Citigroup Pty Limited v Middling (No. 4)

These proceedings began on 15 February 2013 when Citigroup Pty Limited (Citigroup) filed a statement of claim claiming possession of property at Canley Heights (the Property) of which Dennis Middling was registered proprietor. Citigroup alleged that there had been default in the payments under a mortgage that Mr Middling had granted to Citigroup on 6 August 2008 (the Citigroup Mortgage). The monies advanced by Citigroup (the Citigroup Loan) which were secured by the mortgage were used to discharge an earlier mortgage that Mr Middling had granted to Perpetual Trustees Victoria Limited (Perpetual) in return for an advance of $238,500 in 2008 (the Perpetual Loan).

On 8 April 2013 Mr Middling filed a defence as well as a cross-claim, to which Perpetual and Citigroup were cross-defendants. Neither Mr Middling’s defence nor his cross-claim contained any reference to the Contracts Review Act 1980 (NSW).

The matter was listed for hearing on 22 April 2014, at which time Mr Middling sought and was granted leave to amend the defence and cross-claim to include claims for relief under the Contracts Review Act. The hearing of the matter was adjourned as a consequence of the amendment: Citigroup Pty Limited v Middling [2014] NSWSC 474.

The proceedings between Citigroup and Mr Middling were resolved by a Deed of Release dated 17 December 2014 which capped the amount outstanding under the Citigroup Mortgage at $350,000, as long as it is paid on or before 30 June 2015.

Accordingly, the only matter remaining for determination, aside from the question of costs, was Mr Middling’s cross-claim against Perpetual.

Mr Middling, who was born in 1953, has been on a disability support pension from about 2002. He had spent his working life doing manual work, including as an assistant to a carpet layer, a plumber’s assistant and a boner at meatworks. He was in the Army Reserve for about six years as a Private, during which time his literacy skills, which had not been particularly good, improved somewhat. He is able to read, but can only do so slowly. He was married and had two children but was divorced sometime after 1979. In about 1986 he sustained a spinal injury in a serious car accident on his way to work. In 1986 he used a substantial portion of the damages from his common law claim to purchase his house at Canley Vale for about $54,000. He granted a mortgage over the Property to St George Building Society Ltd (St George). He later obtained personal loans, which caveats lodged against the title to the Property indicated were secured by unregistered mortgage to Avco Financial Services Limited (GE Finance).

On 3 June 1989 Mr Middling married Leslie, to whom he remains married. In about 1990 he started work as an armed security guard, drawing on his experience with the Army. In 2001 Mrs Middling suffered a severe stroke, from which she eventually recovered physically, although Mr Middling described her as “still frail and easily distressed and confused”. He injured his back in about 2002 and has not worked since. Since 2002 he has had four strokes, the most recent of which occurred in 2010. Mr Middling’s assessment is that each stroke has affected his memory and attention to detail.

Mr Middling races pigeons for pleasure. He has an aviary of 150 birds in his backyard. Although his pigeons sometimes win prizes, the prize money is used to maintain them, rather than as a source of income for Mr Middling and his wife. Mrs Middling is now on the age pension, which is paid at the same rate as the disability support pension. Accordingly, each has an income of about $575 per fortnight.

In about 2006 Mr Middling still owed $15,000 to St George under the mortgage over the Property. He also owed about $23,000 to GE Finance which, as referred to above, was secured by unregistered mortgage over the Property. Mr and Mrs Middling were having difficulty meeting the repayments.

One of Mr Middling’s friends, Ray Thomson, mentioned to him that he had been helped by a man known as Eric Lu who had arranged for his house to be refinanced. Mr Thomson told Mr Middling that, as part of the refinance, he had borrowed more money which was used for an investment which generated income to service the debt.

In about March 2007 Mr Middling went to see Mr Lu, at premises in Hill Street, Cabramatta. Mr Middling came to learn that Mr Lu was the principal of a company known as Dollar Group Pty Limited (Dollar Group). Mr Middling told Mr Lu that the Property was worth about $260,000 and that his total debts were about $37,000, of which $15,000 was owing under the mortgage to St George Bank and the balance to GE Finance. The following exchange ensued:

Mr Lu gave Mr Middling some papers, including a Dollar Group Home Loan Application, which he took home, in part because he did not have sufficient proof of identity for the 100 point identity check, as he had only brought his driver’s licence and Medicare card with him. He returned to the Dollar Group office on about 12 March 2007, at which time a woman in the office filled in the application for him. He signed the 100 point identity check form, which also appears to have been signed by Mr Lu. The form records that it was completed by “Linda Le”. Mr Middling recalled only a woman called Michelle Lam.

The loan application that was signed by Mr Middling on 12 March 2007 described the purpose of the loan as being “Refinance - Owner Occupier”. Mr Middling was unaware that his loan application included the following documents each of which was false:

A further document, which was included in the loan application and apparently signed by Mr Middling, was entitled “loan purpose / declaration checklist”. Two purposes of the loan were identified: “to refinance an owner-occupier residence” as to $15,000; and “to have available credit to make personal purchase” as to $223,500.

The loan application was sent by Dollar Group by facsimile on 20 March 2007 to Challenger Mortgage Manager Pty Ltd (Challenger), which is relevantly the Mortgage Manager for Perpetual. The message on the cover sheet, apparently signed by “Linda Le”, said, in part:

Among the documents included in the loan application was a valuation of the Property at $265,000.

Under cover of letter dated 27 March 2007, First Title Secure, who appears to have prepared the documentation and acted on the settlement on behalf of Challenger (for Perpetual), forwarded the loan and transaction documents to Mr Middling. A document dated 27 March 2007, which was apparently signed by Linda Le of Dollar Group, recorded that the loan security documents were collected by Ms Le from the offices of First Title Secure’s offices in Market Street, Sydney. On about 28 March 2007, Mr Middling received the loan offer from Perpetual for a loan in the sum of $238,500. He attended the offices of Dollar Group with his wife to accept the offer and sign the relevant documentation. Mr Middling gave evidence that while they were there the following exchange occurred:

I do not accept that this conversation took place in those terms. I am satisfied that Mr Middling knew that he had applied for the extra $200,000 and was prepared to borrow the additional money for Mr Lu to invest on his behalf.

On 28 March 2007 Mr Middling signed a Direction and Authority addressed to Perpetual in which he authorised the payment of certain fees and charges, including for lender mortgage insurance, and directed Perpetual to pay the balance, $233,078.65, into a specified Commonwealth Bank account in the name of Mr Lu. I am satisfied for the reasons given in more detail below that the Direction and Authority was filled in by the time Mr Middling signed it and that Mr Middling intended to borrow $238,500.

A further document in evidence, also dated 28 March 2007, appears to have been signed by Mr Middling, or at least to bear his signature, which read:

I do not accept Mr Middling’s evidence that he did not sign this document. He was, after all, prepared to sign a completed Direction and Authority which was to the same effect apart from the description of Mr Lu as his “business partner”. In any event, the Direction and Authority was sufficient to authorise the payment to Mr Lu.

Mr Middling also signed a document entitled “Borrower’s Acknowledgement” on 28 March 2007 in which he purported to acknowledge as follows:

In addition to these documents, Mr Middling signed an investment agreement with Dollar Group for $200,000, with a specified return of $1,833.33 per month. The term of the investment was said to be 30 years and the interest rate was stipulated at 11% per annum. Mr Middling was provided with a copy of this agreement, and with the documents referred to above, which he later provided to police, as set out below.

On 16 April 2007 Damien Nguyen of Dollar Group sent an email to Sheree List of First Title which read in part:

The First Title Funds Disbursement Report, which was apparently processed by Sheree List, records the amounts of various cheques, including $4,572.90 to Dollar Group, a cheque to “GE Money” in the sum of $18,191.12 and a total of $214,549.28 in respect of “Manual Bank Cheques”, which appears to include $199,845 in “surplus funds”, which were paid to Mr Lu’s account as specified on the Direction and Authority signed by Mr Middling on 28 March 2007.

On 18 April 2007 the loan from Perpetual was drawn down in the sum of $238,500. The loan from GE Finance was discharged by the payment of $18,181.12 from the funds advanced.

In or about July 2007 Mr Middling received a statement of account bearing the Challenger logo which identified the lender as Perpetual, the mortgage manager as Dollar Group and indicated that the closing balance of the loan was $238,765.46. Mr Middling gave evidence in his affidavit that he had queried both the amount and the dishonour fees and dishonoured payments with Mr Lu. According to Mr Middling, Mr Lu had reminded him of the investment of $200,000 that he had arranged, explained that the interest from the investment was used to pay off the Perpetual Loan and assured him that he would “have it rectified by the bank straight away”. For reasons given in more detail below, I do not accept that this conversation occurred. I am satisfied, on the balance of probabilities, that Mr Middling appreciated that he had authorised the loan in the higher amount.

Also in July 2007 Mr Middling received a statement of account in his name with the Perpetual logo, on which was printed Mr Lu’s name, phone number and the contact details of Dollar Group. The statement purported to be referable to a Portfolio Share Investment Account and showed, on the first of two pages, an opening account of $200,000 and credits of $5,499.99 and on the second of two pages indicated that the credits of $5,499.99 comprised the sum of three payments of $1,833.33, each described as interest, which were credited on 27 April 2007, 30 May 2007 and 29 June 2007 respectively. The interest rate was said to be 11%. The evidence does not establish that this document is other than genuine. The statements of account are consistent with a document sent to Mr Middling on Dollar Group letterhead which set out the terms of the investment of $200,000 for a term of 30 years.

The statement of account that recorded the line entries for the Perpetual Loan for its duration from advance on 18 April 2007 until it was discharged on 6 August 2008 recorded that, throughout the life of the loan, interest was being debited to that loan and payments were being made in reduction of the loan.

On 9 August 2007 Mr Middling received a letter from Dollar Group advising him that interest on his $200,000 investment had increased from 7.65% to 7.9%; a further letter dated 22 September 2007 notified that it had increased further to 8.05%.

On 23 January 2008, the balance of the loan account was $243,403.94. A payment of $1,840.58 made on 18 January 2008 had been dishonoured. By letter of 23 January 2008 Kemp Strang, solicitors for Perpetual, sent a notice to Mr Middling pursuant to s 57(2)(b) of the Real Property Act 1900 (NSW) requiring rectification of default within 31 days. As soon as he received the letter with the notice, Mr Middling tried to get in touch with Mr Lu, whom he found difficult to contact. Eventually, he received a letter dated 29 January 2008, which was apparently signed by Michelle Lam in which she said, in part:

At some time later in 2008, Mr Lu visited Mr Middling at the Property. While he was there he telephoned someone from Citibank. It appeared to Mr Middling that Mr Lu was arranging for the Perpetual Loan to be refinanced, which eventually occurred, although not until later. On this occasion Mr Lu told Mr Middling that he had been beaten up by a client. Mr Middling could see that he was recovering from a severe assault and felt sorry for him.

In May 2008 Mr Middling was served with a notice to occupier and a statement of claim, which Perpetual had filed on 14 May 2008, claiming possession of the Property.

Mr Lu arranged for a loan application dated 4 July 2008 to be made to Citibank (on behalf of Citigroup) by or on behalf of Mr Middling for a loan of $263,694. It was supported by financial documents, including payslips, purporting to establish, contrary to the fact, that Mr Middling was employed as a sales representative on a gross weekly income of $1,250. The loan was approved by Citibank by letter dated 14 July 2008. Mr Middling authorised the discharge of the Perpetual Mortgage from funds advanced by Citibank, which in turn were secured by the Citigroup Mortgage, which was executed by Mr Middling. This transaction was settled on 6 August 2008 and Perpetual was paid $245,974.75.

At about this time, Mr Lu advised Mr Middling to pay him a further $10,000 to avoid any further dishonour fees. Mr Middling paid him $8,000, which he withdrew from an account with Westpac on 12 August 2008.

On 13 January 2009 Mr Middling received a loan account statement from Challenger, confirming that the loan amount of $238,500 from Perpetual had been discharged on 6 August 2008.

On about 21 January 2009, Mr Middling received a letter from Citibank advising him that the loan repayments for December 2008 and January 2009 were overdue. Mr Middling alleged, but did not prove, that Mr Lu misappropriated the loan monies. There was no evidence that the account into which the monies borrowed from Perpetual was deposited as an investment was not an actual account, or that the interest from the account was not paid to Perpetual as interest on the loan. The reason for the default on the Perpetual Loan and Mortgage appeared, from the account statements in Mr Middling’s name, to be that the interest earned on the investment was not sufficient to pay the interest owing on the borrowings. It is reasonable to infer that any misappropriation of the investment monies occurred at about the time of, or after, the discharge of the Perpetual Loan and Mortgage, as the $200,000 was not re-invested in an account in Mr Middling’s name, as Mr Lu had represented it would be.

It is not necessary to continue the narrative concerning the Citigroup transaction as that aspect of the proceedings has been resolved.

In March 2009, Mr Middling reported the matter to police and obtained a document headed “NSW POLICE FRAUD REPORT FORM” to be filled in. His daughter, Wendy Middling, asked him to tell her what had happened so that she could fill in the form for him, which she did, by hand. Ms Middling recorded that Mr Lu had informed Mr Middling that when the Perpetual Loan was paid out the monies which had been invested with Perpetual would be invested with ING, which he told him was associated with Citigroup. On the page of the form headed “Financial/ Property Loss”, the “actual total loss” is said to be $272,071.20. To the question “What is your aim in reporting this matter to Police?”, Mr Middling’s daughter wrote on his behalf:

Mr Middling did not allege in his report to the Police that he had not authorised the payment of $200,000 to Mr Lu.

At some time after this, Mr Middling rang Perpetual Investment Management Limited and inquired about the Portfolio Share Investment Account in his name and read out the account number from the statement. Mr Middling gave evidence that the person on the other end of the line told him that there was no such account and that Perpetual had no record of any investment by him. This evidence was admitted on the limited basis that it established the terms of the communication. It is insufficient to found any inference that there was no such account. Indeed, the evidence, such as there is, tends to suggest that there was such an account, there being no evidence to show that the statements, which are apparently genuine, were other than as they appeared to be. Furthermore the company search of Perpetual Investment Management Limited, which Perpetual tendered, indicated that it was a separate company which was not apparently related to Perpetual. Accordingly, any statement made by the person on the other end of the line was not authorised by Perpetual and does not amount to an admission against Perpetual.

Mr Middling signed the form, which was dated 11 March 2009. Later, he attended Cabramatta Police Station and was interviewed by police, who prepared a typed statement which he signed on 16 September 2009, in which he relevantly deposed as follows:

The document referred to in [17] of the Police Statement, which was signed by Mr Middling, was filled in. It must have been in Mr Middling’s possession since he took it, with other documents which he had retained, to the Police Station to make the statement. Mr Elliott, who appeared on his behalf before me, conceded that there were no copies of the Direction and Authority which bore Mr Middling’s signature which did not have all the figures filled in. I do not accept that Mr Middling signed the Direction and Authority in blank. I am satisfied that it was filled in when he signed it.

Mr Middling did not allege in his statement to Police that he had not authorised the payment of $200,000 to Mr Lu. Indeed, he told Police that he had borrowed the money for an investment to be managed by Mr Lu.

It was common ground Mr Lu was charged with several counts of fraud and was convicted of fraud after a trial by jury in which Mr Middling gave evidence. The connection between the conviction and any of the facts in issue in the present proceedings was not established by the evidence. Accordingly, I cannot use it to find that Mr Lu misappropriated the funds or, if such misappropriation did occur, when or how it took place: s 91 of the Evidence Act 1995 (NSW).

Mr Middling presented as a simple man. There was no suggestion, nor do I find, that he was dishonest. However, the disparity between the version in his affidavit and the versions contained in the report to police and his police statement leads me to the conclusion that his evidence in these proceedings is unreliable and can only be accepted if it corresponds with earlier versions given before the commencement of these proceedings.

I reject Mr Elliott’s explanation for the discrepancies between his earlier versions and his evidence at the trial, which was that Mr Middling has had “more time to reflect”, “advice” and “someone with a legal background to work out what has in fact occurred”.

I am satisfied that Ms Middling attempted to elucidate the facts, as well as she could, when she questioned him and filled in the police report form in March 2009. I would not infer, in the absence of evidence from her (and she was not called as a witness), that she applied any pressure to him or failed to understand what he was saying. In September 2009 Mr Middling’s police statement was prepared, on his evidence, over a course of many hours, and by reference to documents in his possession which he brought with him to the police station. I would not infer, without evidence to the contrary (and there was no such reliable evidence), that the police who interviewed Mr Middling did other than endeavour to find out from him what actually occurred. After all, when the Police officers prepared the statement, it was for the purposes of a potential prosecution in which Mr Middling would be called as a witness.

To the extent to which his evidence in these proceedings was, for example, that he did not realise that he had borrowed more than $38,500, or that he did not sign the Direction and Authority when it was completed, I regard him as unreliable and untruthful, although not deliberately so.

On or about 7 July 2004 Interstar Securities (Australia) Pty Ltd (Interstar) and The Mortgage Alternative Pty Ltd (TMA) entered into an agreement with Dollar Group entitled “Loan Origination and Management Agreement” (LOMA) pursuant to which loans from, relevantly, Perpetual, were originated and managed. Interstar, now known as Challenger, was, relevantly, Perpetual’s “Manager”; Dollar Group was known as the “Originator”.

Clause 3.3 provided:

Clause 4.1 provided:

Clause 5 provided in part:

Clause 6 provided in part:

The term “Manuals” in cl 6.2(g) was defined in cl 1.1 to mean the procedures manuals provided by the Manager to the Originator on or before the date of the LOMA and as amended from time to time.

Clause 12 provided for access by the Originator and its representatives to the Manager’s systems and services by password.

Clause 19 provided in part:

Clause 21 provided in part:

The term “Confidential Information” was defined by cl 1.1 of the LOMA to include the terms of the LOMA itself.

Clause 22.1 prohibited assignment of the LOMA by the Originator without the Manager’s consent, which the Manager was entitled to withhold in its absolute discretion.

Mr Middling’s case was pleaded on the following alternative bases:

The relief claimed is, in substance, the amount of money required to enable Mr Middling to pay to Citigroup the amount agreed in the Deed of Settlement and be put in the position in he would have been had he borrowed only $38,500 (without any allowance for interest on that sum). Mr Elliott submitted that, on this basis, Mr Middling was entitled to damages calculated as follows:

Each of the bases for Mr Middling’s cross-claim set out above, apart from the claim under the Contracts Review Act, depended on his establishing that Dollar Group or Mr Lu was Perpetual’s agent and, accordingly, that any wrongdoing by one or both of them can be attributed to Perpetual and Perpetual is fixed with knowledge of matters known to Dollar Group and Mr Lu. The claim under the Contracts Review Act also relied, but did not depend, on agency.

Mr Ashhurst SC, who appeared with Mr Newton for Perpetual, relied on the decision of the Court of Appeal in Tonto Home Loans Australia Pty Limited v Tavares [2011] NSWCA 389 (Tonto Home Loans). In Tonto Home Loans, the mortgage originator was found not to be the lender’s agent but the borrower was granted relief under the Contracts Review Act, in part on the basis that the lender’s loose attention to its own guidelines had contributed to the risk of fraud by the mortgage originator which, although not the lender’s agent, was its chosen commercial counterparty.

Whether a person is an agent of another (the principal) requires consideration of the purpose for which the question is to be determined: Allsop P (with whom Bathurst CJ and Campbell JA agreed) in Tonto Home Loans at [173], referring with approval to Kirkpatrick v Kotis [2004] NSWSC 1265; 62 NSWLR 567 (Kirkpatrick) at [86]. In the present case, the question is whether Perpetual appointed Dollar Group to undertake tasks for it, short of creating a binding loan agreement, such that Dollar Group’s knowledge became Perpetual’s knowledge and Perpetual was to be held legally responsible for Dollar Group’s conduct. It was common ground that Interstar and Challenger were, relevantly, agents of Perpetual and, accordingly, if Dollar Group was Challenger or Interstar’s agent, it was also Perpetual’s agent.

The two matters said to be attributed to Perpetual on the ground that Dollar Group and Mr Lu were the agents were: first, the provision of false information regarding Mr Middling’s income and employment on the loan application; and secondly, the misappropriation of $200,000 by Mr Lu.

The terms of the LOMA are important to the analysis whether, when Dollar Group and Mr Lu were completing the loan application for Mr Middling, they were doing so for the purposes of their own business as mortgage introducers or as agents for Perpetual. The LOMA provided that Dollar Group was not contractually obliged to send the completed loan application to Perpetual (cll 3.3 and 4.1). Furthermore, if Perpetual had not accepted the loan application, Dollar Group was at liberty to submit it to other lenders (such as Citibank). It is apparent from these clauses that there was a general expectation that Dollar Group and Mr Lu would have their own customers, whose loan applications they might choose to forward to Challenger for Perpetual, or to some other lender. Dollar Group and Mr Lu could be expected to act in the interests of such customers and in good faith.

Clause 4.1 of LOMA provided that Dollar Group “may” submit an application to Challenger. The word “may” implies a choice and indicates that, if Dollar Group considered that a particular customer would be better served if the loan application were submitted to another lender, it would not be obliged to submit the application to Challenger. That Dollar Group had a choice is inconsistent with its acting on behalf of Challenger when preparing the loan application.

Dollar Group was contractually prohibited from disclosing the terms of the LOMA (cl 21) or from holding itself out as representing Challenger (cl 19.2).

Clause 19.1 of the LOMA expressly excludes agency. At [182] of Tonto Home Loans Allsop P said of a similar clause (cl 3.1):

Mr Elliott contended that the prohibition on assignment without consent was supportive of the relationship of agency. I regard it as a neutral factor.

Mr Elliott, who appeared on behalf of Mr Middling relied on Michalopoulos v Perpetual Trustees Victoria Limited [2010] NSWSC 1450 (Michalopoulos) and Tran v Perpetual Trustees Victoria Limited [2012] NSWSC 1560 (Tran).

Michalopoulos was decided before Tonto Home Loans. An important issue in Michalopoulos was whether the mortgage originator was the agent of the borrower. Justice White concluded, at [78], that the contractual obligation of the mortgage originator to notify the lender of all relevant information that may come to its attention regarding the loan application was inconsistent with the mortgage originator being the agent of the person applying for the loan. His Honour said:

Justice White, as the passage set out above indicates, did not consider cl 6.2(c) of the Loan Origination and Management Agreement to determine the question whether the mortgage originator was the lender’s agent, although that was ultimately his Honour’s conclusion. The agreement considered in Tonto Home Loans contained a similar term, cl 2.1, to cl 6.2(c) in Michalopoulos and in the present case, but the Court of Appeal decided that the mortgage originator was not the lender’s agent for the purposes of the loan application.

Mr Elliott also relied on Tran, in which Rein J decided the claim on the basis that the account had been debited with an unauthorised disbursement. Accordingly, his Honour’s statements to the effect that, because Perpetual and Challenger “clothed mortgage originators such as Dollar Group with authority to act as their agents and subagents”, cl 19.1 (the non-agent clause) was ineffective to exclude agency were strictly obiter. Furthermore, Rein J followed White J in Michalopoulos, the correctness of which may need to be reconsidered in light of Tonto Home Loans, to which Rein J does not appear to have been referred as it is not mentioned in his Honour’s reasons. The final point of distinction is that in Tran the advice that Mr Lu gave to Mr Tran fell into the category of “loan management” (the re-deposit of a cheque) which the agreement specifically authorised the mortgage originator to perform on its behalf. As Campbell J said in Kirkpatrick:

This last point is also relevant to a consideration of Mr Elliott’s reliance on the fact that Dollar Group was named as the “mortgage manager” and its telephone number shown on the statements of account issued by Challenger for the Perpetual Loan. This conduct occurred after the loan was approved and the agreements entered into and was specifically authorised by the LOMA. Mr Elliott relied on Perpetual Trustees Victoria Limited v Schmidt [2010] VSC 67, in which Forrest J concluded that, because the terms of the contract (as in the present case) contemplated that the mortgage originator would manage the loan after it was advanced, the mortgage originator was the agent of the lender for other purposes. For the reasons given by Campbell J in Kirkpatrick, and Allsop P in Tonto Home Loans at [173] and [188], such an approach is flawed.

I note for completeness that in the present case neither Perpetual nor Challenger could be said to have clothed Dollar Group or Mr Lu with ostensible authority by, for example, permitting them to use their logo or stationery during the period of the loan application. This is to be contrasted with the circumstances of Heperu Pty Ltd v Morgan Brooks Pty Ltd (No. 2) [2007] NSWSC 1438 in which Palmer J found that a mortgage originator and manager (Morgan Brooks) had permitted and encouraged Mr Cincotta, a sub-originator to represent himself as part of its business through stationery and other paraphernalia: [69]-[74]. His Honour concluded that Morgan Brooks held out Mr Cincotta as having apparent authority to enter into a contract for the investment of funds and that, accordingly, Morgan Brooks was bound by the contract.

A consideration of the arrangements established by the LOMA leads, in my view, to the conclusion that, when Dollar Group was completing the loan application for Mr Middling and submitting it to Challenger, it was doing so as principal of its own business, rather than as agent for Challenger or Perpetual. Although there are some differences between the clauses considered in Tonto Home Loans and those in the LOMA, I do not regard the differences as being material. The analysis undertaken by Allsop P at [170]-[197] and, in particular, [173], [179], [182], [186], [189]-[195] that led his Honour to conclude that S Loans was not the agent of Tonto Home Loans, when undertaken in the present case, leads to the same conclusion: that Dollar Group and Mr Lu were acting on their own account and not as Perpetual’s agents when they prepared and submitted the loan application to Challenger.

It follows that the acts of Dollar Group and Mr Lu, including providing false information regarding Mr Middling’s income and employment and persuading him to borrow $200,000 more than he had originally wanted to borrow, are not acts that can be imputed to Perpetual.

A principal is liable for the wrongful act of an agent if the act is done within the scope of the agency. If the act is performed for the benefit of the principal, it is regarded as having been done within the agent’s actual authority: Lloyd v Grace Smith & Co. [1912] AC 716 at 725 and 731. A principal is also liable for acts performed for the benefit of the agent alone that are within the agent’s ostensible authority. Where the act involves fraud, the test applied is whether the fraud occurred during the performance of acts by the agent that were within the actual or ostensible authority of the agent: Uxbridge Permanent Benefit Building Society v Pickard [1939] 2 KB 248; see also Davis v Williams [2003] NSWCA 371 at [32]–[34] per Hodgson JA.

Perpetual did not confer either actual or ostensible authority on Mr Lu to receive the loan disbursements. Nor was any authority conferred on Dollar Group by reason of the fact that, once the loan was in place and the monies advanced, it had a limited role of “managing” the borrower, as indicated in the statements of account for the Perpetual Loan issued by Challenger, which are referred to above.

If Mr Lu misappropriated monies that Mr Middling had borrowed from Perpetual, he did so when acting as Mr Middling’s investment adviser and agent. Mr Middling, by signing the Direction and Authority when it had been completed, as I find he did, had, in any event, expressly authorised the payment to Mr Lu’s nominated bank account. If Mr Lu misappropriated the these funds after the Perpetual Mortgage had been discharged, he could not have been acting as Perpetual or Challenger’s agent, since by that time the lender was Citigroup, the Perpetual Mortgage having been discharged and the Perpetual Loan repaid in full. Even if he had (contrary to the fact) misappropriated the funds before the Perpetual Loan was paid out, there is no basis for the contention that Perpetual had authorised Mr Lu to receive or disburse loan funds: see also Landa v Perpetual Trustees Victoria Ltd [2014] NSWCA 393 at [55]–[65] per Emmett JA, Macfarlan and Meagher JJA agreeing.

For the reasons given above I am satisfied that although Mr Middling may have initially wanted to borrow only $38,500, he was persuaded to borrow $238,500 and understood that he was borrowing that sum at the time. When Mr Lu and Dollar Group were preparing the loan application for submission to Challenger, they were acting on their own account and not as agents for Challenger. Mr Middling expressly authorised Perpetual to disburse a sum in the order of $200,000 to an account in the name of Mr Lu. Mr Lu invested that sum in an investment account which earned interest, which was used to pay interest to Perpetual in respect of the Perpetual Loan. Mr Middling authorised Citigroup to pay out Perpetual in full. Perpetual in turn discharged the Perpetual Mortgage. Accordingly, the claims based on the proposition that Mr Lu and Dollar Group were Perpetual’s, or Challenger’s, agents fail.

The conduct alleged to have been unconscionable was the issue of the notice under s 57(2)(b) of the Real Property Act by Perpetual on 23 January 2008 and the demand for repayment. The bases on which it was said to be unconscionable were confined by [27] of the amended cross-claim to the following:

Conduct will only be unconscionable where it demonstrates a high level of moral obloquy and is irreconcilable with what is right: see Allsop P’s summary of principle by reference to the authorities in Tonto Home Loans at [291]. Although conduct that involves a party taking advantage of vulnerability or lack of understanding can amount to unconscionable conduct, the focus is on the party said to have acted unconscionably.

Notwithstanding that Perpetual and Challenger obtained a benefit of sorts from the Perpetual Loan and Mortgage (in that Perpetual’s funds were deployed at a commercial interest rate upon a valuable security), they were not privy to the dishonest conduct of Lu and Dollar Group. The allegation of unconscionability in the present case was not based on constructive knowledge or the implementation of systems that were inadequate to protect someone such as Mr Middling from the predations of Mr Lu and Dollar Group. Rather, it was based solely on Perpetual’s conduct in claiming to be entitled to repayment of the loan of $238,500 together with penalties and interest. None of the pleaded matters in support of the proposition that such a claim was unconscionable has been made out. Indeed, the evidence established that Mr Middling authorised the loan application for that amount and received the benefit of that amount by refinancing earlier debts and receiving interest on the money invested which was applied in repayment of the Perpetual Loan. For these reasons, the claim based on alleged unconscionable conduct fails.

Section 7 of the Contracts Review Act empowers this court to alter the contractual rights of parties. The prefatory words of s 7 are:

Section 4 provides that “unjust” includes unconscionable, harsh or oppressive. Section 9 provides for the matters relevant to the determination of whether a contract is unjust. It provides:

The Contracts Review Act provides for a two-stage process. First, the court is required to determine whether the contract is just; and secondly, it is to determine whether, if so, it is appropriate to grant relief. The assessment of unjustness and the formulation of suitable relief involve an evaluative process which is to take into account all relevant circumstances: Provident Capital Ltd v Papa [2013] NSWCA 36, per Allsop P at [7]. The relevant circumstances are, however, confined by the pleadings. Accordingly, it is necessary to examine the basis for the allegation that the contracts between Mr Middling and Perpetual were unjust.

The relevant pleading is as follows:

These matters will be considered in turn.

As to particular (a), there was undoubted inequality of bargaining power between Perpetual and Mr Middling. This is a hallmark of loans by financial institutions and individual borrowers and is but one factor to be considered. I have rejected the agency argument for the reasons set out above.

Particular (b) carried the implication that Perpetual engaged in asset lending. This is not, on a proper analysis, what occurred. Mr Middling obtained a benefit from the transaction by amalgamating his existing indebtedness of $38,500. He chose to borrow a further $200,000 to invest, with a view to its providing a return which would service the borrowing of $38,500 as well as the loan of $200,000. It did not work out as contemplated because, at least in the first instance, the interest from the investment of $200,000 was insufficient to service the interest on the total loan and Mr Middling’s actual income (as distinct from what was falsely represented in the loan application) was not sufficient to make up the shortfall. However, had the interest from the investment been sufficient to service the interest on the portion of the loan that related to the $200,000, Mr Middling would have improved his position, because the overall interest rate was lower than on the personal loan. It may be that the prospect of the income from the investment being sufficient to service the interest owing on the Perpetual Loan was remote and that Mr Middling was, from the outset, exposed to substantial risk of shortfall. However, I do not regard the evidence as establishing that proposition; nor was it put on behalf of Mr Middling, whose case was put on the basis that he had not authorised borrowings at that level, or the investment at all. Nor does the evidence permit the conclusion that Mr Middling would not have been able to service a loan of $38,500 at the interest rate offered by Perpetual.

It is also of importance that, although Mr Middling’s income (aside from the interest on the monies that Mr Lu had invested on his behalf) was not sufficient to service the interest on the Perpetual Loan, neither Challenger nor Perpetual was aware of that fact.

As to particular (c), I accept that Mr Middling, though literate and numerate, could only read slowly and deliberately. Whether his presentation in the witness box was consistent with a deterioration in his competence since he entered into the Perpetual Loan and Mortgage cannot be determined from the evidence. He may have deteriorated in that period as he has had at least one stroke in the interim. His economic circumstances were modest in that he did not own his home outright and he and his wife were recipients of pensions. He did not obtain independent legal or financial advice.

Mr Middling attended Dollar Group’s offices to sign the loan application with his wife, who did not give evidence in the proceedings although she was present in court throughout. I infer, accordingly, that her evidence would not have assisted Mr Middling’s case.

As to the second-mentioned particular (b), Perpetual did not ensure that Mr Middling had legal advice before entering into the transaction with Perpetual. However, on the basis of what Perpetual knew and had been provided in the loan application, there was no reason for it to appreciate that it ought ensure that Mr Middling had legal advice. There was nothing about the transaction that, from Perpetual’s point of view, indicated that it was in any way improvident or that Mr Middling would be unable to service the repayments. His employment and income had been verified by documents which, though false, were not known by Perpetual to be so.

Furthermore Mr Middling had signed a document in which he acknowledged, among other matters, that he had been given the opportunity to obtain legal advice and had chosen not to do.

For the reasons given above, Mr Middling has not established that Dollar Group and Mr Lu were the agents of Perpetual in providing false information to Perpetual. To that extent, both Mr Middling and Perpetual were, in a sense, victims of dishonest conduct by Dollar Group and Mr Lu: Mr Middling, because it enabled him to obtain a loan that exposed him to a greater risk than had he borrowed the sum he actually required; and Perpetual, because it advanced money to someone who had no real capacity to service the loan, apart from income generated by the investment of $200,000. Although Perpetual was, in that sense, a “victim”, the word is less apposite in its case in that it was, notwithstanding the false statements, able to profit from the transaction by reason of the interest earned on amounts outstanding and the protection afforded by the value of the Property, which secured the loan: see Tonto Home Loans at [212] per Allsop P.

Relief under the Contracts Review Act does not depend on the establishment of agency but, when it comes to consider the justice of a contract, it is relevant to consider the state of knowledge of each party. On the basis of my findings set out above, Mr Middling knew that he was applying to borrow $238,500. Although there is no evidence that he knew by what means Mr Lu or Dollar Group had persuaded Challenger to approve the Perpetual Loan in that amount, he had signed documents applying for a loan of that order and authorised payments from the funds advanced.

Mr Elliott, in the course of the hearing, sought to rely on matters that had neither been pleaded nor particularised, in support of the claim for relief under the Contracts Review Act, including the following facts and contentions.

First, the loan security documents were collected from First Title Secure’s premises at Market Street Sydney on 27 March 2007 by a representative of Dollar Group, rather than mailed to Mr Middling at the Property. Mr Elliott submitted that this was contrary to First Title Secure’s usual practice of mailing out the loan documentation to the borrower, although there was no evidence of a practice to that effect. He submitted that the collection of the documents denied Mr Middling the opportunity to have the documents received at his home so that he and members of his family could read them and obtain advice on them.

Secondly, the signature that appears on the acknowledgment (of receipt of the transaction documents) referred to above, resembled that of Mr Lu, although the person named is Linda Le. Linda Le also appeared to have signed the facsimile cover sheet which accompanied the loan application when it was sent to Challenger. Linda Le, who is identified as Loan Administrator of Dollar Group on an email dated 5 April 2007 to Fran Evans of First Title Secure, wrote expressing regret that they were unable to meet for lunch the previous day. Mr Elliott also submitted that, although Linda Le had purported to witness Mr Middling’s signature on the Perpetual Mortgage, it was Mr Lu who was with Mr Middling when he signed it. The person who signed the employment verification document on behalf of Dollar Group appeared to be “Rachel Lie”, although Mr Elliott submitted that her writing resembled Mr Lu’s. Mr Elliott also relied on the request dated 16 April 2007 for a funds disbursement authority made by Damien Nguyen. I understood that these three matters were relied on by Mr Elliott to establish that Linda Le, Rachel Lie and Damien Nguyen were false names used by Mr Lu, who used those names to conceal his identity. The evidence is not, in my view, sufficient to establish this.

Thirdly, the lender’s mortgage insurance for the Perpetual Mortgage was to be capitalised, which Mr Elliott described as “desperation measures”.

Fourthly, in the loan application, the purpose of the loan was said to be “refinance-owner occupier” but the amount of the loan gave rise to a 90% Loan to Value Ratio (LVR). The spaces in the loan application that were designed for a declaration of purpose of the loan were struck through. The document dated 28 March 2007 contained a declaration that the funds were to be used for investments purposes and that Mr Middling’s business partner was Mr Lu. Mr Elliott submitted that these discrepancies ought to have put Perpetual on notice that the loan was not in order.

Fifthly, Mr Elliott submitted that Perpetual (through Challenger) ought to have heard alarm bells when it saw the Direction and Authority and noted that a large part of the money borrowed was to be deposited into an account of Mr Lu. Mr Elliott submitted that it should be inferred that First Title Secure was concerned about this because the signatures were verified against the signatures on file (as appears from an email dated 15 April 2008 from Denise Caffrey of First Title Secure reporting at a later time on the disbursement of funds). There was no evidence that verification of signatures represented other than Challenger’s or First Title Secure’s usual practice.

Sixthly, Mr Elliott said that the statements of account issued by Perpetual for the investment account were “fictitious”. As referred to above, I am not satisfied that they were other than genuine.

Seventhly, Mr Elliott referred to cl 6.2(g) of the LOMA, which required the Originator to comply with all requirements in the Manuals. Although he conceded that the Manuals were not in evidence, he contended that I should infer a usual practice from such documents. As there is no evidence of Challenger’s or Perpetual’s usual practice and the Manuals are not in evidence, I do not consider that this matter need be considered further.

Although Mr Elliott suggested that Perpetual (through its agents Challenger and First Title Secure) had, in some unspecified way, failed to comply with its Manuals and that, had it done so, it would have realised that there was something suspicious about the loan, he did not (as referred to above) seek to tender any Manuals or articulate any non-compliance such as would ground a basis for relief under the Contracts Review Act. Accordingly, there was no basis for relief akin to the basis established in Tonto Home Loans where, although the borrower failed to establish agency, he obtained relief under the Contracts Review Act on the basis that the lender had failed to comply with its own guidelines, compliance with which would have alerted it to risks associated with the lending.

Mr Ashhurst confirmed, immediately after Mr Elliott’s opening, that the case Perpetual had come to meet was the pleaded case and submitted that Mr Middling’s case should be confined to the pleaded case. Mr Elliott did not apply for leave to amend the pleadings or augment the particulars to bring the further matters within the pleading. It can be inferred that he did not do so because he appreciated the considerable difficulties associated with such an application, particularly in circumstances where, as referred to above, an adjournment of the hearing had already been granted to enable Mr Middling to plead and prepare evidence to prove his claim for relief under the Contracts Review Act: Aon Risk Services Australia v Australian National University [2009] HCA 27; 239 CLR 175: see also Civil Procedure Act 2005 (NSW), ss 56, 57 and 58.

At the conclusion of Mr Middling’s case, Mr Ashhurst indicated that Perpetual would not call any witnesses but would rely exclusively on documents, which were then tendered. When Mr Elliott made submissions on the basis of the extraneous matters set out above, Mr Ashhurst contended that he had made forensic decisions on behalf of Perpetual on the basis of Mr Middling’s evidence and pleading and that it was not open to Mr Elliott to expand the case beyond the pleading.

I accept Mr Ashhurst’s submissions as to the need for Mr Middling to be confined to the pleaded case. Accordingly, I do not propose to deal with the matters listed above which fall outside the pleading. Nor do I express any view about whether any one or more of them could have formed a basis for relief under the Contracts Review Act had they been pleaded and proved.

I am not satisfied, on the basis of the matters alleged in the pleading set out above, that the contracts between Perpetual and Mr Middling were unjust. Mr Middling, though vulnerable, armed Mr Lu and Dollar Group with documents bearing his signature which enabled him to obtain the loan he had been persuaded would be in his interests, namely $238,500. The dishonest conduct of Mr Lu and Dollar Group cannot be imputed to Perpetual. Mr Middling obtained the benefit of having the personal loan paid out and refinancing his mortgage with St George. He agreed to an investment being set up with the capital sum. That it did not work out is unfortunate, and may be unjust as between him and Dollar Group, but not as between him and Perpetual.

It was submitted by Perpetual, in the alternative, that any claim for relief under the Contracts Review Act was statute-barred. For completeness, I propose to determine this issue. The relevant provision is s 16 of the Contracts Review Act, which provides:

Mr Elliott conceded that the periods referred to in subs 16(a) and (b) had expired. He contended that the cross-claim had been brought within the period specified in subs 16(c). He relied on Murphy v Overton Investments Pty Ltd [2002] FCAFC 129 (Murphy v Overton) in support of the proposition that the words “arising out of or in relation to the contract” should be given a broad interpretation so as to extend to a contract with a party other than the party seeking to enforce the contract in the initial proceedings. He contended that Murphy v Overton supported the proposition that the cross-claim against Perpetual was incorporated within “maintainable proceedings” because the Perpetual Mortgage had been discharged by the monies advanced by Citigroup that Citigroup was claiming, as well as possession of the Property under the Citigroup Mortgage, in the proceedings.

Murphy v Overton concerned a dispute between landlord and tenants in a retirement village. The landlord commenced proceedings in the Supreme Court; some of the tenants commenced proceedings in the Federal Court claiming relief on various bases, including under the Contracts Review Act. The landlord argued, in the Federal Court proceedings, that the claims by the tenants were out of time and submitted that the words “the period of the pendency of maintainable proceedings” applied only if the claim of the party relying on the Contracts Review Act was brought in the same proceedings as the claim by the person seeking to enforce the contract. This argument was rejected by the Full Federal Court, which found that the proceedings in the Federal Court were instituted within the period provided for by subs 16(c) of the Contracts Review Act. At [98] the Full Court (Lindgren, Sackville and Stone JJ) said:

Mr Elliott also sought to rely on the reference in Murphy v Overton at [97] to what Handley JA (Kirby P and Mahoney JA agreeing) said in Baltic Shipping Co. v Merchant “Mikhail Lermontov” (1994) 36 NSWLR 361 at 364-365 that the Contracts Review Act is a remedial statute, which should be interpreted so as to avoid anomalous or capricious results if another and wider meaning is fairly open on its wording.

The Full Federal Court in Murphy v Overton did not need to address the question whether “proceedings arising out of or in relation to the contract” in subs 16(c) of the Contracts Review Act extended to other contracts. Accordingly, Murphy v Overton provides no support for Mr Middling’s argument on the limitation question. The general principle referred to by Handley JA, however, applies.

Mr Ashhurst submitted that the construction of subs 16(c) of the Contracts Review Act for which Mr Elliott contended was not open since it did not accord with the language of the section, it was at odds with the purpose of the legislation and it was inconsistent with Peddie v Stein (Unreported, Young J, 26 March 1987).

These proceedings were commenced on 15 February 2013 by Citigroup. They did not relate to or arise out of either the Perpetual Loan or the Perpetual Mortgage. The only proceeding that relates to the Perpetual Loan and Mortgage is the cross-claim. However the cross-claim is not “proceedings . . . that are pending against the party seeking relief under the Act”, since it is Mr Middling, as cross-claimant, who seeks relief under the Contracts Review Act and not Perpetual, the cross-defendant. Accordingly subs 16(c) does not apply when the words are given their ordinary meaning.

Lest it be thought that this construction of subs 16(c) is harsh or would operate unfairly to Mr Middling, it is necessary to consider the purpose of the Contracts Review Act. The Act followed the draft Bill contained in the Peden Report (John R Peden, Harsh and Unconscionable Contracts: Report to the Minister for Consumer Affairs and Co-operative Societies and the Attorney-General for New South Wales, (1976)). Professor Peden explained, in his annotations to the text of the Contracts Review Act in Part II of The Law of Unjust Contracts, (1982, Butterworths) at 148 - 149:

Although the text, The Law of Unjust Contracts, unlike the Peden Report itself, does not fall within s 34(2) of the Interpretation Act 1987 (NSW), I regard it as falling within s 34(1) since it is capable of assisting in the ascertainment of the meaning of the provision to confirm the ordinary meaning (s 34(1)(a) of the Interpretation Act) and the intended breadth of the operation of the Contracts Review Act.

A similar point arose in Peddie v Stein. Young J, who also had regard to Professor Peden’s book, considered the ambit of subs 16(c). His Honour said:

To adopt the construction for which Mr Elliott contended would be at odds with the wording of subs 16(c) and subvert its purpose as identified in the passages from Professor Peden’s text and Peddie v Stein set out above. Even had Mr Middling otherwise established an entitlement to relief under the Contracts Review Act, his claim would not have been maintainable as it does not fall within subs 16(c).

For the foregoing reasons I make the following orders: