Australia: Solicitor liable to bank for fraudulent mortgage

Curwoods Case Note
Last Updated: 12 April 2012
Article by Craig Hyde and Sally Wooderson

Judgment date: 14 March 2012

Commonwealth Bank of Australia v Hamilton [2012] NSWSC 242

Supreme Court of New South Wales1

In Brief

  • A warranty of authority is an implied contract between a solicitor and a bank (or lender) that the solicitor has the authority from his/her client (the borrower) to direct the bank to draw cheques in a certain way. Common law principles of contract apply.
  • A solicitor who provides cheque directions to a bank without the authority of his client (the borrower) is in breach of the warranty of authority.
  • A cause of action for a breach of warranty of authority arises even if there is not a valid contract between the bank and the borrower.
  • Defences of contributory negligence and proportionate liability only apply to claims for failure to take reasonable care and do not apply to actions for strict liability breaches of contract.


The Proceedings

The Commonwealth Bank (the Bank) sued Jason and Karen Hamilton (the Hamiltons) for the balance owing on their mortgages after a mortgagee sale. The Bank also sued the Hamiltons' solicitor, Peter Webb (Webb), for breach of warranty of authority relating to a fraudulent direction to draw cheques.

The Hamiltons cross-claimed against Webb, on the basis that he breached his duty of care owed to them, and Graham Lee (Lee), who acted fraudulently whilst acting as their agent on the purchase. Lee entered no appearance in the proceedings and summary judgment was entered against him.

Webb cross-claimed against LawCover for indemnity for the claim. LawCover successfully defended the cross-claim in accordance with the fraud exclusion.

The Facts

The Hamiltons each purchased one unit in the same building. On settlement of the contracts for sale, mortgages were registered over each of the properties in favour of the Bank. The Hamiltons were guarantors over each other's mortgages. Webb Lawyers acted for the vendor and the purchaser on both transactions.

Prior to settling the contracts for sale, and unknown to the Bank and the Hamiltons, a Deed of Variation and Transfer was prepared by Webb for each unit in which the vendor consented to reducing the sale price from $560,000 to $365,000. It is unclear from the case why this was done.

On settlement of each transaction, Webb directed the Bank to pay $67,582.15 into his trust account (cheque direction 14). That money was then paid to Lee. Lee was integral in arranging all of the finance and contracts for the Hamiltons. Mr Hamilton admitted to trusting Lee as a friend and both the Hamiltons admitted they did not read every document Lee gave them to sign. Further, the Hamiltons never met Webb or anyone from the Bank during the acquisition. Lee would courier the documents to and from the Hamiltons, Webb and the Bank.

The Hamiltons defaulted on their mortgages and the Bank took possession of the properties and sold them for less than the amounts they were owed. The Bank sought the balance from the Hamiltons in accordance with their guarantees and from Webb for breach of warranty of authority.

The warranty of authority in this case was the implied warranty Webb gave to the Bank that he had the authority to give the cheque directions given. The breach of warranty of authority in this case was in relation to cheque direction 14 of which the Hamiltons had no knowledge and did not authorise.


The Court found that there was no valid home loan agreement between Mrs Hamilton and the Bank as her signature had obviously been forged on a number of key documents including the loan agreement, the mortgage and the guarantee.


The Court found that Webb's actions were not caused by mere naďve incompetence but rather, that he acted dishonestly and with knowledge that the contracts were a sham due to:

  1. Webb's similar prior dealings with the vendor and Lee in relation to the transfer of 5 other apartments in the same development;
  2. the trust account journal entry that the transfer of funds to Lee was pursuant to a "Loan to Graham Lee";
  3. his failure to provide advice on the contracts for sale, the transfer of the surplus funds or how to secure the "loan" to Lee;
  4. his failure to obtain specific instructions from the Hamiltons when he knew Lee was acting in his own interests;
  5. the costs agreement, prepared before the deed of variation, indicated that the Stamp Duty had been assessed on the reduced purchase price of the unit; and
  6. Web admitted he knew that the front page of the contracts provided to the Bank by Lee contained false information relating to the real estate agent acting and the deposit paid.

Warranty of authority

The Court found that even if Webb had honestly believed that there was no deception on the Bank, his fiduciary duty to the Hamiltons included the need to make enquiries and seek instructions from each of them separately as to the authorities, the deeds of variation and the money being advanced by the Bank. Based on the evidence adduced at trial, Webb did not do that.

Further, even if Webb had been acting honestly (which he was not), he did not have the express, ostensible or implied authority of either Mr or Mrs Hamilton to give cheque direction 14 to the Bank. In any event, as Webb knew that the Bank was being deceived and Page 3 of 3 cheque direction 14 was part of the deception, he did not have the authority to give those directions. In each case, Webb dishonestly professed to the Bank that he had the authority to give the directions and he breached his warranty of authority.

The Court found that the action for breach of warranty of authority was available to the Bank notwithstanding that there was no contract between it and Mrs Hamilton. Nor did it matter that the contract between the Bank and Mr Hamilton came into existence before Webb's liability to the Bank arose. Webb's liability to the Bank was pursuant to an implied contract. He breached that contract when he dishonestly claimed to have the authority of the Hamiltons to make cheque direction 14.


There was argument about whether a breach of warranty of authority arises in contract or tort as this was relevant to the defences and remedies available. The Court looked at the history of authorities on this point and found that a breach of warranty of authority is a breach of an implied contract between the agent and the third party. Accordingly, principles of negligence do not apply - common law principles of contract do.

Further, the Court found that even though the fraudulent actions of Lee and another woman were a significant cause of the Bank's loss, it was, nonetheless, unnecessary for Webb's breach to be the exclusive or dominant cause of the loss complained of.

Webb's participation in the deception of the Bank was vital to the success of Lee's fraudulent scheme. Without Webb's warranty to the Bank, the surplus money would not have been paid into his trust account to be paid thereafter to Lee, and the Bank's loss would not have been sustained.

Webb attempted to reduce his liability to the Bank by raising the defences of contributory negligence and proportionate liability. Both of those defences were ultimately unsuccessful for the following reasons.

Contributory negligence

The Court held that the defence of contributory negligence is only available for a breach of a contractual duty of care that is concurrent with and co-extensive with a duty of care in tort.

As the Bank's cause of action was for breach of warranty of authority, which is a strict liability breach of contract claim, there was no act or omission by Webb that amounted to a breach of a contractual duty of care concurrent and co-extensive with any tortious duty.

Proportionate liability

The proportionate liability provisions of the Civil Liability Act 2002 (NSW) (the CLA) did not apply, as the Bank's action was not a claim for damages arising from a failure to exercise reasonable care. Even if the CLA did apply, it was Webb's fraudulent conduct that caused the Bank's damage and pursuant to s 34A(1)(b) of the CLA, there is no proportionate liability in cases of fraud.


This is yet another example of circumstances where the proportionate liability provisions of the CLA will not apply. A breach of contract claim (where there is no co-existing tortious duty) such as a breach of a warranty of authority will not give rise to a proportionate defence and of course proportionate liability will not apply in cases of fraud.

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