APPLYING GENERAL CONTRACT AND CONSUMER PROTECTION LAW TO CREDIT
DISPUTES OUTSIDE OF THE UNIFORM CONSUMER CREDIT CODE
RESEARCH PAPER 2: WHEN ARE LENDERS TAINTED BY THE FRAUD OF A FINANCE
BROKER?
SUMMARY
This research project investigates the role of general principles of contract law
and consumer protection legislation in regulating the provision of credit to
consumers. While many issues arising in respect to consumer credit contracts
are covered by the Uniform Consumer Credit Code (UCCC) there are
inevitably gaps in the legislation. General contract and legislative principles
may supplement the specific provisions of the UCCC and thus promote a
more effective system of consumer protection regulation through a
multilayered, textured approach. The project aims to provide guidance to
industry participants about alternative legal responses to credit disputes and
also to identify relevant considerations in reforming the existing law.
This paper considers the circumstances in which lenders will be tainted by the
fraud of the finance broker who arranged the transaction. Under general
consumer law, because lenders will generally not have any direct dealings
with the borrower, they will not normally be tainted by any fraud on the part
of the broker who represented the borrower in the transaction. However, in
some cases, there may be factors in the loan application and other
documentation provided to the lender that may implicate the lender in the
fraud of the broker.
1
The funding for this project was provided from the Consumer Credit Fund on
the approval of the Minister for Consumer Affairs. Research assistance was
provided by Alice Zhang and Sarah Mauriks. The author wishes to thank for
their contributions the Consumer Law Action Centre, solicitors at Consumer
Affairs Victoria, participants at the Monash Centre for Regulatory Studies
Consumer Research Breakfast and the delegates at the Credit Law Conference
2007. All errors remain the author’s own.
2
WHEN IS A LOAN TRANSACTION TAINTED BY THE FRAUD OF A FINANCE BROKER?
1
Recent years have seen an increase in the use of financial brokers to mediate
between borrowers and lenders.2 There are good reasons for a borrower to
engage the services of a finance broker. Borrowers may find it difficult to
select between a broad range of lenders and products. Borrowers may be
daunted by the range of choices in the market. Borrowers may find it difficult
to access finance. They may be limited in time or experience. They may be
uncertain how best to complete a loan application or be unsure about dealing
with loan documents. The role of the finance broker is to survey a range of
lenders and finance products and recommend to the borrower the
combination that would best suit the borrower’s needs. The broker may also
be responsible for managing the transaction, including submitting the loan
application, delivering the loan documents to the borrower, assisting the
borrower in completing those documents and even answering questions
about the loan. Credit providers may also see advantages in relying on the
services of a finance broker. In particular, brokers allow lenders access to
borrowers without the costs associated with a branch presence.3
Unfortunately, it appears that some brokers who are not properly promoting
the interests of their consumer clients.4 Statutory regulation of brokers is
minimal in most jurisdictions,5 although there are current proposals for
reform.6 There may be little direct monitoring of brokers. Certainly, the
consumers who engage brokers may be ill-equipped to fulfil this function.
Some of those promoting themselves as able to provide brokering services
may lack the necessarily skills properly to provide this service. Another
problem may be brokers recommending to borrowers the loan which will pay
the highest commission to the broker7 rather than one which best suits the
3
needs of their client.8 Yet another, often related, problem is fraud on the part
of the broker.9 There are a number of cases in which a broker has mislead
borrowers,10 ignored the disadvantageous situation of the borrower,11
falsified information in the borrower’s loan application and encouraged
borrowers falsely to represent that their loan is for business purposes and
hence not covered by the protective provisions of the Uniform Consumer Credit
Code.12 This behaviour has typically lead borrowers into loans that they have
no capacity to repay.13
Broker fraud may impact on lenders and not merely borrowers. If a loan is
approved on the basis of false or incomplete information about a borrower,
the risks of default by the borrower may be much greater than anticipated by
the lender. There is also a risk that the contract between the lender and the
borrower may be tainted by the fraud of the broker, and consequently liable
to be set aside by a court. There are few cases in which a loan transaction has
been set aside directly on this basis. Nonetheless, with the rise of broker
facilitated transactions, and as the implications of the sub-prime mortgage
crisis spread,14 it may only be a matter of time before such arguments become
more common.
This paper considers three bases on which a loan transaction may be tainted
by the fraud of a broker:
I
the broker was the agent of the credit provider,
II unconscionable conduct on the basis of knowledge by the lender of a
special disability on the part of a borrower or, similarly, the lender having
notice of undue influence in the loan transaction,
III where the loan contract is an unjust contract under s 70 of the Uniform
Consumer Credit Code or the Contract Review Act (NSW).
4
Parts I to III of this paper consider each of these possible bases of lender
liability in turn. Part IV considers the steps that a credit provider might take
to protect itself from liability.
I
BROKER AS AGENT OF THE LENDER
A principal is liable for the acts of an agent acting within the scope of his
authority. Thus, a lender may be liable for misrepresentation or fraud by a
broker acting as its agent. A principal is also imputed with the knowledge of
its agent.15 This means that a lender may be imputed with the knowledge of a
broker who is its agent. Such knowledge may be relevant to establishing
unconscionable dealing or involvement in a transaction induced by undue
influence.16
Courts have consistently held that a broker is the agent of the borrower not
the lender.17 Nonetheless, agency is a factual inquiry. Thus, it is possible that
the facts of a particular case might establish an agency relationship between
broker and lender.18 If a broker is found to be an agent of the finance
provider, it will be on the basis of actual or apparent authority. A broker will
have apparent authority where it is held out by the finance provider, the
principal,
as
having
such
authority.19
In
these
circumstances,
the
representation operates as an estoppel and will preclude the principal from
denying the agency relationship it has represented, where relied upon by the
other party to the contract.20
Importantly, the person dealing with the company in these circumstances
‘cannot rely upon the agent's own representation as to his actual authority’.21
The relevant representation must be made by the principal, although this may
be found in the conduct of the principal including ‘by a previous course of
5
dealing or by putting the agent in a position or by allowing him to act in a
position from which it can be inferred that his actual representation of
authority in himself is in fact correct’.22 The holding out may also result ‘from
permitting an agent to act in a certain manner, or by equipping or arming the
agent, or by a failure to take proper safeguards against misrepresentation by
the agent’.23
A high standard of evidence will be required to establish that a broker is the
agent of a lender.24 The remarks of the High Court in Con-Stan Industries of
Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd, made in
relation to insurance brokers, are applicable in the broker /lender
relationship, namely:
There will be rare circumstances in which a broker may also be an
agent of the insurer, but the courts will not readily infer such a
relationship because a broker so placed faces a clear conflict of interest
between his duty to the assured on the one hand and to the insurer on
the other.25
Courts have ruled out a number of factors as sufficient to establish an agency
relationship between broker and finance provider. These include: that the
broker may be paid a commission by the finance provider26, that the broker
may have possession of the lender’s forms27, that the broker may fill in the
particulars on the forms28 and that the broker conducted all the dealings in
relation to the applications.29
One of the few cases where an agency argument has been successful is
Woodchester Leasing Equipment v RM Clayton and DM Clayton (t/a Sudbury
Sports).30 The plaintiff, Woodchester Leasing Equipment, was the owner and
finance company, and the defendants, RM Clayton and DM Clayton, were the
hirers, who entered into a consumer hire agreement for a facsimile machine.
6
Prior to the defendants entering into the agreement, the supplier had made a
number of representations to the defendants, on which the defendant relied in
entering the agreement. The agreement did not contain a cancellation notice.
The defendant argued that the supplier was the agent for the owner. Initially,
the hirer had wanted to purchase the machine outright. The hirer was
persuaded by the supplier that leasing would be advantageous. The
arrangement between the finance company and the supplier meant that the
greater the monthly rental negotiated by the supplier, the greater the price
paid by the finance company to the supplier for the goods. If the defendant
had purchased the goods outright, the supplier would have received around
£995. On the basis of the monthly rental negotiated by the supplier with the
hirer, the supplier would receive from the finance company the sum of
around £1715.51. Accordingly, it was to the supplier's advantage to persuade
the defendant to lease, rather than to purchase outright. The County Court
held that at the time the representations were made, the supplier was acting
as an agent for the finance company. This finding was based on the fact that
the whole thrust of the supplier's sales talk was directed not to the virtues of
the goods but to the dubious, from the hirer’s point of view, virtues of
leasing.31
It appears that the supplier was treated as the agent for the finance company
on the ground that it had clearly promoted the interests of itself and the
finance company over those of the hirer. In these circumstances, the supplier
might be said to have assumed the role of the agent of the finance company.
However, it might be questioned whether this conduct should have been be
enough to constitute the supplier as an agent of the financier on the basis of
apparent authority. While the supplier undeniably preferred the interests of
itself and the financier, there was no holding out by the financier that the
supplier was acting on its behalf as its agent.
7
For an agency relationship to be securely established between a broker and a
lender it is suggested that more will be required. Evidence will be needed of
conduct by the lender holding the broker out as acting on behalf of the lender.
Such holding out might occur through representations, perhaps in material
provided to the borrower, to the effect that the broker represents the lender or
conduct by the lender indicating that the broker has authority to negotiate
and/or approve the loan on the lender’s behalf.
II
KNOWLEDGE OF UNCONSCIONABLE DEALING/UNDUE INFLUENCE
The equitable doctrine of unconscionable dealing operates where:
(1) a party to a transaction was under a special disability in dealing
with the other party with the consequence that there was an
absence of any reasonable degree of equality between them; and
(2) the disability was sufficiently evident to the stronger party to
make it prima facie unfair or `unconscientious' that he procure, or
accept, the weaker party's assent to the impugned transaction in
the circumstances in which he procured or accepted it.
Where such circumstances are shown to have existed, an onus is
cast upon the stronger party to show that the transaction was fair,
just and reasonable.32
There are also statutory prohibitions on unconscionable conduct. A primary
source for these prohibitions is in Part IVA of the Trade Practices Act 1974,
under ss 51AA, 51AB and 51 AC.33
In so far as they rest on a notion of conscience, both the equitable and
statutory doctrines require that before a transaction is set aside as
8
unconscionable, the credit provider know of the borrower’s special disability.
Something less than direct actual knowledge may sometimes suffice. In
Commercial Bank of Australia v Amadio Deane J referred to the disability being
‘sufficiently evident to the stronger party.’34 Mason J described the
requirement as being that the dominant party "knows or ought to know" of the
existence of the innocent party's disabling condition or circumstance and of its
effect on him or her.35 Mason J descried the knowledge requirement as
follows:
... if A having actual knowledge that B occupies a situation of
special disadvantage in relation to an intended transaction, so that
B cannot make a judgment as to what is in his own interests, takes
unfair advantage of his (A's) superior bargaining power or
position by entering into that transaction, his conduct in so doing
is unconscionable. And if, instead of having actual knowledge of
that situation, A is aware of the possibility that that situation may
exist or is aware of facts that would raise that possibility in the
mind of any reasonable person, the result will be the same.36
Undue influence is concerned with the exploitation of a relationship of
influence. Thus, a contract may be set aside where a third party exerted
undue influence that affected the dependent party's mind and judgment in
entering the contract.37 A lender will be tainted by the undue influence where
the lender knew or had reason to believe of the impropriety.38 The doctrine
has most commonly been invoked in transactions involving a third party
guarantee but could arise in a loan transaction.
In respect to all of these doctrines, the restriction on relief is likely to be that
the lender lacked the requisite degree of knowledge. In cases involving
brokers, the lender may not have had any actual contact with the borrower
and hence may not have any direct knowledge of any special disadvantage on
9
the part of the borrower or of any undue influence between the borrower and
another party. The point is starkly illustrated by Perpetual Trustees Victoria
Limited v Ford.39 In this case Ford (‘the borrower’) owned a house in
Wollongong in New South Wales which had been inherited from his mother.
In 2004 the borrower entered into a loan agreement for $200,000 secured by a
mortgage over the house. At the time of the transaction the borrower was
almost 58. He suffered from a congenital intellectual impairment and he was
illiterate. The borrower was in receipt of a Disability Pension of $452.70 per
fortnight. He had no capacity from his income or other resources to pay the
interest on a loan of $200,000.
The loan was arranged by the borrower's son. The purpose of the loan was to
purchase a cleaning business to be operated by the son. The business was
purchased in the borrower's name although Ford did not plan to operate the
business and did not have the skills to do so. The broker who facilitated the
transaction never saw the borrower without the son being present. The broker
recommended that the father see a lawyer about the transaction but, to the
knowledge of the broker, this was never done. Within twelve months of the
date of the transaction the borrower had defaulted upon his obligations under
the loan agreement and the lender sought to recover the principal sum and to
take possession of the property. Harrison J found that the loan agreement was
void on grounds of non est factum. 40
In Ford the borrower was clearly suffering from a special disadvantage for the
purposes of unconscionable dealing. It is arguable that the broker ought to
have known of this disadvantage. The borrower had such a severe intellectual
impairment that he was found not to have understood the nature of the
transaction he was entering into and was instead acting under the influence of
his son. A conversation of any depth about the transaction would presumably
have indicated to the broker the borrower's significant lack of understanding
10
about the transaction. However, even if the broker did know of the
borrower’s special disadvantage, the lender did not. The broker was not the
agent of the lender. The lender had no direct dealing with the borrower.41
For similar reasons, the borrower failed in having the transaction set aside on
grounds of undue influence. Harrison J accepted that the borrower entered
into the transaction as a result of, and under the influence of, his son. The
difficulty for the borrower was that there was 'no evidence that the lender had
actual notice of the matters relied upon as demonstrating undue influence
and constructive notice would be insufficient’.42
In these sorts of cases, knowledge of a special disability or of undue influence
may only come to the lender, if at all, through information passed to the
lender by the borrower or the broker. The primary form of information is
likely to be the loan application and loan documentation. Where this
documentation has been completed by the borrower with the assistance of the
broker, it may commonly appear to be normal and the transaction in order.
Nonetheless, it is possible that in some cases the loan documentation might
reveal information that should alert the lender to the fact that the borrower
was unable properly to conserve his or her own interests. Relevant factors in
the loan documentation might include evidence of poor language skills, a
disability perhaps through receipt of a disability pension or obvious
misunderstanding of the nature of the transaction.
Would the sheer improvidence of the transaction be sufficient to attribute to
the lender knowledge of a special disability on the part of the borrower or of
undue influence in the transaction?43 The issue is unresolved. In Elkofairi v
Permanent Trustee Co Ltd44 the borrower was illiterate, had no income, was on
an invalid pension and the borrowing was secured over her only asset. The
11
Court of Appeal of the NSW Supreme Court held that the borrower was in a
position of a special disadvantage. Not all of the information relevant to the
borrower’s position was known to the credit provider. However, the loan
application form failed to disclose any income for either husband or wife.
Thus, the court held that the lender did know that the borrower had no
income and that a large borrowing was secured over the borrower’s only
asset.45 The court held that ‘it was unconscientious for the [lender] to lend a
large sum of money to a person with no income with full knowledge that if
the repayments under the loan were not met, it could sell that person's only
asset.46
By contrast, in Ford the borrower was also on a disability pension and secured
the loan over his only asset. Harrison J did not accept the borrower’s
argument that while the lender did not have actual notice of the borrower's
disability, it should be held culpable because it ‘failed to make enquiries that
it should in the circumstances have made about the literacy of the defendant
or his intellectual capacity to enter into it’.47 Harrison J suggested that the
borrower’s arguments were stretching too far the notion of the knowledge
required for unconscionable dealing.48 Given the borrower’s loan application
was completed with the assistance of the broker and the borrower’s son, there
was presumably nothing in the loan application and other documents which
revealed
the
borrower’s
impairment,
such
as
obvious
spelling
or
comprehension errors. However, the borrower had no income other than a
disability pension and was mortgaging his home to support the loan. Perhaps
the borrower might have argued that these facts should have raised the
possibility of Ford not being able to conserve his own interests in the mind of
a reasonable person.
III
SETTING ASIDE A CONTRACT AS UNJUST ON THE BASIS OF THE BROKER’S
CONDUCT
12
Section 70 of the UCCC, and similarly the Contracts Review Act 1980 (NSW)
provides that:
The court may if satisfied on the application of a debtor, mortgagor or
guarantor that, in the circumstances relating to the relevant credit
contract, mortgage or guarantee at the time it was entered into or
changed (whether or not by agreement), the contract, mortgage or
guarantee or change was unjust, reopen the transaction that gave rise
to the contract, mortgage, guarantee or change.
Under s 70(7) of the UCCC unjust is defined to include conduct that is
'unconscionable, harsh or oppressive’.
Section 70(2) provides that in making a determination pursuant to s 70(1) the
court must have regard to the public interest and all the circumstances of the
case and may in addition have regard to the specified factors which include:
(j) whether the credit provider or any other person exerted or used
unfair pressure, undue influence or unfair tactics on the debt,
mortgagor or guarantor, and if so, the nature and extent of that unfair
pressure, undue influence or unfair tactics.
Under s 70(4) in determining whether a contract or a provision of a contract is
unjust, the Court shall not have regard to any injustice arising from
circumstances that were not reasonably foreseeable at the time the contract
was entered into. A similar provision exists in the Contract Review Act 1980
(NSW) found under s 9(4).
13
It is uncertain whether this section precludes relief except in circumstances
where the fraud of a broker would have been reasonably foreseeable to the
lender at the time the contract was made. Duggan and Lanyon explain that
there are two possible interpretations of the provisions;
It could be read as referring only to circumstances arising after the date
of the contract and before the action is bought. Alternatively, it could
be read as referring back to the circumstances mentioned in s 70(1) – in
other words, to circumstances existing at the time the contract was
made. If it is the first construction, the provision serves the function
[consistent with the Peden Report on which the Contract Review Act is
based], namely of allowing the courts to take account of developments
after the contract was made, provided they were reasonably
foreseeable by the credit provider at the retime.. If it is given the
second construction, the provision serves the quite different function of
limiting the Act to cases where the circumstances on which the
complaining party relies were known to, or ‘reasonably foreseeable’ by,
the credit provider at the time of contracting.49
Duggan and Lanyon explain that the New South Wales Court of Appeal50 has
adopted the first construction in the context of the Contracts Review Act 1980
(NSW). The Victorian Supreme Court has adopted the second construction in
the context of the Credit Act 1984 (Vic).51
Duggan and Lanyon comment that:
The Victorian Supreme Court’s approach reflects a concern to avoid the
reopening of transactions where the credit provider’s conscience was
not affected. The trouble is that, however attractive this concern might
be as a matter of principle, it appears to be inconsistent with
legislature’s intention.52
14
If the view preferred by Duggan and Lanyon is adopted, then under the
UCCC s 70 and the Contracts Review Act 1980 (NSW) a contract can be found
unjust on the basis of the conduct of a finance broker even where the credit
provider had no knowledge of that conduct.
The second step in assessing whether to grant relief under the UCCC or
Contracts Review Act 1980 (NSW) is to consider whether the discretion should
be exercised. Courts have held that the state of a lender’s knowledge will be
relevant to the exercise of the courts discretion to grant relief under the
relevant legislation,53 although absence of knowledge of the circumstances of
injustice does not preclude a claim for relief.54
As already discussed in relation to unconscionable dealing, in some cases a
lender may be treated as having knowledge of a broker’s fraud though
information revealed about the transaction in the loan application and other
documents. Would this consideration preclude relief in respect to a loan
contract being granted to a borrower affected by broker fraud in
circumstances where the lender does not have knowledge of the fraud? On
the one hand, it might be said that if the lender does not have knowledge of
the broker’s fraud it would be unjust to visit the consequences of that fraud
on the lenders, because as we have discussed, the conscience of the lender will
not have been tainted. In Ford Harrison J considered the transaction was
outside the scope of the Contracts Review Act as the loan was for business
purposes. In terms of whether the contract was unfair, while the lender’s lack
of knowledge of the borrower’s disability did not bar relief under the
Contracts Review Act, Harrison J took the view that the contract was not
relevantly unjust.55
15
On the other hand, it might be argued that such a result is not unfair because
lenders will usually be better placed than borrowers to monitor the conduct of
the finance brokers with whom they deal. Borrowers will commonly have
approached a broker because they are inexperienced in the credit market. By
contrast, lenders may have an ongoing working relationship with the brokers
with whom they deal, experience in the market and, through the payment of
commission, some power to impose standards of acceptable conduct on
brokers. The lender has greater expertise and market power than the
borrower. Accordingly, it might be argued that the lender should, in fairness,
have responsibilities for monitoring the conduct of the brokers on which it
relies or at least take active steps to assess the genuine suitability for the
borrowers of the finance product recommended by the broker. If this second
perspective is accepted, then factors relevant to the courts’ discretion to grant
relief might include whether the lender had put in place procedures either to
monitor brokers or to take some steps to verify information given in
applications submitted through a broker.
Whatever the attractions of this approach, it does not sit altogether easily with
the jurisdiction to relieve against an unfair contract. It effectively places a
duty of care on a lender to assess the suitability of a loan for a borrower, a
task for which the borrower has engaged a broker. To the extent that lenders
are well placed to monitor the conduct of brokers, any requirement to do so
should be imposed directly rather than through the device of an unjust
contract.
IV
WHAT STEPS MIGHT A FINANCE PROVIDER TAKE TO AVOID BEING TAINTED BY
THE FRAUD OF A BROKER?
Given the risks associated with broker fraud, both financial and legal, it may
be prudent for lenders to put into place processes for monitoring brokers and
16
loan applications submitted by them. For example, lenders might take steps to
identify the factors which indicate either broker fraud, or the presence of a
borrower who is unable to conserve his or her own interests. Lenders might
insist borrowers have independent advice about the transaction and /or that
the loan documents be signed in the presence of the solicitor and returned to
the solicitor by the solicitor not the broker. Lenders might require some
independent verification of the borrower’s assertions of income and assets.
Lenders might also try to protect themselves against being tainted by the
fraud of a broker by attempting to contract out of any such liability. For
example, a lender might include in the loan documentation signed by the
borrower an assertion that the borrower has not relied on any statements
about the loan provided by the broker or a statement by the borrower
acknowledging that the broker is not the agent of the lender. While much will
depend on the circumstances, it seems doubtful that such statements would
be successful. If the broker has in fact been held out as the agent of the lender
then a contractual disclaimer will not negate that holding out. Similarly, if the
broker is the primary source of information about the loan then it may be
difficult for a lender to distance itself from information, provided by the
broker.56
It might further be argued that attempts by a lender to disclaim responsibility
for fraud by a broker may be void as an unfair term under s 32W of the Fair
Trading Act (Vic). This legislation does not apply to contracts regulated by the
UCCC but might apply to credit contracts outside such legislation. Of
relevance is, s 32X(g) provides that a term which has the object or effect of
‘limiting the consumer’s right to sue’ may be unfair because of that fact.
CONCLUSION
17
The cases of broker fraud raise the need for care on the part of lenders who
rely on brokers to facilitate loan transactions. Broker fraud may lead a lender
into a transaction that is significantly more risky than the lender originally
realised in a financial sense and also possibly in a legal sense. Generally, a
lender will not have any knowledge of the broker fraud so as to be tainted by
that conduct. However, in some cases there may be sufficient information in
the documents provided to a lender by the broker or borrower to implicate
the lender in the wrongdoing. Lenders may therefore be well-advised to
develop procedures for monitoring broker facilitated transactions and
verifying the information presented in relation to such dealings. There is also
clearly a case for stronger regulation to protect borrowers in their dealings
with brokers. However, the inexperience of borrowers who may use the
services of brokers suggests that they may not be in a good position to
monitor the conduct of brokers to ensure compliance with regulatory
requirements. Legislative incentives, should also be provided to lenders
engage in this process of monitoring.
1
Dr Jeannie Marie Paterson, Senior Lecturer, Faculty of Law, Monash University.
The funding for this project was provided from the Consumer Credit Fund on the approval of
the Minister for Consumer Affairs. Research assistance was provided by Alice Zhang and
Sarah Mauriks. The author wishes to thank for their contributions the Consumer Law Action
Centre, solicitors at Consumer Affairs Victoria, participants at the Monash Centre for
Regulatory Studies Consumer Research Breakfast and the delegates at the Credit Law
Conference 2007. All errors remain the author’s own
2
The Ministerial Council on Consumer Affairs, National Finance Broking Legislation Regulatory
Impact Statement (2004) p 7 reports that, while there are no precise figures on the value of
loans facilitated by brokers, in 2003 brokers were said to account for account for 23% of home
loans with banks, credit unions and building societies ($76 billion) in the Australian
Prudential Regulation Authority (APRA), Report on Broker Originated Lending (2003). The
Australian Government Treasury, Financial Services and Credit Reform (Green Paper, 2008) p 3
18
cites a report titled ‘Australian Mortgage Industry — Volume 7’ published by Fujitsu and
JPMorgan in March 2008 stating that the proportion of broker originated home loans has
risen to above 37 per cent in 2007.
Ministerial Council on Consumer Affairs, National Finance Broking Scheme Consultation
3
Package (2007) p 5.
See the House Standing Committee on Economics, Finance and Public Administration,
4
Inquiry into Home Loan Practices and Processes (2007) ch 4.
In most Australian states, consumers may engage the services of a broker without being
5
aware of the qualifications of the broker, the fee charged by the broker the commission
offered to the broker or the range of financial products surveyed by the broker before making
a recommendation: see the Ministerial Council on Consumer Affairs, National Finance Broking
Legislation Regulatory Impact Statement (2004) pp 26-29.
6
Current proposals for reform include prescribed educational standards, requiring brokers to
provide more information about their services and requiring brokers to have a reasonable
basis for any credit recommendation. See further the Ministerial Council on Consumer
Affairs, National Finance Broking Scheme Consultation Package (2007).
7.
Most brokers are paid a commission by the lender based on the value, and in some cases,
the number of loans placed with the lender: The Ministerial Council on Consumer Affairs,
National Finance Broking Legislation Regulatory Impact Statement (2004) p 11.
8
The Ministerial Council on Consumer Affairs, National Finance Broking Legislation Regulatory
Impact Statement (2004) pp 20-1. See also the Australian Government Treasury, Financial
Services and Credit Reform (Green Paper, 2008) p 6 reporting that ‘there has been evidence in
the United States that increased broker commissions for selling sub-prime loans played a role
in the recent sub-prime crisis’.
9
Fraud in the equitable sense is not confined to deceit but may include ‘victimisation which
can consist either of the active extortion of a benefit or the passive acceptance of a benefit in
unconscionable circumstances’: Hart v O’Connor [1985] AC 1000, 1024 per Lord Brightman.
10
See eg Commissioner for Fair Trading v Rowland Thomas & Ors [2004] NSWSC 479; Australian
Securities and Investments Commission v Skeers [2007] FCA 1551.
11
See eg Perpetual Trustees Victoria Limited v Ford [2008] NSWSC 29.
12
See Neuendorf v Rengay Nominees P/L & Anor [2003] VCAT 1732; Benjamin v Ashikian [2007]
NSWSC 735.
19
13
See Permanent Mortgages Pty Ltd v Michael Robert Cook and Karen Cook [2006] NSWSC 1104;
Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 4.
14
R Foreman, ‘Subprime mortgage crisis: a legal perspective’ (2007) 45 Law Society Journal 55.
15
Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd (2001) 50 NSWLR 679, 696-
98 (Handley JA), not affected on this point by the decision of the High Court (2003) 214 CLR
514.
16
See further below.
17
See eg Octapon Pty Ltd v Esanda Finance Corporation Ltd (unreported, NSW Supreme Court, 3
February 1989, 27-8 (Coles J); Custom Credit Corporation Ltd v Lynch [1993] 2 VR 469; Esanda
Finance Corporation Ltd v Spence Financial Group Pty Ltd [2006] WASC 177; Perpetual Trustees
Victoria Limited v Ford [2008] NSWSC 29.
Similarly, a dealer of cars or equipment has been held not to be the general agent of a hire
purchase company: see eg Branwhite v Worcester Works Finance Ltd [1969] 1 AC 552, 577-578
(Lord Upjohn); Morelend Finance v Westendorp [1993] 2 VR 284; Custom Credit Corporation Ltd v
Lynch [1993] 2 VR 469.
18
David Benson Nominees Pty Ltd v Dicksons Ltd and Anor [2005] SASC 97.
Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, 463 (Gleeson CJ, Gummow, Hayne,
Callinan and Heydon JJ). Also Crabtree Vickers (1975) 133 CLR 72; Flexirent Capital Pty Ltd v
EBS Consulting Pty Ltd [2007] VSC 158.
19
20
Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, 463 (Gleeson CJ, Gummow, Hayne,
Callinan and Heydon JJ).
21
Freeman and Lockyer (a firm) v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, 505 per
Diplock LJ
22
Crabtree Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975)
133 CLR 72, 78 (Gibbs, Mason and Jacobs JJ).
23
Flexirent Capital Pty Ltd v EBS Consulting Pty Ltd [2007] VSC 158, [203] per Whelan J.
Branwhite v Worcester Works Finance Ltd [1969] 1 AC 552, 573, 587 per Willmer, Danckwerts
and Russell L.JJ.
24
25
26
(1986) 160 CLR 226, 234 per Gibbs CJ, Mason, Wilson, Brennan and Dawson JJ.
Octapon Pty Ltd v Esanda Finance Corporation Ltd (unreported, NSW Supreme Court, 3
February 1989, 27-8 per Cole J); Custom Credit Corporation Ltd v Lynch [1993] 2 VR 469.
27
Branwhite v Worcester Works Finance Ltd [1969] 1 AC 552, 575 587 per Willmer, Danckwerts
and Russell L.JJ.; Custom Credit Corporation Ltd v Lynch [1993] 2 VR 469; NMFM Property Pty
20
Ltd and Ors v Citibank Ltd (No 10) (2000) 107 FCR 270, 396; Perpetual Trustees Victoria Limited v
Ford [2008] NSWSC 29.
28
Branwhite v Worcester Works Finance Ltd [1969] 1 AC 552, 575 (Willmer, Danckwers and
Russell L.JJ_; Custom Credit Corporation Ltd v Lynch [1993] 2 VR 469.
29
Steele-Smith v Liberty Financial Pty Ltd [2005] NSWSC 398, [104] (Palmer J).
30
[1994] CCLR 87.
31
[1994] CCLR 87.
32
Commercial Bank of Australia v Amadio (1983) 151 CLR 447, 474 per Deane J.
33
See further G Pearson, ‘The ambit of unconscionable conduct in relation to Financial
Services’ (2005) 23 Companies and Securities Law Journal 105.
34
Commercial Bank of Australia v Amadio (1983) 151 CLR 447, 474 per Deane J.
35
Australian Competition and Consumer Commission v Radio Rentals Limited [2005] FCA 1133,
[21] (Finn J).
36
Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, 467 (Deane J). See also
Australian Competition and Consumer Commission v Radio Rentals Limited [2005] FCA 1133, [18]
(Finn J).
37
See further Anthony Duggan, ‘Undue Influence’ in Patrick Parkinson, The Principles of
Equity (2nd ed, 2003); Rick Bigwood, ‘Undue Influence in the House of Lords: Principles and
Proof’ (2002) 65 Modern Law Review 435.
38
Bank of New South Wales v Rogers (1941) 65 CLR 42; Royal Bank of Scotland v Etridge (no 2)
[2002] 2 AC 773.
39
[2008] NSWSC 29 (‘Ford’).
40
Cf Steele-Smith v Liberty Financial Pty Ltd [2005] NSWSC 398.
41
[2008] NSWSC 29 [92] (Harrison J).
42
[2008] NSWSC 29 [95].
43
On the issues raised by asset based lending and unconscionable conduct, see further
Research Paper 3.
44
[2002] NSWCA 413.
45
[2002] NSWCA 413, [56] (Beazley JA).
46
[2002] NSWCA 413, [59] (Beazley JA).
21
47
[2008] NSWSC 29 [86].
48
[2008] NSWSC 29 [92].
49
Anthony Duggan and Elizabeth Lanyon, Consumer Credit Law (1999) p 339, [9.2.7].
50
West v AGC (Advances) Ltd (1986) 5 NSWLR 610; Antonovic v Volker (1986) 7 NSWLR 151;
Beneficial Finance Corp Ltd v Karavas (1991) 23 NSWLR 256, 277 (Meagher JA); St George Bank
Ltd v Trimarchi [2004] NSWCA 120, [36] (Mason P); Perpetual Trustee Co Ltd v Khoshaba [2006]
NSWCA 41, [117] - [119] (Basten JA).
51
Custom Credit Corporation Ltd v Lupi [1992] 1 VR 99; Morlend Finance Corporation (Vic) Pty Ltd
v Westendorp [1993] 2 VR 284; Custom Credit Corporation Ltd v Lynch [1993] 2 VR 469.
52
53
Anthony Duggan and Elizabeth Lanyon, Consumer Credit Law (1999) p 340, [9.2.7].
Collier v Morelend Finance (Vic) Corporation Pty Ltd (1989) ASC 55-716; Beneficial Finance
Corporation Ltd v Karavas (1991) 23 NSWLR 256; Nguyen v Taylor (1992) 27 NSWLR 48;
Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41, [77], [119].
54
Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41, [77] (Spigelman CJ) and [119] (Basten
JA); Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413.
55
[2008] NSWSC 29 [102].
56
See also Bowler v Hilda Pty Ltd (1998) 153 ALR 95, 109.
22