Steele-Smith v Liberty Financial [2005] NSWSC 398

The plaintiffs borrowed money from the second defendant, Liberty Funding (“LF”), secured over their land by mortgage. The plaintiffs claimed that the loan agreements and the mortgages were procured by fraud or unconscionable conduct or other wrongdoing and should be set aside.  The thrust of the Plaintiffs’ complaint was directed to alleged misconduct on the part of a Mr Mohammed (“Mr M”), a director of Vestecorp Financial Services Pty Ltd (“Vestecorp”).  Vestecorp was the finance broker.  The plaintiffs alleged Mr M was an employee of LF and Liberty Financial and that they were liable for his conduct.

Justice Palmer found problems in the pleadings prepared by the non-lawyer was acted as agent for the plaintiffs, especially where such a grave allegation as fraud was being made.

The plaintiffs argued that LF and Liberty Financial had a duty to “check and verify” that the plaintiffs had the financial capacity or were otherwise able to meet their obligations under the loan transactions. There was no evidence of facts which might have given rise to such a duty of care under the general law, such as that it was made known to LF or Liberty Financial that the borrowers were relying upon them to advise them in respect of the loans.

Justice Palmer stated the applicable law, as follows:

As a general principle, a financier is not under a duty to provide a borrower with commercial advice about the proposed loan:  Mahlo v Westpac Banking Corporation Ltd [1999] NSWCA 358 per Sheller JA;  Beneficial Finance Corporation Ltd v Karavas (1991) 23 NSWLR 256.

His Honour concluded  that the plaintiffs were required to provide information about their financial position in loan applications, on the basis of which the defendants would assess the risk of lending to them.  The defendants were in no special relationship with the plaintiffs which imposed on them a duty to investigate whether the plaintiffs were telling the truth about their financial position or whether the plaintiffs, in fact, had the capacity to repay which they represented they had.

His Honour found  that there was no evidence one of the defendants had been induced by the plaintiffs into entering into the loan agreements by misrepresentation, coercion, undue influence or other unconscionable conduct; that there was no evidence (at [86]) that the defendants did not understand the nature of the transactions into which they were entering or were incapable, by physical or mental infirmity, of giving free and informed consent to the transactions; and that there was no evidence  of any loss caused by the mortgage transactions. The loans were for business purposes so that the Contracts Review Act 1980 (NSW) did not apply.

His Honour found  another of the defendants would not have been able to understand a complex commercial document such as a loan application by reason of intellectual impairment, about which there was evidence given by a doctor that was accepted by his Honour. The broker would have been able to recognize his disability without difficulty. The broker’s evidence was rejected. However, there was no evidence that the lender was aware of the borrower’s disability or evidence that they should have been put on enquiry as to his intellectual capacity.   

A finance broker is not necessarily an agent of the lender as his Honour stated:

The Introducer Agreement between Vestecorp and Liberty Financial makes it plain that Vestecorp was an independent contractor, not an employee or agent.  The fact that a finance broker approaches a finance company for a loan to a client of the broker and assists in the execution of loan documentation, as occurred in the present case, does not in itself make the finance broker the agent of the finance company, let alone an employee:  see e.g. Octapon Pty Ltd v Esanda Finance Corporation Ltd (NSWSC 3 February 1989, Cole J);  see also Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Aust) Ltd (1986) 160 CLR 226. 

His Honour reasoned that if the lender had sought to enforce the loan agreement against the borrower who lacked intellectual capacity, the borrower would have had a defence of non est factum. However, as it turned out no enforcement of the loan transaction was ever necessary. His loan never went into default and was discharged upon the sale of one of the mortgage properties. The sale was not forced by LF.

His Honour found the defendant with the intellectual disability had not entered into the loan by reason of anything said by the broker but because of the influence of his mother and brother. He had suffered no loss from borrowing the money and the mortgage being discharged. There was no basis found for ordering that an amount of compensation equal to the loan amount was payable to him by the defendants.

In general there was no wrongdoing by the lenders to the defendants.

Based on the broker’s knowledge of the intellectual disability it was found that Vestcorp was liable, pursuant to an indemnity clause in the introducer agreement, for the loss that the lender suffered in terms of the costs of the proceedings. 
The broker argued that it was indemnified as agent of the lender but his Honour rejected the claim that the broker was an agent of the lender. The broker was the agent of the client or in this case, the person responsible for the loan application, the client’s mother. The broker was therefore entitled to be indemnified by the client’s mother in respect of its liability for the lender’s costs of the proceedings.

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