Khan as Trustee for The Khan Family Trust v Hadid; Hadid v Khan as Trustee for The Khan Family Trust (No 2)

HIS HONOUR : Abdallah Hadid and his wife Sanaa Hadid are the owners of a property in Punchbowl. They have owned the property since 1984. On 31 December 2002 a mortgage (“the Mortgage”) was registered on the property. It was lodged by Manuel Theos of Heidtman & Co, Solicitors, on behalf of the Mortgagee, Mrs Abeeda Khan, on the instructions of a mortgage manager, Response Finance Pty Ltd (“Response”) or its director Andrew Littleford. The mortgage is a forgery. It is not suggested that Mrs Khan, Response or anyone associated with them is involved in the forgery.

Mrs Khan is said to be the trustee of a family trust, the beneficiaries of which include her husband and her.

According to the terms of the Mortgage, it imposes upon Mr and Mrs Hadid obligations to repay a principal sum of $130,000 plus interest and mortgages their home in Punchbowl to secure those obligations. The obligations were not met and Mrs Khan proceeded against Mr and Mrs Hadid for possession and/or repayment of the principal and interest. As at 30 March 2007 (before the hearing and the filing of subsequent written submissions) interest had brought the amount owed, on the calculation of Mrs Khan, to close to $1 M (and, although the parties’ rights are not finalised in that regard, over $1 M by the close of the hearing). On the calculation of another party, on the basis of the provisions relating to compound interest, over $30 M is owed on the Mortgage.

In turn, Mr and Mrs Hadid deny the validity of the Mortgage and proceed, by cross-claim in the possession proceedings and by separate statement of claim against: Mrs Khan; Response; Peter Fisher & Co (a mortgage broker, management consultant and real estate agent); Lorenzo Flammia (a solicitor who, on the mortgage, witnessed the signatures of Mr and Mrs Hadid); Mr John Hancock (also a solicitor and allegedly acting on behalf of Mr and Mrs Hadid either in his capacity as a solicitor or as a director of Split Cycle International Pty Ltd (“Split Cycle”)); Split Cycle, a trustee company which operates a mortgage broker business among other activities; and Anna Maria Palumbo, a travel agent and the person who seems to have had use of the loan funds (after costs of borrowings).

Further, as a result of the proceedings brought by Mr and Mrs Hadid, Mrs Khan cross-claims in those proceedings against Mr Flammia and Mr Hancock (the first and second cross-claim respectively). Mr Flammia claims against Mrs Khan and each other interest (the fourth cross-claim); and Mr Hancock claims against Split Cycle and each other interest (the fifth cross-claim), and claims indemnity from its professional indemnity insurer American Re-Insurance Company (“Am Re”) (the third cross-claim, hereinafter “the Insurance Claim”) that administers Lawcover (the professional indemnity insurance of the Law Society of NSW). The Issues

The fundamental issue between Mrs Khan, on the one hand, and Mr and Mrs Hadid, on the other, is the validity of the registered Mortgage and the enforceability of its obligations. The unsuccessful party on that issue in turn seeks to recoup the losses from those that had a role in the “error”, each of whom, in turn, claims against each other. Lastly, one of those actors, John Hancock, claims under his insurance policy, if he be liable.

In order to resolve those issues it is necessary to recite: (a) the circumstances leading to the signing of the mortgage; (b) the terms of the mortgage; (c) the circumstances leading to the registration of the mortgage; (d) the principles applicable to its validity, namely, the relevant legal principles on indefeasibility of title and fraud and determine the consequence of their application; and then to determine: (e) the liability, if any, of Mr Flammia and to whom; (f) the capacity in which Mr Hancock was acting and his liability, if any, and to whom; (g) if both Mr Flammia and Mr Hancock be liable, then, if permissible, the proper apportionment of responsibility between them; and (h) if Mr Hancock were to have any liability, the liability of Am Re under the insurance policy. The Circumstances Leading to the Mortgage Signing

Mr Hadid came to Australia as a 17 year old in 1977. He learnt English at TAFE and commenced work. He has worked essentially full-time since his arrival and now operates a business as a specialist subcontractor performing renovation and restoration work in the building industry. His company is called Prestige Plastering & Painting Pty Ltd.

He married Mrs Hadid in 1983 and they have children. Shortly after his marriage to Mrs Hadid he purchased the property in question, at which address they still live, although they have demolished and rebuilt the residence on it.

In about mid-2001, inter alia, for the purposes of his business, Mr Hadid refinanced his existing Mortgage and obtained a line of credit secured by a registered First Mortgage. The line of credit was for $120,000.

Mr Hadid, I infer from the evidence, was keen to provide for his family, worked hard and sought to involve himself in low risk moneymaking ventures. He took other business people on trips to the Middle East for which purposes he used a travel agent, Overseas Travel, the principal of which was Ms Palumbo.

It seems that the airline tickets were purchased by Mr Hadid and the cost (or the costs together with some commission) passed on to other persons on the tour. Mr Hadid also commenced an involvement with a property consortium to buy and develop land and to bring Swiss bonds into Australia.

During these dealings, Ms Palumbo (seemingly for cash flow and underselling reasons) needed money. Mr Hadid offered to guarantee a loan for her of $30,000.

There is a suggestion (affidavit and evidence of Ms Bradaric) that the loan (or guarantee) that was discussed was for a larger amount (either $130,000 or $300,000) but Ms Bradaric’s recollection was extremely poor and it would not have been a matter of significance to her. Further she cannot recall whether it was Ms Palumbo who mentioned that figure. I find that Mr Hadid had intimated that he would guarantee $30,000 (and no more), and only on the basis that his house was not at risk, and that the loan was for a short period of two months or so. However, no documents were ever executed to effect any such loan or guarantee.

The motive for the guarantee was the subject of some evidence and suggestions. In my view, the motive is irrelevant, unless it is probative of some other agreement. It is not. But, I set out hereunder my findings of fact on that issue.

I do find that Mr Hadid and Ms Palumbo had a business relationship from which Mr Hadid profited, to some degree. I also infer that Mr Hadid took the view that, through her (and some of her acquaintances), opportunities may or would arise to become involved in moneymaking schemes. It was for these reasons that Mr Hadid agreed to guarantee a loan and I infer he thought it would show him to be a person who valued and rewarded loyalty and as a person of “means”. I find that there was no relationship or motive beyond that.

Nevertheless as a consequence of the agreement to guarantee, Mr Hadid provided a copy of his driver’s licence and proof of his assets including a statement of account from his First Mortgage account. He expected that he would see the guarantee documents before committing to the guarantee and he could, at that stage, determine to what, if any, indebtedness he would subscribe.

Ms Bradaric, a mortgage broker, was asked by Ms Palumbo to organise a loan for something more than $100,000. She contacted John Hancock, who, in turn, contacted Peter Fisher & Co by telephone, followed by a letter. The relevant terms of the letter, dated 15 November 2002, were that: (a) it was written on the letterhead of “Hancocks Solicitors”; (b) it referred to a previous telephone message; (c) the subject matter was summarised as: “Hadid re: $100,000 Short term finance over [Mr and Mrs Hadid’s Punchbowl address]” (d) it refers to “our clients” obtaining short term finance of approximately $130,000 for 2 months, and enclosed an appraisal from a real estate agent, a statement of account from the First Mortgagee and a title identifier; and (e) it was signed “Hancocks Solicitors” with a personal signature of John Hancock.

On 19 November 2002, Peter Fisher sent an application for a loan of $130,000 to Response, and, on 20 November 2002, Response “responded” with an offer of a loan to Mr and Mrs Hadid. On the same day, Response instructed Heidtman & Co to prepare the documentation.

Thereafter, Hancocks sent the offer to Ms Bradaric who sent it to Ms Palumbo’s office because she thought it would come to the attention of Mr Hadid.

Soon after, the application form that accompanied the offer was returned in an executed form.

The terms of the application form, as executed, also warrant summarising. It indicated: (a) the name and address of Mr and Mrs Hadid; (b) it misstated each of Mr and Mrs Hadid’s date of birth; (c) it did not give Mrs Hadid’s driver’s licence number; (d) it misstated Mr Hadid’s driver’s licence number; (e) it misstated the purpose of the loan; (f) it misstated the value of Mr and Mrs Hadid’s assets; and (g) it gave a mobile phone number for each of Mr and Mrs Hadid when neither possessed a mobile phone at that time. Indeed, other than the name and address, almost nothing on the document is correct. Further, at the time of this loan application, Mr Hadid had a line of credit of approximately $90,000 available, without further borrowing, and he had assets of approximately $1.3 M.

The process of communication was then reversed and the executed application form in the names of Mr and Mrs Hadid were faxed to Ms Bradaric from the offices of Overseas Travel. From there it was forwarded to Mr Hancock, then to Peter Fisher & Co and finally to Response.

I find, as a fact, that the application form was completed and executed by one or more persons that did not include either Mr or Mrs Hadid.

On receipt of the application for a loan from Peter Fisher & Co, according to the evidence of Mr Littleford, he telephoned Mr Hadid. In the conversation Mr Littleford did not give Mr Hadid any details, other than the fact that Mr Littleford was from Response and that he had received an application for finance from Mr Hadid. The response from Mr Hadid was that he was “very busy, call my broker”, which, on the evidence, could not have been intended as a reference to either Mr Fisher or Mr Hancock. I find that this conversation occurred.

At this response Mr Littleford telephoned Mr Fisher and informed him, according to Mr Littleford, that Mr Hadid was very brusque on the phone and enquired whether the transaction was going to succeed. Mr Littleford was informed that Mr Fisher did not know Mr Hadid. He was informed that contact had been made through a third person (Ms Bradaric) and that Mr Fisher would call Ms Bradaric. A short time later, according to Mr Littleford, Mr Fisher informed him that he had spoken to Ms Bradaric and that apparently Mr Hadid was inclined to act that way and he wanted to proceed with the loan.

At this point Mr Littleford was aware of a number of things, two of which were: first, that he had not informed Mr Hadid of the details of the loan or confirmed with him any aspect of the loan requirements; secondly, that he was aware that Mr Fisher had not spoken directly with Mr Hadid.

By letter dated 20 November 2002, Response sent to Peter Fisher & Co an offer, unsurprisingly entitled “Letter of Offer”. Its terms are relevant and include the following: (a) the borrowers were Abdallah Hadid and Sandra (sic) Hadid; (b) the loan amount was $120,000 (not $130,000); (c) the term was up to 60 days and the monthly payment was $7,200 payable monthly in advance for the full month or part thereof (6 per cent per month or 72 per cent per year assuming no compounding); (d) the purpose of the loan was “working capital provision to assist in the purchase of a business”; (e) the security was described as “registered caveat supported by a registerable (sic) 2nd mortgage over [the address at Punchbowl]”; and included the following general requirements: (f) a fee of $550 on acceptance of the Letter of Offer; (g) an executed copy of the Letter of Offer bearing original signatures and initialled on each page; (h) evidence in original form detailing outstanding priority mortgages; (i) council rates notice (current) in original form; (j) certificate of currency of property insurance and the addition of the Mortgagee’s interest on the insurance; (k) borrower identification (i.e. driver’s licence, passport) with a large sized photocopy to be provided.

According to Mr Littleford, shortly after the Letter of Offer was sent (somewhere between 20 and 25 November 2002) he received a telephone call from a person who identified himself as Mr Hancock. In that telephone conversation, according to Mr Littleford, Mr Hancock identified himself as the solicitor for Mr and Mrs Hadid and expressed the view that his clients were anxious to proceed as quickly as possible. I find that this conversation occurred.

The Letter of Offer, referred to above, was sent by Mr Hancock to Ms Bradaric and, once more, that Letter of Offer was sent by facsimile to the office of Ms Palumbo.

On 20 November 2002, Mr Theos, a partner in Heidtman & Co, solicitors for Mrs Khan and/or Response, spoke with Mr Hancock by telephone and informed him that the mortgage documents were prepared and made arrangements for their collection at the office of Heidtman & Co by Mr Hancock. By this time the Letter of Offer (amended to reflect a loan for $130,000) had been accepted.

Almost immediately, those documents were delivered to Mr Flammia, whose office was at Penrith. Those security documents include: (a) a Statutory Declaration by “Sandra Hadid” to the effect that she is Sanaa Hadid and that they are one and the same person; (b) a Declaration by Borrower in the name of “Sandra Hadid”; (c) a Declaration by Borrower in the name of “Abdallah Hadid”; (d) a Borrower’s Acknowledgment referring to the Mortgage and Memorandum signed in the name of S Hadid and A Hadid; (e) a Statutory Declaration in the name of Abdallah Hadid and Sandra Hadid; (f) an Authority to Complete and Undertaking to Comply with Requisitions signed in the name of A Hadid and S or Sandra Hadid; (g) a Declaration of Financial Position signed again over the name of A Hadid and S Hadid; (h) a Declaration of Purposes for which Credit is Provided signed in the name of Abdallah Hadid and Sandra Hadid (i) a Mortgage in the name Abdallah Hadid and Sanaa Hadid (signed); and (i) a Memorandum to the Mortgage (unsigned).

Each of the above documents, except the Memorandum, was signed, as witness, by Mr Flammia. On the evidence before the Court, I find that none of the above documents was signed by either Mr Hadid or Mrs Hadid, being the plaintiffs in these proceedings and the owners of the property in question.

Each of Mr Hadid and Mrs Hadid has given evidence that neither attended on Mr Flammia and that they did not sign the documents. Mr Flammia has not given evidence. Further, no evidence has been adduced from any other party, for example handwriting evidence, that would qualify, in any way, the uncontroverted evidence of both Mr and Mrs Hadid. I find, without any hesitation, that neither Mr nor Mrs Hadid signed any of the documents including the Mortgage, on any date or at any time. The Terms of the Mortgage

The terms of the Letter of Offer have been summarised above and, as one would expect, the terms of the Mortgage reflect, at least to some degree, the Letter of Offer. As earlier stated, the mortgage recites as the Mortgagor Abdallah Hadid and Sanaa Hadid of the address in question. The Mortgage was lodged by Heidtman & Co, on behalf of the Mortgagee Abeeda Khan, and the mortgage is dated 25 November 2002. There are two signatures, each of which purports to be, but neither of which is, in truth, Mr or Mrs Hadid and it is witnessed by Lorenzo Flammia. The terms of the Mortgage itself incorporate the provisions of Annexure A and the Memorandum.

The Annexure describes the Mortgagor as “Abdallah Hadid and Sanaa”, which presumably was a reference to Sanaa Hadid. It has “the usual provisions”. Part A appoints the Mortgagee as general attorney of the Mortgagor for the purposes of performing any act required by the Memorandum. Part B incorporates the Memorandum into the Annexure, in numbered clauses, and requires the Mortgagor to observe and perform the covenants in the Annexure and the Memorandum. Part C of the Annexure defines “borrower” as meaning Abdallah Hadid and Sandra Hadid, defines “the final maturity date” as on or before 60 days from the settlement date and provides for two rates of interest: a higher rate of 10 per cent per month; and a lower rate of 6 per cent per month. Response is defined as the mortgage manager and the principal sum is defined as $130,000. The Mortgagor acknowledges receipt of the principal sum and agrees to repay it on the final maturity date.

Clause 3 of Part C of the Annexure requires the Mortgagor to pay interest on the principal sum or upon any judgment order or decree in which this or any other covenant may become merged at the higher rate (i.e. 10 per cent per month), “Such interest to be payable by monthly instalments in advance calculated from the date of the advance of the Principal Sum (each such date being herein referred to as an ‘Interest Payment Date’). The first instalment is to be paid within five (5) days from the date of the advance of the Principal Sum and the subsequent instalments to be payable upon the monthly anniversary of the date of the advance of the principal sum provided always, and it is hereby agreed and declared, that if the Mortgagor shall on every day on which interest is hereinbefore payable under this security or within seven (7) days after each such day respectively pay to the Mortgagee interest on the Principal Sum at the Lower Rate and shall also duly observe and perform all and every of the covenants, conditions and agreements on the Mortgagor’s part herein contained and implied, then the Mortgagee shall accept interest on the Principal Sum at the Lower Rate in the lieu of the Higher Rate for which such interest shall be paid to the Mortgagee within such seven (7) days as aforesaid.”

As is clear from the above recital of clause 3 of Part C of the Annexure, the first instalment is paid within 5 days of the settlement of the monies and subsequent instalments are payable monthly at the anniversary of the date of advance (or settlement) and the Mortgagor has seven (7) days from that anniversary to pay the amount in order to gain the benefit of the lower rate (6 per cent per month) of interest.

Provisions exist for the early payout of the loan on 3 days’ notice. By Clause 6 of Part C of the Annexure, the mortgage manager, Response, is vested with all the rights of the Mortgagee to exercise, in the name of the Mortgagee, all of the rights, powers and remedies that the Mortgagee enjoys.

Clause 9 of Part C of the Annexure sets out the requirement to pay interest following the final maturity date, if the principal sum has not been repaid. It is in the following terms: “9(a) The Mortgagor shall pay to the Mortgagee interest on any amount (other than the Principal Sum) owing but unpaid at any time under this Mortgage and on the Principal Sum or any part thereof for any period after the Final Maturity date during which the Principal Sum or any part thereof and/or all other Moneys Hereby Secured remain unpaid and upon any judgement, order or decree in which this or any other covenant may become merged (and any moneys owing but unpaid and any such judgment, order or decree are in this Clause 9(a) referred to as the ‘Outstanding Moneys’) at the rate of interest per annum equal to the aggregate of four percent (4%) per annum and the rate (expressed as a percentage per annum) determined from time to time by the Mortgagee to be the cost to the Mortgagee of funding the Outstanding Moneys or so much thereof as may from time to time remain unpaid (and the determination of the Mortgagee in this regard shall be final and binding) or at the rate of interest per annum equal to the Higher Rate, whichever is the greater, and such interest shall accrue from day to day and shall be payable on demand by the Mortgagee from time to time.”

Clause 12 sets out the consideration for the Mortgage. It defines Mortgagor to include borrower (in this document defined as Abdallah Hadid and Sandra Hadid). It provides in sub-clause (b) the following: “12(b) The Mortgagor acknowledges that this Mortgage is granted by the Mortgagor to the Mortgagee in consideration of the provision by the Mortgagee of the Principal Sum to the Borrower (testified to by to (sic) execution hereof by the Borrower) and the Borrower and Mortgagor acknowledge that the Borrower shall be primarily responsible for payment of the Principal Sum PROVIDED THAT in the event of default in the payment by the Borrower of such moneys the Mortgagee shall be entitled in its absolute discretion to exercise its rights upon default under the Mortgage without first having instituted proceedings or having made any formal demand upon either the Borrower or the Mortgagor and for this purpose the Mortgagor acknowledges that the Mortgagor shall be jointly and severally liable with the Borrower for the payment to the Mortgagee of the Principal Sum and any other moneys due and payable hereunder.” It should be noted that no part of the principal sum secured by the Mortgage was provided by the Mortgagee to Mr or Mrs Hadid. That statement is true even if one assumed that the Mortgage was not a forgery. The amount secured by the Mortgage were to be paid to a third party (Overseas Travel) who is neither the borrower nor the Mortgagor as those terms are used in any security document.

Clause 14 of the annexure is relevant for a purpose to which I will shortly come. It is in the following terms: “14 In the event of default the Mortgagor will use its best endeavours to procure the consent of the First Mortgagee to the registration of this Mortgage.” It is clear from the foregoing clause (and the terms of the Letter of Offer that was accepted (see paragraph 28(e) above)) that the parties’ agreement provided that the Mortgage would not be registered unless there were default.

I turn then to the Memorandum which forms part of the Mortgage documents.

“Event of default” is defined prolixly, but relevantly includes the following events: “(i) The Mortgagor defaults in the due and punctual payment of any of the Monies Hereby Secured; … (x) The Mortgagor ceases or threatens to cease to carry on his business or a major part of it or stops or suspends payment of his debts or indicates his intention to do so.”

By the provisions of clause B(1.4) of the Memorandum, the Mortgagee was entitled “at its option and without demand” to convert the interest payable into principal immediately payable to the Mortgagee and charge interest under the mortgage on such principal. There is no evidence of the exercise of such an “option” and I find none has been exercised.

Clause 19.1 of the Memorandum provides that in the event of default, all of the monies secured immediately become payable on demand.

Clause 26.1 of the Memorandum provides for an ability to issue a certificate defining: the moneys secured; their classification within a particular paragraph of the definition of “moneys hereby secured”; and the amount of interest due and payable. The certificate is, in the absence of manifest error, prima facie evidence as to its contents.

Clause 26.2 provides: “26.2 This Mortgage shall bind every person who executes it as Mortgagor notwithstanding that any other person named as Mortgagor never executes this Mortgage or that the execution or any person so named is void or voidable.” This clause has interesting consequences in circumstances where neither person named as Mortgagor has executed the document. It is unnecessary for me to determine, with any finality, what those consequences might be, but if it, by implication, excludes the liability of named persons who have not signed, neither Mr nor Mrs Hadid would be bound by the Mortgage, at least in contract.

Lastly, of note, the provisions of clause 26.6 of the Memorandum provide for the severability of each and all of the covenants. That severability operates on each of the covenants, as distinct from each other covenant, in circumstances of a finding of invalidity, illegality or unenforceability in respect of any one of those provisions. Circumstances Surrounding the Registration of the Mortgage

Mr Theos, partner of Heidtman & Co, acting on behalf of Mrs Khan and Response in the mortgage arrangements, maintains that he received the security documents and Mortgage. He noticed that they had been witnessed and signed and took comfort from the witnessing of the documents and the provision of independent legal advice as certified by a solicitor (Mr Flammia).

It is appropriate to note that Mr Hancock gave evidence to the effect that he had never seen the security documents. This evidence is given notwithstanding the evidence otherwise adduced that Mr Hancock collected the security documents from Heidtman & Co and, I infer, delivered them (or arranged for their delivery) to Mr Flammia. I do not accept that Mr Hancock did not see the documents. On or about the same date as Heidtman & Co received the security documents and Mortgage, Mr Theos telephoned Mr Hancock. The effect of that telephone conversation was that Mr Theos asked for certain other documents including evidence of the current insurance of the property that noted the interest of the Second Mortgagee. On that date, Mr Hancock forwarded to Heidtman & Co a certificate of insurance, which complied with that request, together with a letter from AAA Mortgage dated 22 November 2002. I find that Mr Hancock saw the security documents and obtained from the insurance company the insurance record created on that date, 22 November 2002.

Somewhat oddly, Heidtman & Co then received two documents directing payment of monies on settlement, which, while not totally inconsistent, must have been, and were, seen to be somewhat unusual.

Each of them seem to have been received on or about 22 November 2002, one of them is dated 21 November 2002 and the other, dated 22 November 2002, was a letter from Hancocks Solicitors. The document dated 21 November 2002 is, or purports to be, over the signature of Mr A Hadid and Mrs S Hadid. Those signatures have an obvious similarity with signatures that are found elsewhere and which I have held to be forgeries. On the evidence that is before me (not taking into account that similarity) this document too is a forgery.

The document dated 21 November 2002 is on plain paper (i.e. there is no letterhead). It is a typed document (other than the signatures) and all of the typing is in upper case. It is in the following terms: “HEIDTMAN AND CO. RE; ABEEDA KHAN LOAN TO MR. A. AND MRS. S. HADID PLEASE NOTE THAT THE LOAN AMOUNT LESS FEES ARE TO BE DEPOSITED AS FOLLOWS: ACCOUNT: OVERSEAS TRAVEL LMD TRUST ACCOUNT BRANCH: COMMONWEALTH BANK MACQUARIE STREET LIVERPOOL BSB: 062 1XX ACCOUNT NUMBER: 00 XXX XXX ALL CORRESPONDENCE TO PLEASE BE FORWARDED TO OUR POSTAL ADDRESS BEING PO BOX 127 LIVERPOOL NSW 2170.” (Crosses have been substituted for account numbers for privacy reasons.) The post office box was, at that time, the postal address for Overseas Travel.

The other document is a document on the letterhead of Hancocks Solicitors dated 22 November 2002 and sent by facsimile on that date. The substance of the correspondence, after referring to a telephone conversation and an earlier letter both of the same date, sought cheques to be drawn from the Mortgage advance in the following way: “1. Interest payment in advance $7,800.00 2. Peter Fisher & Co $4,400.00 3. Split Cycle International Pty Limited $4,400.00 4. Heidtman & Co $1,432.50 5. Overseas Travel Service $111,967.50” It informs Heidtman & Co, to whom it was sent, that Mr Hancock will “come and collect the cheque” and that “if any further information is required, John Hancock should be contacted” and it gives his mobile phone number.

Mr Theos’ evidence was that he was puzzled by the 21 November letter and was clearly suspicious of its origins. Those suspicions led him to decide not to act upon its contents.

Further, having had his suspicions aroused by the provenance of the document dated 21 November 2002, Mr Theos also became concerned that Mr Hancock, a person he considered to be the solicitor for Mr and Mrs Hadid, had not been the person who gave the legal advice to Mr and Mrs Hadid, but that it had gone to a separate solicitor (Mr Flammia). It was for this reason that Mr Theos asked Mr Hancock in a telephone conversation: Mr Theos: “If you are acting for them, why did you not provide them with independent advice or explain the mortgage documents to them?” Mr Hancock: “Mr and Mrs Hadid lived far away and it is much easier for them to go to another solicitor. I have formal instructions from them as well as verbal instructions to act for them and to draw the money as I directed to you. My clients are purchasing a travel agencies (sic) business off another person and they have an informal agreement with this other person to purchase this business.” Mr Hancock does not recall this conversation and, at least in part, denies it. I accept that the conversation occurred and I accept, in this regard, Mr Theos’ evidence on the conversation. I should note at this stage that, as earlier stated, Mr Flammia’s office was at Penrith, Mr and Mrs Hadid lived in Punchbowl and the office of Hancocks Solicitors was at Ultimo. On that basis, the reason given by Mr Hancock for separate advice does not withstand scrutiny. (From Ultimo to Punchbowl is about 16.5km and 20 minutes, without traffic, and from Punchbowl to Penrith is about 48.5km and 39 minutes, also without traffic.)

There was a further conversation between Mr Theos and Mr Hancock on 22 November 2002. This conversation concerned the direction to pay that, by that stage, had been received by Heidtman & Co from Hancocks Solicitors. The relevant part of that conversation is in the following terms or words to the following effect: Mr Theos: “I have received the cheque direction. Who is Overseas Travel and where do they fit in to the transaction?” Mr Hancock: “That is the business that my clients are purchasing.” Mr Theos: “Who is Split Cycle International Pty Limited?” Mr Hancock: “That is my own company and we are getting these fees for arranging the loan for Mr and Mrs Hadid.” The direction for payment is the first time that there is mention in correspondence or otherwise of Split Cycle. I will later deal with the nature of Split Cycle. However, it is fair to say that a cheque drawn to a company (Overseas Travel) is an unusual way of purchasing the company. It could be a capital injection additional to the purchase price, but even then there would more usually be a share or loan transaction, or it would be invested through an intermediary.

The loan was settled on 25 November 2002 and the cheques were drawn and paid in accordance with the direction of Hancocks Solicitors of 22 November 2002. The interest, to which reference is made in the earlier letter, was paid to Response Finance Pty Limited. I reiterate that Split Cycle, the nature of which will be discussed later, was the trustee company, the activities of which included mortgage brokering and a service company for Hancocks Solicitors. It is worth noting, once more, that no amount of money was paid to either Mr or Mrs Hadid.

According to Mr Littleford, the monies were not paid over until he had received a telephone call from Mr Theos, during which telephone call Mr Theos informed him of the receipt of all the security documents and the fact that they were in order. Further, Mr Theos is said to have informed Mr Littleford that he had contacted Mr Flammia who had provided independent solicitor’s advice to Mr and Mrs Hadid. On receiving the information, Mr Littleford authorised Mr Theos to proceed to settle the loan.

That evidence of Mr Littleford was the subject of significant cross-examination and was not supported by Mr Theos. Mr Theos gives evidence of a conversation with Mr Flammia in or to the same effect, but does not suggest that he passed that information on to Mr Littleford at that time. It is often difficult to recall precisely when a person was first provided with information. The assessment of Mr Littleford that this information was provided to him on 25 November 2002 is not accepted. The evidence, particularly the cross-examination on these issues, shows his recollection to be unreliable and there were a number of inconsistencies in the evidence that was provided. Nevertheless, I accept that Mr Theos had a conversation with Mr Flammia on or about 25 November 2002.

It is appropriate to point out that 22 November 2002 was a Friday and 25 November 2002 was a Monday. Mr Theos’ evidence was in or to the effect that, as best he could recollect it, the conversation with Mr Flammia occurred on a Tuesday or Wednesday, which, on the other information that is available, would suggest that it occurred on 26 or 27 November 2002. The significance of these matters will be dealt with later in the judgment. However, I consider, on the balance of probabilities that it occurred on 25 November 2002, before settlement, and that it was occasioned by doubt in Mr Theos, caused by the process and documents of which he was aware.

In accordance with the scheme envisaged in the Letter of Offer (and confirmed in the provisions of the mortgage itself) at the same time as the settlement of the loan, Heidtman & Co lodged a caveat over the mortgaged property. In accordance with its usual procedure, the caveat having been lodged, the Land Titles Office notified Mr and Mrs Hadid at the address of the security. The letter is dated 26 November 2002 and attached a copy of the caveat.

Mr Hadid maintains that this notice from the Land Titles Office was the first that he knew of Mrs Khan, Response, Peter Fisher & Co or Mr Flammia. On receipt of the notice from the Land Titles Office, Mr Hadid telephoned them and they directed him to Heidtman & Co. He rang Heidtman & Co. He spoke to Mr Theos and denied borrowing any money. Mr Theos directed Mr Hadid to Andrew Littleford of Response. In essence, Mr Theos confirms this approach and puts the timing of it as Thursday, 28 November 2002. Mr Theos thereupon rang Mr Littleford and told him Mr Hadid had informed him he knew nothing about the caveat on his property or the loan that he took out with them and that Mr Hadid had been referred to Mr Littleford.

Mr Littleford and Mr Hadid spoke, during which telephone conversation Mr Hadid repeated the allegation that the Mortgage was not one to which he had subscribed and that, in essence, the Mortgage was a fraud. While there is some dispute as to the date of the conversation, it is clear that it occurred on the same day (and after) the conversation between Mr Hadid and Mr Theos. The telephone conversation may well have occurred on 27 November 2002, but it is more likely that it occurred on 28 November 2002, and I so find.

Mr Littleford then, it seems, rang Mr Fisher and Ms Bradaric in turn. Later Mr Littleford rang Mr Hancock. The conversation with Mr Fisher was confined to a report to Mr Fisher of the conversation with Mr Hadid and, after comment by Mr Fisher of no relevance to these proceedings, the obtaining of Ms Bradaric’s contact details. The contact with Ms Bradaric and the later contact with Mr Hancock were each, either immediately or eventually, to the same effect, namely, each of them assured Mr Littleford, according to Mr Littleford, that each had acted for Mr Hadid on a number of occasions and that what Mr Littleford had been told was wrong. Those of course were not the words that were used. Mr Littleford describes the assurance by Ms Bradaric as coming in two different phone calls. In the first of them she said: “I can’t understand it. That’s bizarre. I have acted for him on several transactions. I can’t believe he would say such a thing. I will telephone Mr Hadid and call you back.” She subsequently rang back and informed Mr Littleford: “I have spoken to Mr Hadid. There is a family issue between Anna Maria Palumbo and the Hadids. They are going to meet to discuss and sort it out.” Mr Hancock assured him in the following terms: “That’s nonsense. I have acted for him and I have had a number of discussions with him about this and other matters. Leave it with me, I will speak to you.”

After these telephone conversations, Mr Littleford, it is said, spoke with Mr Theos. Mr Theos’ version of the conversation has Mr Littleford saying that Mr Hadid is lying and that he should proceed to register the Second Mortgage and seek the First Mortgagee’s formal consent. According to Mr Theos’ version, Mr Littleford also maintained, in the conversation, that the information he had received (information that is not supported by the terms of the conversation Mr Littleford repeats) was that Mr Hadid is prevaricating. One moment saying he would pay the loan and asking for the amounts that are outstanding and the next minute saying he doesn’t owe the money at all.

Mr Littleford recounts a different conversation in significant respects. First, he says he told Mr Theos that he had told Mr Hadid that Mr Hadid “should see a solicitor and get in contact with your firm as soon as possible”. Further he said to Mr Theos “let’s just wait and see what happens”. In Mr Littleford’s version there is no reference to Mr Hadid lying or prevaricating. Nor is there a reference to an instruction to register the Second Mortgage or seek the formal consent of the First Mortgagee.

On this matter I do not accept the evidence of either Mr Littleford or Mr Theos. Mr Theos’ evidence and the terms of the conversation between Mr Littleford and him is unsupported by any other material, except that, shortly thereafter, a request was made of the First Mortgagee for consent to the registration of the Second Mortgage. No account of the conversation between Mr Littleford and any one of Mr Fisher, Ms Bradaric or Mr Hancock accords with what Mr Littleford told Mr Theos was the content of those conversations. This is not intended to be a criticism of Mr Theos, but it seems to be a reconstruction of events that, as seemed clear from cross-examination, was not based upon any clear recollection. Mr Littleford was generally unreliable in his evidence. On any analysis of the facts, as disclosed by evidence that can be accepted, the request for consent from the First Mortgagee occurred after Mr Hadid had informed both Mr Theos and Mr Littleford that the loan was, in effect, a forgery.

The request for consent of the First Mortgagee occurred by letter dated 29 November 2002 and was expressed to be a matter of urgency.

On 4 December 2002 Mr Theos received a document entitled Heads of Agreement. This document bears repeating. It is on the letterhead of Overseas (LMD) Travel Service Pty Limited. It is signed under the names of Maria Anna Palumbo and Abdallah Hadid. It is dated 2 November 2002 and it is in the following terms: “LIVERPOOL 2ND NOVEMBER, 2002 !! HEADS OF AGREEMENT. BETWEEN. MR. ABDALLAH HADID MRS MARIA ANNA PALUMBO [Mr Hadid’s Punchbowl address] [Mrs Palumbo’s St Johns Park address] THAT WE HAVE AGREED BETWEEN THE BOTH OF US AS FOLLOWS. THAT MR HADID HAS PAID BY WAY OF CAVEAT OVER HIS PROPERTY BEING AT [MR HADID’S PUNCHBOWL ADDRESS] IN THE STATE OF NEW SOUTH WALES, THE SUM OF ( ONE HUNDRED AND THIRTY THOUSAND DOLLARS ) $ 130,000. BEING FOR DEPOSIT TOWARDS FLIGHT TICKETS FOR 100 PASSENGERS TRAVELLING FROM SYDNEY TO JEDDAH AND RETURN VALUE OF PASSENGERS TICKETS BEING THE SUM OF $230,000 THE ABOVE BEING A DEPOSIT OF $ 130,00 (sic) AND THE BALANCE BEING $100,000 TO BE PAID ON OR BEFORE THE 10TH JANUARY, 2003. UPON COMPLETITION (sic) OF THE ABOVE TRANSACTION THE CAVEAT OVER MR. HADID (sic) HOUSE BEING [MR HADID’S PUNCHBOWL ADDRESS] IN THE SATE OF NEW SOUTH WALES WILL BE LIFTED. OWNER MANAGERESS SECOND PART MARIA ANNA PALUMBO ABDALLAH HADID …………………………… …………………………… SIGNED AND WITNESSED AT LIVERPOOL THIS 2ND NOVEMBER, 2002 Mr Hussan Shami …” [address provided] (Addresses omitted for the purpose of privacy.)

The notation on the document suggests that it was faxed on 4 December 2002 and that date is confirmed by other evidence.

As is clear from the terms of the “Heads of Agreement”, there are a number of factors, which, if it were alleged the document was related to the transaction for which the loan was obtained, would or should give a Mortgagee great concern. In fact the covering letter from Hancocks Solicitors which enclosed this Heads of Agreement could only have been understood as intending to grant comfort to the Mortgagee as to the bona fides of the Mortgage. The Heads of Agreement does not support the borrowing in issue. Apart from its form and the misspelling, the Heads of Agreement necessarily raises the following inconsistencies with the loan documents: (a) the Heads of Agreement is dated 2 November 2002, well before the settlement of any loans or the application for any loan; (b) it recites that the money ($130,000) has already (i.e. on or before 2 November 2002) been paid by Mr Hadid; (c) it states that the monies paid were a “deposit” for flight tickets for which another $100,000 was payable before 10 January 2003; (d) it recites that a caveat has been placed over the property of Mr Hadid (that is by 2 November 2002), a fact known to be incorrect by the Mortgagee; (e) it recites that the payment has been “by way of caveat”, an unintelligible arrangement for anyone familiar with property transactions; (f) it recites that upon “completition” (sic) the caveat will be lifted (in circumstances where, as at the date of its receipt the only caveat on that property was known by the Mortgagee to be a caveat placed by Mrs Khan that could be lifted only by Mrs Khan); (g) the signature under the name Abdallah Hadid bears no or little resemblance to the signature on the mortgage documents or the security documents; and (h) it was clearly not drafted with the benefit of legal advice or the input of a legal practitioner, in circumstances where the Mortgagee understood that Mr Hancock was acting and advising.

Heidtman & Co sent the facsimile from Hancocks Solicitors to Response, including the Heads of Agreement. This was done on or about 5 December 2002. On 6 December 2002 Response wrote to Mr and Mrs Hadid advising of the settlement of the $130,000 loan. On receipt of the letter, Mr Hadid, once more, telephoned Mr Littleford and requested to meet him.

In early December (but necessarily after 6 December 2002), Ms Bradaric met with Ms Palumbo and Mr Hadid. There was a conversation in which Mr Hadid, referring to the letter explaining the allocation of monies from the loan, asked: “Who is Split Cycle International Pty Ltd and what is the amount of $4,400 for? Why is their rate so high? Wasn’t it two months’ interest up front? Anna you get ripped off with all the fees and charges you are paying. I know a very good solicitor who can get you out of paying it back. Also my wife’s name on the letter is not right.” To this statement, that Ms Bradaric alleges Mr Hadid made, Ms Bradaric allegedly replied that he should contact John Hancock.

On 20 December 2002, the First Mortgagee consented to the registration of the Second Mortgage. On the same day, Mr Littleford received a telephone call from Mrs Hadid alleging that she did not know anything about the loan. On the same day, Mr Littleford received a complaint, by telephone, from Ms Palumbo. The complaint was about the amount said to be owing under the loan.

Finally, after receiving advice relating to the preliminaries for title registration, Mr Theos, on 31 December 2002, lodged the Second Mortgage for registration. In that regard the lodgement was done, as would be usual, by a clerk in the employ of Heidtman & Co, on the instructions of Mr Theos.

Mr Littleford alleges that, on 10 January 2003, there was a further conversation between Mr Hadid and Mr Littleford in which Mr Hadid queried the amount now owing on the loan and, according to Mr Littleford, acknowledging that he knew Ms Palumbo, Mr Hancock and Mr Flammia and was aware of the transaction from which the debt arose. I do not accept that this conversation, to this effect, occurred.

On 20 January 2003, there was a conversation between Mr Hadid and Ms Palumbo in which Mr Hadid tore up the letter written to him in November (the Heads of Agreement) and insisted upon a letter from Ms Palumbo guaranteeing the refinancing of her home and acknowledging her responsibility for the caveat.

Mr Littleford alleges that there was a further conversation with Mr Hadid in which Mr Hadid explained that Ms Palumbo will be in a position to repay the amount shortly and that Mr Hadid and Mr Littleford should work together on this to resolve the issues. Mr Hadid, however, reiterated that he had not signed any documents; that the matter was solely done by Ms Palumbo and sought to obtain Mr Littleford’s assistance in arranging a large ($500 M) investment from overseas. Further, following that conversation, Mr Littleford alleges, Ms Palumbo rang him confirming the fact that she had reached a commercial arrangement with Mr Hadid in which she would pay the $130,000 and that she would pay this month’s interest. I accept two conversations occurred in or to this effect.

As would be expected, thereafter, there were appropriate notices of default, given to Mr and Mrs Hadid, and there were letters relating to the non-payment of Response and/or Mrs Khan. Credit of Witnesses and Subsidiary Facts

The evidence in some areas has been set out more fully because of the conflict in the evidence. While there are other conflicts in evidence that are not set out, the resolution of those conflicts is more obvious. Part of the resolution of those conflicts depends on the reliability and credit of various witnesses.

The evidence of Mrs Hadid is accepted without qualification. She is a devout, moral person who acted in a manner that displayed a truthfulness, candour and reliability that is rare. She recalled that which one would expect and answered directly and fully, whether or not the answer was thought to be helpful to her case, or assisted or protected her husband or their relationship.

Largely, I also accept the evidence of Mr Hadid. While there is not the same level of confidence in his reliability as is the case with his wife, his demeanour and his relative openness made his evidence believable. There are some areas where, either because of the stress under which he was operating at the time, or because they were then unimportant, his memory is faulty, but his testimony does not disclose any attempt to dissemble.

Ms Bradaric was not as reliable as either Mr or Mrs Hadid. I am not of the view that she lied, only that she was a little flippant and it affected the care taken with her evidence in a way which made the detail unreliable.

Mr Shami gave evidence on a secondary issue with which I will deal shortly. His evidence was largely reliable. He was a truthful witness but did not seem to understand the import of much that was occurring. He seemed extremely distressed and unwell, but truthful.

Mr Farouk Hadid was extremely frank, truthful and well spoken. Ultimately, however, his evidence related to peripheral issues.

Mr Flammia was not called. No attempt was made to call him or to explain his absence. While an application was made on his behalf that there was no case to answer, which application would ordinarily involve an election not to call evidence, no reliance was placed on this as a reason for not calling him. Nor could it be without at least seeking leave of the Court to call the evidence despite the “no case” application: see Uniform Civil Procedure Rule 29.10(4).

Ms Palumbo was the sixth defendant but, in these hearings, she did not appear and she was not called.

Mr Theos and Mr Littleford were both called by Mrs Khan. To a large degree, Response and Heidtman & Co acted throughout this transaction, and the events surrounding it, as one entity. The necessary inference (and in some respects the direct evidence) was that the companies/firms and the individuals worked in that way on all or many such transactions over many years.

Mr Theos, for the most part, gave the impression of being honest and helpful. There are some significant respects in which that is not so. First, the timing of events given by him is unreliable. Secondly, and to some degree related to the first, his notes are, in significant respects, not contemporaneous. It is likely that one or two of them (particularly relating to contact with Mr Flammia, both its timing and the practice of independently checking with the solicitor giving independent legal advice) are inaccurate. Dates have been altered, as have other details. I do not accept, in the absence of any note confirming it in any other similar matter, that contact with Mr Flammia, or the solicitor giving independent advice, was part of the ordinary practice. Thirdly, I do not accept that by 28 November 2002, Mr Theos did not have significant concerns and doubts about the genuineness of the mortgage and security documents. I will return to this later.

My initial reaction to the evidence of Mr Littleford was that it was glib. I was prepared initially to assess the evidence on the basis that he was in unfamiliar circumstances, was less prepared than others (particularly the legal practitioners called) and sounded glib because he was seeking to cover his embarrassment at his inability to answer questions. His evidence, however, continued over three days. While at times he was tired and exasperated, particularly during the cross-examination on behalf of Mr Hancock, his evidence at other times gave little doubt that he was prevaricating. At times there was a significant time gap in answers after which there was a qualification of a response that he seemed to think was unhelpful to Mrs Khan’s case. Mr Littleford had (like Mr and Mrs Hadid) a financial interest (albeit, in Mr Littleford’s case, indirect) in the outcome of the proceedings.

Having made that comment, I do not think Mr Littleford set out to tell untruths. I find, however, that his evidence, on any controversial issue, was unreliable. This is because his notes (if any) were poor, his recollection poorer and he reconstructed events on the basis of what should have happened if he were acting properly and not in doubt about the genuineness of the mortgage and security documents. This course led him into the necessity to attempt to avoid questions that required detail or exposed inconsistency. His evidence is not accepted on any controversial matter.

Lastly, I turn to the demeanour of Mr Hancock. Mr Hancock was a most unimpressive witness. It is rare to see a witness, particularly a legal practitioner, whose evidence is so unbelievable. He dissembled. He prevaricated. He gave the impression, to which I will return, that, during the events in late 2002/early 2003, he was more concerned with Ms Palumbo’s welfare than for Mr or Mrs Hadid. He acted in other matters for Ms Palumbo. He gave the impression that, with what was originally an honest belief in the genuineness of the arrangement, he took part in a process, which he later realised was not genuine. He thereafter rationalised his conduct and deludes himself about it.

I do not accept the genuineness of his notes. I do not accept he had any conversation or conference with Mrs Hadid. Further, I do not accept he had any relevant conversation or conference with Mr Hadid except on two occasions. The first was a meeting in or about May 2002 with a number of people one of which was Mr Hadid. The others present were independent business people and it was not a conference at which it was appropriate to take instructions or in which instructions to act were given. Nevertheless, at that meeting, Mr Hadid expressed the view that he would like to assist Ms Palumbo and would “go guarantee” for a $30,000 loan to her. The second occasion was a conversation after the settlement of the mortgage monies. Otherwise, Mr Hancock took his instructions from Ms Palumbo or Ms Bradaric and did not speak to either Mr or Mrs Hadid. Nor did he send them a letter or any information that would alert them to the events occurring or the conduct he was purporting to perform on their behalf. All correspondence was sent to Ms Bradaric or Ms Palumbo.

Mr Hancock seemed to have no recollection of events that were significant at the time, which events would normally be memorable. Often, when asked, he had to refer to (or read from) his affidavit on such matters. On matters not recited in the affidavit, Mr Hancock would reconstruct events seemingly from what ought to have occurred, if he were avoiding liability, and which best fits the other evidence, all of which he had heard and/or read.

The view taken of the witnesses allows resolution on one of the important but subsidiary aspects of the factual matrix: Mr Hadid’s knowledge of the transactions and his reactions to it. It is not in issue that Mrs Hadid had no knowledge, prior to 27 or 28 November 2002, of any transaction, and no knowledge of the persons involved, other than her husband. Mrs Hadid’s reaction, as described, was at once shock, anger and dismay. She accused her husband of cheating on her, not only in relation to funds. These are not unusual reactions and the reactions are obvious from the evidence adduced.

Mr Hadid had greater knowledge. He originally (May 2002) expressed a willingness to guarantee the loan to Ms Palumbo. The nature of their relationship has already been described. I infer that Mr Hadid, somewhat naively, did not appreciate the burden or potential liability that such a guarantee involves and took the view that the risk was low.

After the initial indication, in or about May 2002, that he was prepared to guarantee a loan to Ms Palumbo, Mr Hadid may have had one other conversation in relation thereto, but it is difficult to ascertain and the evidence is not conclusive, even on the balance of probabilities. Mr Hadid did not have a conversation concerning a loan of $130,000 before the receipt by him and Mrs Hadid of the letter from the Land Titles Office.

Moreover, properly understood, the evidence of Mr Hadid’s conduct after receipt of the Land Titles Office letter is consistent with his lack of knowledge beforehand, and I so conclude.

On receipt of the letter, initially by Mrs Hadid, Mr Hadid was required to deal with the alleged debt and, once its source was ascertained, his wife’s suspicions and accusations relating to Ms Palumbo.

For a period, the stress of the situation prevented Mr Hadid from acknowledging or accepting the reality of the situation. When he did try to deal with it, he dealt with it by confronting Ms Palumbo. She dealt with it by giving him a “guarantee” that the $130,000 would be paid and he would be able to recover the money. I find that she intended the Heads of Agreement to be a letter of comfort, which, fraudulently, would allow Mr Hadid to claim from AIATA Insurance the amount purportedly spent on unissued tickets. I accept that Mr Hadid, when he was later advised that the whole arrangement was illegal, destroyed the letter and demanded a binding document, legally enforceable, that Ms Palumbo would pay the debt. This confrontation led to Ms Palumbo ringing Mr Littleford.

The conversation, overhead by Ms Bradaric, and referred to in [75] above, occurred after the Heads of Agreement document had been signed and at a time when Mr Hadid had become comforted that: (a) he could (or had) proved to his wife that the relationship with Ms Palumbo was purely business; (b) the debt of $130,000 could be recovered; and (c) that his and his wife’s home was secure. That is obvious from all of the surrounding facts, the evidence otherwise accepted, and the terms of the conversation repeated by Ms Bradaric that it was Ms Palumbo, in Mr Hadid’s mind, who had the liability, not Mr Hadid. It is also consistent with the terms, that I accept, of the conversation between Mr Littleford and Mr Hadid. The reference to $500 M, which I do accept was made, was rodomontade and said deliberately for the purpose of inducing a more helpful attitude. Indefeasibility of Title and Fraud

The most fundamental feature of the system of land title in Australia is indefeasibility of title under which feature the State guarantees the title of those with a registered interest in land to the extent of that interest. The principle is so important, and adherence to it so essential, that registered title can be successfully challenged only in the most exceptional circumstances. Courts must be alert to ensure that notions of justice or fairness in a particular matter are not an excuse for the qualification of the principle.

As at 28 November 2002, Mr and Mrs Hadid were the registered proprietors of the relevant property. A First Mortgagee held a registered Mortgage. The principle of indefeasibility prevents any challenge to those titles. Similarly, as at 31 December 2002, when the Second Mortgage to Mrs Khan was entered on the register, that Second Mortgage was subject to the principle of indefeasibility and no challenge may be upheld against that interest except as is permitted by the legislature.

It is apposite to repeat the passage from the opinion of Lord Wilberforce in Frazer v Walker [1967] 1 AC 569 at 580-581, where he defined “indefeasibility” as “a convenient description of the immunity from attack by adverse claim to the land or interest in respect of which he is registered, which a registered proprietor enjoys. This conception is central in the system of registration. It does not involve that the registered proprietor is protected against any claim whatsoever; as will be seen later, there are provisions by which the entry on which he relies may be cancelled or corrected, or he may be exposed to claims in personam. These are matters not to be overlooked when a total description of his rights is required. But as registered proprietor, and while he remains such, no adverse claim (except as specifically admitted) may be brought against him.”

Sections 42 and 43 of the Real Property Act 1900, so far as relevant, are in the following terms: “42(1) Notwithstanding the existence in any other person of any estate or interest which but for this Act might be held to be paramount or to have priority, the registered proprietor for the time being of any estate or interest in land recorded in a folio of the Register shall, except in case of fraud, hold the same, subject to such other estates and interests and such entries, if any, as are recorded in that folio, but absolutely free from all other estates and interests that are not so recorded …. 43(1) Except in the case of fraud no person contracting or dealing with or taking or proposing to take a transfer from the registered proprietor of any registered estate or interest shall be required or in any manner concerned to inquire or ascertain the circumstances in or the consideration for which such registered owner or any previous registered owner of the estate or interest in question is or was registered, or to see to the application of the purchase money or any part thereof, or shall be affected by notice direct or constructive of any trust or unregistered interest, any rule of law or equity to the contrary notwithstanding; and the knowledge that any such trust or unregistered interest is in existence shall not of itself be imputed as fraud.”

These provisions are the subject of much authority. Clearly an unregistered interest is immediately overridden by the registration of a fully or partially inconsistent interest, at least to the extent of the interest registered. But so too is a registered interest overridden by a subsequent registration. The expression in s 43 of the Real Property Act that requires a dealing with “the registered proprietor” does not mean that, in a case such as the present, when the registered proprietors have not, in fact, been dealt with, there is no indefeasibility: see the difference between Rich and Dixon JJ in Clements v Ellis [1934] HCA 18; (1934) 51 CLR 217, which relies on the difference between Gibbs v Messer [1891] AC 248 and Assets Co v Mere Roihi [1905] A.C. 176. Gibbs v Messer is no longer authoritative on the issues with which this judgment deals and may not be authoritative on any issue: see Schultz v Corwill Properties (1969) WN (Pt 1) 90 (NSW) 529 at 535-536.

In Breskvar v Wall [1971] HCA 70; (1971) 126 CLR 376 at 384-385, Barwick CJ said: “These sections are to my mind central to the Torrens system of title by registration: they make the certificate conclusive evidence of its particulars and protect the registered proprietor against actions to recover the land, except in the specifically described cases. Section 44 complements these provisions by providing that the registered proprietor holds the land absolutely free from all unregistered interests except (a) ‘in the case of fraud’ – which means except in the case that the registration as proprietor was obtained by the proprietor’s own fraud – see Assets Co. Ltd. v. Mere Roihi ; … Thus, except in and for the purposes of such excepted proceedings, the conclusiveness of the certificate of title is definitive of the title of the registered proprietor. That is to say, in the jargon which has had currency, there is immediate indefeasibility of title by the registration of the proprietor named in the register. The stated exceptions to the prohibition on actions for recovery of land against a registered proprietor do not mean that that ‘indefeasibility’ is not effective. It is really no impairment of the conclusiveness of the register that the proprietor remains liable to one of the excepted actions any more than his liability for ‘personal equities’ derogates from that conclusiveness. So long as the certificate is unamended it is conclusive and of course when amended it is conclusive of the new particulars it contains.”

Thus, with fraud being the only possible relevant exception, it is clearly established that immediately upon registration of an interest, the registered interest holder obtains good title. This is so even when there has been a forgery of the transfer or instrument creating the interest: Garofano v Reliance Finance (1992) 5 BPR 11,941; [1992] NSWConvR 59,659 (55-640).

It is therefore necessary to deal with the allegation of fraud submitted on behalf of Mr and Mrs Hadid. In Assets Co Ltd v Mere Roihi , supra, in an oft cited passage, Lord Lindley stated: “Passing now to the question of fraud, their Lordships are unable to agree with the Court of Appeal. Sections 46, 119, 129 and 130 of the Land Transfer Act 1870 (NZ) and the corresponding sections of the Act of 1885 [and his Lordship identifies them] appear to their Lordships to show that by fraud in these Acts is meant actual fraud – that is, dishonesty of some sort; not what is called constructive or equitable fraud, an unfortunate expression and one very apt to mislead, but often used, for want of a better term, to denote transactions having consequences in equity similar to those which flow from fraud. Further, it appears to their Lordships that the fraud which must be proved in order to invalidate the title of a registered purchaser for value, whether he buys from a prior registered owner or from a person claiming under a title certified under the Native Land Acts, must be brought home to the person whose registered title is impeached or to his agents. Fraud by persons from whom he claims does not affect him unless knowledge of it is brought home to him or his agents. The mere fact that he might have found that fraud if he had been more vigilant and made further enquiries which he omitted to make does not of itself prove fraud on his part. But if it be shown that his suspicions were aroused and that he abstained from making enquiries for fear of learning the truth, the case is very different, and fraud may be properly ascribed to him. A person who presents for registration of a document which is forged or has been fraudulently or improperly obtained is not guilty of fraud if he honestly believed it to be a genuine document which can be properly acted upon.”

As Street J said: “Forgery is more than fraud, and gives rise to considerations peculiar to itself. But the greater includes the lesser. It follows, therefore, that for the purposes of s 42 a forgery is a fraud just as is an act falling within the ordinary meaning of that word.” ( Schultz v Corwill , supra, at 537 per Street J.)

In Australia, at least, fraud for the purposes of s 42 or s 43 means actual fraud: see Assets Company , supra. It requires conduct involving personal dishonesty or moral turpitude: Wicks v Bennett [1921] HCA 57; (1921) 30 CLR 80; Butler v Fairclough [1917] HCA 9; (1917) 23 CLR 78. “Despite the passage of some ninety years since Lord Lindley, when delivering the opinion of the Judicial Committee in Assets Co Ltd v Mere Roihi [1905] AC 176 at 210, said: ‘… By fraud in these acts is meant actual fraud, ie, dishonesty of some sort, not what is called constructive or equitable fraud — an unfortunate expression and one very apt to mislead, but often used, for want of a better term, to denote transactions having consequences in equity similar to those which flow from fraud. Further, … the fraud which must be proved in order to invalidate the title of a registered purchaser for value, … must be brought home to the person whose registered title is impeached or to his agents’ and the many cases which have been decided in that period of ninety years, the position still remains that, for the purposes of s 42 of the Act, ‘fraud’ comprehends actual fraud, personal dishonesty or moral turpitude on the part of the registered proprietor of the subject estate or interest or of that registered proprietor’s agents: see Bahr v Nicolay [No 2] (at 614) per Mason CJ and Dawson J; (at 631-632) per Wilson J and Toohey J. Although it is now accepted that not all species of equitable fraud stand outside the concept of ‘fraud’ which has been adopted for the purposes of s 42 of the Act (see, eg, Latec Investments Ltd v Hotel Terrigal Pty Ltd (In Liq) (1965) 113 CLR 265 at 273-274 per Kitto J; Bahr v Nicolay [No 2] ) those species of ‘equitable fraud’ which are regarded as falling within the concept of ‘fraud’ for the purposes of s 42 of the Act are those — as for example, a collusive and colourable sale by a mortgagee company to a subsidiary ( Latec Investments Ltd v Hotel Terrigal Pty Ltd (In Liq) (at 273- 274)) — in which there has been an element of dishonesty or moral turpitude on the part of the registered proprietor of the subject interest or on the part of his or its agent.” ( Grgic v ANZ Banking Group (1994) 33 NSWLR 202 at 221, per Powell JA with whom Meagher and Handley JJA agreed.)

In the current proceedings, subject to the fraud of Mrs Khan, or her agents, Mrs Khan obtains good title. Forgery by others does not affect the quality of indefeasibility in Mrs Khan’s title. Even fraud by her agents does not affect the title of Mrs Khan, unless “the ordinary principles governing the responsibility of a principal for the fraud of [her] agent” applies: Schultz , supra, at 537-538 (per Street J).

In Schultz , supra, his Honour said: “If the fraud in question is the immediate act of the person whose title is impeached, then the position is not open to doubt. If, however, the fraud is that of an agent for the person whose title is impeached, the principle of respondeat superior, with all its limitations qualifications, is applicable. The matter is to be tested by investigating whether or not the principal is, in the particular circumstances under consideration, liable to the person who has been defrauded for the acts of the agent. On this topic one need not delve more deeply than the general statement in Bowstead on Agency, 13th ed., p. 242: ‘An, act of an agent within the scope of his actual or apparent authority does not cease to bind his principal merely because the agent was acting fraudulently and in furtherance of his own interests. This principle is general, applicable to cases of actual and apparent authority; in tort; in the disposition of property; a similar result even appears in criminal cases. But the mere fact that the principal, by appointing an agent, gives that agent the opportunity to steal or otherwise to behave fraudulently does not without more make him liable: the agent must normally be acting within the scope of his actual or apparent authority for the principal to be responsible.’ The second situation contemplated by the Privy Council in connection with the invalidating effect of fraud is one which involves the person whose title is impeached or his agents having knowledge of the presence of a fraud in the transaction under investigation. In this instance considerations of respondeat superior do not arise: it is knowledge that a fraud has been committed by someone for whom he is not responsible that exposes the title of the registered proprietor to challenge. Such knowledge in the registered proprietor, if existing in him prior to the consummation of the transaction under investigation, is squarely within the exception of fraud in s. 42 to which their Lordships referred. The Privy Council have, however, also left open, as a basis for going behind the register, knowledge on the part of the agents of the registered proprietor that fraud has tainted the transaction from which the registered title is about to derive. But (and here I acknowledge that I am putting a gloss upon the words used by the Privy Council), the mere fact that the existence of a fraud is known to an individual who is, in the transaction under consideration, the agent for some purposes of the person whose title is impeached will not of itself affect the indefeasibility of the title when registered. It is not enough simply to have a principal, a man who is acting as his agent, and knowledge in that man of the presence of a fraud. There must be the additional circumstance that the agent’s knowledge of the fraud is to be imputed to his principal. This approach is necessary in order to give full recognition to (a) the requirement that there must be a real, as distinct from a hypothetical or constructive, involvement in the fraud by the person whose title is impeached, and (b) the extension allowed by the Privy Council that the exception of fraud under s. 42 can be made out if ‘knowledge of it is brought home to him or his agents’ . This line of reasoning takes one into the well-known field of vendor and purchaser law dealing with the effect on a purchaser of notice of defects in his vendor’s title. Considerations of constructive notice are to be placed aside as not meeting the requirement of knowledge of fraud. If one finds, knowledge in the person whose title is impeached, then that meets the requirements of the passage I have quoted from the judgment of the Privy Council. And if one finds, not express knowledge in the principal, but express knowledge in his agent such that, within settled principles, that express knowledge is to be imputed to the principal, that is to say, the person whose title is impeached, then that also will fall within the exception enunciated by the Privy Council. Although the Privy Council has advisedly, it seems to me, used the word ‘knowledge’ and not the word ‘notice’, the ordinary principles of vendor and purchaser law relating to the imputation of notice to the purchaser will equally cover the imputation of knowledge for presently relevant purposes.”( Schultz , supra, at 537.G – 539.A, per Street J.)

In the current circumstances, there can be no doubt that the action and knowledge of Mr Theos and Mr Littleford were the actions and knowledge of Mrs Khan. They were given a wide authority and discretion to carry out the business of Mrs Khan and they were held out as transacting Mrs Khan’s business in all relevant respects. They stood in the shoes of Mrs Khan and represented her for all relevant purposes. Mrs Khan is bound by their conduct performed for the purposes of that authority and has the knowledge gleaned by them during that course: see Schultz , supra, at 539.A citing Williams on Vendor and Purchaser.

By the time the interest was sought to be registered (31 December 2002), Mrs Khan, through her agents: (a) had not dealt directly, or spoken directly (save for the “brusque” conversation), with Mr or Mrs Hadid or informed them of the actions of Mrs Khan or purportedly taken on behalf of Mr and Mrs Hadid; (b) was aware that the security agreement was for a caveat secured by a registrable mortgage, to be registered only on default; (c) was aware that the mortgage broker for the Mortgagor had not dealt with the Mortgagors; (d) had received instructions for payment that were suspicious, had an unknown postal address, and were not acted upon; (e) had received, on the same day, different instructions for payment; (f) was aware that the person they considered had been acting as the solicitor for the Mortgagor did not witness their signatures, nor certify that advice had been given; (g) had been told that the reason for the involvement of a second solicitor was “distance” in circumstances where that was manifestly wrong; (h) was aware that the payments were not to Mr and Mrs Hadid but, in two cases, to hitherto unknown companies, one related to the alleged solicitor and the other the company that was purportedly to be purchased; (i) was aware that the Mortgagors had the capacity, without borrowing at short term rates, to have access to $90,000 (when borrowing $130,000) and the assets to extend such a facility with ease and thereby avoid usurious interest; (j) was aware that Mr and Mrs Hadid had each denied that they had signed the mortgage or were party to the loan; (k) had been sent a Heads of Agreement document that was inconsistent with the rationale and effect of the loan as originally agreed and which document predated it; and (l) had different documents purportedly signed by Mr Hadid in which the signature was significantly different.

Against all of that, Mrs Khan had the comfort of a certificate and attestation of one firm of solicitors (not the Mortgagors’ known regular solicitors) and the comfort of “knowing” that solicitors were purporting to act for Mr and Mrs Hadid, which solicitors were assuring Mrs Khan, through her agents, that all was genuine.

Items (a) through to (i) inclusive, adumbrated in paragraph 117 above, were each known to Mrs Khan before the settlement of the loan.

Has there been fraud by Mrs Khan or her agents? Registration of title for the purpose of perfecting the title, or even of defeating a competing title or claim, is not fraud, unless there be personal dishonesty or moral turpitude or the kind of knowledge to which Street J referred in Schultz , supra (see [115] above). Registration of an interest when there is notice of a competing interest does not, of itself, give rise to fraud.

However, it is worthwhile, at least when referring to knowledge, to repeat the words of Salmond J in the N.Z. Supreme Court: “The true test of fraud is not whether the persons actually knew for certain of an existence of an adverse right but whether he knew enough to make it his duty as an honest man to hold his hand and either to make further enquiries before purchasing or to abstain from the purchase, or to purchase subject to the claimant’s rights rather than in defiance of them. If, knowing as much as this, he proceeds without further enquiry or delay to purchase a known encumbered title with intent to disregard the claimant’s rights, if they exist, he is guilty of that wilful blindness or voluntary ignorance which according to the authorities, is equivalent to actual knowledge and therefore amounts to fraud.”( Waimiha Sawmilling Co v Waione Timber [1923] NZLR 1137 at 1175.

The foregoing judgment was affirmed by the Privy Council in Waimiha Sawmilling Co v Waione Timber [1926] A.C. 101. In turn, this was cited with approval in the joint judgment of Wilson and Toohey JJ in Bahr v Nicolay [No 2] [1988] HCA 16; (1988) 164 CLR 604 at 631. Their Honours said: “What then constitutes fraud for the purposes of ss 68 and 134? A convenient starting point is a passage in the judgment of the Privy Council in Waimiha Sawmilling Co v Waione Timber Co : ‘If the designed object of a transfer be to cheat a man of a known existing right, that is fraudulent, and so also fraud may be established by a deliberate and dishonest trick causing an interest not to be registered and thus fraudulently keeping the register clear. It is not, however, necessary or wise to give abstract illustrations of what may constitute fraud in hypothetical conditions, for each case must depend upon its own circumstances. The act must be dishonest, and dishonesty must not be assumed solely by reason of knowledge of an unregistered interest.’ The most often cited case in which fraud was held to have occurred is Loke Yew v Port Swettenham Rubber Co Ltd . There a purchaser, with knowledge of the existence of an unregistered interest, represented to the transferor that it would make its own arrangements with the holder of the unregistered interest. It failed to do so, in circumstances where it was held to have been the purchaser’s intention to destroy the outstanding interest by registration of its own title. It was the purchaser’s fraudulent misrepresentation that persuaded the previous registered proprietor to transfer the land to it. With this decision may be contrasted Waimiha Sawmilling Co v Waione Timber Co . The registered proprietor of land, Howe, granted timber rights to the appellant which protected its agreement by caveat. Howe purported to determine the appellant’s interest for breach of covenant. The appellant appealed against a judgment upholding Howe’s re-entry. While the appeal was pending, Howe sold the land to Wilson who was acting as agent for a company to be formed, the respondent. Howe obtained an order for removal of the caveat (against which the appellant did not appeal) and transferred the land to Wilson. Wilson later transferred the land to the respondent. The appellant’s appeal against the judgment upholding Howe’s re-entry was itself upheld. Notwithstanding that Wilson knew of the appellant’s claim and of the litigation between it and Howe, the Privy Council held that there had been no fraud on the part of the respondent.” (Per Wilson and Toohey JJ in Bahr v Nicolay [No 2] , supra.)

With one exception, to which I will come, in this case nothing points to fraud. The awareness of a denial of the loan by Mr and Mrs Hadid occurred after the settlement date. Most of the authorities do not deal with fraud, or alleged fraud, other than in relation to the creation of the interest in land, as distinct from its registration (see s 45(2) of the Real Property Act ). This is probably because the interest is created by the instrument. The instrument, in the above analysis, creates a legal interest, which, by statute, may be registered. Indefeasibility guarantees the title transferred by the instrument and that title was at all times capable of being registered. I do not deal with the examples of fraud by employees of the Land Titles Office, which are currently irrelevant, but still involve fraud in obtaining “the interest”: see Williams v Davis [2003] NSWSC 453; Davis v Williams [2003] NSWCA 371.

In Bahr v Nicolay [No 2] , the Court dealt with fraud or trickery in preventing the registration of an interest, but in a wholly different context. However, the joint judgment of Mason CJ and Dawson J recognised “fraudulent conduct which enables him to obtain title or registration”. (164 CLR at 615)

Thus, where a transferee has obtained a legal interest from the registered proprietor, even though the interest was conveyed by a forgery, the transferee is able to register the interest because the statute allows it. In the circumstances of this Mortgage, affected by forgery, there is, with the one earlier mentioned exception, no fraud that would qualify the title of Mrs Khan.

I turn then to the exception and how, it seems to me, it operates. The Letter of Offer was a binding contract: Masters v Cameron (1954) 91 CLR 353 at 360 as described in Bahr v Nicolay [No 2] at 628. The terms of the Mortgage confirm it. By that contract, Mrs Khan agreed that the Mortgage would be in registrable form, but secured by a caveat, unless and until there were an act of default by Mr and Mrs Hadid. Until that act of default, the interest could not be registered without a fraudulent misrepresentation of its status.

Further, the obtaining of the consent of the First Mortgagee was not agreed and could occur only after an act of default.

While the equitable Mortgage, on my findings, was not obtained by fraud by or on behalf of Mrs Khan, the conversion of that interest into a legal interest in the land, capable of being registered, was effected by fraud. It was completed at a time when all of the facts in [117] and [118] above were known, including knowledge that Mr and Mrs Hadid denied its efficaciousness. Further, I find that at the time of its lodgement for registration, Mrs Khan, through her agents, had real concern and knowledge of a fraud involved in the execution of the instrument.

Moreover it was effected in breach of the contract. On 25 November 2002, interest was paid for the month ending 24 December 2002. On 25 December 2002, the interest for the month ending 24 January 2003 was payable. However, there was not default “in the due and punctual payment” of the interest. The mortgage allowed seven days for payment from the anniversary date, 25 November 2002. “The defendant contended that three days of grace were allowed for the payment of each instalment, and that if one added the days of grace, the second instalment would not have become payable until December 24. It was not denied that if the word ‘punctually’ had been omitted the defendant would have had until December 24 to pay; but the plaintiff said that the insertion of the word in the instrument showed that the parties intended that the three days of grace should not be allowed…. [His Lordship] thought that it meant that the maker had his attention drawn to the fact that, if he was not prompt in payment, he would lose the benefit of paying by instalments, and would have to pay the whole of the balance. He could not think that it was intended that the maker should be deprived of the usual concession as to the three days of grace. It was only intended to emphasize the necessity, on the part of the maker, of not being dilatory in paying his instalments.” ( Schaverien v Morris (1921) 37 TLR 366)

If due and punctual payment could be made within seven days of 25 December 2002, default had not occurred during the day of 31 December 2002.

This analysis may seem overly technical, but it does not depend solely on the strict application of the contract. It depends on the nature of the interest obtained in the Mortgage on 25 November 2002. That interest was not obtained by fraud of Mrs Khan. But the interest created by the registration of the Mortgage was. The registration of the Mortgage was obtained when there was actual knowledge of the claim of forgery and all the other issues listed in paragraph [117] above. That is the kind of knowledge referred to by Street J in Schultz , supra, at 538 and by the Privy Council in Assets Co v Mere Roihi , supra. On 25 November 2002, all that was obtained was an equitable Mortgage, in registrable form, but, by agreement, not to be registered and incapable of registration pursuant to the agreement by which it was obtained.

Moreover, at 31 December 2002, Mrs Khan had the kind of knowledge that required her to find out whether Mr and Mrs Khan were bound by the contract. If not, they could never be in default.

Expressed in other ways, the registration of a mortgage that was agreed to be registered would not amount to fraud, even in circumstances such as the present. However, the registration of a mortgage that was not intended to be registered, at a time when the parties had agreed it would not be registered, in the current circumstances is fraud. It is fraud because the agreement does not contemplate that the interest of the Mortgagee will be protected by registered mortgage. The agreement contemplates that the interest of the Mortgagee will be protected by a caveat. The registration of the Mortgage on 31 December 2007, given the state of knowledge of the Mortgagee and/or her agents, was not for the purpose of protecting the interest it had acquired through the agreement, it was for the purpose of improving the interest it had acquired and defeating any legitimate interest that Mr or Mrs Hadid may have. It is with some reluctance that I come to the conclusion that the conduct of Mrs Khan, through her agents, destroys the indefeasibility of her title and, given that the Mortgage is a forgery, the Mortgage is void and Mrs Khan has no right to possession of the land. The Liability of Mr Flammia to Mrs Khan

The facts have been sufficiently stated to understand the role of Mr Flammia. He is proceeded against by Mrs Khan, in the event, found by me, that the Mortgage is void, on the basis of negligent misrepresentation and misleading and/or deceptive conduct contrary to section 42 of the Fair Trading Act 1987.

The crux of the conduct upon which Mrs Khan relies to ground their causes of action are the signing of the security documents as witness to “Mr and Mrs Hadid” and the oral representation made during the conversation, said by Mr Theos, to have occurred on 25 November 2002.

I have already held that there was a conversation between Mr Flammia and Mr Theos of Heidtman & Co on 25 November 2002. The balance of probabilities, on the basis of the evidence that I accept, is that that conversation occurred prior to the settlement. That is the evidence that is before me, and it is certainly an inference that is available. I am more comfortable in drawing that inference, given the absence of Mr Flammia and the refusal of him to give evidence.

While I have held that the conversation between Mr Theos and Mr Littleford did not occur until after settlement, the conversation between Mr Flammia and Mr Theos occurred before settlement. Mr Theos is, as I have stated on a number of occasions, Mrs Khan’s agent. Mr Theos gives evidence that he relied, at least in part, on the conversation with Mr Flammia to give him comfort as to the identity of Mr and Mrs Hadid and the genuineness of their request for a mortgage. I accept that. I do not consider that the reliance on Mr Flammia’s conversation (and as will be shown, his attestation) is as great as the reliance upon the fact that Mr and Mrs Hadid were represented by a solicitor, namely, Mr Hancock. I consider that there was reliance upon Mr Flammia’s representation, which was in or to the effect of that recalled by Mr Theos.

It is also necessary to deal with the attestation. In the mortgage, Mr Flammia certifies that, relevantly, Mr and Mrs Hadid were “signing opposite” and that they were persons “with whom [Mr Flammia is] personally acquainted or as to whose identity [Mr Flammia is] otherwise satisfied” and that they signed this instrument in Mr Flammia’s presence.

I have already held that the persons who signed the mortgage were not Mr and Mrs Hadid.

There is no direct evidence of what occurred in Mr Flammia’s office. A number of possibilities exist. First, it is possible that nobody attended Mr Flammia’s office. This would be fraud by Mr Flammia and is not a conclusion I can reach without evidence. There is no evidence to suggest that there is fraud on the part of Mr Flammia. Secondly, it is possible that two persons attended Mr Flammia’s office, presented identification, which it was reasonable for Mr Flammia to accept, as a consequence of which he was prepared to certify in accordance with the above. Alternatively, a third person (perhaps Ms Palumbo) may have attended and introduced the impostors. Either one of these scenarios would be consistent with reasonable behaviour by Mr Flammia and would, if there were evidence of it, clearly assist his case. Thirdly, there is the possibility that two persons attended and could not reasonably establish their identity, yet Mr Flammia attested in accordance with the above certification.

Mr Flammia submits that I cannot find negligence in circumstances where there is no evidence as to what occurred in his office. There are only two possibilities on the evidence before the Court. Either Mr Flammia acted reasonably and is not liable, or he did not.

In his absence, I am entitled to come to the conclusion that Mr Flammia’s evidence would not assist his case.

The inference that arises from the judgment of the High Court in Jones v Dunkel [1959] HCA 9; (1959) 101 CLR 298 is a matter of common sense, as it has been described by the Court of Appeal in Fabre v Arenales (1992) 27 NSWLR 437. I do not here repeat at length the passages from the High Court which are all too familiar to any legal practitioner concerned with litigation. The difficulty arises in circumstances such as presently before the Court because, as has been made clear on a number of occasions, a party to proceedings that does not bear the burden of proof is entitled to say and do nothing. The inference that arises from the principles adumbrated in Jones v Dunkel does not fill a shortcoming in the evidence; its purpose is only to allow the drawing of an inference more comfortably than would otherwise be the case. The High Court (per Windeyer J at 321) cited with approval two passages from R v Burdett (1820) 4 B & Ald 95; 106 ER 873. The passage from the judgment of Best J was to the following effect: “Nor is it necessary that the fact not proved should be established by irrefragable inference. It is enough if its existence be highly probable, particularly if the opposite party has it in his power to rebut it by evidence and yet offers none; for then we have something like an admission that the presumption is just.” ( R v Burdett , supra at 122; 883.) (This is said in the context of criminal proceedings, for which now see RPS v R [2000] HCA 3; (2000) 199 CLR 620, hence the reference to burden of proof higher than the civil standard.)

The Court of Appeal described the process as “plain commonsense”: Fabre v Arenales . It said of the above passage within the larger judgment of Windeyer J in Jones v Dunkel : There is in this nothing esoteric or peculiar to legal reasoning. It is, as Windeyer J said, ‘plain commonsense’. A factual inference (if A, B, C exist, Z exists) is open if, to quote the words of Knox CJ and Dixon J, human experience would be contradicted if Z did not exist: see the cases referred to in Jones v Sutherland Shire Council [1979] 1 NSWLR 206 at 222 et seq). It follows that the inference will or may be drawn if general human experience (plain commonsense) will not be contradicted if the inference be drawn.” ( Fabre v Arenales , supra, at 445 per Mahoney JA with whom Priestley and Sheller JJA agreed.)

In this case, the evidence before the Court shows that Mr Flammia attested to the signatures of persons who were not Mr and Mrs Hadid as if they were Mr and Mrs Hadid. That attestation was to the effect that he was “personally acquainted” or that they were persons with “whose identity I am otherwise satisfied”.

The evidence of identification that is before the Court is that of a “driver’s licence” of Mrs Hadid. That driver’s licence is a photocopy. It is a photocopy of the driver’s licence of Ms Palumbo except insofar as the name and address is concerned, which has been superimposed on the name and address otherwise on the driver’s licence. Likewise a very poor photocopy of the driver’s licence of Mr Hadid has been used. That is the evidence before the Court as to the identification documents available. There is sufficient before the Court for me to say that it would defy common sense for me not to draw the inference, assuming fraud is eliminated, that Mr Flammia was negligent in his identification of Mr and Mrs Hadid and that his attestation and certification was not only wrong but negligently executed.

Further, each of the times that Mr Flammia witnessed the execution of documents by the persons purporting to be Mr and Mrs Hadid, being the Mortgage, the Authority to Complete and Undertake to Comply with Requisitions, the Borrowers’ Acknowledgement, the Declaration of Receipt of Independent Legal Advice and the Statutory Declaration, he did so in his capacity as solicitor and in a manner which was unqualified. There were further Statutory Declarations, a Declaration of Financial Position and a Declaration of the Purposes for which Credit was Provided, which likewise were witnessed by Mr Flammia without qualification and in his capacity as solicitor.

Mr Flammia submits that there is no evidence that Mr Flammia acted without an honest belief that the persons who executed the documents were in fact Mr and Mrs Hadid. Honest belief is not a sufficient defence to misleading and deceptive conduct. I have already concluded on the evidence before the Court, and the inferences that arise therefrom, that Mr Flammia acted negligently. His intent however is irrelevant: Hornsby Building Information Centre v Sydney Building Information Centre [1978] HCA 11; (1978) 140 CLR 216 at 223.

Moreover, conduct in breach of section 42 of the Fair Trading Act , like its federal counterpart in relation to corporations, does not require negligent conduct. A person who acts honestly and reasonably may be liable to damages under the provision if the conduct in fact misled or deceived and the liability is unrelated to fault and need not involve any breach of law or negligence: Parkdale Custom Built Furniture v Puxu Pty Ltd [1982] HCA 44; (1982) 149 CLR 191 at 197; Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661 at 666. The High Court in Yorke v Lucas , supra, said: “It is of course established that contravention of [s 42] … does not require any intent to mislead or deceive and even though [a person] acts honestly and reasonably, [he] may nevertheless engage in conduct that is misleading or deceptive.”

If Mr Flammia had exercised due care he would not have warranted that he knew Mr or Mrs Hadid or that he was satisfied as to their identity. The misrepresentation would not have occurred, the documents would not have been witnessed (at least by Mr Flammia) and Mrs Khan would not have lent the money on the basis of the documents. With due care, Mr Flammia would have discovered the misrepresentation that he was publishing and he is liable in damages for the contravention: Menmel Pty Ltd v The Great Australian Bite Pty Ltd (1997) ATPR 41-553.

It is, of course, necessary for the conduct to be in trade or commerce even under the provisions of the Fair Trading Act . But there can be no doubt that the lending of money, as part of a business, is conduct in trade or commerce and the conduct of mortgage brokers, and solicitors, acting on a paid basis, which is part of that lending activity, is “conduct which is itself an aspect or element of activities or transactions which, of their nature, bear a trading or commercial character”: Concrete Constructions (NSW) Pty Ltd v Nelson [1990] HCA 17; (1990) 169 CLR 594 at 604.

In those circumstances it is unnecessary for me to determine the not uncomplicated question as to whether Mr Flammia owes a duty of care to Mr and Mrs Khan: see Chandra v Perpetual Trustees Victoria [2007] NSWSC 694, per Bryson AJ. The Capacity in which Mr Hancock was Acting

As previously stated, Mr Hancock is a solicitor of the Supreme Court of New South Wales and practises as such. Every piece of correspondence written by Mr Hancock in relation to the events surrounding this mortgage was written on the letterhead of “Hancocks Solicitors”. Further it was signed under the nomenclature “Hancocks Solicitors” by John Hancock.

Split Cycle, was first mentioned in these transactions in a letter dated 22 November 2002. The purpose of that letter was to identify to whom a cheque should be made. Split Cycle was the trustee company that conducts a business as a mortgage broker and has a business name, “Ultimo Finance”. Mr Hancock swears to the fact that: “Split Cycle has its own business name ‘Ultimo Finance’ which is separate and distinct from my personal business name for the legal practice of ‘Hancocks Solicitors’.” (Affidavit 26 March 2007, paragraph 5(l)(C).) Further Mr Hancock swears: “I have never engaged in the finance broking business. My practice as a solicitor is not intermingled with the business of Split Cycle.” (Affidavit 12 March 2007, paragraph 8.) The above statements are inconsistent with the conduct of Mr Hancock in these proceedings and are not accepted. Indeed, in cross examination Mr Hancock accepted, far from Split Cycle not being intermingled with Mr Hancock’s practice as a solicitor, that Split Cycle is the service company for the solicitor’s practice. Thus even the payment of $4,400 (leaving aside the amount thereof) is not inconsistent with Mr Hancock acting as a solicitor.

It defies belief that Mr Hancock can write a letter on the letterhead of Hancocks Solicitors, sign it Hancocks Solicitors, refer to Mr and Mrs Hadid as “our clients”, yet still maintain that he was not representing that he was acting as a solicitor for Mr and Mrs Hadid. Further, in no conversation and in no document is there a reference to “Ultimo Finance” the mortgage business name to which Mr Hancock refers in his evidence.

Mr Hancock arranged for the collection of mortgage documents, arranged for the signing and witnessing of those documents (albeit by another solicitor), he sent the direction to pay on behalf of Mr and Mrs Hadid and generally performed tasks that one would expect a solicitor to perform, if the solicitor were instructed as such. Further, on the facts known to Response and Mrs Khan, Mr and Mrs Hadid already had a mortgage broker: Peter Fisher & Co. If Mr Hancock is correct in his assertion, which I do not accept, that he was purporting to act, and did in fact act, as a mortgage broker, Mr and Mrs Hadid, on the facts known to all, had three mortgage brokers, namely, Ms Bradaric, Mr Hancock and Peter Fisher & Co. His commencement letter to Peter Fisher & Co, in the risk of being repetitive, on the letterhead of “Hancocks Solicitors” and signed under the nomenclature “Hancocks Solicitors” is a letter to a mortgage broker referring to a message left on the telephone of that date (15 November 2002) and stating: “Our clients would like to obtain short term finance of approximately $130,000 for two months.” The letter goes on to enclose an appraisal by a real estate agent, a mortgage loan statement from the First Mortgagee and a folio identifier for the land and title. It is noteworthy that it does not reflect a request to Hancocks Solicitors or John Hancock or Split Cycle that they would arrange finance. It reflects an attorney, acting under his power, on behalf of his clients, requesting a mortgage broker to arrange finance.

I have otherwise set out sufficient material to show the role that Mr Hancock played. I reiterate that on any issue of controversy I do not accept Mr Hancock’s evidence and, in particular, I do not accept his evidence of the conversation with Mr Theos of 25 November 2002. Rather, I accept that Mr Hancock said he was acting for Mr and Mrs Hadid and gave the explanation for the involvement of Mr Flammia, which I have already outlined.

Mr Hancock never appropriately contacted Mr Hadid in relation to the matters. Mr Hancock breached his duty as Mr Hadid’s solicitor, if he were so acting. He sent correspondence that should have gone to Mr and Mrs Hadid to other persons. If he were acting as a solicitor, he has acted in a manner that is grossly unprofessional. If Mr and Mrs Hadid have suffered loss as a consequence which, but for the conclusion to which I have come in relation to the efficaciousness of the mortgage, they would have done, Mr Hancock would be liable for that loss. Whether or not Mr Hancock was acting as a solicitor, he did not have instructions to act on behalf of Mrs Hadid. Further he did not have the instructions to do as he did on behalf of Mr Hadid.

The representations made by Mr Hancock, purportedly on behalf of Mr Hadid, to Response and/or Mr Theos, acting on behalf of Mrs Khan, were made negligently and were misleading and deceptive and likely to mislead and deceive. I adopt the analysis of the law and principles I have summarised in relation to Mr Flammia above: see [148] to [152] above in particular.

Further the evidence clearly establishes that Mrs Khan, through her agents, relied upon the representations made by Mr Hancock. They were entitled to rely upon them. When a solicitor with a practising certificate represents to another solicitor (or person familiar with the processes) that he is acting on behalf of persons in a mortgage transaction, the other solicitor is entitled to rely upon those representations and rely upon the fundamental proposition that the solicitor purporting to act has obtained instructions to act. While the evidence of both Mr Theos and Mr Littleford was to the effect that they did rely upon Mr Hancock’s representation and the fact that he was acting, it would defy common sense if it were otherwise.

Mrs Khan has suffered loss and damage as a consequence of the reliance by her on the representations made negligently by Mr Hancock. Mr Hancock is liable for that loss and damage.

Further, the conduct of Mr Hancock was, for the above reasons, also misleading and/or deceptive or likely to mislead and deceive within the meaning of section 42 of the Fair Trading Act .

In evidence in cross-examination, Mr Hancock accepted that his conduct contributed to the settlement of the loan occurring. There is little doubt that Mrs Khan, through her agents, relied on the direction to pay (for which there was no authority) and the other representations made by Mr Hancock that he acted for Mr and Mrs Hadid, which he did not. Moreover, Mr Hancock had received no instructions from Mrs Hadid and, other than a brief conversation with a number of people in May 2002, he had received no relevant instructions from Mr Hadid.

The evidence makes clear that, absent the role of Mr Hancock as the solicitor for Mr and Mrs Hadid, the loan would not have been settled. As a consequence the misleading and deceptive conduct of Mr Hancock has caused loss and damage to Mrs Khan and Mr Hancock is liable for same. Damages and Apportionment

As a consequence of the foregoing, Mr Flammia and Mr Hancock are liable for the loss and damage suffered by Mr and Mrs Khan: s 68 of the Fair Trading Act .

The evidence establishes that Mrs Khan, through her agents, relied upon a series of representations by Mr Hancock that he was acting, in his capacity as a solicitor, for Mr and Mrs Hadid. As earlier stated he was at no stage acting for Mrs Hadid and had never met Mrs Hadid. While Mr Hancock had met Mr Hadid, he did not receive instructions from Mr Hadid of the kind that would enable him to correspond in the way that he did. He had no authority to represent that he acted for Mr Hadid and had no authority to direct payment of the kind that he represented.

Likewise, as is obvious, Mr Flammia did not know personally Mr and Mrs Hadid and was negligent in the manner in which he was satisfied that the persons who had signed the documents were Mr and Mrs Hadid respectively.

The conduct of Mrs Khan that was induced by reliance upon the representations of Mr Hancock and Mr Flammia was the conduct in entering into the contract for the loan and the settlement of the Mortgage. It was the settlement of the Mortgage and the entering into the loan which caused the loss or damage to Mrs Khan and, in turn, that conduct was engaged in as a result of the reliance by Mrs Khan, through her agents, on the representations of Mr Hancock and Mr Flammia.

I do not consider that Mrs Khan, or her agents, in relying upon the representations of either Mr Hancock or Mr Flammia, or both of them, lacked due care for herself. Further, I do not consider, if it were possible to allow for contributory negligence, that any contributory negligence has been displayed.

There may have been culpability in the actions of or on behalf of Mrs Khan after the settlement on 25 November 2002, but this was not the cause of any damage. If anything the conduct after 25 November was an attempt, albeit inappropriate, to mitigate the loss that otherwise might arise, not a lack of due care.

The conduct of Mr Hancock and the conduct of Mr Flammia, being causative of the loss, leads to the conclusion that each is liable for the loss and damage: Henville v Walker [2001] HCA 52; (2001) 206 CLR 459.

I reserved to the parties the right to approach the Court on the question of the calculation of damage and the principles that apply thereto and I continue that reservation. That which should be addressed in any such further proceeding, should be the calculation of the damage (see State Bank of New South Wales v Yee (1994) 33 NSWLR 618 at 630 et seq), the principles that apply to that calculation (i.e. what, if any, rate of interest applies) and whether apportionment is available as between Mr Hancock and Mr Flammia: see Part 4 of the Civil Liability Act 2002.

Having determined that both Mr Hancock and Mr Flammia are liable for the loss or damage sustained by Mrs Khan, it is necessary to deal with the claims by each against the other for contribution and/or for the apportionment of damage, to the extent that apportionment is available.

If I were to decide that issue on the basis of a determination of what is just and equitable as between the parties based on the extent to which each is responsible for the loss or damage, my conclusion would be that, if apportionment of the damage is appropriate, the relative apportionment, utilising those ordinary principles, would be 80 per cent Mr Hancock and 20 per cent Mr Flammia.

The determination reached on indefeasibility of title results in the absence of loss or damage to Mr or Mrs Hadid. It is unnecessary for me to determine “contributory negligence” of Mr Hadid or Mrs Hadid.

However, there are cross-claims by each of Mr Hancock and Mr Flammia against Mr Hadid. Prior to 25 November 2002, Mrs Hadid had done nothing, was not required to do anything and could be liable to no one. Any action or inaction thereafter is not causative of any damage to Mrs Khan, Mr Hancock or Mr Flammia.

Prior to 25 November 2002, Mr Hadid provided his driver’s licence and some documents relevant to the provision of a loan. It is unnecessary for me to determine whether that involved a lack of due care for himself, because contributory negligence is not relevant. It cannot be said that any conduct of Mr Hadid was misleading or deceptive (except, perhaps, the mention of the $500 M, which was not causative of any damage).

Further, in order for either of the cross-claims against Mr Hadid to be successful, it would need to be established that there existed a duty of care to any or all of Mrs Khan, Mr Hancock and/or Mr Flammia. It is unclear on the material before the Court what that duty would be and to whom it is owed: to all lenders; to all solicitors? Is it a duty not to provide copies of documents that might be used to defraud oneself owed to anyone who thereafter suffers loss, even by the intervening criminal act of a third party?

There is no duty owed by Mr Hadid to Mrs Khan, Mr Hancock or Mr Flammia. If there were a duty, it would not have been breached by the provision of copy documents, and no originals were provided. The Liability of Am Re

I have come to conclusions of fact in relation to the conduct of Mr Hancock, which involved Mr Hancock representing, consciously or otherwise, that he was acting as a solicitor. This is a factual situation that may significantly affect the submissions that have been put, thus far, in relation to the Insurance Claim.

I will allow Mr Hancock and Am Re 14 days in which to file written submissions on the effect, if any, of these findings of fact on the insurance claim. Orders

As is clear from the above, I propose orders to give effect to the following: A. In 10537/2007, the claim for Mrs Khan for possession: (a) verdict for the defendants, Mr and Mrs Hadid; (b) dismiss all cross-claims. B. In 20052/2003, the claim by Mr and Mrs Hadid: (a) verdict for the defendant Mrs Khan; (b) verdict for Mrs Khan in the cross-claim against Mr Hancock; (c) verdict for Mrs Khan in the cross-claim against Mr Flammia.

I direct those representing Mr and Mrs Hadid and those representing Mrs Khan to confer and file with my Associate, either jointly or separately, an order or orders to reflect these reasons.

I will hear the parties briefly on the damage and costs. I propose that all orders to be made in both proceedings will be made at one time and I will hear the parties on the appropriate orders as to costs. My preliminary view is that the costs of both Mrs Khan and Mr and Mrs Hadid should be borne by Mr Hancock and Mr Flammia.

As earlier indicated I will receive written submissions, as advised, from Am Re and Mr Hancock on the effect, if any, of these findings of fact on the insurance claim.