Failure to communicate barriers to enforcement of terms of preferred lending practice
In his article “Manage Malpractice Risk by Recognizing Cultural Diversity“, Lorne Shelson (Litigation Director & Counsel in the Specialty Claims Department at LAWPRO) gives five ‘culturally-based’ claims scenarios loosely based on real LAWPRO claims.
Here is one scenario:
A woman needed to refinance her home to raise funds for her business. Due to her religious beliefs, she wanted to finance the loan through the Islamic mortgage system rather than with an interest-based mortgage. The lawyer agreed to act for both the woman and lender on a Sharia-compliant loan transaction.
Unbeknownst to the lawyer, the woman had conspired with the mortgage company’s representative to falsify her income to obtain approval for the loan. The mortgage went into default.
A dispute arose between the first and second mortgagee. For a mortgage to be Sharia compliant, no interest can be charged. Instead, the borrower makes periodic payments characterized as rent.
The second mortgagee took the position that by paying the principal balance owing under the mortgage, it had assumed the position of first mortgagee. The second mortgagee refused to pay the portion of the balance characterized as rent. Likewise, the borrower alleged that no “rent” was payable to the claimant as she did not “rent” anything other than the money under the mortgage.
The lender sued the lawyer alleging that although she instructed the lawyer to complete the legal work for a Sharia-compliant mortgage, she had always intended to make a return on her investment, and if the “rent” provisions of the mortgage were not enforceable under Ontario law, then the lawyer was negligent in structuring the mortgage transaction and in failing to warn the lender of an inherent risk. The lawyer disputed the lender’s claim, noting that any such risk was well known to those providing Sharia-compliant loans. (The claim, which was founded primarily on other allegations, eventually settled.)
This article appeared in the September 2014 “The Changing Face of the Profession” issue of LAWPRO Magazine. All past LAWPRO Magazine articles can be found at