Smart v AAI [2015] NSWSC 392

A mortgage broker misappropriated his client’s funds which they had agreed to on-lend but never did and was found liable for breach of contract and false and misleading conduct.

The court’s finding that the broker was liable in contract meant that the client’s loss was not at risk of being reduced by any proportionate liability or contributory negligence on the part of the client.

The proportionate liability provisions of the Civil Liability Act were held inapplicable because the absence of reasonable care was not an element of the contract claim against the broker.

The broker’s company was later deregistered and so the client attempted to claim directly against the broker’s insurer pursuant to section 601AG of the Corporations Act. 

The court found that the broker’s claims made policy did not cover that liability for three reasons:

  1. a claim on the policy was not made within the period of cover because the client did not make a demand for compensation, merely a return of funds advanced which is not sufficient;
  2. the services provided were outside the normal scope of a broker’s business and excluded because lenders provide funds directly to borrowers not to mortgage brokers as did the client;
  3. liability resulted from the company’s fraud which was excluded from cover. The fraud of the general manager was found to be that of the part owner of the business and not an employee and so was not exempted in the exclusion clause for fraud.

The client lost and did not recover the funds lent.

Click here to read the full judgment.

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