CB Direct v Challenger Mortgage Management [2009] NSWSC 334

In this case White J, as Duty Judge in Equity, determined an application for an interlocutory injunction by a mortgage originator, CB Direct, against a loan funder, Challenger.

CB Direct argued that a purported termination of the origination agreement was invalid and sought a mandatory interlocutory injunction that Challenger pay trailing commission due for the months of February and March 2009 and for each succeeding month until further order.

His Honour determines the grounds for termination were questionable

On 6 March 2009 Challenger wrote to CB Direct:

Challenger has identified the inconsistencies on a loan application relating to a loan submitted by you including a misrepresentation by you that you had conducted and confirmed the employment of a borrower.

As a result of those inconsistencies, Challenger has formed the opinion that you have engaged in misleading or deceptive activity. As such, Challenger is exercising its rights to terminate under clause 20.1(c) of the [origination agreement] effective as at the date of this letter.

In accordance with clause 20.3(c) of the origination agreement, you are not entitled to receive any further trailing commission.

His Honour noted that as at 6 March 2009 there was no “proven” deceptive or fraudulent activity in relation to an application or a settled loan. He also determined there was a serious question to be tried as to whether the first defendant formed the requisite opinion to trigger the termination right and also a serious question to be tried as to whether any such opinion was reasonable.

Challenger did not give evidence of precisely who on its behalf formed the opinion for the purposes of giving notice of termination of the agreement; nor was there evidence, apart from in the correspondence, as to what that opinion was.

When CB Direct sought particulars of the grounds for termination and Challenger responded:

Challenger has formed its opinion after due consideration and investigation of, amongst other files, El-Akkaoui Loan, that income and employment details provided by you were false.

His Honour commented:

The unspecific reference to ‘other files’ is most unsatisfactory. If the opinion described in the letter was formed by reference to “other files”, the plaintiff should reasonably be entitled to expect that proper particulars would be provided. Fair dealing would require no less. 

His Honour held that it appears from the correspondence that whoever at Challenger formed the opinion about the plaintiff’s activities, had formed the opinion they had engaged in misleading or deceptive activity; not deceptive or fraudulent activity. In other words the activity was unintentional (they had themselves been supplied with false information and passed it on not manufactured it).

After reviewing the evidence proffered by Challenger, His Honour held that there was also a serious question to be tried as to whether it could reasonably have formed its opinion without making further enquiries.

Challenger may have affirmed the origination agreement

By letter dated 23 October 2007 Challenger advised CB Direct that it would not accept any new loan applications. However it also said that CB Direct “must continue to manage all originated loans in accordance with the relevant terms of the origination agreement and the guidelines manual.” The letter concluded, “Challenger reserves all rights available to it at all times under the origination agreement and under this letter.”

The judge held this letter provided CB Direct with a strong argument that by requiring the plaintiff to continue to perform the origination agreement and by itself continuing to perform the origination agreement by making monthly payments of the trailing commission it had elected to affirm the agreement. His Honour held that  prima facie requiring the plaintiff to continue to perform its obligations under the origination agreement was inconsistent with Challenger exercising its right to terminate the agreement, (assuming such a right had arisen) and constituted an unequivocal election to affirm the agreement. His Honour noted that the reservation of rights in the last paragraph of the letter was ineffective if there had been an unequivocal election to affirm the contract.

Arguments for and against interlocutory relief

An injunction is not normally granted when damages at the final hearing would be an adequate remedy. CB Direct argued that damages would not be an adequate remedy because it was possible, and perhaps likely, that if Challenger withheld payment of the monthly commissions CB Direct would be forced out of business with the destruction of goodwill associated with its business.

CB Direct bolstered this argument by leading evidence that if the trailer commission was cut off it would suffer a monthly cashflow deficit of about $9,000. However this was a two-edged sword because the Court held:

This evidence demonstrates that the plaintiff’s undertaking as to damages is likely to be worthless if the defendant succeeds at the final hearing.

An undertaking as to damages is, except in special circumstances, required in every case in interlocutory injunctions. His Honour noted that an undertaking as to damages is a “very important, if not an essential, means of preventing injustice from being done by the Court when it makes an order at an interlocutory stage, before the rights of the parties have been finally determined.”

The Court therefore concluded that notwithstanding the strong prima facie case raised by CB Direct it was very likely that if CB Direct failed it would not be able to meet its undertaking as to damages. Thus an injunction would be tantamount to giving CB Direct final judgment on amounts claimed to have fallen due under the origination agreement. Accordingly the application was refused.

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