|Focus:||Landa v Perpetual Trustees Victoria Ltd  NSWCA 393|
|Industry Focus:||Financial services|
Landa v Perpetual Trustees Victoria Ltd  NSWCA 393
In a recent NSW Court of Appeal decision, the appellant was unsuccessful in his claim under the Contracts Review Act 1980 (NSW) that the lending structure, under which he had borrowed funds, exposed him to fraud by a third party.
Perpetual Trustees Victoria Ltd (Perpetual) appointed Interstar Management Pty Ltd (Interstar) to be responsible for arranging, disbursing and managing secured loans on behalf of Perpetual.
Interstar then entered into successive loan origination and management agreements with Morgan Brooks Pty Ltd (Morgan Brooks). Under these agreements, Morgan Brooks was given the right to request that Interstar arrange for Perpetual to advance monies on the security of mortgages, and also empowered Morgan Brooks to act as the servicer and supervisor of the mortgages granted (the Structure).
Mr Cincotta, acting as an agent of Morgan Brooks, arranged for Dr Landa to borrow money under three loan contracts entered into with Perpetual. The loans were secured by three properties owned by Dr Landa, one of which was his principal residence.
Dr Landa entrusted to Mr Cincotta the monies advanced by Perpetual, together with other personal funds for the purposes of investing those monies. The monies were misappropriated by Mr Cincotta.
Dr Landa commenced proceedings against Perpetual, seeking declarations that the loan contracts and mortgages were void or voidable and should be set aside. Dr Landa claimed relief on two grounds:
- The principal basis being the allegation that when Mr Cincotta engaged in the relevant fraudulent activity he was acting within the scope of his authority from Perpetual and, therefore, Perpetual was responsible for the relevant fraudulent activity, and
- In the alternative, Dr Landa asserted that the loan contracts were "unjust in the circumstances" at the time they were made, within the meaning of the Contracts Review Act 1980 (NSW) (the Act).
In respect of Dr Landa's claim under the Act, Dr Landa argued that the unjustness arose from the structure used by Perpetual, which sought to distance Perpetual from the loan process, while also providing Perpetual with the benefit of the process, but without adequate monitoring of mortgage originators and managers to detect abuse.
Dr Landa gave no particulars of the manner in which the Structure facilitated the fraudulent activities of Mr Cincotta, or what steps Perpetual should, or could have, taken to monitor such activities to detect and prevent them.
The Court dismissed Dr Landa's claim concluding that Perpetual was not responsible for the acts of Mr Cincotta, and that the Act had no application.
On appeal Dr Landa relied only on his claim under the Act. He did not press his claim that Perpetual was responsible for the fraudulent activity of Mr Cincotta, which was the main focus of his claim at first instance.
Dr Landa asserted that the primary judge erred in failing to give adequate reasons for concluding (for the purposes of section 7 of the Act) that the loan contracts between he and Perpetual were not unjust in the circumstances. Also, assuming that the primary judge's reasons were accepted as adequate, that His Honour failed to consider all of the circumstances of the case as required by section 9(1), as well as the matters referred to in section 9(2).
While the Court of Appeal suggested that "some criticism could be directed at the brevity of the reasons of the primary judge in dealing with the claims under the [Contract's] Review Act", the Court went on to find that:
- Dr Landa's claim that Mr Cincotta was acting as agent for Perpetual and Interstar was inextricably tied up with his claim under the Act
- on that basis, and in circumstances where the primary judge dealt with the agency claim at some length, very little was left to be said of Dr Landa's claims under the Act. The Court was not persuaded that there was a failure to give adequate reasons
- Dr Landa's failure to give the particulars of his claim under the Act referred to above was a "fatal difficulty"
- if the primary judge's reasons were read as a whole, it was clear that the reference to "s 9" of the Act included a reference to section 9(1), which is apparent from His Honour's conclusion that Dr Landa's loss occurred as a result of Mr Cincotta's deception, and not because of any unjust contract. The Court held that it was difficult to see how His Honour could have come to that view if he had regard only to the matters set out in section 9(2).
- Dr Landa's decision to entrust the funds to Mr Cincotta had nothing to do with, and was not induced by Perpetual or Interstar
- the primary judge correctly found that the real cause of Dr Landa's loss was the fraud of Mr Cincotta and not any unjust contract between Dr Landa and Perpetual (noting that the investment of money by Dr Landa through Mr Cincotta commenced months before Dr Landa had any involvement with Perpetual).
Many lenders structure their lending process in a similar way to Perpetual in this case. The outcome is good news for those lenders, however, the result may have been different if Dr Landa was able to particularise how Perpetual's Structure facilitated the fraud, or what steps Perpetual should have taken to detect the fraud. The absence of those particulars were fatal to Dr Landa's claim for relief under the Act.
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.