Australia: Lender responsible for unconscionable conduct of intermediaries

In Perpetual Trustees Victoria Ltd v Burns [2015] WASC 234, the Court considered the enforceability of loans granted by a lender through intermediaries in circumstances of unconscionable conduct.

BACKGROUND

The plaintiff lent the defendants, each on a disability pension, over $840,000 in a series of six "low doc" loans used to purchase a number of properties over a period of several years.

Both defendants had significant disabilities and it was contentious whether either defendant fully appreciated and understood the nature of the security arrangements and documentation they had entered into.

Various intermediaries assisted the defendants in applying for and obtaining their loans. The agreements between the intermediaries and the plaintiff purported to deny the existence of any "agency" type arrangement.

By April 2011, the defendants had defaulted and the plaintiff sought an order that the defendants give vacant possession of their Armadale property, being their residence and only significant asset.

Alternatively, the plaintiff sought an order that the defendants pay an amount of approximately $267,000 plus interest for money had and received and/or as restitution for unjust enrichment.

Amongst other things, the defendants counterclaimed for a declaration that the mortgage and its associated loan were void and unenforceable. Further, the defendants sought an order that the mortgage over the Armadale property be discharged by the plaintiff.

DECISION

Justice Heenan dismissed the plaintiff's claim for possession of the Armadale property, holding that a form of limited agency or authority existed between the plaintiff and the intermediaries. His Honour found that the intermediaries had express authority to evaluate and consider mortgage applications and to administer the criteria for "low doc" loans on the plaintiff's behalf.

Although the terms of the contracts between the plaintiff and the intermediaries denied the existence of an agency relationship, Justice Heenan focused on the substance, rather than the form of the arrangements and held that the private instructions from the plaintiff to its intermediaries were not effective in renouncing an agency relationship.

The defendants, through their previous dealings with the intermediaries and previous loan history with the plaintiff, understood that by dealing with the intermediaries they were dealing with representatives of the plaintiff.

Having established that an agency relationship existed, Justice Heenan went on to hold that the plaintiff, through its intermediaries, had acted unconscionably. His Honour said:

"[t]he knowledge of [the intermediaries] meant that the extent of the [defendants] disabilities, both physical and financial, were known to the plaintiff which, also, had at its disposal details of all the earlier loans then outstanding and aggregating $844,200, bearing interest at 9.97%, with an aggregate monthly interest bill on all loans of $6,380, well in excess of any rent which the [defendants] could expect to derive from the properties and when they had no other source of income save for their pensions."

Justice Heenan ordered that the mortgage and loan agreement be set aside and sought to return the parties to their original positions.

Accordingly, the defendants were ordered to pay restitution to the plaintiff for the original principal advanced under the loan for the Armadale property, plus simple interest calculated at the Reserve Bank of Australia cash rate (being significantly less than the interest rate under the "low doc" loans) as a debt due and payable, but unsecured.

Justice Heenan also ordered that interest and costs paid under the earlier loans (which had already been paid out) be payable as restitution by the plaintiff to the defendants. This amount could be offset against the debt owed to the plaintiff in respect of the Armadale property.

COMMENT

This decision demonstrates that lenders remain responsible for the actions of intermediaries, even where an agency relationship is expressly denied.

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