The recent Court of Appeal decision of Pioneer Mortgage Services Pty Ltd v Columbus Capital Pty Ltd  FCAFC 78 reinforces the courts firm stance against employers for the actions of their employees.
Bransgroves Lawyers acted for Columbus Capital which was the successful party at first instance and on appeal. We have previously reported on the lower Court decision in this case.
The grounds of appeal were as follows:
- the primary judge erred in finding that the Originator was in default of its origination deeds;
- the primary judge erred in finding the Originator was vicariously liable for the actions of its employee; and
- the primary judge erred in finding that the employee committed the fraud as a representative of the Originator.
The Court of Appeal disagreed and dismissed the appeal with costs.
In doing so, the Court looked at a clause in the origination deed which provided as follows:
“The Manager must take such steps and maintain such procedures as would be taken and maintained by a reasonably prudent mortgagee in connection with each Participating Loan”.
And further that the Manager had an obligation to manage all Participating Loans:
“in an efficient and business like manner and in accordance with sound business practices”.
The Originator tried to argue that it was the Funder who had the obligation to implement and perform checks and balances on its systems, not the Originator. This argument did not hold weight with the Court who found that the fraud could have easily been detected by the Originator if they had implemented appropriate auditing processes.
The Originator also tried to argue that the English test for vicarious liability should now be used in Australia. However, the Court said that “with the panache of an experienced advocate” it did not matter which test applied, as the Funder established breach under both tests.
It was further held by the Court that the employee had committed the fraud “in the course of doing the very class of acts that she had been empowered to do”. The fraud was therefore committed in the course of her employment and was not outside the scope of her authority.
This decision highlights the importance of Mortgage Originators ensuring their employees are properly supervised, and that there are processes in place to reduce the risk of fraud.
A good strategy to use is for Originators to tell their employees of the checks and balances in place to help deter fraud. However, as this decision shows, this may not be sufficient and the onus on Originators is great.
Click here for a full copy of the judgment.