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June 2008

Proper Execution of Documents

A fundamental principle of the land transfer system in New Zealand is that the Land Register is paramount when determining issues of ownership of land and interests in land, such as mortgages. There are, however, some limited exceptions to this, most notably, where fraud has been involved. The Supreme Court has recently ruled on such a situation.

Factual Background

Dollars & Sense Finance Limited (“ D & S”) agreed to lend one Rodney Nathan the amount of $245,000.00 to assist him to purchase shares in a business. It was a condition of the loan that Mr Nathan’s parents provide security by executing a mortgage in favour of D & S over the parents’ jointly owned home. Therefore, the solicitor for D & S arranged delivery to Mr Nathan in Whangarei of a package containing the various documents for Mr Nathan’s parents to sign.

The solicitor had understood that at that time both Mr Nathan’s parents lived in Kerikeri but in fact they had been separated for many years and Mrs Nathan lived in Gisborne. Mr Nathan procured his father’s signature on the documents but, knowing that his mother was unlikely to agree to give the mortgage, he forged her signature. The signed documents were then returned to the solicitor for D & S but as the signatures of Mr Nathan’s parents had not been witnessed, they were returned to Mr Nathan for this to occur. The signatures were then “witnessed” and returned to D & S’s solicitor, who duly arranged for the mortgage to be registered against the title to Mr Nathan’s parents’ property.

Both D & S and the solicitor for D & S was unaware of the forgery. The true position did not come to light until Mr Nathan defaulted under his obligations and D & S sought to exercise its power of sale over Mr Nathan’s parents’ property.

Fraud under the Land Transfer Act

As mentioned above, one of the fundamental principles of the land transfer system in New Zealand is that the Land Register is paramount. The exception is where a registered interest has been obtained by fraud. In this instance, there was no issue that Mr Nathan’s actions in forging his mother’s signature would constitute fraud within the meaning of the Land Transfer Act, but the issue was whether or not that fraud, which was unknown to D & S and its solicitor, could nevertheless impugn the validity of D & S’s registered mortgage.

Was Mr Nathan the Agent for D & S?

In order to determine whether or not Mr Nathan’s fraud could be imputed to D & S, it was necessary to determine whether or not Mr Nathan was the agent of D & S at the relevant time. It was held that on the facts of that particular case, Mr Nathan was indeed the agent of D & S. It was held that where a lender delegates the task of obtaining signatures on a loan document to a third party, that third party becomes the lender’s agent for that purpose. In this instance, Mr Nathan was not only engaged to obtain his parents’ signatures, but also to obtain the duplicate Certificate of Title and insurance details. These conclusions were upheld both by the Court of Appeal and the Supreme Court.

Was the Forgery Committed within the Scope of Mr Nathan’s Agency?
Following it being established that Mr Nathan was indeed acting as agent for D & S, the next issue that needed to be determined was whether or not Mr Nathan’s forgery fell within the scope of that authority. If the forgery was undertaken outside the scope of the authority given to Mr Nathan by D & S, then D & S would not be responsible for that forgery.

In this instance, there was no suggestion that D & S specifically authorised Mr Nathan to forge his mother’s signature. However, it was ultimately found that Mr Nathan’s act of forgery was sufficiently closely connected with the task that he was engaged to undertake that it must be treated as having been done within the scope of the agency. The fact that the fraudulent act was committed by Mr Nathan to further his own interests, as distinct from being for the benefit of D & S, did not alter the fact that the fraudulent act was nevertheless undertaken within the scope of the authority given to Mr Nathan by D & S.

Outcome

The outcome of the case is that because the fraud committed by Mr Nathan was sufficiently closely connected with the task he was engaged to undertake, it must be treated as having been done within the agency. Therefore, the fraud committed was the fraud of an agent of D & S and accordingly it came within the fraud exception of the indefeasibility provisions of the Land Transfer Act. As a result, the order of the High Court that the mortgage be removed from the title to Mr Nathan’s parents property was upheld.

Conclusions

The case obviously had serious consequences for both D & S and Mr Nathan’s mother, both of whom it were the unwitting victims of Mr Nathan’s act of forgery. From D & S’ perspective, it was unable to recover funds that it had lent to Mr Nathan on the security of the property. However, as the Supreme Court noted, D & S effectively engaged Mr Nathan to procure his parents’ signatures on the mortgage documents. The whole situation would have been avoided had D & S adopted the usual practice of not leaving the borrower to obtain guarantors’ signatures but communicating directly with the guarantors and advising of the need to obtain independent legal advice.

The case also serves as a useful example of the problems that can be caused when shortcuts are taken in relation to matters such as the proper execution of documents.