Capital Securities (Aust) Pty Ltd v Perpetual Trustees Vic Ltd
[2009] VSCA 259
•22 October 2009
SUPREME COURT OF VICTORIA
COURT OF APPEAL
No 3717 of 2009
| CAPITAL SECURITIES (AUST) PTY LTD | |
| Appellant | |
| v | |
| PERPETUAL TRUSTEES VIC LTD | First Respondent |
| - and - | |
| CHALLENGER MORTGAGE MANAGEMENT PTY LTD | Second Respondent |
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JUDGES: | BUCHANAN and MANDIE JJA and BYRNE AJA | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 21 October 2009 | |
DATE OF JUDGMENT: | 22 October 2009 | |
MEDIUM NEUTRAL CITATION: | [2009] VSCA 259 | |
JUDGMENT APPEALED FROM: | [2009] VCC 34 (Judge Kennedy) | |
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NEGLIGENCE – Agreement between lender and ‘loan originator’ – Fraud of agent of loan originator – Whether such fraud caused or materially contributed to lender’s loss under loan agreement – Whether lender indemnified under terms of loan origination agreement – Whether negligence of conveyancing solicitors broke the chain of causation or constituted a novus actus interveniens.
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| APPEARANCES: | Counsel | Solicitors |
| For the Appellant | Mr S M Anderson SC with Mr A T Schlicht | Simon Nixon |
| For the Respondents | Mr P J Riordan SC with Mr D V Aghion | Phillips Fox |
BUCHANAN JA:
I will ask Justice Byrne to deliver the first judgment.
BYRNE AJA:
On or about 3 September 2004, the first-named respondent, Perpetual Trustees Victoria Limited ('Perpetual') executed a loan agreement which named as borrowers Huseyin Soyturk, his wife Fikriye Soyturk, their son Cengiz Soyturk and his wife Sureyya Soyturk. The amount to be lent was $220,500. The security offered was a first mortgage over property situated at and known as 40 Ferris Avenue, Deer Park, then standing in the joint names of Huseyin and Fikriye The business was introduced to Perpetual by the appellant, Capital Securities (Australia) Pty Ltd ('Capital'). The loan application was prepared by Michael Ostojic, an agent of Capital, on 2 June 2004 and forwarded on 7 July 2004, and it was formally approved on 12 July 2004, subject to certain conditions, which included a requirement that the security property stand in the names of the four borrowers.
For the conveyancing work associated with the loan, Perpetual engaged as solicitors First Title City West. In August First Title received the various documents which it required to settle the loan on 3 September 2004. These included the certificate of title to the property and a transfer from the two registered proprietors. The transferors were Huseyin and Fikriye as joint proprietors of 19 undivided parts or shares and Cengiz and Sureyya as joint proprietors of the remaining part or share, all as tenants in common. The document was prepared by a firm of solicitors apparently acting for the borrowers and the execution clauses show that Cengiz signed twice, once as transferee and once as attorney of his mother, Fikriye, pursuant to a power of attorney dated 1 May 2004. The power of attorney, which was prepared by another solicitor, appears to have been executed by Fikriye in the presence of two witnesses, Mr Ostojic and one Tony Calvarero. Another document produced for settlement was an undated direction and authority as to the payment of the balance of the advance after deduction of expenses. This document seems to have been executed in the same way as the transfer; that is, it is signed by Huseyin, Cengiz and Sureyya and by Cengiz under power of attorney for Fikriye.
The funds were to be deposited in an account with the Commonwealth Bank at Ivanhoe standing in the name of 'Trustee for the Soyturk Family Trust trading as Genco Holdings'. The instruction was later changed. On 2 September 2004, Capital instructed First Title to send the surplus by telegraphic transfer to an account at Westpac Bank, St Albans, standing in the name of Sureyya. On 1 September 2004, First Title submitted to the appellants a document called a settlement confirmation, as required by their internal procedures. In this document, First Title confirmed that the title to the security property was good and marketable, and that all security documents including a mortgage had been properly signed and were in order.
Following settlement, the Registrar of Titles issued a requisition on 15 September 2004 drawing attention to the fact that the transferee, Cengiz, was also the attorney for one of the transferors. She stopped the transaction and required a certificate from a current practitioner attesting the propriety of the transaction on behalf of Fikriye. This certificate was not provided and the dealing was withdrawn on 12 November 2004, as was the mortgage which depended upon it. Furthermore, the first interest payment due on 1 October 2004 was dishonoured. No further payments were made, so that by 8 March 2007, when the County Court proceeding was commenced, the indebtedness of the borrowers stood at $282,287.22, the amount sought by way of damages in the proceeding.
In due course, it was established that the loan application, the transfer, the mortgage, the direction and authority document and the loan agreement itself were in fact not signed by Huseyin. Furthermore, the power of attorney was not in fact signed by Fikriye and the execution of the above documents by her son, Cengiz, was not authorised. Moreover, Mr Ostojic had falsely witnessed the execution in the name of Huseyin of the transfer, the mortgage, the loan agreement and a declaration of purchase which accompanied the loan agreement. He also falsely witnessed the execution of Fikriye's power of attorney.
The plaintiffs in the litigation are the lender, Perpetual, and Challenger Mortgage Management Pty Ltd, formerly called Interstar Securities Australia Pty Ltd ('Interstar'), which assisted Perpetual in processing loan applications. The defendant and the present appellant, Capital, was described as an originator and servicer in respect of Perpetual mortgage-backed securities program. Mr Ostojic was alleged to have been an employee of Capital at all material times. This was denied by Capital, but it was conceded at trial that he was its agent.
The function of Capital was, in general terms, that of submitting loan applications to Interstar for the grant of finance by Perpetual and the provision of various services associated with this. It is described in the schedule to the loan agreement as the borrowers' mortgage manager. Capital performed these functions under an agreement with Interstar dated 4 October 2003, called a Loan Origination and Management Agreement. The respondents' causes of action depended upon Capital's obligation to indemnify them under the provisions of this loan origination agreement. It is convenient that I here set out the relevant provisions of the loan origination agreement. It uses the expression 'originator's representative' and defines this as including officers, employees and agents of Capital. Mr Ostojic therefore was an Originator's representative. The agreement sets out the role of the Originator in cll 4 and 5:
4. Applications
4.1From time to time, the Originator may submit an Application to Interstar for the consideration of Interstar. The Originator shall also provide to Interstar such further information in relation to an Application as may be required by Interstar.
4.2Interstar may, in its absolute discretion, accept or reject any Application from the Originator.
5.Origination and servicing loans
5.1The Originator agrees that, in the process of originating proposed Loans, the Originator will:
(a)submit Applications to Interstar;
(b)carry out credit checks of Applicants through an approved credit bureau;
(c)provide Applicants with written correspondence setting out the proposed terms of a Loan;
(d)arrange for the valuation of any Property which has been offered as security for a Loan;
(e)do such other things as agreed from time to time between Interstar and the Originator; and
(f)generally market and promote the loan products provided by Interstar.
5.2In relation to a Settled Loan, the Originator shall, unless otherwise directed by Interstar:
(a)continue to liaise with Borrowers in relation to Settled Loans;
(b)where appropriate, answer any queries raised by Borrowers in relation to Settled Loans or refer those queries to Interstar;
(c)in accordance with the directions of Interstar, contact Obligors in relation to arrears owing under a Loan (or any other default) and liaise with Interstar in relation to those arrears or defaults; and
(d)generally manage and service Settled Loans in accordance with the Manual or as otherwise reasonably directed by Interstar.
The indemnity provision upon which the claim against Capital depends is Clause 18.1. It reads (in part):
18.1The Originator agrees to indemnify and keep indemnified Interstar and the Trustee from and against any damages, losses, outgoings, costs, charges or expenses suffered or incurred by Interstar or the Trustee directly or indirectly in respect of:
(a)any breach of the Originator’s obligations, warranties, representations and covenants under this Agreement or the Manual or any error, omission or misrepresentation whether innocent or fraudulent by the Originator or the Originator’s Representatives;
…
(c)any Settled Loan where an insurer fails to indemnify (or gives notice to any person of its intention to deny liability, either wholly or in part, to indemnify) any Obligor and/or the Trustee under an Insurance Contract where a claim is or may be made under an Insurance Contract and such failure to indemnify results either in whole or in part from any fraud, negligence, misrepresentation, act, omission or default of the Originator or the Originator’s Representatives;
…
(e)the provision of any incomplete or inaccurate Applicant Data…
The case of Perpetual and Interstar was that the loss of the sum advanced was suffered or incurred by Interstar or Perpetual, directly or indirectly, in respect of the following false representations of Mr Ostojic:
(1)That Fikriye Soyturk, Huseyin Soyturk, Sureyya Soyturk and the said Cengiz Soyturk were joint applicants for a loan;
(2)that a transfer of land enabling Sureyya and Cengiz Soyturk to be registered as joint proprietors on the certificate of title to the property at 46 Ferris Avenue, Deer Park was lawfully executed by or on behalf of Fikriye Soyturk and Huseyin Soyturk as transferors;
(3)that the certificate of title to 46 Ferris Avenue, Deer Park, was provided as security for the loan with the knowledge of Fikriye and Huseyin Soyturk; and
(4)that the loan application dated 2 June 2004 contained genuine signatures of Fikriye Soyturk and Huseyin Soyturk.
The judge's findings that these representations were in fact made and that they were false and dishonestly false were not challenged before us. Her Honour defined the issue in the proceeding as follows:
(a)Whether or not Clause 18.1(a) operates in relation to the fraudulent misrepresentations; and
(b)whether or not the plaintiffs' loss was caused by the making of the representations.
She concluded that Clause 18.1(a) did operate and, further, that causation was established.
Upon the appeal, all grounds other than grounds 1, 5, 6 and 11 were abandoned. The remaining grounds concern the second issue identified by her Honour, which was the principal area of controversy at the trial. What was contended was that the loss to Perpetual was not caused by the misrepresentations, and that the failure by First Title to detect the problem with the execution of the transfer and its consequent negligent certification broke the chain of causation.
The question of causation arises in the application of the indemnity provision of Clause 18.1. Stripped of irrelevant parts, the indemnity given is one 'against any loss suffered by Interstar or Perpetual directly or indirectly in respect of any misrepresentation by the originator's representatives'. Her Honour considered the causation question first as if it were a question of loss suffered at common law by a wrongful act. She concluded, on the authority of cases such as March v E & MH Stramare Pty Ltd[1] that the question was whether the wrongful acts of Capital's agent caused or materially contributed to the loss. In the context of a break in causation, she stated the principle in these terms:
The causal link between breach and loss can be severed by an act or event subsequent to and independent of the breach. However the intervening act must be potent enough to ‘break the chain of causation’ so that it can be treated in a practical sense as the sole cause of the damage. Further, it makes no sense to regard the negligence of the plaintiffs or a third party as a superseding cause or novus actus interveniens when the defendant’s wrongful conduct has generated the very risk of injury resulting from the negligence of the plaintiffs or third party and that injury occurs in the ordinary course of things.[2]
No criticism was directed to her Honour's statements of these principles, and, with respect, I agree with her exposition of the law. The grounds of appeal are directed to her application of these principles to the facts as her Honour found them.
[1](1991) 171 CLR 506.
[2][2009] VCC 0034, [76].
Reliance was placed on the evidence of Jack Maurice Bock, a solicitor with considerable experience in mortgage and conveyancing. The evidence of Mr Bock showed that First Title ought to have been aware that the documentation supplied to it, and whose sufficiency it confirmed in its settlement confirmation, was inadequate. It was not that the solicitor ought to have detected the fraud; it should have taken
various steps required of a prudent solicitor and which were required under the Perpetual procedures manual. In particular, it ought to have called for a solicitor's certificate in the form later required by the Office of Titles and should not have certified that the matter was proper for settlement until that had been provided. Had it done so, the money would not have been advanced until a solicitor's certificate was provided, and such a certificate would not have been provided, so that the loss therefore would have been averted. I pass over the possibility that, upon such a request, a solicitor enquiring of Fikriye may have been satisfied by her that she approved the transaction, or that the fraudsters might have procured a certificate which satisfied First Title.
Accepting that the transaction would not have settled but for First Title's negligence, the question then remains whether this breach of duty by the lender's solicitor was an event potent enough to break the chain of causation. The Judge in her reasons set out Mr Bock's criticisms of the conduct of First Title with respect to the execution of the transfer and also in terms of the breaches of the Perpetual operating procedures. She proceeded on the basis that the solicitor's negligent conduct had occurred and concluded that, even so, the chain of causation between the misrepresentations of Capital’s agent, Mr Ostojic, and Perpetual's loss was not broken.
In my opinion, this has not been demonstrated to have been an erroneous conclusion. As her Honour pointed out, the deliberate fraudulent acts of Capital's agent were intended to produce such a loss, presumably in the expectation that by some neglect or otherwise the fraud would not be detected.
Her Honour also observed, correctly in my view, that the conduct of Capital's agent continued at least up to the moment when the advances were made. In so far as the sequence of events was a relevant consideration, it may be that the failure of Cengiz to repent of the wrongdoing of himself and Mr Ostojic until that time ensured that this conduct remained the operative cause of the loss of Perpetual.
I mention in conclusion that there is much to be said for the proposition that the contractual indemnity given under Clause 18.1 imposed a less onerous causation requirement than that at common law for the causal nexus between a tortious act and resulting loss. The appeal, however, was conducted on the basis that causation at common law was satisfied and that the less severe contractual provision would not have produced a different result.
I would dismiss the appeal.
BUCHANAN JA:
I agree.
MANDIE JA:
I agree with Byrne AJA.
I consider that the trial judge correctly applied the legal principles to the facts in this case and that the reasons stated by the judge for doing so were also correct.
To adapt what was said by Mason CJ in March v Stramare to the facts of this case, as a matter of both logic and common sense, it makes no sense to regard the negligence of First Title as a superseding cause, or novus actus interveniens, when the appellant’s representative's fraud has generated the very risk of injury resulting from the negligence of First Title and that injury occurred in the ordinary course of things. In such situation, the appellant’s representative's fraud satisfies the 'but for' test and is properly to be regarded as a cause of the consequence because there is no reason in common sense, logic or policy for refusing to so regard it.
I think that it offends common sense to say that the appellant’s representative's fraud did not cause the loss in this case, and even more so, it lacks any sense to say that such fraud did not materially contribute to the loss.
The appeal should be dismissed.
BUCHANAN JA:
The order of the Court is that the appeal is dismissed.
The respondent has proffered minutes of proposed orders, most of which are agreed or not opposed. There is, though, opposition to the claim by the respondent for a special order as to costs. The first basis upon which that claim is made is that it was a term of the contract in Clause 18.2 that the mortgagor would pay the mortgagee's costs on a solicitor and own client basis.
We are reluctant to make an order on that basis because, quite apart from the fact that it might be contended that costs are in the control of the Court rather than the parties, the matter was not pleaded below. Accordingly, we have been deprived of any determination at the trial level as to whether or not that clause of the agreement applies, and we do not think it appropriate that the matter be raised for the first time on appeal.
As to indemnity costs, we do not think that the appeal was so hopeless that the appellant should be visited with the consequences of a special order for costs.
Accordingly, the Court will order that the appellant is to pay the respondent's costs of the appeal taxed as between party and party.
The other orders that the Court will make are:
1. The appeal be dismissed.
2.Of the moneys paid by the appellant to the solicitors for the respondents held by them in trust on account of the judgment below, the following sums be released to the respondent:
2.1$282,287.22 being the judgment sum.
2.2$46,957.44 being interest ordered by the trial judge on 19 February 2009.
2.3$14,800.69 being interest at the penalty interest rate from 20 February 2009 to 22 October 2009, with any balance to be held by the solicitors for the respondents on account and in partial satisfaction of any entitlement of the respondents to costs of the trial or of the appeal.
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