Australian Breeders Co-operative Society Ltd v Jones

[1997] FCA 1405

FEDERAL COURT OF AUSTRALIA

CORPORATIONS LAW - Private offer memorandum (“POM”) offering shares in syndicate venture for purchase of brood mares - Whether manner of issue of POM constituted an offer to the public - Section 169 Companies Code (NSW) - Severability of illegal documents - restitution.

TRADE PRACTICES - Whether opinion of valuer as to value of bloodstock capable of constituting misleading or deceptive/conduct - Whether reasonable grounds for valuer’s opinion as to value of syndicate mares - Whether provision of valuation to financier caused damage to investors by facilitating formation of syndicate.

NEGLIGENCE - Valuation of bloodstock in connection with establishment of syndicate venture - Whether duty of care owed to the investors and financier - Whether negligent valuation causative of loss.

FIDUCIARY DUTIES - Promoters - Conflict of interest - Vendor of bloodstock acting as promoter of sale to syndicate purchasers - Failure to disclose information as to previous sale price for bloodstock to purchasers - Whether accountant adviser of vendor owed fiduciary duty to purchasers - Information as to previous sale prices not disclosed to investors - False statement as to valuation in POM - Whether breach of fiduciary duty.

INSURANCE - Professional indemnity insurance policy - Construction of exclusion clauses - Whether syndicate venture “operated or controlled” by insured firm - Whether provision by insured firm of venture “investment facility or service” - Whether claim arose out of provision of advice regarding investment in a facility or service in which insured firm or its partners had a financial interest - meaning of “financial interest”.

Companies Code (NSW) - s 169
Income Tax Assessment Act 1936 (Cth) - s 26(j)
Fair Trading Act 1987 (NSW) - s 42

Trade Practices Act 1974 (Cth) - s 52

NG 317 of 1996

AUSTRALIAN BREEDERS CO-OPERATIVE SOCIETY LIMITED
v GRIFFITH MORGAN JONES, FREDERICK LANCE MESH, EARLE WILFRED BAILEY, THOMAS ALFRED INGLIS BRAYE, JEFFREY WALL, BRIAN DAVID THORNTON, KEVIN IAN PERKINS, PAUL EDWARD NEILSON, ANTHONY MARMADUKE CARMICHAEL, GLEN WILLIAM GREEDY, PAUL STENBERG, GORDON FRASER, JOHN HOPE GIBSON, EDWARD JAMES AIRD (JNR), DONALD LEVICK, NOLA LEVICK, JEFFREY CECIL FOSTER AND MARK THOMAS SEALES
First Respondents

RODERICK STUART McDONALD, Second Respondent; GREGORY ALFRED FARROW, Third Respondent; PETER DONE, Fourth Respondent; BRIAN KING, Fifth Respondent; JAMES BESTER, Sixth Respondent and C E HEATH CASUALTY & GENERAL INSURANCE LIMITED, Seventh Respondent

NG 319 of 1996

PETER DONE, Appellant/Fourth Cross Respondent
v GRIFFITH MORGAN JONES, FREDERICK LANCE MESH, EARLE WILFRED BAILEY, THOMAS ALFRED INGLIS BRAYE, JEFFREY WALL, BRIAN DAVID THORNTON, KEVIN IAN PERKINS, PAUL EDWARD NEILSON, ANTHONY MARMADUKE CARMICHAEL, GLEN WILLIAM GREEDY, PAUL STENBERG, GORDON FRASER, JOHN HOPE GIBSON, EDWARD JAMES AIRD (JNR), DONALD LEVICK, NOLA LEVICK, JEFFREY CECIL FOSTER AND MARK THOMAS SEALES, First Respondents/First Cross Respondents; MORTGAGE ACCEPTANCE NOMINEES LIMITED & ORS, Second Respondent; RODERICK STUART McDONALD, Third Respondent/Second Cross Respondent; GREGORY ALFRED FARROW, Fourth Respondent/Third Cross Respondent; JARPAN MANAGEMENT SERVICES PTY LIMITED, Fifth Respondent; BRIAN KING, Sixth Respondent/Fifth Cross Respondent; JAMES BESTER, Seventh Respondent/Sixth Cross Respondent; AUSTRALIAN BREEDERS CO-OPERATIVE SOCIETY LIMITED, Eighth Respondent/Cross Appellant and C E HEATH CASUALTY & GENERAL INSURANCE LIMITED, Ninth Respondent/Seventh Cross Respondent

NG 321 of 1996

BRIAN KING
v GRIFFITH MORGAN JONES, FREDERICK LANCE MESH, EARLE WILFRED BAILEY, THOMAS ALFRED INGLIS BRAYE, JEFFREY WALL, BRIAN DAVID THORNTON, KEVIN IAN PERKINS, PAUL EDWARD NEILSON, ANTHONY MARMADUKE CARMICHAEL, GLEN WILLIAM GREEDY, PAUL STENBERG, GORDON FRASER, JOHN HOPE GIBSON, EDWARD JAMES AIRD (JNR), DONALD LEVICK, NOLA LEVICK, JEFFREY CECIL FOSTER AND MARK THOMAS SEALES, First Respondents; MORTGAGE ACCEPTANCE NOMINEES LIMITED & ORS, Second Respondent; RODERICK STUART McDONALD, Third Respondent; GREGORY ALFRED FARROW, Fourth Respondent; PETER DONE, Fifth Respondent; JAMES BESTER, Sixth Respondent and AUSTRALIAN BREEDERS CO-OPERATIVE SOCIETY LIMITED, Seventh Respondent

NG 323 of 1996

GRIFFITH MORGAN JONES, FREDERICK LANCE MESH, EARLE WILFRED BAILEY, THOMAS ALFRED INGLIS BRAYE, JEFFREY WALL, BRIAN DAVID THORNTON, KEVIN IAN PERKINS, PAUL EDWARD NEILSON, ANTHONY MARMADUKE CARMICHAEL, GLEN WILLIAM GREEDY, PAUL STENBERG, GORDON FRASER, JOHN HOPE GIBSON, EDWARD JAMES AIRD (JNR), DONALD LEVICK, NOLA LEVICK, JEFFREY CECIL FOSTER AND MARK THOMAS SEALES,   Appellants/First Cross Respondents; MORTGAGE ACCEPTANCE NOMINEES LIMITED, Respondent/Cross Appellant; RODERICK STUART McDONALD,     Second Cross Respondent; GREGORY ALFRED FARROW, Third Cross Respondent; PETER DONE, Fourth Cross Respondent; BRIAN KING, Fifth Cross Respondent; JAMES BESTER, Sixth Cross Respondent and AUSTRALIAN BREEDERS CO-OPERATIVE SOCIETY LIMITED, Seventh Respondent.

NG 324 of 1996

GRIFFITH MORGAN JONES, FREDERICK LANCE MESH, EARLE WILFRED BAILEY, THOMAS ALFRED INGLIS BRAYE, JEFFREY WALL, BRIAN DAVID THORNTON, KEVIN IAN PERKINS, PAUL EDWARD NEILSON, ANTHONY MARMADUKE CARMICHAEL, GLEN WILLIAM GREEDY, PAUL STENBERG, GORDON FRASER, JOHN HOPE GIBSON, EDWARD JAMES AIRD (JNR), DONALD LEVICK, NOLA LEVICK, JEFFREY CECIL FOSTER AND MARK THOMAS SEALES

v C E HEATH CASUALTY & GENERAL INSURANCE LIMITED

JUDGES::WILCOX, LEE AND LINDGREN JJ

PLACE:SYDNEY

DATE:12 DECEMBER 1997

IN THE FEDERAL COURT OF AUSTRALIA  )
NEW SOUTH WALES DISTRICT REGISTRY )  NG 317 of 1996
GENERAL DIVISION  )

On appeal from a Judge of the Federal Court of Australia

BETWEEN:

AUSTRALIAN BREEDERS CO-OPERATIVE SOCIETY LIMITED
  Appellant

AND:

GRIFFITH MORGAN JONES, FREDERICK LANCE MESH, EARLE WILFRED BAILEY, THOMAS ALFRED INGLIS BRAYE, JEFFREY WALL, BRIAN DAVID THORNTON, KEVIN IAN PERKINS, PAUL EDWARD NEILSON, ANTHONY MARMADUKE CARMICHAEL, GLEN WILLIAM GREEDY, PAUL STENBERG, GORDON FRASER, JOHN HOPE GIBSON, EDWARD JAMES AIRD (JNR), DONALD LEVICK, NOLA LEVICK, JEFFREY CECIL FOSTER AND MARK THOMAS SEALES
  First Respondents

RODERICK STUART McDONALD
  Second Respondent

GREGORY ALFRED FARROW
  Third Respondent

PETER DONE
  Fourth Respondent

BRIAN KING
  Fifth Respondent

JAMES BESTER
  Sixth Respondent

C E HEATH CASUALTY & GENERAL INSURANCE LIMITED

Seventh Respondent

IN THE FEDERAL COURT OF AUSTRALIA  )
NEW SOUTH WALES DISTRICT REGISTRY )  NG 319 of 1996
GENERAL DIVISION  )

On appeal from a Judge of the Federal Court of Australia

BETWEEN:

PETER DONE
  Appellant/Fourth Cross Respondent

AND:

GRIFFITH MORGAN JONES, FREDERICK LANCE MESH, EARLE WILFRED BAILEY, THOMAS ALFRED INGLIS BRAYE, JEFFREY WALL, BRIAN DAVID THORNTON, KEVIN IAN PERKINS, PAUL EDWARD NEILSON, ANTHONY MARMADUKE CARMICHAEL, GLEN WILLIAM GREEDY, PAUL STENBERG, GORDON FRASER, JOHN HOPE GIBSON, EDWARD JAMES AIRD (JNR), DONALD LEVICK, NOLA LEVICK, JEFFREY CECIL FOSTER AND MARK THOMAS SEALES

First Respondents/First Cross
  Respondents

MORTGAGE ACCEPTANCE NOMINEES LIMITED & ORS
  Second Respondent

RODERICK STUART McDONALD
  Third Respondent/Second Cross
  Respondent

GREGORY ALFRED FARROW
  Fourth Respondent/Third Cross
  Respondent

JARPAN MANAGEMENT SERVICES PTY LIMITED
  Fifth Respondent

BRIAN KING
  Sixth Respondent/Fifth Cross
  Respondent

JAMES BESTER
             Seventh Respondent/Sixth Cross Respondent

AUSTRALIAN BREEDERS CO-OPERATIVE SOCIETY LIMITED
  Eighth Respondent/Cross
  Appellant

C E HEATH CASUALTY & GENERAL INSURANCE LIMITED
  Ninth Respondent/Seventh Cross
  Respondent

IN THE FEDERAL COURT OF AUSTRALIA  )
NEW SOUTH WALES DISTRICT REGISTRY )  NG 321 of 1996
GENERAL DIVISION  )

On appeal from a Judge of the Federal Court of Australia

BETWEEN:

BRIAN KING
  Appellant

AND:

GRIFFITH MORGAN JONES, FREDERICK LANCE MESH, EARLE WILFRED BAILEY, THOMAS ALFRED INGLIS BRAYE, JEFFREY WALL, BRIAN DAVID THORNTON, KEVIN IAN PERKINS, PAUL EDWARD NEILSON, ANTHONY MARMADUKE CARMICHAEL, GLEN WILLIAM GREEDY, PAUL STENBERG, GORDON FRASER, JOHN HOPE GIBSON, EDWARD JAMES AIRD (JNR), DONALD LEVICK, NOLA LEVICK, JEFFREY CECIL FOSTER AND MARK THOMAS SEALES
  First Respondents

MORTGAGE ACCEPTANCE NOMINEES LIMITED & ORS
  Second Respondent

RODERICK STUART McDONALD
  Third Respondent

GREGORY ALFRED FARROW
  Fourth Respondent

PETER DONE
  Fifth Respondent

JAMES BESTER
  Sixth Respondent

AUSTRALIAN BREEDERS CO-OPERATIVE SOCIETY LIMITED
  Seventh Respondent

IN THE FEDERAL COURT OF AUSTRALIA  )
NEW SOUTH WALES DISTRICT REGISTRY )  NG 323 of 1996
GENERAL DIVISION  )

On appeal from a Judge of the Federal Court of Australia

BETWEEN:

GRIFFITH MORGAN JONES, FREDERICK LANCE MESH, EARLE WILFRED BAILEY, THOMAS ALFRED INGLIS BRAYE, JEFFREY WALL, BRIAN DAVID THORNTON, KEVIN IAN PERKINS, PAUL EDWARD NEILSON, ANTHONY MARMADUKE CARMICHAEL, GLEN WILLIAM GREEDY, PAUL STENBERG, GORDON FRASER, JOHN HOPE GIBSON, EDWARD JAMES AIRD (JNR), DONALD LEVICK, NOLA LEVICK, JEFFREY CECIL FOSTER AND MARK THOMAS SEALES
  Appellants/First Cross Respondents

AND:

MORTGAGE ACCEPTANCE NOMINEES LIMITED
  Respondent/Cross Appellant

RODERICK STUART McDONALD
  Second Cross Respondent

GREGORY ALFRED FARROW
  Third Cross Respondent

PETER DONE
  Fourth Cross Respondent

BRIAN KING
  Fifth Cross Respondent

JAMES BESTER
  Sixth Cross Respondent

AUSTRALIAN BREEDERS CO-OPERATIVE SOCIETY LIMITED
  Seventh Respondent

JUDGES:      WILCOX, LEE and LINDGREN JJ
PLACE:        SYDNEY
DATE:          12 DECEMBER 1997

THE COURT ORDERS THAT:

1. The orders made by Davies J in matter NG711 of 1991 on 18 December 1995 be set aside.

2. The Order made by Davies J in matter NG711 of 1991 on 2 April 1996 be amended by setting aside:

   (i)orders 1, 2, 4, 7, 10, 13, 16, 20, 21, 25, 30, 33, 35 and 39;

   (ii)Schedules 1, 2 and 4.

3. The said matter be remitted to Davies J for the purpose of:

   (i)determining the amount property payable by:

.(a)       Griffith Morgan Jones, Frederick Lance Mesh, Earle Wilfred Bailey, Thomas Alfred Inglis Braye, Jeffrey Wall, Brian David Thornton, Kevin Ian Perkins, Paul Edward Neilson, Anthony Marmaduke Carmichael, Glen William Greedy, Paul Stenberg, Gordon Fraser, John Hope Gibson, Edward James Aird (Jnr), Donald Levick, Nola Levick, Jeffrey Cecil Foster and Mark Thomas Seales (“the Investors”), or any of them, to Mortgage Acceptance Nominees Pty Limited by way of restitution of unjust enrichment; and

(b)Roderick Stuart McDonald, Gregory Alfred Farrow, Peter Done, Brian King, Australian Breeders Co-operative Society Limited and James Bester to each of the Investors; and

(ii)making appropriate orders, including orders for contribution.

1. Australian Breeders Co-operative Society Limited, Peter Done and the Investors each pay to C E Heath Casualty General Insurance Limited one-third of its costs of these appeals and of the appeal NG324 of 1996, such costs being assessed or taxed on the basis they occupied one hearing day.

1. Mortgage Acceptance Nominees Limited pay to the Investors one half of their costs of appeal NG323 of 1996, such costs being assessed or taxed on the basis the appeal occupied one hearing day.

1. The cross-appeal of James Bester to appeal NG319 of 1996 be dismissed.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA  )
NEW SOUTH WALES DISTRICT REGISTRY )  NG 324 of 1996
GENERAL DIVISION  )

On appeal from a Judge of the Federal Court of Australia

BETWEEN:

GRIFFITH MORGAN JONES, FREDERICK LANCE MESH, EARLE WILFRED BAILEY, THOMAS ALFRED INGLIS BRAYE, JEFFREY WALL, BRIAN DAVID THORNTON, KEVIN IAN PERKINS, PAUL EDWARD NEILSON, ANTHONY MARMADUKE CARMICHAEL, GLEN WILLIAM GREEDY, PAUL STENBERG, GORDON FRASER, JOHN HOPE GIBSON, EDWARD JAMES AIRD (JNR), DONALD LEVICK, NOLA LEVICK, JEFFREY CECIL FOSTER AND MARK THOMAS SEALES
  Appellants

AND:

C E HEATH CASUALTY & GENERAL INSURANCE LIMITED
  Respondent

JUDGES:      WILCOX, LEE and LINDGREN JJ
PLACE:        SYDNEY
DATE:          12 DECEMBER 1997

THE COURT ORDERS THAT:

1. The appeal be dismissed.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA         )
NEW SOUTH WALES DISTRICT REGISTRY       )  NG 317 of 1996
GENERAL DIVISION  )

On appeal from a Judge of the Federal Court of Australia

BETWEEN:

AUSTRALIAN BREEDERS CO-OPERATIVE SOCIETY LIMITED
  Appellant

AND:

GRIFFITH MORGAN JONES, FREDERICK LANCE MESH, EARLE WILFRED BAILEY, THOMAS ALFRED INGLIS BRAYE, JEFFREY WALL, BRIAN DAVID THORNTON, KEVIN IAN PERKINS, PAUL EDWARD NEILSON, ANTHONY MARMADUKE CARMICHAEL, GLEN WILLIAM GREEDY, PAUL STENBERG, GORDON FRASER, JOHN HOPE GIBSON, EDWARD JAMES AIRD (JNR), DONALD LEVICK, NOLA LEVICK, JEFFREY CECIL FOSTER AND MARK THOMAS SEALES
  First Respondents

RODERICK STUART McDONALD
  Second Respondent

GREGORY ALFRED FARROW
  Third Respondent

PETER DONE
  Fourth Respondent

BRIAN KING
  Fifth Respondent

JAMES BESTER
  Sixth Respondent

C E HEATH CASUALTY & GENERAL INSURANCE LIMITED
  Seventh Respondent

IN THE FEDERAL COURT OF AUSTRALIA  )
NEW SOUTH WALES DISTRICT REGISTRY     )  NG 319 of 1996
GENERAL DIVISION  )

On appeal from a Judge of the Federal Court of Australia

BETWEEN:

PETER DONE
  Appellant/Fourth Cross Respondent

AND:

GRIFFITH MORGAN JONES, FREDERICK LANCE MESH, EARLE WILFRED BAILEY, THOMAS ALFRED INGLIS BRAYE, JEFFREY WALL, BRIAN DAVID THORNTON, KEVIN IAN PERKINS, PAUL EDWARD NEILSON, ANTHONY MARMADUKE CARMICHAEL, GLEN WILLIAM GREEDY, PAUL STENBERG, GORDON FRASER, JOHN HOPE GIBSON, EDWARD JAMES AIRD (JNR), DONALD LEVICK, NOLA LEVICK, JEFFREY CECIL FOSTER AND MARK THOMAS SEALES
  First Respondents/First Cross
  Respondents

MORTGAGE ACCEPTANCE NOMINEES LIMITED & ORS
  Second Respondent

RODERICK STUART McDONALD
  Third Respondent/Second Cross
  Respondent

GREGORY ALFRED FARROW
  Fourth Respondent/Third Cross
  Respondent

JARPAN MANAGEMENT SERVICES PTY LIMITED
  Fifth Respondent

BRIAN KING
  Sixth Respondent/Fifth Cross
  Respondent

JAMES BESTER
             Seventh Respondent/Sixth Cross Respondent

AUSTRALIAN BREEDERS CO-OPERATIVE SOCIETY LIMITED
  Eighth Respondent/Cross
  Appellant

C E HEATH CASUALTY & GENERAL INSURANCE LIMITED
  Ninth Respondent/Seventh Cross
  Respondent

IN THE FEDERAL COURT OF AUSTRALIA     )
NEW SOUTH WALES DISTRICT REGISTRY       )  NG 321 of 1996
GENERAL DIVISION   )

On appeal from a Judge of the Federal Court of Australia

BETWEEN:

BRIAN KING
  Appellant

AND:

GRIFFITH MORGAN JONES, FREDERICK LANCE MESH, EARLE WILFRED BAILEY, THOMAS ALFRED INGLIS BRAYE, JEFFREY WALL, BRIAN DAVID THORNTON, KEVIN IAN PERKINS, PAUL EDWARD NEILSON, ANTHONY MARMADUKE CARMICHAEL, GLEN WILLIAM GREEDY, PAUL STENBERG, GORDON FRASER, JOHN HOPE GIBSON, EDWARD JAMES AIRD (JNR), DONALD LEVICK, NOLA LEVICK, JEFFREY CECIL FOSTER AND MARK THOMAS SEALES
  First Respondents

MORTGAGE ACCEPTANCE NOMINEES LIMITED & ORS
  Second Respondent

RODERICK STUART McDONALD
  Third Respondent

GREGORY ALFRED FARROW
  Fourth Respondent

PETER DONE
  Fifth Respondent

JAMES BESTER
  Sixth Respondent

AUSTRALIAN BREEDERS CO-OPERATIVE SOCIETY LIMITED
  Seventh Respondent

IN THE FEDERAL COURT OF AUSTRALIA  )
NEW SOUTH WALES DISTRICT REGISTRY     )  NG 323 of 1996
GENERAL DIVISION  )

On appeal from a Judge of the Federal Court of Australia

BETWEEN:

GRIFFITH MORGAN JONES, FREDERICK LANCE MESH, EARLE WILFRED BAILEY, THOMAS ALFRED INGLIS BRAYE, JEFFREY WALL, BRIAN DAVID THORNTON, KEVIN IAN PERKINS, PAUL EDWARD NEILSON, ANTHONY MARMADUKE CARMICHAEL, GLEN WILLIAM GREEDY, PAUL STENBERG, GORDON FRASER, JOHN HOPE GIBSON, EDWARD JAMES AIRD (JNR), DONALD LEVICK, NOLA LEVICK, JEFFREY CECIL FOSTER AND MARK THOMAS SEALES
  Appellants/First Cross Respondents

AND:

MORTGAGE ACCEPTANCE NOMINEES LIMITED
  Respondent/Cross Appellant

RODERICK STUART McDONALD
  Second Cross Respondent

GREGORY ALFRED FARROW
  Third Cross Respondent

PETER DONE
  Fourth Cross Respondent

BRIAN KING
  Fifth Cross Respondent

JAMES BESTER
  Sixth Cross Respondent

AUSTRALIAN BREEDERS CO-OPERATIVE SOCIETY LIMITED
  Seventh Respondent

IN THE FEDERAL COURT OF AUSTRALIA  )
NEW SOUTH WALES DISTRICT REGISTRY     )  NG 324 of 1996
GENERAL DIVISION  )

On appeal from a Judge of the Federal Court of Australia

BETWEEN:

GRIFFITH MORGAN JONES, FREDERICK LANCE MESH, EARLE WILFRED BAILEY, THOMAS ALFRED INGLIS BRAYE, JEFFREY WALL, BRIAN DAVID THORNTON, KEVIN IAN PERKINS, PAUL EDWARD NEILSON, ANTHONY MARMADUKE CARMICHAEL, GLEN WILLIAM GREEDY, PAUL STENBERG, GORDON FRASER, JOHN HOPE GIBSON, EDWARD JAMES AIRD (JNR), DONALD LEVICK, NOLA LEVICK, JEFFREY CECIL FOSTER AND MARK THOMAS SEALES
  Appellants

AND:

C E HEATH CASUALTY & GENERAL INSURANCE LIMITED
  Respondent

JUDGES:WILCOX, LEE AND LINDGREN JJ

PLACE:SYDNEY

DATE:          12 DECEMBER 1997         

REASONS FOR JUDGMENT

WILCOX and LINDGREN JJ:

TABLE OF CONTENTS

INTRODUCTION  

General  

The parties  

The underlying facts  

OUTLINE OF FINDINGS AND CONCLUSIONS OF THE TRIAL JUDGE              

ORDERS OF THE TRIAL JUDGE  

OUTLINE OF THE APPEALS  

Appeal by ABCOS - NG 317 of 1996  

Appeal by Done - NG 319 of 1996  

Appeal by King - NG 321 of 1996  

Appeal by the Investors against MANL - NG 323 of 1996  

Appeal by the Investors against Heath - NG 324 of 1996  

LIST OF ISSUES  

DONE’S BREACH OF FIDUCIARY DUTY  

The trial Judge’s findings  

Done’s submissions  

The Investors’ submissions  

The initial limitation of Done’s retainer  

Done’s subsequent actions  

Conclusions  

KING’S APPEAL  

ABCOS’ NEGLIGENCE AND CONTRAVENTION OF S 52 OF THE TRADE PRACTICES ACT

The valuation  

Was there a duty of care?  

MANL’s reliance on ABCOS’ valuation  

Causation  

SECTION 169 OF THE COMPANIES CODE  

Offer or invitation to the public  

Effect of the breach of s 169  

Severability  

Restitution  

CONTRACTUAL PENALTY ISSUES  

MEASUREMENT OF INVESTORS’ DAMAGES  

Taxation  

Fall in market  

CONTRIBUTORY NEGLIGENCE OF THE INVESTORS  

APPORTIONMENT OF FAULT  

DONE’S CONTRIBUTION CLAIM  

INSURANCE ISSUES  

The exclusions  

Exclusion (c)  

Exclusion (e)  

CONCLUSIONS AND ORDERS  

Appeal by ABCOS - NG317 of 1996  

Appeal by Done - NG319 of 1996  

Appeal by King - NG321 of 1996  

Appeal by the Investors against MANL - NG323 of 1993  

Appeal by the Investors against Heath - NG324 of 1996  

INTRODUCTION

General

Five appeals are brought from judgments of Davies J in two proceedings, heard together, arising out of a thoroughbred horse breeding venture called the "the First Trinity Park Stud Breeding Venture".

In both proceedings, the applicants were 18 individuals ("the Investors") who, with three others, invested in the venture.  They claimed to have suffered loss as a result. The relationship between the 21 investors has been called a "syndicate".  Most, but not all, of the syndicate members were clients of an accounting firm, Beattie McDonald, of which Roderick Stuart McDonald and Gregory Alfred Farrow were the partners. 

In proceeding NG 711 of 1991 the Investors sought to recover damages from eight respondents, being individuals and companies who, in various ways, allegedly caused them to invest in the venture.

In the other proceeding, NG 491 of 1994, the Investors sought relief against C E Heath Casualty & General Insurance Limited ("Heath"), the professional liability indemnity insurer of Beattie McDonald, under s 5(1)(c) of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) ("the LR(MP) Act").

The learned trial Judge delivered four judgments: on 10 November 1995 (general), 23 February 1996 (contribution and other issues - now reported at 142 ALR 561), 23 February 1996 (costs) and 25 March 1996 (damages and taxation). The principal Reasons for Judgment were those delivered on 10 November 1995, comprising 111 pages. The factual and legal issues before the trial Judge were complex, as are the legal issues raised on the five appeals. There are two cross appeals and four notices of contention.

It will be necessary to discuss in detail the evidence relating to some issues contested before the trial Judge.  For the purpose of the present introduction, it is necessary to give only an outline of the background facts, the orders made by Davies J and the appeals.

The parties

The first respondent to proceeding NG 711 of 1991 was Mortgage Acceptance Nominees Limited ("MANL"), the financier of the venture.  The venture involved the purchase by MANL of fourteen mares for lease to the syndicate as breeding stock, and purchase by the syndicate of four foals.  MANL purchased the mares and granted leases of undivided interests in them to the syndicate members.  MANL also made loans of venture expenses to all except one of the Investors.  By way of security for the loans, MANL took mortgages over each borrower’s “one (1) ownership share in the First Trinity Park Stud Breeding Venture”.  The Investors eventually purported to rescind their contracts with MANL and, in proceeding NG 711 of 1991, sought relief that would establish they had effectively done so.  By a cross claim MANL sought recovery of rent, the residual sum due under each lease and the amount outstanding under the mortgages, with pre-judgment interest on the whole sum.  MANL was represented by counsel before the trial Judge and on the hearing of the appeals.

McDonald, and to a lesser extent Farrow, actively promoted the venture. They were, respectively, the second and third respondents to proceeding NG 711 of 1991. McDonald was the principal author of a document called a Private Offer Memorandum ("POM") which was distributed to interested persons. The Investors allege the POM was negligently drawn, was misleading and deceptive and its distribution contravened s 42 of the Fair Trading Act 1987 (NSW) ("the FT Act"). Further, they allege the distribution of the POM, and of interests in the venture, constituted an offer or issue to the public of a prescribed interest in contravention of s 169 of the Companies Code 1981 (NSW) (“the Code”).   McDonald and Farrow represented themselves before the trial Judge and did not appear on the hearing of the appeals.

Jarpan Management Services Pty Limited ("Jarpan") was the manager of the venture.  Its directors were McDonald and Ray Marshall.  Marshall was the manager of the Trinity Park Stud, the property at which the venture’s breeding activities were to be conducted. Each Investor entered into a management agreement with Jarpan, in respect of the Investor’s interest as lessee of an undivided interest in the mares and the Investor’s undivided interest in the natural increase of the mares and the four foals.  Although the Investors named Jarpan as the fourth respondent in proceeding NG 711 of 1991, they sought no relief against it.  Jarpan played no part in the trial and was not a party to any of the appeals.

Peter Done was the fifth respondent to proceeding NG 711 of 1991.  He was sued as representing all the persons carrying on business as partners of the accounting firm Peat Marwick Hungerfords ("Peats") between 1 February and 30 June 1989.   The Investors allege Peats, principally through Done, were involved in the establishment of the venture and Peats’ conduct was a cause of their loss.  Done was legally represented at the trial and on the hearing of the appeals.

The sixth respondent in proceeding NG 711 of 1991 was Brian King.  He played a key role.  Both personally and through his company, Natalma Bloodstock Ltd ("Natalma"), he was a seller of bloodstock acquired for the venture.  He was also active in the formation of the syndicate.  The Investors claim he acted in breach of his fiduciary duty to them and engaged in misleading and deceptive conduct.  King appeared on his own behalf before the trial Judge but was represented by counsel on the hearing of the appeals.

The seventh respondent in proceeding NG 711 of 1991 was James Bester. He provided a valuation of the bloodstock which was included in the POM. The Investors allege the valuation was negligently prepared and his issue of it constituted misleading and deceptive conduct in contravention of s 42 of the FT Act. Bester represented himself before the trial Judge but did not appear on the hearing of the appeals.

A further valuation was obtained from Australian Breeders Cooperative Society Ltd ("ABCOS"), the eighth respondent in proceeding NG 711 of 1991. The Investors claim ABCOS’ valuation was also negligently prepared.  ABCOS’ valuation did not form part of the POM distributed to Investors, but it was provided to MANL.  The Investors say MANL relied on this valuation in deciding to finance the Investors into the venture; without ABCOS’ valuation the venture would not have "got off the ground"; therefore ABCOS’ conduct in issuing the valuation was also a cause of the Investors’ loss.

The respondents in proceeding  NG 711 of 1991 made numerous cross claims for contribution as between themselves.   The trial Judge recorded that "almost every conceivable claim based on negligence, misleading and deceptive conduct, misrepresentation and breach of fiduciary duty which could have been made has been made."

The underlying facts

In 1986, King, a dealer in bloodstock, instructed Done, his accountant, to establish a corporate structure in Guernsey, one of the Channel Islands, for use in the conduct of his business.  In consequence, Natalma was incorporated on 10 June 1986 and a trust called "The Natalma Settlement" was established on 1 September 1986.  The Natalma Settlement was managed by Peats and their agents.  This was done on behalf of King, the effective controller of Natalma.  Done handled Natalma's affairs at the Australian end.

King believed the Australian racing industry would benefit if overseas blood lines were introduced.  He gradually acquired overseas mares that he thought would be suitable breeders in Australia.  By late 1988, he knew of other mares, in America and New Zealand, he believed he could acquire.

In the second half of 1988, King arranged to sell Marshall a stallion named "Cardell", to be "syndicated" by Marshall.  McDonald was a friend of Marshall, and learned of this acquisition.  McDonald thought it would be desirable for his firm, Beattie McDonald, to promote a horse breeding syndicate.  In November 1988, he discussed the idea with Marshall.  In late December 1988, the two men discussed the proposal with King.  King declined to become a member of the syndicate on the ground that there would be a conflict of interest between membership and his position as seller to the syndicate.  However, he subsequently promoted the venture.  By the end of December 1988, the general concept of a breeding venture based on King's bloodstock had been formulated.

During January and early February 1989, King contacted Done about the project.  Peats held themselves out as experienced in setting up horse breeding and racing syndicates. At King's suggestion, McDonald spoke to Done.  Done agreed to assist but, as King was his client, he put a limitation on his role, the exact nature of which we will later discuss.  On 20 February 1989, Done sent a fax to McDonald setting out a suggested structure for the venture.  He advised that an independent valuation of the bloodstock would be required.

On 28 February 1989, Bester was introduced to King and Done.  King and Done decided Bester should undertake the valuation.  In a room at Peats' offices, King outlined to Bester what was required.  Bester had never previously undertaken a formal valuation of bloodstock, although he had worked for some years for Robert Sangster and was familiar with overseas bloodstock.  His discussions with King excited his interest in the project.  Almost immediately, he sold to King one of his own mares, "Plaisir d'Amour", for $55,000.  Bester had purchased the mare in 1987 for only US$12,500.  With McDonald's approval, this mare was later acquired for the syndicate from King at a price of $75,000. 

In the discussion on 28 February, King gave Bester a schedule of the mares then under consideration and also copies of some documents that had passed between King, McDonald and Marshall regarding the transaction.  King put those documents forward as evidence of an agreed sale.  Subsequently, he had further conversations with Bester and faxed further documents to him.

By 13 March McDonald and King had settled on the bloodstock to be acquired and their prices.  There were to be fourteen mares, four with foals.  Most of the horses were to be sold into the syndicate by King or his company, Natalma.  The remainder, five mares and one foal, came from McDonald’s own stock.  There were no outside purchases and there was no negotiation over amounts; McDonald acquiesced in the prices King nominated.  It suited McDonald’s purposes that there be a syndicate with 20 shares and the cost of the bloodstock be approximately $1.5 million; and it was in the interests of both men, as vendors, for the prices to be high.  The prices ascribed to the fourteen mares totalled $1,436,000 and for the four foals $130,000 - a total of $1,566,000. 

Bester was informed of the final selection and the agreed prices.  Thereafter, on 15 March 1989,  he placed a value on each horse identical to its agreed price.   Bester forwarded his valuation to Peats, addressed to the First Trinity Park Stud Breeding Venture.   Done thought its form unprofessional so  Peats redrew it.  In its new form, but without any change in content, it was signed by Bester.  Peats forwarded the signed valuation to McDonald.  Bester's account for his valuation fee was addressed to King.

McDonald forwarded a draft POM to Done in early April 1989.  The draft included Bester’s valuation, as a Schedule, and contained the statement that “(t)he acquisition price of the bloodstock is based on (Bester’s) valuation”.  This was the reverse of the true position:  Bester’s valuation had been based on the agreed acquisition prices.  On 6 April Done suggested amendments to the POM.  There is an issue about how much of the draft he read, but it is clear the suggested amendments did not include any correction of the false statement about the acquisition price.  The POM, including Bester's valuation and a description of the bloodstock, was printed.  Copies were given to Marshall and King. 

McDonald had drafted the POM on the basis there would be 20 shares.  Most of the persons who became members of the syndicate were clients of Beattie McDonald, but at one stage it seemed there might be a shortfall.  King successfully approached some persons in Queensland, and paid substantial fees or commissions to attract extra members.  One participant heard of the venture from another source.  To make up the numbers, McDonald took one share and he and Farrow together took a further share.  Because of another  joint holding, there were 21 members, although only 20 shares.

Done and King approached NZI Securities ("NZI") for finance.  After some consideration, causing delay,  NZI decided it did not wish to become involved in the venture. An approach was made to Australian Thoroughbred Finance, a division of Equico Financial Corporation, which advised it would need "a valuation from William Inglis & Sons Ltd to the value of $1,436,000." John
on, the brood mare manager of Inglis, was given the task of providing the valuation.  Bester spoke with him and gave him the documents that had been supplied to Bester by King.  In the middle of June, Hutchinson advised Bester that Inglis could not assist with the valuation.  There was some dispute about the terms of the conversation, but the trial Judge found it was made clear to Bester that Inglis could not value the bloodstock "anywhere near the figure that Mr Bester was seeking".  However, Bester apparently told King and Done that the “people at Inglis” were "too busy" to do the valuation. 

It had always been intended that the transactions would be implemented, and the syndicate come into operation, by 30 June 1989.  Time was running out.  A new financier, MANL, was quickly found but it required an “independent” valuation and apparently did not regard Bester as independent.  Accordingly, after speaking with Done, Bester contacted Alistair Pulford of ABCOS and asked him to make a valuation. Bester told Pulford the precise figure that was required ($1,565,000) and gave him the documents he had previously supplied to Hutchinson, as well as pedigrees on which he had noted prices.

By 27 June 1989, Pulford completed his valuation.  On that day, on his behalf,  his secretary signed an “appraisal”, valuing the horses at the required total figure of $1,565,000.  Some of the component figures were slightly below, and some slightly above, the figures in Bester's valuation, but in general they accorded with them.  The total stated value was just $1,000 less than Bester’s total.  The letter accompanying the appraisal was addressed to First Trinity Park Stud Breeding Venture.  The appraisal itself was expressed to be "on a/c of Mr Brian King".  The letter and appraisal were faxed to King.  A note on the fax shows King brought it to the attention of a MANL officer named Lock.  On 30 June 1989, at King's request, the appraisal was retyped on the letterhead of ABCOS and addressed to Jarpan. 

On 29 June 1989 there was a lengthy meeting at Peats' office attended by McDonald, Done and King.  The individual syndicate members, other than Gibson, had given McDonald powers of attorney.   At the meeting there were executed, on behalf of each relevant syndicate member:  a “Lease Agreement - Livestock” by which MANL leased to the syndicate member an undivided interest as tenant in common in 14 named broodmares for 48 months from 30 June 1989; a “Thoroughbred Owner Management Agreement” between the syndicate member and Jarpan providing for management of the 14 broodmares, four named weanlings and described yearlings by Jarpan; a “Deed of Loan” between MANL as lender and the syndicate member as borrower; and a Mortgage between the syndicate member as mortgagor and MANL as mortgagee over (in substance) the member’s undivided interest, to secure the member’s indebtedness to MANL. King agreed to become temporary secretary of Jarpan and signed the management agreements with the syndicate members on that company’s behalf. 

On the following day, 30 June, settlement took place at MANL's office. Many payments were made between the parties.  It seems the previously agreed total purchase price was reduced by $1,000 to accommodate the difference between the ABCOS and Bester valuations.  McDonald received $350,000 for five mares sold to MANL and $10,000 for a foal sold to the syndicate. King and Natalma received $1,085,000 for mares sold to MANL and $120,000 from the syndicate for three foals.  The horses sold by King and Natalma had been acquired by them for the equivalent of only A$329,572.  Many of the mares were still in the United States.

By the time of the 1990 Inglis Easter sales, bloodstock prices had fallen sharply.  As the viability of the venture depended on the syndicate obtaining high prices for its yearlings, in practical terms the venture had failed, although the syndicate members were not told of this.  MANL took possession of the mares on 1 October 1991.  Those in Australia were eventually sold for a net return of $12,598.40.  Those in the United States remained there.  They were eventually auctioned by the owner of the property on which they were agisted with a view to recovering some of the outstanding agistment fees.  One of those mares, "Prospect Digger", later achieved some success in America and, later still, was sold there for US$55,000; but even this was less than the amount ($95,000) paid for her by MANL.

OUTLINE OF FINDINGS AND CONCLUSIONS OF THE TRIAL JUDGE

The trial Judge made the following findings:

1. The POM misled and deceived the Investors in various respects.

1. The distribution of the POM did not constitute the making of an offer of a "prescribed interest" to the public in contravention of s 169 of the Code; the offer made in it was "essentially a private offer".

1. The fact that the Investors had not paid out MANL did not constitute a failure by them to mitigate their loss or a break in the chain of causation of the losses suffered by them.  Moreover, they were not guilty of negligence which had contributed to or caused their losses.

1. McDonald's conduct in creating and distributing the POM:

(a)was misleading and deceptive conduct in contravention of s 42 of the FT Act which caused the Investors to suffer loss and entitled them to recover damages from him;

(b)involved a breach by him of a duty of care, not only to the clients of Beattie McDonald, but also to all potential investors in the venture; and

(c)involved a breach of fiduciary duty to the members and potential members of the syndicate; but

(d)did not constitute fraud.

1. Farrow was:

(a)liable as a partner for McDonald's negligence, the venture having been established in the course of the conduct of the accounting practice of Beattie McDonald; and

(b)directly liable to the Investors for contravention of s 42 of the FT Act, by reason of his conduct in distributing the misleading and deceptive POM.

1. King, as a seller, had interests in conflict with those of the syndicate members. He was in breach of the fiduciary duties he owed them and was, in consequence, liable to account to the Investors for the benefits received by him as a result of his breach. In addition, he engaged in misleading and deceptive conduct, in contravention of s 42 of the FT Act, by distributing the POM to (at least) three of the Investors. Without those three Investors, it was probable the venture would not have proceeded. Accordingly, King's conduct was a contributing cause of the loss suffered by all the Investors.

1. Done acted as King’s accountant and had duties towards him. He also owed fiduciary duties to the syndicate members because he acted in his professional capacity in advising the principal promoter, McDonald, on the venture and assisting in its establishment. As King’s interests conflicted with those of the syndicate members, Done ought not to have acted for the syndicate members. In doing so, he breached fiduciary duties owed to them. However, his conduct was not in contravention of s 42 of the FT Act and it was not established that he owed to the syndicate members the particular duty of care pleaded against him, namely, a duty to take reasonable care to ensure the representations in the POM were not made, or to ensure their falsity was disclosed. Nor was it shown Done was knowingly concerned in King's breaches of duty or contravention of the FT Act.

1. Bester's valuation was outside the range at which a competent valuer could have arrived and was negligently prepared. It was misleading and deceptive in contravention of s 42 of the FT Act. Although the Investors no longer made a claim against Bester, he was the subject of cross claims and claims for contribution.

1. Pulford of ABCOS did not give an independent valuation as he was requested to do and as the circumstances required. His values were outside the range at which competent valuers would have arrived. He was negligent and ABCOS was vicariously liable for his negligence. ABCOS' valuation was misleading and deceptive in contravention of s 52 of the Trade Practices Act 1974 ("the TP Act").

1. MANL had a copy of the POM but took no part in its preparation or distribution or in the selection of syndicate members.  Although MANL led no oral or affidavit evidence and relied only on documentary evidence,  that evidence showed MANL relied on the ABCOS valuation.  Allegations of contributory negligence against MANL were not made out; nor were allegations that MANL was negligent in its management of the bloodstock and had failed to mitigate its loss; nor the allegation that the terms upon which interest and other moneys were payable to MANL under the agreements constituted the imposition of penalties.

1. For the purposes of contribution, the trial Judge apportioned fault as follows:

Beattie McDonald   30%;

King  20%;
  Bester  20%;
  ABCOS  20%;

Done  10%.

1. Heath was not liable to indemnify Beattie McDonald, by reason of an exclusion (exclusion (c)) in the relevant policy. Other exclusions relied on by Heath did not apply. Davies J did not have to decide whether subs 6(1) of the LR(MP) Act applied, although he was inclined to think it did.

In the judgment delivered on 23 February 1996 relating to contribution, Davies J held Done was entitled to recover equitable contribution in respect of his liability to pay equitable compensation for breach of fiduciary obligation to the Investors.

ORDERS OF THE TRIAL JUDGE

On 18 December 1995, judgment was given on MANL's cross claim against the Investors (including McDonald and Farrow) in various amounts. 

On 2 April 1996, his Honour made complex orders in relation to the other claims.  They can be understood only by reference to four schedules to the Order.  Schedule 1 lists the names of 17 investors or, in one case, two co-investors.  Schedule 2 lists 15 Investors or, in three cases, joint and several Investors.  Schedule 3 lists 17 Investors or, in some cases, joint and several Investors.  Schedule 4 reads as follows:

“Respondent  Amount

Roderick Stewart McDonald and
             Gregory Alfred Farrow  $1,497,766.20

Brian King  $998,510.80

James Bester  $998,510.80
           Peter Done  $499,255.40
           ABCOS  $998,510.80”

Those amounts total $4,992,554.

The orders in the two principal proceedings may be summarised as follows:

MANL

The proceedings were dismissed as against MANL and the Investors were left to pay severally that proportion of MANL's costs set opposite their respective names in Schedule 2.

Heath

The Investors were ordered to pay Heath's costs.

McDonald, Farrow, Done, King and ABCOS

Each of McDonald, Farrow, Done, King and ABCOS was ordered to pay the Investors, by way of damages or equitable compensation, the amounts set opposite the respective Investors’ names in Schedule 1 (totalling $4,992,554), and the Investors' costs of both proceedings, and to indemnify them in relation to the costs payable by the Investors to MANL and Heath.

The cross claims were resolved as follows:

MANL

Save for the judgment dated 18 December 1995 against inter alia McDonald and Farrow, mentioned earlier, MANL's claims were dismissed against ABCOS, McDonald, Farrow, Jarpan, King, Bester and Done.  Certain cross respondents were left to pay severally the proportion of MANL's costs of its cross claim set opposite that cross respondent's name in Schedule 3, including the costs of MANL of its cross claims against ABCOS, Jarpan, King, Bester and Done.

McDonald and Farrow

McDonald's and Farrow's cross claims against MANL and Heath were dismissed. Save for each man’s cross claim for contribution under s 5 of the LR(MP) Act, their cross claims were dismissed as against ABCOS, King, Bester and Done. However, on their cross claims for contribution under s 5, each recovered judgment against each of King, Bester, ABCOS and Done, in the amounts set opposite the respective names of those parties in Schedule 4. Each was left to pay his own costs including his costs of all cross claims.

Done

Done's cross claim against Heath was dismissed. In his cross claims against McDonald, Farrow, King, Bester and ABCOS, for contribution pursuant to s 5 in respect of damages payable by him to the Investors, Done recovered judgment in the amounts set opposite those respondents’ respective names in Schedule 4. He was left to pay his own costs of the proceedings including his costs of all cross claims.

King

Judgment was given for King on his cross claim against McDonald and Farrow, for contribution under s 5 in respect of damages payable by him to the Investors, in the amounts set opposite their respective names in Schedule 4. King was left to pay his own costs of the proceedings including his costs of all cross claims.

ABCOS

ABCOS' cross claim was dismissed as against Heath. Save for its claim for contribution under s 5, ABCOS’ cross claim was dismissed as against McDonald, Farrow, Done, King, Bester and the Investors. On its cross claim against McDonald, Farrow, King, Bester and Done for contribution under s 5 in respect of damages payable by it to the Investors, ABCOS obtained judgment in the amounts set opposite those respondents’ names in Schedule 4. ABCOS was left to pay its own costs of the proceedings including its costs of all cross claims.

Bester

Bester's cross claim was dismissed; he was left to pay his own costs of the proceedings including his costs on all cross claims.

OUTLINE OF THE APPEALS

Appeal by ABCOS - NG 317 of 1996

ABCOS’ amended notice of appeal, filed on 21 June 1996, comprises 53 paragraphs. It attacks the conclusions of the trial Judge in favour of the Investors in negligence and for contravention of s 52 of the TP Act. It contends ABCOS was under no duty of care to the Investors; further, the commissions or benefits received by five Investors (Mesh, Bailey, Wall, Fraser and Jones) from King, and by McDonald from his participation in sales to MANL, broke the chain of causation by reason of which ABCOS might otherwise have been liable to them and/or other investors. In relation to breach of duty, ABCOS contends his Honour erred in finding the letter under cover of which the ABCOS valuation was provided did not amount to a qualification of its valuation.

The amended notice of appeal also asserts his Honour erred in finding that MANL relied on the ABCOS valuation in entering into the transaction.  In this respect, it attacks certain evidentiary rulings of the trial Judge.

The notice of appeal further asserts his Honour erred in concluding the Investors' damages should not be reduced by reason of their contributory negligence, in apportioning ABCOS’ fault at 20%, and in holding that Done was entitled to claim contribution from ABCOS pursuant to s5(1) of the LR(MP) Act.

Finally, ABCOS attacks his Honour's conclusion that exclusion (c) in the policy issued by Heath applied to exclude Heath's obligation to indemnify McDonald and Farrow in respect of the claims made against them. 

Heath filed an amended notice of contention supporting the trial Judge's decision in its favour on the additional grounds that:

(A)exclusion (e) in the policy applied;

(B)there was only one claim under the policy, so the total amount recoverable was subject to an aggregate limit of $1,000,000; and

(C)on the true construction of subs 6(1) of the LR(MP) Act, no charge could arise under the subsection unless the contract of insurance was in force at the time of the events giving rise to the claim; and the events giving rise to the Investors' claim occurred on 30 June 1989, prior to the inception of the policy.

Appeal by Done - NG 319 of 1996

Done’s notice of appeal challenges the conclusion of the trial Judge that he was liable to the Investors for breach of fiduciary obligation, and that exclusion (c) applied.  The notice of appeal also says his Honour erred in holding the Investors’ acquisition of their interests in the venture did not follow an issue or offer to the public made contrary to s 169 of the Code. 

The notice of appeal raises several complaints regarding damages. The first is that the trial Judge erred in failing to hold that the amount of damages payable by Done to the Investors ought to be reduced to reflect the fact that they were entitled to deductions, under subs 51(1) of the Income Tax Assessment Act 1936 ("ITAA"), in the years ended 30 June 1991, 1992, 1993, 1994 and 1995, with respect to rent and interest; alternatively, his Honour erred in failing to reduce the amount to reflect the fact that the damages will not be taxable, whereas amounts received as compensation for the rent and interest would have been taxable as income according to general principles under subs 25(1) of the ITAA or as a receipt by way of indemnity under subs 26(j) of the ITAA. This alternative submission was not pressed at the hearing of the appeals.

Bester filed a cross appeal in Done's appeal proceeding.   This was formally incorrect because it challenges conclusions of the trial Judge that affected others besides Done.  However, the point is inconsequential;  Bester did not appear to press his cross appeal and it will be dismissed.  Heath filed a notice of contention raising grounds (A), (B) and (C) referred to earlier in connection with ABCOS.

Appeal by King - NG 321 of 1996

In his amended notice of appeal filed on 5 June 1996, King complains the trial Judge made 13 errors of law, but his submissions were within a narrower compass, as appears later. 

Appeal by the Investors against MANL - NG 323 of 1996

The Investors filed a notice of appeal contending the trial Judge erred in holding that their acquisition of interests in the First Trinity Park Stud Breeding Venture did not involve an issue or offer to the public in contravention of s 169 of the Code.  They say his Honour ought to have found the loan and lease transactions with MANL came into existence as the result of an unlawful offer to the public of a prescribed interest and those transactions were therefore illegal and unenforceable. 

The notice of appeal further contends his Honour erred in finding there was no element of penalty in the arrangement set out in cll 3.1, 3.2 and 3.5 of the deeds of loan, in the provision for payment of the residual value in the lease agreements, or in the provision for payment of interest at the rate of 26% in cl 21.1.3 of the lease agreements. 

Among other orders, the notice of appeal seeks an order that the management agreement between Jarpan and each Investor,  and the lease agreement, deed of loan and mortgage between MANL and each Investor, are not binding on the Investor and each such contract is invalid and unenforceable.

By an amended notice of cross appeal filed on 26 September 1996, MANL cross appeals against the Investors’ appeal, but only against the possibility that MANL’s judgment against the Investors is varied, set aside or vacated.  In that cross appeal, MANL submits that, if there was a contravention of s 169 of the Code and the deeds of loan, mortgages and lease agreements are not severable or independent, and are therefore unenforceable by MANL, his Honour should have held that MANL is entitled to recover its outlay from the Investors on a restitutionary basis, founded on unjust enrichment, with interest accruing from 30 June 1989 at the contract rate, the market rate (said to be 25%), or the rate prescribed from time to time under the Rules of the Supreme Court of New South Wales.  MANL makes the same submission if it is found anything in the deeds of loan, the lease agreements or the mortgages constituted a penalty.  Finally, the amended notice of cross appeal urges that, if the Investors succeed in their appeal to the effect that the management agreements, the lease agreements, the mortgages and the deeds of loan are not binding on the Investors or are invalid or unenforceable, and if the Investors are not liable to pay in the alternative on a restitutionary basis, MANL is entitled to recover damages from McDonald, Farrow, Done, King and Bester with interest at the market rate since 30 June 1989.  MANL gives particulars of damage.

MANL filed an amended notice of contention in the course of the hearing on 26 September 1996.  This seeks affirmation of the decision of the trial Judge on the ground that, if an issue or offer to the public was involved, the deeds of loan and lease agreements are nonetheless enforceable by MANL.  The reasons given are that MANL was not involved in the illegal conduct; the deeds of loan and lease agreements are severable or independent, and hence enforceable; MANL is entitled to recover on a restitutionary basis on the ground of unjust enrichment, together with interest at the “market” rate (allegedly 25%) or at rates prescribed under the Rules of the Supreme Court of  New South Wales; and the Investors are estopped from denying the deeds of loan and lease agreements are enforceable in accordance with their terms. 

The amended notice of contention also says that if anything in the deeds of loan or the lease agreements gives rise to a penalty, his Honour should have held MANL is entitled to recover interest from 30 June 1989 on all moneys due to it at the rates prescribed under the Rules of the Supreme Court, or alternatively at the market rate (allegedly 25%), and to recover the residual value discounted by the contractual interest rate.

Appeal by the Investors against Heath - NG 324 of 1996

The Investors contend his Honour erred in finding that exclusion (c) applied.  By notice of contention, Heath raises the grounds (A), (B) and (C) referred to earlier.

LIST OF ISSUES

As will be apparent, numerous issues are raised by the various appeals, cross appeals and notices of contention.  Moreover, in relation to most issues, counsel have put a multitude of arguments, some of them scarcely tenable or inconsequential in terms of result.  We have considered each of those arguments but do not propose to discuss them all.  To do so would be to make these Reasons unacceptably long.  We will confine ourselves to the submissions that are both significant and consequential.

Adopting that approach, nine topics arise for determination on the appeals:

1. Done's breach of fiduciary duty

2. King’s appeal

3. ABCOS’ negligence and contravention of s 52 of the Trade Practices Act

4. Section 169 of the Code

5. Contractual penalty issues

6. Measurement of Investors’ damages

7. Contributory negligence of the Investors

8. Apportionment of fault

9. Done’s contribution claim      

10. Insurance issues

We will deal with each of these topics separately and then apply our conclusions to each separate notice of appeal.

DONE’S BREACH OF FIDUCIARY DUTY

The trial Judge’s findings

Many claims were made against Done.  Only one succeeded:  that based on breach of fiduciary duty.  In dealing with that claim, Davies J said:

“The most difficult part of the case is that which concerns the allegations made against Mr Done.

I am satisfied that whatever Mr Done did was done by him in good faith, as he saw it.  Mr Done had an ability to see affairs in terms of black and white.  He informed Mr McDonald that he could not advise him with respect to prices.  Mr Done honestly thought that that was the end of that matter.  He did not see the significance of his acting in the establishment of the venture nor the significance of steps that he later took.  A conflict of interest is an insidious matter.  When it exists, it requires that a great deal of positive thought be given to ensuring that each party is given the advice that that party would otherwise be entitled to absent the conflict.  Otherwise, the conflict will tend to have an effect upon affairs.  Having said to Mr McDonald that he could not advise Mr McDonald with respect to the prices or values of the mares, Mr Done appears to have given the matter of conflict no further attention.

Mr Done said in evidence that he perceived Mr King to be his ‘Number One client’.  He also was aware that the success in establishing the syndicate was very much in Mr King’s interests.  And he was aware of the difference between the prices which Mr King had paid for the bloodstock and the prices at which he was selling the bloodstock.”

His Honour then referred to three cases in which comments were made about the undesirability of a professional person acting for parties whose interests are not identical:  Commonwealth Bank v Smith (1991) 42 FCR 390, Blackwell v Barroile Pty Ltd (1994) 123 ALR 81 and O’Reilly v Law Society of New South Wales (1988) 24 NSWLR 204. He went on:

“If Mr Done had had no information which Mr McDonald would have considered to be material and if he had merely acted in the interests of both Mr King and of the investors in the syndicate, Mr Done would not have breached any duty which he owed to the investors notwithstanding that the interests of Mr King and of the investors were not identical.

However, Mr Done did have knowledge which Mr McDonald would have regarded as material and he did not disclose it.  That knowledge was knowledge of the prices which Mr King had paid for the mares.”

The Judge quoted evidence of McDonald that:

(a)if he had been told in the first half of 1989 that Bester had never done a valuation for an outside party of this scale, he would have been concerned and would have required an independent valuation; and

(b)if he had been told at that time that King was the vendor to the syndicate of many of the horses and was selling them at prices three or four times more than he had paid, this would have been of great concern; indeed the syndicate would not have proceeded “because the mathematics of it wouldn’t have worked if the horses were of considerably less value” and he “certainly would not have allowed the POM to be issued without disclosing the information”.

His Honour said he accepted that evidence.  He went on:

“Mr King did not make merely a reasonable profit on the sale.  Mr King made a very large profit, more than 3 times his costs.  Had Mr McDonald been aware of this, he undoubtedly would have taken other action.

Mr King gave evidence that, in his opinion, the prices paid overseas were irrelevant to Australian prices.  However, in my opinion, the prices paid by Mr King and the profits made by him were not irrelevant, for the quantum of the profits was so great as to cast doubt on the financial viability of the venture.  Moreover, at the time when the discussions were taking place, most of the mares were not in Australia.  The POM itself proposed that $73,000 would be expended in the 1990 year for transport, most of this being for the transport of the mares from the United States to Australia.  In my opinion, the value of the mares where they were agisted when the transaction occurred was a relevant factor.  And some of the mares were acquired from Allegra, which was a New Zealand company.  Prices in New Zealand have an influence on and are influenced by Australian prices.  Australia and New Zealand effectively comprise one market for bloodstock.

Mr Done said in evidence that he would not have regarded the prices paid by Mr King as a relevant matter.  That may have been the case had an independent and reliable valuation been obtained.  But that was not the case.

Mr Done had knowledge of the prices at which Mr King and Natalma had purchased and of the prices at which they were to be sold to the syndicate.  Mr King [sic; scil. “Done”] knew these matters because he was the person through whom all communications were made to Guernsey.  He knew that Mr King and Natalma were obtaining prices 3 times or more greater than they had paid, and this included not only the bloodstock purchased in the United States but also the bloodstock which was being purchased from Allegra of New Zealand.

When Mr Done informed Mr McDonald that he had a conflict and could not advise Mr McDonald with respect to prices or values, that disclosure simply indicated to Mr McDonald that he, Mr Done, was an honourable person on whom he, Mr McDonald, could rely.  Mr McDonald did not realise that Mr Done had information which, if disclosed, would have materially affected Mr McDonald’s course of action.  Not knowing that fact, he thought he could rely upon Mr Done.  Mr McDonald’s consent to Mr Done’s non-disclosure was not an informed consent, for he was unaware of the significance of the information which Mr Done withheld.

The problem then arose that, not only did Mr Done not positively insist that Mr McDonald obtain his own valuation totally independently of Mr King, but Mr Done and Mr King selected and instructed the valuer.  Just a few days after having informed Mr McDonald that he could not advise on prices or values, Mr Done took an active part in the selection of Mr Bester.  Mr Done’s diary notes are usually brief.  On 28 February, however, one-third of the page is taken up with the heading ‘Valuations’ and matters associated with that.  Under the heading, there is a reference to James Bester and to David Corser.  On the top of the page appears the name David Corser underlined and also towards the top of the page is the name James Bester with a star against it.  Mr Done was to see Mr McDonald, Mr Marshall and Mr King at 12 o’clock.

Although Mr Done could not recall it, I think it is likely that, before noon on 28 February 1989, Mr Corser and Mr Bester came to the offices of Peat Marwick, as Mr Bester and Mr King testified they did, and that Mr Corser there introduced Mr Bester to Mr Done and to Mr King.  Mr Corser did not remain long and I think that it is probable that Mr Done did not remain long thereafter save to assure himself that Mr Bester was a satisfactory person to undertake the valuation.  I suspect that the star against Mr Bester’s name towards the top of the diary page may be an indication that Mr Bester was selected for the task.  Whether or not the star has that meaning, Mr Bester was approved and Mr Done left Mr King to instruct Mr Bester as to what had to be done.  Mr King did so in one of the offices in Peat Marwick’s premises.

Later in the day, Mr Done held a conference with Mr McDonald, Mr Marshall and Mr King.  Mr McDonald and Mr Marshall would have been informed as to what had occurred.  As Mr McDonald had confidence in Mr Done and Mr King, he accepted that Mr Bester should do the valuation and he took no further part in the matter.

Mr Done ought not to have allowed that to happen.  As he had a conflict, Mr Done should have played no part whatever in the obtaining of a valuation and should have advised Mr King that he too should play no part in it.  As it was, Mr McDonald was content to allow the matter to proceed because he trusted Mr Done and Mr King and thought the matter was in good hands.”

The Judge referred to evidence illustrating Done’s knowledge of the profits about to be made.  He found that Peats prepared invoices to Jarpan from Natalma and King and provided them to Pulford of ABCOS for the purposes of his valuation.  His Honour also said:

“Mr Done not merely gave advice on the structure of the venture but took an active management role in the setting up of the venture.  The obtaining of the valuation, of finance and of insurance were matters which Mr McDonald left in the hands of Mr King and of Mr Done.”

After referring to, and rejecting, Done’s claims of a more limited involvement, Davies J concluded:

“Mr Done owed fiduciary duties to the investors for he acted in his professional capacity in advising on the venture and in assisting with its establishment.  A charge of $13,500 was made by Peat Marwick for this work.  In my opinion, Mr Done, who was aware of the prices at which Mr King and Natalma Bloodstock had purchased and were purchasing the mares, ought not to have acted for the syndicate.  He could not, without breach of confidence, disclose the information which was confidential to Mr King.  The mere fact that he acted in the matter encouraged Mr McDonald to conclude that there was nothing in the background about the value of the horses which he should investigate.  The fact that Mr Done was acting without suggesting that there was anything that ought to be disclosed comforted Mr McDonald to such an extent that he thought he could safely leave the valuation and the obtaining of finance to Mr King and Mr Done.

Mr McDonald expressly assented to the non-disclosure by Mr Done to him of any information he had with respect to values or prices.  However, Mr McDonald’s assent was not an informed assent:  See Trade Practices Commission v CC (NSW) Pty Ltd (1994) 125 ALR 94 at 105; Commonwealth Bank of Australia v Smith (1991) 42 FCR 390. Mr McDonald was unaware of the large differences which existed between the prices paid by Mr King and the prices sought by him.  Mr McDonald would have anticipated that he was speaking with a person who had nothing to hide.  In his cross-examination Mr Done conceded, or came very close to conceding, that, but for his conversation with Mr McDonald and his relationship with Mr King, he would have felt himself under obligation to disclose the difference between the prices and the values because he saw himself as having some responsibility to the investors through Mr McDonald.  In my opinion, those matters were material, and should have been disclosed if Mr Done was to act as he did.

I am satisfied that Mr Done was in breach of the fiduciary duties which he owed to the investors.

In these circumstances, the applicants claim equitable damages from Mr Done and the other partners of Peat Marwick to compensate them for the loss that they suffered through his breach.  I am satisfied that, if Mr McDonald had gone to an independent adviser, it is probable that he would have been firmly advised to obtain an independent valuation and would have acted on that advice.  That is because the success of the venture depended upon the value of the bloodstock.”

Done’s submissions

At the hearing of the appeal, counsel for Done, Mr D F Jackson QC and Mr T D Castle,  made no challenge to the trial Judge’s findings of fact.  Indeed, they seized upon many of them.  They referred to findings that Done did not know the Bester and ABCOS valuations were flawed, nor that King was so active in the establishment of the venture as to have a fiduciary duty to syndicate members.  Counsel also pointed out that Peats had no direct contact with any of the Investors; Peats did not issue the POM and were not mentioned in it.

The burden of counsel’s argument in respect of Done’s alleged breach of fiduciary duty is that he “owed no fiduciary duty to give advice in respect of the price or value of the syndicate horses, his retainer being expressly limited so as to exclude these matters”.  They say the trial Judge “erred in failing to give effect to the express limitation of Done’s retainer in analysing Done’s supposed fiduciary duties.  In a case such as this the ambit of any fiduciary duty will depend upon the circumstances alleged to give rise to it”.  The cases cited by his Honour, say counsel, are all cases in which a person acted or gave advice despite a conflict of interest and duty; but Done specially limited his retainer by McDonald so as to avoid a conflict arising.  They say Davies J failed properly to consider  what was the ambit or “special terms” of the retainer and this was contrary to the accepted view that an alleged fiduciary relationship should be precisely identified before an analysis is undertaken of the obligations that flow from it.  They cite the judgment of Mason J in Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41. At 96-97 his Honour said:

“The accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence or confidential relations ... viz., trustee and beneficiary, agent and principal, solicitor and client, employee and employer, director and company, and partners.  The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense.  The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position.  The expressions ‘for’, ‘on behalf of’, and  ‘in the interests of’ signify that the fiduciary acts in a ‘representative’ character in the exercise of his responsibility, to adopt an expression used by the Court of Appeal”.

However, as counsel for Done pointed out, Mason J went on to emphasise the primacy of any contractual relationship:

“That contractual and fiduciary relationships may co-exist between the same parties has never been doubted.  Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship.  In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties.  The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them.  The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.”

Counsel referred to the application of these principles in New Zealand Netherlands Society “Orange” Incorporated v Kuys [1973] 1 WLR 1126 and Kelly v Cooper [1993] AC 205. In the latter case the Judicial Committee of the Privy Council upheld the existence, in a contract between a firm of real estate agents and their client, of an implied term that the agents were entitled not to disclose information about sales of other properties negotiated by them, even if that information was material to a decision to be made by the client. In the present case, counsel argue, there was an express agreement that Done was to have nothing to do with values or prices; this limited his retainer and, therefore, the extent of his fiduciary duty. The submission proceeds:

“McDonald knew that he and King represented adverse commercial interests in the transaction for buying and selling the Syndicate horses.  He knew that Done acted for King.  On any objective analysis of the situation, it must have been obvious to McDonald that the horses were being sold by King (or by King’s principals) at a profit - Why else would they be doing it? - and that Done was or might have been privy to information about that profit.  McDonald understood precisely Done’s position and said in his evidence that if he were in Done’s position, he would have done the same thing ... McDonald conceded that he never even asked King about the prices paid by King or his principals for the horses because ‘it was not my affair’.”

Counsel for Done say that, consistently with his retainer, their client gave no advice about the value of the horses; his only involvement in relation to valuation was his participation in the selection of Bester as the valuer.  They say that, in relation to this task, Done was not under a fiduciary duty; “there was no element of vulnerability to Done’s views in relation to the selection of the valuer”.  Anyway, counsel argue, Done had no reason to doubt Bester’s ability to perform that task; the problem with Bester’s valuation was his failure to apply appropriate valuation methods, not his lack of qualifications or experience.

Finally, counsel submit that, if Done owed a fiduciary duty, it was not to the syndicate members; he had no proximity to any of them.  None of them knew of his involvement, or even the possible involvement of a third party accounting firm; there is no evidence that McDonald sought or obtained their consent in relation to his retainer of Done; and Done’s fees were not paid by the syndicate members.

It is possible, we think, to dispose immediately of this last submission.  It is trite law that promoters owe a fiduciary duty to companies they create.  The principle applies equally to other forms of joint enterprise:  see per Gibbs CJ in United Dominions Corporation Limited v Brian Proprietary Limited (1985) 157 CLR 1 at 5-6, Ravinder Rohini Pty Ltd v Krizaic (1991) 30 FCR 300 and the cases collected by Rogers J in Catt v Marac Australia Ltd (1987) 9 NSWLR 639 at 651-653. Although there is often a contract between the person alleged to be a fiduciary and the person to whom the duty is said to be owed, this is not essential. A promoter may be under a duty to a company even before it comes into existence, or to joint venturers whose identity is not yet known. In the present case, it is clear that, in establishing the syndicate, McDonald owed a fiduciary duty to those who would become its members. Done was aware of the nature of the syndicate and was engaged to assist McDonald in establishing it. As set out earlier in these reasons his Honour found that Done not merely gave advice on the structure of the venture but took an active management role in setting it up. Done conceded he “saw McDonald as having some obligations to the potential investors”. Moreover, he agreed he appreciated that McDonald “had a very personal and financial interest in the venture proceeding”. Under these circumstances, it seems to us clear that, subject to any relevant express limitations, Done also came under a fiduciary duty towards future members of the syndicate. This duty extended to all aspects of his participation in the establishment of the syndicate, including the selection of Bester. In relation to all those actions, there was vulnerability on the part of the future syndicate members.

It is true that Peats’ account for Done’s services was sent to Jarpan, not directly to the syndicate members.  However, as Done was aware, Jarpan was the manager of the syndicate.  As Done would have expected, the moneys paid by Jarpan in settlement of the account were paid at the ultimate expense of the syndicate members.  In any event, the destination of the account cannot determine whether or not Done came under a fiduciary duty, at an earlier point of time, to those who ultimately became syndicate members.   Subject to the question of express limitation, we agree with the trial Judge that he did.

The Investors’ submissions

As we understand their position, the Investors do not complain that Done breached any fiduciary duty by introducing Bester to King, as being someone who might suitably be employed to make a valuation.  However, their counsel, Mr R B Macfarlan QC, Mr L Einstein and Mr G Grant, argue the trial Judge was correct in finding that Done’s silence about the selling price constituted a breach of fiduciary duty to the syndicate members.  In that regard they put three propositions:

“(a)The purported exclusion from Done’s initial retainer did not, on its proper construction, extend to relieving Done of the obligation he would otherwise have had to disclose to McDonald the objective facts of which he was aware as to the purchase price of the horses;

(b)The purported exclusion from Done’s initial retainer would in any event have required McDonald’s informed consent to be effective and such consent as McDonald gave was not informed in the relevant sense;

(c)The initial retainer was subsequently broadened so as to supersede the initial purported exclusion.”

In relation to the first two propositions, it is convenient to interpolate a reference to the evidence concerning the making of the retainer agreement between McDonald and Done.  This was done orally, but there seems to be no issue as to the content of the agreement.  In a witness statement adopted at the trial, Done gave this account of the conversation at his initial meeting with McDonald, on 17 February 1989:

“McDonald:‘I have raced and bred a lot of horses over the years.  The breeding of the horses that Brian wants to sell is fantastic.  We want to put together a syndicate.  I’ve never done one before.  Will you help me to put it together.’

I:‘I’d be happy to assist you.  But I act for King so I’ve got a conflict.  I can’t be involved in the transaction between you and him or any discussions as to the value of the horses.  But I can show you how to structure it.’

McDonald:     ‘That’s fine.  I understand.’”

The reference to “Brian” was, of course, a reference to King.  So this evidence suggests that, in this conversation:

(a)Done learned that McDonald, perhaps with others, wished to “put together” a syndicate to purchase horses from King;

(b)Done agreed to help McDonald put the syndicate together, at least to the point of showing him how to structure it; but

(c)Done excluded himself from negotiations as to the substance of the transaction between McDonald and King “or any discussions as to the value of the horses”.

Done gave the following oral evidence:

“It is as simple as this is it not Mr Done, that Mr McDonald told you that it was desired that a syndicate be put together and he asked you for help to put it together and you agreed to assist, subject to one matter that you’ve mentioned in your statement; is that right?---Not openly the way you’ve put it.

Well, let me take it in steps then.  He did say to you that we want to put together a syndicate, and he did ask you, will you help me to put it together, did he not?---He did say words to that effect.

You did say in response I would be happy to be [sic] assist you but, and then you added a qualification?---And then I explained the areas I could help him in.

You explained, so you say, the area the [sic] you could not help him in, did you not?---That’s - that’s in the sense of then going on to;

(a)       to work out projections but

(b)my biggest problem was to start with is that, as you know, that I knew what my client had paid for prices.  I also knew that the two of them, that McDonald and Marshall had, together with King, agreed prices.  That came out right at the start that the prices had all been agreed.  I said fine.  I act for King’s side of things, therefore, I can’t act for you having this conflict and, therefore, I cannot talk anything about prices or projections on horses which, because I am not expert at doing projections anyway in the sense of sales, if you’re happy with that then we can move to the next step which is showing you how this tax - how tax effectively this thing works.

You were conscious at your first meeting with Mr McDonald, were you not, that you had information from having acted for Mr King, that you would have to tell Mr McDonald if you did not receive some agreement from him, that you need not do so?---Well, I couldn’t have acted otherwise in my view.”

Counsel for the Investors say it is apparent from Done’s evidence that, at the least, his retainer involved showing McDonald how to structure the venture; and, as Done himself recognised, in the absence of any agreed limitation, even that retainer would have required him to tell McDonald the prices at which King had purchased the mares.  They referred to a statement of Megarry J in Spector v Ageda [1973] Ch 30 at 48:

“A solicitor must put at his client’s disposal not only his skill but also his knowledge, so far as it is relevant; and if he is unwilling to reveal his knowledge to his client, he should not act for him.  What he cannot do is to act for the client and at the same time withhold from him any relevant knowledge that he has”.

Counsel submit the same rule applies to other types of professional advisers:

“Done was not entitled to withhold from McDonald knowledge of facts plainly relevant to McDonald’s and the Investors’ interests and he could not honestly act for McDonald and the prospective investors when he knew that McDonald was proceeding in ignorance of facts of fundamental significance to the venture.”

The initial limitation of Done’s retainer

In relation to their first proposition, counsel for the Investors draw attention to the finding of the trial Judge that “Mr Done agreed to assist but said to Mr McDonald that, as he acted for Mr King, he could give no advice with respect to the values of or prices of the bloodstock”.  They argue there is a distinction between giving advice about values or prices, and disclosing knowledge of the prices at which King and Natalma had bought the horses.

An immediate problem about the supposed distinction is that it is not clear from what source the trial Judge took the word “advice”, in his account of the conversation of 17 February.  It will be remembered that Done put the matter differently.  His witness statement account was that he could not get involved in “any discussions as to the value of the horses”.  In oral evidence he said  “I cannot talk anything about prices or projections on horses”. The suggested distinction does not arise on either version; the limitation excluded any discussion about the values or prices of the horses, not merely advice about those subjects.  

First Respondents

RODERICK STUART McDONALD
  Second Respondent

GREGORY ALFRED FARROW
  Third Respondent

PETER DONE
  Fourth Respondent

BRIAN KING
  Fifth Respondent

JAMES BESTER
  Sixth Respondent

C E HEATH CASUALTY & GENERAL INSURANCE LIMITED
  Seventh Respondent

IN THE FEDERAL COURT OF AUSTRALIA  )
NEW SOUTH WALES DISTRICT REGISTRY )  NG 319 of 1996
GENERAL DIVISION  )

On appeal from a Judge of the Federal Court of Australia

BETWEEN:PETER DONE

Appellant/Fourth Cross Respondent

AND:GRIFFITH MORGAN JONES, FREDERICK LANCE MESH, EARLE WILFRED BAILEY, THOMAS ALFRED INGLIS BRAYE, JEFFREY WALL, BRIAN DAVID THORNTON, KEVIN IAN PERKINS, PAUL EDWARD NEILSON, ANTHONY MARMADUKE CARMICHAEL, GLEN WILLIAM GREEDY, PAUL STENBERG, GORDON FRASER, JOHN HOPE GIBSON, EDWARD JAMES AIRD (JNR), DONALD LEVICK, NOLA LEVICK, JEFFREY CECIL FOSTER AND MARK THOMAS SEALES

First Respondents/First Cross
  Respondents

MORTGAGE ACCEPTANCE NOMINEES LIMITED & ORS
  Second Respondent

RODERICK STUART McDONALD
  Third Respondent/Second Cross
  Respondent

GREGORY ALFRED FARROW
  Fourth Respondent/Third Cross
  Respondent

JARPAN MANAGEMENT SERVICES PTY LIMITED
  Fifth Respondent

BRIAN KING
  Sixth Respondent/Fifth Cross
  Respondent

JAMES BESTER
  Seventh Respondent/Cross Appellant

AUSTRALIAN BREEDERS CO-OPERATIVE SOCIETY LIMITED
  Eighth Respondent/Sixth Cross
  Respondent

C E HEATH CASUALTY & GENERAL INSURANCE LIMITED
  Ninth Respondent/Seventh Cross
  Respondent

PETER DONE
  Fourth Cross Respondent

IN THE FEDERAL COURT OF AUSTRALIA  )
NEW SOUTH WALES DISTRICT REGISTRY )  NG 321 of 1996
GENERAL DIVISION  )

On appeal from a Judge of the Federal Court of Australia

BETWEEN:BRIAN KING

Appellant

AND:GRIFFITH MORGAN JONES, FREDERICK LANCE MESH, EARLE WILFRED BAILEY, THOMAS ALFRED INGLIS BRAYE, JEFFREY WALL, BRIAN DAVID THORNTON, KEVIN IAN PERKINS, PAUL EDWARD NEILSON, ANTHONY MARMADUKE CARMICHAEL, GLEN WILLIAM GREEDY, PAUL STENBERG, GORDON FRASER, JOHN HOPE GIBSON, EDWARD JAMES AIRD (JNR), DONALD LEVICK, NOLA LEVICK, JEFFREY CECIL FOSTER AND MARK THOMAS SEALES

First Respondents

MORTGAGE ACCEPTANCE NOMINEES LIMITED & ORS
  Second Respondent

RODERICK STUART McDONALD
  Third Respondent

GREGORY ALFRED FARROW
  Fourth Respondent

PETER DONE
  Fifth Respondent

JAMES BESTER
  Sixth Respondent

AUSTRALIAN BREEDERS CO-OPERATIVE SOCIETY LIMITED
  Seventh Respondent

IN THE FEDERAL COURT OF AUSTRALIA  )
NEW SOUTH WALES DISTRICT REGISTRY )  NG 323 of 1996
GENERAL DIVISION  )

On appeal from a Judge of the Federal Court of Australia

BETWEEN:GRIFFITH MORGAN JONES, FREDERICK LANCE MESH, EARLE WILFRED BAILEY, THOMAS ALFRED INGLIS BRAYE, JEFFREY WALL, BRIAN DAVID THORNTON, KEVIN IAN PERKINS, PAUL EDWARD NEILSON, ANTHONY MARMADUKE CARMICHAEL, GLEN WILLIAM GREEDY, PAUL STENBERG, GORDON FRASER, JOHN HOPE GIBSON, EDWARD JAMES AIRD (JNR), DONALD LEVICK, NOLA LEVICK, JEFFREY CECIL FOSTER AND MARK THOMAS SEALES

Appellants/First Cross Respondents

AND:MORTGAGE ACCEPTANCE NOMINEES LIMITED

Respondent/Cross Appellant

RODERICK STUART McDONALD
  Second Cross Respondent

GREGORY ALFRED FARROW
  Third Cross Respondent

PETER DONE
  Fourth Cross Respondent

BRIAN KING
  Fifth Cross Respondent

JAMES BESTER
  Sixth Cross Respondent

AUSTRALIAN BREEDERS CO-OPERATIVE SOCIETY LIMITED
  Seventh Respondent

IN THE FEDERAL COURT OF AUSTRALIA  )
NEW SOUTH WALES DISTRICT REGISTRY )  NG 324 of 1996
GENERAL DIVISION  )

On appeal from a Judge of the Federal Court of Australia

BETWEEN:GRIFFITH MORGAN JONES, FREDERICK LANCE MESH, EARLE WILFRED BAILEY, THOMAS ALFRED INGLIS BRAYE, JEFFREY WALL, BRIAN DAVID THORNTON, KEVIN IAN PERKINS, PAUL EDWARD NEILSON, ANTHONY MARMADUKE CARMICHAEL, GLEN WILLIAM GREEDY, PAUL STENBERG, GORDON FRASER, JOHN HOPE GIBSON, EDWARD JAMES AIRD (JNR), DONALD LEVICK, NOLA LEVICK, JEFFREY CECIL FOSTER AND MARK THOMAS SEALES

Appellants

AND:C E HEATH CASUALTY & GENERAL INSURANCE LIMITED

Respondent

CORAM:Wilcox, Lee, Lindgren JJ

PLACE:Sydney

DATE:12 December 1997

REASONS FOR JUDGMENT

LEE J:  I have had the advantage of reading the reasons prepared by Wilcox and Lindgren JJ and agree with those reasons except for the conclusion that par (e) of the exclusion clause of the Accountants’ Professional Indemnity Insurance policy (“the policy”) issued by C E Heath Casualty and General Insurance Limited (“Heath”) to Beattie McDonald & Co (“Beattie McDonald”) relieved Heath of liability to indemnify Beattie McDonald under that policy.

The relevant clause is as follows:

“This Certificate shall not indemnify the Insured firm against Claims made upon it:

(a)by or on behalf of any person named in this Policy as a co-insured;

(b)by or on behalf of any person operated or controlled by the Insured firm or by any partners, employees, nominees or trustees of the Insured firm and in which the Insured firm or any of its partners or any member of their respective families has a direct or indirect financial interest;

(c)by any person advised or induced by the Insured firm or partners or employees of the Insured firm or of its predecessors in business at the time of the advice or inducement to invest in or lend money to any person being a person referred to in the preceding sub-clause or to any person named as the Insured firm under this Policy;

(d)by any member of the family of any partner of the insured firm;

(e)arising out of the provision by the Insured firm of any advice, inducement, recommendation, endorsement or opinion regarding the investment of any interest, capital or personal endeavour in an investment facility or service in which the Insured firm or its predecessors in business or any of its partners or any member of their family has a direct or indirect control or financial interest;

(f)        ...

For the purpose of these general exclusions, the following words or expressions shall have the following meanings:

‘Family’ shall mean the spouse or any of the children of any partner of the Insured firm.

‘Financial interest’ shall exclude any financial interest of less than 10% of the issued capital in a company or less than 10% of the value of any other enterprise.”

The exclusion clause must be construed in the context of the entire policy to ascertain the extent to which the contract of insurance has limited the insurer’s liability to indemnify the insured firm under the policy.

Pursuant to SECTION 1 - LEGAL LIABILITY the policy states that Beattie McDonald is indemnified against, inter alia, claims made in the period of insurance “by reason of any act error or omission or breach of contract between the Insured firm and its clients in or about the conduct of any professional business conducted by, or on behalf of the Insured firm or its predecessors in business”. The policy goes on to say that “This Section shall cover the liability”, inter alia, of any “service, administrative or trustee company or trust insofar as its activities are carried out solely in connection with the professional business but not including any company which accepts money for investment otherwise than as a trustee.”

Under the heading “Extensions” the policy provides that Beattie McDonald is “protected...for any claim upon which suit may be brought by reason of any alleged dishonesty, misstatement or fraud on the part of the Insured firm or its partners or its employees” unless a judgment adverse to the insured establishes that acts of “active and deliberate fraud or dishonesty” were committed by a partner or partners of the insured with actual fraudulent or dishonest purpose and intent, being conduct material to the cause of action adjudicated upon in the judgment.

Under the same heading it is stated that Beattie McDonald is indemnified against any claim upon which suit may be brought by reason of any alleged guarantee regarding the financial return of any investment unless a judgment adverse to the insured establishes that such a guarantee was provided by the insured.

The exclusion clause appears to be an amalgam of the work of more than one draftsperson in that there is a lack of consistency in expression and coherence between par (e) and the preceding paragraphs of the clause giving rise to substantial uncertainty as to the intended scope of par (e).

In par (a) it is stated that Beattie McDonald is not indemnified against claims made upon it by a person named in the policy as a “co-insured”. The term “co-insured” is not defined and no person is so named in the policy. Where the policy states under the heading LEGAL LIABILITY that partners of the insured firm are “covered” against any claim made during the period of insurance “arising from the conduct of any business by such partners in their professional capacity as accountants before they  joined the Insured firm”, it may be that such a partner could be regarded as separately insured under the policy, the liability referred to not being a liability of the insured firm.

Also, the policy provides that a company for which the insured firm “carries on the business of Secretary, Manager or Registrar” is indemnified by the insurer for losses caused by the loss, destruction or forging of company documents, fraudulent entries in share registers, loss of cash received in the insured firm’s “share department” caused by theft, burglary, larceny or pilferage. Notwithstanding that the loss suffered by the company may be by an act of the insured firm in the conduct of its professional business the company is separately indemnified under the policy and not derivatively under the indemnity of the insured in respect of a claim on the firm.

In par (b) two circumstances must exist before no indemnity will apply under the policy. Unless the insured firm, or persons who owe allegiance to the insured firm as partners, employees, nominees or trustees of the firm operate or control the person making a claim on the firm and the insured firm, or any of its partners, or any members of their respective families, has a direct or indirect financial interest in the claimant the clause will not apply. Such a claimant would be, for example, a “service, administrative or trustee company or trust” carrying out activities solely in connection with the professional business of the insured firm referred to earlier in the policy as an entity the liability of which is “covered” under the policy.

The effect of the paragraph is that the insurer will not indemnify the insured firm against a claim made upon the firm by an “alter ego“ of the firm. Paragraph (d) of the clause is to the same effect and the insured firm will not be indemnified where the claimant is a member of a family of a partner. Another provision to like effect is to be found in the terms of the policy which precede the exclusion clause, where in the case of an insured firm that operates as an incorporated practice, indemnity of the firm against claims is also an indemnity for the benefit of directors and shareholders of the incorporated practice but is not an indemnity of a director for a claim made by shareholders “in their capacity as shareholders”. (Emphasis added) “Shareholders” are defined in the policy as being included in the word “partners” where applicable.

With regard to the second disqualifying circumstance of par (b), namely, the holding of a direct or indirect financial interest in a claimant, the meaning of the paragraph is not clear. Putting to one side the question what would constitute an “indirect financial interest” and the question how the “value” of “any other enterprise” would be ascertained, the qualification is not met unless the insured firm, any of its partners or any member of their respective families has the direct or indirect financial interest. Although the words “any of its partners”, “any member of their respective families”  may include more than one, the use of the verb “has” is of importance in deciding how the paragraph is to be read in the context of the policy. The interest of an insured firm, by operation of the definition of insured firm in the policy, would include the interests of partners held for the use of the partnership business. Aggregation of those interests would follow to ascertain the interest the insured firm has. However, where the clause goes on to refer to the interests that any of the partners or any member of their respective families has, it is likely to be speaking of the separate personal property of a partner or of a member of the family of a partner, the disqualifying element not being satisfied unless the property of the partner or family member is, on its own, the “financial interest”. It is less likely that the alternative meaning to be attributed to that limb of the clause is that it is speaking of aggregated property of partners or family members.

In par (c) of the exclusion clause an indemnity under the policy will not extend to a claim made upon the insured firm by a person who has been advised or induced by the insured firm or by partners or employees of the insured firm who were partners or employees of its predecessors in business at the time of the advice or inducement to invest in, or lend money to, the insured firm or to a person described in par (b) as a person in respect of whose claim against the firm the firm will not be indemnified. The comments made in relation to par (b), therefore, also apply to par (c). Given that the preceding terms of the policy, by providing “cover” for such an activity, contemplate that the professional business conducted by the insured firm may include the operation of a company which accepts money for investment as a trustee, if such an activity is carried out solely “in connection with” the business of the firm, it is unlikely that par (c) excludes indemnity for claims made by a client in respect of advice to invest in, or lend to, such an entity.

In par (e) indemnity is not provided to the firm against a claim by a person who has acted on, inter alia, advice, inducement or opinion regarding investment (not limited to an investment of money) in an “investment facility or service” with which the insured firm has a particular connection.

Having regard to the potential width of operation of the exclusion, any ambiguity in the words used therein must be resolved by applying the construction least advantageous to the insurer where it seeks to rely on that clause to deny liability under the policy.

An exclusion clause inserted by an insurer which has the effect of removing the right of indemnity the insured would otherwise obtain but for the exception, is to be construed strictly against the interests of the insurer and the burden of showing that the facts of a case attract the operation of such a clause rests on the insurer. (See:  Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 at 510; Trickett v Queensland Insurance Co Ltd [1932] NZLR 1727 at 1745; K Sutton, Insurance Law in Australia, (2nd Ed), (Sydney: The Law Book Company Limited, 1995), 553 et seq.)

It was submitted by counsel for Heath that “policy considerations” supported the application of a broad construction of the exclusion clause given that it was a professional indemnity policy intended to cover primarily the members of the firm of Beattie McDonald in relation to claims against them for things done in their professional capacity. I am not sure what the “policy considerations” were to which counsel alluded but it is well settled that if the terms of such an exclusion clause lack clarity, or are ambiguous, only the meaning least advantageous to the insurer is the construction to be applied to the clause and consideration of questions of public policy in this instance may reinforce that approach.

The apparent purpose of par (e) is to permit the insurer to limit its exposure under the policy by denying the insured an indemnity against claims where the competent conduct of the business of the insured firm, or the observance of fiduciary duties, may be compromised by the preferment of personal interests above those of a client, the risk of claims against the firm being increased thereby.

However, it is to be remembered that under the policy the insured firm is indemnified for claims arising out of conduct that would involve a gross breach of professional standards unless it is established that “active and deliberate fraud or dishonesty” has been committed by a partner or partners of the insured firm. The insured firm continues to be indemnified against any claim arising out of “active or deliberate fraud or dishonesty” by an employee of the firm. The “active or deliberate fraud or dishonesty” of a partner may be regarded as an act so far removed from the conduct by the partners of the professional business insured as to be beyond the scope of the policy.

Similarly, where the policy states that indemnity against suit is provided under the policy unless it is established that the insured firm has provided a guarantee regarding the “financial return of any investment”, the act of the insured firm in assuming the liability of a guarantor may be regarded as an act beyond the conduct of the “professional business” of the insured firm and beyond the scope of the policy.

It is a matter of public concern that rules which govern the practise of a professional business such as that engaged in by Beattie McDonald be sufficient to require the practitioners to obtain insurance indemnifying them against liability arising out of the practise of their profession. Such insurance is a professional obligation to be undertaken to safeguard the interests of clients. Beattie McDonald met that obligation in applying for insurance under the Australian Accountants’ Professional Indemnity Insurance Facility.

Having regard to the foregoing, it is to be expected that any limitation of the indemnity provided by the policy will be expressed in words of clear meaning and will apply only to events for which the denial of insurance is appropriate.

It is to be observed that on the face of the paragraph the circumstances to which par (e) will apply are likely to involve a claim against the insured firm by a client where the act, error or omission giving rise to the claim has occurred in the course of the conduct of the professional business and that the claim would be one for which it would be expected that the insured would be indemnified under the policy.

It must have been the intention of the parties that par (e) would apply to events likely to cause a marked increase in the risk the insurer had accepted under the policy being a circumstance sufficient to deny any public interest in a client of the insured firm having recourse to the insured’s indemnity in respect of a claim for loss arising out of the conduct of the professional business of the insured firm.

The plain meaning of the words “has a direct or indirect control or financial interest”, is governed by the use of the verb “has”. The word denotes a temporal connection between the relevant control or interest and the provision of advice, inducement, recommendation, endorsement or opinion regarding investment in an “investment facility or service” and indentifies the relevant subject as singular and not plural. That is to say the “direct or indirect control” must be that which the firm, a partner or a member of the family of a partner has at the relevant time.

Given that a partner or employee providing the advice or inducement on behalf of the firm may be unaware of minor personal interests that partners, shareholders or members of partners’ or shareholders’ families may have in the “investment facility or service” in respect of which the advice or inducement occurred and that the exclusion of indemnity is predicated upon the furthering of personal interests of the firm at the expense of the observance of professional standards in the conduct of the business of the firm, perhaps it is more consistent with the application of a concept of deemed or constructive knowledge that the interest in the “investment facility or service” be a significant interest held by the firm, a partner, a shareholder or a member of a partner’s or shareholder’s family. The several minor interests in an “investment facility or service” held as the personal property of each of one or more partners, shareholders or members of the families of partners or shareholders is not a circumstance which suggests that the conduct of the business of the insured firm may fall so far short of professional standards as to materially increase the risk of the insurer under the policy.

It would be a strange result if honest but misguided advice or opinion by an employee of the insured firm given without knowledge of the personal interests that partners, shareholders or members of families of partners or shareholders may have in an “investment facility or service” would entitle an insurer to decline to indemnify the insured firm whilst “active or deliberate fraud or dishonesty” by the employee, perhaps due to inadequate supervision by the firm in the course of the employee’s employment, would not.

I am of the opinion that the proper construction of par (e) is that the “financial interest” in an “investment facility or service” is the “financial interest” held by a firm, a partner, a shareholder or a member of the family of a partner or shareholder and not an aggregation of the separate personal interests of partners, shareholders and members of their families in such a facility or service.

On the facts of this case neither Beattie McDonald, McDonald or Farrow had a “financial interest” and the claims of the Investors, ABCOS and Done for orders against Heath should have succeeded to that extent.

With the exception of the orders relating to the disposal of the appeals of the Investors, ABCOS and Done against Heath and costs thereon I agree with the orders proposed by their Honours.

I certify that this and the preceding twelve (12) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Lee

Associate:

Dated:   12 December 1997