In the recent case of Dollars & Sense Finance Limited v Rerekohu Nathan [2008] 2 NZLR 557, the Supreme Court sent a warning to lenders and their solicitors – tread carefully to ensure that you do not inadvertently appoint an agent whose actions you may be responsible for.

Dollars & Sense Finance Limited (DSFL) advanced money to Rodney Nathan (Borrower) to assist him to purchase shares in a business. A condition of the loan was that the Borrower's parents provide security for the repayment of the loan by executing a memorandum of mortgage in favour of DSFL over the parents' jointly owned residential home. However, DSFL and their lawyers did not realise that the Borrower had forged his mother's signature on the mortgage document (by survivorship she was now the sole owner of the property).

DSFL attempted to exercise its power of sale under its registered mortgage over the property. Mrs Nathan sought to prevent this from happening by relying on the fraud exception to the indefeasibility provisions contained in the Land Transfer Act 1952.

The issues for consideration were:

  • Whether DSFL expressly or impliedly appointed the Borrower as its agent to procure execution of the mortgage.
  • Whether the forgery was committed within the scope of that agency.

Findings

The Supreme Court unanimously answered 'yes' on both counts. In coming to this conclusion, the Court noted the following:

  • The solicitor for DSFL did not insist that the Borrower's parents get legal advice and he made no attempt to communicate with them directly. He left it to the Borrower to make the necessary Credit Contracts Act disclosures to his parents and to get their signatures on the acknowledgment of the disclosure. When the solicitor noticed that the parents' signatures were not witnessed, he returned the documents to the Borrower to remedy this defect, rather than sending them directly to the Borrower's parents. These factors contributed to the finding that the Borrower had been appointed the agent of DSFL.
  • Regarding the scope of the agency, the Court noted that there are two stages of enquiry. First, what act had DSFL authorised, and secondly, was the Borrower's act so connected with the authorised act that it can be regarded as a mode of performing the authorised act. The Court found that the Borrower was charged with obtaining his parents' signatures and that his forgery can be considered an improper mode of fulfilling this task. The forgery was therefore considered to be within the scope of the agency.

As a result of these findings, the Supreme Court held that DSFL did not have an indefeasible title to the mortgage and the mortgage should be removed from the Land Transfer Register.

Implications

This case reinforces the need for lenders and their solicitors to take care not to inadvertently appoint a third party as the agent of the lender by, for example, failing to actively facilitate the execution of loan and security documentation and compliance with relevant laws (such as in relation to disclosures).

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