[1] Mrs Rerekohu Nathan is the registered proprietor of a half interest in a property in Kerikeri. Dollars & Sense Ltd has a first registered mortgage over the property as security for money it lent to her son, Mr Rodney Nathan (Rodney). Mrs Nathan knew nothing of the transaction as Rodney had forged her signature on the mortgage documentation. When Dollars & Sense took steps to exercise its power of sale to recover the money lent to Rodney, Mrs Nathan sought to invoke the fraud exception to the indefeasibility provisions of the Land Transfer Act 1952 (the LTA).
[2] In a judgment now reported at [2005] NZHC 1094; [2006] 1 NZLR 490, Winkelmann J held that when Rodney forged Mrs Nathan’s signature he was acting as an agent for Dollars & Sense, that his forgery (or knowledge of it) should be attributed to Dollars & Sense and that, in any event, Dollars & Sense had been wilfully blind to the possibility of fraud. Accordingly, she declared the mortgage void ab initio, and directed the District Land Registrar to remove it from the Register. Dollars & Sense now appeals against that judgment.
[3] The critical issues in the case are:

(a) Can Rodney’s forgery (or knowledge of it) be attributed to Dollars & Sense? And,

(b) Was Dollars & Sense wilfully blind to the possibility that Rodney had forged his mother’s signature?

Before I address those issues directly, I will discuss in a little more detail the factual background and also the general legal context (as to which additional written submissions were sought and obtained from counsel).

The factual background

[4] Rodney began working at the Settlers Tavern in Whangarei in 1990 or 1991 as Assistant Manager. The Settlers Tavern was bought by Setz Holdings Ltd (Setz) in mid-1995. Around the same time Rodney acquired a 10% shareholding in Setz. The other shares in Setz were held by a Mr Bruce Bryant (as to 40%) and Madison Investments Ltd (as to 50%). Madison held its interest in Setz effectively on behalf of Further Developments Ltd, an unlisted public company. Its nominee on the Setz board was Mr Peter Harris.
[5] In 1996 Mr Bryant was bought out of Setz which was then restructured so that Rodney obtained a 40% interest in the company and Madison’s interest moved to 60%. The $245,000 which was required to buy out Mr Bryant was provided by Rodney who in turn borrowed it from Dollars & Sense. Mr Harris, through his company General Capital & Commerce Ltd (General Capital), had introduced Rodney to Dollars & Sense. Dollars & Sense already had an indirect interest in Setz as it and General Capital had provided the funding which enabled Madison’s initial interest in Setz to be acquired. As well, Mr Brian Bowden, who is the principal of Dollars & Sense, was an investor in Further Developments.
[6] The loan from Dollars & Sense to Rodney was secured by a mortgage over the Kerikeri property owned by his parents. At the time Mr and Mrs Nathan were separated. Mr Nathan was living in the house at Kerikeri and Mrs Nathan was living in Gisborne (as she had been since 1972). Mr Anthony Thomas, an Auckland solicitor, was instructed to act for Dollars & Sense on the transaction, although he was not its usual solicitor. He had, however, previously acted for General Capital and for Setz. Mr Thomas did not act for Rodney.
[7] At the time the transaction was proposed, there was nothing to suggest that Mr and Mrs Nathan had not agreed to provide security for the advance to Rodney. Messrs Harris and Thomas and Dollars & Sense did not know that Mr and Mrs Nathan were separated. As well, a mortgage valuation supplied by Rodney showed that the valuer had been able to go through the house, implying a measure of co-operation at least from the occupier (or occupiers).
[8] In early to mid July 1996, Mr Thomas prepared the loan and mortgage documentation which he packaged and gave to Mr Harris. Mr Harris took the package to Whangarei and delivered it to Rodney. The package of documents included the mortgage documents for execution by Rodney’s parents, the loan contract for signature by Rodney’s parents, a document entitled “Statement by Covenantors” for signature by Rodney’s parents and initial disclosure under the Credit Contracts Act 1981. The mortgage was a stand-alone mortgage between Mrs Nathan and her husband as mortgagors and Dollars & Sense as mortgagee.
[9] The Statement by Covenantors provided that:

We choose not to be independently advised regarding the documents described in Schedule A below. We know that Dollars & Sense Finance Limited expects that we should first receive independent legal advice on this matter and independently of Rodney Nathan and Dollars & Sense Finance Limited, but we have elected not to do so despite advice to the contrary.

The Mortgage and the Loan Agreement with Dollars & Sense Finance Limited and Rodney Nathan is freely and voluntarily given with our informed consent, understanding of the contents of it, and of the circumstances under which the liabilities therein contained have been undertaken. We accept full responsibility for our election, even though confidentiality requirements and conflicts of interest may mean that the parties to the transaction may be unable to disclose to us the full knowledge possessed by them regarding the borrowing transaction and our liability thereunder.

[10] When Rodney returned the documents to Mr Thomas they had been apparently signed by his parents but none of the signatures had been witnessed. Nor had the title and insurance details been provided as requested. As well, the interest commencement date on the mortgage was left in blank, as was the date on which the outstanding principal sum was to be repaid.
[11] Mr Thomas then wrote to Mr Harris in these terms:

The documents have been returned but none of the signatures have been witnessed. Nor was the title of the insurance policy for the property provided.

Given that neither Rod nor his parents have sought legal advice, and given that the parents are providing security for their son, I am concerned that this is settled properly and that nobody says at a later date that the securities were completed under duress or improperly or were otherwise deficient.

These documents really need to be fully and unequivocally enforceable.

[12] On 24 July 1996, Mr Thomas couriered the documents back to Rodney, stating that the witnessing provisions needed to be completed in relation to Rodney’s and his parents’ signatures. He also requested the certificate of title to the property and the details of insurance. The letter concluded in this way:

I really do recommend that you see a Solicitor to ensure that these documents are completed properly.

[13] The loan and security documents were received back by Mr Thomas on 8 August 1996. The duplicate certificate of title and insurance details were provided and the previously unwitnessed documents were now witnessed. The witness was a friend of Rodney. The address she gave on the documents was Rodney’s home address. Rodney said in evidence that the friend had not been present when his father signed the documentation and of course she had not seen Mrs Nathan execute the mortgage as Rodney had forged her signature.
[14] There are four features of all of this which I should record:

(a) Mr Nathan had apparently kept the duplicate title in a cupboard in the house and had given it to Rodney. As far as Mr Thomas was concerned, however, the provision to him of the certificate of title might have been treated as more evidence that Mr and Mrs Nathan approved the transaction.

(b) Messrs Harris and Thomas knew by this stage (presumably from something Rodney said) that at the time the documents were to be signed Mrs Nathan was in or around Gisborne. Given this, it might be thought unusual that the same person “witnessed” both what purported to be her signature as well as that of Mr Nathan. On the other hand, since the address given by the witness indicated that she was living in the same house as Rodney, it was possible that she had accompanied Rodney to both Kerikeri and Gisborne.

(c) Mr Thomas dated the mortgage 9 August 1996 and amended the form so that the two blank dates (see [10] above) were filled in. The interest commencement date was specified as 9 August 1996 and the repayment date was specified as 9 August 2001. This meant that there was an incongruity between the mortgage (as “amended” by Mr Thomas) and the loan agreement. Although this point was touched on when Mr Thomas was cross-examined at trial, it was never pleaded that Mr Thomas’ actions in these respects (ie altering the mortgage form but nonetheless signing it correct and then registering it) were fraudulent and such a proposition was never put to him explicitly. Nor did Winkelmann J focus on this aspect of the case when she found against Dollars & Sense.

(d) Mr Thomas and Mr Harris both knew that Rodney would not be obtaining legal advice, but said that they had advised him to do so. Neither Mr Harris nor Mr Thomas made any attempt to contact Rodney’s parents to explain the transaction to them, or to recommend that they obtain independent advice. Indeed, throughout the whole process, there was no direct communication, or attempt at direct communication, with Rodney’s parents by Dollars & Sense, Mr Thomas or Mr Harris.

[15] Some time after the purchase of shares in Setz by Rodney, the Settlers Tavern ceased to be profitable. Setz was placed into liquidation in August 1998. For some time Dollars & Sense took no steps to realise its security. This was because Mr Bowden suffered a serious and incapacitating accident in October 1996 and it was some three years or so before he was physically and mentally able to come to grips with his business interests. But eventually, on 3 April 2000, Mr Thomas wrote to Mrs Nathan referring to the loan and the mortgage and recording that payments due under the loan were substantially in arrears. He said that he had been instructed to start recovery proceedings. Mrs Nathan responded by asserting that her signature had been forged.
[16] On 2 December 2001, demands under ss 90 and 92 of the Property Law Act 1952 were served upon Mrs Nathan and her husband. These were later reissued in January 2002. Mrs Nathan commenced the present proceedings in the same month. Her husband was joined to the proceedings as second plaintiff in 2004. However, he died in November 2004. At the start of the trial, Winkelmann J granted Dollars & Sense’s application to dismiss the husband’s claim due to, amongst other matters, substantial non-compliance with Court ordered timetabling orders, prejudice to Dollars & Sense and the fact that the husband’s interests should be adequately protected by Mrs Nathan.

The general legal context

Overview

[17] Section 62 of the LTA provides:

62 Estate of registered proprietor paramount

Notwithstanding the existence in any other person of any estate or interest, whether derived by grant from the Crown or otherwise, which but for this Act might be held to be paramount or to have priority, but subject to the provisions of Part 1 of the Land Transfer Amendment Act 1963, the registered proprietor of land or of any estate or interest in land under the provisions of this Act shall, except in case of fraud, hold the same subject to such encumbrances, liens, estates, or interests as may be notified on the folium of the register constituted by the grant or certificate of title of the land, but absolutely free from all other encumbrances, liens, estates, or interests whatsoever,—

(a) Except the estate or interest of a proprietor claiming the same land under a prior certificate of title or under a prior grant registered under the provisions of this Act; and

(b) Except so far as regards the omission or misdescription of any right of way or other easement created in or existing upon any land; and

(c) Except so far as regards any portion of land that may be erroneously included in the grant, certificate of title, lease, or other instrument evidencing the title of the registered proprietor by wrong description of parcels or of boundaries.

[18] In Assets Co Ltd v Mere Roihi [1905] AC 176 at 210 the Privy Council held that fraud means actual fraud in the sense of dishonesty of some sort which is brought home to the person whose registered title is impeached or that person’s agents. It does not mean constructive or equitable fraud.
[19] On the now orthodox approach to indefeasibility, Dollars & Sense obtained an indefeasible interest in the land on registration of its mortgage, see Frazer v Walker [1967] NZLR 1069 (PC).
[20] Mrs Nathan has no contractual liability to Dollars & Sense in relation to the underlying advance. But, unless set aside, the mortgage creates an interest which permits Dollars & Sense to have resort to the property for the purpose of recovering its advance, interest and expenses. Should Dollars & Sense do so and there is a shortfall, it cannot recover that shortfall against Mrs Nathan. As to all of this, see Duncan v McDonald [1997] 3 NZLR 669 (CA) which I regard as the controlling authority (cf the discussion in Hinde McMorland and Sim Land Law in New Zealand, at [15.005(a)] (looseleaf ed)).
[21] So on orthodox principles of indefeasibility of title, the case comes down to whether Mrs Nathan has succeed in establishing that registration of the mortgage resulted from the fraud of Dollars & Sense or its agents. Obviously there was fraud by Rodney and the case turns on whether Dollars & Sense is affected by that fraud on the basis that either Rodney was acting as its agent or, alternatively, it was wilfully blind to the possibility of fraud.

Imputed notice principles

[22] The present case involves a three-sided commercial transaction in which there is a lender (Dollars & Sense), a borrower (Rodney) and sureties (Mr and Mrs Nathan). One of the sureties (Mrs Nathan) seeks to impeach the security obtained by the lender on the grounds of misconduct by the borrower. At this level of generality, the case thus has some similarity to the more common fact situation exemplified by cases such as Barclays Bank Plc v O’Brien [1993] UKHL 6; [1994] 1 AC 180 (HL) and Wilkinson v ASB Bank Ltd [1998] 1 NZLR 674 (CA) in which the alleged misconduct of the borrower consists of undue influence or misrepresentation. Prior to O’Brien, sureties often alleged that the borrower was the lender’s agent for the purpose of obtaining the surety’s signature and that accordingly the lender was responsible for any undue influence exerted or misrepresentations made by borrower, see for instance Turnbull & Co v Duval [1902] AC 429 (PC). This agency approach was rather artificial as the borrower might, in this situation, usually be thought to be acting primarily for his or her own purposes and it was treated as such in O’Brien (see particularly at 194 and 195). While O’Brien makes it clear that the agency analysis will sometimes still be appropriate (see at 191), cases of this type are now usually resolved by reference to notice principles first enunciated in O’Brien and subsequently developed in England in Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44; [2002] 2 AC 773 (HL) and as applied in New Zealand in Wilkinson and Hogan v Commercial Factors Ltd [2006] 3 NZLR 618 (CA).
[23] Addressed in accordance with those notice principles, such cases tend to throw up three questions:

(a) Was the surety subject to undue influence?

(b) If so, were the circumstances as known to the creditor such as to put the creditor on inquiry as to the risk of undue influence?

(c) If so, did the creditor act in such a way as to insulate itself from the consequences of such undue influence?

A surety will only obtain relief if the first two questions are answered “Yes” and the third, “No”. As to this, see the discussion in Hogan at [12] – [13] and [32] – [47].

[24] If Rodney, as agent of Dollars & Sense, had induced Mrs Nathan to sign the mortgage by undue influence or misrepresentation, his actions would have been attributed to Dollars & Sense. Further, even if he had not been acting as the agent of Dollars & Sense, Mrs Nathan probably would have had an entitlement to relief against Dollars & Sense under the O’Brien imputed notice approach (given that the three questions identified in [23] above would have been answered in her favour). I, nonetheless, only say “probably” because the New Zealand courts have yet to determine, in a definitive way, the operation of the imputed notice principles established by O’Brien in the context of ss 62 and 182 of the LTA. This is quite a difficult point and warrants brief explanation.
[25] Section 62 is set out above at [17] and s 182 is in these terms:

182 Purchaser from registered proprietor not affected by notice

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 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.

If a person dealing with a registered proprietor is not affected by “direct or constructive” notice of an “unregistered interest” it is not self-evident that such a person should necessarily be affected by imputed notice of an equity to challenge a transaction on grounds of undue influence. As to this see Hinde, McMorland and Sim at [9.055], Hughson, Neave and O’Connor, “Reflections on the Mirror of Title: Resolving the Conflict Between Purchasers and Prior Interest Holders” [1997] MelbULawRw 16; (1997) 21 MULR 460 at 489 and following and two articles by Moore, “Equity, restitution and in personam claims under the Torrens System” (1998) 72 ALJ 258 and “Equity, restitution, and in personam claims under the Torrens system: Part Two” (1999) 73 ALJ 712. At least to date, however, it seems to have been assumed (at least by counsel arguing the relevant New Zealand cases) that an O’Brien/Wilkinson argument would prevail over a registered mortgage, as the point has yet to be raised in New Zealand by counsel for a financier. This assumption may well be right. The principles of constructive notice which are invoked in an O’Brien/Wilkinson case are not the orthodox ones developed by the courts of equity in relation to property dealings, see Etridge at [39] – [41] per Lord Nicholls (HL). A successful O’Brien /Wilkinson argument directly impeaches the contract between financier and surety. In this sense, it has the look and feel of an in personam claim and is not strictly comparable with the sort of third party, prior title, claim to which ss 62 and 182 (and orthodox constructive notice principles) are directly addressed. So for present purposes I am prepared to act on the basis that an O’Brien/Wilkinson claim is not defeated by indefeasibility of title.

[26] On the present facts, it could fairly be assumed that Dollars & Sense was on inquiry as to the risk that Rodney would exert undue influence on his parents and did not act in such a way as to insulate itself from the consequences of such misconduct should it have occurred (see the second and third questions identified in [23] above). On the basis of what I have just said (in [25]), I am prepared to assume that Mrs Nathan would have succeeded if she had signed the mortgage as a result of undue influence applied by Rodney (cf the first of the questions identified in [23] above). So, should it matter that the actual misconduct on the part of Rodney was not undue influence but rather forgery? Although this particular question was neither squarely raised by counsel nor explicitly addressed by the Judge, I suspect that it was at least at the back of her mind when she came to find that the appellant had been wilfully blind to the possibility of forgery.
[27] As a matter of principle the question I have just posed can only be answered by reference to whether the circumstances of the case give Mrs Nathan an in personam claim against Dollars & Sense. This turns on whether the imputed notice principles which underpin O’Brien and Wilkinson are applicable in cases of forgery. This is not the way the case was argued but I nonetheless think it right to address it.

Are imputed notice principles applicable in cases of forgery?

[28] In addition to fraud, a registered proprietor of LTA land may be vulnerable to attack on the ground that the proprietor is subject to a claim in personam. In Frazer v Walker Lord Wilberforce observed (at 1078-9) that the principle of indefeasibility:

... in no way denies the right of a plaintiff to bring against a registered proprietor a claim in personam, founded in law or in equity, for such relief as a Court acting in personam may grant.

[29] Of course, the Courts should not recognise in personam claims which are inconsistent with the objectives of the Torrens system (including indefeasiblity, see Duncan at 683). An in personam action founded on nothing more than the invalidity of the instrument or underlying transaction would be inconsistent with the indefeasible nature of the registered proprietor’s title. Thus, the bare fact that the relevant instrument was forged is not sufficient to found an in personam claim, see Vassos v State Bank of South Australia [1993] VicRp 74; [1993] 2 VR 316 (VCA) at 332 - 333 per Hayne JA and Eade v Vogiazopoulos [1999] 3 VR 889 (VSC). Therefore something more than Rodney’s forgery and the registration of the mortgage by Dollars & Sense would be required to establish an equitable or legal cause of action.
[30] In Duncan v McDonald this Court stated (at 683) that it is a question of fact and degree when a registered proprietor’s behaviour will give rise to an equity of sufficient strength to support an in personam claim. The Court went on (at 683-4):

... more is required than the act of registering an instrument with knowledge of a competing claim by a third party. More is also required than knowledge of an irregularity in or relating to the instrument. Before a registered proprietor is susceptible to an in personam claim it must be shown that he or she has acted or is acting unconscionably in obtaining or taking advantage of the registered interest, but the registered proprietor’s conduct need not have involved actual dishonesty towards the in personam claimant. An attempt by the registered proprietor to enforce an interest knowingly obtained by his or her unlawful behaviour may be found to be unconscionable.

[31] In Vassos v State Bank of South Australia Hayne JA held that neglect in itself does not amount to unconscionability. Thus, even if by making reasonable enquiries the bank could have discovered the forgery, this fact alone did not render its conduct unconscionable. In that case, there was no misrepresentation by the bank, no misuse of power, no improper attempt to rely upon its legal rights and no knowledge of wrongdoing by any other party.
[32] In addition to unconscionable conduct, a recognised cause of action is necessary to found an in personam claim. The courts have consistently stated that an in personam claim encompasses only known legal or equitable causes of action: see, for example, Duncan v McDonald at 683.
[33] I see two overlapping problems with an in personam claim in this case. The first is that neither Dollars & Sense nor Rodney actually dealt with Mrs Nathan. They did not misrepresent anything to her or exert undue influence over her. So there was nothing that happened between Dollars & Sense and Mrs Nathan which would give rise to an orthodox cause of action. The second is that that under orthodox principles of law and equity there is no need for an in personam claim in the present circumstances. Because Mrs Nathan did not sign the mortgage she has no liability under it. The ability of Dollars & Sense nonetheless to enforce the mortgage arises of out of the statute. Given that the statute itself provides a compensation regime (see [41] below), there has been no occasion for the courts to develop an in personam remedy. In contradistinction, the majority take the view that if Dollars & Sense had obtained an indefeasible title, Mrs Nathan would nonetheless have had an in personam claim based on unjust enrichment which would have permitted her to have the mortgage discharged. I suspect that the principals of Dollars & Sense might be surprised at the suggestion that their company has been enriched at all, let alone unjustly. It is, after all, distinctly out of pocket. As well, I think it would be destructive of the scheme of the Torrens system to allow an indefeasible title to be defeated by a personal claim based on imputed notice considerations where there is no other relevant underlying relationship between the parties.
[34] In those circumstances I conclude, in answer to the question posed in [26] above, that it does make a difference that Rodney’s misconduct involved forgery and not undue influence and accordingly that the O’Brien and Wilkinson imputed notice line of cases do not apply to forgery.

Section 81 of the LTA

[35] Section 81(1) of the LTA provides:

81 Surrender of instrument obtained through fraud, etc.

(1) Where it appears to the satisfaction of the Registrar that any certificate of title or other instrument has been issued in error, or contains any misdescription of land or of boundaries, or that any entry or endorsement has been made in error, or that any grant, certificate, instrument, entry, or endorsement has been fraudulently or wrongfully obtained, or is fraudulently or wrongfully retained, he may require the person to whom that grant, certificate, or instrument has been so issued, or by whom it is retained, to deliver up the same for the purpose of being cancelled or corrected, as the case may require.

[36] This section was referred to by Lord Wilberforce in Frazer v Walker in terms which suggest that it may confer on the Registrar powers of cancellation and correction which are more extensive than those available to the courts (see 1075, 1076 and 1079). However, it does not seem particularly likely that the legislature really envisaged that the Registrar, acting administratively, could invoke s 81 against a registered proprietor of land whose interest is indefeasible under ss 62 and 63. The issues as to all of this (including the cases and academic commentary) are discussed at length by McGechan J in Housing Corporation of New Zealand v Maori Trustee [1988] 2 NZLR 662. What is clear is that s 81 does not control the way ss 62 and 63 operate (something which is apparent from Frazer v Walker). Further, s 81 either does not permit the impeachment of a title which is indefeasible under ss 62 and 63 (which is perhaps the predominant view) or alternatively, as a matter of practice, would (or should) not be invoked for that purpose (which was very much the view of McGechan J in the Housing Corporation case). For a recent discussion on this difficult issue, reference can usefully be made to Hinde, McMorland and Sim at [9.025]. It is most unlikely that a District Land Registrar would take an expansive approach to s 81 and any relief under that section would have to come under the procedure provided for in ss 216-224 of the LTA. So unless Mrs Nathan were to have the stamina to undertake that process (with its uncertain prospects of success), s 81 will provide no assistance to her.

The Credit Contracts Act 1981

[37] In the unusual circumstances of this case, the Credit Contracts Act 1981 applies rather awkwardly if at all.
[38] In the first place, Mrs Nathan was never in contract with Dollars & Sense and the applicability of the Act is thus questionable.
[39] Assuming the Act is applicable, initial disclosure can be made at any time. There is a penalty regime (see s 25) but relief would, in my view, be available under ss 31 and 32.
[40] It is clear therefore that the provisions of this Act do not pose a significant impediment to the enforcement of the mortgage. A claim under the Act by Mrs Nathan was rejected by Winkelmann J and that aspect of her judgment is not challenged in this Court.

The compensation regime

[41] Section 172 of the LTA provides:

172 Compensation for mistake or misfeasance of Registrar

Any person—

...

(b) Who is deprived of any land, or of any estate or interest in land, ... by the registration of any other person as proprietor of that land ... and who by this Act is barred from bringing an action for possession or other action for the recovery of that land, estate, or interest—

may bring an action against the Crown for recovery of damages.

[42] On the face of it, if Mrs Nathan loses this case she would be entitled to damages under this section subject of course to limitation issues.

Can Rodney’s forgery (or knowledge of it) be attributed to Dollars & Sense?

Overview

[43] Mrs Nathan’s argument on this head is premised on the contentions that Rodney acted as the agent of Dollars & Sense for the purpose of obtaining the mortgage and that the forgery (or at least his knowledge of it) should be attributed to Dollars & Sense.

The other possible agency relationships

[44] I note in passing that it was accepted at trial and in this Court that Mr Thomas was the agent of Dollars & Sense.
[45] There was an issue at trial and in this Court as to the status of Mr Harris. The Judge found that he was also the agent of Dollars & Sense. On the view I take, the correctness or otherwise of that conclusion is not a controlling consideration. This is essentially because his state of mind was not appreciably different from that of Mr Thomas. Accordingly, I will proceed by assuming but not deciding that he was the agent of Dollars & Sense.

The approach of Winkelmann J

[46] Winkelmann J held that Rodney had been acting as an agent of Dollars & Sense in obtaining execution of the loan documentation by his parents. She concluded that Rodney was undertaking significant tasks for the lender at its request which went well beyond obtaining his parents’ signature. These tasks were directed at perfecting the lender’s security (obtaining the title and insurance policy document), fulfilling statutory duties of the lender (initial disclosure under the Credit Contracts Act), and forestalling potential later challenges to enforceability (by obtaining what was called the Statement by Covenantors, set out at [9] above).
[47] Winkelmann J noted that, in relation to the Statement by Covenantors, Mr Thomas, Mr Harris and Mr Bowden (of Dollars & Sense) had made no effort to communicate directly with Rodney’s parents. Dollars & Sense must therefore either have intended Rodney to explain the nature of the transaction and to tell his parents that Dollars & Sense expected them to receive full independent legal advice, or Dollars & Sense was indifferent as to the truth of the matters recorded there. Winkelmann J was accordingly satisfied that Rodney was acting as the agent of Dollars & Sense.
[48] Winkelmann J discussed the case law and an article by Professor Watts “Imputed Knowledge in Agency Law: Excising the Fraud Exception” (2001) 117 LQR 300. She concluded that Dollars & Sense should not be able to take the benefit deriving from Rodney’s fraudulent actions (the mortgage), while disclaiming his actions for other purposes. It had ample opportunity to ensure that the signatures were not fraudulently obtained. A simple phone call by Mr Thomas to the parents would have sufficed. In contrast, Mrs Nathan had no knowledge of the transaction and no ability to protect herself from the fraud. Accordingly, the Judge was satisfied that the knowledge of Rodney’s fraudulent conduct was the knowledge of Dollars & Sense for the purposes of the LTA.

Evaluation

[49] Mr Thomas arranged for the documents to be provided to Rodney so that he could pass them on to his parents for signatures. That, in itself, is insufficient to make Rodney the agent of Dollars & Sense, see the remarks of Richardson J in Contractors Bonding Ltd v Snee [1992] 2 NZLR 157 at 172:

The mere despatch of documents by A to B for execution by B and C does not without more justify the inference that A was holding out B as its agent to procure their execution. There must be something more in the evidence to warrant the inference that A was cloaking B with authority to do so on A's behalf.

I am, however, nonetheless prepared to accept that there is a sense (albeit a little artificial) in which Rodney might be regarded as the agent of Dollars & Sense:

(a) It was left to Rodney to ensure that disclosure was made.

(b) It was left to Rodney to obtain his parents’ signatures to the “statement by covenantors”.

(d) When he sent the documents back incorrectly witnessed they were returned to him for the purpose of ensuring that they were correctly witnessed.

(e) Rodney was asked to obtain the title and insurance details.

(f) By this time, it was quite obvious to Mr Thomas that Mr and Mrs Nathan were not using solicitors. Dollars & Sense had no direct dealings with the Rodney’s parents despite them being the borrowers. Accordingly Dollars & Sense must be taken to have realised that the only person they would be dealing with over execution of the documents was Rodney.

[50] Accordingly I conclude that it was open to Winkelmann J to hold that Rodney was acting as the agent of Dollars & Sense for the purpose of securing the signatures of his parents to the mortgage. And if Rodney, in the course of obtaining their signatures, had applied undue influence or had misrepresented the situation to them, that would, on this approach, have resulted in the mortgage being set aside. But the problem from the point of view of Mrs Nathan is that Rodney did not deal with his mother at all. Instead he simply forged her signature, an action which does not fit even loosely within the agency arrangement as found by Winkelmann J.
[51] In reality, Rodney set out to, and did, defraud Dollars & Sense. He obtained that company’s money by falsely representing that Mrs Nathan had signed the mortgage. In those circumstances, would it be right to attribute to Dollars & Sense Rodney’s actions or his knowledge that he had forged his mother’s signature to the mortgage?
[52] There are two modern cases which are directly on point and both are against Mrs Nathan.
[53] The first is Schultz v Corwill Properties Pty Ltd [1969] 2 NSWR 576 (NSWSC). In this case Street J held that a mortgagee was not answerable for his solicitor’s forgery because that forgery was not within the scope of the solicitor’s actual or apparent authority as agent. He held that the ordinary principles of vendor and purchaser law relating to the imputation of notice to the purchaser will equally cover the imputation of an agent’s knowledge to his principal in this context. He quoted Williams on Vendor and Purchaser (4ed) at 306 which explains the principle of imputed notice in the following terms –

The rule that a purchaser is affected by notice to his counsel, solicitor or other agent, seems to rest on this ground:– When a man employs such agents to transact his business he holds them out to the world as standing in his own place and representing himself; in fact, as being identical, for the purposes of the business which he has authorised them to transact, with his own person. He must therefore accept this representation of himself by another, which is the consequence of his own act in employing an agent, as complete for all the purposes of such business, and cannot justly be permitted to sever the identity of person created by him as to repudiate notice or knowledge given to or acquired by the agent, but not in fact communicated to the principal. It is therefore said that, where the relation of principal and agent and the duty of the agent to communicate any matter to the principal have been established, an irrebuttable presumption arises that the agent communicated the matter to the principal; hence evidence is not admissible to prove that the agent did not in fact communicate his knowledge to the principal.

Street J went on to note an important exception (the fraud exception) to this rule. This exception is stated by Williams immediately following the above passage:

The rule is, however, subject to the exception that, if the matter, of which it is sought to affect the principal with notice, is the agent’s own fraud or fraudulent dealing or some equity arising thereout, or if the agent during the time of his employment as such, and when he acquired the information in question, was a part to a scheme of fraud, then the principal is permitted to give evidence to rebut the above presumption and prove his ignorance of the matter; for the supposition that the agent communicated his fraud to the principal is too improbable to be entertained even by a Court of Equity.

[54] The second case is Cricklewood Holdings Ltd v C V Quigley & Sons Nominees Ltd [1992] 1 NZLR 463 where Holland J referred at 482 to:

[t]he special principle that knowledge of the agent of fraud should not be imputed to the principal when the fraud is a fraud of the agent on his principal or in general terms is his own fraud for his own benefit... .

Holland J considered that, in this respect, there may be some significance in the fact that while the fraudulent solicitor was an agent of the contributors he was not their servant or employee (and knowledge of a dishonest servant may be imputed to the employer). It followed that the fraud could not be brought home to the mortgagees.

[55] The fraud exception to imputed knowledge goes back to Kennedy v Green [1834] EngR 1072; (1834) 3 My & K 699; 40 ER 699 and its existence was accepted in Duncan v McDonald at 679 where Blanchard J noted:

It can also be accepted that knowledge of the circumstances of a fraud of an agent against his or her principal is not to be imputed to the principal.

But while the existence of the exception is well-established, its rationale is not so obvious.

[56] As the passages cited from Williams on Vendor and Purchaser indicate, one explanation for the fraud exception is that there can be no presumption of communication where the agent is defrauding his or her principal. Another is that the fraud terminates the agency. Neither rationale is completely convincing as Professor Watts has demonstrated in the article referred to by Winkelmann J (“Imputed Knowledge in Agency Law – Excising the Fraud Exception” (2001) 117 LQR 300). Nor do these rationales explain cases in which principals are sometimes held liable for the actions of fraudulent agents, as in Lloyd v Grace, Smith & Co [1912] UKHL 1; [1912] AC 716 (HL). Further, there is an old decision of this Court (ex parte Batham (1888) 6 NZLR 342) which might seem inconsistent with its application in the present context.
[57] It is right to recognise that there are many possible situations in which issues arise as to whether a principal is liable for the dishonesty of an agent and these situations are not susceptible to explanation by reference to a simple (or single) rule. Lloyd v Grace, Smith concerned a principal’s liability for money entrusted to him via his agent, a case which is thus very different from the present. Indeed I see the attribution issue in this appeal as akin to that decided in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] UKPC 26; [1995] 3 NZLR 7 and thus necessarily involving a policy component. The only person who acted fraudulently was Rodney and his fraud was primarily against Dollars & Sense. In approaching the policy question whether his fraud should nonetheless be attributed to Dollars & Sense, I regard carelessness on the part of Dollars & Sense as irrelevant. If Dollars & Sense had acted more prudently but its precautions had been outflanked by Rodney, the conclusion that Rodney, as its agent, had been fraudulent would still defeat its security. A primary purpose of the Torrens system is to render unnecessary conveyancing precautions which would be required in the absence of indefeasibility of title. The costs saved by the avoidance of such precautions presumably outweigh the costs of an occasional compensation claim under s 172. Against that background, I am most reluctant to adopt an attribution approach which has the potential to erode the costs savings associated with indefeasibility.
[58] I do not see the present case as controlled by ex parte Batham. This case was decided before the principles of indefeasibility of title were settled. As well, there was a sense in which the actions of the fraudulent agent were within the scope of his authority. He was a land-broker and he presented for registration (and signed correct) a mortgage in favour of his client which he had forged. Since his retainer extended to the registration of the mortgage and he procured that registration by fraud (by falsely signing it correct) the critical actions on his part were (at least arguably) within the agency arrangement. Whether this would now suffice to invoke the fraud exception to indefeasibility might be open to question. But the case for doing so was far stronger in that case than here.
[59] Nor do I see the case as controlled by considerations of approbation and reprobation on which Winkelmann J relied. The whole point of the indefeasibility of title principles is that Dollars & Sense does not have to rely on the validity of the underlying transactions. Rather it is entitled to rely simply on the register. In relying on the register, Dollars & Sense is not approbating Rodney’s fraud. I note that this is very much the approach taken by Street J in Schultz at 584-85.
[60] In this situation, where there is at least an element of artificiality to the agency characterisation of the relationship between Dollars & Sense and Rodney and where that agency relationship undoubtedly did not extend to forging his mother’s signature or to any of the actions which directly resulted in the registration of the forged mortgage, I consider that the approach taken by Street J in Schultz and Holland J in Cricklewood should prevail. Accordingly, and in respectful disagreement with Winkelmann J, I am of the view that Rodney’s actions and knowledge should not be attributed to Dollars & Sense.

Was Dollars & Sense wilfully blind to the possibility that Rodney had forged his mother’s signature?

Overview

[61] On this aspect of the case, Mrs Nathan maintained Messrs Thomas and Harris were wilfully blind to the possibility of forgery.

The approach of Winkelmann J

[62] Winkelmann J concluded that Dollars & Sense had been wilfully blind to the possibility of fraud connected with the obtaining of the security from Rodney’s parents. Her reasons for this conclusion were expressed in this way:

[95] Dollars & Sense was ... aware, through Mr Thomas and Mr Harris, of the fact that Mr Nathan’s parents were elderly and were not receiving legal advice. Dollars & Sense was aware that the documents were initially irregularly executed, and that when they were returned the same person was shown as witnessing all signatures. At no stage did Dollars & Sense attempt to communicate with Mr Nathan’s parents to check if they were aware of the transaction, or to recommend that they obtain legal advice. When the documents were returned irregularly executed Mr Thomas should have made rudimentary inquiries to satisfy himself that the parents were willing mortgagors. He did not do so. Dollars & Sense delegated all dealings with the parents to Mr Nathan.

[96] When these matters are taken together I am satisfied that this conduct amounted to more than recklessness. Dollars & Sense was wilfully blind to the possibility of fraud connected with the obtaining of the security from Mr Nathan’s parents. In this sense the dishonesty associated with the transaction was brought home to Dollars & Sense, and is sufficient to bring it within the fraud exception to indefeasibility for the purposes of the Land Transfer Act.

The business context

[63] Given their business interests (via Further Developments and Madison), it suited Messrs Bowden and Harris for Rodney to complete his acquisition of a 40% interest in Setz (essentially because Further Developments was obtaining an additional 10% stake in Setz for no additional cost). Because Mr Harris would appear to have been primarily responsible for the financial affairs and management of Setz, it is understandable that the financial arrangements associated with repayment of the loan were largely left to him to organise. In light of that general business context and a limited prior association between Messrs Harris and Thomas in relation to Setz, it is not particularly surprising that Mr Thomas dealt directly with Mr Harris in relation to the restructuring of Setz and the advance to Rodney.
[64] In all of this, Mr Thomas was merely acting as a solicitor. He had no entrepreneurial interest in Setz and all that was at stake for him was a reasonably modest fee in relation to the making of the advance and the obtaining of security. It would have been no skin off his nose if the loan transaction had not proceeded. It would not necessarily have occurred to Mr Thomas that his client would be able to rely on a forged mortgage. To make an advance on behalf of Dollars & Sense on the basis of a mortgage which he suspected had been forged would have been extraordinarily foolish. There was nothing in the evidence to suggest that he wished to do anything other than obtain an effective, valid and registrable security. Similar, although not identical, considerations apply to Mr Harris. It is almost inconceivable that he would have known that a forged mortgage could be enforceable. So the advantages for Madison associated with the restructuring of Setz could hardly have been seen by him as warranting the making of an advance against a possibly forged mortgage. And, in any event, for all that Mr Thomas consulted with him in relation to the advance, Mr Harris was not in a position to drive the decisions made by Mr Thomas as to the adequacy of the security documents which were eventually provided.
[65] Some further context is also important. It is not common practice in New Zealand for financiers to have direct dealings with sureties, cf the comment of Blanchard J in Wilkinson v ASB Bank Ltd 4 at 689. The same would appear to be the case with English lenders, see Etridge at [51]. There are good reasons why this is so. The greater the direct (ie face to face) contact a financier has with a surety, the greater the likelihood of later litigation in which the surety claims to have been misled by the financier. So there is nothing particularly surprising in Mr Thomas (and Dollars & Sense) choosing not to deal directly with Mr and Mrs Nathan.

Evaluation

[66] Although constructive notice does not amount to knowledge (see Schultz), the Privy Council in Assets Co stated that wilful blindness may be sufficient to constitute knowledge of fraud (at 210):

... 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 out fraud if he had been more vigilant, and had made further inquiries which he omitted to make, does not of itself prove fraud on his part. But if it be shewn that his suspicions were aroused, and that he abstained from making inquiries 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 a document which is forged or has been fraudulently or improperly obtained is not guilty of fraud if he honestly believes it to be a genuine document which can be properly acted upon.

[67] In Cricklewood, Holland J emphasised that it is not sufficient that the registered proprietor or his agent “ought to have known” of the dishonest activities of the fraudulent party. In that case, it may have been that the solicitor acting for the registered proprietor company could, if he had investigated further, have ascertained the prior interest but the Court was satisfied that he acted in good faith and that he knew of nothing which would have persuaded an honest man to stay his hand.
[68] The best case from the point of view of Mrs Nathan is Australian Guarantee Corp Ltd v De Jager [1984] VicRp 40; [1984] VR 483 (VSC). The husband signed the mortgage but his wife’s signature was a forgery. The mortgagee did not know that the wife’s signature was a forgery, but its employees were aware that her signature had not been duly attested, and despite knowing this they caused the mortgage to be registered. Tadgell J held that the actions of the employees in allowing the mortgage to be registered knowing that it had not been signed by an attesting witness who was present when one of the registered proprietors had (apparently) signed the instrument, amounted to fraud. Instead he concluded that, in the circumstances of the case, the mortgagee had no basis for assuming that she had signed. The mortgagee could have found out the true position easily enough but nothing was done with a view to doing so. In the Judge’s view, the fact that the mortgagee had no contractual or other relationship with the wife made the case plainer. The mortgagee had the means of confirming or denying what should have been, to a company in its position, a suspicion of irregularity, whereas she was, in effect, an entirely innocent and ignorant third party. Tadgell J concluded that the mortgagee was in a position of one who “abstained from making enquiries for fear of learning the truth”. The mortgagee’s title did not, therefore, prevail against her due to the fraud exception.
[69] The case against Dollars & Sense on this issue rests on the following considerations:

(a) Neither Mr Thomas nor Mr Harris made any attempt to contact Rodney’s parents prior to entrusting Rodney with the mortgage documents. Likewise, there was no attempt to communicate with the parents to ensure they were aware of the mortgage after the documents were returned irregularly executed and with documents missing. The documents were simply couriered back to Rodney

(b) Mr Thomas and Mr Harris were aware that Rodney’s parents were not receiving legal advice. They were also aware that there was nothing in the transaction to benefit the parents personally.

(c) When first returned, the documents had been irregularly executed. None of the signatures had been witnessed and the title and details of insurance had not been provided as requested.

(d) When the documents were returned the second time, apparently witnessed, the same person had completed the witnessing section of all the documents and the address given by the witness was Rodney’s home address. By this time Mr Thomas knew that Mrs Nathan was not at the Kerikeri address but was in or around Gisborne.

[70] The circumstances referred to in subparas (a) and (b) of [69] are commonplace. As noted, there are good reasons (associated with the risk of later being accused of misrepresentation) why financiers tend not to make direct contact with proposed sureties. In most cases where parents guarantee advances made to their children, there is nothing in the transaction which is of direct benefit to them. Yet cases in which children forge a parent’s signature seem comparatively rare.
[71] As to the point referred to in subpara (c), Mr Thomas returned the documents to Rodney when he appreciated that they had not been properly witnessed. So the situation is thus different from that in de Jager. Further, they came back apparently duly witnessed and were accompanied by the certificate of title. Rodney’s ability to obtain access to the certificate of title seems to me to be of some significance as indicating that the registered proprietors (who were jointly entitled to possession of it) were prepared to have it released to Mr Thomas.
[72] That one person purported to witness the signatures of both parents (see [69](d) above) is the strongest of the points relied on by counsel for Mrs Nathan. But there was nothing implausible in the assumption that a person living at the same address as Rodney had accompanied him when he visited both his parents. Nor was the failure of Mr Thomas to make further inquiry sinister as being logically explicable on the basis that he did not know want to know the truth. As already indicated, there are good reasons why financiers (and those acting for them) prefer not to deal directly with sureties. So it is understandable that Mr Thomas did not make direct inquiry of Mr and Mrs Nathan. Further, in the particular circumstances of this case, such inquiry would have carried the corollary that Mr Thomas at least suspected Rodney of forgery and thus carried the potential to cause offence. There was no expert evidence as to the practice of solicitors in comparable circumstances. One of the purposes of indefeasibility of title is to limit the need for those dealing apparently with a registered proprietor to make the sort of inquiries which are necessary in other jurisdictions.
[73] On the Assets Co test (see [66] above), wilful blindness was not established unless:

(a) Messrs Thomas and Harris actually suspected forgery; and

(b) They abstained from further inquiries for fear of learning the truth.

[74] Interestingly, Winkelmann J did not find (at least expressly) that Mr Thomas (or Mr Harris for that matter) suspected forgery. There would indeed have been no evidential foundation for such a finding. I say this because there is no direct evidence to suggest that they actually suspected that Rodney had forged one or both of his parents’ signatures and no facts which would support an inference to that effect. The Judge likewise did not find expressly that the reason for not making further inquiries was a fear of finding the truth. Again, in my view, there would in any event have been no evidential finding justifying such a finding.
[75] Accordingly, I am satisfied that the finding of wilful blindness must be set aside.

The amendments made by Mr Thomas to the mortgage

[76] The actions of Mr Thomas in amending the mortgage after it was returned to him the second time and subsequently signing it correct have troubled me (cf the rule in Pigot’s Case [1572] EngR 180; (1614) 11 Co Rep 26b; 77 ER 1177 (KB). But there was no pleading directed to these aspects of the conduct of Mr Thomas and they were not developed in any detail in cross-examination. As well, the point is well-removed from the critical focus of Mrs Nathan’s case which relates to forgery. While Mr Thomas took something of shortcut, he would no doubt deny having acted dishonestly and instead would maintain that the state the documents were in when they were returned to him implied that Mr and Mrs Nathan expected him to fill in the blanks as appropriate (with the result that he believed he had the assent of the obligors to the alterations he made). Given that the point was not developed at trial or relied on by counsel before us, it would be wrong for us to take it any further.

Result

[77] For the reasons I have given, I would allow the appeal.

GLAZEBROOK AND ROBERTSON JJ

(Given by Glazebrook J)

Table of Contents Para No
Introduction [78]
Was Rodney the agent of Dollars & Sense? [81]
Can Rodney’s forgery be attributed to Dollars & Sense? [86]
Was Dollars & Sense wilfully blind? [122]

What is the effect of the amendment of the mortgage? [133]

Would Mrs Nathan have an in personam claim against
Dollars & Sense? [135]

Consistency with Torrens system [138]

Unconscionable conduct [140]

Recognised cause of action [151]

Conclusion [155]
Could s 81 of the LTA be of assistance? [156]

Would Mrs Nathan be entitled to compensation under
s 172 of the LTA? [159]

Is the Credit Contracts Act applicable? [160]

Result and costs [164]

Introduction

[78] Mrs Nathan’s son, Rodney, forged her signature on a number of documents, in particular a mortgage over a property in Kerikeri which, at the time, was jointly owned by her and Rodney’s father, in favour of Dollars & Sense. Rodney’s father has since died and she has become the sole owner by survivorship.
[79] The mortgage secured a loan to Rodney, which he used to buy further shares in a tavern-owning company in Whangarei. The company failed and the loan has not been repaid. Dollars & Sense seeks to exercise its power of sale over the Kerikeri property, relying on the doctrine of indefeasibility set out in s 62 of the Land Transfer Act 1952 (LTA). The pertinent facts are set out in more detail in William Young P’s judgment at [4] – [16].
[80] The issues in this appeal are:

(a) Was Rodney the agent of Dollars & Sense?

(b) Can Rodney’s forgery be attributed to Dollars & Sense?
(c) Was Dollars & Sense wilfully blind?
(d) What is the effect of the amendment of the mortgage?
(e) Could s 81 of the LTA be of assistance?
(f) Would Mrs Nathan have an in personam claim against Dollars & Sense?
(g) Would Mrs Nathan be entitled to compensation under s 172 of the LTA?
(h) Is the Credit Contracts Act applicable?

Was Rodney the agent of Dollars & Sense?

[81] Winkelmann J held that Rodney was the agent of Dollars & Sense with regard to the mortgage and associated documentation. This was because Rodney was undertaking significant tasks for Dollars & Sense at its request which went well beyond obtaining his parents’ signatures on the documents. William Young P concludes that it was open to Winkelmann J to make that finding – see at [50]. We consider that it was not only open to Winkelmann J to make that finding but that, for the reasons given by her and William Young P, it was the only available conclusion.
[82] In this matter we are most influenced by what must have been envisaged as Rodney’s role with regard to the “Statement by Covenantors” set out at [9]. The statement is drafted in a manner that presupposes that Mr and Mrs Nathan had been informed, prior to signing the statement, of Dollars & Sense’s expectation that they would seek independent legal advice and also that they had been advised to do so. While, in some sense, the statement itself could be taken as informing them of Dollars & Sense’s expectation, it makes no attempt to set out why independent legal advice should be obtained (apart from what is contained in the second paragraph of the statement). As no one from Dollars & Sense contacted Mr and Mrs Nathan directly, it must have been expected that Rodney would inform his parents why they should seek independent legal advice.
[83] The statement goes on to say that the consent of Mr and Mrs Nathan to the mortgage and loan agreement is an informed consent and that they understand the contents of the documentation and the circumstances under which the liabilities have been undertaken. While (although somewhat unrealistically) it might be assumed that Mr and Mrs Nathan would read and thereby understand the documents, those documents did not adequately explain the circumstances under which the liabilities had been undertaken. Again, it can only have been expected that Rodney would have undertaken this task and that he would also have answered any questions on the documents or the transaction that his parents may have had.
[84] Dollars & Sense raised a question as to the status of Mr Harris. We agree with William Young P that it makes no difference for this purpose whether Mr Harris was the agent of Dollars & Sense or not. Mr Thomas, as Dollars & Sense’s solicitor, was clearly its agent. If Mr Harris had not taken the documents to Rodney, then Mr Thomas would have posted them to Rodney. Either way, there would have been no direct contact with Mr and Mrs Nathan.
[85] It was argued on behalf of Dollars & Sense that Mr Thomas had no power to appoint sub-agents and so could not have appointed either Mr Harris or Rodney in that capacity. We do not accept this submission. There was nothing in the evidence to suggest that Dollars & Sense had expressly prohibited the delegation of functions by Mr Thomas. Nor would it have been sensible for it to have done so. Mr Thomas was in Auckland. It would have been quite routine, for example, for him to arrange with a Kerikeri solicitor to deal with the Nathans or their solicitor on matters relating to the execution of the documents. Even had there been an express prohibition on appointing sub-agents, we consider it likely that Mr Thomas’ actions in this regard would be attributed to Dollars & Sense in any event. Mr Thomas would at least have had apparent authority to appoint sub-agents.

Can Rodney’s forgery be attributed to Dollars & Sense?

[86] Does this case come within the fraud exception in s 62 of the LTA (set out at [17])? In Assets Co Limited v Mere Roihi [1905] AC 176 at 210, the Privy Council held that, in that section, fraud means actual fraud in the sense of dishonesty of some sort which is brought home to the person whose registered title is impeached or to that person’s agent or agents. It also held, at 211, that forgery is a species of fraud. The Assets Co formulation has been consistently approved and applied by courts considering the concept of fraud under Torrens legislation.
[87] In this case, Rodney forged his mother’s signature on the documentation, including the mortgage itself. There is thus actual fraud in the sense of dishonesty by Rodney. Rodney was the agent of Dollars & Sense whose registered title is impeached. Under the Assets Co formulation, therefore, there was fraud in the sense required by s 62 of the LTA.
[88] As noted by Winkelmann J, this result is also in accordance with authority of this Court - see Ex parte Batham (1888) 6 NZLR 342. In that case, the defendant’s agent procured the assignment of a registered mortgage by deceiving one of the existing joint mortgagees and forging the signature of the other. The agent then proceeded to register the transfer and misappropriate the funds given to him by the defendant for the purchase of the mortgage. The Court attributed the agent’s fraud to the defendant and, despite being personally innocent, he was ordered to deliver up the memorandum of mortgage so that the endorsement of transfer could be cancelled. The agent had been employed to prepared a transfer and to procure its due execution and registration and it was in the course of that activity that the fraud occurred.
[89] William Young P suggests that a point of distinction between Batham and this case may be that the agent in Batham was entrusted with registration as well as ensuring execution of the documents - see at [58]. We do not see this as a legitimate basis for distinction. Registration is a mechanical function and would not be possible without the underlying documents. From a policy perspective, too, it makes no sense to distinguish between cases where an agent has responsibility for registration and ones where registration is completed by another party. Whether an agent is responsible for registration will often be little more than chance. Further, if such a distinction were made, principals could benefit from their guilty agents having put the formalities into the hands of innocent ciphers - see Watts in “Imputed Knowledge in Agency Law – Excising the Fraud Exception” (2001) 117 LQR 300 at 311 footnote 43 (the Watts article).
[90] It is true that this Court in Batham placed weight on the role of the fraudulent agent in knowingly registering a false instrument and that may strictly be the ratio decidendi of the case but, in our view, the result in the case was based on the wider principle that an agent’s fraudulent actions are attributed to an innocent principal where the agent is acting within the scope of his or her actual or apparent authority. We would need to depart from this wider principle in order to find in favour of Dollars & Sense.
[91] William Young P suggests, at [58], that the fact that Batham was decided before the principles of indefeasibility were settled, has significance in that regard. However, the decision in Batham did not turn on the question of deferred or immediate indefeasibility. The issue was merely whether the agent’s fraud was attributable to the principal and thus we do not accept this as a reason to depart from Batham.
[92] William Young P also refers to developments both here and in other jurisdictions as a reason to doubt the continued applicability of Batham. The first case referred to is that of Schultz – see at [53]. In that case, the plaintiff’s solicitor had affixed the defendant’s seal to the memorandum of mortgage over the defendant’s land without authority and forged his mother’s signature who was a director of the defendant company. He then proceeded to use the money for his own purposes. Later, he fraudulently induced the plaintiff to discharge the mortgage.
[93] Street J discussed two possible bases for the plaintiff principal to be liable; attribution of the agent’s actions to the principal and imputation of knowledge of the forgery to the principal. As to the first, Street J held that it was not within the solicitor’s actual or apparent authority to commit forgery. It was an independent activity in furtherance of the solicitor’s own interests, rather than an activity on behalf of the mortgagee. Further, Street J held that a registered proprietor who is merely relying on the register is not adopting the fraud of his or her agent. Thus the solicitor’s actions could not be attributed to the plaintiff. Street J also held that knowledge of the solicitor’s forgery was not imputed to the plaintiff. This was on the basis of the long standing fraud exception to the principle of imputed notice. Street J acknowledged, at 583, that, in finding that the agent’s knowledge had not been imputed to the principal, he was putting a gloss on the Privy Council’s comment in Assets Co noted at [86].
[94] The next case referred to by William Young P (see at [54]) is Holland J’s decision in Cricklewood Holdings Ltd v C V Quigley & Sons Nominees Ltd [1992] 1 NZLR 463. In that case Mr Quigley, a solicitor, arranged for his firm’s nominee company to lend money (secured by second mortgage over a farm property) to Cricklewood Holdings Ltd in which he had a large stake. Mr Quigley then fraudulently drew the funds down for his own purposes. There was already a first mortgage over the relevant farm property, securing a loan by BNZ Finance. The BNZ mortgage had not been registered by Mr Quigley. Neither did he register the nominee company mortgage. The nominee company mortgage was unauthorised. There were 17 contributors. Nine of them had earlier signed general authorities for investment in first mortgage securities. Five signed such authorities after the loan was drawn down. The authorisation of one further contributor was forged and two others had not signed any authority at all. Only two of the contributors had been told specifically of the advance to Cricklewood Holdings but it had been misrepresented as being secured by a first mortgage over two farm properties owned by Cricklewood. At a later date, the nominee company mortgage was registered by one of Mr Quigley’s partners in the course of an investigation into Mr Quigley’s dealings. The BNZ mortgage was overlooked and remained unregistered.
[95] One of the issues in Cricklewood Holdings was whether the registration of the nominee company mortgage could be impugned on the basis of fraud in terms of s 62 of the LTA. Holland J held that the partner who registered the mortgage was not acting under any express or implied authority to register a forged mortgage. In addition, the mortgagees had not conducted themselves in any way so as to represent that such authority existed. Further, Mr Quigley’s knowledge as agent of the fraud should not be imputed to the contributors (although, if he had been their employee, it may have been so imputed). The registered mortgage therefore took priority over the later BNZ mortgage.
[96] Cricklewood Holdings was decided in conformity with Schultz without reference to Batham, a decision binding on the High Court. However, factually it was different from Batham in that Mr Quigley, the “agent” in Cricklewood Holdings, did not have authority as director to act alone and, in addition, acted in a dual capacity as solicitor for both parties – see the discussion in the Watts article at 310.
[97] We must now consider whether the reasoning in Schultz and Cricklewood Holdings suggests that we should revisit Batham. We do not think so for six reasons:

(a) Schultz and Cricklewood Holdings are inconsistent with Assets Co;

(b) The fraud exception is not soundly grounded in authority;
(c) The fraud exception was rejected by this Court in Batham;
(d) The explanations given for the fraud exception are unconvincing;
(e) The fraud exception is inconsistent with the House of Lords decision in Lloyd v Grace, Smith & Co [1912] UKHL 1; [1912] AC 716;
(f) Policy considerations point to the rejection of the fraud exception.
[98] We take each of these in turn. First, we cannot see why a gloss should be put on the statement in Assets Co as Street J did in Schultz. The statement is clear and, unless overturned by the Supreme Court, is binding on us – see R v Chilton [2005] NZCA 295; [2006] 2 NZLR 341 at [111].
[99] Secondly, the fraud exception relied on in Schultz and Cricklewood Holdings is not soundly grounded in authority. As noted by William Young P, at [55], the exception goes back to the English case of Kennedy v Green [1834] EngR 1072; (1834) 3 My & K 699; 40 ER 266. As demonstrated cogently at 312 – 314 of the Watts article, Kennedy v Green was a departure from earlier English authorities. In addition, as Professor Watts points out at 311 – 312, the fraud exception is inconsistent with later authorities, including Lloyd v Grace, Smith, which we discuss below at [117] - [120]. Professor Watts’ discussion at 330 – 331 also shows that Kennedy v Green in its widest form is inconsistent with the American Law Institute, Restatement of the Law on Agency (2 ed 1984). The same applies to the third edition of the Restatement (2005) – see at [5.03], [5.04], [7.07] and [7.08].
[100] Thirdly, the fraud exception has not found favour with this Court. Kennedy v Green was referred to in this Court by counsel in Batham (see at 345 of the report of that decision) and the result and reasoning in Batham must be seen as a rejection of it. William Young P refers to the comment in Duncan v McDonald, set out at [55], as an endorsement of the fraud exception. We do not consider that it is. The comment in Duncan v McDonald relates to the situation where the fraud is a fraud on the principal. It goes without saying that an agent should not be able to argue, as against the principal, that the principal knew (through the fraudulent agent) of the fraud and condoned it. See the Watts article at 316 318 and Bowstead and Reynolds on Agency (18 ed, 2006) article 95 at [8,213].
[101] Fourthly, as discussed by Professor Watts at 304 – 311, the justification given for the fraud exception is not convincing. One explanation given in the cases for the exception is that, although it is presumed there will be full communication between a principal and an agent, this is rebutted in the case of fraud. The presumption is that an agent will not tell the principal about his or her fraud.
[102] The first issue with that explanation is that liability in this case is not based on knowledge of the forgery being imputed, but on Rodney’s actions in forging the signature on the documents being attributed to Dollars & Sense. The second issue is that it is difficult to see why Rodney would be presumed to have alerted Dollars & Sense to any misrepresentation or to an exercise of undue influence, but not to his forgery of Mrs Nathan’s signature. William Young P, at [24], accepts that if Rodney, as agent of Dollars & Sense, had induced Mrs Nathan to sign the mortgage by undue influence or misrepresentation, his actions and knowledge would have been attributed to Dollars & Sense. The third difficulty is that the whole concept behind presumed communication is flawed. As noted in the Watts article, at 304, the reason agents are employed is so that a principal can be relieved from dealing with the matter personally, an aim that would be defeated if there is full communication of every action taken or information received by the agent.
[103] The other rationale given for the fraud exception is that fraud takes the agent outside the scope of his or her agency, except where there is actual authority to commit the fraud. This is, in our view, taking too narrow a view of an agent’s task. Rodney’s task was, as it was part of the agent’s task in Batham, to obtain execution of registrable documents. Obtaining execution, even by forgery, is within the scope of that task – see further at [105]-[114] below. There is also something quite artificial in singling out forgery as taking the agent outside his or her authority. There would usually be no express authorisation for misrepresentation or undue influence. Yet it is accepted that these would not take an agent outside the scope of his or her (at least apparent) authority.
[104] Fifthly, not attributing Rodney’s forgery to Dollars & Sense is inconsistent with the House of Lords decision of Lloyd v Grace, Smith. In that case a managing clerk, who was employed to conduct conveyancing transactions for a firm of solicitors, procured instructions from a client to sell two cottages she owned and to call in the mortgage money owing to her under a debt secured by mortgage. He asked her to give him the deeds of the cottages and to sign two documents. These documents were in fact a conveyance of the cottages and a transfer to him of the mortgage. He then dishonestly disposed of the properties for his own benefit. It was held that the firm was responsible for the fraud committed by their representative as it had been undertaken in the course of his employment. The main issue in the case was whether a principal is liable for the fraud of his or her agent when that agent is acting within the scope of his or her authority but where the fraud was committed for the benefit of the agent and against the interests of the principal. It was accepted by the House of Lords as going without saying that, where a fraud is committed for the benefit of the principal, then the actions of the agent are attributed to the principal and the principal is liable.
[105] The main judgment in Lloyd v Grace, Smith was that of Lord Macnaghten (with whom all their Lordships agreed). Lord Macnaghten at 732 733 approved the comments of Sir Montague Smith in McKay v Commercial Bank of New Brunswick (1874) LR 5 PC 394 (PC). In that case, the Judge said that it may generally be assumed that, in mercantile transactions, principals do not authorise their agents to act wrongfully. Consequently fraud is beyond the scope of an agent’s authority in the narrower sense of the word but such a limited sense would have the effect of enabling principals to avail themselves of the frauds of their agents without suffering loss or incurring liabilities on account of them. This would be opposed as much to justice as to authority. Sir Montague Smith recognised that it is not easy to define with precision how far an agent’s authority should extend, but he considered that the best explanation was to be found in Barwick v English Joint Stock Bank (1867) LR 2 Ex 259. Willes J in that case said that there is liability where a master has put his or her agent in place to do that class of act. In such a case, masters must be answerable for the manner in which their agents have conducted themselves in doing the business which it was the act of their masters to place them in.
[106] Lord Macnaghten said, at 736, that the principle is that an innocent principal is civilly responsible for the fraud of his authorised agent as if it was his or her own fraud. In his view, the only difference between the case where the principal receives the benefit of the fraud and the case where he or she does not is that, in the latter case, the principal is liable for the wrong done to the person defrauded by his agent acting within the scope of his agency. In the former case he is liable on that ground and also on the ground that, by taking the benefit, he has adopted the act of his or her agent and he cannot approbate and reprobate.
[107] We consider that the present case falls squarely within the principles set out by Lord Macnaghten. The critical fact is that the fraud took place to achieve the very thing that Rodney was asked to do as agent by Dollars & Sense, that is obtain a registrable mortgage. We thus consider that he was acting within his actual authority, contrary to Street J’s reasoning in Schultz. Further, in a very real sense the forgery, while of benefit to Rodney (in that presumably, without the mortgage, Dollars & Sense may not have lent him the money and certainly would not have done so on the terms it did), it was also of benefit to Dollars & Sense. The forgery allowed Dollars and Sense to have a registered mortgage as security for its loan if its validity was upheld.
[108] Dollars & Sense, in seeking to rely on the indefeasibility of the forged mortgage, is wishing to affirm the actions of its agent for one purpose but, at the same time, not to take responsibility for its agent’s actions in forging the documentation. Thus it is seeking, as Winkelmann J found, both to accept the benefit of Rodney’s conduct, while rejecting the detriment. In the words of Lord Macnaghten, it is seeking to approbate and reprobate the conduct of its agent. We consider that William Young P’s view, expressed at [59], and Street J’s view in Schultz, that Dollars & Sense is not approbating Rodney’s fraud but is simply relying on the register, takes too narrow a view of the matter. There could have been no registered mortgage without the underlying documentation (including the mortgage document itself). In exercising the power of sale, Dollars & Sense is relying on the covenant in the mortgage document. It is thus in a very real sense relying on Rodney’s forgery.
[109] At 332 of the Watts article, it is argued that to the extent a principal wishes, despite the fraud on it, to enforce or rely on a transaction in which the fraudulent agent had been involved, it would be difficult to conclude that the agent was acting outside of his or her authority. We leave open, however, the question of whether the situation would be different if the fraud had been solely for Rodney’s benefit (as in Lloyd v Grace, Smith) and if Dollars & Sense was not seeking to approbate Rodney’s fraud.
[110] We recognise that one possible basis for distinguishing this case from Lloyd v Grace, Smith is that there the managing clerk had direct contact with the third party, whereas here there had been no contact between Rodney and Mrs Nathan with regard to the transaction. In Lloyd v Grace, Smith, the third party could be seen as having relied on the agent’s apparent authority. This, however, assumes that actual authority is negatived by the wrongful action of the agent and Lloyd v Grace, Smith proceeded on the basis that it was not. We thus do not see this as a valid distinction.
[111] Professor Reynolds in Bowstead and Reynolds on Agency, however, suggests a possible caveat to this position but it is one not applicable to this case. Although he recognises, in article 74 at 8-064 – 8-066, that an agent acting within the scope of actual and apparent authority does not cease to bind his or her principal merely because the agent is acting fraudulently, he notes that fraud, which is not for the benefit of the principal, may negative actual authority - see at article 23 at 3-009.
[112] If that is the case (although this is not in accordance with the reasoning in Lloyd v Grace Smith), this would mean that, where (unlike in this case) the fraud is solely for the agent’s benefit, an agent may only ever have apparent authority. If there has been no contact with the defrauded third party then that party will have placed no reliance on the agent’s apparent authority. If liability is dependent on reliance then this may mean that an agent’s fraud is not attributed to the principal in such circumstances. We do not, however, favour this view. The defrauded third party is affected by forgery in the same way as he or she would be affected by misrepresentation and/or deceit and in a real sense forgery can also be seen as a fraud on the register and the Registrar - see the discussion at [125] below.
[113] William Young P, at [57] distinguishes Lloyd v Grace, Smith, from this case on the basis that the agent in that case had been entrusted with money by the third party. We do not see this as a valid point of distinction. The principle in Lloyd v Grace, Smith is wider and not reliant on the particular facts of that case.
[114] Another possible basis for distinction, suggested in Cricklewood Holdings at 482, is that the solicitor’s clerk in Lloyd v Grace, Smith was an employee rather than an independent agent. The House of Lords made no such distinction. Nor is it a distinction made in Clerk & Lindsell on Torts (19ed 2006), where, at 6.74 – 6.75, it is stated that, in cases of vicarious liability for fraud, the issue is the same whether it concerns an employee or an independent contractor agent. The question is whether the agent (be it an employee or independent contractor) is acting within the scope of his or her actual, implied or apparent authority. See also Fridman The Law of Agency (7ed 1996) at 228.
[115] This Court has equated the position of agents and employees in situations where the vicarious liability of employers for the actions of their employees has been extended beyond traditional bounds. In S v AttorneyGeneral [2003] NZCA 149; [2003] 3 NZLR 450 at [69], the majority (Blanchard, McGrath, Anderson and Glazebrook JJ) held that foster parents were agents of the State (although the agency was of an unusual kind). The State was thus vicariously liable for the sexual and other abuse suffered by the appellant while in their care. In the majority’s view, the abuse was sufficiently connected to the purpose of parenting for which the placement was made, even though it was absolutely contrary to the intentions of the government department responsible for the placement. This decision was reached (see at [59] [67] of the decision) on the basis of the Supreme Court of Canada’s decision in Bazley v Curry 1999 CanLII 692 (SCC); [1999] 2 SCR 534 (and later Canadian cases) as well as the House of Lords decision in Lister v Hesley Hall Ltd [2002] 1 AC 215. Both Bazley and Lister concerned employees.
[116] Tipping J, in a separate concurring judgment, agreed that the State was vicariously liable for the abuse suffered by the appellant but considered that foster parents’ relationship with the State was not that of agent but was sui generis. Tipping J proposed a policy-based approach to vicarious liability where the court is facing a novel situation. This approach found favour in Todd, The Law of Torts in New Zealand (4ed 2005) at 922, [23.8].
[117] This leads to the sixth and final reason for refusing to revisit Batham. Attributing Rodney’s actions to Dollars & Sense is, in our view, in accordance with policy. There is a choice as to who should bear the loss in this situation – either Dollars & Sense or Mrs Nathan (or the State if Mrs Nathan receives compensation under s 172 of the LTA – see at [159] below).
[118] In policy terms there can be no contest. It was Dollars & Sense (through its solicitor, Mr Thomas, or through Mr Harris) who appointed Rodney as its agent, a person who was clearly at risk of exerting undue influence on his elderly parents. There was no attempt whatsoever to contact Mr and Mrs Nathan directly and possible irregularities in the attestation of the documents were ignored – see at [126] - [128]. Despite this, the documents were signed correct by Mr Thomas. Mr Thomas also (unilaterally it appears) filled in the mortgage documents in a manner that did not accord with the loan agreement – see at [76] above.
[119] The only thing Mrs Nathan can be said to have done to facilitate the fraud (apart from giving birth to Rodney) was to leave the certificate of title in the custody of her husband, rather than, for example, in the custody of a third party with instructions to release it only upon the signed written consent of both her and her husband. Such an arrangement, which would not be common in New Zealand, would not, however, have necessarily saved Mrs Nathan in these circumstances, given the involvement (whether induced by undue influence or not) of Mr Nathan and the fact that Rodney forged Mrs Nathan’s signature.
[120] As a matter of policy, there also seems little reason why the State should be responsible for losses suffered by Mrs Nathan in circumstances where Dollars & Sense is benefiting from the fraud of its own agent and when, as financier, it failed to take even the most elementary precautions against sharp dealing. The mortgagee, given the possibility of controls and safeguards built into the agency, will always be in a better position to guard against forgery than the State - see Struan Scott, “Indefeasibility and the Forged Mortgage” [1998] NZ Law Rev 531 at 555. It is not unreasonable that a financier should suffer the consequences for its failure to take proper precautions.
[121] For all of the above reasons, we consider that Rodney’s forgery is attributable to Dollars & Sense and that, as a consequence, the fraud exception in s 62 of the LTA applies.

Was Dollars & Sense wilfully blind?

[122] William Young P, at [62], sets out Winkelmann J’s reasons for holding that Dollars & Sense had been wilfully blind to the possibility of forgery. We agree with William Young P’s conclusion that the findings of Winkelmann J fall short of concluding that either Mr Thomas or Mr Harris shut their eyes to the possibility of forgery, a finding that would have been necessary to sustain the conclusion that they had been wilfully blind. We also agree that there was no evidential basis for such a finding - see at [69] - [74] above.
[123] There is, however, another aspect of the transaction which could have formed the basis for a finding of wilful blindness. This relates to the false attestation. As Mrs Nathan did not sign the documents, the witness to her signature, Rodney’s friend Ms Ford, was “telling a lie” in attesting that Mrs Nathan had signed the mortgage in her presence.
[124] There is a line of cases in Australia which have held that a false attestation can amount to Torrens fraud where that attestation is by or known about by an agent of the registered proprietor. See for example AGC v De Jager [1984] VicRp 40; [1984] VR 483, National Commercial Banking Corporation of Australia Ltd v Hedley (1984) 3 BPR 9477, Westpac Banking Corporation v Sansom (1994) 6 BPR 13,790 and Beatty v ANZ Banking Group [1995] VicRp 57; [1995] 2 VR 301. A case where a different result was reached was Russo v Bendigo Bank Ltd [1999] VSCA 108; [1999] 3 VR 376, but we agree with the criticisms of that case in Rodrick “Forgeries, False Attestations and Imposters: Torrens System Mortgages and the Fraud Exception to Indefeasibility” [2002] DeakinLawRw 5; (2002) 7(1) Deakin LR 97, at 105 – 123.
[125] In cases of false attestation, the fraud relates to the attestation process itself and applies even where the purported witness believed the signature to be genuine. We agree with Rodrick, at 118 – 9, that false attestation is best characterised as a fraud on the register in the sense that it constitutes a violation of the Registrar’s right to take the document at its word when it states that the mortgagor signed in the presence of an attesting witness, and thus to proceed on the assumption that the document was properly executed and can safely be registered. A false attestation is thus an attack on the integrity and reliability of the registration system. We agree also with the point made by Rodrick, at 120, that a false witness can be treated as having deprived the mortgagor of the protection that proper attestation is designed to provide.
[126] In this case, the documents were returned to Mr Thomas unwitnessed. By this stage both Mr Thomas and Mr Harris knew that Mrs Nathan was in Gisborne rather than Kerikeri when the documents were signed (see at [14](b)). Mr Thomas returned the documents to Rodney saying that the witnessing provisions needed to be completed but without explaining the importance of the witness being a person who had seen Mr and Mrs Nathan sign the documents. Given that the witness at a later date was asserting that they had witnessed the initial signing of the documents, we would have thought such an explanation to be (at the least) prudent, particularly as neither Rodney nor his parents had been legally advised up to this point.
[127] Mr Thomas did make a strong suggestion in his letter (see at [12]) that Rodney (but without specifically referring to his parents) seek legal advice on completing the documents correctly. However it must be considered unlikely that a person who has not sought legal advice on the transaction itself will do so with regard to what a layperson would no doubt see as a technical witnessing requirement. Mr Thomas also wrote to Mr Harris (see at [11]) about the documents not being witnessed but again did not explain the technical requirements of attestation. Nor does there appear to be an expectation that Mr Harris would personally deal with the witness.
[128] Mr Thomas was asked about this in cross-examination:

You have indicated that when the documents came back they were signed but not witnessed? That is correct.

Were they signed by all of the parties? Yes they were.

When you returned those documents to Mr Nathan, with the addition of a witness, your covering letter doesn’t give him any instructions on how he might appropriately do that, other than telling him he should see a solicitor, does it? No.

It doesn’t suggest that the witness needs to be someone who actually saw the people sign the documents? Doesn’t say that, but the word witness is self-evident, I think.

It doesn’t say that the person should be someone who knows the people signing the documents? No that letter doesn’t say that, no.

And you got the documents back with all of the signatures purportedly witnessed by the same person, one Angela Ford? That’s right.

And that must have concerned you, knowing that Mrs Nathan was in the East Cape area, as you have said, Mr Thomas Nathan in Kerikeri and the witness is providing a Whangarei address? No it didn’t concern me.

So you thought it was just convenient that this person had been with Mrs Nathan when she had signed some weeks earlier, with Mr Nathan, when he had signed some weeks earlier and with Rodney Nathan when he had signed some weeks earlier? I guess my assumption was Rodney Nathan had taken her to both his father and his mother when the signatures were obtained.

If he had known of the need for a person to witness their signatures, wouldn’t that have been done in the first place? I can’t get into his mind. ...

You have indicated, you assumed that Rodney Nathan took his parents sorry, took Ms Ford to his parents on each occasion but just didn’t ask her to actually witness them at that time? That was my assumption.

Mr Thomas, when you received the documents back with Angela Ford showing as a witness, did you take any steps to confirm that she knew Mrs Nathan or Mr Thomas Nathan? No I did not.

And you did not seek from her any statutory declaration regarding the execution of the documents, did you? No I did not.

And you certified the mortgage document correct didn’t you? Yes I did.

[129] In our view, there may have been a sufficient evidential basis for concluding that there had been wilful blindness regarding the lack of proper attestation on the part of Mr Thomas. We would not have expected an experienced practitioner to accept without further inquiry the proposition that Rodney’s partner went to both Kerikeri and Gisborne with Rodney, saw both Mr and Mrs Nathan sign the documents but did not witness the documents at the same time. In addition, Mr Thomas knew that there was a gap between signing and witnessing and that he had not explained the witnessing requirements even after the documents had been returned unwitnessed. An experienced conveyancing practitioner would know that laypersons often do not understand the technical requirements for witnessing or take them as seriously as they should.
[130] Wilful blindness to the lack of proper attestation could, in our view, in itself (even without any suspicion of forgery) have sufficed to amount to LTA fraud. We agree with the point made by Rodrick, that it is not unreasonable for the courts to use the fraud exception as a tool to compel mortgagees’ agents and employees to be rigorous in ensuring proper attestation so that the registration system operates with as much integrity as possible – see at 123 of the article referred to at [124] above.
[131] These comments must apply with particular force to a solicitor who is signing the documents correct. B E Hayes, in “The Certificate of Correctness under the Land Transfer Act” Registrar-General of Land Information Paper 2000/01, states, at 31, that a certificate of correctness certifies, among other things, that the instrument is not voidable by reason of fraud or void through forgery, referring to the comments on this latter point by Williams J in Ex Parte Davy, Gibbs v Messer (1888) 6 NZLR 760 at 764 (CA). We also refer on this point to Registrar-General of Land v Marshall [1994] NZHC 791; [1995] 2 NZLR 189 at 200 (HC).
[132] Winkelmann J made no findings as to whether there was wilful blindness in the lack of proper attestation but, given our view that Rodney’s fraud is attributed to Dollars & Sense, we do not need to consider this matter further.

What is the effect of the amendment of the mortgage?

[133] This is discussed by William Young P at [76]. The New South Wales Court of Appeal in Karacominakis v Big Country Developments Pty Ltd [2000] NSWCA 313; (2000) 10 BPR 18,235 at 18,243 [48] (NSWSC) held that registration overrides the effect of Pigot’s Case [1572] EngR 180; (1614) 11 Coke 26b; 77 ER 1177 (KB). The rule in Pigot’s Case is that, where a deed or other written contract is, after execution, materially altered by the obligor without the consent of the obligee, it becomes void.
[134] We consider that, absent fraud, registration would overcome the rule in Pigot’s Case in New Zealand as well, although subject to the limitations in Duncan v McDonald – see at [100] above. We agree with the comments of William Young P, however, that fraud has not been established in this case with regard to the additions and alterations to the documents by Mr Thomas.

Would Mrs Nathan have an in personam claim against Dollars & Sense?

[135] In addition to fraud, a registered proprietor of LTA land may be vulnerable to attack on the ground that he or she is subject to a claim in personam – see Frazer v Walker [1967] NZLR 1069 at 1075 (PC). Their Lordships in that case, however, did not limit or define the various situations in which actions of a personal character against registered proprietors may be admitted.
[136] Traditionally, in personam claims were thought to be limited to contractual or trust claims. Their extent has now widened, although the exact limits are still to be defined - see Elizabeth Toomey “Certainty of Title in the Torrens System: Shifting Sands” [2000] FlinJlLawRfm 13; (2000) 4 FJLR 235 and Stevens and O’Donnell “Indefeasibility in Decline: The In Personam Remedies” in Grinlinton (ed) Torrens in the Twenty-first Century (2003).
[137] We examine in this section whether Mrs Nathan would have an in personam claim against Dollars & Sense. Such a claim would only be necessary if we are wrong in our conclusion that the fraud exception applies in this case. According to Hinde, McMorland & Sim, Land Law in New Zealand Volume 1 2005 (last updated January 2007), at 9.044, an in personam claim must have three elements:

(a) It must not be inconsistent with the objectives of the Torrens system;

(b) It must involve unconscionable conduct on the part of the current registered proprietor; and
(c) It must be a recognised cause of action.

Consistency with Torrens system

[138] We agree with William Young P, (see at [29]) that the bare fact that Mrs Nathan’s signature on the relevant instrument was forged, is not by itself sufficient to found an in personam claim. To hold otherwise would destroy the benefit of immediate indefeasibility and would be inconsistent with the Torrens system – see Hughson, Neave and O’Connor in “Reflections on the Mirror of Title: Resolving the Conflict Between Purchasers and Prior Interest Holders” (1997) 21 Melbourne University LR 460 at 491 – 492.
[139] We also agree that something more than neglect on the part of Dollars & Sense is required – see William Young P’s judgment at [31]. Further, in personam claims based merely on notice (particularly constructive notice) of any trust or unregistered interest would offend s 182 of the LTA – see at [25]. There must be something more before an in personam claim would lie. The “something more” is in each case the second element set out at [139](b); unconscionable conduct.

Unconscionable conduct

[140] As was said by this Court in Duncan v McDonald, at 683, it is a question of fact and degree as to when a registered proprietor’s behaviour will give rise to an equity of sufficient strength to support an in personam claim. The Court said at 683 4, that:

... more is required than the act of registering an instrument with knowledge of a competing claim by a third party. More is also required than knowledge of an irregularity in or relating to the instrument. Before a registered proprietor is susceptible to an in personam claim it must be shown that he or she has acted or is acting unconscionably in obtaining or taking advantage of the registered interest, but the registered proprietor’s conduct need not have involved actual dishonesty towards the in personam claimant. An attempt by the registered proprietor to enforce an interest knowingly obtained by his or her unlawful behaviour may be found to be unconscionable.

[141] In CN and NA Davies Ltd v Laughton [1997] 3 NZLR 705 at 713 – 714 (CA), this Court held that it was certainly arguable (the case related to whether an interim injunction should be maintained) that an in personam claim could lie where there had been unauthorised material alterations to the primary obligation by the lender’s agents and therefore misrepresentation as to the extent of the surety’s obligations. It was held to be arguable that the alterations meant that the contract of securityship was extinguished or never came into force and thus that no money was owing under the mortgage.
[142] Another possible area of unconscionable conduct is where there has been undue influence. See the cases of Barclays Bank Plc v O’Brien [1993] UKHL 6; [1994] 1 AC 180 (HL), Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44; [2002] 2 AC 773 (HL) and their New Zealand counterparts Wilkinson v ASB Bank Ltd [1998] 1 NZLR 674 (CA) and Hogan v Commercial Factors Ltd [2006] 3 NZLR 618 (CA) and also at [22] -[25] above.
[143] In such cases, an in personam claim would succeed if the person exerting the undue influence is an agent of the lender, as recognised by William Young P at [24]. In Barclays Bank at 191, Lord Browne-Wilkinson said that, if the wrongdoing husband is acting as agent for the creditor bank in obtaining the surety from the wife, the creditor will be fixed with the wrongdoing of its own agent (the unconscionability element) and the surety contract can be set aside against the creditor.
[144] We agree with William Young P’s comments, at [24], that the position is more difficult where the person exerting undue influence is not the creditor’s agent. However, we also agree that such a claim would, if successful, defeat indefeasibility. As William Young P says, at [25], a successful O’Brien/Wilkinson argument directly impeaches the contract between the financier and the surety and thus is not strictly comparable with the sort of third party prior title claim to which ss 62 and 182 of the LTA are addressed.
[145] We, however, unlike William Young P, do not see O’Brien/Wilkinson as cases of imputed notice (see at [27] of his judgment). We see them as cases of the courts enforcing standards of conduct on financiers in situations of known risk. This is especially the case with the requirement that financiers insulate themselves from the consequences of undue influence (see at [23](c) of William Young P’s judgment). The courts have decided on grounds of public policy to enforce a code of conduct on financiers taking security interests over domestic assets from a surety who stands in a non-commercial relationship with the principal debtor - see Birks “The Burden on the Bank” in Rose (ed), Restitution and Banking Law (1998) at 195 and Goff and Jones, The Law of Restitution, (7ed 2007) at 11-009. It is therefore an example of policy-motivated restitution, a subset of the law of unjust enrichment – see Birks “Restitution at the End of an Epoch” [1999] UWALawRw 2; (1999) 28 UWALR 13 at 27 30. The policy background to restitution is also commented on in Goff and Jones, The Law of Restitution, at 11008. See also Griggs in “In personam, Garcia v NAB and the Torrens System – Are They Reconcilable?” (2001) 1(1) QUTLJJ 76, at 87.
[146] William Young P notes, at [65], that it is not common practice in New Zealand, or in England, for financiers to have direct dealings with sureties. He attributes this to concerns that any misrepresentation made by the agent would be attributed to the financier – see Williams’ Contract for Sale of Land and Title to Land (1975) at 41 and Clerk and Lindsell, on Torts (19ed, 2006) at 18-25. As an aside, it was clearly much more dangerous in this regard for Dollars & Sense to have acted through Rodney, as an interested agent who had a positive incentive to mislead his parents, than it would have been to have had direct contact. Be that as it may, after O’Brien, Wilkinson, Etridge and Hogan, financiers avoid direct contact with sureties like Mr and Mrs Nathan at their peril, particularly where they know (as Dollars & Sense did here) that neither the debtor nor the surety is receiving any legal advice.
[147] In policy terms, the case for allowing an in personam claim for undue influence where proper procedures have not been followed by financiers is strong. The concept of undue influence would be stripped of much of its force if it could only be raised against a creditor with an unregistered security or in circumstances where registration is not yet obtained, a period when the undue influence would normally still be extant. We accept, however, that an in personam claim may not always be required. Where mortgage documents are drafted so that the charging clause is dependent upon the underlying documents (and most modern mortgages secure “all obligations”) and the underlying transaction is set aside, the charge is likely to be seen as indefeasible but securing nothing – see Blanchard, “Indefeasibility under the Torrens System in New Zealand” in , Torrens in the Twenty-first Century (2003) 29, at 49. This may explain why the question of whether an O’Brien/Wilkinson argument would prevail over a registered mortgage has not, to date, arisen - see William Young P’s judgment at [25].
[148] In our view, there is no reason in principle why the O’Brien/Wilkinson exception should not be extended from cases of undue influence to those of much more serious misconduct such as forgery, where the financier has been (by the nature of the transaction or relationship) put on inquiry as to the possibility of some sharp dealing and fails to insulate itself from that possibility. In this case, there was sufficient information to put Dollars & Sense on inquiry as to some kind of untoward dealing (even if forgery was not suspected) and Dollars & Sense failed to take even the most elementary precautions to insulate itself from that possibility.
[149] In this regard, we point to the fact that no attempt at direct contact with Mr and Mrs Nathan was made and there were irregularities with attestation – see at [126] - [129]. Indeed, we consider that the circumstances were such that Dollars & Sense could be seen to have been wilfully blind to the possibility of undue influence. This goes beyond mere neglect or constructive notice of possible undue influence (although both of these were present too). In these circumstances, the fact that the untoward conduct took another form should make no difference.
[150] We thus consider that the second requirement of unconscionable behaviour on the part of Dollars & Sense is met. This means that there was “something more” than mere invalidity of the underlying documentation – see at [138] - [139] above.

Recognised cause of action

[151] The final issue is whether there is a recognised cause of action in this case. William Young P considers that this requirement is not met because there is no recognised cause of action for forgery. The instrument would, absent registration, merely be void – see at [33] above. In our view, the answer lies in a claim for unjust enrichment. This is discussed by Professor Chambers in “Indefeasible Title as a Bar to a claim for Restitution (Pyramid Building Soc v Scorpion Hotels)” [1998] Restitution Law Review 126.
[152] Professor Chambers argues that an indefeasible title acquired by registration of an interest in land should not bar a claim for restitution of unjust enrichment. In his view, those that see such a claim as inconsistent with the Torrens system wrongly see the plaintiff’s interest in recoverable land as a pre-existing interest, which ought to be subject to the principle of indefeasibility. However, as Professor Chambers points out, there is in fact no pre-existing interest with a claim for unjust enrichment. Rather, the plaintiff’s right to recover the land is restitutionary, arising for the first time on or after the transfer of legal title and in response to the unjust enrichment of the defendant – see at 129.
[153] In Professor Chambers’ view, if the defendant knew or ought to have known that the plaintiff was operating under a mistake, duress, undue influence or in ignorance of the transaction itself, the plaintiff’s interest in obtaining restitution of the unjust enrichment (i.e. the restoration of the land free of encumbrance) can prevail over the defendant’s interest in the security of his or her title, without undermining the objectives of the Torrens system. This formulation is supported in Moore “Equity, Restitution and In Personam Claims Under the Torrens System: Part Two” (1999) 73 ALJ 712 (resiling from the position taken in an earlier article at (1998) 72 ALJ 258).
[154] We do not need to decide for the purposes of this case whether Professor Chambers’ formulation should be accepted in New Zealand in its entirety (particularly insofar as it is based on constructive knowledge). We do, however, consider that a claim for unjust enrichment would lie in this case, given the matters set out at [148] - [149] above.

Conclusion

[155] All three elements for an in personam claim were present. Even if we are incorrect in holding that the fraud exception applies in this case, Mrs Nathan would have succeeded in having the mortgage discharged.

Could s 81 of the LTA be of assistance?

[156] This issue is discussed in William Young P’s judgment at [35] - [36]. In our view, s 81 of the LTA is an administrative provision which has to be interpreted in the context of the LTA as a whole. As William Young P notes, it is unlikely that the Registrar acting administratively would be empowered to defeat indefeasibility in circumstances where a court cannot.
[157] Section 81 would thus not be of any assistance to Mrs Nathan if she was not otherwise able to rely on the fraud exception or on an in personam claim. With regard to the effect of s 81 of the LTA, see Scott “Indefeasibility of Title and the Registrar’s Unwelcome s 81 Powers” (1999) 7 Cant LR 246.
[158] We do not favour the alternative view (see at [36]) that, while the power might exist for the Registrar to impeach an indefeasible title, the Registrar should not invoke it for that purpose. If there were power to impeach an indefeasible title, there seems no reason why it should not be used but in our view the Registrar has no such power.

Would Mrs Nathan be entitled to compensation under s 172 of the LTA?

[159] We agree with William Young P (see at [42]) that, if she had not succeeded against Dollars & Sense, Mrs Nathan would have been entitled, subject to limitation issues, to compensation under s 172(b) of the LTA. For a discussion on the compensation provisions in the LTA, see Flaws “Compensation for Loss under the Torrens System – Extending State Compensation with Private Insurance” in Torrens in the Twenty-first Century (2003) at 397.

Is the Credit Contracts Act 1981 applicable?

[160] This issue is dealt with at [37 –[40] of William Young P’s judgment. We do not agree with his analysis. On its face, the mortgage is a credit contract. It provides for a principal sum, interest, interest payment dates and repayment of the principal. Mrs Nathan is named as a party. While she is not liable on her personal covenant (see at [20]), the credit contract still affects her property and the covenant being enforced is one in a document naming her as a party.
[161] William Young P suggests, at [39], that relief from penalties would be available under ss 31 and 32 of the Credit Contracts Act. Section 31(a) requires that any failure to disclose be through inadvertence or to events outside the control of the creditor. No proper attempt was made to disclose to Mrs Nathan (even by posting the disclosure material to the address of the Kerikeri property). We do not consider that s 31(a) is met in these circumstances and thus relief under that section would not be available. For similar reasons, we doubt that relief would be available under s 32 either.
[162] As noted at [40] of William Young P’s judgment, Winkelmann J’s conclusion that the contract was not oppressive for the purposes of s 10 of the Credit Contracts Act was not challenged in this Court (even when leave was granted and availed of to file further submissions on a number of points, including the Credit Contracts Act). We are not, however, to be taken as necessarily being in agreement with the conclusions drawn by Winkelmann J on this point.
[163] In particular, we leave open whether seeking to exercise the power of sale in a mortgage in these circumstances (where no proper attempt at disclosure had been made, where the conduct of Dollars & Sense, at the time the mortgage was purportedly signed, fell far short of best practice and where Mrs Nathan, through no fault of her own, knew nothing of the loan and received no benefit from it) could be regarded as exercising a power under the credit contract in an oppressive manner - see s 10(1)(b) of the Credit Contracts Act. It appears, however, that it was s 10(1)(a) and (c) and not s 10(1)(b) that were relied on before Winkelmann J.

Result and costs

[164] The appeal is dismissed.
[165] Costs of $6,000 plus usual disbursements are awarded to the respondent.

Solicitors:
Blackwells, Auckland for Appellant
Ellis Law, Auckland for Respondent

NZLII: Copyright Policy | Disclaimers | Privacy Policy | Feedback
URL: http://www.nzlii.org/nz/cases/NZCA/2007/177.html