Plaintiff v Defendant

MORTGAGE - Loan contracts and mortgages - Low Doc loans - Borrower persuaded to sign completed loan application forms - Loans approved on false financial information without knowledge of borrower.

PRINCIPAL AND AGENT - Whether finance broker agent of mortgage originator - Whether mortgage originator agent of trustee - Whether broker acting for borrower or lender - True nature of relationship - Conduct of business by mortgage originator - Implied agency - Scope of authority of mortgage originator.

TORT - Duty of care - Negligence - Whether duty owed by mortgage originator to borrower - Whether contributory negligence available to finding of unconscionable conduct.

1 Manfred Schmidt, a retired printer, was induced by a conman, Mr Ian Maddocks ("Maddocks"), to invest in property developments in Myola Street, Carrum. Maddocks was ultimately gaoled; the investments were worthless. Mr Schmidt lost over $200,000 as a result of Maddocks' activities.

2 In May 2004, in order to finance his investments, Mr Schmidt obtained a loan from Perpetual Trustees Australia Limited ("Perpetual"), secured by a mortgage over his home. Although the loan was originally for the sum of $190,000, now, five years later, there is nearly $450,000 owing on it.

3 Perpetual had nothing to do with the loan other than providing the funds. In addition to Maddocks, there were three other intermediaries involved in arranging Mr Schmidt's loan: Macquarie Securitisation Limited ("MSL"), Violet Home Loans Australia Pty Ltd ("VHLA") and Medallion Finance Concepts Pty Ltd ("Medallion").

4 Mr Schmidt accepts that he signed the loan documents (which contained many false details) and the mortgage; however he asserts in his counterclaim that VHLA was Perpetual's agent and Perpetual is therefore liable for VHLA's conduct. He argues that VHLA, the loan facilitator, acted unconscionably in procuring and submitting the loan and therefore his repayment to Perpetual should be limited. He also says that VHLA breached the duty of care it owed to him. Finally he contends that VHLA acted in breach of s 52 of the Trade Practices Act 1974 (Cth) ("TPA").

5 Perpetual denies that VHLA was its agent. It relies primarily upon the terms of the Mortgage Origination Agreement ("MOA") between itself, VHLA and MSL. At a secondary level, it argues that Mr Schmidt has not made out any of the arguable causes of action against VHLA.

6 Perpetual joined Violet Home Loans Pty Ltd ("VHL") as a third party to Mr Schmidt's counterclaim. Perpetual asserts that, pursuant to a deed of novation ("the novation deed") entered into between VHL and Perpetual in July 2007, VHL is liable for any default or breach of agreement on the part of VHLA. In the event that Mr Schmidt is successful in his counterclaim, then Perpetual contends that it is entitled to recover any consequential loss from VHL.

7 There is no issue about the level of Mr Schmidt's indebtedness under the loan agreement. In the event of Mr Schmidt's counterclaim failing, he is liable to repay approximately $450,000 and Perpetual is entitled to possession of the property.[1]

8 Mr Schmidt's counterclaim, in combination with the third party proceeding by Perpetual against VHL, raises the following issues:

(a) Whether Medallion was the agent of VHLA in its dealings with Mr Schmidt's loan application and the provision of finance by Perpetual.

(b) Whether VHLA was the agent of Perpetual in its dealings with Mr Schmidt's loan application and the provision of finance. If so, was it acting within the scope of its agency.

(c) Whether VHLA owed a duty of care to Mr Schmidt in its dealings with him. If so, did it breach that duty.

(d) Whether Medallion (if agent of VHLA) and/or VHLA acted unconscionably, in breach of the provisions of the TPA and of the Australian Securities and Investments Commission Act 2001 (Cth) ("ASICA") or the general law, in its dealings with Mr Schmidt. [2]

(e) Whether VHLA's conduct was misleading and/or deceptive, in breach of s 52 of the TPA.

(f) If Perpetual is liable, then whether it is open to Perpetual to defeat or apportion Mr Schmidt's claim on the basis of his contributory negligence.

(g) If Perpetual is liable for VHLA's conduct then is it entitled to an indemnity from VHL (joined by Perpetual as a third party), the corporate successor to VHLA.

9 Mr Schmidt is now 70 years of age. After migrating from Austria to Australia, he worked as a printer and retired in 1999. In 2004, he resided alone at his home at Robin Court, Carrum and was in receipt of Commonwealth Centrelink benefits.

10 Maddocks was a self-styled financial adviser. He operated businesses called "Members Benefit Mortgage Assist" and "Asset Equity Group" in Melbourne. Their purported aim was to establish property syndicates which would purchase and develop land, particularly in the bayside area.

11 Medallion was a finance broker. It must have had an association with Maddocks. One of its employees was a Mr Andrew Paranavitana. No direct evidence was led as to its operations, other than that it was an "accredited broker" with VHLA and had an agreement with VHLA in relation to the distribution of its financial products.

12 VHLA operated the Violet Home Loans business and was known in the finance trade as a mortgage originator; it is described in the MOA as a mortgage manager. It operated from premises in William Street, Melbourne. Its two directors, Mr John Mingos and Mr John Hendricks, managed the business. In August 2003, it entered into the MOA with Perpetual and MSL which gave it access to a fund known as the "Puma fund". It had no shopfront operations. Its business came from finance brokers such as Medallion and in 2004, it had agreements with over 100 "accredited" finance brokers. Subsequently, it ran into financial difficulties and was wound up.

13 VHL was, in effect, the corporate successor of VHLA. In late September 2004, Mr Hendricks resigned as a director of VHLA, leaving Mr Mingos as its sole director. In 2006 VHL became the corporate vehicle for the Violet Home Loans business. Pursuant to a deed of novation with MSL and Perpetual, on 20 July 2007, VHL took over VHLA's arrangement with Perpetual and was given the right to receive VHLA's trailing commissions for business written prior to its winding up.[3]

14 MSL operates out of Sydney and was the programme manager of the Puma Fund. Ms Rosemary D'Lambert was in charge of the programme and its relationship with mortgage managers such as VHLA. In practice, MSL had the day-to-day conduct of the management of the fund. For the purpose of Mr Schmidt's loan, it was MSL which ultimately determined loan approval or rejection. It also carried out a number of management tasks in relation to the loan once it had been approved.

15 Perpetual provided the funds as the trustee and custodian of the Puma Fund. It appointed MSL to manage the fund. It authorised the release of monies to the borrower. It had no role in the procurement of the borrower's business or the approval of the loan, however the loan contract was entered into between Perpetual and Mr Schmidt.

16 The course of the trial was interrupted by changes in position of each of the parties, which resulted in a number of amendments to the pleadings and necessitated one quite lengthy adjournment of the trial. On 11 November, in the course of submissions, I permitted the filing of a further defence and counterclaim on behalf of Mr Schmidt to which a reply and amended defence was filed on 24 November 2009.

17 At the trial, VHLA and Perpetual made common cause in contending that there was no breach of duty, misleading or deceptive conduct or unconscionable conduct on the part of VHLA. Each also denied that Medallion was the agent of VHLA or that VHLA was the agent of Perpetual. The only matter of dispute between these two parties (which surfaced during the trial but not in VHL's submissions) was whether Perpetual or MSL condoned and/or authorised VHLA to ignore a provision in the MOA that required it to interview loan applicants. This is an issue of some significance if VHLA is found to be the agent of Perpetual.

18 Perpetual called two witnesses: Ms Amanda Sherwood, a litigation specialist employed by MSL,[4] who, essentially, gave evidence to establish the formalities of the loan and mortgage. She had no knowledge of the relationship between Perpetual, MSL and VHLA. Ms Rosemary D'Lambert, also of MSL and the head of wholesale mortgages of the Puma Programme at the relevant time,[5] gave evidence of the relationship between Perpetual, MSL and VHLA. She was involved in negotiations with VHLA prior to the MOA being finalised.

19 Mr Schmidt was the only person called on his behalf.

20 VHL called four witnesses: its director, Mr Mingos, and three former VHLA employees, Ms Alana Holloway, Mr Martin Rae and Mr Raymond Bartlett. Mr Rae and Ms Holloway each gave evidence concerning the processing of loan applications and VHLA's relationship with MSL, Perpetual and Medallion. Neither had been involved in handling Mr Schmidt's loan application. Mr Mingos, who also had no direct knowledge of Mr Schmidt's loan application, gave evidence relevant to VHLA's dealings with Perpetual, Macquarie and Medallion.

21 On 15 August 2003, Perpetual, MSL and VHLA entered into the MOA[6] which described Perpetual as the trustee and custodian of the Puma fund.

22 In July 2003 MSL published a large loose leaf folder entitled "Puma Programme Parameters" ("the parameters") [7] which is referred to in the MOA and part of which sets out the criteria to be applied by the mortgage manager in processing and managing a loan for the Puma programme.

23 On 24 March 2004, Mr Schmidt completed a loan application form[8] ("the loan application") on a VHLA form,[9] as well as a borrower income declaration[10] ("the income declaration") addressed to Perpetual which, with other identity and security documents, formed the basis for the approval of the loan by MSL. The loan, characterised as a "low doc" loan, was ultimately approved.

24 On or about 20 May 2004, Mr Schmidt entered into a loan contract with Perpetual ("the loan contract").[11] VHLA was the nominated mortgage manager, and the loan was for the sum of $190,000. The funds were made available at that time. On the same day, Mr Schmidt executed a mortgage in favour of Perpetual over his Carrum home.[12]

25 The credit limit of $190,000 was fully drawn down by Mr Schmidt in May 2004 and by 2 February 2005, he was in default.[13]

26 On 8 July 2005, the solicitors for Perpetual issued a notice to pay pursuant to s 76 of the Transfer of Land Act 1958.[14]

27 The writ in this proceeding was issued on 14 November 2005 by Perpetual seeking repayment of the loan and possession of Mr Schmidt's home.

28 On 18 June 2009, Maddocks was convicted on seven fraud counts and sentenced to a total effective sentence of five years' imprisonment. A compensation order in favour of Mr Schmidt in the sum of $143,000 was made by a judge of the County Court.[15]

29 Manfred Schmidt was born on 31 December 1939 and was educated in Austria. After finishing primary school, he went to trade school and completed an apprenticeship as a printer. He then undertook national service and, at age 20, came to Australia as part of the assisted migration programme.[16] He worked in various jobs before commencing employment as a printer for Fildes Labels Pty Ltd in Sandringham,[17] where he remained for approximately 28 years, with his retirement in 1999.[18] Since then, he has been in receipt of Commonwealth benefits.

30 Mr Schmidt is able to write and read English, however it is not his preferred language.[19] He has not undertaken any formal education in English.[20]

31 During his time in this State, Mr Schmidt has owned three residential houses and on each occasion completed the loan documentation himself, although whether he understood such documentation is unclear.[21] In the past, he has owned a small parcel of Telstra shares obtained through the TI float, as well as a fund investment, coincidentally, managed by Perpetual.[22] Mr Schmidt agreed that he understood when he signed the mortgage that his home was at risk of being sold.[23]

32 Mr Schmidt purchased his home in Carrum in late 2000 after he and his wife were divorced. It is his only asset of any significance.

33 Mr Schmidt operated a "deeming" account with the Bank of Melbourne (now Westpac) into which his Centrelink pension of approximately $430 per fortnight was deposited.[24] He had, at some time in 2001, arranged a line of credit (known as an "asset builder account")[25] with the Bank of Melbourne up to the sum of $85,000.[26] This was secured by a mortgage of his Carrum home to the bank.[27]

34 Mr Schmidt had, in the past, retained the services of a financial adviser, Mr Huxtable. However, as best I could determine, when he moved to Carrum in 2000 he ceased to seek advice from Mr Huxtable.[28]

35 No evidence was adduced as to the manner in which Medallion conducted its business or as to the details of its dealings with Mr Schmidt. However, there was evidence as to the relationship between Medallion and VHLA.

36 VHLA entered into "referral agreements" with finance brokers such as Medallion. Mr Mingos said that the agreement with Medallion was in a standard form issued by VHLA to its brokers, however he could not locate the executed agreement with Medallion.[29] An agreement said to be in the standard form with another broker was tendered as evidencing the terms of the agreement with Medallion,[30] as was an apparently unexecuted agreement with Medallion.[31] Their terms are close to identical and there was no issue that the following provisions formed part of the executed agreement between the two companies:

• Medallion would perform the services with all due care and skill in the manner required by Violet (3.1). [32]

• Medallion would act lawfully and in accordance with the reasonable directions as set down by Violet from time to time (3.2(g)).

• Medallion would use only advertising and promotional material prepared by or approved by Violet in respect of the services and ensure that any material provided is distributed or displayed by the company or its staff in accordance with the reasonable directions of Violet ("service" was defined to mean all acts and services to be performed by Medallion in relation to the provision of a loan referral service to Violet) (3.2(c)).

• Medallion would use all reasonable endeavours to promote Violet in accordance with its directions in all mediums utilised by Medallion for the purpose of advertising and promotion, including but not limited to advertising boards, periodical publications, newspaper advertising, internet websites and office displays (3.2(d)).

• Violet may provide training sessions for employees, agents and representatives of Medallion to minimise the risk of any of its employees, agents or contractors breaching the consumer credit code. It will also provide general training from time to time to assist Medallion in properly performing its obligations under this agreement (5.1).

• It was acknowledged that Violet has entered into separate agreements with various funders and it was the obligation of Medallion to comply fully with any and all terms and conditions which applied to VHLA in all manners and respects as if Medallion was mentioned in such agreement in place of Violet (7.1).

Under the heading "Adherence to Violet's funder's obligations" -

• It shall be sufficient for the (sic) Violet to supply Medallion with a copy of the relevant term or condition upon which it requires compliance and Medallion shall immediately and expeditiously comply (7.2).

37 Ms Holloway explained in some detail the relationship with Medallion; it was one of over 25 brokers actively engaged by VHLA[33]. A prospective Violet broker completed an application form and was interviewed both at the broker's office and at the VHLA office. An ASIC search was conducted and the broker was required to have professional indemnity insurance in place.[34] The brokers were trained in VHLA processes.[35]

38 Mr Mingos did not know any of the persons employed by Medallion[36] and knew nothing of the VHLA accreditation process as it specifically applied to Medallion. He said that Medallion had introduced a small number of loans to VHLA, approximately five or six.[37] No witnesses were called to explain Medallion's business or its dealings with Maddocks or Mr Schmidt. It is, however, clear from the documentation that Mr Paranavitna was a Medallion lending officer and that it operated out of premises at Chesterville Road, Moorabbin.[38].

39 As I have noted, VHLA did not conduct retail operations itself; rather, it relied on the brokers to attract the business[39] . After sourcing the clients brokers would then submit applications for loans on their behalf to VHLA which had several sources of funds, including the Puma fund.[40]

40 Mr Rae, who worked in the arrears department at VHLA 2004, and Ms Holloway, the operations manager, confirmed Mr Mingos' evidence that there was no direct contact with the potential borrowers - that was undertaken by the brokers.[41]

41 Ms Holloway explained the process as follows: The brokers provided loan applications and accompanying documentation to VHLA which, after perusal and analysis, would be checked, collated and then referred on to the particular fund provider - in this case, to MSL, the programme manager. MSL would then determine whether the loan was approved or rejected.[42] Ms Holloway said that if MSL requested further information to either finalise or proceed with a loan, it would be obtained from the broker and then forwarded back to MSL for resubmission.

42 Ms Holloway described the material provided by the broker as comprising a complete set of information, including the signed application form, and the supporting income documentation. It would then be formatted, placed in the internal IT system and then processed through to MSL.[43]

43 VHLA's responsibility in relation to a loan did not conclude once the loan had been processed and the funds advanced. It continued to receive a trailing commission from Perpetual as long as the loan was not in arrears.[44] It continued to maintain contact with the client to whom it provided regular statements of account. In the event of default VHLA pursued the client.

44 Ms D'Lambert and Ms Sherwood described the operations of MSL in the following terms: MSL staff would not just "rubber stamp" the loan, but would assess it.[45] If satisfied that the lending criteria had been met, it would be approved or, if not, rejected.[46] As part of the process approval from a mortgage insurer was necessary.[47]

45 According to Ms Sherwood MSL acted on behalf of Perpetual in carrying out its functions in examining and approving the loan application.[48]

46 Ms D'Lambert had no knowledge of Mr Schmidt or his application, however she did say that she was surprised to learn that in the period of seven weeks during which the loan was being processed by VHLA and MSL, no-one from either Medallion, the broker, or VHLA had any contact with him.[49]

47 The evidence as to Perpetual's role is scanty. Indeed, this may well be because, as the MOA demonstrates, it has little to do, intentionally I infer, with the day-to-day operation of the Puma fund of which it is the custodian and trustee. The loan contract and the mortgage were executed by Perpetual and the income declaration was addressed to Perpetual. According to Ms Sherwood its role otherwise was limited: it would, upon MSL's instructions, advance the funds and would hold the security documents.[50]

48 The Directors of VHLA, Mr Mingos and Mr Hendricks, had, for some time prior to August 2003, sought to obtain access to funding from Perpetual via the Puma programme. They made a number of visits to MSL's offices in Bond Street Sydney where they met, at times, with Ms D'Lambert. Ms D'Lambert said that she had been told by the directors that VHLA would be using the broker's model, which was a fairly common practice.[51]

49 Once the MOA was entered into, there was daily contact between MSL's offices and VHLA concerning individual loans, as well as the regular visits from MSL officers.[52]

50 The MOA was executed on 15 August 2003 between Perpetual, VHLA and MSL.[53] In essence, it provided that Perpetual, as the trustee of the Puma fund, would (in its discretion) release funds following an application from MSL. MSL was described as the "programme manager" of the Puma fund and the MOA provided for VHLA, described as "the mortgage manager", to submit loan applications to MSL. The agreement provided that MSL would "originate" the $90 million in trust mortgages in the first year and thereafter that time $10 million per calendar month in trust mortgages. VHLA received an up-front payment upon loan approval and thereafter a trailing commission dependent upon the reliability of the borrower in making repayments.[54]

51 Of relevance to the question of whether VHLA was acting as Perpetual's agent are the following provisions within the MOA:

(a) Under the heading "Status of mortgage manager" VHLA was described as "in all respects, an independent contractor and acts as a principal" - and was prohibited from holding itself out as an agent of Perpetual or MSL (12.1).

(b) VHLA was able to submit loan applications to MSL for Perpetual to make an approved loan (1.1(a))

(c) MSL was entitled "in its absolute discretion and without being required to do so" to

(b) advise VHLA that it has approved the loan application (1.2).

(d) VHLA could not grant any loan approval unless it was in accordance with an Approved Application and the Parameters (2.1).

(e) VHLA was required to pay from its own funds all costs and expenses in relation to performing its obligations under the MOA (3.4).

(f) VHLA was required to maintain adequate workers compensation or other equivalent insurance (12.1(c)(i)).

(g) VHLA was required to otherwise comply with all relevant legal requirements relating to the employment of persons (12.1(c)(iii)).

(h) VHLA must comply with any directions given to it by Perpetual or MSL with respect to the performance of its obligations under the MOA (13.5).

(i) VHLA acknowledged and agreed that MSL and Perpetual relied on its reputation, skill and judgment in:

(iii) the information and documentation provided in and with the application (2.5(a)).

52 The parameters, as mentioned earlier, were issued by MSL and set out the obligations of VHLA in relation to the origination and management of Puma loans. By clause 13.1 of the MOA VHLA was obliged to comply with the parameters.

53 Although Mr Mingos endeavoured to retreat from this position, in evidence-in-chief he accepted that a document dated July 2003 tendered as Exhibit TP5 set out the relevant criteria for a home loan to be applied by VHLA in relation to the Puma Programme.[55] Ms D'Lambert confirmed that the parameters were in force in May 2004[56] and to her knowledge, there has been no written variation of the document.[57]

54 The parameters contain, amongst other things, the criteria which were to be applied to any application for a loan. The parameters distinguished, in parts, between low doc loans and fully verified loans. In practical terms, the difference was explained by Ms Sherwood, who was called on behalf of Perpetual. She explained that a fully verified loan was a loan where the borrower needs to supply financials and tax returns in order to obtain finance, whereas a low doc loan requires an income declaration signed by the borrower. There was no issue that Mr Schmidt's loan fell within the "low doc" criteria within the parameters (2.1.15).

55 The relevant parts of VHLA's obligations in respect of a low doc loan as provided by the parameters are set out below:

(a) A borrower was not required to provide evidence of income, but rather a statement of income and expenditure (2.1.15).

(b) In the case of re-finance, VHLA had to check the previous six months of statements of the existing loan to determine the regularity of payments (2.1.16).

(c) VHLA was required to receive a duly completed and signed application for finance together with evidence regarding the financial position of the applicant borrower and guarantor required under the parameters.(3.1)

(d) Consistent with the terms of the MOA VHLA was required to indemnify Perpetual and MSL against any loss or damage as a result of the contents of an application or the documentation accompanying an application being untrue or misleading. VHLA was required to ensure that all information disclosed on an application and on accompanying documentation was genuine and correct (3.1).

(e) VHLA was required to "personally interview and identify each borrower in respect of an application in accordance with the identification method as per attachment 5 (3.1).[58]

56 Of relevance to Perpetual's claim against VHL are the following provisions of the MOA:

(a) VHLA provided a series of warranties to MSL and Perpetual:

• Of full compliance with the terms of the Parameters and the MOA (8.1(d));
• That the borrower's application for a loan approval had been fully investigated by VHLA and that it had no knowledge of and does not or should not suspect any fraud in connection with the application and that the application complies with the Parameters and VHLA was satisfied that all statements and information contained in that application and all documents provided with that application are true and correct and may be relied upon by Perpetual and MSL (8.1(i));
• That each application and settlement statement delivered by VHLA in respect of the mortgage was complete and correct in all respects; (8.1(j));

(b) VHLA also indemnified and agreed to keep indemnified each of Perpetual and MSL in respect of all claims and losses (whether consequential or otherwise) which may be suffered as a result of any breach of non-performance or non-observance by VHLA of its obligations under the MOA (10.1). Specifically the indemnity referred to loss occasioned by the contents of an application or the documents or information accompanying the application being incorrect or misleading(10.1(c)).[59]

57 In the course of the trial, as I have said, the only real dispute between MSL and VHL was the application of the specific parameter that required VHLA to conduct personal interviews.

58 Ms D'Lambert's evidence was that MSL required that this obligation be met by VHLA. MSL had no role to play in the direct contact with the potential borrower. VHLA was required to carry out the interview itself and not delegate that responsibility to a broker. She said that there was no subsequent contradictory understanding between MSL and VHLA that this stipulated provision could be varied by the broker carrying out the interview.[60]

59 Ms D'Lambert said that it was her expectation that VHLA would interview the client and ensure that he or she was identified as the person described in the loan application and the accompanying documents.[61] Ms D'Lambert did not think it was necessary for the client to be interviewed face-to-face and that it could be done by telephone, but it was, nonetheless, the responsibility of the mortgage manager, VHLA.[62]

60 Mr Mingos, however, said that it was always understood by Perpetual and MSL that given the nature of the broker model used by VHLA, it would not undertake personal interviews and that this task was delegated to the brokers.[63]

61 Ms D'Lambert was aware that the broker model used by VHLA meant that it had no shopfront or branches.[64]

62 Once the MOA was in place, MSL maintained a close relationship with VHLA..[65] An MSL officer, a Ms Lam, went regularly (fortnightly or, perhaps, monthly)[66] to the VHLA office in William Street.[67]

63 Ms Holloway explained the details of the relationship. Her unchallenged evidence was that there were quite a few visits between 2003 and up to mid 2004 by MSL staff to the VHLA offices. The MSL officers went over the processes, met the staff and were provided with the information MSL needed to be able to process loan applications.[68] She also said that the MSL officers would conduct audits of particular loan files. The files contained the loan application, the supporting documentation, correspondence, valuation, "anything pertinent to the loan was kept on the loan file".[69] She also said that Ms Lam as the business development manager for MSL would visit the office, meet the staff, go through loans and was the main point of contact with MSL.[70]

64 I do not accept that Ms D'Lambert's evidence on this issue was unchallenged, as submitted by counsel for Perpetual. To the contrary, there was a clear challenge as to her perception of whether the personal interview requirement was ever enforced. The uncontradicted evidence of Mr Rae and Ms Holloway, as well as Mr Mingos, was to the effect that in the period from August 2003 through to May 2004, MSL's officers, (particularly Ms Lam) through their regular contacts and visits to the VHLA office,[71] were necessarily aware that VHLA did not conduct personal interviews of the loan applicants. According to Mr Mingos and Mr Rae, this was inevitable, given the broker model that was used - no shopfront offices and reliance upon the broker.[72] Moreover, the evidence of Ms Holloway, which I accept, demonstrates that this had to be known to MSL as the regular visits included file perusal and audits.[73] Self-evidently, no interviews, nor any records of interviews were to be located on the files. MSL's officers did not raise the lack of such material with VHLA staff.

65 I have concluded that notwithstanding the wording of the parameters, in practice, the requirement to personally interview clients was never adhered to.

66 I am also satisfied on the evidence of the VHLA employees that MSL, through its officers visiting VHLA's office and its knowledge of the broker model, was aware that no face to face interviews or personal interviews were conducted by VHLA and, in my view, MSL condoned or, at the least, turned a blind eye, to this practice. Whether Ms D'Lambert was unaware of this practice or whether it was Nelsonian blindness is immaterial. MSL officers were aware that there was no facility to carry out face to face interviews and no records existed of any other form of client interviews.

67 The following advertisement appeared in the Mordialloc Chelsea Leader on 5 May 2003:[74]

Retirees/Investors/Superannuation Invest $40,000 Net return of $80,000. Announcing an opportunity to participate in Asset Equity Group's Property Syndicate No. 4. Now open for subscription, you can invest $40,000 only and receive a NET return of $80,000 within 12 months. A net return of 100% on your capital outlay. Redraw on a Home Equity Loan at 6.57% interest, the borrowing costs would be $1577 pea (after tax 40%) yet you would earn $40,000 net profit. Offer closes May 30. Shares allocated on a 'first in' basis. For a detailed information kit, call the Investment Advisors:- 95228999 Asset Equity Group 5/574 St Kilda Rd Melbourne.

68 Mr Schmidt rang the phone number and spoke to Maddocks. He was told that the investment was in a property syndicate which was buying blocks of land, building units and then on-selling the units. This particular investment was said to relate to the construction of units at 10 Myola Street, Carrum,[75] about five minutes' walk from Mr Schmidt's home. Several days after the telephone conversation on 8 May,[76] Maddocks visited Mr Schmidt at home and discussed the investment and the use of the Bank of Melbourne line of credit to finance it. Mr Schmidt agreed with the proposition put to him in cross-examination that in the course of that discussion, Maddocks promised that he could double his investment in 12 months.[77]

69 After Maddocks' visit, Mr Schmidt decided to invest $50,000 in property syndicate number four and wrote a cheque on the asset builder account on 29 May 2003 for that amount.[78] The cheque was payable to Asset Equity Group. Mr Schmidt agreed that he entered into the investments as he hoped they would provide him with a source of making extra money to supplement his pension.[79]

70 On 27 June 2003, Mr Schmidt wrote out a further cheque for $5,000 for Maddocks which, I assume, was a further investment in syndicate number four.

71 Subsequently, Maddocks visited him on a number of occasions and discussed the investment and the development of the property. He invited Mr Schmidt to join property syndicate number five and, on 5 September 2003, using the remaining funds in the asset builder account, Mr Schmidt wrote a cheque for $25,000 payable to Members Benefit Mortgage Assist.[80] The syndicate number five investment was in units to be built at 28 Myola Street.[81]

72 From time to time, Maddocks would circulate reports concerning the progress of the syndicates investment.[82] Maddocks continued to visit Mr Schmidt regularly and, in early 2004, again discussed making further investments in the property syndicates. At Maddocks' suggestion, Mr Schmidt approached his manager at the Bank of Melbourne in Chelsea but was told that he could not borrow the money, as he was a pensioner and did not have the capacity to repay the money.[83]

73 When Mr Schmidt next spoke to Maddocks, he promised to arrange the money for him.[84]

74 Mr Schmidt was not able to recall whether he had spoken to Mr Huxtable about his investments with Maddocks, or with anyone else, including his son.[85] He did not speak to an accountant or a lawyer.

75 It is likely that the loan application[86] and the income declaration[87] were signed at the same time. Mr Schmidt's evidence as to the manner in which the documents were completed was hazy,[88] however he was adamant about the following matters:

(a) That Maddocks brought the documents to his Carrum home and the documents were signed there.[89]

(b) That, apart from the signature, the writing within the documents was that of Maddocks,[90] whose writing Mr Schmidt was able to identify.[91]

(c) That Mr Schmidt provided much of the information which went into the application form, which was inserted by Maddocks.[92]

(d) That Mr Schmidt signed the last page of the loan application which bears the date 24 March 2004.[93]

(f) That the purported witness to the loan application, Andrew Paranavitana, was not present in the house when the application was signed and Mr Schmidt had never met such a person.[94]

(g) That he did not read the contents of either document.

76 Ms Sherwood said that the loan application form completed by Mr Schmidt was upon a "Violet" form, which appears to be borne out by its contents.[95] The income declaration is, however, addressed to Perpetual.

77 The completed loan application contains a series of false statements. Mr Schmidt is described as a domestic painter - a job he last worked at as an apprentice in Austria in the 1950s. He was, of course, a retired printer. His employer was described as "Schmidt Painting Service" - an organisation that never existed. He was described as being self-employed - he was in receipt of a Centrelink pension. His length of employment in the fictitious business was said to be 25 years, and he was said to be in full-time employment. All employment details in the loan application were false. Mr Schmidt's annual income was said to be $49,000 per annum - again false. As I have already noted, Mr Paranavitana did not witness the document.

78 The income declaration[96] purports to provide further information in respect of the loan application.[97] It describes Mr Schmidt's stated income as "self-employed personal income" with a total income of $49,000.

79 Mr Schmidt said that he had no dealings with Medallion. Notwithstanding Mr Mingos' rejection of the proposition that Medallion did not see and interview Mr Schmidt,[98] the documentary evidence and Mr Schmidt's evidence points in one direction only - Medallion simply dealt with Maddocks and had no direct contact with Mr Schmidt.

80 Mr Schmidt also said that he had no contact with any officer of VHLA. He was not challenged on this assertion and there is nothing in Ms Bonnici's correspondence which suggests that he was contacted or interviewed.

81 Suffice to say for the moment that I accept Mr Schmidt's evidence that he had no contact with any officer of Medallion, VHLA, MSL or Perpetual in the course of arranging the loan.[99] This is consistent with the correspondence between VHLA and Medallion,[100] which I will turn to in a moment.

82 I also accept, as Mr Schmidt conceded, that he sought no advice from a lawyer or financial adviser as to the prudence of the Maddocks investments or the taking out of the Violet Loan.[101]

The handling of Mr Schmidt's loan application by Medallion and VHLA

83 No evidence was adduced from any employee of Medallion, nor was Maddocks called to give evidence. There is no direct evidence as to how Mr Schmidt's loan application documents were provided by Maddocks to Medallion or how they were dealt with by Medallion. Nor is there any direct evidence as to the relationship between Maddocks and Medallion. I accept, as I have said, that Mr Schmidt was not contacted or interviewed by Medallion.

84 Ms Tammie Bonnici, a credit officer, managed Mr Schmidt's loan application at VHLA.[102] She had no contact with Mr Schmidt. She did not interview him. She was not called as a witness and Mr Mingos' explanation for her absence was unsatisfactory.[103] Mr Rae, who was the arrears manager at VHLA in 2004, was called by VHL and said that he believed she was working for a broker in Melbourne.[104]

85 On 27 March, VHLA received a fax from Medallion comprising a "lodgement advice" with various other copy documents.[105] The lodgement advice referred to "Andrew" as the introducer contact (presumably Mr Andrew Paranavitana) identified Mr Schmidt and stipulated a loan amount as $190,000. In the comments section, the following was noted:

This loan was sent to us through a business partner at another company who deals with business finance. A disbursement authority for their company (Asset Equity Group) has been included instead or ours. Let me know if you can pay into their account or if our one is needed

86 The accompanying documents included the following: The loan application, passport and driver's licence, Certificate of Title of 8 Robin Court, Carrum, a Rate and Valuation notice from the City of Kingston, an authority to discharge the Westpac mortgage signed by Mr Schmidt dated 24 March, a disbursement authority for $10,500 to be paid to the Asset Equity Group and nine pages of statements of the Asset Builder Account dating from May 2003 to February 2004. These pages revealed that from May 2003 to February 2004 payments of interest on the borrowings were met out of the advance itself and not by payments by Mr Schmidt into the account.

87 Pausing here, it can be inferred that "the business partner" referred to in the note was Maddocks; it is readily apparent that there was some form of relationship between Maddocks and Medallion, particularly as Maddocks had supplied a disbursement authority which was passed on by Medallion to VHLA.

88 Subsequent to the lodgement advice being forwarded by Medallion, there was email/fax correspondence between Medallion and VHLA.[106] The first is undated (I will set out in a moment why I have assumed it is the first) and reads as follows:

To: Andrew Paranavitana

Subject: Schmidt

Good Morning Andrew

Loan look okay, just need a couple of bits of information

1. Craa showing that clients has no history and we have just created a new file, please confirm that client has had no name change

2. Term that client has been self employed (This has not been filled in on application)

3. Client earning more than $50k p/a please supply a ABN

4. LoDoc Dec saying client earns $65k application saying $75k these need to be the same, please have this amended so both read the same income

5. Need copy of back of client D/License as the front is showing the incorrect address. D/L must have the correct address on it

Once the above are completed I can send to LMI for cond approval

Many Thanks.

It bears a stamp with Ms Bonnici's name on it, who is noted as a "Loans underwriter" for VHL

89 The second is the response to that email addressed to Medallion FC at optusnet.com.au on 5 April 2004 from Ms Bonnici, the subject being "Mr Schmidt":

Hi Tammy,

Hope you had a good weekend.

Regarding Schmidt:

- Client has had no name change

- Has been self employed for 25 years

- Lodoc Declaration and income amount on application are both being changed to $49K as client does not have an ABN

- All other docs and additional info will be sent by tomorrow at the latest.

Apologies for the delay with this file, we have no direct contact with the client as the file is filtered through a third party.

Kind Regards,

Andrew.

It can be inferred that the "lodoc" declaration is probably the income declaration and the "application" is the loan application.

90 In cross-examination by counsel for VHL, Mr Schmidt gave evidence which is now of some significance in relation to his dealings with Maddocks and VHLA's dealings with Medallion. He was being cross-examined about Exhibit P4, the income declaration.[107] He recalled Maddocks returning on one occasion and saying to him, in respect of documents he had signed, that they were "all no good. We have to do the whole lot again now". He said that the documents had stickers with a mark saying "Sign here", and that was what he did. Maddocks told him "Those are the same documents. We have to do them all over again". Mr Schmidt was unable to identify with any precision which documents were re-executed, but he thought that the income declaration could have been one of them. Mr Schmidt said, and I accept, that he did not read through any of the documents provided to him, such as the loan application, the income declaration or the mortgage.[108]

91 This account is consistent with Mr Schmidt's statement to the police[109] given in August 2005 in which he says, in relation to the VHLA loan and documentation:

I signed the documents for Maddocks when he brought them to me on that day mentioned above. However, I recall that Maddocks came around to my house a couple of weeks later and asked me to sign the documents again, as he had done them all wrong and were no good. Maddocks did not explain to me what he meant and again I signed the documents where he indicated without reading them. I assumed at the time that they were the same documents but in hindsight I don't know nor do I have any documents to compare. Maddocks took all the documents relating to the borrowing of money and never left me any copies.

92 Counsel for VHLA urged me to conclude that the Medallion email was not responsive to Ms Bonnici's fax. It is patent, I think, given the text of the two pieces of correspondence, that Mr Paranavitana was responding to Ms Bonnici's various requests. It also tallies with Mr Schmidt's account of completing a second set of documents. Moreover, it is tolerably clear from a perusal of Exhibit D4[110] that the page of the loan application detailing Mr Schmidt's annual income declaration did not form part of the original application. The original fax and accompanying documents bear the date "27 March 2005". However, the fax page detailing the income declaration bears the date of "7 April 2005". Although not entirely free of doubt, this is consistent with a further application being completed by Mr Schmidt and the relevant page being inserted within the original documentation. Whilst the year is incorrect, the day and month sit comfortably with the other correspondence.

93 Mr Rae agreed that the lodgement advice and accompanying documents demonstrated that Medallion introduced the loan to VHLA.[111]

94 In my view, the following inferences can be drawn from this exchange of correspondence when combined with the evidence of Mr Schmidt. First, that the original documents completed by him asserted income of $65,000 (the income declaration) and $75,000 (the loan application) respectively. Second, that as a result of Ms Bonnici's request, Medallion required Maddocks to procure a fresh set of documents. Third, that the new loan application and the income declaration disclosed an amount of $49,000 as Mr Schmidt's income. Fourth, the documentation completed by Mr Schmidt and provided to VHLA showed an income of $49,000 because of the inability of Mr Schmidt to provide an ABN.

95 I also infer that it was known to Ms Bonnici that Mr Schmidt did not have an ABN, albeit that he was said to be self-employed, and also that his income of $49,000 was, in all likelihood, misstated. No contradictory evidence was adduced by Perpetual or VHL.

96 On 8 April, Ms Bonnici completed a document headed "Loan Comments".[112] It described Mr Schmidt's loan and included the following general comments:

Client has refinancing from BOM, current loan has been paid in a good manner -

Client is self-employed as a painter for the last five years - CRAA showing no credit history - Client would like extra funds for future investments.

97 The loan application would have also alerted Ms Bonnici to the fact that Mr Schmidt was 64 years of age (at least this part was accurate) and the accompanying bank documents would have made it clear that interest on the asset builder loan was paid out of the remaining balance.

98 On 21 April, Ms Bonnici signed off on a "Puma Fastrack Track Approval Checklist".[113] The checklist described Mr Schmidt as being self-employed. It was forwarded with the loan application, the income declaration and financial and identity documents to MSL by fax on 21 April.

99 Ms Sherwood gave evidence, which was not disputed, that VHLA did not have the power to approve Mr Schmidt's loan and it was necessary for the application to be referred to MSL.[114] As she understood the procedure, MSL received the loan application, the income declaration and a property valuation.[115] The evidence of Ms Holloway (which I accept) was that the supporting material, e.g. identity documentation, bank statements, etc was also supplied to MSL.

100 Consistent with the evidence of Ms D'Lambert, Ms Sherwood explained that MSL would then examine the documentation "on behalf of Perpetual"[116] and determine whether the loan was to be approved or not. This decision was made in conjunction with the mortgage insurer.[117] She described the process as being one of review of the supplied documentation and the information completed on the loan application.[118]

101 An MSL employee completed a loan serviceability worksheet[119] in relation to Mr Schmidt's application. A credit officer Mr Robinson reviewed the application.[120] He was not called; but it was not in issue that the loan was approved by MSL.

The loan contract and the drawing down of the loan

102 The loan contract with Perpetual signed by Mr Schmidt is undated, but it can be assumed that it was signed prior to the loan being drawn upon by him on 19 May 2004.[121]

103 The loan contract is comprised of both a schedule and general conditions. [122] The amount of $190,000 is the credit limit and the variable rate is referred to as the "ultra Violet low doc line of credit variable rate minus a margin of .26%". In the schedule there are a number of references to the role played by both Perpetual and the mortgage manager, VHLA. The following is said of the role of the mortgage manager:

Perpetual has appointed your mortgage manager to manage your loan contract and the securities and to exercise all the powers, rights and functions of Perpetual under your loan contract and the securities on its behalf.[123]

104 The schedule and conditions of the loan contract also contain a significant number of references to the role of the mortgage manager in the administration of the loan. For instance

• You [The Borrower] acknowledge that Perpetual and your Mortgage Manager strongly recommend that you obtain independent legal and financial advice regarding the contents and effects of your loan contract and any securities granted by you, and that you have had an opportunity to seek that advice (Page 9 of the Schedule);

• Perpetual is not obliged to advance the loan unless the security has been executed in the form required by Perpetual and has been delivered to Perpetual or your Mortgage Manager (Clause 1.1b);

• You should ask your Mortgage Manager how many home loan accounts you may request Perpetual to open - if you have more than one home loan (Clause 2.4 (b));

• Certain loan classes are made available from time to time by Perpetual through your Mortgage Manager (Clause 2.5);

• A redraw request must be made in writing to your Mortgage Manager (Clause 3.2(a));

• You may request advances in writing to your Mortgage Manager (Clause 4.2(a));

• The arrangement of direct debit from an account at a bank or financial institution acceptable to your Mortgage Manager (Clause 14.4(a));

• Any request to change the interest rate must be made through the Mortgage Manager (Clause 17.2);

• You are only able to use telephone access in relation to a home loan if your Mortgage Manager consents (Clause 18.1);

• You will only be able to make BPAY payments in relation to a home loan if the Mortgage Manager consents (Clause 19.1);

• A certificate which has been signed and dated for and on behalf of Perpetual or your Mortgage Manager is sufficient evidence of any fact or matter stated in the certificate including default/amount due and payable (Clause 22);

• You must notify your Mortgage Manager as soon as possible if you change your name and address (Clause 23.3);

• Your loan contract sets out the entire agreement between Perpetual and you in relation to the loan and overrides any representations made by Perpetual, your Mortgage Manager or anyone else (Clause 24.1).

105 The loan was settled on 19 May 2004[124] and, in round terms, the money was disbursed as follows:

Three separate cheques to Asset Equity Group (Maddocks) $29,000

Members Benefit Mortgage - the other Maddocks entity $50,000

The balance went to legal fees, stamp duty and disbursements.

106 By the time the loan funds had been disbursed, Mr Schmidt had invested a total of $161,500 in the two Maddocks property syndicates to which, on 11 October 2004, a further $5,000 was added as a result of a request from Maddocks for further funds.[125]

107 After Mr Hendricks ceased to be a director of VHLA in late September 2004 the Violet business was operated by Mr Mingos. Subsequently, VHLA was the subject of a creditor's winding up petition and was placed into liquidation. VHL took over the business from VHLA and in particular the clients and accounts acquired under the Puma programme.

108 In the novation deed[126] entered into by Perpetual, MSL and VHLA in July 2007, VHL took over the management of Violet business from VHLA; importantly, VHL was given the right to receive VHLA's trailing commissions for business written prior to its liquidation. Putting to one side various corporate structures, the evidence was clear that Mr Mingos was the controller of both VHLA and VHL after late 2004.

Procedural issue: Amendment to Mr Schmidt's statement of claim to allege that MSL is the agent of Perpetual

109 In the course of final addresses and in the written submissions filed on behalf of Mr Schmidt, it was alleged that MSL acted as the agent of Perpetual in the handling of Mr Schmidt's loan application.[127]

110 Counsel then sought to amend the statement of claim to make this allegation. This allegation had not been raised previously. It did not appear in Mr Schmidt's original statement of claim nor in the several amendments it underwent immediately prior to trial or during the course of the hearing. The hearing was adjourned for a period of time for consideration of a fresh allegation by Mr Schmidt that VHL had a direct liability to Mr Schmidt by reason of the novation deed. A delay of some six weeks ensued. I delivered my ruling and then the case proceeded.[128]

111 This application squarely raises the principles set out by the High Court in Aon Risk Services Australia Ltd v Australian National University[129] which I also considered in my previous ruling.

112 I need only repeat a small part of that analysis. In Aon the High Court held:

(a) Courts must now consider the wider public interest and the efficient use of limited Court resources when deciding whether to grant an application to amend a pleading.

(b) Parties do not have an entitlement to raise any arguable case at any stage of proceedings, subject only to payment of costs.

(c) Amendments that produce delay impact on the entire Court system and affect parties desirous of utilising that particular Court system.

113 In Aon, in the joint judgment, the following was said:-

An important aspect of the approach taken by the plurality in J L Holdings was that it proceeded upon an assumption that a party should be permitted to amend to raise an arguable issue subject to the payment of costs occasioned by the amendment. So stated it suggests that a party has something approaching a right to an amendment. That is not the case. The 'right' spoken of in Cropper v Smith needs to be understood in the context of that case and the Rule, which required amendment to permit the determination of a matter already in issue. It is more accurate to say that parties have the right to invoke the jurisdiction and the powers of the court in order to seek a resolution of their dispute. Subject to any rights to amend without leave given to the parties by the rules of court, the question of further amendment of a party's claim is dependent upon the exercise of the court's discretionary power.[citations omitted][130]

In the judgment of Heydon J, his Honour cited with approval a portion of a judgment of Bryson J which, as his Honour noted, merited preservation from "the oblivion of unreported judgments". In the context of this case, it is worth citing part of that judgment:

I do not think that the law requires the discretion to allow amendments to be exercised in entire innocence of understanding the obvious impact of forbearance and liberality on the behaviour of litigants, who have diminished incentive to do their thinking in due time and to tell the court and their opponents their full and true positions. When forbearance and liberality are extended to a delinquent the burden of inconvenience and lost opportunities for preparation tends to fall heavily and without adequate repair on parties who have not been delinquent. A relative disadvantage is imposed on those who proceed methodically and in due time; their interest in procedural justice should claim at least as much consideration as the interests of the applicant for a late amendment who does not have to look far for the creator of his difficulty.[131]

114 It is unacceptable, in my view, for Mr Schmidt to raise this allegation at the end of a long trial, particularly given the history of the litigation. Whilst it may be surprising that this contention was not raised in the earlier pleadings, the reality is that there was no suggestion of such a relationship. The case proceeded, as I have said (with an adjournment necessitated by Mr Schmidt's amendments to his claim), in starts and fits, giving Mr Schmidt ample time to seek to make such an allegation and to seek to explain why it was raised at such a late point. Although there are examples of courts permitting the litigation of a point raised in the course of closing addresses,[132] the principles stated by the High Court in Aon point against such a course in this case. No explanation has been proffered for the failure to raise the allegation at this time. Counsel for Perpetual said, and I accept this, that he may well have wished to call other evidence to supplement the MOA in defending the allegation, as well as lead further evidence from Ms D'Lambert relevant to MSL's relationship with Perpetual.

115 For these reasons, I disallowed the application to plead that MSL was Perpetual's agent.

116 Perpetual relied upon the evidence of Ms Sherwood, the loan contract,[133] the mortgage,[134] the notice to pay,[135] the certificate under clause 22 of the loan contract and the certificate under clause 8.3 of the memorandum of common provisions AA529.[136]

117 It was accepted by counsel for Mr Schmidt that in the event of Mr Schmidt being unable to make good his counterclaim, then his client had no defence to Perpetual's claim and no issue was taken with the quantum of the claim. The certificates provided as part of Exhibit P12 establish the existence and the quantum of the debt.[137]

118 Perpetual is, in the event of Mr Schmidt's counterclaim failing, entitled to judgment in accordance with the certificate - $448,498 - with interest of $96 per day since 28 September 2009.

119 Mr Schmidt's argument as to the existence of a principal and agent relationship and the scope of the authority of the agent pursuant to that relationship, arises in two instances. First, as to whether Medallion was the agent of VHLA. Second, as to whether VHLA was the agent of Perpetual. In both instances the question of agency and the ambit of the authority of the agent (if so established) depends upon conclusions to be drawn from the circumstances surrounding the dealings between the respective parties and, in particular, in relation to the management of Mr Schmidt's loan application and loan. As will be seen, in determining this issue in both cases, it is necessary to look not only at the written terms of the respective agreements, but also the manner in which the relationships operated in a real and practical sense.

120 In Scott v Davis[138] Gummow J said of the relationship between principal and agent:

The term 'agency' is best used, in the words of the joint judgment of this Court in International Harvester Co of Australia Pty Ltd v Carrigan's Hazeldene Pastoral Co, 'to connote an authority or capacity in one person to create legal relations between a person occupying the position of principal and third parties'.

121 In Professor Dal Pont's work, Law of Agency, the following is said as to the elements of a principal/agency relationship:[139]

There are at least two essential elements of an agency relationship: the consent (or assent) of both principal and agent; and the authority given to the agent by the principal to act on the principal's behalf. A third element found in some conceptions of an agency relationship is the principal's control over the agent's actions.

122 The issue here, the categorisation of the relationships between Medallion and VHLA, and VHLA and Perpetual, is whether the particular relationship is properly identified as one between two principals or as one between principal and agent. As Professor Dal Pont notes,[140] persons who carry on an established business in their own right are often independent contractors; this, of itself, however, does not preclude the existence of a relationship of agency with another party.

123 In Bowstead and Reynolds Law on Agency, the following proposition is advanced:

Agreement between principal and agent may be implied in a case where one party is conducting himself towards another in such a way that is reasonable for that other to infer from that conduct assent to an agency relationship.[141]

As the authors note, this proposition is no different to the position in contract, namely, the existence of a contract may not necessarily be expressed, but may depend upon inferences to be drawn from the surrounding circumstances. So it follows that the law recognises that by their conduct, two parties may have, notwithstanding the language employed by them or, indeed, their lack of appreciation of the legal concept of agency, a principal and agent relationship.[142] In Garnac Grain Co Inc v HMF Faure and Fairclough Ltd,[143] Lord Pearson said:

The relationship of principal and agent can only be established by the consent of the principal and the agent. They will be held to have consented if they have agreed to what amounts at law to such a relationship, even if they do not recognise it themselves and even if they have professed to disclaim it. ... But the consent must have been given by each of them either expressly or by implication from their words and conduct.

124 Subsequently, in Branwhite v Worcester Works Finance Ltd,[144] Lord Wilberforce said (although in disagreement with the majority on the question of the existence of a principal/agent relationship):

...while agency must ultimately derive from consent, the consent need not necessarily be to the relationship of principal and agent itself (indeed, the existence of it may be denied), but may be to a state of fact upon which the law imposes the consequences which result from agency.

125 In South Sydney District Rugby League Football Club v News Limited,[145] the South Sydney Football Club sought to restrain the National Rugby League Limited (the NRL) on the basis of breaches of various provisions of the TPA. One of the arguments Finn J was required to consider was whether the NRL had a principal and agent relationship with an organisation known as the NRL Partnership, a partnership between a News Limited subsidiary and the Australian Rugby Football League Limited.[146] NRL and the NRL Partnership had entered into a written agreement which set out the terms of the relationship between the two parties. The point which his Honour had to determine was whether the relationship between the two was one of principal and principal or principal and agent. His Honour set out, and I respectfully adopt, the following propositions of law (which his Honour considered to be relatively uncontroversial):

1. Those definitions of agency that take the principal and agent relationship itself as their particular focus: emphasise that that relationship "can only be established by the consent of the principal and the agent".

2. The consents so given need not necessarily be to a relationship that the parties understand, or even accept, to be that of principal and agent. It is sufficient if "they have agreed to what amounts in law to such a relationship"; notwithstanding that they may have "artfully disguised" it by express disclaimers.

3. It is legitimate for parties to avoid the "unwanted consequences" of a particular category of legal relationship by seeking to cast it in a form that takes it outside that category of relationship. But whether or not they are successful in achieving that end does not depend simply upon whether, in an express provision of their agreement, they attribute or deny to their relationship a particular legal character - be this, for example, employer and employee; principal and principal or principal and agent or partners. The parties cannot by the mere device of labelling, no matter how genuinely intentioned, either confer a particular legal character on a relationship that it does not possess or deny it a character that it does possess.

4. Save where an express labelling provision is shown to be a sham, the provision itself (as a manifestation of the parties' intent) must be given its proper weight in relation to the rest of their agreement and such other relevant circumstances as evidence the true character of their relationship. This may lead to its being disregarded entirely; or to its being given full force and effect. And such will depend upon whether, given the actual incidents and content of the relationship (that is, "the factual relation") to which the parties have consented, they have consented "to a state of fact upon which the law imposes the consequences which result from agency".

5. Though there is no uniformly agreed definition of agency; the two whose authoritative character has resulted in their wide citation are those of the Restatement, Second, Agency, s1 and of Bowstead and Reynolds, above, 1-001 (the latter being based upon the Restatement provision). The Restatement's definition is that:

s1 Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.

I would note in passing that the definition proposed in the Restatement, Third, Agency, Tentative Draft No 1, s1.01 proposes no material departure from the above. Bowstead and Reynolds' definition is that:

Agency is the fiduciary relationship which exists between two persons, one of whom expressly or impliedly consents that the other should act on his behalf so as to affect his relations with third parties, and the other of whom similarly consents so to act or so acts.

The necessary consents apart, the required characteristics of the relation are that (a) one party acts on the other's behalf, but (b) subject to that other's control or direction.

6. The second of the above characteristics (control or direction) does not appear to figure prominently as a decisive indicator of agency in common law case law save in two settings. The first is where it is contended that a company is an agent of its parent company, shareholders, or of particular officers because of the control it or they exercise over it. Here, and to accommodate the perceived demands of the principle established in Salomon v Salomon & Co that a company is a legal person separate from its parent, officers and shareholders, the control characteristic has had to undergo a degree of refinement which it is not relevant to explore in this proceeding. The second setting in which resort has been had to the control characteristic is where a party that is expressed to stand in the relation of independent contractor to another is claimed as well to be the agent of that other. The two relationships are not mutually exclusive. Though "[c]ontrol by itself is insufficient to establish agency" - the "acting on behalf of" or "representative" characteristic must be able to be discerned in the factual relation of the parties - where that characteristic can properly be inferred in circumstances in which the alleged principal exercises, or is entitled to exercise, a significant degree of control over the contractor's performance of its services (and in particular over contracts entered into), the contractor is apt in consequence to be characterised as an agent. It probably is the case that the control exercisable by one party can in some settings itself bear on the determination whether the other acts on its own account or on behalf of the former when dealing with third parties. (Citations omitted). (My emphasis)[147]

126 In South Sydney, a clause within the agreement between the parties alleged to be principal and agent specifically denied the existence of agency. However, Finn J's analysis of the terms of the arrangement and its practical implementation led him to conclude that notwithstanding that provision given the level of control by one party of the other, the parties had entered a principal and agent relationship. He regarded the use of the expression "independent contractor" within the agreement as being at odds with the obligations placed upon one of the parties, whom he concluded was, in truth, an agent.

127 Mr Schmidt alleges that Medallion, in handling his loan application, acted as VHLA's agent. If it was found to be so, it adds another element, so it was said, to the case against VHLA. The failings of Medallion, to a large extent, mirrored those alleged against VHLA. Medallion did not conduct a personal interview of Mr Schmidt and the loan documents were "massaged" by it with VHLA's knowledge to fit the criteria for the low doc loan.

128 Counsel for Mr Schmidt relied upon the following matters as establishing the relationship of principal and agent -

(a) The imposition by VHLA of accreditation criteria on its brokers, including Medallion.[148]

(b) The requirement that its brokers undertake regular in-house training sessions.[149]

(c) Medallion had on hand copies of VHLA's paperwork.[150]

129 VHLA's business revolved around its brokers bringing in the customers - otherwise it was out of business. Medallion acted in the interests of VHLA when it obtained the loan documentation and submitted it to VHLA for its consideration. The loan application was on a "Violet" form supplied by VHLA to Medallion. It was authorised to do so as part of the referral agreement and in doing so, it was also acting for the benefit of VHLA.[151]

130 The terms of the Medallion agreement which I have set out at [36] demonstrate that VHLA exercised some direction over the manner in which Medallion acted in procuring loan applications for submission to VHLA. Medallion was required to comply with the conditions within parameters issued pursuant to the MOA. It was subject to directions from VHLA as to matters such as advertising and promotional material. It was required to perform services "as directed by Violet".

131 I will subsequently refer in more detail to the decision of the Appeal division of this Court in Morlend Finance Corporation (Vic) Pty Ltd v Westerndorp[152]. That case stands for the proposition that where a broker facilitates the provision of a loan through a financier then, notwithstanding the payment of a commission, the broker is not to be regarded as the agent of the financier. This, it seems to me, is the situation here. The broker, Medallion, merely processed the documentation and forwarded it to VHLA. Once the loan application had been submitted to VHLA, Medallion's role ended. It did not play any further part in the loan application process or the management of the loan which was undertaken by VHLA. It was simply the initiator of the loan process. Accreditation and in-house training by VHLA does not lead to an inference that the relationship was one of principal and agent.

132 Each of the matters I have mentioned do not point convincingly to the existence of a relationship of principal and agent between the two organisations and I am not persuaded that such a relationship existed as between VHLA and Medallion.

133 This is a critical issue. For Mr Schmidt to make good his counterclaim against Perpetual, it is necessary for him to establish that the impugned conduct of VHLA (or that of Medallion as its agent) was carried out by VHLA in the course of it acting as Perpetual's agent and, necessarily, within its authority as its agent. The finding of a relationship of principal and agent as between Perpetual and VHLA cannot be established by any express appointment or provision of authority pursuant to that appointment. Indeed, to the contrary, the MOA endeavours to characterise VHLA as an independent contractor and principal in its own right as opposed to an agent of Perpetual. As has also been noted, that, of itself, is not conclusive, but may well be indicative of the intentions of the parties.

134 Counsel for Mr Schmidt primarily relied upon the principle of ostensible or apparent authority to assert the existence of a liability on the part of Perpetual for VHLA's actions. [153] The doctrine of ostensible authority dictates that a principal may be liable for the actions of a person who possesses no actual authority but upon whom the principal has, by his or her words or actions, conferred apparent or ostensible authority to carry out those actions.[154]

135 In Pacific Carriers Ltd v BNP Paribas, the High Court restated the principles relevant to ostensible authority:

In Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd, and in Northside Developments Pty Ltd v Registrar-General, this court followed and applied Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd as to the general principles concerning the apparent or ostensible authority of an officer of a company dealing with a third party. Where an officer is held out by a company as having authority, and the third party relies on that apparent authority, and there is nothing in the company's constitution to the contrary, the company is bound by its representation of authority. "The representation, when acted upon by the contractor by entering into a contract with the agent, operates as an estoppel, preventing the principal from asserting that he is not bound by the contract." It is not enough that the representation should come from the officer alone. Whether the representation is general, or related specifically to the particular transaction, it must come from the principal, the company. That does not mean that the conduct of the officer is irrelevant to the representation, but the company's conduct must be the source of the representation. (Citations omitted and emphasis added). [155]

136 Subsequent to Pacific Carriers, in Flexirent Capital Pty Ltd v EBS Consulting Pty Ltd & Ors,[156] Whelan J, after reviewing the authorities, set out the following principles, which I respectfully adopt:

(a) Apparent authority operates as an estoppel preventing a principal from asserting that the principal is not bound by a contract where the principal has held the agent out as having authority.

(b) The holding out may be of a general character, arising for example out of an office or position in which the principal places the agent, or it may be specific to a particular transaction. The holding out may take the form of the setting up of an organisation or structure which presents to outsiders an appearance of authority in the agent.

(c) The holding out must be conduct by the principal, not the agent. A third party cannot rely upon the agent's own representation as to authority. But this does not mean that the agent's conduct is to be ignored. The principal may hold out the agent as having authority by permitting the agent to act in a certain way or to make representations about himself or herself, or the principal may hold the agent out by equipping or arming the agent with a document or thing which enables the agent to assert authority with the hallmark of authenticity.

(d) 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.

(e) The principal's conduct is to be assessed as a whole, looking at all the relevant circumstances.

137 The central inquiry in relation to such an allegation is the conduct of the principal, not those of the purported agent. For instance, VHLA could not rely upon its own representation as to its actual authority to implicate Perpetual as its agent.[157]

138 Contrary to the submissions of Perpetual, there is some evidence of it holding out VHLA as its agent. Arguably, at least, the loan contract signed by both Mr Schmidt and an officer of Perpetual, which refers repeatedly to the role of VHLA as mortgage manager, may provide evidence of, at least at that point of time, Perpetual holding out VHLA to be its agent. I consider, however, that this document assumes far more importance in determining whether there was, by implication, a relationship of principal and agent between the two parties.

139 It is not necessary to dwell on this issue as it is not sufficient to establish merely that there has been a holding out as to the authority of another. As Pacific Carriers makes clear, the party making the assertion of ostensible authority must demonstrate that he or she reasonably relied upon that representation.[158] The representation must, for the argument to succeed, have led that party to rely, and reasonably rely, upon that representation.

140 There is no evidence that Mr Schmidt relied upon any representation made by Perpetual. To the contrary, his case is that he knew virtually nothing about the loan or its details, and simply relied upon Maddocks' representations and the provision of documentation. There is no suggestion that he read the loan contract or relied upon its content as conveying to him that VHLA was the agent of Perpetual. Moreover, if it be relevant, VHLA made no representation to Mr Schmidt in relation to its relationship with Perpetual that he relied upon. [159]

141 I reject the argument that by reason of ostensible or apparent authority, VHLA may be treated as the agent of Perpetual.

142 In my view, (and as I raised in discussion in final submissions with counsel) the real inquiry is whether, at the time Mr Schmidt's loan was handled by VHLA, it was Perpetual's agent notwithstanding the terms of the MOA which endeavoured to portray the relationship as one of principal and principal.[160]

143 Counsel for Mr Schmidt argued that the following matters demonstrated the relationship of principal and agent as between Perpetual and VHLA:

• VHLA acted as a conduit to Perpetual for prospective borrowers and this was facilitated by the MOA and the manner in which it operated.

• VHLA had no branches and no direct involvement with members of the public.

• VHLA had no delegated lending authority. Any application had to be approved by MSL which, in effect, meant Perpetual, as it delegated the responsibility to MSL.

• VHLA was required to ensure that any loan application fitted within specific criteria as laid down by the parameters which sprung from the MOA.

• The MOA and the parameters stipulate in considerable detail the way by which Perpetual required VHLA to deal with loan applications and obtain funds from the Puma programme.

• The templates used by VHLA for applications for a loan were extracted from schedules to the parameters.

• Although the parameters were issued by MSL, it was contended that MSL and Perpetual acted hand in glove, and this was simply another example of the delegated power of Perpetual being exercised by MSL.

• VHLA, in effect, acted as a clearing house. It put the documents into proper order and then sent them to MSL.

• The linkage of the computer systems of VHLA and MSL.

• The only way in which funds could be obtained from the Puma programme (and thus from Perpetual) was by compliance with Perpetual's stipulations in the MOA and the parameters.

• Perpetual was not an isolated principal, notwithstanding the specific statement within the MOA. For instance, the income declaration was not addressed to VHLA or MSL but to Perpetual.

• Ultimately, it was Perpetual which determined whether to release the funds or not.

• The actions carried out on behalf of VHLA in relation to procuring the loan, providing the loan documentation and then managing the loan repayments afterwards were all to the benefit of Perpetual. By paying a commission upon the settling of a loan and then the trailing commission, Perpetual secured the services of VHLA to act on its behalf for the life of the loan.

144 Counsel for Perpetual relied upon the following matters as demonstrating that the relationship was one of principal and principal:

• The MOA provided that VHLA acted as an independent contractor and a principal.
• VHLA was required to maintain adequate workers compensation or other equivalent insurance.
• VHLA was required to comply with all relevant legal requirements relating to the employment of persons.
• VHLA was able to submit loan applications to MSL for Perpetual to make an approved mortgage.
• VHLA acknowledged and agreed that Perpetual and MSL relied on VHLA's reputation, skill and judgment in the selection and finalisation of loans and the provision of documentation.
• VHLA was required to pay from its own fund all costs and expenses in relation to performing its obligations under the MOA.
• VHLA did not obtain funds exclusively through Puma, but had other sources of funds. It could pick and choose what type of product it was offering to the public.
• VHLA employed about 36 people and had a number of different departments.
• VHLA dealt with the borrower after settlement of a loan and would answer queries and chase up arrears.
• VHLA engaged brokers such as Medallion without the knowledge or approval of Perpetual and entered into separate arrangements with the brokers.
• VHLA instructed valuers and solicitors in relation to the provision of a loan.
• VHLA did not keep any files which emanated from Perpetual.[161]
• VHLA did not send out correspondence to its borrowers using a Perpetual logo, rather correspondence went out under its own name.
• Perpetual did not control the way in which VHLA conducted its activities or sourced its loans.

145 Central to the notion of the existence of an implied principal/agent relationship is an examination of the surrounding facts, which include, the terms of the MOA, the parameters and the loan contract. A couple of the propositions previously set out are worth repeating briefly, particularly in relation to the specific identification of VHLA as an independent contractor as provided in clause 12.1.

146 First characterisation of VHLA as an independent contractor does not, of itself, mean that it cannot act as agent for Perpetual. As Bowstead and Reynolds[162] point out, the dichotomy between employee and independent contractor stems from the law of tort. A number of the points made by Perpetual relating to the manner in which VHLA conducted its own business (e.g. workers compensation, engagement of staff, operating from a separate building, the ability to deal with other funders) may be relevant to determining whether, as may occur in a claim in tort, VHLA was an independent contractor.[163] However, its existence as a separate entity carrying on its own business does not preclude an inference that the true nature of its relationship with Perpetual was one of agent and principal.

147 Nor does the fact that VHLA had other sources of funds negate the proposition that it was the agent of Perpetual for the purpose of Mr Schmidt's loan. There is nothing inimical to the relationship of principal and agent in the suggestion that a person or organisation can be the agent of separate principals in relation to different transactions. Indeed, insurance agents often operate in this way. The true focus of the inquiry is necessarily upon the relationship between Perpetual and VHLA.

148 Second, the statements of principle by members of the House of Lords [164] and as Finn J's observations in South Sydney demonstrate, that the use of such language as is contained in clause 12.1,[165] is not determinative of the nature of the relationship, although it may disclose, perhaps persuasively, the intention of the parties.

149 Counsel for Perpetual drew my attention to what I said, when sitting as an Acting Justice of Appeal in Homeare Direct Shopping Pty Ltd v Gray:[166]

Mary Kay Cosmetics Pty Ltd does not stand for the proposition that one cannot look beyond the contract in question to ascertain the true nature of the arrangement. At best it is authority for the proposition that one should be careful before looking behind the express terms of the agreement, particularly where there is ambiguity. However, as both the trial judge and the Full Court made clear, the agreement needed to be considered in the light of the other written material (in that case a manual) and the conduct of the parties. In my view, nothing which was said in Mary Kay Cosmetics Pty Ltd precludes an analysis based on the conduct of the parties as well as all the relevant written material in determining the scope of the principal and agent relationship between Homecare and De Groot

150 I accept that a court must be careful in putting to one side the express intention of the parties to the effect that the arrangement between them is not one of principal and agent. [167] Here of course clause 12 of the MOA goes to considerable lengths to emphasise that no such relationship existed. Not surprisingly counsel for Perpetual asked me to look no further than the MOA in determining this question. But that is not what the law requires - all the surrounding circumstances must be examined. For reasons I shall now set out, the nomenclature describing VHLA as an independent contractor and principal disguised the reality of the situation.

151 The relationship between Perpetual and VHLA involves an examination of their dealings and contractual arrangements not only during the loan application process but also of the manner in which the loan was managed after its disbursement to Mr Schmidt.

152 The securing of Mr Schmidt's application and the processing of the loan through MSL was all to Perpetual's benefit. As the loan contract made clear VHLA managed the loan contract and the security and, was authorised "to exercise all the powers, rights and functions of Perpetual under your loan contract and the securities on its behalf"[168]; the other terms of the loan's contract as set out at [103] and [104] demonstrate that Perpetual's relationship with the client was managed exclusively by VHLA. It was, I think, more than just a conduit between Perpetual and Mr Schmidt . VHLA was, to all intents and purposes, Perpetual's right hand in procuring the loan and managing it after the funds were released as the evidence of Mr Mingos[169] demonstrated:

Part of our function, that's what we were getting paid for, the upfront commission, and also trailing commission, would be that we would manage the loan. After the settlement of the loan we are the people with whom the borrow [sic] deals with. We sent out the statements. We answer any queries that they may have. Part of the process also is, making sure that any person, or any loan borrower, who falls into arrears, is hopefully brought back into ine, so our arrears department would get in contact with them and say, "Hey, listen, you're late". Maybe they forgot, maybe they were away on holidays, lots of different maybes. Usually it's the Grandmother just died last week, lots of stuff like that occur, and we just try and make sure that the loan gets up to date, because as was lead [sic] in evidence earlier, if the loan's in arrears for more than 60 days, then we don't get paid per dollar, on top of that, we also get a bad reputation as being a bad mortgage manager.

153 Clearly VHLA acted, with the consent of Perpetual, on its behalf in its dealings with Mr Schmidt both prior to the signing of the loan contract and subsequently. By the terms of the MOA and the parameters Perpetual, dictated in relatively precise terms the manner in which VHLA was to deal with Perpetual's borrowers - inconsistent with a relationship of principal and principal. In addition, VHLA was, pursuant to clause 14.2 of the MOA, obliged to permit inspection of its documents by Perpetual. By clause 13.5 VHLA "must comply with any directions given to it by Perpetual or MSL in relation to the agreement." This demonstrates a real level of control by Perpetual over VHLA's activities, again inconsistent with a principal and principal relationship.

154 The totality of the relationship demonstrates that VHLA was, in truth, the agent of Perpetual. VHLA sought out the borrower and ensured that the documentation was in order and in compliance with the parameters (which included the provision of at least one document addressed directly to Perpetual). It was, unlike an independent contractor, required to comply with directions given by Perpetual or MSL. The loan contract, and its administration, I think, exposed the true nature of the relationship and the one that subsisted in fact. Once it was entered into by the borrower, VHLA handled, on behalf of Perpetual, all aspects of the management of the loan repayments, accounts, statements, and any defaults.

155 Perpetual relied upon the decision in Morlend to refute the proposition that in circumstances involving loan procurement the broker is to be regarded as the agent of the financier. I think that such reliance is misplaced. The facts in that case need to be considered. The Westendorps guaranteed a loan by Morlend to their son, who had approached a finance broker who in turn procured finance with Morlend and prepared the documentation. Fullagar J (with whom Brooking and Tadgell JJ agreed) held that the broker was the agent of the Westendorps, notwithstanding that he had received commission and prepared the documentation. That factual scenario, however, is a long way (measured I think in kilometres rather than metres) from the facts in the present case. Mr Schmidt had no contact with VHLA - he did not, like Westendorp Jr, engage VHLA to act on his behalf. Moreover, as the loan contract, the parameters and the evidence as to subsequent dealings with Mr Schmidt demonstrate, VHLA played a managerial role in relation to Mr Schmidt's loan - not on his behalf (unlike the agent in Morlend) but rather on behalf of Perpetual.

156 Notwithstanding the language of the MOA, I am satisfied that VHLA's role in the procuring and administration of Mr Schimdt's loan was such that it can be reasonably inferred, that VHLA was acting as the agent of Perpetual.[170]

Was VHLA acting within the scope of its authority as Perpetual's agent?

157 Perpetual argued that if VHLA was characterised as its agent, then in processing the loan in the fashion it did, it was acting outside the scope of its authority as set out in the MOA and the parameters. It was said that VHLA's failure to conduct an interview, as it was required to do so, meant that such conduct was outside the scope of its authority.

158 This argument depended upon the acceptance of two propositions:

(a) That the requirement that VHLA personally interview a borrower, in some way, limited the scope of VHLA's authority and, if so, in what manner;

(b) That, notwithstanding the written word of the Parameters, this was, in fact, a limitation on the scope of VHLA's authority.

159 As a general rule the principal is responsible for all acts of his or her agent performed within the scope of that agent's authority. That authority extends to all acts which are necessary or ordinarily incidental to the exercise of the express authority.

160 The actual authority of an agent may be expressed or implied. In Equiticorp Finance Ltd (in liq) v Bank of New Zealand[171] Clarke and Cripps JJA said at 132:

Actual authority arises where a principal grants, and an agent accepts, authority for the agent to perform specific tasks on behalf of the principal - in short there must be a consensual agreement between the principal and agent. Notwithstanding the absence of an express agreement, the parties, that is, the principal and agent, may conduct themselves in such a way that it is proper to infer that the relevant authority has been conferred on the agent.

Accordingly, where the question is whether the agent has implied authority to act in a particular way the court directs its attention to the conduct of the parties in order to decide whether the inference of authority should be drawn.[172]

161 In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd, Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ said:

As Dixon AJ said in Press v Mathers, 'in any ordinary case the question whether one person authorized another to do an act or series of acts on his behalf is best answered by considering for whose benefit or in whose interest it was intended it should be done'. Such a consideration may not be conclusive, but it is a useful practical starting point [citation omitted].[173]

162 The extent of the actual authority of an agent often may be expressed either in written or oral form. However it may also be implied. In Statewide Tobacco Services Ltd v Morley, Ormiston J said as follows:

It is, however, important to realise the breadth of the concept of implied actual authority. This can best be seen from the brief summary appearing in Bowstead, on Agency, 15th ed, p.93: 'The most obvious cases of implied authority arise in the forms of incidental authority (implied authority to do whatever is necessarily or normally incidental to the activity expressly authorised), usual authority (implied authority to do whatever an agent of the type concerned would usually have authority to do) and customary authority (implied authority to act in accordance with such applicable business customs as are reasonable); there is a further general category of implied authority arising from the course of dealing between the parties and the circumstances of the case'. (Emphasis added.)[174]

163 In Cousens v Grayridge Pty Ltd,[175] the Court of Appeal in this State, considered decisions of the English Court of Appeal in Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd[176] and Hely-Hutchinson v Brayhead Ltd[177] and said as follows:

Freeman & Lockyer and Hely-Hutchinson are both cited by Bowstead on Agency for the proposition that every agent has such authority as is to be inferred from the conduct of the parties and the circumstances of the case.

164 The first proposition advanced by Perpetual is that the terms of the parameters requiring the personal interview by VHLA of a borrower such as Mr Schmidt limited the scope of VHLA's authority. It was said that VHLA was required to carry out interviews itself. It had no authority to delegate such a task to Medallion, if that be the case.

165 In the course of argument, my attention was drawn to the decision of the High Court in Colonial Mutual Life Assurance Society Ltd v The Producers and Citizens Cooperative Assurance Company of Australia Ltd.[178] In that case CML employed one Herbert Ridley as a salesman of its life insurance policies. Ridley, in selling CML's policies, defamed CML's rival, The Producers and Citizens Cooperative by telling potential purchasers that Producers was insolvent. One of the terms of Ridley's written retainer as an agent was that he would not use disparaging language denigrating the character, integrity or conduct of any person or institution.

Before the High Court the question was whether CML was liable for the defamatory statements made by Ridley, given that he did not observe the stipulation in his agreement with CML. Gavin Duffy CJ and Stark J said:

We apprehend that one is liable for another's tortious act 'if he expressly directs him to do it or if he employs that other person as his agent and the act complained of is in the scope of the agent's authority'. It is not necessary that the particular act should have been authorised; it is enough that the agent should have been put in a position to do the class of acts complained of. And if an unlawful act done by an agent be within the scope of his authority, it is immaterial that the principal directed the agent not to do it.[179]

If the view be right which I have already expressed, that the 'agent' represented the company in soliciting proposals so that he was acting in right of the company with its authority, it follows that the company in confiding to his judgment, within the limits of relevance and a reasonableness, the choice of inducements and arguments, authorised him on its behalf to address to prospective opponents such observations as appeared to him appropriate. The undertaking contained in his contract not to disparage other institutions is not a limitation of his authority but a promise as to the manner of its exercise. In these circumstances I do not think it is any extension of the principle to hold the company liable for the slanders which he thought proper to include in his apparatus of persuasion.

The wrong committed arose from the mistaken or erroneous manner in which the actual authority committed to him was exercised when acting as a true agent representing his principal in dealing with third persons.[180]

166 The principles stated by the High Court in Colonial Mutual are directly applicable to the argument put on behalf of Perpetual. It invested VHLA with the authority to handle loan applications and process those applications for ultimate approval by Perpetual or MSL and to then manage the loans once they had been approved and disbursed. The precise manner by which it went about exercising that authority was laid down in the parameters - such as the necessity for an interview, the provision of a loan application, the criteria for low doc loans to name but a few examples - however this does not, as the High Court pointed out in Colonial Mutual, limit the authority of VHLA in a general sense to carry out the tasks it was entrusted with.

167 By analogy with the CML agreement, the parameters contained a series of promises as to the manner in which VHLA would exercise its authority, but this was not a limitation on the scope of its authority; rather, it has a remedy against VHLA for breach of its promise as is now reflected in the claim for indemnity made by Perpetual against VHL.

168 It follows that the argument based upon a limitation of the scope of the authority by reason of the failure by VHLA to comply with the personal interview provision is, I think, misplaced.

169 Even if I was satisfied that the provision limited the scope of VHLA's authority, I think that it was inoperative given the manner in which borrowers' applications were dealt with from the commencement of the relationship between Perpetual and VHLA. It was tacitly ignored throughout that period.

170 For the reasons I have set out at [57] to [66] the requirement that VHLA personally interview borrowers was not observed by VHLA and, in a practical sense, could not be regarded as setting any limitation on the scope of VHLA's authority under the MOA.

171 I am satisfied that the manner in which the loan was processed by VHLA, including the failure to interview Mr Schmidt, was within the authority conferred upon it by Perpetual.

172 Mr Schmidt alleges that VHLA breached its duty of care to Mr Schmidt. In summary, the particulars of breach are as follows:[181]

(a) Accepting instructions as to Mr Schmidt's income from an unknown third party - namely, Maddocks.

(b) VHLA could not have been satisfied, on the material provided by Medallion, that Mr Schmidt had demonstrated a continuity of stable income.

(c) VHLA failed to sight a statement of income and expenditure or two years' income tax returns.

(d) VHLA should have appreciated on the re-finance documents that no repayments on the line of credit had actually been made.

(e) VHLA failed to conduct a personal interview of Mr Schmidt.

173 The assertion of breach by Mr Schmidt presupposes the existence of such a duty. The law, however, does not recognise any duty upon a lender to assess the capacity of a borrower to repay a loan, or to ascertain the viability, of a loan or to verify the details provided in loan applications.[182] Nor is a lender under any duty to provide either a borrower or third party with commercial advice, although once such advice is tendered, the financier may assume a duty of care.[183]

174 Micarone provides an example of these principles. Perpetual, through its agent Puma, advanced $640,000 to the mortgagors on the security of various properties. The mortgagors failed to meet their obligations under the loan agreement and Perpetual commenced proceedings for possession. The mortgagors set up defences based on, in part, unconscionable conduct and breach of duty. In the South Australian Full Court, Debelle and Wicks JJ concluded:

What enquiries a lender makes to verify information given in support of a loan application is entirely its concern. It may choose to make no independent enquiries.

The plaintiff and Puma were parties contracting at arm's length. So far as Puma was concerned, the plaintiff's application was a standard application for finance. It was not aware of any unusual circumstances. There is no duty on a financier to provide either a borrower or a third party with commercial advice, although, if such advice is tendered, the financier may assume a duty of care. Nor is there any general principle of law that a lender is in a fiduciary relationship with a borrower. Circumstances may give rise to an obligation to give advice or to create a fiduciary duty. But such circumstances did not exist in this case. To adapt a phrase used by Scott VC in Banco Exterior Internacional SA v Thomas,[184] a lender is not to be treated as a branch of a social services agency. It is entirely for a lender to determine what enquiries it should make to verify information given in support of a loan application. On receipt of an apparently regular and satisfactory loan application, there is no obligation on the lender to pursue further detailed enquiries as to the circumstances of the applicant for the loan, the proposed business transaction to which it relates, or the commercial viability of the loan.[185] (Citations omitted).

175 Permanent Trustee Co Ltd v O'Donnell,[186] a case decided by the New South Wales Supreme Court last year, bears some factual similarities to those in this case. Streetwise was a finance broker which presented loan applications to Tonto Home Loans, a mortgage manager for Permanent. Streetwise falsified information in the loan applications, particularly details of the borrowers' income and assets, so that they could obtain LowDoc mortgages to invest in a property development joint venture with the broker. The loans were approved and Permanent took mortgages over the borrowers' homes. The property development joint ventures were unsuccessful, with the fraudulent perpetrator taking all of the funds and the mortgagors having no interest in any development property. Price J found that the respondents had engaged in unjust lending under the Contracts Review Act (NSW). However, his Honour also observed:

Whilst it might be for the lender to determine what enquiries it should make to verify information given in support of a loan application: Micarone at [625], it seems to me that adherence by a lender to its own guidelines has added importance where prospective borrowers are exposed to a serious risk of fraud. [187] [Emphasis added].

176 It is clear that Perpetual, as the lender, owed no duty to Mr Schmidt, as the authorities I have referred to demonstrate. It contracted at many arms' length. It knew nothing of the irregularities in the loan documents. It knew nothing of any potential vulnerability of Mr Schmidt. It merely provided the funds.

177 But what of VHLA, as the mortgage manager and the procurer of the loan? There is no authority for the proposition that a mortgage originator owes a duty of care to a borrower in its handling of a loan application and the submission of documentation to the financier or its representative.

178 However, given what was said in Micarone and O'Donnell, it is arguable that the knowledge of the inconsistent documentation and the existence of an obligation to interview Mr Schmidt as prescribed by the parameters may give rise to a duty of care. One must, I think, look to general principles relevant to establishing a duty of care where the loss is financial.[188] As the High Court noted in Woolcock Street Investments Pty Ltd v CDG Pty Ltd[189] - "claims for damages for pure economic loss present peculiar difficulty". In Perre v Apand Pty Ltd, McHugh J said:

The principles concerned with reasonable foreseeability of loss, indeterminacy of liability, autonomy of the individual, vulnerability to risk and the defendant's knowledge of the risk and its magnitude are, I think, relevant in determining whether a duty exists in all cases of liability for pure economic loss. In particular cases, other policies and principles may guide and even determine the outcome. But I do not think that a duty can be held to exist in any case of pure economic loss without considering the effect of the application of these general principles.[190]

179 A number of considerations arise when determining whether a duty exists in a claim arising out of negligence and involving only economic loss.

180 Reasonable foreseeability is a necessary, but not sufficient, condition relating to the duty of care. If that and consequential loss only is established, then damages are not recoverable.[191]

181 Liability must not be indeterminate. It cannot be to an indeterminate class, or in an indeterminate amount, or for an indeterminate period.[192] This approach:

eliminates or diminishes the prospect that there will come into existence liability to an indeterminate class of persons; it ensures that liability is confined to those individuals whose financial loss falls within the [defendant's] area of foreseeability.[193]

182 The imposition of the duty of care cannot impede the legitimate pursuit of financial gain.[194] In Woolcock Street, McHugh J said:

Speaking generally, a person owes no duty to prevent economic loss to another person even though the first person intends to cause economic loss to that other person. This particular immunity from liability reflects the common law's concern with the autonomy of the individual and its desire to give effect to the choices of the individual by not burdening his or her freedom of action. Thus, as long as a person is legitimately protecting or pursuing his or her commercial interests, the common law does not require that person to be concerned with the effect of his or her conduct on the economic interests of other persons.[195]

183 There must be demonstrable vulnerability to risk of damage of the kind suffered. This may be shown where the plaintiff is unable to protect himself or herself from the risk due to ignorance, social, political or economic constraints. It is in this context, that references to reliance and assumption of responsibility form part of the plaintiff's inability to protect himself or herself from the consequences of the defendant's conduct. In Perre, McHugh J said:

Vulnerability will often include, but not be synonymous with, concepts of reliance and assumption of responsibility. The widely used concepts of "reasonable reliance" and "assumption of responsibility" have come under criticism. This Court has recognised that neither concept represents a necessary or a sufficient criterion for determination of a duty of care, saying that commonly, but not necessarily, a duty will arise in cases which "involve an identified element of known reliance (or dependence) or the assumption of responsibility or a combination of the two". This statement provides an insight into why both reliance and assumption of responsibility have been rejected as a unifying criterion in cases of pure economic loss. Like proximity, reliance and assumption of responsibility are neither necessary nor sufficient to found a duty of care.

In my view, reliance and assumption of responsibility are merely indicators of the plaintiff's vulnerability to harm from the defendant's conduct, and it is the concept of vulnerability rather than these evidentiary indicators which is the relevant criterion for determining whether a duty of care exists. [Citations omitted].[196]

His Honour also said that a duty of care should not be imposed if the plaintiff could have taken steps to protect itself from the loss:

In many cases, there will be no sound reason for imposing a duty on the defendant to protect the plaintiff from economic loss where it was reasonably open to the plaintiff to take steps to protect itself. The vulnerability of the plaintiff to harm from the defendant's conduct is therefore ordinarily a prerequisite to imposing a duty. If the plaintiff has taken, or could have taken steps to protect itself from the defendant's conduct and was not induced by the defendant's conduct from taking such steps, there is no reason why the law should step in and impose a duty on the defendant to protect the plaintiff from the risk of pure economic loss.[197]

184 Finally, it is necessary to demonstrate knowledge by the defendant of harm to the plaintiff.[198] The case for imposing a duty of care is strengthened if the defendant knew of the magnitude of the risk.[199] Generally, actual knowledge of the risk is required, although in some cases constructive knowledge will be sufficient.

185 I am not satisfied that VHLA owed a duty of care to Mr Schmidt. I am prepared to accept, with some hesitation, that it was reasonably foreseeable on the part of VHLA that in the event that there were obvious inconsistencies in the documentation and that it failed to carry out a personal interview, there was a risk (not far fetched or fanciful) that Mr Schmidt would suffer financial loss. However, as we have seen, foreseeability alone is not sufficient. The following factors point, I suggest, against the imposition of a duty of care.

• First, there was no direct relationship or dealings between Mr Schmidt and VHLA.

• Second, Mr Schmidt did not rely upon VHLA - he did not know of its existence. His reliance was upon Maddocks.

• Third, VHLA did not assume any responsibility on his behalf. There was no understanding or dealings between Mr Schmidt and VHLA which could have given rise to such an assumption of responsibility.

• Fourth, Mr Schmidt was, as I perceived the situation, naïve and gullible, but he was nevertheless capable of protecting his own interests, to a certain extent.[200] He did not suffer from any mental infirmity. It was open to him to obtain independent advice.

• Fifth, there was no conduct on the part of VHLA which induced Mr Schmidt to not protect his own interests.

• Finally, it was not up to VHLA to determine whether the loan was approved or not. Whilst it had control over the provision of the loan documentation to MSL, it had no control over the ultimate decision to approve the loan and provide the funds.

Did VHLA and/or Medallion engage in unconscionable conduct in relation to Mr Schmidt's loan?

186 The case against VHLA on this issue is that set out in the 26 November pleadings[201] which alleges that VHLA "contrary to s 51AB, further or alternatively s 51AA, further or alternatively s 51AC of the TPA 1974, further or alternatively s 12CB of the ASIC Act 2001, further or alternatively s 7, further or alternatively s 8, further or alternatively s 8A of the Fair Trading Act 1999" engaged in unconscionable conduct.

187 The pleading within the counterclaim does not specify particulars of the impugned conduct of VHLA, however in final submissions the relevant aspects of its conduct were identified by counsel as follows:

(a) Neither VHLA nor Medallion conducted a personal interview of Mr Schmidt.

(b) VHLA knew that no such interview had been conducted by itself or Medallion.

(c) VHLA was aware that instructions to Medallion came from an unknown third party, now known to be Maddocks.

(d) VHLA disregarded the parameters and, in particular, the requirement to conduct a personal interview.

(e) The failure by VHLA to verify Mr Schmidt's income, particularly when it knew that his true income was not disclosed in either the loan application or the income declaration.

188 Section 12CB(1) of the ASICA substantially mirrors the provisions of s 51AB of the TPA. The relevant provisions prohibit a person, in connection with the supply of financial services,[202] engaging in conduct which is unreasonable. Section 12CB(2) then sets out criteria applicable (not exclusive or mandatory) to the determination of whether such conduct is unreasonable.

(2) Without limiting the matters to which the court may have regard for the purpose of determining whether a person (the supplier ) has contravened subsection (1) in connection with the supply or possible supply of services to a person (the consumer ), the court may have regard to:

(a) the relative strengths of the bargaining positions of the supplier and the consumer; and

(b) whether, as a result of conduct engaged in by the supplier, the consumer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; and

(c) whether the consumer was able to understand any documents relating to the supply or possible supply of the services; and

(d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the consumer or a person acting on behalf of the consumer by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the services; and

(e) the amount for which, and the circumstances under which, the consumer could have acquired identical or equivalent services from a person other than the supplier.

189 It was accepted by counsel for Mr Schmidt that neither s 51AA or s 51AB of the TPA were applicable to his claim.[203] However, he relied on s 51AC of the TPA, which deals with unconscionable conduct in business transactions. It also sets out a series of criteria in s 51AC(3):

Without in any way limiting the matters to which the court may have regard for the purpose of determining whether a corporation or a person (the supplier ) has contravened subsection (1) or (2) in connection with the supply or possible supply of goods or services to a person or a corporation (the business consumer ), the court may have regard to:

(a) the relative strengths of the bargaining positions of the supplier and the business consumer; and

(b) whether, as a result of conduct engaged in by the supplier, the business consumer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; and

(c) whether the business consumer was able to understand any documents relating to the supply or possible supply of the goods or services; and

(d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the business consumer or a person acting on behalf of the business consumer by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the goods or services; and

(e) the amount for which, and the circumstances under which, the business consumer could have acquired identical or equivalent goods or services from a person other than the supplier; and

(f) the extent to which the supplier's conduct towards the business consumer was consistent with the supplier's conduct in similar transactions between the supplier and other like business consumers; and

(g) the requirements of any applicable industry code; and

(h) the requirements of any other industry code, if the business consumer acted on the reasonable belief that the supplier would comply with that code; and

(i) the extent to which the supplier unreasonably failed to disclose to the business consumer:

(i) any intended conduct of the supplier that might affect the interests of the business consumer; and

(ii) any risks to the business consumer arising from the supplier's intended conduct (being risks that the supplier should have foreseen would not be apparent to the business consumer); and

(j) the extent to which the supplier was willing to negotiate the terms and conditions of any contract for supply of the goods or services with the business consumer; and

(ja) whether the supplier has a contractual right to vary unilaterally a term or condition of a contract between the supplier and the business consumer for the supply of the goods or services; and

(k) the extent to which the supplier and the business consumer acted in good faith.

190 As counsel for Perpetual and VHL pointed out, the application of the principle of unconscionable conduct under the general law is usually confined to circumstances where a party to a transaction is under a special disadvantage such as, to use the words of Fullagar J in Blomley v Ryan:

Among them are poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary. The common characteristic seems to be that they have the effect of placing one party at a serious disadvantage vis-à-vis the other [204]

...illness, ignorance, inexperience, impaired faculties, financial need or other circumstances affect his ability to conserve his own interests....[205]

191 These lists are not exhaustive and are "no more than particular exemplifications of an underlying general principle",[206] that underlying principle being that the person's condition "seriously affects the ability of the innocent party to make a judgment as to his own best interests".[207] As Harper J recently noted in Kakavas v Crown Melbourne Ltd[208] "the range of disabilities which may, according to the circumstances become "special" are beyond easy classification".

192 I should state at this point that I am not satisfied that Mr Schmidt suffered from any linguistic, educational or intellectual disability in respect of which Medallion or VHLA took advantage. VHLA knew nothing of him and he was, to use the vernacular, "just another customer". He has engaged in minor financial dealings in the past. He has no physical or mental impairment but he is, as I discuss later, unsophisticated and naïve.

193 The law has, however, developed since the decisions in Blomley and Amadio. Statutory provisions such as these in the TPA and the ASICA to which I have referred have arguably enlargened the scope of the concept of unconscionable conduct.[209] Counsel for Mr Schmidt argued that it has now been said by Judges of the Federal Court[210] and, sub silentio, by the High Court, that it is not essential to establish special disadvantage in the sense mentioned by Fullagar or Kitto J in Blomley, but rather, there may be circumstances, particularly in the context of the enlarged statutory tests, where the relationship between the parties is such that the conduct of one party is unconscionable vis-à-vis the other, notwithstanding that there is no linguistic, educational or intellectual disability.

194 In recent years, "disadvantage" has been described as falling into two categories - constitutional and situational. A constitutional disadvantage is a Blomley/Amadio type disadvantage and stems from an inherent infirmity, weakness or deficiency (for example, sickness, drunkenness or illiteracy - as has been seen). A situational disadvantage, on the other hand, arises out of the business or financial weakness of the disadvantaged party: it arises out of the intersection of the legal and commercial circumstances in which the parties find themselves.[211]

195 In ACCC v CG Berbatis Holdings Pty Ltd, Gleeson CJ referred to the concept of situational disadvantage in the following terms:

In Blomley v Ryan, Fullagar J, after pointing out that the circumstances of disability or disadvantage that can be involved in unconscionable conduct are of great variety and are difficult to classify, gave, as examples, 'poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary.' The common characteristic of such circumstances is that they place one party at a serious disadvantage in dealing with the other.

In the present case, French J said that the lessees suffered from a 'situational' as distinct from a 'constitutional' disadvantage, in that it did not stem from any inherent infirmity or weakness or deficiency. That idea was developed somewhat in a joint judgment, to which French J was a party, in Australian Competition and Consumer Commission v Samton Holdings Pty Ltd, where it was said that, under the rubric of unconscionable conduct, equity will set aside a contract or disposition resulting from the knowing exploitation by one party of the special disadvantage of another, and then it was said:

'The special disadvantage may be constitutional, deriving from age, illness, poverty, inexperience or lack of education: Commercial Bank of Australia Ltd v Amadio. Or it may be situational, deriving from particular features of a relationship between actors in the transaction such as the emotional dependence of one on the other: Louth v Diprose; Bridgewater v Leahy'.

While, with respect to those who think otherwise, I would not assign the facts of Bridgewater v Leahy to such a category, the reference to emotional dependence of the kind illustrated by Louth v Diprose as a form of special disadvantage described as 'situational' rather than 'constitutional' is understandable and acceptable, provided that such descriptions do not take on a life of their own, in substitution for the language of the statute, and the content of the law to which it refers. There is a risk that categories, adopted as a convenient method of exposition of an underlying principle, might be misunderstood, and come to supplant the principle. The stream of judicial exposition of principle cannot rise above the source; and there is nothing to suggest that French J intended that it should. A problem is that the words 'situation' and 'disadvantage' have ordinary meanings which, in combination, extend far beyond the bounds of the law referred to in s 51AA; and, it may be added, far beyond the bounds of what was explained to Parliament as the purpose of the section.(citations omitted) [212]

However, his Honour went on to make a point as to the inequality of bargaining positions that should not be lost in the consideration of a case such as this:

One thing is clear, and is illustrated by the decision in Samton Holdings itself. A person is not in a position of relevant disadvantage, constitutional, situational, or otherwise, simply because of inequality of bargaining power. Many, perhaps even most, contracts are made between parties of unequal bargaining power, and good conscience does not require parties to contractual negotiations to forfeit their advantages, or neglect their own interests.[213]

196 Last year, in ACCC v Allphones Retail Pty Ltd (No. 2), Foster J set out the following principles relevant to the application of s 51AC of the TPA:

Section 51AC was introduced into Pt IV of the TPA by the Trade Practices Amendment (Fair Trading) Act 1998 (Cth). It came into effect on 1 July 1998. Sections 51AA and 51AB were already in the TPA as at 1998.

Subsections (3), (4), (5) and (6) set out statutory guidance as to the factors to which the court can and cannot have regard for the purposes of determining whether a corporation has contravened either subs (1) or (2) of s 51AC. The list of factors set out in those sub-paragraphs to which the court is permitted to have regard is not exhaustive.

...

There is a body of authority in this court which establishes the following propositions:

(a) The scope of s 51AC is wider than that of s 51AA. The meaning of unconscionable for the purposes of s 51AC is not limited to the meaning of the word according to established principles of common law and equity.

(b) The ordinary or dictionary meaning of unconscionable, which involves notions of serious misconduct or something which is clearly unfair or unreasonable, is picked up by the use of the word in s 51AC. When used in that section, the expression requires that the actions of the alleged contravenor show no regard for conscience, and be irreconcilable with what is right or reasonable. Inevitably the expression imports a pejorative moral judgment.

(c) Normally, some moral fault or moral responsibility would be involved. This would not ordinarily be present if the critical actions are merely negligent. There would ordinarily need to be a deliberate (in the sense of intentional) act or at least a reckless act.

The above statements of principle provide useful guidance as to the content of the concept of unconscionability or unconscionable when used in s 51AC of the TPA. Of necessity, the authorities to which I have referred do not prescribe a precise definition which would be able to be applied to every set of circumstances presented to the court for consideration. The application of the meaning accorded to the concept will always be a matter of judgment in every case and will depend upon a careful consideration of the circumstances of each case.

It must also be remembered that, as is the case with other sections of the TPA contained in Pts IVA, IVB and V, s 51AC establishes a norm of conduct. Failure to observe that norm has consequences provided elsewhere in the Act. (Citations omitted). [214]

197 Let me turn now to the concept of asset based lending which Dr Patterson has described in the following terms:

Where a loan is secured by a substantial asset, some lenders may engage in a practice known as 'asset based lending'. Asset based lending is lending on the security of an asset - such as real property or shares - rather than relying on a borrower having sufficient income to repay the loan.[215]

198 VHLA knew that Mr Schmidt's only real asset was his home Given its participation in the "fudging" of the figures, it could have had no confidence in the assertion that he was a self-employed painter, particularly one who was in a position to service the loan from income. An analysis of the asset builder loan statements would have demonstrated to VHLA that Mr Schmidt's repayments were being made out of capital, rather than from any income source. The loan to Mr Schmidt involved asset based lending.

199 A large body of cases (both at single judge and appellate level) have now been decided concerning asset based lending and the liability of a borrower to his or her lender upon default. Many have been determined pursuant to the provisions of the Uniform Consumer Credit Code or the Contracts Review Act 1980 (NSW).[216] However, there are also a number of decisions where courts have considered whether, in the context of an asset based loan, special disadvantage has been demonstrated so as to establish a claim of unconscionable conduct on the part of the lender or those responsible for arranging the loan.

200 In Kowalczuk v Accom Finance Pty Ltd,[217] the New South Wales Court of Appeal said that it can been accepted that "pure asset lending", i.e. "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"[218] is, in some circumstances, unjust within the meaning of the Contracts Review Act, or unconscionable.[219] The Court went on to say:

However whether lending on the basis that the loan can adequately be repaid from the security, is in the circumstances of any particular case unconscionable or unjust, depends on other matters as well.[220]

In other words, the mere fact that the loan is asset based is not, of itself, sufficient to make it unconscionable. There must be some other factor that makes the conduct of the lender morally repugnant.

201 In Elkofairi v Permanent Trustee Co Ltd,[221] the appellant was a co-surety with her husband for a loan which was defaulted upon. Her defence to the lender's claim, in part, was on the basis of unconscionable conduct in the Amadio sense. Mrs Elkofairi was poorly educated and could not read or write English. However, these facts were not known to the lender.[222] But what was known was that Mrs Elkofairi had no income and that the loan amount was a large borrowing secured over her only asset. This was apparent to the lender from the loan application form. Forty per cent of the loan was to be used for business or investment purposes but there was no information in the loan application form as to the nature of the business or the investment to be undertaken, what income it was likely to generate, whether a new business was to be established or whether the loan was to assist the purchase of an existing business or whether some other form of investment was involved.[223] There was a total absence of financial information, particularly in the application form, and no income was stated for either Mrs Elkofairi or her husband.[224]

202 Beazley JA (with whom Santow JA and Campbell AJA agreed) held that these facts should "certainly have sounded a warning bell to a lender in respect of any borrowing".[225] The lender was also aware that Mrs Elkofairi did not receive legal advice in respect of the mortgage and that it had no information as to her ability, existing or prospective, to service the loan. Her Honour then said:

...notwithstanding that the respondent did not have knowledge of the appellant's lack of education and her language and domestic difficulties, her lack of income, in the circumstances of this transaction - that is a large borrowing secured over her only asset, in circumstances where the application form failed to disclose any income for either husband or wife - placed her in a special position of disadvantage. Though the full extent of that special position of disadvantage was not known to the respondent, nonetheless the absence of any relevant financial information was sufficient to put the respondent on notice of the appellant's lack of capacity to meet the repayment obligations under the mortgage. That left as the only source of repayment the selling of her only asset, as again the respondent must be taken to have known.

Counsel for the respondent submitted that the respondent did not need to be concerned with the fact that the borrowers, or the appellant at least, had no income. It was sufficient for its purposes that the loan was amply secured. That was a position, according to the respondent, which the respondent was entitled to take. I do not agree. In fact, it demonstrates the unconscientious nature of the transaction and the advantage the respondent took of the appellant's disadvantageous position. On its own submission, the respondent was only concerned with its ability to recoup any amount outstanding on the loan in circumstances where it must be taken to have known, because on the only information the respondent had, the appellant had no income, that the appellant, who was exposed to liability for the whole of the loan, had no ability to make even the first payment. The unconscientious nature of the transaction was that she was thereby at risk of losing her only asset. That risk was both immediate and real. [226] (Emphasis added).

203 Small v Gray[227] was decided in the Supreme Court of New South Wales after Elkofairi. Mrs Gray signed a mortgage of her home to secure a loan to her son and daughter-in-law. Her case was different to that of Mr Schmidt in that Mrs Gray had no interest in the loan and was effectively a guarantor of the liabilities of her relatives. However, in common was the fact that there was little information available to the lenders as to her capacity to repay the loan. McDougall J said:

In Elkofairi, Beazley JA concluded at 20, 852 [61] that the deficiencies in the explanation that had been given to the appellant did not affect, but rather reinforced, the conclusion that the transaction was unconscionable.

In my judgment, the circumstance that the plaintiffs failed (on the evidence) to consider, let alone make enquiry as to, what appeared to be a significant discrepancy in the information that they procured, as to Kristine's financial circumstances, is sufficient to make it unconscionable for them to rely on the mortgage in circumstances where they were lending only on the basis that they were well secured and where they had no reason to be confident that the borrowers could service the loan. In those circumstances, it must have been apparent to them that Kristine, having no material interest in the transaction, was at risk. Their action in proceeding was, I think, in all the circumstances unconscionable.[228]

204 In ASIC v National Exchange Pty Ltd,[229] a decision of the Full Federal Court, National Exchange sent unsolicited offers to a number of shareholders of a demutualised company to purchase shares at less than half their value. The offer document was quite frank about this but National Exchange's strategy was to hope that at least some individuals would behave irrationally and agree to sell their shares. ASIC commenced proceedings under s 12CC of the ASICA. The Full Federal Court said:

National Exchange set out to systematically implement a strategy to take advantage of the fact that amongst the official members there would be a group of inexperienced persons who would act irrationally from a purely commercial viewpoint and would accept the offer. They were perceived to be vulnerable targets and ripe for exploitation, as they would be likely to act inadvertently and sell their shares without obtaining proper advice, and they were a predictable class of members from whom Tweed could procure a substantial financial advantage by reason of their commercially irrational conduct. This is not a case of shrewd commercial negotiation between businesses within acceptable boundaries. The conduct can properly be described as predatory and against good conscience. This is not a case of obtaining a low price by shrewd negotiation. It is predatory conduct designed to take advantage of inexperienced offerees.[230]

205 The Court concluded that such conduct was unconscionable: "there is a strong element of moral obloquy in this case" and National Exchange's conduct clearly "offends against basic notions of good conscience and fair play".[231]

206 In the context of this case, the common thread underpinning both the statutory provisions and the general law is, as Foster J pointed out in Allphones Retail, the necessity to establish conduct that is against good conscience and can properly be described as involving a deliberate act that is morally repugnant or, at the least, involves moral fault.[232]

207 Acceptance of the concept of situational disadvantage extends the reach of the doctrine[233] to cases involving asset lending where there is intentional moral obloquy, contrary to good conscience on the part of the financier or the procurer of the loan in relation to its dealings (including the processing of the loan application) with the borrower. It is not limited to knowledge of linguistic, educational or intellectual difficulties, but, I think, extends to a situation where the loan documentation alerts the financier or its representative to real issues (such as the patent discrepancies exposed in this case) concerning the borrower's ability to repay the loan, particularly where the security, in the form of the borrower's family home, is his or her only asset.

208 Recently in Kakavas[234] Harper J said as follows:

One of equity's enduring concerns has been the protection of the vulnerable. But that protection must be both principled and consistent. Neither principle nor consistency are served without a clear conception of both; and that in turn requires a careful identification of what is encompassed by the vulnerability which equity is prepared to protect. It requires, as well, an equally careful assessment of the proper measure of protection which in any given set of circumstances is appropriate. So, for example, while equity will sometimes intervene in circumstances where there has been an inequality of bargaining power, sometimes it will not. Again, it may on occasion be proper for equity to protect people from themselves. Ordinarily, however, each must accept responsibility for his or her action or inaction. The seeds of tyranny are to be found in the footsteps of those who profess to know more about what is good for the subjects of their attention than do the subjects themselves.

I readily accept that before determining that equity should intervene, one must be conscious of these wise cautionary words. However equity will protect individuals in an unequal bargaining position who are the subject of behaviour which can reasonably be regarded as morally repugnant.

209 No one factor is decisive in determining whether the conduct of VHLA was unconscionable. However, each of the following matters, it seems to me, are of significance:

(a) VHLA knew that there were irregularities in the income declaration and the loan application. This is unlike the situation in Micarone,[235] where the South Australian Full Court overturned the finding of the trial judge that the lender's conduct was unconscionable, noting that the loan application was "apparently regular and satisfactory". Here, Mr Schmidt's loan application figures had been "massaged". Moreover, it was known to VHLA that Mr Schmidt was in his mid sixties (as evidenced by the copy of his passport details) and had no ABN, notwithstanding the original application nominating income from self-employment of either $69,000 or $75,000, depending upon which document one looked at. There must have been significant doubt as to whether Mr Schmidt had any capacity to repay the loan. This is particularly so when VHLA knew from the details in the asset builder loan statements that his repayments of that loan were not being made out of other sources (such as income from self-employment or investments) but came out of the capital remaining in that account.

(b) There can be no doubt that Ms Bonnici knew the figures were fudged and chose to make no further inquiry. Indeed, to the contrary, once the $49,000 declaration was obtained and inserted within the application, it was submitted to MSL with no qualifying statement or observation concerning the previous figures and their internal discrepancies. Ms Bonnici was not called to explain what thought processes, if any, induced her to submit the loan to MSL.

(c) VHLA knew that as part of the MOA and the parameters, it was, at the least, contemplated that a personal interview of the borrower was to be undertaken. Whether it was undertaken by VHLA or Medallion is, to a certain extent, irrelevant. The clear purpose, of ensuring that one or other of the chain of intermediaries interviewed the borrower was to determine not only the existence of the borrower and his or her identity, but also in the broadest sense to confirm some of the details of the loan application. I do not suggest that there was any obligation to carry out an indepth interview or to go chapter and verse through the loan application or the income declaration, but rather, I think, to confirm the identity of the person and, further, that he or she carried on the occupation or trade described in the application. Not only was this not done, it was known to VHLA that it had not performed the check, and on the basis of the evidence available it could reasonably have concluded that Medallion had not carried out any such interview.

I am conscious of the fact that in certain circumstances a personal interview, either by telephone or in person, would not elicit any different details from the borrower than those already known to the mortgage originator or financier. However, I had the opportunity to observe and hear Mr Schmidt give evidence. It was not suggested to him in the course of the trial that he was party to the false description of his job and income within the documentation provided to VHLA; this was Maddocks' invention. In my view, only a few questions indeed, perhaps one, directed to Mr Schmidt's occupation and source of income would inevitably have led to the conclusion that his loan application details were false.

(d) VHLA knew that Mr Schmidt was in his mid-sixties, very close to the community retiring age and that this loan was secured by his only real asset. I repeat that it also knew that the asset builder loan had not been serviced by payments from income, but rather, from payments out of the available loan funds as evidenced by the statements provided.

210 I accept that Mr Schmidt knew that he was signing a mortgage. He understood that his house was security for the loan. He also knew that loan funds were to be paid out as he intended. As counsel for VHL and Perpetual emphasised it was Maddocks who was directly responsible for Mr Schmidt's loss. I also accept that this was not a situation in which Mr Schmidt was in desperate financial need, but rather, it was his decision without seeking any independent advice (i.e. from a financial advisor as he had in the past) to invest in the ill-fated investment scheme, although given his age and position, one should not be too critical of him endeavouring to provide for himself in his old age.

211 By the conclusion of the submissions made on behalf of VHL and Perpetual, one could have been forgiven for thinking that Mr George Soros had relocated to Robin Court Carrum. Contrary to those contentions I formed the view that Mr Schmidt was vulnerable in the sense that he was an unsophisticated and naïve man who had little financial nous. His financial dealings throughout his time in this country were minimal. He was putty in the hands of Maddocks. His demeanour and answers to questions when giving evidence were consistent with a man with limited education and only a rudimentary knowledge of the English language.

212 Notwithstanding the matters I have referred to in [210], in my view, VHLA's actions in processing the loan in the knowledge of the various factors I have referred to were deliberate and attended by moral fault and lack of moral responsibility. By, at the least, turning a blind eye to the irregularities in the loan application and the income declaration and ensuring that the supplementary information was massaged, VHLA did not act in good faith. Rather than just accept the massaged supplementary documentation, it could have, conscious of the inconsistency between the amounts in the three forms ($69,000, $75,000 and then $49,000), asked for further proof of the income of Mr Schmidt. This would undoubtedly have led to the rejection of the loan, as would a personal interview, which would have ascertained that all the figures provided and relevant to income were patent nonsense.

213 Accordingly, I am satisfied that VHLA acted unconscionably and in breach of the general law, s 51AC of the TPA and s 12CB of the ASICA. I am also satisfied that in the processing of the loan in this fashion it was, for the reasons I have set out, acting as Perpetual's agent. It follows that Perpetual is liable for VHLA's unconscionable conduct.

214 If I am wrong in my finding that Medallion was not VHLA's agent then I should state my conclusion as to Medallion's conduct. Medallion was party to the fudging of the figures. Medallion's conduct was also unconscionable for reasons akin to those I have set out in relation to VHLA. Further, Medallion was obliged to comply with the parameters pursuant to its agreement with VHLA. It also failed to conduct a personal interview which, as I have said, would have disclosed the true state of affairs.

215 Mr Schmidt faintly pressed a claim for loss based on the misleading and deceptive conduct on the part of VHLA. The claim was based upon breach of provisions of s 52 of the TPA, s 12DA of the ASICA and s 9 of the Fair Trading Act (Vic). The allegations of misleading or deceptive conduct were not particularised in the pleading, nor was there any effort made in final submissions to identify with precision those acts or omissions which constituted misleading or deceptive conduct.

216 As Deane and Fitzgerald JJ said in Taco Co of Australia Inc v Taco Bell Pty Ltd[236]

No conduct can mislead or deceive unless the representee labours under some erroneous assumption[237]

217 It is not necessary for me to repeat what I have said in relation to the contact between VHLA and Mr Schmidt and any misapprehension on his part induced by VHLA. The real vice in VHLA's handling of Mr Schmidt's loan application was the internal management of his application and its failure to conduct an interview with him - not what it may have said or done as perceived by Mr Schmidt. There was no representation or conduct on the part of VHLA of which Mr Schmidt was aware. He did not read any of the documentation - he simply signed where he was told to by Maddocks. If anyone was guilty of misleading or deceptive conduct it was Maddocks not VHLA.

218 No claim based on misleading and deceptive conduct on the part of VHLA has been made out by Mr Schmidt.

219 In Perpetual's defence to the counterclaim, contributory negligence is asserted on the basis that it was an answer or partial answer to "any loss or damage" sustained by Mr Schmidt. It was not made clear in the course of the trial or in the final submissions whether this argument was confined solely to the plea of negligence or, alternatively, to the claim based upon unconscionable conduct. I have assumed, given the pleading, that it is not restricted to negligence and is sought to be applied to the claim based on unconscionable conduct - which I have concluded has been established.

220 Perpetual provided the following particulars of contributory negligence:

(a) the Defendant failed to seek and/or obtain any advice and/or guidance as to the wisdom or prudence of investing in the property syndicates as promoted by Ian Maddocks;

(b) the Defendant allowed Ian Maddocks to arrange finance for investment at a time when the Defendant was aware that his own Bank had denied him finance due to his own personal and financial circumstances;

(c) the Defendant failed to make any inquiries and/or seek guidance as to whether he should trust Ian Maddocks in allowing him to arrange finance and/or make investments which Maddocks promoted;

(d) the failure to seek advice/guidance and the allowing of Maddocks to obtain finance was driven by a desire to earn unrealistic returns which, on any reasonable view, should have called for appropriate inquiry and/or investigation;

(e) the Defendant failed to obtain any security from Maddocks for his investments in the form of a mortgage and/or charge over the land that he understood he was investing in, alternatively a debenture over the company that was making the investment;

(f) the Defendant failed to obtain from Maddocks any legally binding document which acknowledged his interest in the property syndicate and that the property syndicate had an interest in the land promoted as being developed.

221 Counsel for Perpetual argued that this was a case in which s 63 of the Wrongs Act should be applied to the extent that the claim was totally defeated. Counsel for Mr Schmidt accepted that s 62 of the Act was sufficiently wide to cover the damage sustained by Mr Schmidt, but argued that if there was contributory negligence, it was not to the extent that it would defeat the claim. As I understood the concession by counsel for Mr Schmidt that if contributory negligence could be applied to Mr Schmidt's claim, it was only if Mr Schmidt's claim against VHLA was aptly characterised as arising from negligence on the part of VHLA.

222 Section 62(1) of the Wrongs Act falls within Part 10 and was amongst a raft of changes to the Act introduced as a result of the Ipp report to the Commonwealth Government. The section provides:

The principles that are applicable in determining whether a person has been negligent also apply in determining whether the person who suffered harm has been contributorily negligent in failing to take precautions against the risk of that harm.

Section 62(2) requires the standard of care to be that of a reasonable person in the position of Mr Schmidt and is to be determined on the basis of what he knew or ought to have known at the time of suffering harm. Section 63 provides that a Court may, by reason of contributory negligence, apply a reduction of 100% if it is just and equitable to do so with the ensuing result that the claim for damages is defeated.

223 In my view, it is not open to Perpetual to set up a defence of contributory negligence on the part of Mr Schmidt to a claim based upon unconscionable conduct. For contributory negligence to be raised as a defence the conduct of the claimant must involve a finding of a failure to exercise reasonable care. No such finding has been made. I will now try to explain my reasoning.

224 Section 63 is to be found in Part 10 of the Wrongs Act headed "Negligence". The application of that part to a claim is set out in s 44:

This part applies to any claim for damages resulting from negligence, regardless of whether the claim was brought in tort, in contract, under statute or otherwise.

Negligence is defined in s 43 of the Wrongs Act as meaning: "Failure to exercise reasonable care". It follows I think that for an allegation of contributory negligence, which is made under Division 7 of Part 10, it is necessary for the primary claim to be characterised as one involving negligent conduct on the part of the claimant, albeit that it may also give rise to a cause of action other than negligence.

225 The inquiry therefore in determining the application of the Act requires as a starting point (and perhaps end point) that the claim giving rise to an allegation of contributory negligence can be characterised as one arising from a failure to exercise reasonable care. I do not accept (although I note that this was not proffered as an argument by Perpetual) the proposition that the mere raising of the allegation of lack of reasonable care could result in the application of the Act. It is only when the conduct is identified and the legal consequences flowing from that conduct are known that it can be determined whether the Act is engaged or not.[238]

226 I have concluded that VHLA was not negligent, but rather its conduct was unconscionable. Mr Schmidt's loss flows from that conduct and, it follows, that Part 10 does not apply. Moreover, the remedy for such conduct is not damages, as s 43 requires, but equitable relief and here, as will be seen, in the form of setting aside the loan contract and the mortgage.

227 This conclusion is consistent with the approach undertaken by courts over decades (indeed centuries) in relation to determining whether contributory negligence is available in cases in which the primary claim arises out of an intentional tort.

228 In Horkin v North Melbourne Football Club Social Club,[239] Brooking J considered whether a defence of contributory negligence under s 25 of the Wrongs Act was available to a defendant in an action for intentional battery. After, if I may respectfully say so, a scholarly and exhaustive analysis of the authorities, in this country and the Commonwealth, his Honour concluded that it was not open to a defendant to allege contributory negligence in response to an intentional tort:

Given that one may consider whether it is fair and reasonable to regard the plaintiff as in any real sense as the author of his own harm, it is easy to understand why the law should as a matter of policy, withhold the defence in cases of intentional as opposed to negligent trespass to the person and to say with Prosser Handbook on Torts, 3rd ed,.436 that the reason why contributory negligence is no defence where the defendant intended to inflict injury is to be found in the difference between the fault of the defendant and that of the plaintiff; the difference is not merely in degree but in kind, and the social condemnation attached to the fault differs markedly.[240]

229 In Australian Guarantee Corporation Ltd v State Bank of Victoria Commissioners[241] Ormiston J concluded that contributory negligence was not available as a defence to an action for conversion of a cheque. His Honour adopted a line of Australian authority which specifically denied the availability of such a defence.[242] His Honour also pointed out the difficulty in relation to an apportionment as required by a finding of contributory negligence:

In any event, there are difficult questions which would arise in apportioning damages where the action of the defendant involve a wrongful dealing with property but where the plaintiff's damages are required to be reduced having regard to its 'share in the responsibility for the damage.[243]

230 Indeed, as Ormiston J implicitly recognised, I suggest, underpinning the concept of contributory negligence is the necessity to compare the degree of fault or culpability on the part of each of the parties. Traditionally, that consideration is in the context of comparing the lack of care of one party with the lack of care of the other and determining, having assessed the culpability and causal potency of the relevant acts, the degree of contributory negligence on the part of the plaintiff. As the High Court in Podrebersek v Australian Iron & Steel Pty Ltd said:

The making of an apportionment as between a plaintiff and a defendant of their respective shares in the responsibility for the damage involves a comparison both of culpability, ie of the degree of departure from the standard of care of the reasonable man and of the relative importance of the acts of the parties in causing the damage. It is the whole conduct of each negligent party in relation to the circumstances of the accident which must be subjected to comparative examination. The significance of the various elements involved in such an examination will vary from case to case; for example, the circumstances of some cases may be such that a comparison of the relative importance of the acts of the parties in causing the damage will be of little, if any, importance.(Citations omitted). [244]

231 A combination of s 42, s 43 and s 62 of the Wrongs Act, in my view, maintain those comparators mandating that notwithstanding the description of the cause of action provided that it can properly be characterised as behaviour amounting to negligent conduct, then it may be subject to a reduction, or indeed, defeated on the basis of contributory negligence. Unconscionable conduct does not fall within this rubric. It involves the application of equitable principles, also enshrined in statute, which attempt to provide a degree of protection to those who fall victim of unconscionable behaviour on the part of another. Fault, in the legal sense, forms no part of the determination of that issue.

232 In the context of this case, the allegation of contributory negligence could only be made out if negligence was established on the part of VHLA- it was not. The finding of unconscionable conduct does not trigger the operation of s 63 of the Wrongs Act. Perpetual is not able to rely upon a defence of contributory negligence.

The appropriate orders in respect of the unconscionable conduct claim

233 In Vadasz v Pioneer Concrete (SA) Pty Ltd the High Court said:

Thus unconscionability works in two ways. In its strict sense, it provides the justification for setting aside a transaction. More loosely, it provides the justification for not setting aside the transaction in its entirety or in doing so subject to conditions, so as to prevent one party obtaining an unwarranted benefit at the expense of the other.[245]

234 In Elkofairi, Beazley JA (with whom Santow JA and Campbell AJA agreed) said:

When a transaction is set aside for unconscionability or fraud, such order may be conditional on the repayment of any unwarranted benefit. The remedy to redress the effect of unconscionability should do no more than the minimum necessary to do so. The court thereby seeks to achieve 'practical justice"[246]

235 The loan contract and the mortgage should be set aside, as a result of VHLA's unconscionable conduct which is attributable to Perpetual. Accordingly, subject to one exception, the claim for repayment of the moneys borrowed plus interest should be dismissed as should the claim for possession of Mr Schmidt's home.

236 The exception is the amount used to pay out the Asset Builder loan. That loan and the obligation to repay it existed before any of the impugned conduct on the part of VHLA. Consistent with what was said in Elkofairi, it would be inequitable to relieve Mr Schmidt of this obligation. It follows that as a condition of dismissing Perpetual's claim Mr Schmidt is obliged to repay to Perpetual the sum of $85,269 plus interest.[2] Counsel for Mr Schmidt did not, properly, contend otherwise.

237 The question of an appropriate allowance for interest may be resolved by reference to what was said by the High Court in Maguire v Makaronis[247] and by the New South Wales Court of Appeal in Elkofairi.[248]

238 The novation deed was entered into between VHL, MSL and Perpetual on 20 July 2007. The thrust of the deed was that VHL would take over the rights and obligations of VHLA arising out of the MOA. I have set out a number of the terms in my ruling of 10 November 2009[249]. The nub of the argument on behalf of Perpetual is that pursuant to the terms of the MOA, it was entitled to an indemnity from VHL for any loss sustained as a result of VHLA's conduct. The novation deed provided for that obligation to be transferred to VHL notwithstanding that the conduct was that of VHLA, its predecessor. By the same token, VHL took the benefit of the trailing commissions which were payable, pursuant to the MOA, to VHLA.

239 No argument was put by counsel for VHL in relation to the scope of the indemnity or the transfer of obligations pursuant to the novation deed to suggest that the interpretation argued for by Perpetual was incorrect.

240 VHLA's conduct was in breach of the obligations contained in clauses 8.1(i) and (j) of the MOA. Under clause 10.1 Perpetual is entitled to an indemnity for any loss incurred as a result of that breach.

241 It follows that Perpetual is entitled to be indemnified by VHL for its loss occasioned by the unconscionable conduct of VHLA. That loss is of $104,730 plus interest which would have been payable to Perpetual pursuant to the provisions of the loan contract.

(a) VHLA engaged in unconscionable conduct in dealing with Mr Schmidt's loan application.

(b) VHLA, in dealing with the loan application, was acting as the agent of Perpetual.

(c) In dealing with the loan application, VHLA was acting within the scope of its authority as agent of Perpetual. Perpetual is, therefore, liable for VHLA's conduct.

(d) The loan contract and the mortgage should be set aside. However as a condition of that relief, Mr Schmidt is required to repay to Perpetual the sum of $85,269 plus interest.

(g) VHLA did not engage in misleading or deceptive conduct which resulted in any loss to Mr Schmidt.

(h) Perpetual's defence of contributory negligence to Mr Schmidt's claim cannot be sustained.

(i) Perpetual is entitled, pursuant to the MOA, to an indemnity from VHL as a result of VHLA's unconscionable conduct. The provisions of the novation deed entitle Perpetual to an indemnity from VHL for its loss of $104,731 plus interest.

243 The parties may, after consideration of these reasons, wish to make submissions relating to questions of interest and costs relevant to the orders against Perpetual and VHL. A short period of time will also enable the parties to discuss the form of the orders to facilitate the findings I have made.

[1] Exhibit P12, with interest accruing at $96.33 per day since 28 September 2009. See [54] - [56] below

[2] Mr Schmidt filed, pursuant to my order, on 11 November, a second further amended defence and counterclaim to which, on 24 November 2009, a responsive reply and amended defence was filed by Perpetual. Subject to a qualification which I will mention in a moment, I regard these as the operative pleadings. A defence and counterclaim filed on 26 November provided a "clean" version of Mr Schmidt's final position. Unfortunately, the numbering within this defence and the counterclaim was re-arranged, with the end result that there was no responsive defence to it by Perpetual. With one exception, there is no difference between the document of 11 November and that of 26 November. That distinction is that the 26 November document also pleads, in the context of unconscionable conduct, s 51AC of the TPA and s 12CB of the ASICA. This matter was raised in discussion with counsel and it is clear that the parties proceeded on the basis that it was open to Mr Schmidt to rely upon those two provisions. I have, accordingly, treated paragraph 40 of the 11 November document as including a claim based on s 51AC of the TPA and s 12CB of the ASICA.

[3] In Perpetual Trustees (Aust) Ltd v Schmidt [2009] VSC 508 I set out some of the background of this arrangement and extracts of the deed of novation.

[32] VHLA is referred to as Violet in the agreement.

[33] T302. Mr Rae said there were two or three hundred accredited brokers but only 10% were active in processing loans. T185.

[55] Tendered through Mr Mingos in evidence in chief, T144, see [22] above.

[58] Attachment 5 is headed "Austrack Section 21 Account Holder Identification Form". It requires identification of the "signatory" by an acceptable referee. See s 21 Financial Transaction Reports Act 1988.

[59] The full text of the indemnity is set out in [2009] VSC 508 [16].

[110] An exhibit to Mr Rae's affidavit of 21 November 2006 which describes that exhibit as the original of the application - T177-178.

[123] Exhibit P5, Page 7 of the schedule.

[128] Perpetual Trustees (Aust) Ltd v Schmidt [2009] VSC 508.

[129] [2009] HCA 27; (2009) 239 CLR 175 ('Aon').

[131] Ibid [133] citing Bryson J in Maronis Holdings Ltd v Nippon Credit Australia Ltd [2007] NSWSC 753 [15].

[132] For instance see Leotta v Public Transport Commission (NSW) (1976) 50 ALJR 666.

[137] Dobbs v National Bank of Australasia Limited [1935] HCA 49; (1935) 53 CLR 643, 651; Permanent Trustee Company Limited v Gulf Import and Export Company [2008] VSC 162.

[138] (2000) 204 CLR 333 [227];

[139] G E Dal Pont, Law of Agency (2nd ed, 2008) 4.3. See also the detailed analysis of Gummow J in Scott v Davis (2000) 204 CLR 333 [227]-[244].

[141] FMB Reynolds et al, Bowstead and Reynolds on Agency (18th ed, 2006) 2-030.

[142] See Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd & Ors [2004] HCA 52; (2004) 219 CLR 165; Branwhite v Worcester Works Finance Limited (1969) 1 AC 552, 587, Bonette v Woolworths Limited (1937) 37 SR (NSW) 142, 150; Dal Pont Law of Agency (2nd ed, 2008) 4.7.

[143] (1968) AC 1130, 1137.

[144] (1969) 1 AC 552, 587.

[145] [2000] FCA 1541; (2000) 177 ALR 611 ('South Sydney')

[151] See Press v Mathers [1927] VicLawRp 45; (1927) VLR 326, 332; Toll (FGCT) Pty Ltd v Alphafarm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165, [70].

[153] See Pacific Carriers Limited v BNP Paribas [2004] HCA 35; [2004] 218 CLR 451, 463; Flexirent Capital Pty Ltd v EBS Consulting Pty Ltd [2007] VSC 158.

[154] Dal Pont, Law of Agency( 2nd ed, 2008).

[155] [2004] HCA 35; [2004] 218 CLR 451, [36] ("Pacific Carriers").

[156] [2007] VSC 158.

[157] See Freeman and Lockyer (a firm) v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, 505.

[158] See also Hoare v McCarthy [1916] HCA 65; (1916) 22 CLR 296, 305-306.

[159] See Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising and Addressing Company Pty Ltd [1975] HCA 49; (1975) 133 CLR 72, 78.

[160] See [51] describing VHLA as an independent contractor.

[161] I regard this assertion as highly dubious, given that the income declaration and the loan contract each are addressed to Perpetual.

[162] Bowstead and Reynolds on Agency (18th ed, 2006) 1-030.

[163] See for example Sweeney v Boylan Nominees Pty Ltd [2006] HCA 19; (2006) 226 CLR 161

[166] [2008] VSCA 111 [50]

[167] Commissioner of Payroll Tax (Vic) v Mary Kay Cosmetics [1982] VicRp 87; (1982) VR 871.

[170] See Pole v Leask (1863) 8 LT 645, 648; Bonette v Woolworths Limited (1937) 37 SR (NSW) 142, 150.

[171] (1993) 32 NSWLR 50.

[172] Ibid 132. See also Press v Mathers [1927] VicLawRp 45; [1927] VLR 326; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; [2004] 219 CLR 165, 190.

[175] (2000) VSCA 96, [5]. See also [4].

[177] [1968] 1 QB 549.

[178] [1931] HCA 53; (1931) 46 CLR 41 ("Colonial Mutual").

[181] Paragraph 20A of the counterclaim.

[182] Banco Exterior Internacional SA v Thomas [1996] EWCA Civ 676; (1997) 1 WLR 221; Citibank v Nicholson [1997] SASC 6784; (1997) 70 SASR 206, 229; Micarone v Perpetual Trustees Australia Ltd [1999] SASC 265; (1999) 75 SASR 1 [625] ("Micarone").

[183] Beneficial Finance Corporation Ltd v Karavas (1991) 23 NSWLR 256, 276-277.

[184] [1996] EWCA Civ 676; [1997] 1 WLR 221, 230-231; [1997] 1 All ER 46, 56.

[185] [1999] SASC 265; (1999) 75 SASR 1 [625].

[186] [2009] NSWSC 902.

[188] Notwithstanding Part X of the _Wrongs Act i_t was not suggested that the general law principles were not applicable to resolution of this issue.

[189] [2004] HCA 16; (2003) 216 CLR 515 [21] ("Woolcock Street").

[190] [1999] HCA 36; (1999) 198 CLR 180, 220 ("Perre").

[193] Caltex Oil (Aust) Pty Ltd v The Dredge "Willemstad" [1976] HCA 65; (1976) 136 CLR 529, 593..

[194] Hill v Van Erp (1997) 188 CLR 159, 180.

[202] Financial service is defined by s 12CBA of the ASICA as meaning a service that consists of providing a financial product or "is otherwise supplied in relation to a financial product". Neither VHL or Perpetual argued that s 12CB was not applicable to VHLA's provision of services in relation to Mr Schmidt's loan.

[203] Section 51AAB provides that s 51AA and s 51AB do not apply to "conduct in relation to financial services ...".

[204] [1956] HCA 81; (1956) 99 CLR 362, 405 ("Blomley").

[205] Ibid 415. See also Bridgewater v Leahy [1998] HCA 66; (1998) 194 CLR 457; Commercial Bank of Australia Limited v Amadio [1983] HCA 14; (1982) 151 CLR 447, 474 ("Amadio").

[206] Amadio [1983] HCA 14; (1982) 151 CLR 447, 462 (Mason J).

[208] [2009] VSC 559 [430] ("Kakavas")

[209] There remains a debate as to what extent, if any, such provisions have enlargened the general law concept. See Hurley v McDonalds Australia Ltd [1999] FCA 1728; Canon Australia Pty Ltd v Patton [2007] NSWCA 246.

[210] Monroe Topple & Associates Pty Ltd v Institute of Chartered Accountants in Australia [2001] FCA 1056, Australian Competition and Consumer Commission v Simply No-Knead (Franchising) Pty Ltd [2000] FCA 1365; (2000) 104 FCR 253.

[211] Nicholas Seddon et al, Cheshire & Fifoot's Law of Contract (2008, 9th ed) 15.8.

[214] (2009) FCA 17 [109]-[110], [113]-[115]; see also ACCC v Dukemaster Pty Ltd [2009] FCA 682..

[215] Dr J.M. Patterson, "Knowledge and Neglect in Asset Based Lending: When is it unconscionable or unjust to lend to a borrower who cannot repay" (2009) 20 Journal of Banking and Finance Law and Practice 18.

[216] For example, Perpetual Trustee Co Ltd v Khoshaba (2006) NSWCA 41; Perpetual Trustees Victoria Limited v Ford [2008] NSWSC 29; (2008) 70 NSWLR 611; Permanent Mortgages Pty Ltd v Cook [2006] NSWSC 1104; (2006) ASC 155-082, all referred to in Dr Patterson's monograph.

[217] (2008) 252 ALR 55; [2008] NSWCA 343.

[218] Perpetual Trustee Co Ltd v Khoshaba (2006) NSWCA 41 [128].

[219] Kowalczuk v Accom Finance Pty Ltd [2008] NSWCA 343; (2008) 252 ALR 55 [96].

[221] [2002] NSWCA 413 ('Elkofairi').

[227] [2004] NSWSC 97. See also Attorney General of (New South Wales) v World Best Holdings Pty Ltd [2005] NSWCA 261; (2005) 63 NSWLR 557.

[229] [2005] FCAFC 226; [2005] 148 FCR 132.

[231] Ibid [43]-[44]. See also ACCC v Simply No Knead (Franchising) Pty Ltd [2000] FCA 1365; (2000) 104 FCR 253, ACCC v 4WD Systems Pty Ltd [2003] FCA 850; [2003] 200 ALR 491.

[232] See also John Holland Services Pty Ltd v Terranora Group Management Pty Ltd (2004) FCA 679.

[233] AJ Duggan, 'Unconscientious Dealing' in Parkinson P (ed), The Principles of Equity (2nd ed, 2003).

[235] [1999] SASC 265; (1999) 75 SASR 1.

[236] [1982] FCA 136; (1982) 42 ALR 177, 200.

[237] See also Campomar Sociedad, Limitada v Nike International Ltd [2000] HCA 12; (2000) 202 CLR 45 [106].

[238] Of course, it may be open in certain cases to determine on the pleadings whether the Act is engaged, depending upon the particular factual allegations. This is not such a case.

[239] [1983] VicRp 12; (1983) 1 VR 153. The Wrongs Act defines fault as meaning "negligence, breach or statutory duty or any other act or omission which gives rise to a liability in tort or would, apart from this part, give rise to the defence of contributory negligence".

[241] [1989] VicRp 57; (1989) VR 617.

[242] Wilton v Commonwealth Trading Bank of Australia (1973) 2 NSWLR 644, Day v Bank of New South Wales (1978) 18 SASR 163 and Grantham Homes Pty Ltd v Interstate Permanent Building Society (1979) 37 FLR 191.

[244] [1985] HCA 34; (1985) 59 ALR 529, 532.

[245] [1995] HCA 14; (1995) 184 CLR 102, 114.

[246] (2002) NSWCA 413 [98].

[247] [1997] HCA 23; (1997) 188 CLR 449, 476, 477.

[248] [2002] NSWCA 413 [83]-[85].

[249] [2009] VSC 508.