Tonto Home Loans Australia v Tavares [2011] NSWCA 389

This Court of Appeal decision concerned three cases where the lender, ANZ subsidiary, Origin Mortgage Management Services, used a mortgage originator, Tonto Home Loans, who in turn used a broker, Streetwise. Streetwise conned the borrowers into taking out the loans and it’s principal, Mr Bangaru, absconded with the proceeds.

The trial judge set aside the loans of all borrowers under the Contracts Review Act. He did this on the grounds that the Streetwise was the agent of Tonto, and Tonto was the agent of the Origin.  This finding of agency was under challenge on appeal.

Origin, provided delegated authority to Tonto to assess each loan application and to make a credit decision on lending. The delegated authority was $500,000. Tonto was a mortgage originator / manager. The documentation that governed the relationship between Origin and Tonto was a “Mortgage Origination and Management Deed”. The arrangement between Tonto and Streetwise was governed by a Introduction Deed.

The trial judge’s decision
The trial judge concluded on the basis of the Introduction Deed and collateral arrangements that Tonto entrusted responsibilities to Streetwise. His Honour found Streetwise had a duty to ensure borrowers it introduced were eligible and that information was correct.

The conduct of Streetwise was not that of an independent finance broker. The cross-claimants were not advised of any potential lender other than Tonto nor were any steps taken to ascertain alternative loan sources. Streetwise was more than a loan introducer. Streetwise played, an integral part on behalf of Tonto and Origin in their loan approval and credit assessment process ‘.

Having found agency existed the trial judge founded his decision of unjustness in the circumstances on asset lending by Tonto rather than the fact Streetwise was organising the loan so it could steal the money:

Tonto thereby clearly knew the actual financial position of each of the borrowers and that they could not afford or satisfy the repayment obligations of the respective loan agreements and mortgages. Tonto, it was submitted, thereby knew that the only manner in which the loan could be repaid was by the sale of their family homes. Tonto therefore knew that the loans were asset loans secured by family homes, being their only substantial asset.

Tonto tried to argue the fraud exception to agency which is as follows:

In knowledge cases, the presumption that information will be passed on may also be nullified by proof that the agent was defrauding the principal in that transaction, whether or not the third party knew this: it can, in such a case, be said that … that the agent was not acting for the principal when he received the information.

The trial judge distinguished this rule using the following reasoning:

It is not irrational to impute the knowledge of Streetwise to Tonto. By the agreement which Tonto had reached with Streetwise in its own commercial interests, Tonto had placed Streetwise in the position where the fraud could readily be committed . . . In the circumstances of the present proceedings, reasons of justice and commonsense, to my mind, require that the knowledge of Streetwise of the true financial position of the cross-claimants be imputed to the plaintiffs.

Of course reasons of justice and commonsense are not valid reasons to refuse to apply the law anymore than the vibe of the constitution is. After all if every judge could decide every case based on his view of justice and commonsense we would be in the same position as India. Article 142 of the Indian Constitution empowers the country’s courts to make any order “as is necessary for doing complete justice in any cause of matter pending before it”. This amounts to a bestowal of unlimited arbitrary power on that court. As Montesquieu explained this in Spirit of the Laws:

The judgments ought to be fixed, and to such a degree, as to be always conformable to the exact letter of the law. Were they to be the private opinion of the judge, people would then live in a society without knowing exactly the obligation it lays them under.

The decision of the trial judge depended on the Khoshaba principal of asset lending laid down by Basten JA in these terms:

To engage in pure asset lending, namely to lend money without regard to the ability of the borrower to repay by instalments under the contract, in the knowledge that adequate security is available in the event of default, is to engage in a potentially fruitless enterprise, simply because there is no risk of loss. At least where the security is the sole residence of the borrower, there is a public interest in treating such contracts as unjust, at least in circumstances where the borrowers can be said to have demonstrated an inability reasonably to protect their own interests.

The trial judge re-wrote the rules of the Khoshaba principle, rejecting Basten JA’s proviso (in italics above) stating :

Where the asset lending has arisen because of the fraud and deception of the lender’s agent and the borrowers are unaware that the reality of the lending is on the value of their home, in my opinion, it makes little difference to considerations of injustice under the CRA that the borrowers are persons who normally are able to look after themselves.

The Court of Appeal’s decision on agency
The court of appeal noted that the High Court defines agency as:

Agency is a word used in the law to connote an authority or capacity in one person to create legal relations between a person occupying the position of principal and third parties.

This was not the position with Streetwise, it had no authority to bind Tonto in agreements with third parties. Noting this the Court of Appeal, distinguished the High Court’s definition and decided to adopt the views of an academic being:

Agency is the fiduciary relationship which exists between two persons, one of whom expressly or impliedly manifests assent that the other should act on his behalf so as to affect his relations with third parties, and the other of whom similarly manifests assent so to act or so acts pursuant to the manifestation. The one on whose behalf the act or acts are to be done is called the principal. The one who is to act is called the agent. Any person other than the principal and the agent may be referred to as a third party.

On the basis of this definition the Court of Appeal found there was no agency:

No provision of the introduction deed required that Streetwise would represent Tonto. Not only is that not contemplated, but Streetwise was contractually forbidden from disclosing the terms of the deed or the arrangement. The fact that Streetwise did not hold itself out as working for, or being in some way connected with, Tonto or Permanent or the relevant loan programme makes it plain that the facts could not give rise to ostensible or apparent authority. This removed, any suggestion that Streetwise did in fact act as a representative of Tonto in dealing with third parties.

The Court of Appeal finds unjustness (even without agency)
The relationship, although not an agency was not irrelevant to determining unjustness. The Court of Appeal noted this:

This conclusion on agency does not, however, mean that when one turns to the application of the Contracts Review Act , one ignores the history and detail of the relationship between Tonto and Streetwise. They were not commercial strangers; they were intimate commercial counterparties, the latter performing functions that were integral to the operation of the former’s business and the lending enterprise.

The Court of Appeal held the main factor making the loans unjust was the risky business structure Tonto had with its introducers:

The clear inhering business risk of sub-contracting the important process of information collection and choice of appropriate loan product to a land developer to assist in obtaining funds for people doing business with it and so effectively providing a source of funding for its projects should be taken into account in understanding how the fraud occurred. In any such business enterprise, appropriate safeguards were necessary to minimise the risk of fraud. They were administered loosely, to the direct risk of the lenders and the indirect risk of the prospective borrowers. Agreeing not to contact prospective borrowers before settlement and agreeing to mislead them if they rang by answering the telephone as Streetwise were hardly risk minimisation strategies.

The Court of Appeal also drew attention to role in the fraud played by branding the loan with the Streetwise as the lender:

The preliminary and final approval letters and the application, having been “branded” as “Streetwise” assisted Streetwise dishonestly to mislead the respondents. It enabled Streetwise to represent that it was closer to the loan than it really was. This enabled Streetwise, as happened here, to persuade people that the filling in of forms was a matter of formality, it (Streetwise) having been given all relevant information. It is to be recalled that Tonto in its standard form Introduction Deed had a provision forbidding Streetwise disclosing the terms of the deed or the arrangement with Tonto. Tonto and the lenders wanted to “stay in the background”. The branding and the “ownership” given to the introducer enabled the introducer to have the borrower believe that it was closely connected with the loan to the extent that such might be relevant to a deception.

The Court of Appeal placed great weight on Tonto failing to follow its lending guidelines:

The only clear organisational checks and precautions were the guidelines. Not only were they not followed, but they were disregarded in a way found by the primary judge to reflect a lack of real concern for aspects that underpinned serviceability and the suitability of the borrowers. Of course, lending guidelines such as these are principally the relevant tool to protect the lender’s interests. However, following the guidelines confers a direct benefit on a prospective borrower by identifying risky loans and preventing fraud. The failures can be seen to be material in permitting the fraud to occur.

The borrowers must take a share of the blame
The Court of Appeal found that although the lender bore most of the responsibility is did not warrant totally setting aside the loan. The borrowers also bore responsibility:

The above said, the behaviour of the borrowers signing of incomplete or blank documents was careless, giving the opportunity for the fraud. The carelessness also extended to the degree to which the documents were misleading when they signed them.

In my view, an unjust consequence would be avoided by relieving the borrowers of three quarters of the financial consequences of the loan agreement. To do more would be unjust to the lender.

ASIC, which asked to be heard in the matter, pressed that a statutory finding of unconcionability be made. This was rejected as follows:

Aspects of the content of the word “unconscionable” include the following: the conduct must demonstrate a high level of moral obloquy on the part of the person said to have acted unconscionably. It is neither possible nor desirable to provide a comprehensive definition. The range of conduct is wide and can include bullying and thuggish behaviour, undue pressure and unfair tactics, taking advantage of vulnerability or lack of understanding, trickery or misleading conduct. A finding requires an examination of all the circumstances.

There is no real suggestion that Tonto understood the actuality of the trickery and lies that were being undertaken by Streetwise or had any notice of them. I do not think that the structural creation of risk and the heightening of that risk by the arrangements with Streetwise meet the notion of moral obloquy required. The true facts are now known, but in circumstances where those at Tonto were innocent of the conduct at the time.

This conclusion is an evaluative one. The respondents and ASIC pressed the view strongly that the circumstances that lead (even without a finding of agency) to the conclusion of the responsibility of Tonto and the lenders for what happened so as to invoke the Contracts Review Act equally lead to a conclusion as to unconscionability. I cannot agree. What is required is some degree of moral tainting in the transaction of a kind that permits the opprobrium of unconscionability to characterise the conduct of the party. Here, without a finding of some knowledge or complicity, the circumstances do not reach that level.

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