30 - [2009] SASC 24 | CaseChat AU

SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Application)
K & S CORPORATION LTD & ANOR v KPMG & ORS
[2009] SASC 24
Reasons for Decision of The Honourable Justice Anderson
6 February 2009
PROCEDURE - SUPREME COURT PROCEDURE - SOUTH AUSTRALIA - PROCEDURE UNDER RULES OF COURT - PLEADINGS - GENERALLY
Application by third parties to dismiss or strike out third party statement of claim - plaintiffs claim damages against the defendant for breach of contract and negligence arising out of thefts of money from plaintiffs' accounts to the third parties' accounts - defendant is the plaintiffs' auditor - defendant filed and served third party statement of claim - defendant claims contribution from third parties - defendant claims third parties owe a duty of care to the plaintiffs - whether pleading discloses a reasonable cause of ction - whether proceedings are an abuse of process - whether relationship between third parties and defendant gives rise to a duty of care.
Held: Third parties bear the onus of establishing that pleading has no possible chance of success - court must accept the facts as pleaded - third parties came into possession of the funds in circumstances where it is alleged that they knew the source of the funds - it is not possible to determine that there is no duty of care - applications to dismiss and strike out third party statement of claim are dismissed.
Supreme Court Civil Rules 2006 r 104(b), r 117(2)(e), r 193(a) and r 193(b), referred to.
Caltex Oil (Australia) Pty Ltd v The Dredge "Williamstad" (1976) 136 CLR 529; Perre v Apand Pty Ltd (1999) 198 CLR 180; Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515; Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241; Bryan v Maloney (1995) 182 CLR 609; Chapman v Australian Broadcasting Corporation (2000) 77 SASR 181; Shipard v Motor Accident Commission (1997) 70 SASR 240; Parker v British Airways Board [1982] 1 QB 1004; Bridges v Hawkesworth (1851) 21 LJQB 75, considered.

K & S CORPORATION LTD & ANOR v KPMG & ORS
[2009] SASC 24
Civil

ANDERSON J. This is an application by the first and second third parties (“the third parties”) to dismiss or alternatively to strike out the third party statement of claim dated 30 October 2008. The application to dismiss the third party statement of claim is pursuant to r 193(a) and r 193(b) of the Supreme Court Civil Rules 2006 on the grounds that the pleading either discloses no reasonable cause of action, or alternatively that the proceedings are an abuse of process of the court. The alternative application is to strike out the pleading pursuant to r 104(b) and r 117(2)(e) of the Supreme Court Civil Rules 2006 on the grounds that the pleading does not comply with the rules because it does not disclose a cause of action known to the law and is therefore an abuse of process of the court.
Background
These proceedings were commenced on 24 January 2007. The first and second plaintiffs (“the plaintiffs”) claim damages against the defendant for breach of contract and negligence arising out of a series of thefts of monies from the plaintiffs by the then chief financial officer and company secretary of the plaintiffs, Mr Telford.
Mr Telford caused large sums of money to be transferred from the bank account of the second plaintiff to accounts maintained by Mr Telford with various bookmakers. The first third party, Mr Seal, was one of these bookmakers. In total, Mr Telford caused the transfer of over $9 million to an account maintained by the third parties on fifteen occasions between July 2000 and February 2002.
On 26 August 2008 I granted leave to the defendant to file and serve third party proceedings by 22 September 2008. This was subsequently extended to 30 October 2008. A third party statement of claim was filed on 30 October 2008 and served upon the third parties.
In the third party claim the defendant claims that the circumstances of the receipt of those funds in the third parties’ account were such that the third parties knew or ought to have known that they were not the intended recipients of the funds. The defendant claims contribution from the third parties for breach of a duty of care that the third parties are said to owe to the second plaintiff.
The central issue
The basis of the third parties’ application to strike out the third party claim is that the third party statement of claim fails to disclose any reasonable cause of action, as the matters pleaded do not give rise to any duty of care. The existence of this duty of care is pleaded in paragraph 22 of the third party claim and the breach is pleaded in paragraph 23. These paragraphs are set out below:
[22]By virtue of the matters set out in paragraphs 17, 18 and 19 above, Mr Seal and Mrs Seal each owed a duty, in respect of each of the transfers received after the time at which they knew or ought to have known that they were not the intended recipient of such property, to exercise reasonable care to locate and contact the second plaintiff and to advise it of their receipt of the electronic fund transfers and to return the said transfers to the second plaintiff, and to maintain and preserve the funds pending the discharge of that duty.
[23]In breach of the duty referred to in paragraph 22 above, Mr Seal and Mrs Seal each on no occasion made any attempt whatsoever to contact the second plaintiff, or advise it of receipt of the said transfers and instead utilised the moneys comprised in the said transfers for their own purposes.
The central issue for determination in this application is whether the relationship between the second plaintiff and the third parties is one that fits within the established categories of relationships that can give rise to a duty of care, or alternatively, whether the relationship exhibits the necessary indicia that could lead to a conclusion of a duty of care.
The third parties’ argument
During the course of his argument, Mr Trim QC for the third parties submitted that the relationship between the second plaintiff and the third parties does not fall into an established category of relationship where a duty has been previously found to exist, nor is it a relationship where reasonable foreseeability of harm gives rise to a duty of care.
Mr Trim relied on recent judgments of the High Court to highlight the necessary indicia or “salient features” necessary in the relationship to support the existence of duty of care. He referred to Caltex Oil (Australia) Pty Ltd v The Dredge “Williamstad” (1976) 136 CLR 529 per Stephen J at 576-577, Perre v Apand Pty Ltd (1999) 198 CLR 180 per Gummow J at [201] and Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515 per Gleeson CJ, Gummow, Hayne and Heydon JJ at [22].
Mr Trim addressed each of these indicia in turn.
Vulnerability of the plaintiff
Mr Trim submitted that the vulnerability of the plaintiff to harm from the defendant’s conduct is a prerequisite to imposing a duty. He submits that in this case the plaintiffs took steps to protect themselves from the defendant’s conduct by appointing the defendant as its auditors, and therefore there is no reason why the law should step in and impose a duty on the defendant to protect the plaintiffs from the risk of pure economic loss. In support of his argument, he referred to the judgment of McHugh J in Perre at [118] where His Honour said:
Cases where a plaintiff will fail to establish a duty of care in cases of pure economic loss are not limited to cases where imposing a duty of care would expose the defendant to indeterminate liability or interfere with its legitimate acts of trade. In many cases, there will be no sound reason for imposing a duty on the defendant to protect the plaintiff from economic loss where it was reasonably open to the plaintiff to take steps to protect itself. The vulnerability of the plaintiff to harm from the defendant’s conduct is therefore ordinarily a prerequisite to imposing a duty. If the plaintiff has taken, or could have taken, steps to protect itself from the defendant’s conduct and was not induced by the defendant’s conduct from taking such steps, there is no reason why the law should step in and impose a duty on the defendant to protect the plaintiff from the risk of pure economic loss.
Mr Trim’s submission was that as a corporate plaintiff the second plaintiff could have taken steps to protect itself from the defalcations. He relied on the decision in Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241 as being analogous to the current case.
In that case Esanda Finance Corporation Ltd (“Esanda”) lent monies to Excel Finance Corporation Ltd (“Excel”). Excel was unable to repay Esanda, causing loss. Esanda commenced an action in this Court against Excel’s auditors, Peat Marwick Hungerfords (“PMH”). In its statement of claim, Esanda alleged that it obtained and relied upon audited and certified accounts and an audited report of Excel for the year to 30 June 1989. Esanda alleged that mandatory accounting standards applied and that PMH had breached those standards in conducting the audit.
It was further alleged that Esanda was a member of a class of persons whom PMH foresaw, or ought reasonable to have foreseen, might reasonably have relied on the audited accounts and report.
Thirdly, it was pleaded that but for the audited accounts and report, Excel would not have entered into the transactions or suffered the consequential losses. PMH subsequently applied to strike out the claim on the ground that it disclosed no reasonable cause of action. The application was dismissed at first instance but allowed on appeal to the Full Court. The High Court went on to affirm the decision of the Full Court. The High Court held that the auditors, PMH, did not owe a duty of care to the investor, Esanda, because Esanda was able to protect itself, yet failed to do so.
Mr Trim referred to three passages from the High Court decision in support of his vulnerability argument. First, the judgment of Toohey and Gaudron JJ at 266:
It may be accepted that, as Excel’s auditors, Peat Marwick were in a particularly advantageous position to know or ascertain Excel’s true financial position. However, there is nothing to suggest Esanda was not itself able to have accountants undertake the same task on its behalf as a condition of its entertaining the possibility of entering into financial transactions with Excel.
Secondly, McHugh J at 285:
Creditors and investors on the other hand are likely to be in a better position than auditors to know the likely extent of their losses. The investor or creditor knows the maximum extent of any likely loss. Unlike most plaintiffs in negligence cases, these investors and creditors can take steps to protect themselves against loss. Some creditors and investors will have the staff or means to investigate and verify that part of the audited person’s financial affairs that is relevant to the loan or investment. They can seek verification of the report and accounts from the auditors and rely on any representations or assurances (whether for reward or otherwise) that the auditors give. Creditors can assign debts to debt factoring organisations and in some cases may even be able to insure their debts. They can spread the loss against successive years of revenue by making provision for bad and doubtful debts. Investors can spread their risk by diversifying their investments. Of course none of these steps are cost free, and the result of taking them may, for example, increase the cost of credit or deter investment. But the question is whether investors or creditors, as one class, or auditors as the other can most efficiently absorb the losses which flow from the conduct of the clients of auditors.
Thirdly, Gummow J at 304:
Finally, the recipients of that guarantee, such as Esanda, are in quite a different league to the consumer in product liability cases. A financier such as Esanda would not lack power to deal from a position of strength in ordering its commercial relationship with the party to whom it provided financial accommodation.
Control over the risk of injury
Mr Trim submitted that an indicia in favour of the existence of a duty of care is where a third party is in a position of control over the risk of injury to the plaintiff. He submits that the third parties exerted no such control on the basis that the funds were unilaterally deposited into the third parties’ account electronically without any involvement on their part. Furthermore, the third parties had no way of exercising control over the actions of Mr Telford.
Indeterminate liability and unreasonableness
The third indicia raised by Mr Trim is where the imposition of a duty of care would impose a liability “in an indeterminate amount for an indeterminate time to an indeterminate class”. He relies on the decision of Bryan v Maloney (1995) 182 CLR 609 at 618 in support of this submission. He submitted that imposing a duty of care in a case like this would be to place a burden on the recipient of electronic funds to know where all the funds they have received have come from. Mr Trim says this is a very “onerous obligation” that gives rise to “indeterminacy of liability”.
Mr Trim also put to the Court that to impose a duty on the third parties to check and verify the source of all the funds transferred to them is to place an “unreasonably onerous burden upon the third parties”. Accordingly, this is a factor against imposing a duty of care.
Mr Trim gave the analogy of a supermarket proprietor receiving $300 per week for groceries from a customer. He suggested that it would be absurd and unreasonable to expect the supermarket proprietor to check with the customer’s employer in order to verify his financial position. This situation would clearly raise an indeterminate liability.
The defendant’s argument
Mr Hoffmann QC for the defendant began his submission by noting that the test of whether a paragraph in a pleading discloses a cause of action, and thereby is not an abuse of process, is that it is “not so obviously untenable that it cannot possibly succeed”. He therefore placed the burden on the third parties to establish that this is a case where there is no possible chance of success. In support of this proposition, he relied on the following passages from the decision in Chapman v Australian Broadcasting Corporation (2000) 77 SASR 181 per Lander J at [38]-[39].
[38]It would be rarely the case that the proceedings themselves would be struck out if an application was made out under r 46.18(b), r 46.18(c) or r 46.18(d). Usually if the pleading does not comply with the rules of pleading or if the pleading had a tendency to cause prejudice, embarrassment or delay or it was scandalous, frivolous or vexatious the pleading or that part of the pleading would be struck out, but the plaintiff would be given leave to either re-plead his or her case in whole or in part. An order might be made to strike out the proceedings themselves if there was a continuing failure to comply with the rules as to pleadings or the plaintiffs insisted on maintaining a pleading which had a tendency to cause prejudice, embarrassment or delay or which was scandalous, frivolous or vexatious, but that would be a rare occurrence. It is more likely to be the case that a court might reach the conclusion that the parties' proceedings ought to be dismissed in addition to striking out the pleadings for either of the reasons in r 46.18(a) or r 46.18(e). If the Court was satisfied that a pleading disclosed no reasonable cause of action and none was maintainable it would, in those circumstances, strike out the Statement of Claim, and the proceedings. So also if the Court believed its processes were being abused it might strike out the proceedings themselves.
[39]The striking out of any cause of action or proceedings on an application before the filing of defence is, as was said in Egan v Commonwealth Minister For Transport, to be a jurisdiction to be exercised sparingly, much like the jurisdiction which is exercised under r 25.04…
(Citations omitted)
Mr Hoffmann submitted that when determining the question of whether a duty of care was owed in the particular circumstances, the court is required to conduct a careful analysis of the facts of the case. He relies on the judgment of Doyle CJ in Shipard v Motor Accident Commission Positive (1997) 70 SASR 240 at 247. He submitted that in the current case the pleadings do not allow the Court to conduct a close assessment of the facts or of the third parties’ defence and therefore the question of whether a duty of care exists should be allowed to proceed to full argument at trial.
Mr Hoffmann submitted that the third party statement of claim pleads that the third parties came into possession of the funds in circumstances where they knew that the monies came from the second plaintiff; where they knew that they were not the intended recipients of the funds; where they knew that Mr Telford was a senior officer with both the plaintiffs; and where they knew he did not have the authority to transfer the funds. He submits that these are matters that must be accepted as pleaded and therefore, on an assessment of these facts, there is a prima facie duty of care owed.
Mr Hoffmann placed emphasis on the fact that the third parties knew the plaintiffs individually rather than as part of a group or class. He submitted this is a “critical and fundamental distinction”. The principle that he derives from the Caltex Oil case (per Gibbs J at 555; Stephen J at 576-577) is that where economic loss to a specific person as opposed to a general class is foreseeable, a duty to prevent financial loss would exist. He referred to the judgment of Gibbs J at 555:
However, there are exceptional cases in which the defendant has knowledge or means of knowledge that the plaintiff individually, and not merely as a member of an unascertained class, will be likely to suffer economic loss as a consequence of his negligence, and owes the plaintiff a duty to take care not to cause him such damage by his negligent act.
Mr Hoffmann argued that the third parties could easily determine the specific identity of the owner of the funds from the bank statements. He distinguishes the current case from that of Esanda, which he says was decided on the basis that Esanda were members of a class, namely, creditors who dealt from time to time with Excel Finance Corporation. Furthermore, Mr Hoffman sought to distinguish Esanda on the basis that it was a negligent mis-statement case, which is a category of cases in which duties of care have been found to be owed.
Mr Hoffmann made reference to two English cases: Parker v British Airways Board [1982] 1 QB 1004 and Bridges v Hawkesworth (1851) 21 LJQB 75. Both these cases dealt with lost chattels. In Parker, the court considered the decision of Bridges. The latter was a case in which £65 in banknotes was dropped in a shop. A shop customer found the notes and the question arose as to whom, as between the customer that found the banknotes and the proprietor of the shop, had the better title to the banknotes. Mr Hoffman sought to draw an analogy between the lost banknotes situation and the current case, on the basis that the Third Parties were not entitled to the electronic funds and therefore had a duty to inform the true owner of the funds.
Conclusion
I have considerable sympathy for each of the arguments advanced by Mr Trim. This is a marginal case on the pleadings as to the existence of a duty of care.
On the basis of the pleadings, and on the assumption that the allegations of fact are correct, it is a very heavy onus for the third parties to discharge.

I am not persuaded that the line of English property cases referred to by Mr Hoffmann assists him in this matter. It would be a backward step, in my view, if long-established laws relating to title to property defeated the incremental approach to the duty of care advanced by the High Court of Australia.
However, I accept generally the other submissions made by Mr Hoffmann as set out earlier in these reasons. I agree with the distinction he makes as to the applicability of the Esanda decision to this matter. Likewise I agree with his submission as to the Caltex Oil decision. As pleaded, this is a case where it is alleged that there is a foreseeable loss to a specific entity as distinct from a general class.
Mr Trim’s example of the supermarket is not appropriate in this case. On the allegations here, the third parties came into possession of very large amounts of money by electronic transfer into their accounts where they knew or should have known that the monies came from the second plaintiff. Moreover, it is alleged they knew Mr Telford was a senior officer employed by the plaintiffs and where they knew or should have known that he did not have authority to transfer the plaintiffs’ funds to discharge his gambling debts.
On the facts pleaded, which I have to accept as correct, the third parties have not discharged the onus of showing that there is no duty of care in the circumstances pleaded.
It is therefore my view that the application to dismiss the third party statement of claim fails, and likewise the application to strike out the statement of claim.
I therefore dismiss both applications.