Australia: Who is liable – the lender or the broker? Liability of mortgage brokers

Insurance Update March 2012

Perpetual Trustee Company Ltd v Milanex Pty Ltd (in liquidation) [2011] NSW CA 367

A recent decision of the NSW Court of Appeal has clarified the liabilities of mortgage brokers.

At first instance, Mr Alexander Kotevski (Mr Kotevski), a 74 year old pensioner, was described by the primary judge as being "an unsophisticated man with very little formal education and virtually no business experience ... had some knowledge of spoken English ... [but] ... no capacity to understand more than very simple concepts..."

In 2005, Mr Kotevski was encouraged by a friend to take out a loan, secured by a mortgage over his property and repayable over a period of 30 years.

The preparation and completion of Mr Kotevski's loan application was the responsibility of Good Home Loans Pty Ltd (GHL), following referral from Milanex Pty Ltd (Milanex), a mortgage broker.

Upon preparation and completion of the loan application, GHL forwarded the loan application to Calibre Financial Services Pty Ltd (Calibre), pursuant to a Mortgage Origination and Management Agreement (MOMA). Calibre was the agent of the lender, Perpetual Trustee Company Ltd (Perpetual). Calibre forwarded the loan application to Perpetual for approval.

In January 2006, following approval of the loan application, Perpetual advanced Mr Kotevski the sum of $221,935 (the Loan). The Loan was secured by a registered mortgage over Mr Kotevski's home. Mr Kotevski initially made payments to reduce the Loan. Later he defaulted, and Perpetual took steps to enforce the mortgage.

In his defence, Mr Kotevski sought relief under the Contracts Review Act 1980 (NSW) (the CRA), claiming that the basis on which the loan agreement was formed was unjust.

A cross-claim was brought by Perpetual against Milanex for damages pursuant to section 52 of the former Trade Practices Act 1974 (Cth) and section 42 of the Fair Trading Act 1987 (NSW), on the basis that it had been misled by Milanex in relation to Mr Kotevski's loan application and personal circumstances.

At first instance, Patten AJ found that Mr Kotevski had been pressured by his friend to enter into the loan agreement. It was noted by the Court that Mr Kotevski entered into the loan agreement for the sole purpose and benefit of his friend. Although Mr Kotevski sought independent legal advice from Mr Kevin Lo (Mr Lo) prior to entering into the loan agreement, His Honour found that Mr Lo could not have been satisfied that Mr Kotevski understood the requirements of the loan agreement, and that if Mr Kotevski had, he would not have entered into it.

Milanex was found liable for misrepresentation for verifying Mr Kotevski's identity and income prior to referring Mr Kotevski to GHL. Mr Kotevski was a 74 year old retired builder whose sole income was his Centrelink pension. Patten AJ concluded that the loan contract between Perpetual and Mr Kotevski was unjust at the time it was made and, pursuant to the CRA, the loan and mortgage over the property were void. As a result, Perpetual was found to have suffered loss and damage.

However, Perpetual was unable to recover the funds it had advanced to Mr Kotevski. The Court confirmed that not only was the loan deemed void from the beginning, but that Perpetual, through its agent GHL, should have made the relevant enquiries to confirm the details apparently provided by Mr Kotevski in support of his loan application.

Milanex contended that it had done nothing more than pass information on, without adopting or endorsing it and as such had not made any representations. This argument was rejected, the primary judge finding that Milanex was not acting as a mere "conduit" or "post box."

On appeal, Perpetual challenged the trial judge's finding that it had not relied upon the representations made by Milanex. Perpetual submitted that, in considering reliance, the trial judge should have included in Milanex's contravening conduct its continued involvement on behalf of Mr Kotevski in the process of the loan being advanced. Macfarlan JA, with whom Campbell and Young JJA agreed, found that Perpetual had relied on the representations, at least in part, and that they did not rely solely on the representations "is not to the point". His Honour referred to the comments of Wilson J in Gould v Vaggelas [1985] that "the representation need not be a sole inducement. It is sufficient so long as it plays some part even if only a minor part in contributing to the formulation of the contract." Accordingly, his Honour rejected Milanex's submission that the fact that GHL sought to verify some information it had received from Milanex meant that it wasn't relying on the representations.

Macfarlan JA also found that the actions of GHL, having acted in some respects carelessly or having departed from the operations manual Calibre had directed it to comply with, were not significant to the case. His Honour went further and applied the approach laid down by Gaudron, Gummow and Hayne JJ in I & L Securities v HTW Valuers [2002]:

"It can be said of each of those events (the misrepresentation being one event and the carelessness of the lender the other), that had it not happened, the loan would not have been made and the lender would, therefore, have suffered no loss...but to show that if either of the two events had not occurred, a loss which has been suffered would not have been suffered, does not demonstrate that the one rather than the other event was the cause of the loss, any more than it demonstrates that neither was a cause of that loss. But the fact is that both did happen and both contributed to the decision to make the loan."

The MOMA between Perpetual and GHL provided Perpetual with a contractual right to compel GHL to take over the loan where there was a failure to comply with the operations manual. On this basis, Milanex attempted to plead that Perpetual failed to mitigate its loss. However, the point was only raised in closing submissions at first instance and Milanex was not permitted to raise the issue on Appeal.

Judgement was also entered against Mr Lo by consent on Mr Kotevski's cross claim. Milanex successfully argued that Mr Lo was a concurrent wrongdoer and that Perpetual's claim should be reduced to take into account Mr Lo's share of responsibility. Although there was no contractual relationship or duty of care between Mr Lo and Milanex, Milanex argued that Mr Lo engaged in misleading and deceptive conduct in making representations to Perpetual to the effect that he had provided independent legal advice to Mr Kotevski and that he was satisfied "Mr Kotevski freely and voluntarily signed the loan and mortgage." Their Honours apportioned the liability 65 per cent to Milanex, 35% to the solicitor (Young JA dissenting and apportioning liability of 75 per cent to Milanex).

Comments
The Court of Appeal rejected Milanex's argument. Their Honours referred to the case of Butcher v Lachlan Elder Realty [2011] and noted:

"... [i]f the circumstances are such as to make it apparent that the corporation is not the source of the information and that it expressly or impliedly disclaims any belief in its truth or falsity, merely passing it on for what it is worth, we very much doubt that the corporation can properly be said to be itself engaging in conduct that is misleading or deceptive."

Justice Macfarlan has provided a significant win for mortgage lenders. His Honour considered:

"... that a mortgage broker who communicated to a mortgage lender or mortgage manager that it had a client who wanted to borrow money and who signed a loan application and associated documents would reasonably be understood to have been representing the truth of those matters, they being fundamental to the existence of the relation of the lender and Mr Kotevski that the mortgage broker was proposing to create."

Traditionally, a mortgage broker's role in the granting of a loan is the preparation and gathering of relevant documents and materials in support of the application, which is forwarded to the lender and/or it's agent for processing.

This decision broadens the scope of the mortgage broker's liability in the loan application process. A mortgage broker will be held liable for loss or damage caused to a lender, following any representations made, however minor they might be, if they are relied upon by the lender in granting the loan.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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