A broker made false misrepresentations to a bank in order to procure two pensioners a loan of $350,000. The borrowers did not obtain independent legal or financial advice and effectively signed blank loan forms. The borrowers gave the broker $235,000 out of the loan amount for the broker to invest a “miscellaneous investment scheme” to which they were promised a substantial return.
Part of the agreement with the broker involved the broker making repayments to the bank of the interest accrued from the investment. Initially payments were made by the broker but they quickly stopped. Intermittent payments continued to be made by the broker but insufficient to support the loan.
The bank sought recovery of their loan from the pensioners. During proceedings, the borrower’s alleged the lender was vicariously liable for the misrepresentations of the broker (as their agent) and therefore the outstanding debt.
This was rejected by the court commenting that:
“a relationship of agency between a principal and subagent is only established if:
the appointment of the subagent is authorised or ratified by the principal; and
that the agent and subagent intended that there be a direct relationship of agency between the subagent and the principal;
It is insufficient that the broker completed and submitted the finance application forming order to obtain commission or a fee”
The borrower also alleged that the conduct of the bank was unconscionable (s12CB of the ASIC Act), a proposition also rejected by the court as:
- The Borrowers were not in an inferior bargaining position to the Lender;
- The Borrowers should have detected the fraudulent loan application;
- The Lenders conditions for borrowing were reasonable.
- The Borrowers would have been able to understand the loan application;
- No undue influence or pressure or unfair tactics were used by the Lender against the Borrowers (absent any agency).
Citing various authorities, the court noted a lender does not owe a general common law duty to advise or protect a borrower from fraud. An assumption of responsibility does exist in cases of extreme vulnerability (inability to protect itself) but not in cases of carelessness on the borrower’s part.
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