Provident Capital v Papa [2013] NSWCA 36

A mother borrowed on the security of her home and on-loaned the money to her son’s business . The son assured his mother that the business was going very well when this was untrue at the time. The introducer was aware of this but not the lender. Being a third party loan, the lender required the mother to obtain independent legal advice and she did so. The lender sought possession and the mother claimed that the loan was unjust under the Contracts Review Act and cross-claimed against her solicitor. The trial judge in favour of the mother against the lender and reduced her liability by $500k being the amount applied for the benefit of the son’s business. This was because the trial judge imputed the knowledge of the introducer, who had actual knowledge of the desperate financial circumstances of the son, to the lender as its agent. The judge also found that the lender failed to make adequate inquiries of the mother’s ability to service the loan and as to why she would choose to invest in the business. The trial judge dismissed the borrower’s cross-claim against the solicitor. The lender appealed the Contracts Review Act finding and the mother appealed against her loss against her solicitor.

The Contracts Review Act claim

The Court of Appeal found for the lender determining the mortgage was not unjust. The court rejected the contention that the introducer was an agent of the lender. The court noted that the lender was not completely unconcerned about the borrower’s ability to service the loans because it required her assurance by signed declaration, undertook credit checks and stipulated the she must obtain independent legal advice and confirm that she had done so. The court held that the fact that the legal advice was inadequate was not the lender’s fault.

Low-Doc loans

There was some illuminative comments on low-doc loans:

Public interest does not necessarily require so-called asset lending to be proscribed, or even deterred. It may advance the interests of the parties to many transactions, and facilitate commerce generally, for financiers to be able to lend on a “low doc” basis without requiring the expenditure of time and effort in ascertaining and verifying the ability of borrowers to service loans. In any event, that exercise will often be difficult. For example if Provident had sought to undertake it in the present case, it would have had to make a difficult business judgment about the viability and prospects of the gymnasium business, a topic about which even well-informed minds could undoubtedly have differed. Financiers should not be required to make such assessments if they do not wish to do so. If, instead, a financier is satisfied that a borrower is able to make the decision for him or herself or has received appropriate advice, the public interest reflected in the Contracts Review Act will ordinarily have been satisfied.

The mother’s claim against the solicitor

The Court of Appeal found for the mother against the solicitor who provided her with independent legal advice.

It is well established that solicitors are not ordinarily required to advise upon the wisdom of transactions in relation to which they act. However proper execution of a retainer to give independent legal advice concerning a loan and mortgage transaction may, depending upon the circumstances known to the solicitor, require more than an explanation of the legal effect of the documents to be executed. A reasonable solicitor would have formed the view that the mother’s home, and the business which constituted her livelihood that she conducted from it, would be significantly endangered by her entry into the transactions with the lender ….a reasonable solicitor would have recommended that she obtain financial advice, independent of her son, concerning the capacity of the business to service the loan. A solicitor’s obligation is not simply to explain the legal effect of documents but to advise his or her client of the practical implications of the client’s entry into a transaction. The prospect of the subject transaction wreaking havoc on the mother’s life was glaring, given the by no means remote prospect that the business would be unable to support the loan repayments.

The court found that the solicitor breached his professional duties and if he had given the advice, then on balance, the mother would have followed it and not proceeded with the loan.

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