Perpetual Trustee Australia Limited v Schmidt  VSC 67
Mortgage originators should make a reasonable effort to ensure the details in loan application documents are correct, and not turn a blind eye to the question of whether the borrower will be able to service the loan repayments. Failure to do so may constitute unconscionable conduct and lead to liability.
Perpetual loaned money to Schmidt. Perpetual had nothing to do with the loan, other than providing the funds. The loan was arranged by a finance broker ('Medallion') and a mortgage originator ('Violet'). Medallion introduced prospective borrowers to Violet. Violet was responsible for processing loan applications, and managing the loan contracts. Schmidt defaulted. Perpetual sued him in the Victorian Supreme Court to recover the outstanding principal and interest.
Schmidt counterclaimed. He said Medallion and Violet acted wrongfully, Medallion was Violet's agent, Violet was Perpetual's agent, the wrongful acts of each should be attributed to Perpetual, and the amount he owed Perpetual should therefore be reduced. Perpetual denied this, but said if Violet was found to be its agent and to have acted wrongfully, it was entitled to indemnity from Violet in respect of any liability it had to Schmidt.
Was the finance broker the agent of the mortgage
Forrest J found that, although Medallion was 'accredited' as a finance broker by Violet, and had received in-house training from Violet, it was not Violet's agent. Medallion had merely processed the loan documentation and forwarded it to Violet. Once forwarded, Medallion's role ended.
Was the mortgage originator the agent of the lender?
There was a 'Mortgage Origination Agreement' between Perpetual and Violet. It said Violet was 'in all respects, an independent contractor and acts as a principal' and was prohibited from holding itself out as Perpetual's agent.
Nevertheless, Forrest J found Violet acted as Perpetual's agent in its dealings with Schmidt. This was because the Mortgage Origination Agreement dictated how Violet was to deal with Perpetual's borrowers, provided that Violet was to comply with directions given to it by Perpetual, and required Violet to permit inspection of its loan documents by Perpetual. The loan contract with Schmidt made it clear that Violet managed the loan contract and was authorised to 'exercise all the powers, rights and functions of Perpetual' under that contract. Perpetual's relationship with Schmidt under the loan contract was managed exclusively by Violet.
Perpetual argued that if the Court found Violet was its agent, then Violet had acted outside the scope of its agency, and Perpetual was therefore not liable for its wrongdoing. It argued Violet did not process Schmidt's loan application properly because it did not conduct an interview with Schmidt, to go over the details in his application form. Forrest J disagreed. He found that Perpetual had invested Violet with authority to process loan applications. The fact that Violet did not process Schmidt's loan application properly did not mean Violet was acting outside the scope of its authority.
Did Violet and Medallion act unconscionably?
Forrest J found that (in breach of various provisions of the Australian Securities and Investments Commission Act 2001 (Cth) and the Fair Trading Act 1999 (Vic)) Violet had engaged in unconscionable conduct when it processed Schmidt's loan application. Although Schmidt suffered no 'constitutional disadvantage' (such as a linguistic, educational, or intellectual disability), he did suffer a 'situational disadvantage' (such as business or financial weakness). Forrest J found there were various inconsistencies and other information in the loan application documents that should have alerted Violet to the fact that (contrary to what was stated in the loan application) Schmidt may not have been a self employed painter, and that he may not have been able to service the loan repayments out of income. In fact, Schmidt was a retired painter, and it was clear the repayments were coming out of the loan capital, at least initially. It was also relevant that this was asset-based lending, where the security for the loan was given over Mr Schmidt's only real asset, namely his home. Under the circumstances, Violet's conduct lacked moral responsibility and was unconscionable.
For similar reasons, Forrest J found Medallion had also acted unconscionably. However, as he found Medallion was not Violet's agent, this was a moot point.
Did Violet breach a duty of care to Schmidt?
Schmidt made an alternative claim against Perpetual, that Perpetual's agent, Violet, owed him a duty of care, which it breached. The Court dismissed this claim. It found there was no such duty because there was no direct relationship and no direct dealings between Violet and Schmidt. Schmidt did not rely on Violet. Violet did not assume any responsibility on his behalf. Schmidt was capable of protecting his interests by seeking independent advice. Further, Violet did not induce Schmidt to believe there was no need for him to protect his own interests, and Violet had no control over whether the loan application was approved.
Perpetual argued that if it were liable to Schmidt, its liability should be reduced on account of Schmidt's contributory negligence. The Court held the defence of contributory negligence did not operate in a claim founded on unconscionable conduct. For such a defence to succeed, there would need to be a finding that Schmidt failed to take 'reasonable care'. No such finding was made.
Did Violet engage in misleading or deceptive conduct?
Schmidt made an alternative claim against Perpetual, arguing Perpetual's agent, Violet, engaged in misleading or deceptive conduct. The Court dismissed this claim. It found Schmidt was not aware of Violet's existence. His dealings were exclusively with his financial adviser, who in turn dealt with Violet. There was no representation or conduct by Violet which misled or deceived Schmidt.
For these reasons, the Court held that Perpetual was liable in respect of the unconscionable conduct of its agent, Violet. It reduced the damages Schmidt had to pay Perpetual, and dismissed the claim for possession of Schmidt's home. Perpetual's claim for indemnity against Violet (or rather, Violet's successor, which stood in place of Violet) succeeded.
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