Australia: Loss Arising From Non Arms Length Sale: Court Allows Lender To Recover Against Various Third Parties

Last Updated: 26 February 2009

A non arms length sale is a hazard that most incoming mortgagees want to avoid. This month Levy J, in the District Court of NSW, found that a lender was entitled to recover a shortfall from a number of third parties who had varying degrees of responsibility for submitting a misleading front page of a sales contract as part of a loan application.

The facts

Gadens acted for the lender. In the case:

  • two parties exchanged contracts for the sale of an investment unit at an above market price
  • the front page of the sales contract recorded that a deposit had been paid and that an estate agent was acting for the vendor
  • the front page of the sale contract had been signed by the vendors and faxed by the their solicitor to the lender prior to settlement of the loan
  • the vendor and purchaser were both represented by the same solicitor
  • the vendors were prepared to settle, even though the purchasers did not have available at settlement the balance (after financing) of the purchase price
  • shortly after funding, the purchasers disappeared
  • no repayments were ever made
  • the disbursement of the settlement money included amounts to pay the purchasers' legal fees, a broker and stamp duty.

The claim

The lender commenced proceedings claiming misleading and deceptive conduct in the course of trade and commerce against the vendors.

The lender also claimed against the person who had witness the purchasers' signatures on the loan contract and mortgage. The lender claimed that the witness:

  • had misrepresented that he was personally acquainted with the purchasers or had checked their identity; and/or
  • that the witness had aided and abetted the vendors in making their misrepresentations to the lender (in breach of s 75B of the Trade Practices Act and s 61 of the Fair Trading Act).

The decision

Case against the vendors

Levy J found in favour of the lender against the vendors for the full amount claimed, that being the amount of the lender's shortfall plus interest.

Levy J was satisfied that:

  • there had not been a deposit paid (Levy J was not prepared to accept the vendors' argument that the tendering of a cheque together with a request not to cash the cheque, was sufficient to constitute a deposit)
  • an estate agent had not introduced the purchasers to the vendors
  • that the faxing of a sale contract front page with false information concerning the existence of a deposit and estate agent, was in this instance a representation made by the vendors in trade and commerce
  • that the lender had established reliance on the information contained in the sale contract front pages ‑ since the information was necessary to satisfy one of the lender's pre-conditions to funding.

Case against the witness

As the case unfolded, it became apparent that the witness had played a role beyond merely witnessing the purchasers' signatures on the loan contract and mortgage.

In fact, the witness:

  • was an employee of the broker (who had been paid a $9,680 commission from the sale proceeds)
  • had introduced the purchasers to the lender
  • was the grandson of the vendors.

Levy J concluded:

"I find that the circumstances of the Fist Defendant's involvement in the various steps in the transaction suggest that it is more probable than not, by reason of the suspicious characteristics of the transaction already identified, the First Defendant had knowledge of the "scam" that was perpetrated against the Plaintiff even though given his young age and limited business acumen at that time he was a relatively minor player in the events in question."


The case serves as an example of where the Courts have extended the reach of the law beyond those who actually make the misrepresentations to others who have knowledge of the "scam".

In the above case there was no direct evidence that the witness had knowledge of the "scam". However, Levy J was prepared to infer such knowledge from the circumstantial evidence. The lender's case was assisted somewhat by the witness swearing two contradictory affidavits (the witness had changed solicitors a number of times during the course of the proceedings) about how he had come to witness the purchasers' signature.

This case means that lenders should be on the lookout for alternative means to recover a shortfall when the circumstances warrant further investigation into the underlying transaction. Third parties who may have some exposure include:

  • valuers
  • vendors and their solicitor
  • purchasers and their solicitor
  • estate agents
  • witnesses
  • brokers, loan intermediaries and originators
  • outgoing mortgagee and their solicitors.

Justin Bates t +61 2 9931 4763 e

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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