1483; (1996) 66 FCR 246 at 262; factors similar to those
that are relevant to the CRA are relevant: Spina v Permanent
Custodians Ltd [2009] NSWCA 206 at [124]; the concept of unconscionable in
this context is wider than the general law and the provisions are intended to
build on and not
be constrained by cases at general law and equity: National
Exchange at 140 [30]; the statutory provisions focus on the conduct of the
person said to have acted unconscionably: National Exchange at 143 [44].
It is neither possible nor desirable to provide a comprehensive definition. The
range of conduct is wide and can include
bullying and thuggish behaviour, undue
pressure and unfair tactics, taking advantage of vulnerability or lack of
understanding, trickery
or misleading conduct. A finding requires an examination
of all the circumstances.
- I
do not propose to rehearse once again the totality of the conduct. Streetwise
was not Tonto HL's agent. That is of great importance
in this enquiry. Not only
does it remove attribution of the conduct of Streetwise and its knowledge, but
it also removes the finding
of asset lending in the way his Honour found it.
There remain the breaches of the guidelines and the lack of attention and care
to
serviceability and suitability based upon primary reliance upon security.
There also remains the objective risk that existed by the
employment of a
company such as Streetwise together with the additional arrangement of not
approaching borrowers. Whilst these are
facts which all amount to circumstances
and conduct which, for the reasons I have already given, are sufficient to
justify relief
being given against the lenders under the CRA , they do
not in my view amount to unconscionability. There is no real suggestion in the
argument or the evidence that those at Tonto
HL understood the actuality of the
trickery and lies that were being undertaken by Streetwise or had any notice of
them. I do not
think that the structural creation of risk and the heightening of
that risk by the arrangements with Streetwise meet the notion of
moral obloquy
required. The true facts are now known, but in circumstances where those at
Tonto HL were innocent of the conduct at
the time it is not unconscionable to be
seeking to maintain the transaction.
- This
conclusion is an evaluative one. The respondents and ASIC pressed the view
strongly that the circumstances that lead (even without
a finding of agency) to
the conclusion of the responsibility of Tonto HL and the lenders for what
happened so as to invoke the CRA equally lead to a conclusion as to
unconscionability. I cannot agree. Spigelman CJ in World Best Holdings at
583 [121] referred to a "high level" of moral obloquy. Whether that is too
stringent and whether "significant" or "real" may be
preferable need not be
decided. What is required is some degree of moral tainting in the transaction of
a kind that permits the opprobrium
of unconscionability to characterise the
conduct of the party. Here, without a finding of some knowledge or complicity,
the circumstances
do not reach that level.
- If
I be wrong and if the conduct of Tonto HL and the lenders was unconscionable,
the flexible relief provided for by the ASIC Act , ss 12GD and 12GM would
lead to no different relief than I would give under the CRA .
- In
my view relief should not be given on the basis of unconscionability.
- For
the above reasons it is unnecessary to deal with whether s 12CB or s 12CC
applied. The question as to how one characterises whether
financial services
(being here the provision of a "credit facility" within Reg 2B of the
Australian Securities and Investments Commission Regulations 2001 (Cth)
(as the provision of credit or a mortgage that secures obligations under a
credit contract) and thus a "credit facility" for
s 12BAA(7)(k) and through it a
"financial product" for ss 5(1) and 12BA(1)) are ordinarily acquired for
personal, domestic or household use is not straightforward. It is not necessary
to examine
whether the Full Court of the Federal Court in Leveraged Equities
Ltd v Goodridge [2011] FCAFC 3; 191 FCR 71 at 121 [416] was correct in
examining the matter from the perspective of the predominant business purpose of
the loan. If a person sought to finance
a business in trading in derivatives by
taking out a 20 year standard home loan it would be difficult to conclude
otherwise than
that the credit facility or financial product fell within s
12CB(5). Here the "products" were so-called "LoDoc" loans for the purchase
or
refinance of a home or an investment property or to access equity for personal
or investment reasons. Judicial notice can be taken
of the wide investment in
the community for the provision of retirement saving. Such borrowing for such
purposes is not infrequently
undertaken for the personal use of saving for one's
retirement. To a degree that is a business use; to a degree it is a personal
or
household use - for personal savings.
- In
any analysis of this question, the careful and helpful judgment of Young J in
Bunnings Group Limited v Laminex Group Limited [2006] FCA 682; 153 FCR
479 at 496-507 is of great assistance. Given the place of this issue in the
resolution of this dispute, it is unnecessary to review in
detail his Honour's
analysis or reach any final view. It is sufficient to express my general
agreement with it.
- Looking
here at the characteristics of this so-called financial product, were it
necessary to decide, I would conclude that "ordinarily"
such loans are used for
the personal use of investment saving: cf Hygienic Lily Ltd v Deputy Federal
Commissioner of Taxation (1987) 13 FCR 396 at 399; Bunnings v Laminex
at 502-503. One can see this from the nature and characteristics of the
product and the type of small business person that the guidelines
reveal might
well be applying for the loan.
Orders
- Thus
the orders that I would make are as follows:
(1) As to appeal number 2009/00298570 (formerly 40454 of 2009) being the Tavares
and Rowe appeal:
(a) Allow the appeal in part.
(b) Set aside order 2(b) made by the Supreme Court on 26 February 2010 (as set
out in [448] of the primary judge's reasons) and in
lieu thereof order that the
mortgagee Tonto Home Loans Australia Pty Ltd deliver up to Jose De Carvalho E
Rego Tavares and Kim Lee-Anne
Rowe a registrable discharge of mortgage, but only
on condition that Mr Tavares and Ms Rowe pay or have paid to the mortgagee or
at
its direction the sums referred to in order 4 made by the Supreme Court on 26
February 2010.
(c) The appellant pay the respondents' costs of the appeal.
(2) As to appeal number 2009/00298571 (previously 40455 of 2009) being the Di
Benedetto appeal:
(a) Allow the appeal in part.
(b) Set aside order 2(b) made by the Supreme Court on 26 February 2010 (as set
out in [447] of the primary judge's reasons) and in
lieu thereof order that the
mortgagee, Permanent Trustee Company Limited ("Permanent"), or to the extent
that it has acceded to that
company's rights, FirstMac Limited, deliver up to
Lawrence Di Benedetto and Maria Di Benedetto a registrable discharge of
mortgage.
(c) The appellant pay the respondents' costs of the appeal.
(3) As to appeal number 2009/00298572 (previously 40456 of 2009) being the
O'Donnell appeal:
(a) Allow the appeal in part.
(b) Set aside orders 2 and 5 made by the Supreme Court on 26 February 2010 (as
set out in [446] of the primary judge's reasons) and
in lieu thereof order:
(i) The loan agreement dated 10 January 2003 and made between Permanent as
lender, or to the extent that it has acceded to that company's
rights, FirstMac
Limited, and Gillian O'Donnell and John Robert O'Donnell as borrowers be varied
to reduce the principal loan from
$500,000 to $125,000 such variation to take
effect from 1 August 2005, with the effect that thereafter the responsibility
for payment
of interest and principal be referable to a principal sum of
$125,000.
(ii) The security provided by registered mortgage numbered 9386484P between Mr
and Mrs O'Donnell and Permanent, or to the extent
that it has acceded to
Permanent's rights, FirstMac Limited, be limited in effect accordingly such that
upon payment of the sum or
sums sufficient to repay said loan as varied the
O'Donnells be entitled to receipt of a registrable discharge of mortgage.
(iii) The plaintiff pay 75 per cent of the defendants'/cross-claimants' costs of
the proceedings.
(c) The appellant pay 75 per cent of the respondents' costs of the appeal.
- I
have made the appellant responsible for three quarters of the costs of the
proceedings and the appeal because I do not think that
the costs order can be
separated from relief of the injustice contemplated by s 7(1) of the CRA.
The variation to the loan agreement leaving the O'Donnells to fund 25 per
cent of the loan achieves justice in my view to both the
lender and the
O'Donnells. The costs order should reflect that proportion. The parties have
not, however, been heard on this aspect
of costs and I would give the parties an
opportunity to seek a different order.
- There
may also be a need for particular variations of the orders to meet exigencies of
circumstances or the documentation. Further,
the leaving in place of the orders
of the primary judge avoiding the loan agreements might be the subject of slight
variation to
ensure (as no doubt was intended by the primary judge) that
Streetwise not benefit in any way from that avoidance.
- The
parties should apply promptly (within 14 days) by notice of motion for any such
variations.
- CAMPBELL
JA: I agree with the reasons of Allsop P. I add remarks concerning one
topic.
- It
is implicit in the President's reasoning at [223] that, insofar as it was
relevant to enquire whether the fraud of Streetwise was
reasonably foreseeable,
the appropriate enquiry was whether that fraud was reasonably foreseeable by
the respondents . I shall explain why that way of approaching the matter is
correct.
- Presently
relevant parts of the Contracts Review Act are:
"7(1) Where the Court finds a contract or a provision of a contract to have
been unjust in the circumstances relating to the contract
at the time it was
made, the Court may, if it considers it just to do so, and for the purpose of
avoiding as far as practicable an
unjust consequence or result, do any one or
more of the following:
(a) it may decide to refuse to enforce any or all of the provisions of the
contract,
(b) it may make an order declaring the contract void, in whole or in part,
(c) it may make an order varying, in whole or in part, any provision of the
contract,
...
...
9(1) In determining whether a contract or a provision of a contract is unjust
in the circumstances relating to the contract at the
time it was made, the Court
shall have regard to the public interest and to all the circumstances of the
case, including such consequences
or results as those arising in the event of:
(a) compliance with any or all of the provisions of the contract, or
(b) non-compliance with, or contravention of, any or all of the provisions of
the contract.
(2) Without in any way affecting the generality of subsection (1), the
matters to which the Court shall have regard shall, to the
extent that they are
relevant to the circumstances, include the following:
(a) whether or not there was any material inequality in bargaining power
between the parties to the contract,
(b) whether or not prior to or at the time the contract was made its
provisions were the subject of negotiation,
(c) whether or not it was reasonably practicable for the party seeking relief
under this Act to negotiate for the alteration of or
to reject any of the
provisions of the contract,
(d) whether or not any provisions of the contract impose conditions which are
unreasonably difficult to comply with or not reasonably
necessary for the
protection of the legitimate interests of any party to the contract,
(e) whether or not:
(i) any party to the contract (other than a corporation) was not reasonably
able to protect his or her interests, or
(ii) any person who represented any of the parties to the contract was not
reasonably able to protect the interests of any party whom
he or she
represented,
because of his or her age or the state of his or her physical or mental
capacity,
(f) the relative economic circumstances, educational background and literacy
of:
(i) the parties to the contract (other than a corporation), and
(ii) any person who represented any of the parties to the contract,
(g) where the contract is wholly or partly in writing, the physical form of
the contract, and the intelligibility of the language
in which it is expressed,
(h) whether or not and when independent legal or other expert advice was
obtained by the party seeking relief under this Act,
(i) the extent (if any) to which the provisions of the contract and their
legal and practical effect were accurately explained by
any person to the party
seeking relief under this Act, and whether or not that party understood the
provisions and their effect,
(j) whether any undue influence, unfair pressure or unfair tactics were
exerted on or used against the party seeking relief under
this Act:
(i) by any other party to the contract,
(ii) by any person acting or appearing or purporting to act for or on behalf
of any other party to the contract, or
(iii) by any person to the knowledge (at the time the contract was made) of
any other party to the contract or of any person acting
or appearing or
purporting to act for or on behalf of any other party to the contract,
(k) the conduct of the parties to the proceedings in relation to similar
contracts or courses of dealing to which any of them has
been a party, and
(l) the commercial or other setting, purpose and effect of the contract.
(3) For the purposes of subsection (2), a person shall be deemed to have
represented a party to a contract if the person represented
the party, or
assisted the party to a significant degree, in negotiations prior to or at the
time the contract was made.
(4) In determining whether a contract or a provision of a contract is unjust,
the Court shall not have regard to any injustice arising
from circumstances that
were not reasonably foreseeable at the time the contract was made.
(5) In determining whether it is just to grant relief in respect of a
contract or a provision of a contract that is found to be unjust,
the Court may
have regard to the conduct of the parties to the proceedings in relation to the
performance of the contract since it
was made."
- The
wording of s 9(4) does not say by whom circumstances are to be "not
reasonably foreseeable at the time the contract was made" , if those
circumstances are to be ignored by the court.
- There
are textual indications in s 9 that what is meant is "not reasonably
foreseeable by the party to the contract whose conduct and circumstances is
being considered" . Section 9(2)(a) is concerned with the position in which
the individual parties to the contract find themselves. The same can be
said of
each of s 9(2)(b), (c), (d), (e) and (f). Concerning s 9(2)(g), whether the
contract is wholly or partly in writing, and
the physical form of the contract,
are objective matters. However, the intelligibility of the language in which it
is expressed can
include matters relating to the individual position of a party
- a contract written in the plainest of English will not be understood,
from the
writing alone, by someone who does not read English, or does not read English
sufficiently well. Section 9(2)(h), (i) and
(j) pay particular attention to the
position of the party to the contract who is seeking relief. Section 9(2)(k)
requires the court
to pay attention to the circumstances of the individual
parties to the contract. After all those matters that are dependent upon
the
particular position of parties to the contract, it would be in keeping that s
9(4) similarly decides what is "reasonably foreseeable" by reference to
the position of the parties to the contract.
- Admittedly,
there are legal contexts in which "reasonably foreseeable" mean
reasonably foreseeable by the notional ordinary reasonable person. However,
importing that shade of meaning into s 9(4) would
not advance the purposes of
the Contracts Review Act . One of the purposes of the Contracts Review
Act is to provide some measure of protection to the vulnerable, the naive
and the unintelligent. If the term "reasonably foreseeable" in s 9(4) was
taken to mean reasonably foreseeable by the notional ordinary reasonable person,
the Act would be hobbled. This is because injustice
arising from circumstances
that were reasonably foreseeable by a notional reasonable person but that were
not reasonably foreseeable
by a person with the limitations that a particular
plaintiff has, would be excluded from the balancing exercise that is involved
in
deciding whether a contract is unjust. Conversely, if either a plaintiff, or a
defendant, has particular sophistication or knowledge
that makes a consequence
reasonably foreseeable to someone in their situation, that consequence can be
taken into account in the
balancing exercise even if it would not be reasonably
foreseeable by the notional ordinary reasonable person. The purpose of s 9(4)
is, after all, to identify circumstances that the court is forbidden to
take into account in deciding whether a contract is unjust. The broader purposes
of the Act as a whole are more effectively advanced
by limiting the matters that
the Court is obliged to ignore.
- In
the context in which [223] appeared, the topic under discussion was whether the
fraud of Streetwise should have been left out of
the balancing exercise because
it is reasonably foreseeable that handing over signed documents containing
blanks might lead to fraud.
Thus, in that context, what was relevant was what
was reasonably foreseeable to the respondents.
- Another
aspect of this case concerned whether the fraud of Streetwise was reasonably
foreseeable by Tonto HL in its position of running
a substantial lending
business using a structure that involved deliberately keeping itself out of
communication with potential borrowers.
To such a person the risk was reasonably
foreseeable, and thus appropriately entered into the balancing exercise.
- I
agree with the orders proposed by Allsop P.
**********
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