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Supreme Court 14 March 2012

Commonwealth Bank of Australian v Hamilton

[2012] NSWSC 242

Fraud & dishonesty
CONTRACTS LOAN CONTRACTS AND MORTGAGES FRAUD OF INVESTMENT CONSULTANT WHETHER BORROWERS LIABLE TO THE BANK BREACH OF WARRANTY OF AUTHORITY WHETHER SOLICITOR DISHONEST

Citation: Commonwealth Bank of Australia v Hamilton [2012] NSWSC 242
Court: Supreme Court of New South Wales
Date: 14 March 2012
Judge: Price J

Background

A husband and wife (the borrowers) each obtained home loans of $448,000 from the bank in September 2005 to purchase separate units in a Wentworthville apartment block. The loans were approved on the basis of contracts recording a purchase price of $560,000 per unit, but the actual consideration was later reduced to $365,000 per unit by deeds of variation executed before settlement. The bank had not obtained external valuations before approving the loans.

The borrowers' investment consultant, Graham Lee, orchestrated a fraudulent scheme that included producing inflated contract prices to the bank, supplying false financial information about the borrowers, and forging signatures on loan documents. On settlement, the bank handed over cheques totalling approximately $447,659 per transaction. A portion of each settlement sum was directed into the trust account of Webb Lawyers, a firm acting for both vendor and purchaser. The firm's principal, solicitor Peter Webb, then paid the surplus funds to Lee pursuant to trust authorities and letters of instruction purportedly signed by the borrowers.

The borrowers defaulted on repayments. The bank obtained possession orders over both units, sold them at a loss, and commenced proceedings against the borrowers for the outstanding debt, and against Webb for breach of warranty of authority. The borrowers cross-claimed against Webb, and Webb cross-claimed against his professional indemnity insurer, LawCover.

  • Whether the borrowers were liable to the bank under the loan agreements and guarantees, given that the relevant documents had been forged or executed in circumstances of fraud
  • Whether the solicitor, Peter Webb, breached a warranty of authority owed to the bank by acting without proper authorisation from his clients
  • Whether Webb's conduct was dishonest, and what consequences followed for his claim on the warranty of authority and his professional indemnity policy
  • Whether the Civil Liability Act 2002 (NSW) applied to a claim for breach of warranty of authority, including whether contributory negligence and proportionate liability were available defences
  • Whether the bank's own conduct in approving loans without independent valuations constituted contributory negligence reducing any damages award
  • Whether Webb was entitled to indemnity from LawCover under his professional indemnity policy

Decision

Claims against the borrowers: Price J entered judgment in favour of both borrowers against the bank. The court found that the signatures on critical loan and mortgage documents had been forged, meaning the borrowers had not validly executed those instruments. The bank therefore could not enforce the loan agreements or mortgages against the borrowers. The September 2010 agreement between the bank and the borrowers, under which the borrowers abandoned their defences under the Contracts Review Act, Trade Practices Act, ASIC Act, and Consumer Credit Code in exchange for the bank agreeing not to enforce any money judgment against them personally beyond any recovery the borrowers made from Lee or Webb, rendered the borrowers' position effectively neutral but did not affect the bank's ability to recover from Webb.

Breach of warranty of authority: The court found that Webb had acted dishonestly. He had breached his warranty of authority to the bank by purporting to act for the borrowers in directing settlement funds when he did not in fact have proper authority to do so, and by facilitating the transfer of surplus funds to Lee. The court held that this breach caused the bank's loss.

Civil Liability Act and contributory negligence: Price J concluded that the Civil Liability Act 2002 applied to the breach of warranty of authority claim. The court found that the bank had contributed to its own loss by approving loans on the basis of inflated purchase prices without obtaining independent external valuations. The bank's negligent contribution reduced the damages payable by Webb. Bank fees included in the outstanding amounts were also excluded from the loss calculation. Interest up to judgment was not awarded, both because the bank's loss already included interest components and because of the bank's own negligent contribution.

LawCover indemnity: Webb's cross-claim against LawCover failed. The professional indemnity policy excluded indemnity for claims arising from dishonest or fraudulent acts of a principal of the firm. Because the court found that Webb, as principal of Webb Lawyers, had acted dishonestly, LawCover was entitled to judgment in its favour on the cross-claim.

Orders Made

  • Verdict and judgment for the first defendant (Jason Hamilton) against the bank.
  • Verdict and judgment for the second defendant (Karen Hamilton) against the bank.
  • Verdict and judgment for the bank against the third defendant (Peter Webb) in the sum of $497,056.00.
  • The cross-claims by Jason Hamilton and Karen Hamilton against Peter Webb were dismissed.
  • Verdict and judgment for LawCover in the second cross-claim against Peter Webb.
  • The question of costs was reserved for further hearing.

Key Takeaways

  • A bank cannot enforce loan agreements or mortgages against borrowers where the relevant documents were forged, even if the bank was deceived by a third-party fraudster acting ostensibly on behalf of those borrowers.
  • Breach of warranty of authority is an available cause of action against a solicitor who purports to act for a client without genuine authority, and where the solicitor's conduct is dishonest, the action is maintainable in those circumstances.
  • The Civil Liability Act 2002 (NSW) can apply to breach of warranty of authority claims, opening the door to reductions for contributory negligence where the plaintiff's own conduct contributed to the loss. Here, the bank's failure to obtain independent property valuations before approving loans constituted such a contribution.
  • Proportionate liability principles under the Civil Liability Act were engaged on these facts, reflecting that multiple parties' conduct contributed to the bank's loss.
  • A professional indemnity policy excluding claims arising from dishonest or fraudulent acts of a firm's principal will defeat an indemnity claim where the principal is found to have acted dishonestly, even where the insured solicitor might otherwise have faced significant liability.

Legislation and Cases Referenced

Legislation:
- Civil Liability Act 2002 (NSW), ss 5, 5D, 5E, 34, 34(1)
- Civil Procedure Act 2005 (NSW), s 100
- Contracts Review Act 1980 (NSW)
- Conveyancing Act 1919 (NSW), s 38
- Fair Trading Act 1987 (NSW)
- Trade Practices Act 1974 (Cth)
- Australian Securities and Investments Commission Act 2001 (Cth)
- Law Reform (Miscellaneous Provisions) Act 1965 (NSW), ss 8, 9
- Real Property Act 1900 (NSW)

Cases:
- Collen v Wright (1857) 8 El & Bl 647 (foundational authority on warranty of authority)
- Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309
- Beach Petroleum NL v Abbot Tout Russell Kennedy (1999) 48 NSWLR 1
- Booksan Pty Ltd v Wehbe [2006] NSWCA 3
- Kuhl v Zurich Financial Services Australia Ltd [2011] HCA 11
- CSG Limited v Fuji Xerox Australia Pty Ltd [2011] NSWCA 335
- Galea v Bagtrans Pty Ltd [2010] NSWCA 350
- Jones v Dunkel (1959) 101 CLR 298
- Black v Smallwood (1966) 117 CLR 52
- Caltex Oil (Australia) Pty Ltd v The Dredge Willemstead (1976) 136 CLR 529
- Essington Investments Pty Ltd v Regency Property Pty Ltd [2004] NSWCA 375