In an important decision for banks and financial providers, the New South Wales Supreme Court has confirmed that lenders do not owe a general duty of care to advise a borrower on the viability of commercial projects for which the loaned funds will be used. The decision in Permanent Mortgages Pty Limited v MacFadyen [2012] NSWSC 130 represents the first clear statement that the principles in the Privy Council's decision in the UK judgment in National Commercial Bank (Jamaica) Ltd v Hew and Anor [2003] apply in New South Wales.
Permanent Mortgages commenced proceedings seeking possession of a property following the defendant's default under a loan agreement and mortgage. In her loan application, the defendant had stated the funds were to be used to refinance a home loan and construct four units. The units to be constructed by the defendant had been presold under four unconditional contracts for sale which were subsequently reviewed and endorsed by Permanent Mortgages. The presold contracts, among other factors, led Permanent Mortgages to approve the loan.
An unexpected turn of events caused the presale contracts to fall through. In the proceedings for possession, the defendant argued that Permanent Mortgages had a duty of care to check a range of matters concerning the presale contracts before advancing the money.
In his judgment, Johnson J stated the principles to be applied were to be found in the Privy Council's decision National Commercial Bank (Jamaica) Ltd v Hew and Anor [2003] UKPC 51; 63 WIR 183. In its judgment, Lord Millett repeated the following statement from Banbury v Bank of Montreal [1918]:
"[A banker] is under no obligation to advise but if he takes upon himself to do so, he will incur liability if he does so negligently."
Johnson J found that Permanent had not breached any duty of care as it had not actively advised the defendant as to the strength of the pre-sold contracts.
The defendant also claimed Permanent Mortgages had breached its duty by failing to properly assess the defendant's ability to service the loan. In rejecting this argument, the Court applied the decision in Buccoliero v Commonwealth Bank of Australia [2011] NSWCA 371 where it was held that a lender is under no duty to make reasonable enquiries to be satisfied that a borrower can service a loan.
Conclusion
This decision represents a significant statement of the nature of the duty of care owed by a lender. However, it must be remembered that the common law duty is only one issue that must be considered by lenders. For loans to which the National Consumer Credit Code and the Contracts Review Act apply, a Court may determine a loan unfair or unjust even where no duty of care arises.
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