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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.
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.
Kemp Strang has received acknowledgements for the quality of
our work in the most recent editions of Chambers & Partners,
Best Lawyers and IFLR1000.
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