A doctor was defrauded of $1.65m by a mortgage broker, who convinced the doctor to mortgage his properties and re-invest those monies to earn a higher rate of interest. Instead of investing his client’s monies, the mortgage broker misappropriated the money. The lender sued for possession of the properties. The doctor sued the lender on the basis that the broker was its agent when he perpetrated the frauds or alternatively that the loans were unjust.
The court noted that attempts to make lenders liable for the fraud of brokers have almost always failed. However the totality of the relationship determines whether the intermediary is the lender’s agent. The structure the lender used was to outsource the origination and management to an intermediary who in turn outsourced to brokers.
The court said:
The lender’s organisational structure is not the key factor in these cases. What needs to be shown is how the originator was authorised or was held out by the lender to be a person for whose acts the lender must bear responsibility.
The court did not consider that acts of the lender to be sufficient to establish agency. The court distinguished a case where a lender was held liable for the fraud of its mortgage manager on the basis that in that case, the loan made clear that the manager was authorised to exercise all the powers of the lender and managed the relationship exclusively. However there was no comparative analysis of the loan contract in this case to make clear the distinction.
Contracts Review Act
The court found that whilst the Act does not apply to a business transaction, it did apply here because the loans were not for business purposes but mere investment as distinct from the business of investment. The court noted that some of the elements usually found in business, namely labour, expenses and profit were missing, namely labour and debts. However the court rejected any formula and said that the question was one of fact.
The court said:
One must construe this remedial legislation widely, the focus of the Act is to exclude the ordinary operations of a business, trade and profession, and not people’s profit making on the sidelines at least where they are not actually expending effort in acquiring income or capital.
The court did not find the doctor to be doing more than investing.
However the court did not find any unjustness noting that the contract contained no unjust provisions nor did it operate oppressively. The loss of the doctor’s investment occurred not because of any unjust contract, but because he was deceived by his broker.
The court granted the lender possession.
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