Bank of South Australia v Ferguson No. SCGRG 94/816 Judgment No. 5174 Number of Pages 49 Real Property Fraud Contracts Justices
[1995] SASC 5174
•18 July 1995
COURT IN THE SUPREME COURT OF SOUTH AUSTRALIA LEGOE AJ
CWDS
Real property - Action for possession under Part XVII Real Property Act by mortgagee Bank - defence to claim for possession fraud committed by plaintiff Bank - within section 69 I Real Property Act - plaintiff Bank not entitled to order for possession. Real Property Act 1886 69 I 195, referred to. Wicklow Enterprises Ltd. v Doysal and the Registrar General (1987)45 247, applied. Abigail v Lapin (1934) AC 491; Trust and Agency Co. v Markwell (1874)4 QSCR
50; Stuart v Kingston (1923) 32 CLR 309; Assets Co. Ltd. v Mere Roihi (1905) AC 176; Moonta Corporation v Rodgers (1980)26 SASR 143, considered.
Fraud, misrepresentation and undue influence other forms of fraud - Claims by defendant under Fair Trading Act, Misrepresentation Act for fraudulent misrepresentation and negligent misstatement and breach of fiduciary duty - no breach of fiduciary duty - no findings on other claims - no loss or damage established by defendant. Fair Trading Act (1987); Misrepresentation Act
(1972), referred to. James v ANZ Bank 64 ALR 347; Yorke and Anor v Ross Lucas Pty. Ltd. and Ors. (1982) 45 ALR 299; Munchies Management v Belperio (1988)84 ALR 700; Gould v Vaggalas (1985) 157 CLR 215; Holmes v Jones (1907) 4 CLR
1692; Howell and Anor v Bennett and Fisher Ltd. and Janz (1966) SASR 188, considered.
Contracts - general contractual principles - construction and interpretation of contracts - Plaintiffs counterclaim for moneys under contract - failure of mortgagor to repay moneys advanced by Bank - parties not ad idem when contract made - reason of fraud on part of plaintiff Bank - plaintiff unable to recover moneys under the contract - counterclaim for moneys dismissed. Armour Coatings (Marketing) v General Credits (Finance) (1977) 17 SASR 259; Outer Suburban Properties v Clarke (1933) SASR 221, applied.
Justices - jurisdiction and procedure generally - procedure - leave granted to defendant to amend defence and counterclaim during trial - original claim under section 69 I Real Property Act for mortgage to be set aside. United Motors Retail v Australian Guarantee Corportation (1991) 58 SASR 156; re Hoffman; ex parte Worrell v Schilling and another (1989) 85 ALR 145 applied. Cronin v State Bank (1994) 176 LSJS 410; GSA Industries v NT Gas Ltd (1990) 24 NSWLR 710; Alati v Kruger (1995) 94 CLR 216; Abram Steamship Co Ltd v Westville Shipping Co (1923) AC 773 considered.
HRNG ADELAIDE, 5-16, 26-27, 30 June and 12 July 1995 #DATE 18:7:1995 #ADD 7:9:1995
Counsel for plaintiff: Mr J Cudmore
Solicitors for plaintiff: Ward and Partners
Counsel for respondent: Mr D Greenwell with Mr R Sallis
Solicitors for respondent: Di Giorgio and Co
ORDER
1. The plaintiff's claim for possession of the land is
dismissed.
2. The plaintiff's claims in its counter-claim to the
defendant's amended counter-claim are dismissed.
3. The defendant's claims on his amended counter-claim are
dismissed.
JUDGE1 LEGOE AJ The plaintiff issued its summons on 30 May 1994 pursuant to Part XVII of the Real Property Act 1886 and Rule 65.01 of the Supreme Court Rules. The plaintiff claimed "for delivery of possession of the whole of the land comprised and described in Crown Lease Perpetual Register Book Volume 1150 Folio 12 being the whole of the land situated at Robe Road Penola by the defendant to the plaintiff." This land is registered in the name of the defendant. The plaintiff also claims costs.
2. The plaintiff's claim for summary disposal of the matter pursuant to Part XVII of the Real Property Act was answered by an affidavit from the defendant. By order of this Court on 4 August 1994 the matter proceeded on pleadings in the light of the affidavit material. It was further ordered that a Statement of Claim be filed and delivered forthwith, a Defence within 28 days and a Reply within 14 days from the Defence, and finally Discovery and Inspection to be completed within the following eight weeks. Accordingly the application in the summary jurisdiction of this Court under s195 of the Real Property Act was ordered to proceed in the ordinary jurisdiction of the Court in which the issues were to be explored after Delivery of the proper Pleadings on each side see Moonta Corporation v Rodgers (1980) 26 SASR 143 in particular at 154 per Zelling J. Before dealing with the issues raised by the Pleadings which went through a number of amendments both before the hearing and during the course of the hearing I briefly review some background facts.
BACKGROUND
3. The plaintiff is a large bank carrying on business for banking throughout this State. At all relevant times the plaintiff bank operated a branch in the township of Penola in the south-east of this State. That branch was staffed by a branch manager, and other staff under the manager. The two bank managers who were the subject of these proceedings were first a Mr McMellon and his relief replacement a Mr Towner who took over the position of manager as relief manager sometime early in August of 1990. The plaintiff bank lent money on mortgage to its customers. I will deal in more detail with the usual bank practices and procedures in relation to such transactions later.
4. The defendant has been a farmer and grazier all his working life. He was born on 10 October 1947 on the Yorke Peninsula South Australia. He completed his education to the level of Year 10. In 1956 his family purchased a grazing property near Lucindale in the south-east. The defendant worked on that property as a grazier in partnership with his father, mother and brother until 1970 when the land was sold. The defendant then leased a property for grazing purposes for about four years until 1974.
5. In 1974 the defendant purchased a grazing property in his own name being the subject property in these proceedings. He borrowed from the Commonwealth Bank the sum of $30 000 for the purpose of purchasing this property. The balance of the purchase price of about $70 000 was paid from savings that he had made. Until about 1990 the defendant carried on the business of grazing cattle and sheep for the live meat trade and the wool market on this property. He had his ups and downs over the years interrupted by such setbacks as the Ash Wednesday Bush Fire when he lost 730 sheep, 10 cattle and 50% of his property was burnt. This disaster struck the defendant at a time when he had almost paid back the full amount of the Commonwealth Bank loan of $30 000. He had to borrow a further $10 000 from the Ministry of Agriculture to try to recover his losses. This was only of limited assistance. Less than two years after the Ash Wednesday fire in about August 1985 the defendant's farm was hit by a snap frost when he lost some seven to eight hundred sheep which was about half his flock. At that time he opened an account with Elders on which he purchased stock while recovering from the losses he had sustained in the fire and the frost. By 1989 his property had substantially recovered from the effects of the fire.
6. In 1988 he began a new venture whereby he sent cattle up to lush pastures in New South Wales. When these cattle had reached marketable condition he sold them at various cattle markets in Australia. In 1989 he was unfortunate in that the cattle venture failed owing to floods and he sustained substantial losses of about $50 000.
7. Up until 1970 the defendant's father was responsible in every respect for the financial affairs and management of the family partnership where he was working up until that time. In 1974 when he purchased the property on Robe Road Penola his father who had instigated the negotiations with the Commonwealth Bank for the purchase of that property attended most of the meetings and advised the defendant after the negotiations that he should take out a loan with the Commonwealth Bank for the purpose of purchasing the property. Furthermore until the time of his father's death several years after the purchase of the property his father continued to be involved in and make final decisions regarding financial affairs for the defendant.
8. The defendant had opened a private savings account which his parents started for him when he was living on the Yorke Peninsula. This private account was at the State Bank and was only used by him for the purposes of banking casual wages which he earned off the family property. His main business banking activities from the 1970s to 1990 remained with the Commonwealth Bank at Naracoorte. The Commonwealth Bank did not have a branch at Penola but the State Bank did. When he moved to the property on Robe Road Penola he transferred his private account in the State Bank to Penola but retained his business Commonwealth account at Naracoorte.
9. When living on his property near Penola the defendant joined in some of the local recreational activities including football and cricket. During the course of these sporting and social activities associated with the sport he met and got to know a Mr Les McMellon who was the manager at the time of the plaintiff's Penola branch. They did not become close friends.
10. Through his contact with other farmers and graziers in the local area the defendant learned of a factory which was going to start up in the Penola district by a company called SAFRIES. This factory was going to purchase potatoes from the field and produce potato chips for the restaurants, hotels and other consumers. The evidence in this case does not disclose the extent of the farmers in the area who were growing potatoes for sale to SAFRIES in or about 1990 when the defendant learnt about the factory. But the evidence is sufficient to enable a finding that there were some. Obviously the factory would not have been put into operation at Penola (there was already a similar factory at Millicent) unless there was a suitable quantity of potato production in the area. I do not understand the defendant to have had any particular plan to grow potatoes on his farm at Robe Road except to take an interest as a land owner of farming land in the area generally. The evidence does not disclose that there were other farmers on the Robe Road who had planted potatoes in the previous season of 1989 to 1990. Potatoes I understand are normally planted sometime in the spring, perhaps late spring and are harvested in the autumn.
THE PLAINTIFF'S STATEMENT OF CLAIM
11. The plaintiff is incorporated under the Corporations Law and carries on business as a banker. The plaintiff is actually the successor in law to the State Bank of South Australia in which name these proceedings were initially instituted, but alteration was made to the Pleadings at the time of filing the Statement of Claim to "Bank of South Australia Limited". The plaintiff bank is for the purpose of these proceedings the body incorporated pursuant to s7 of the State Bank (Corporation) Act of 1994.
12. The following paragraphs are admitted by the defendant in his amended Defence and accordingly I set them out as admitted facts as follows:-
3. The defendant is the registered proprietor of the whole
of the land comprised and described in Crown Lease Perpetual
Register Book Volume 1150 folio 12 situate at Robe Road
Penola in the said State (hereinafter referred to as "the
said land").
4. On the 5th day of September 1990, the defendant executed
a certain Memorandum of Mortgage over the said land in
favour of the plaintiff bearing Registered Number 6997921
(hereinafter referred to as `the said Memorandum of
Mortgage').
5. The said Memorandum of Mortgage was executed in order to
mortgage in favour of the plaintiff the whole of the
defendant's interest and estate in the said land to secure
repayment of advances together with interest thereon
advanced by the plaintiff to the defendant from time to
time.
7. On or about 30th day of March 1994, the plaintiff
served upon the defendant a certain notice of demand and
calling upon the defendant to pay arrears then due pursuant
to the said Memorandum of Mortgage.
8. On or about the 13th day of April 1994, the plaintiff
served upon the defendant a certain Notice of Default and
Intention to Sell which included, inter alia, notice of the
plaintiff's intention to exercise its power of sale over the
said land and all other remedies, powers and authorities
conferred upon the plaintiff by virtue of the said
Memorandum of Mortgage and the Real Property Act 1886 in the
event of the default of compliance therewith by the
defendant.
9. The notices referred to in paragraphs 7 and 8 hereof were
each served upon the defendant by delivering the same to the
mortgaged land.
10. No payment has been made by the defendant to the
plaintiff pursuant to the aforesaid Notices to pay the
amount secured in accordance with the said Memorandum of
Mortgage as disclosed herein.
12 . The defendant is still in possession of the
subject land."
13. I shall deal with the defendant's further pleading in relation to these admitted paragraphs in the defence later. The defendant denies the allegations in paragraph 6 of the Statement of Claim which reads:-
"6. The defendant is in arrears in the payment of interest
and repayment of principal due and owing to the plaintiff
pursuant to the said Memorandum of Mortgage and more
particularly is in arrears by way of principal and interest
for certain amounts as follows:-
A/c No. 70/278961340 $68 865.39
A/c No. 70/23237640 195 927.32
A/c No. 70/278962140 255 135.59."
14. The defendant also denies paragraph 11 of the Statement of Claim which reads:-
"11. The defendant has continued the default to the date
hereof."
15. Paragraph 13 of the Statement of Claim reads as follows:-
13. The plaintiff desires to sell the land to recover the
amount due to it pursuant to the said mortgage.
AND the plaintiff seeks:-
(a) an order that the defendant give up possession of the
said land to the plaintiff so as to thereby enable the
plaintiff to sell the same for the purposes of recovering
the outstanding liabilities owed by the defendant and
secured by the said Memorandum of Mortgage together with all
expenses incurred in connection with the default, demand and
sale.
(b) Costs of action."
THE DEFENDANT'S DEFENCE
16. The first defence was filed on 5 September 1994. In his original defence the defendant pleaded that he did not know and was therefore unable to plead to paragraphs 1 and 2 of the Statement of Claim. In paragraph 2 the defendant admitted paragraphs 3, 4, 5, 7, 8, 9, 10 and 12 of the Statement of Claim but "says he executed the said Memorandum of Mortgage after relying upon representations from the plaintiff that were misleading and deceptive and/or likely to mislead or deceive and in particular with respect to
2.1 the proposed SAFRIES Ltd plant at Penola;
2.2 its experience in the potato industry and special
ability to give detailed and specialised expert advice which
was intended to be relied upon and acted upon;
2.3 ready and available finance to fund ventures in the
potato industry generally and how specifically it could be
obtained for the defendant;
2.4 the valuation and suitability of the defendant's rural
land at Penola;
2.5 the application for finance;
2.5.1 the valuation placed upon the defendant's land at
Penola by the plaintiff;
2.5.2 the cashflow analysis of the business of the defendant
which was altered, changed and substantially made different
by the plaintiff without the defendant's knowledge and
contrary to his specific instructions."
17. In his denial of paragraphs 6 and 11 of the plaintiff's Statement of Claim the defendant repeats entirely the allegations in paragraph 2 set out above and further says that:-
"3.1 Insofar as it is alleged in paragraph 6 of the Defence
that the defendant is in arrears in payment of interest and
principal under the said mortgage the defendant says that he
is not in breach of any mortgage contract or obligation or
term thereof as alleged as the amounts referred to in
paragraph 6 and the Notice of Demand were at the time of
service of the said Notice of Demand within the current
facility which the defendant had with the plaintiff;
3.2 At the time the plaintiff `froze' the defendant's
account and/or accounts the plaintiff:-
3.2.1 did so at a time when the defendant was operating
within the terms of his facility;
3.2.2 capriciously so that;
(a) the defendant was unable to meet his obligations under
the facility and in so doing the plaintiff caused and
contributed to the defendant's alleged default forcing the
defendant into a position where he was unable to service the
facility;
(b) placed the defendant in a position at a time when crop
management was critical and finance was necessary for
fertiliser and nutrients and fungicides to enable the
management program to be completed for maximum yield and the
success of the crop as a result was substantially reduced
and the defendant as a consequence lost his contracts with
SAFRIES Ltd and other chip suppliers and the defendant has
suffered loss and damage. Such loss and damage shall be
quantified and provided to the plaintiff prior to the trial
hereof."
18. In paragraph 4 of the original defence the defendant pleaded:-
"4. Insofar as it is alleged in paragraph 13 of the
Statement of Claim that the plaintiff is desirous of
entering upon the land and into possession of and selling
the land of the defendant he does not know and cannot say
however the defendant denies that the plaintiff is entitled
to or has any legal or statutory right to do so and is not
entitled to the orders sought in paragraphs 13(a) and (b)
thereof."
19. On the 25 November 1994 the defendant filed an amended Defence and counter-claim. The amendment to the Defence was by the addition of the counter-claim which read:-
"5. In or about July of 1990 the defendant had a
conversation with Les McMillan (sic) and/or G R Towner,
servants, agents and employees of the plaintiff. During the
course of the conversation or conversations McMillan and/or
G R Towner either separately or together represented to the
defendant that:-
5.1 he and/or they were acquainted with the company SAFRIES
and knew its management and that it was a company that could
be trusted and relied upon and if the defendant could obtain
a contract for the supply with SAFRIES he would be "set up
for life";
5.2 that the plaintiff had a great deal of experience in the
potato industry and had given extensive and specialised
financial advice to corporations and individuals in that
particular industry.
AND FURTHER
5.2.1 it had special knowledge of the requirements of
farmers in that industry and should the defendant borrow
monies from the plaintiff it would provide ongoing
specialised advice;
5.2.2 no approval for finance would be given unless and
until the plaintiff was satisfied that the defendant had
both the experience and financial ability to undertake
potato growing and in that regard the defendant could rely
upon any approval given as a clear indication that the
defendant would and could operate a financially successful
potato farm;
5.2.3 the plaintiff had specialised experience in valuing
potato country and would place an appropriate and realistic
value on the defendant's property for the purpose of the
application for finance;
5.2.4 that the cashflow provided by the defendant was in
every material way sufficient to support the application for
finance.
PARTICULARS
The conversation took place at the Penola branch of the
plaintiff.
6. The representations referred to in paragraph 5 above were
misleading and deceptive and/or likely to mislead or deceive
in that the plaintiff had:-
6.1 no special knowledge relationship or association with
the company SAFRIES.
6.2 No specialised knowledge about the potato industry from
a financial or any other point of view;
6.3 did not have or provide specialised advice to the
defendant;
6.4 no specialised valuation was obtained and the valuation
provided negligently and/or knowingly or otherwise grossly
overvalued the property of the defendant;
6.5 fraudulently altered and forged the defendant's
signature on the cashflow provided in support of the
application for finance.
7. The application for finance and supported by an
inaccurate valuation and fraudulent cashflow analysis
granted an approval which the defendant relied upon as
indicating his ability to meet and service the loan.
AND FURTHER
relying upon the advice of McMillan that he should enter
into the loan he accepted the offer of finance and entered
into the loan.
8. As a consequence of the representations more particularly
referred to in paragraphs 5 and 6 above the defendant
entered into the loan and was unable to service the loan and
consequently fell into arrears and suffered loss and damage.
9. The defendant repeats the pleading in paragraph 3.2
hereof and says that the defendant has breached its contract
with the plaintiff and is in breach of a fiduciary duty owed
to the plaintiff and as a consequence the defendant has
suffered loss and damage.
10. The defendant seeks an extension of time to extend the
period of the time to initiate proceedings pursuant to the
provisions of s48 of the Limitation of Actions Act. The
defendant says that the facts material to his claims for
relief under the Fair Trading Act and for negligent
misrepresentation and breach of fiduciary duty were not
ascertained by the defendant or his legal advisers until
after the period of Limitation had expired when he became
aware of the false valuation, forged cash flow analysis and
other matters following upon inspection of documents in
October 1994 at Ward and Partners, solicitors following
Discovery of the plaintiff.
11. And the defendant claims damages, interest and costs
for:-
11.1 breach of s58Fair Trading Act;
11.2 breach of s7 of the Misrepresentations Act;
11.3 negligent representations;
11.4 breach of contract;
11.5 breach of fiduciary duty;
11.6 fraud."
THE PLAINTIFF'S REPLY
20. On 22 December 1994 the plaintiff filed its reply and joined issue with the defendant upon the matters pleaded in the Defence except where the same consisted of admissions (paragraph 1 of reply). The plaintiff further pleaded to the allegations in paragraph 2 of the Defence in that it stated:-
"2. If the plaintiff made representations to the defendant
in respect of any of the matters referred to in paragraph 2
of the Defence (which is denied) then the plaintiff says
that such representations:-
2.1 were not misleading or deceptive.
2.2 were not likely to mislead or deceive.
2.3 did not mislead the defendant.
2.4 did not deceive the defendant.
2.5 were not relied upon by the defendant as being material
to the loan entered into by the parties nor the security
provided by the defendant which supported it (together `the
transaction')."
21. In the alternative the plaintiff denied that the defendant was entitled for the purpose of deciding whether or not to enter into the transaction to rely upon any of the alleged misrepresentations referred to in paragraph 2 of the Defence (paragraph 3 of the Reply). By paragraph 4 the plaintiff affirmatively alleged in relation to paragraph 2 of the Defence that at the time when negotiations were being entered into for the transaction that:-
"4.1 Both parties well knew that SAFRIES Ltd was building a
new potato processing plant at Penola.
4.2 Both parties well knew that the plaintiff:-
4.2.1 was experienced in the banking industry.
4.2.2 Was not experienced in the potato industry.
4.2.3 Had no special or other ability to provide any expert
advice about the potato industry or about any other
investment that its customers or proposed customers were
contemplating.
4.2.4 Had no special or existing relationship with the
defendant either as banker and customer or otherwise so as
to entitle the defendant to seek or rely upon expert or
other advice either in respect of the potato growing venture
then being considered by the defendant or at all.
4.3 The plaintiff had funds available for loan to borrowers
generally (including borrowers who wished to invest in the
potato industry) and did in due course make a loan from such
funds to the defendant as requested.
4.4 The plaintiff enquired of the defendant as to the value
of his land at Penola with particular reference to the
existence of a water licence which permitted irrigated
potato growing in terms of the defendant's proposal.
4.5 Certain information was collated by the plaintiff which
formed part of the defendant's application for finance and
which included, inter alia, the following:-
4.5.1 an appraisal of the value of the defendant's land
which the plaintiff prepared and applied for his own
internal purposes.
4.5.2 A cash flow budget of the proposed venture prepared
from information provided by the defendant."
22. By paragraph 5 of its reply the plaintiff repeated the matters alleged in paragraph 3 of the Reply and further stated that the use and application by the plaintiff of any of the material referred to in subparagraph 4.5 was for the purpose of its consideration of the defendant's application for finance. In paragraph 5.1 the plaintiff sets out in its reply the provision of banking accommodation and facilities which were actually made to the defendant as set out in specific proposal letters namely letters of 10 September 1990, 30 October 1991, 28 April 1992, 16 November 1992 and 17 September 1993. These figures allege that the initial facilities consisted of three amounts namely (a) a fixed term/fixed interest sum of $250 000 and (b) commercial bill facility of $125 000 and (c) fluctuating overdraft of $25,000 making a total of $400,000. These facilities were due for expiry and review in September of 1991. The total amounts of the three facilities are varied over the subsequent periods as stated above fluctuating up to a total of $537,000 as at 16 November 1992 and down to an amount of $485,000 as at 17 September 1993. In paragraph 5.2 the plaintiff alleged:-
"5.2 all of the banking accommodation and facilities
provided by the plaintiff to the defendant became repayable
on demand as and from the 30th day of November 1993 and were
thereafter lawfully demanded by the plaintiff in the terms
alleged in paragraphs 6 and 7 of the Statement of Claim."
23. In its defence to the counter-claim the plaintiff denied the allegations in paragraphs 5, 6 and 7 of the counter-claim and repeated the matters pleaded in paragraphs 2, 3 and 4 of the Reply (see paragraph 6 of Defence to counter-claim). Further by paragraph 7 of the Defence to counter-claim the plaintiff denied that the defendant entered into the transaction in reliance upon any representation of the plaintiff as alleged or at all, and further
"the plaintiff admits the allegations in paragraph 8 of the
counter-claim in that:-
1. the defendant entered into the transaction, and
2. the defendant was unable to service the transaction,
and
3. the defendant fell into arrears under the transaction."
24. By paragraph 8 of the defence to counter-claim the plaintiff denied the allegations referred to in paragraph 9 of the counter-claim and denied that it was a fiduciary of the defendant. The plaintiff repeats the matters in paragraph 4.2.4 of the Reply. And finally by paragraph 9 of the Defence to counter-claim the plaintiff denied that the defendant is entitled to the relief claimed in paragraphs 10 and 11 of the counter-claim or to any relief.
THE HEARING
25. On Monday 5 June when the matter first came before me counsel for the defendant made application to amend the amended Defence and counter-claim pursuant to Rule 53 of the Rules of Court by adding a paragraph 11 as follows:-
"11.1 AND the defendant seeks a declaration that the
plaintiff has:-
(i) contravened the provisions of s58 of the Fair Trading
Act, 2987.
(ii) Contravened the provisions of Part V of the Trade
Practices Act, 1974.
(iii) Breached s7 of the Misrepresentation Act, 1972.
(iv) Is liable to the defendant for negligent
misrepresentation.
(v) Is liable to the defendant for breach of contract.
(vi) Has breached its fiduciary duties to the defendant.
(vii) Has engaged in fraud.
11.2 The defendant will seek an order for account pursuant
to Rule 71.03 of the Supreme Court Rules, 1987 as to damages
and interest.
11.3 Costs."
26. Counsel for the plaintiff strenuously opposed the application to further amend at this stage and a number of objections were discussed with counsel. I did not grant leave but indicated that I would leave the notice of the amendments to the pleadings with the copy documents and directed that the case proceed.
27. Counsel for the plaintiff then opened his case. Counsel elected to prove the plaintiff's case by affidavit evidence. The affidavit of one Neil Roger Barratt sworn on 5 June 1995 was tendered with the various exhibits to that affidavit. Mr Barratt was until 30 June 1994 employed by the State Bank of South Australia as assistant manager/realisations. From 1st July 1994 he has been employed by the plaintiff bank of South Australia Ltd as rural manager/credit management. He deposes to the fact that the plaintiff Bank is a body corporate carrying on the business of banking in the State of South Australia and in other parts of the Commonwealth of Australia pursuant to the provisions of the State Bank of South Australia Act, 1983. The Bank of South Australia Ltd is a company formed under the Corporations Law which has since 1 July 1994 carried on the business of banking pursuant to the Banking Act 1959. Pursuant to the provisions of the State Bank (Corporatisation) Act 1994 Bank SA has become entitled to possession of all documents in the possession of State Bank and entitled to all rights of State Bank in relation to the defendants in this action as customers of State Bank. Further Mr Barratt deposes to the fact that:-
"State Bank did, until 30 June 1994, and from 1 July 1994
Bank SA does maintain, possess and control certain banking
records including:
(a) books of account, accounts and accounting records;
(b) books, diaries or other records used in the course of
carrying on of the business of a bank;
(c) cheques, bills of exchange, promissory notes, deposit
slips, orders for payment of money, invoices, receipts and
vouchers;
and
(d) securities and documents of title to securities
(together with the `banking records')."
28. Further Mr Barratt states that the defendant was until 30 June 1994 a customer of State Bank and has been from 1 July 1994 a customer of the plaintiff bank and the plaintiff bank now has in its possession and control banking records relating to the customer.
29. The exhibits which were tendered by the plaintiff in support of its case are attached to the affidavit of Mr Barratt and referred to in paragraph 5 as follows:-
"Exhibit P5 is a copy of Crown Lease Register Book Volume
1150 Folio 12;
Exhibit P6 is a copy of the Memorandum of Mortgage No.
667921;
Exhibit P7 is a copy of standard terms and conditions No.
6603083;
Exhibit P8 is a copy of the bill finance facility deed of
indemnity dated 19 September 1990 executed by Mr K E
Ferguson;
Exhibit P9 is a bundle of copy correspondence from State
Bank to Mr K E Ferguson;
Exhibit P10 is a bundle of bank records relating to a $ 250
000 fully drawn advance;
Exhibit P11 is a bundle of bank records relating to the
acceptance by State Bank of commercial bills;
Exhibit P12 is bank statement, current account no. 070/6278;
Exhibit P13 is a copy of a Notice of Demand dated 29 March
1994;
Exhibit P14 is a copy of Notice of Default dated 12 April
1994;
Exhibit P15 is a true copy of account close out inquiries
dated 19 May 1994;
Exhibit P16 is a copy of a letter Di Giorgio and Co to State
Bank dated 9 May 1994.
30. Finally Mr Barratt deposes to the fact that these documents forming exhibits P5-P16 inclusive are true copies of extracts of banking records of State Bank and Bank SA relating to the within defendant Kennett Edward Ferguson and each of which is
(a) a banking record or in the case of photocopies, computer
printouts or microfilm and microfiche prints, a true copy of
a banking record, which was compiled in the ordinary course
of the business of the banks, and
(b) is a banking record, or in the case of photocopies etc
true copies of a banking record, which is the custody and
control of the banks and
(c) and in respect of which he, Mr Barratt has taken steps
to ensure in the case of the photocopies etc that they are
accurate copies of the original comprising part of the
banking records of the two banks.
31. Counsel for the plaintiff indicated that he proposed to tender these bank records pursuant to the provisions of s47 of the Evidence Act. Clearly the last part of Mr Barratt's affidavit was directed to that particular point.
32. Counsel for the defendant objected to the tendering of certain of the exhibits which were attached to the affidavit of Mr Barratt and considerable argument was addressed to me on the right of counsel for the defendant to cross-examine Mr Barratt on these exhibits. I published reasons for my ruling dismissing the application by defence counsel to cross-examine Mr Barratt which is Judgment No. S5119 published on 6 June 1995. Upon publication of my reasons I then removed the MFI qualifications which I had placed upon exhibits P6, P7, P8, P9, and P10 subject to the submissions of counsel.
33. Counsel for the defendant then opened his case. Counsel explained briefly that the case was unusual because the defendant did not find out about the fraudulent execution of documents or the execution of documents by other officers using his hand until Discovery and Inspection took place in these proceedings. The counter-claim was filed after these discoveries had been made by the defendant. Just before opening his case counsel for the defendant made the rather startling statement which appears on page 75 of the transcript that "if, in fact, as Your Honour says, processes move along and rights and remedies may merge, then of course they can be rectified by damages at the end of the day, although there could be an argument that he may still lose possession of the property." Without further discussion counsel then briefly opened the case for the defendant giving the background and indicating that the defendant would give evidence. Before calling the defendant counsel for the defence was asked whether counsel intended calling any other witnesses to which counsel replied, "I may be calling other witnesses ... we may be calling a bank officer but that would depend on my learned friend's cross examination."
DEFENDANT'S EVIDENCE
34. It was not until the defendant gave evidence that I learnt of particulars behind the allegations of fraud and the details of alterations to banking documents in particular the cashflow document and the statement of position.
35. The defendant gave evidence relating to his background and farming experience and his activities after he took over the farm on Robe Road near Penola. I have set out this background above. The defendant said that he met Mr McMellon in the main street of Penola when they spoke generally about things around the town including a football match and he added at page 95 of the transcript:
"I happened to mention, it was current knowledge at the time
the SAFRIES Factory was being negotiated and up and running
and people in the area - it was very much spoken of, and I
said to Les, `It's good for the area for this factory to be
built and it will employ people and create opportunities for
farmers to get into diversified industry."
36. He says that Mr McMellon stated: "Had I thought about changing my activities?" The defendant answered that he hadn't thought about changing his activities at all. According to Mr Ferguson, Mr McMellon then said at Page 96:
"If ever you do think about diversifying, perhaps going into
growing potatoes and being assisted by the new factory being
in the area ... call in one day and have a chat."
37. That was the extent of the conversation in the main street. The defendant elaborated more on the general knowledge in the area about the SAFRIES Factory and the fact that they were producing chips for fast food markets. The defendant thought that sometime after that conversation with McMellon in the main street he had occasion to speak to a Mr Geoffrey Allen. That too was a casual conversation when he called out to the defendant's property on Robe Road Penola. On that occasion the defendant said he asked Mr Allen about the SAFRIES Factory as he knew that Mr Allen was in some way involved with the factory. Mr Allen said to the defendant that "they were looking for growers and people interested and they were going around the countryside checking soil to see if the soil was good enough to be able to grow potatoes." The defendant did not ask Mr Allen to do anything. There was no arrangement to meet again to discuss the topic of potatoes. Sometime later Mr Allen called back with a man called Charles Sponge both representing SAFRIES and they said that they were driving round the district looking at the country and talking to people about the expansion of SAFRIES. They were interested in getting soil to take soil tests. The defendant told them that he hadn't even thought about growing potatoes. They did not formally invite him to participate in the program of growing potatoes. They apparently took soil tests from the defendant's land as they had the equipment with them. The defendant was later informed that the soil type was alright to grow potatoes on his property. The defendant said that he recalled asking Mr Allen what he would have to do to get a contract if he ever decided to pursue growing potatoes on his land. The defendant was told that SAFRIES offered contracts for the potato crops. Following on that conversation the defendant rang up an irrigation company - Davis and Drilling down at Mt Gambier and enquired about what would have to be done to organise watering of potatoes. The defendant was informed there were two ways basically - one with the centre pivot to irrigate and the other to irrigate with a water winch. Having made a further survey of his property as to the approximate area which could be used for growing potatoes the defendant rang Davis and Drilling a second time to enquire about the price of a centre pivot. The defendant said he had ascertained that he could water approximately 70 acres. He preferred the centre pivot irrigation system to the alternative of using a water winch. As a result of his enquiries he ascertained that a centre pivot would cost approximately $70 000 and a pump and motor and bore would be an additional $25-30 000. He said he made no enquiry about seed fertilisers and other costs in potato production at that stage. The defendant did not feel that he would be able to fund the costs of the centre pivot and bore and pump.
38. Subsequently on an occasion when he was banking some money in the State Bank Mr Les McMellon called him into his office. He said that they started talking about SAFRIES. Mr McMellon emphasised the fact that SAFRIES production seemed to be on line and everything was functioning very well. He asked the defendant if he'd thought any more about growing potatoes. The defendant told Mr McMellon that he'd done a little bit of homework on it but hadn't really gone that deeply into it and was not all that excited about going into a new venture. The defendant also indicated that he did not know what the total cost of going into a potato growing venture might be. He said Mr McMellon asked him what he (Ferguson) thought the costs would be. The defendant told Mr McMellon that he thought that going into production of potatoes under a centre pivot of 70 acres would cost approximately $250 000. He said Mr McMellon made no comment to that but asked the defendant what his commitments were? The defendant told Mr McMellon that he was committed to the Commonwealth Bank with a mortgage and that he thought it would be too costly to enter into production of potatoes. As the defendant left Mr McMellon's office Mr McMellon gave him some papers which the defendant described as "budget cash flows". Mr McMellon asked the defendant to have a look at these papers in case he wanted to pursue the venture. The forms were blank forms entitled "Budget cashflow forms issued by the State Bank of South Australia." The defendant says that when he left Mr McMellon's office with those forms he wasn't intending to grow potatoes as he felt it was too costly but he did in fact go through the exercise of preparing a budget. Based on some figures and information that he had ascertained from the few enquiries that he had made at that stage the defendant prepared a budget to see whether potato growing would be profitable. He said he did the budget for the year 1991 and 1992. He also prepared what he described as "a rough document of what the costing would be to pursue the growing of potatoes". He said he didn't do anything with those documents but sometime during the period of June and July of 1990 he once again went to the bank to bank his casual wages in his private account. Again he saw Mr McMellon. Mr McMellon said to him at 108: "Have you done anything about thinking about growing potatoes?" The defendant said: I have run some figures over those budget forms and I left them there I wasn't doing anything with them." Mr McMellon said: "Why don't you drop them in?" The defendant said he could and subsequently he did leave those documents at the bank. The rough budget has been described in the evidence as the "potato budget" and is Exhibit D1. The other documents in his handwriting are two cashflow forms which he had received earlier from Mr McMellon and he had prepared figures for the purpose of completing those documents. The cashflow documents are Exhibit D2A for the 1991 cashflow budget and D2B for the 1992 cashflow budget. When the documents were produced in Court the defendant pointed out that there were some additional figures which had been placed on the documents that he had prepared and he was unable to say who had placed those additional figures or marking on the documents nor was he able to say when that had been done. Suffice it to say that the documents remained in the custody of the bank from the time that the defendant left the documents with Mr McMellon sometime in July of 1990. The defendant said that when he took the documents in he was in a rush. He handed them to Mr McMellon. He said to Mr McMellon "They are the documents" and left them with him. Mr McMellon did not say anything further to him on that occasion. Nor did the defendant hear from Mr McMellon again.
39. Approximately 10 days to a fortnight later the defendant received a phone call from Mr Graham Towner who said that he was the relief manager at the Bank. Mr Towner asked the defendant to come in and attend a meeting with him at the bank "to discuss the budgets and figures I had left with Les McMellon." The defendant believed that he was in Penola sometime during the following week and he had a further discussion with Mr Towner.
40. The defendant further recalled during his evidence-in-chief that Mr McMellon had asked him about the value of his land and the defendant had told Mr McMellon that it was roughly $420 - $450 an acre. Mr McMellon had stated that the State Bank was very keen to get into the rural industry and to assist people and seemed eager for the defendant to change the account to the Bank at Penola from the Commonwealth at Naracoorte. He also stated that SAFRIES was a very profitable industry producing chips for the fresh food market and that it was a booming industry supplying MacDonalds and Kentucky Fried contracts that they had gained. The defendant said he was full of praise for the company. Mr McMellon had indicated that the company was backed by the State Government because they had money in it and that the State Bank was involved as they were backed by the Government and he understood it to be a very sound and forthgoing business.
41. When the defendant saw Mr Towner at the bank in Penola Mr Towner stated that he was following up the information that Les McMellon had prepared and had received from the defendant. Mr Towner said he wanted to talk further with the defendant about it. The defendant thought this was during the first or second week in August. The defendant had made no independent inquiries since he had had discussions with Mr McMellon up to the time he saw Mr Towner. The defendant described his interview with Mr Towner in this way at 117:-
"Firstly I said to him that I had no experience in growing
potatoes or at this stage pursuing it, and I was just
curious to know what he wanted to talk to me about. That's
the initial start. He introduced himself, that he was there
relieving Les McMellon and then he started talking about his
experience with the bank, that he had been a branch manager
at Mt Gambier and he spoke of the potato industry. He
mentioned that he was familiar with SAFRIES and their
operations at Millicent and he was aware the new factory had
moved to Penola. He felt that the expansion there was very
good for the South-East, for the people to venture into
potatoes and he was just very encouraging entirely about the
whole fact that SAFRIES was a new venture in the South-East.
... He told me he had previously dealt with customers who
were involved in growing potatoes within the lower
South-East, Kalangadoo, Millicent, Penola area ... he stated
that his experience with other growers, that he was familiar
with their financing and cashflow budgets and the
profitability of growing potatoes and he was very confident
that the industry would expand and be very profitable for
the area. He actually stated for anybody to get into potato
production was almost like printing money....... He said he
had been involved ...... and seen a lot of growers budgets
and followed them through. He expressed to me that people
growing both potatoes and running cattle or grazing, the
cash generated from potatoes was very profitable compared to
grazing cattle and sheep."
42. The defendant believed that Mr Towner had the budget and cash flow analysis in front of him when he was speaking to him. In cross-examination the defendant made it clear that Mr Towner was sitting on the other side of the table to where he the defendant was sitting. Mr Towner did have some papers in front of him. The defendant did not see or read nor was he shown the papers that Mr Towner was apparently looking at. Mr Towner asked him a number of questions which the defendant answered. He also said that Mr Towner was very encouraging about the venture of growing potatoes. He also said that as the defendant had put a budget in he (Towner) was hoping that the defendant would pursue it. Further he indicated that it would be much more convenient for the defendant to bank in Penola. The defendant said that he was committed to the Commonwealth Trading Bank where he had a mortgage. The value of the land was again discussed and the defendant indicated that it was about $420 - $450 an acre. The defendant said that Towner replied words to the effect, "if you are going into potatoes your country is worth $800 - $900 an acre." The defendant says he was amazed that the value could increase so quickly. The defendant pointed out that he was only growing 70 acres and that he did not know how the whole of his land would be worth that value. Towner said to him that he had been involved in growing, knew the value of the Kalangadoo country and the value of potato growing country and that the defendant could rest assured that if Towner did a valuation it would be done in a proper manner and everything would be assessed properly. The defendant said he was also amazed that Mr Towner did not mention the risks involved in growing potatoes.
43. After the meeting with Towner the defendant was greatly encouraged by what Towner had said and his views had changed about the potato growing venture. He said that Towner advised him that with the cashflow budget he had put in that it would be workable and that he didn't think the defendant would have any trouble obtaining a loan.
44. The defendant did have some informal discussion with some other farmers in the area about growing potatoes but these were discussions confined to the agricultural/horticultural side and not financial matters. The defendant thought that about 10-14 days after he had had the discussion with Mr Towner his wife received a phone call from Mr Towner and the defendant replied to that call. Mr Towner said that the defendant had been successful in his application for a loan from the bank to pursue the potato venture. Shortly after that the defendant received the letter in Exhibit P9 dated 10 September 1990 which constituted the offer from the Bank to make available the facilities referred to in that letter totalling the $400 000. The evidence does not disclose why this amount was so much greater than the $250 000 which the defendant thought he had applied for the purpose of his potato venture. The defendant went into the bank again and discussed the terms of the facility with Mr Towner. Mr Towner then asked the defendant to sign the letter accepting the facilities which he did. The defendant's recollection is that Mr Towner indicated that he would put the documents in place and there would be a further meeting for the defendant to sign the mortgage. The mortgage is Exhibit P6. The defendant agrees that that is his signature on the mortgage instrument. That is dated 5 September 1990 some five days prior to the facility offer.
45. The defendant said in his evidence that the only cashflow documents that he handed in to the bank were those that he had handed into Mr McMellon. Mr Towner did not ask him for a cashflow budget for the 1990 period. The defendant then identified a document which was document No. 3 coming from the possession of the plaintiff bank. It purports to be a value of the defendant's rural property which is identified by the section numbers and is stated to be 424 hectares in area. The defendant's property is 424 hectares. That document which became Exhibit D5 states, "Valuation: land (fenced and watered) 1,049 acres at $900 per acre $944 100." The document is dated 31 August 1990. The defendant had never seen this document until he had Discovery and Inspection of documents some time in October 1994 after this action had commenced. The defendant was unaware of the existence of this document (Exhibit D5) at the time that he signed the facility agreement and at the time that he signed the mortgage in early September of 1990.
46. The defendant was asked to look at a further document coming from the possession of the plaintiff bank namely Document No. 5 which is a valuation of rural property and is dated 10 July 1992. It is a valuation by a Mr Bob Ellis licensed valuer. The defendant gave evidence that Mr Ellis had visited his property at about that time together with a Mr Fitzsimmons who was the manager of the Penola branch of the plaintiff bank at that time. Again the defendant did not see this document until Discovery. The valuation states that it is a valuation of the property owned by the defendant. It states: "876.75 hectares situated 24 kilometres west of Penola." The defendant pointed out that his property is 424 hectares approximately half of the stated area in this document. The fair market value of the property is stated on page 3 to be $1,020,000 and the estimated realisable value $950 000. There are further pencilled notations on page 3 where it purports to be phone advice from Bob Ellis on 6 August 1993 where it states "FMV (short for fair market value) $560,000 and underneath that ERV (estimated realisable value) $525 000. That document become Exhibit D6.
47. A further valuation of the defendant's property again prepared by Mr Ellis for the attention of a Mr D Warhurst on the plaintiff bank's note paper front sheet is dated 4 August 1993. In this document on page 2 Mr Ellis apparently put the fair market value at $560 000 and the estimated realisable value at $525 000 which is the same as the pencilled notation on page 3 of Exhibit D6. Again the defendant did not see this document until the inspection of documents in October of 1994.
48. The defendant sought production of a further valuation which was apparently prepared at the request of the plaintiff during the course of negotiations at the time of the pre-trial conference. I ruled that this report was privileged and distinguished certain authorities in my published reasons in Judgment No. S5120 dated 8 June 1995.
49. The defendant further went through a number of documents which were tendered relating to the various cashflow forms and statements of position during the currency of the facilities being exhibits in D8 to D19.
50. At the end of the Defendant's examination-in-chief I pointed out to counsel that no evidence had been led on the question of the claim for damages. Counsel for the defendant indicated that the defendant had an application before the Court seeking declaratory orders and that the matter could be "adjourned off" (as he put it) for an account to be taken or an assessment to be taken at a later time. Counsel for the plaintiff indicated that his instructions were to strenuously oppose the application to amend seeking declaratory orders and after some further discussion I directed that the cross-examination of the defendant commence.
51. In cross-examination of the defendant counsel for the plaintiff put a number of separate versions of the facts as recounted by the defendant in his evidence-in-chief. Most of these are related to the conversations that the defendant had had with Mr McMellon. In particular it was suggested that the defendant had given a number of facts and details to Mr McMellon which formed the basis of the cash flow documents which were ultimately prepared by officers of the bank and the statement of position documents. In particular the details which ultimately emerged during the evidence of Mr Towner in the form of Exhibit P27B which is a document which at all times has been in the possession of the bank and is dated 24 July 1990. That document was prepared before Mr Towner went to the Penola branch. Clearly it's a document prepared by Mr McMellon. The defendant generally speaking denied the specific allegations of fact that were put to him in this regard.
52. One of the topics that was put to the defendant related to his understanding of the activities and projects of the new factory SAFRIES in the Penola district. Mr Ferguson said that he gained his understanding of SAFRIES from general knowledge in the district and from the conversations with the SAFRIES field officers, Mr Geoff Allen and Mr Charles Sponge. In this regard it was suggested to the defendant that he had decided to go in for the venture of potato-growing even before he had the relevant discussions with Mr McMellon in the bank. The defendant denied these suggestions. On the contrary the defendant said that it wasn't really until Mr Towner came to the bank and had the discussion with him that he was persuaded to go in for potato-growing. Counsel for the plaintiff suggested to the defendant that it was he (the defendant) who raised the topic with Mr McMellon about his interest in becoming a grower of potatoes. The defendant said "No, that's not right." The defendant said he was quite certain about this. When it was suggested to him that after the first discussion with Mr McMellon he subsequently made a commitment to growing potatoes, again the defendant said no, that's not right. Further it was suggested that he had contacted the bank and made an appointment with Mr McMellon about discussing State Bank assisting him with the financing of growing potatoes. Again he said, "no, that's not right." It was further suggested to him that he had discussed potato growing with Mr Allen and again he denied that. Further certain passages of an affidavit that the defendant had sworn early in these proceedings was put to the defendant suggesting that early in 1990 he had become aware that SAFRIES was to build a large potato processing plant and that as a result of inquiries he was considering planting a small section of his property down to potatoes. The defendant said he did not recall that. Further the defendant said that all these discussions and enquiries happened between July and August. When it was put to him that he was mistaken in his recollection about that, he said, "no."
53. A number of questions were then put to him about the purchase of the pivot irrigation equipment from Upton Engineering and the purchase of seed and his contact with Mr Geoff Allen. The defendant was unsure as to whether he may have made contact with Upton Engineering before he had an agreement with the State Bank. When questioned further about his document Exhibit D1, the so-called "Potato budget" he said that he had anticipated that with the money that could be made out of the potato crop he estimated that he could cover his costs in roughly three years.
54. When it was put to him that he had an agreement with Mr Geoff Allen to share the cost of the plant prior to preparing the potato budget D1, the defendant said, "I just said at this stage I hadn't even anticipated going into potatoes." He denied that he had any agreement at that stage to share the cost of the plant with Mr Allen. The reference to "half share" in Exhibit D1 was explained on the basis that in a venture of that nature he would not be able to afford the full cost of the machinery and it would be necessary to share with some other grower.
55. Counsel for the plaintiff put the following question and received the following answers from the defendant at 272:-
"Q. I would like to suggest to you that sometime in about
July 1990 you had a meeting with Mr McMellon to discuss an
application to the State Bank to assist you in financing a
potato venture for planting in the year 1990 for the purpose
of fulfilling a contract with SAFRIES for delivery in
March/April 1991?
A. No, that is not right."
56. He was also asked a number of questions about his conversation with Mr McMellon suggesting that he had given Mr McMellon a number of details about how he had restructured his borrowings after the fire through the Commonwealth Trading Bank at Naracoorte. The defendant denied that he had told Mr McMellon anything about that. It was also suggested that he had told Mr McMellon that he found it increasingly difficult to make the trip to Naracoorte to arrange banking while running his farm. The defendant said he believed that point was mentioned when he spoke to Mr McMellon in the street in a general conversation. The defendant was definite that he had never told Mr McMellon that he had been assured by Mr Geoff Allen that he would have no problem getting a contract when potato production had been established. There were a number of other matters put to the defendant relating to what he told Mr McMellon about his farming activities and what he intended to do so far as potato growing and continuation of his grazing activities were concerned and generally speaking the defendant said that that was not right and denied the suggestions. When it was suggested to him that he had told Mr McMellon that he would rely heavily on the advice of Mr Geoff Allen, the defendant said, "No, that's not right. Mr Geoff Allen did not know anything about potatoes as he had never grown a crop."
57. The following questions were put to the defendant and answers received:-
"Q. What I want to suggest to you is that all that
information on D3, was provided by you to Mr Les McMellon in
a meeting you had with Mr Les McMellon at the bank.
A. No, it wasn't. I don't know when these figures were put
on here.
Q. I am suggesting to you that you provided that information
to Mr McMellon at a meeting at the bank in July 1990.
A. No.
Q. You deny that, do you?
A. These figures could have been put there later on. As I
stated on oath, that is not my signature so I don't know
when those figures were put."
58. He definitely disputed that he gave those figures to Mr McMellon at a meeting with him.
59. In relation to the later meeting with Mr Towner at the Bank it was further suggested that the document Exhibit D3 was on the table and that Mr Towner had discussed it with the defendant. The specific question that was put to the defendant in cross-examination in relation to exhibit D3 at 295 was:-
"Q. With the information which appears on it, already on it?
A. Mr Towner had documents available. I don't know what
they were. I can't specify what document he had in front of
me at the time. He obviously had papers there..... I
believe yes, he was writing, taking some notes but I can't
specifically say what he was writing on."
60. When it was suggested to him that Mr Towner had the document D3 in front of him and was going through that already completed document the defendant said, "No, not to my knowledge. I can't say yes or no." The defendant said that Towner had papers there but that he couldn't specifically recall discussing in detail any plant and equipment.
61. It was also suggested that an officer of the Commonwealth Trading Bank in Naracoorte, a Mr Michael Gill had spoken to the defendant about going into partnership for the purpose of growing potatoes. Although the defendant said he hadn't really gone into partnership with anyone before September 1990 he said that it was not correct to say that he had said anything like that to Mr Gill. He'd grown the potatoes when he took the loan out. He grew the potatoes on his own and did not go into partnership with anybody.
62. It was further suggested to the defendant that at the meeting with Mr Towner he had before him "a loan application together with your draft cashflow budget and a typewritten cashflow budget?"
"A. I don't recall that, no."
63. Mr Towner later agreed that he prepared the typewritten cashflow document subsequently after his meeting with Mr Ferguson. The following cross-examination is important on this topic:-
"Q. The documents being Exhibit 2A, which is the cashflow
budget in biro for year ended with, 1991; D2B, which is the
cashflow budget in pencil, 1992; and D3 which is the
statement of position. I would like to suggest to you that
those documents were before both of you and Mr Towner at the
meeting you had with Mr Towner?
A. I don't recall those documents in front of me or Mr
Towner. He had papers in front of him.
HIS HONOUR:
Q. But you don't know what they were?
A. I don't know what they were.
Q. You didn't see them and he didn't show them to you?
A. He didn't show them to me.
Q. He didn't sit down alongside and say `Look, Ken, I've got
these here. How about those figures?'
A. No.
Q. That's not how the meeting took place?
A. No.
Q. Were you sitting on the other side of the table?
A. I was sitting on the other side of the table.
Q. And he didn't come round with the documents and hand them
over to you?
A. No.
XXN.
Q. What I would like to suggest is that Mr Towner also had a
typewritten cashflow budget before on the table that he was
discussing with you.
A. No.
Q. But I'm suggesting he had it before him and he was
discussing it with you?
A. No."
64. Further the defendant denied that Mr Towner ever said words to the effect that he was looking at a cashflow document. The defendant consistently continued to deny that these documents were in front of him or that he ever agreed to the contents of the documents suggested to him by counsel for the plaintiff. He reiterated once again that he never saw these documents which the bank had prepared until Inspection of documents took place in October of 1994.
65. When asked some further questions on his earlier affidavit it was suggested that in paragraph 14 of that affidavit the defendant had stated that he as suggested had prepared required figures and cashflows for the plaintiff and that those were Exhibit D2A and D2B. The defendant answered:-
"A. This evidence I gave here, at the time I swore the oath,
that's what I was led to believe, and it wasn't until I
instructed my solicitor to get discovery of the file, seek
discovery of the file, that issues like that were clarified.
They became clear in my mind.
...
Q. Are the cashflows and required figures you are referring
to there, the documents D2A and D2B?
A. Yes.
Q. Might you also be referring to the potato budget which is
D1, that's the handwritten potato budget.
A. Yes."
66. Later a statement from his affidavit to this effect, "having said this to me Mr Towner then turned his attention to the draft cashflows I had provided to the bank and reworked them" were put to the defendant. The defendant once again denied that there was any discussion about the cashflows or that Mr Towner had turned his attention to the draft cashflows in his presence. When pressed further as to whether the truth was what he said in his affidavit or what he is saying on oath in the witness box the defendant answered:
"A. I'm not saying the story has changed. I'm saying the
picture is a lot clearer. ... I'm saying it has changed,
yes. I've found out a lot of information from those bank
files."
67. When asked whether Mr Towner had transferred a figure of $231,000 from the 1992 cashflow figures into the 1991 year the defendant said that that definitely did not happen during the discussion that he had with Mr Towner.
68. Another topic that was raised by counsel for the plaintiff related to the so-called water rights. When the defendant had the conversation with Mr Towner about the success of his application for finance counsel suggested that Mr Towner told the defendant that the bank was looking very favourably at his proposal "but that it was concerned it didn't have enough security." The defendant did not recall that. When asked whether that might have been said the defendant said "no." It was then suggested that the defendant's property would be worth more because he had water rights on his property and it would be more if he could apply it to planting down potatoes to which the defendant answered "No, that's not right. There is no water rights on my property..... When I say there is no water rights, there is no restriction on water rights. You can put bores down. There's several areas in the south-east where there is restrictions. ..... I never said that to Mr Towner." He did agree it was necessary to get a licence to sink a bore. When it was suggested to the defendant that his property would be worth more because he's got water rights the defendant said, "no that it is not true."
69. These were the main topics that were put in cross-examination. I have referred to some parts in a good deal of detail because later evidence from Mr Geoff Allen, and from the plaintiff's witnesses called in support of the defence to counterclaim, demonstrated the importance of the defendant's evidence as to his credit and the relevant issues generally.
THE DEFENDANT'S OTHER WITNESS
70. I indicated that I would give leave to the defendant to further amend his defence by setting up a defence and seeking relief pursuant to section 69 of the Real Property Act, and other particulars. The defendant called one other witness, Mr Geoff Allen.
71. Mr Allen has known the defendant for about 20 years. Mr Allen is a farmer and grazier. He met the defendant first when farming at Wattle Range near Lucindale in the South East. He later took up land near the Victorian border, east of Naracoorte. When the floor wool price went, he looked for other activities. He applied for a job with SAFRIES, and commenced work there as a field officer sometime in early 1990. SAFRIES required particular types of potatoes of a certain standard of quality. These potatoes required the right soil with a sufficient supply of water for the area of land sown to potatoes. SAFRIES also required a minimum quantity of potatoes each day. Mr Allen was employed to travel around the South East, particularly the area around Penola, Naracoorte and into Victoria to ascertain farmers who were prepared to sow these types of potatoes, and whose soil and water supply was suitable for that purpose.
72. Mr Allen thought that one of the first growers that he approached was Mr Ferguson. That was perhaps February or March of 1990. Mr Ferguson said he would think about it. Later Mr Allen took soil tests on Mr Ferguson's land. They had discussions. Mr Allen could not remember when Mr Fergson actually agreed to sign up a contract for the supply of potatoes to SAFRIES.
73. SAFRIES required the growers to grow the kennebec seed potatoes. These were supplied by Barker Monaghan of Colac in Victoria. Mr Allen had to order these well before the planting season which, in the South East, commenced in about October. The suppliers required him to order the seed in the particular names of growers who may be going to grow and supply potatoes. He did not tell those persons, like Mr Ferguson, who had not, at the time of the order, actually signed a contract with SAFRIES, that he had ordered seed potatoes in their name. He confirmed that Mr Ferguson did not know that seed potatoes had been ordered in his name until Mr Ferguson had to pay for the seed potatoes later in the year.
74. Mr Allen had not grown potatoes until the 1990/91 season. He planted about 80 acres on his land in late 1990. He needed irrigation to water his potatoes. He made enquiries. He contacted Upton Engineering and ascertained that it would be cheaper to order and transport two pivot irrigators from USA rather than one. He ordered one for himself and one for Mr Ferguson. The deposit had to be paid to Upton about the time that the order was confirmed. To grow potatoes it was necessary to obtain a digger. This would not be needed until the harvest in 1991. Mr Allen and Mr Ferguson agreed some time later in 1990 to share the cost of this digger 50/50. They used the digger for about three seasons and then sold it. Neither Mr Allen nor Mr Ferguson have grown potatoes since. Mr Allen has not been employed by SAFRIES now for several years.
75. Mr Allen was extensively cross-examined on a number of topics. In particular, his credit was attacked about his water rights on his land, which, at the time (1990), was apparently subject to water restrictions. Mr Allen maintained that he had the necessary permission to draw water. He was also cross-examined about the details relating to the order for potato seed for Mr Ferguson, the order of the pivot irrigator, also for Mr Ferguson, and the so called "partnership agreement" with Mr Ferguson to grow potatoes. On the last topic, both Mr Ferguson and Mr Allen said that the agreement was limited to sharing the cost of plant, being the digger.
THE FURTHER AMENDMENTS TO THE PLEADINGS
76. Counsel for the defendant had applied during the course of the defendant's cross-examination to amend the counter-claim by alleging in paragraph 6.5 that the plaintiff had fraudulently and/or negligently prepared and forged the defendant's signature on a statement of position as well as altering cash flow projections and/or produce different cash flow projections and/or budgets to those supplied by the defendant. Previously, the alleged forged signature as on the cash flow projections rather than a statement of position document. I did not rule on that application at the time.
77. At the conclusion of the defendant's evidence, I raised with counsel the problems that I felt arose from the documents that had been produced, and the answers which the defendant had given in cross-examination about the signature which he said was not his on the statement of position document (exhibit D3), as well as the alterations which appeared on some of the other documents, including the cash flow documents and the different valuations of the land to the value stated by the defendant as appeared in exhibits D5 and D6.
78. The application to further amend adding different forms of relief, particularly relief pursuant to section 69 of the Real Property Act, was strenuously opposed by counsel for the plaintiff on two main grounds:-
(a) That the principles of case flow management enshrined in
the rules were virtually mandatory and would prevent me from
exercising my discretion to allow any amendment such as the
amendments proposed by the defendant and the additional
particulars which were added to the draft amendment document
submitted to the Court and counsel for the plaintiff. It
was submitted that the prayers for relief constituted a
totally new case for the plaintiff to meet. I was referred
to United Motors Retail Ltd. v Australian Guarantee
Corporation Ltd. (1991) 58 SASR 156, and Cronin v State Bank
(1994) 176 LSJS 410 and GSA Industries Pty. Ltd. v NT Gas
Ltd. (1990) 24 NSWLR 710 particularly the judgment of
Samuels JA at page 715.
(b) That the plea pursuant to section 69 of the Real
Property Act was an attempt to impeach the plaintiff's
statutory charge obtained upon registration of the mortgage
dated 5th September 1990, and that the defendant elected to
affirm the contract when he originally pleaded his defence
and later his counterclaim and, consequently, it was too
late to now add the plea under section 69. See Alati v
Kruger (1955) 94 CLR 216.
79. After a lengthy argument, which has been recorded in the transcript, I indicated that I would grant leave to the defendant to amend his defence and counter-claim. I did so basically because:-
1. The documents which were discovered by the defendants
when inspection of documents took place had always been in
the possession of the plaintiff Bank, and were not produced
in evidence until called for by the defendant's counsel
during the defendant's evidence in chief.
2. I was of the opinion that the evidence given by the
defendant and the documents produced were very significant
and relevant to any relief which the Court may have to
consider in this case.
3. Further, I was of the opinion that the justice of the
case required the issues to be clarified by further
amendment to the pleadings so that proper consideration
could be given to the allegations relating to the alleged
forged signature on the statement of position document, the
alterations to the cash flow documents, and the increased
valuation which the defendant said was done without his
knowledge. As King CJ said in United Motors v Australian
Guarantee supra at page 162 "It will always be necessary for
the Court, however, to take all factors into account. The
necessity for the amendment or postponement may arise from
causes which involve no fault on the part of the applicant
or its legal representatives. In such cases the need to do
justice to the party will ordinarily take precedent over
policy considerations. The necessity for a late amendment
or a postponement of the trial may result from circumstances
which are genuinely, to repeat the language of Rule 89(2)
'exceptional and unforseen.'". Further, reference was made
to the remarks of Bollen J at page 163 in the same case. In
the joint judgment of Dixon CJ, Webb, Kitte and Taylor JJ in
Alati v Kruger supra at page 224, their Honours said "the
function of a Court in which proceedings for rescission are
taken is to adjudicate upon the validity of a purported
disaffirmance as an act avoiding the transaction ab initio,
and, if it is valid, to give effect to it and make
appropriate consequential orders: see Abram Steamship Co.
Ltd. v Westville Shipping Co. Ltd. (1923) AC 773.
4. That the defendant had not known of the forged signature,
the alterations to the cash flow and the over valuation
placed on his land (exhibit D5) until about October of 1994,
after the notices of default had been given and the facility
advances had been terminated by the plaintiff Bank and after
the plaintiff Bank had commenced this action and some
pleadings had been filed. In this regard I obtained
guidance from the judgment of Pincus J in re Hoffman; ex
parte Worrell v Schilling and Anor. (1989) 85 ALR 145, in
particular at pages 149-152 where His Honour made reference
to the dictum of Reed J in Drozd v Vaskas (1960) SASR 88 at
95-96 where His Honour relied upon a passage in the judgment
of the House of Lords in Abram Steamship Co. supra "election
to affirm must, if if be gathered from action, be gathered
from unequivocal acts." As Reed J noted, there must be
complete and exact knowledge of the facts before a party can
be said to have elected to have affirmed. Pincus J also
referred to Sargent v ASL Developments Ltd. (1974) 131 CLR
634 at 642 in the judgment of Steven J and further in the
judgment of Mason J (as he then was) at 658. Pincus J
concluded at page 151 as follows: "Although it is true that
the authorities are at variance, the better view appears to
be that (as was the case in the opinion of Jordan CJ, in
1936) the weight of authority favours the existence of the
general rule that, where knowledge is necessary to make an
election effective, it is knowledge of the facts giving rise
to the right to elect, not knowledge of the right itself,
which must be proved. For a number of reasons, I prefer to
apply that principle even in a fraud case; it accords with
the general rule as to the relevance of knowledge of the
law, it removes the necessity of an awkward examination, in
many cases, of what legal advice has been received, it has
the virtue of simplicity alluded to in the passage quoted
from Sargent's case at page 658 and, lastly, it does not
altogether deprive the defrauded party of his remedy as
damages remain available."
80. For these reasons, and after careful consideration, of the submissions put to me by counsel for the plaintiff, I made orders after further argument at the conclusion of Mr Geoff Allen's evidence, that the parties have leave to further amend the pleadings within the short periods that I specified and adjourned the hearing to the week following the next week during which I had full commitments in Court in other matters. Consequently, there was no delay in the actual hearing occasioned by the leave to amend. The parties had to make their amendments to the pleadings during the week that I was engaged in other commitments.
THE FURTHER AMENDED PLEADINGS
81. The principal amendments to the defence were to paragraph 4 by adding to the defendant's denial an allegation that the plaintiff is not entitled to the relief he claimed by reason of the provisions of section 69 I of the Real Property Act to the orders sought in paragraphs 13(a) and (b) of the plaintiff's claim as the mortgage registered number 6997921 is void. In his particulars under his denial, it is stated inter alia 4.1 that in July 1990 the plaintiff fraudulently prepared and forged the defendant's signature on a statement of position of the defendant; 4.2 altered cash flow documents prepared by the defendant and fraudulently used these cash flow documents in support of an application for facility prepared by the plaintiff for the defendant; and 4.3 the defendant entered into the loan facility and executed the mortgage without knowledge of the said fraudulent dealings by the plaintiff; and 4.4 the defendant entered into the loan facility and executed the mortgage relying upon the fraudulent representations in 4.1, 4.2 and 4.3.
82. The amended counter-claim was structurally similar but additional particulars were pleaded taken from the evidence up to that point.
83. By paragraph 11 of his counter-claim, the defendant claimed that:-
1. The plaintiff did not have reasonable grounds for making
the representations pursuant to section 54(1) of the Fair
Trading Act, 1987;
2. The plaintiff engaged in conduct in the course of trade
or commerce that was misleading and deceptive, and/or likely
to mislead and deceive, in contravention of section 56(1) of
the Fair Trading Act;
3. The plaintiff engaged in trade or commerce in the supply
of services, including the proferring of financial advice
and banking services, contrary to section 58(a)(b)(e)(f)(g)
and (j) of the Fair Trading Act, 1987;
4. The mortgage document is void by the provisions of
section 69 I of the Real Property Act.
84. By paragraph 12, the defendant sought declarations relating to the FairTrading Act, the Real Property Act and section 6 of the Misrepresentation Act, 1972.
85. The relief claimed in paragraph 13 was substantially extended to:-
(a) Orders under section 85(5)(a)(b) of the Fair Trading
Act, with further particulars;
(b) Order that the Registrar General be directed to cancel
the Memorandum of Mortgage registered number 6997921 from
the Register Book;
(c) That the plaintiff deliver up to the defendant the
duplicate Certificate of Title Register Book Volume 1150
Folio 12.
86. Paragraph 14 sought damages substantially similar to the previous amended counter-claim, including
(a) for breach of section 54, 56 and 58 of the Fair Trading
Act.
(b) innocent and negligent misrepresentation;
(c) innocent and negligent mis-statement;
(d) breach of contract;
(e) breach of fiduciary duty;
(f) fraud.
87. In its amended defence to the further amended counter-claim, the plaintiff joined issue with the defendant upon the amended counter-claim and further repeated, in a somewhat different form, the denials that the representations were either misleading or deceptive or likely to mislead or deceive and further denying that the defendant was mislead or deceived by any of the representations. Further, it was alleged that, in so far as the representations were made as to future matters, then the plaintiff had reasonable grounds for making those representations. The plaintiff denied seriatim the particular allegations in paragraphs 5 and 6 of the further amended counter-claim.
88. The plaintiff added the following paragraphs in its amended defence:-
"5. The plaintiff, by its employee Mr Towner, spoke on the
telephone with the plaintiff in late August or early
September 1990 on a date which the plaintiff cannot now
101. Mr Towner said that he then prepared the documents and the letter of offer for settlement. He also said that he put a new valuation on the file to reflect the increased value of the water rights, that is exhibit D5. Mr Towner signed that document. It went on the branch file. It is dated 31st August 1990. It is a typed document. But he further stated that that document does not go to the customer, it is another bank internal record. He agreed that he never showed it to Mr Ferguson. He also agreed that Mr Maddaford did not finally agree to the facility loan until the increased value stated in exhibit D5 had been put on the land. He said he actually put $900.00 per acre on the land.
15. He then gave evidence of the preparation of the Mortgage
and the facility documents which are contained in the
plaintiff's exhibits which were tendered as part of the
plaintiff's case. As a result of the execution of those
documents, further arrangements were made to draw down the
various advances which were to be made to Mr Ferguson.
16. Mr Towner stated that he detected what he described as
"irregularities" early in his term of office. In general
terms, what was occurring was that advances were made to
clients of the Bank who had requested loans without the
proper paperwork being put in place - there were very few
files completed. He was very unsure as to what he had found
to start with. He contacted the Regional Office and spoke
to the Regional Lending Manager who made an appointment to
come down during the week. Mr Towner showed him what he had
found. The Regional Manager decided to call in the audit
staff.
103. When asked what the audit investigation told him, Mr Towner, about the actions of Mr McMellon, Mr Towner said:-
"Well he wasn't operating as he should be in his capacity as
a Manager, and it could be that we didn't have the necessary
paperwork in place for all our files, which is a serious
report for a Manager."
104. He said it certainly made him suspicious that Mr McMellon wasn't doing his job properly. When asked by me whether he was suspicious as to whether Mr McMellon was acting honestly, Mr Towner said that he couldn't answer that. I then asked him what did he suspect. He said that he wasn't quite sure of his honesty or not and then I put the following questions to him:-
"Q. Did you suspect that?
A. I might have.
Q. You might have; did you?
A. I believed so at the time, yes."
105. He was then asked by counsel for the plaintiff to whom did he think Mr McMellon had been dishonest and he said at first he wasn't sure but it became apparent when doing the audit that he was being dishonest to the Bank, his employer, in that he was authorising advances to customers without the proper authorisation and paperwork.
17. He was asked a number of questions about whether he was
suspicious of the paperwork prepared by Mr McMellon on
behalf of Mr Ferguson and he said that that paperwork was
fairly straight forward and the fact that it had gone to
Regional Office and been declined, meant that there was
nothing in the file to make him aware there was anything
wrong. However, he did say that sometime within a few weeks
prior to the trial of this action, he was in the office of
solicitors for the plaintiff and he discovered that the
signature on exhibit D3 was not that of Mr Ferguson. He
said they were going through the documents, document by
document, and there were several with Mr Ferguson's
signature on them. There was a discussion about Mr
McMellon. Mr Towner glanced at the signature on D3 and
compared it to the other two and "I suddenly realised it
wasn't Mr Ferguson's signature".
106. In cross-examination Mr Towner agreed that the statement of position document is an integral part of the process for consideration in an application for a loan. It is one of the many steps. The importance placed upon it depends on who is assessing the application and how much importance that person places on it. He also said in cross-examination that it is normal practice for this to be taken as the loan application, during a loan application interview. However, the loan application is not based on one document.
107. Mr Towner was also asked a number of questions about his knowledge of the potato industry to which he basically denied that he had any knowledge of the potato industry, adding that all he learned was what he learned from Mr Ferguson. He denied that he ever made statements to the effect that he knew the value of potato growing country and that Mr Ferguson could rest assured that if he valued the land, it would be done in a proper manner and everything would be assessed properly. He did agree in cross-examination that a valuation of the land as at 31st August of $900 an acre approximately did persuade Mr Maddaford to approve the loan. Mr Towner reiterated his statement that it was Mr Ferguson who suggested the increased value due to the so-called "water rights".
108. Finally, after Mr Towner had given his evidence, counsel for the plaintiff indicated that he had a further witness, a Mr Darryl Hutchinson who is the Chief Manager of Rural Banking of the plaintiff Bank. He has been with the Bank for 35 years. In 1990 he was the Manager of Rural Lending. He described the levels at which approval has to be given by persons in a position above that of a Branch Manager. Mr Ferguson's loan came into that category. Therefore Mr Ferguson's loan had to go to Mr Maddaford, who was the Branch Manager at the time. Mr Hutchinson said he knows Mr Wayne Maddaford, who suffers from multiple sclerosis and his condition is deteriorating. He saw him recently at home. In cross-examination he agreed that he was not suggesting that Mr Maddaford was of unsound mind or that there was anything wrong with his mental capacity.
109. As to Mr McMellon, he agreed that he was dismissed by the Bank. Mr Hutchinson stated that he is presently responsible for the Northern Territory and Queensland branches. Recently, when in Darwin, he was informed that Mr McMellon was working in the Darwin area. He did not see him. He also gave his description of what he understood had been found by the auditors at Penola in 1990. When asked whether he thought Mr McMellon's conduct was dishonest, he said it is certainly not good banking practice and it would depend on interpretation of dishonesty. But he agreed you couldn't tolerate anything along those lines and that being the case he agreed it was dishonest. When asked dishonest to whom? he said "well, you know, dishonest to his employers and really dishonest to the customers and dishonest to himself and his family, in my opinion". In cross-examination he agreed in reference to the signature on exhibit D3 that Mr McMellon had forged a signature. He also agreed that that would be regarded as pretty dishonest. The following question was put to him:
"Q. To forward a false signature on mortgage documents and
security documents?"
A. Yes.
Q. Statements of position?
A. Yes, apparently.
Q. That's all pretty dishonest stuff, isn't it?
A. Yes."
110. The plaintiff then closed its case. There was no further evidence. The case was then adjourned to enable counsel to prepare written submissions. I indicated that I would hear short addresses to the written submissions on a date to be fixed.
CREDIBILITY OF WITNESSES. 111. There has been an attack made on the credibility of the defendant on the basis that he has reconstructed his whole case on what he discovered when he inspected the documents. It was submitted that the defendant had decided to switch to potato growing before he discussed the matter with Mr McMellon, and that he actually made the appointment to see Mr McMellon. Further, it was submitted that even if representations were made, they were neither false nor had it been proved that any representation was false or misleading or deceptive. Further, it was submitted that Mr Ferguson was not induced to grow potatoes by any representations made by Bank Officers and that he was not induced to seek the financial advances from the plaintiff Bank in consequence of any alleged representations made to him.
112. But the plaintiff did not call Mr McMellon. I must make my decision on the evidence before me. Insofar as the negotiations between the plaintiff Bank and the defendant prior to the arrival of the relief Manager, Mr Towner, are concerned, the evidence is all one way. I was impressed by Mr Ferguson in the witness box. He displayed real frankness and considerable care in answering questions over the long period of time he was there. I consider that his answers to questions, including his answers to questions about statements that he had made in an affidavit that he swore in August of 1994, that was before he saw the forged signature on a document and the other alterations to valuation in the inspected documents, were convincing and frank. There was no indication of Mr Ferguson at any stage trying to be evasive or to make his answers suit his case. On the contrary, much of his evidence was frank and consistent. When a number of suggestions were made to him in cross-examination, which I have outlined in some detail earlier in these reasons, I found Mr Ferguson's denials to be direct, precise and convincing. I accept Mr Ferguson as a witness of truth. I propose to make findings based largely on the evidence of Mr Ferguson. In some respects, he was supported by other evidence in the case, in particular the evidence of Ms Cann in relation to the so called "water rights" on Ferguson's property.
113. Mr Allen, who was called by the defendant, was an equally frank witness. I accept his evidence that he ordered the seed potatoes early in the discussions because there was a need to ensure the supply of the special type of seed potatoes required for growers in the district. I accept Mr Allen's evidence that he did not notify Mr Ferguson of this fact until the potatoes had to be paid for and Mr Ferguson had agreed to sign a contract with SAFRIES. There was no evidence as to exactly when Mr Ferguson did sign a contract with SAFRIES. I also accept Mr Allen's evidence about his own potato growing activities and the actions that he took in relation to the order of the pivot irrigator and later the digger when he shared the cost with Mr Ferguson. I am not satisfied on the whole of the evidence that the attempted attack on Mr Allen's credit in relation to water rights and the evidence that was called by the plaintiff from Ms Cann, in that respect, in fact destroyed Mr Allen's credit on the direct issues relating to the defendant's case in this matter. The water rights on Mr Allen's property were not relevant to the issues in this case. The evidence of Mr Monaghan, giving details as to the dates and circumstances in which the seed potatoes were ordered by Mr Allen from his firm, was not inconsistent with Mr Allen's evidence. I accept Mr Allen as a witness of truth.
114. The plaintiff's witnesses, Messrs Gill, Monaghan and Hutchinson and Msa Cann, were all good witnesses on the limited aspects of the relevant issues to this case upon which they could give evidence. I accept that Mr Gill probably did have a telephone conversation with the defendant relating to his proposed change of account from the Commonwealth Bank, Naracoorte to the plaintiff Bank at Penola. I further accept, as noted by Mr Gill, that there was some explanation given by the defendant along the lines that he was "going into partnership" with some unnamed person in relation to potato growing. That conversation was probably towards the end of July 1990 when the defendant had had discussions and probably a meeting with Mr McMellon when Mr McMellon had made a number of representations to the defendant. I do not consider that the evidence of Mr Gill was inconsistent with the defendant's account as to the stage that he had reached in relation to his enquiries generally about growing potatoes and his negotiations in particular with Mr McMellon at the plaintiff bank. Mr Hutchinson's evidence, as far as it went, was not directed to the credit of the defendant but rather to the circumstances as far as they are known in which Mr McMellon left the bank in July of 1990. He certainly confirmed that Mr McMellon's actions at the Bank were dishonest, indeed he put it higher as grossly dishonest. Furthermore, he expressed the view that in forging the signature on a document, Mr McMellon was not only defrauding his employer, the plaintiff Bank, but as well the particular customer in respect of whom the document was forged. Accordingly, I am not able to find that the sole purpose of Mr McMellon forging the defendant's signature on exhibit D3 was for the purpose of defrauding his employer. It was the defendant's signature that he forged and not any authority or authorisation by the plaintiff Bank. In forging the defendant's signature on exhibit D3 Mr McMellon was putting forward an important document, namely a statement of position, setting out the defendant's assets and liabilities which he wrote out in his own handwriting, for the purpose of advancing an application to the Regional Office to grant facilities to the defendant.
115. Mr Towner was an important witness in the case. He was the only bank officer involved in the Ferguson application who gave evidence. Much of his evidence confirmed what the defendant said. This is true, for example, in relation to the question as to whether or not the defendant, when he went in to have the interview with Mr Towner some time early in August 1990, actually saw the documents that Mr Towner had on the table. I am prepared to accept Mr Towner's evidence to the extent that he confirmed that the defendant was sitting on the other side of the table and that Mr Towner had the papers in front of him. To suggest that the defendant could have read the documents upside down and to have actually accepted the alterations that were being made in pencil by Mr Towner is, in my opinion, unreal. I note that the cross-examination of Ferguson on this aspect is somewhat different from Mr Towner's actual evidence. Be that as it may, I am not prepared to accept Mr Towner's evidence in so far as he suggested that he went through the documents line by line with Mr Ferguson and actually got his approval to the whole of the documents. I accept Mr Ferguson's evidence in this regard to the effect that Mr Towner did ask him some questions about documents which Mr Towner had in front of him and that Mr Ferguson believed that those documents were the cash flow documents. There was no suggestion in either the cross-examination or in Mr Towner's evidence that Mr Ferguson was ever made aware of the fact that Mr Towner had exhibit D3 with Mr Ferguson's forged signature on it in front of him, nor that he ever showed that document to Mr Ferguson during any part of that interview. Mr Towner made no notes of the interview, nor is there any diary record of the details. Furthermore, contrary to what had been put in cross-examination, Mr Towner made it clear, and I accept his evidence in this regard, that he prepared a fresh statement of position which was typed, and another application, after Mr Ferguson had left the Bank and there is no evidence to suggest that Mr Ferguson was ever aware of the further documents prepared by Mr Towner or of the details of the alterations which Mr Towner in fact made.
116. I do not, however, accept Mr Towner's account of the alleged telephone conversation when Mr Towner had apparently heard back from the Regional Office and had apparently been told by Mr Maddaford that the application would probably be approved but Mr Maddaford was concerned about the amount of security. I am satisfied that there was a telephone call between Mr Towner and the defendant after Mr Towner had heard back from Mr Maddaford some time late in August 1990. However, I accept the defendant's version of that telephone conversation which is to the effect that he said he was told that the application had been approved and that the documents would be prepared for him to sign shortly. I accept the defendant's version that there was some conversation about water rights, probably at the interview, and that Mr Ferguson was amazed at the suggestion that his land could be worth more than the council assessment of about $577,000 because he was only intending to plant some 70 acres down to potatoes. Where Mr Towner got the idea that the land would be worth nearly twice as much, namely over $900,000, I am unable to say on the evidence. But I do not accept Mr Towner's evidence that he got this from the defendant during that telephone conversation. I find that Mr Towner has; because of the lapse of time between the events of late August 1990 or because of the fact that he was bitterly concerned with the audit that was going on in the Bank at the time or for some other reason, mistaken the source of the facts supporting a greater valuation because of the unrestricted right of Mr Ferguson to draw water for the purpose of potato growing of the information that the unrestricted right of Mr Ferguson to draw water for the purpose of potato growing would support an increased land valuation.
117. Based on these comments as to the credibility of witnesses, I make the following findings of fact.
FINDINGS OF FACT
118. I find on the evidence or by reasonable inference to be drawn from the evidence that:
1. The circumstances of the defendant's background and his
farming activities and experience are as I have set them out
at the beginning of these reasons.
2. Mr McMellon did encourage the defendant to consider
growing potatoes on his land in the light of the new SAFRIES
factory at Penola.
3. The defendant did make some enquiries about potato
growing in the district, including some discussions with Mr
Allen and some enquiries to the Department of Agriculture.
4. Mr McMellon did invite the defendant into his office and
made representations about SAFRIES and the prospects for
local potato growers as given in evidence by the defendant.
5. Mr McMellon did give the defendant bank forms (cash flow
documents) to fill out.
6. The defendant prepared his own 'potato budget' (exhibit
D1) and filled out the forms given to him by Mr McMellon.
He was never given a statement of position document to fill
out (exhibit D3).
7. The defendant, at Mr McMellon's request or suggestion,
handed over the documents that he had prepared to Mr
McMellon at the Bank on an occasion when he was there doing
some banking, probably some time in July 1990. The
defendant was in a hurry. He did not have any discussion
with Mr McMellon about these documents, but simply left them
with Mr McMellon. I am satisfied that, at that stage, the
defendant had no definite plans to grow potatoes on his
land. Clearly he was considering the possibility and had
made calculations as to the possible expenditure and income
involved in such a venture. Clearly from exhibit D1 he had
in mind that if he were to enter upon such a venture, he
would plant some 70 acres down to potatoes and would have to
install a pivot irrigator which could be obtained from Upton
Engineering and would incur various other expenses about
which he had little information.
8. Mr McMellon prepared a statement of position document in
his own handwriting, and forged the defendant's signature on
that document (exhibit D3). He probably placed that on the
file and then prepared, without further discussion with Mr
Ferguson, the application and narrative and cash flow
documents, which were typed, being exhibits P27A, P27B and
P27C. He then submitted those documents to the Regional
Office for consideration of approving the loan.
9. The statement of position was an important document in
the plaintiff Bank's procedures for loan applications as
appears from the evidence of Mr Towner. I find that it was
'operative' (to use counsel's expression) in the case of the
defendant's application, prepared by Mr McMellon and based
in important respects on the defendant's documents and
equally on the details which Mr McMellon had himself
incorporated into the documents, particularly the statement
of position document (exhibit D3).
10. Mr McMellon left the Bank some time in late July and
never returned. He was dismissed by the Bank. It is
unclear on the evidence why he was dismissed, except on the
evidence of Mr Towner and Mr Hutchinson, that he was
dismissed for "irregular practices". The fact that an
extensive audit was conducted in August, September and
thereafter in 1990, means that it is apparent that the Bank
must have known why Mr McMellon was dismissed. However, the
evidence has not clearly disclosed the reason for his
dismissal.
11. The signature of the defendant, which Mr McMellon forged
on D3, defrauded the defendant in that it led to the putting
forward and placing on the Bank file for use in connection
with the loan application prepared by Mr McMellon, an asset
and liability situation which was neither agreed to nor
approved nor supplied by the defendant, a potential customer
of the Bank. I find that the forgery of the defendant's
signature on this document was patently dishonest. This was
a dishonest act by a responsible officer, namely the Branch
Manager of the plaintiff Bank at Penola, in the course of
his duties as a bank officer handling the affairs of a Bank
customer, the defendant, who had had a small account at the
Bank for some time.
12. Mr Towner arrived at the Bank early in August. He
received a message from the Regional Office that the
defendant's application for a loan required further details
(exhibit P28).
119. Mr Towner studied the file and the documents (exhibits P27A, P27B and P27C) which had been returned from the Regional Office. He telephoned the defendant, who came into the Bank and had an interview with Mr Towner about the application.
13. At the interview Mr Towner had the documents from the
file in the Bank (including D3), as well as the documents
returned from the Regional Office in front of him on the
desk. The defendant sat on the other side of the desk. The
defendant was not shown, nor did he identify, any of the
documents on the desk. The defendant knew from the
questions that Mr Towner asked him that Mr Towner wanted
some further details about the cash flow statements. Mr
Towner made some notes on some of the documents as appear in
pencil on the documents but the defendant was not informed
of those details. The defendant never read any document as
altered by Mr Towner. He was not aware that his forged
signature was on one of the documents in front of Mr Towner.
120. At the interview, something must have been said by Mr Towner about water rights on the defendant's property. I have accepted the defendant's account that the fact that the defendant's ability to draw water for potatoes on his land would add to the value of his land was mentioned. The defendant pointed out however that he would only plant about 70 acres of his land to potatoes. The defendant was amazed at the suggestion that the ability to draw water would result in any substantial increase to the value of his land.
14. The defendant received a phone call later from Mr
Towner, who told him that the loan had been approved.
121. I have rejected Mr Towner's version of that telephone call. Consequently, I make a finding that the valuation prepared by Mr Towner and dated 31st August 1990 (being some 6 days before the mortgage was signed by the defendant) was prepared on advice or information which did not come from the defendant. This is exhibit D5.
15. The defendant signed the mortgage (exhibit P6) without
any knowledge of:
(a) his forged signature on D3,
(b) the details of any alterations made by Mr Towner to Mr
McMellon's documents, and
(c) in the belief that he was granting the mortgage as
security for the facility to be made by the Bank in relation
to assets to the value of between $520,000 and $577,000 and
not some $944,000 as stated in Mr Towner's valuation,
exhibit D5.
16. The defendant signed and accepted the facility offer
dated 10th September 1990 on the same understanding as he
had previously signed the mortgage on about the 5th
September 1990.
17. The Bank made the advances to the defendant as detailed
in the documents tendered as exhibits in this case.
18. The further advances as detailed in the documents were
made over the period up to the date of the notice of
default. The plaintiff issued notices of default and demand
in accordance with the statutory requirements. The
defendant purchased the equipment and seed required for his
potato growing activities with the moneys advanced. He had
a profitable crop for the first season, that is the 1990/91
season.
122. He planted and harvested two further crops of potatoes. There is no evidence that the defendant ever made a loss from his potato growing activities.
123. He had no sheep of his own by September 1990. There were some sheep on his land on agistment at that time. His cattle were waiting to be sold. Whether the defendant made a profit or loss from his cattle is not clear on the evidence. In any event, I can't see how that is relevant to any of the issues in the case. Certainly he owed Elders a large amount of money for the purchase of cattle which he was still trading in September 1990 and thereafter. There are no details of the Elders account.
20. The defendant first learnt of the fact that his
signature had been forged on document exhibit D3, and of
the alterations made to the cash flow documents, and of the
valuation made by Mr Towner on the 31st August 1990 of his
land in exhibit D5, and of the later valuation dated 10th
July 1992 where the acreage of his land in exhibit D6 is
shown inaccurately as 876.75 hectares, when the defendant
had inspection of documents in about October of 1994.
21. It was after discovery of these facts referred to in the
previous paragraph that the defendant instructed his
solicitors to issue a counter-claim and allege the matters
which he had discovered on inspection of documents.
THE LEGAL PRINCIPLES TO BE APPLIED TO THESE FINDINGS
124. In my judgment, the defendant has established on the whole of the evidence a good defence to the claim for possession made by the plaintiff in its summons under Part XVII of the Real Property Act. Section 195 of the Real Property Act reads:-
"195.If the person summoned shall appear, the Court shall
hear the summons and may make such order thereon and impose
such terms as it may think fit ..."
125. In Rodgers v Moonta Town Corporation (1981) 37 ALR 49 at 52, Gibbs CJ said:-
"The provisions of section 192 and the following sections of
the Real Property Act do not, in terms, limit the power of
the Court to make an ejectment order to cases in which no
triable issue has emerged. However, assuming that the Court
has a discretion to decline to proceed with the
determination of disputed questions of fact and law, it is
apparent that it would not be right to refuse to make an
order for possession if the relevant issues before the Court
had been fully explored and the evidence revealed that the
applicant had a right to possession."
126. Having fully explored the evidence I am of the opinion that the plaintiff in this case has not established its right to possession. The statutory form of mortgage gives a title in equity until registration, but when registered it has the effect of a deed and is effective to create a legal statutory charge. Section 57 of the Real Property Act reads:-
"57. Every instrument shall, when registered, be deemed part
of the Register Book, and shall have the effect of and be
deemed and taken to be a deed duly executed by the parties
who have signed the same." See further Abigail v Lapin (1934) AC 491 at 500.
127. The position of registered mortgages of land under the provisions of the Torrens statutes is somewhat different from that of mortgages under the general law; under these statutes a mortgage does not operate as a transfer of the mortgaged land but has effect as a security only. Section 132 of the Real Property Act reads:-
"132 Every mortgage and encumbrance under this Act shall
have effect as a security, but shall not operate as a
transfer of the land thereby charged ...."
128. Section 132 goes on to specify the conditions that operate upon default in payment of the principle sum, interest, annuity or rent charge pursuant to a mortgage and encumbrance under the Act. Consequently, the general rights incident to legal ownership do not attach themselves to such mortgages and the rights attaching to registered mortgages are mainly dependent upon statutory and specific contractual rights. Registration is essential to the creation of a legal mortgage. Under the registered mortgage, the mortgagor remains the legal owner of the land, see Section 67 of the Real Property Act; and Trust and Agency Co. v Markwell (No. 2) (1874) 4 QSCR 50.
129. Consequently it is upon the act of registration that the creation of the statutory charge depends; the statutory powers upon default are available in full only to the registered mortgagees; it is only registration which gives the statutory form of mortgage the force and effect of a deed. Upon registration, the title of the registered proprietor is indefeasible except as specified in section 69 of the Real Property Act. That section reads:-
"69. The title of every registered proprietor of land shall,
subject to such encumbrances, liens, estates, or interests
as may be notified on the original certificate of such land,
be absolute and indefeasible, subject only to the following
qualifications:-
"FRAUD
I. In the case of fraud, in which case any person defrauded
shall have all rights and remedies that he would have had if
the land were not under the provisions of this Act ..."
130. The proviso is not relevant in this particular case.
131. There has been much discussion in the cases as to the meaning of fraud in this section. I bear in mind the remarks of Stark J in Stuart v Kingston
(1923) 32 CLR 309 at 359 where His Honour observed that no definition of fraud can be attempted so various are its forms and methods. As Professor Whalan observes in his text The Torrens System in Australia (1982) at page 311 what amounts to fraud must depend on the particular facts of the case. What must be proved is actual fraud, that is "dishonesty of some sort, not what is called constructive or equitable fraud/an unfortunate expression and one very apt to mislead, but often used, for want of a better term to denote transactions having consequences in equity similar to those which flow from fraud." See Assets Co. Ltd. v Mere Roihi (1905) AC 176 at 210 per Lord Lindley delivering the judgment of the Privy Council.
132. I am satisfied on the facts of this case and make a finding that the actions of the plaintiff's Bank Manager had the effect of initial fraud in the first application made by Mr McMellon with the subsequent actions resulting in the defendant being defrauded by his execution of the Memorandum of Mortgage and acceptance the facility offer on a false premise. As I said earlier, the forgery of the defendant's signature on the statement of position was operative and led, after the various alterations to the original documents and the valuation on the 31st August, to the plaintiff Bank, accepting the application to grant the defendant a loan on the security of a mortgage to be granted by him over his land. It was argued by counsel for the plaintiff that the forgery of the defendant's signature did not operate to affect the acceptance of the defendant's application for a loan, which was, in any event, a repetition of the facts which came from the defendant. But in my opinion, the withholding of very relevant material facts from the defendant which appear to have been deliberately withheld by McMellon when he forged the defendant's signature and were later withheld when the subsequent alterations and valuations were done, constituted fraud within section 69 I of the Real Property Act. Although each case is different, similar principles were applied by O'Loughlin J in Whicklow Enterprises Pty. Ltd. v Doysal Pty. Ltd. and the Registrar General (1987) 45 SASR 247. See pages 267 - 269.
133. What then are the consequences of denying the plaintiff its indefeasible title to the statutory charge? It seems to me that the "defrauded person" (the defendant) and the "defrauding party" (the plaintiff by its responsible servant or agent) are entitled to such rights at law or equity as they may have on an unregistered mortgage, including any rights or liabilities in contract.
134. Exhibit P6, the mortgage, granted by the defendant when he executed that instrument, provides that the mortgage is granted:-
"In consideration of -
(1) The loans advances or banking accommodation provided or
to be provided by the Bank to or at the request of the
mortgagor, and
(2) The Bank forbearing at the mortgagor's request to press
for the immediate payment of such of the moneys herein
defined as the moneys hereby secured as are owing to the
Bank ..."
135. Further, the mortgagor agreed to obey all covenants in the mortgage conditions.
136. These clauses provided the consideration for the defendant to execute the mortgage in registerable form which enabled the plaintiff to register the instrument which it subsequently did. The Bank then made its facility offer dated 10th September 1990.
137. In my judgment the basis upon which the defendant executed the mortgage and accepted the facility offer was not the same basis as that upon which the Bank agreed to make the advances once the defendant had executed the mortgage, because (a) the application made by the applicant was fraudulently made (I refer to my reasons above), (b) the application had been altered in a material way without the defendant's knowledge or agreement, particularly in the valuation of the land (exhibit D5). The parties were not ad idem when the mortgage was executed and the facility offer was accepted.
138. In my opinion this brought the case within the principles of Armour Coatings (Marketing) Pty. Ltd. v General Credits (Finance) Pty. Ltd. (1977) 17 SASR 259 at 277 per Bray CJ where His Honour said:-
"In the second type of case, as in Outer Suburban Properties
Ltd. v Clarke (1933) SASR 221 (F.C.), there may well be no
implied authority to supplement it after one party has
signed it. The signatory may be regarded as offering to
treat on the basis of what he has signed and any additional
particulars subsequently attached may amount to a counter
offer by the other party needing acceptance by the first
before any contract comes into existence."
139. In the circumstances of this case, the plaintiff Bank was making a counter offer to provide the defendant with the loan if his property was worth $944,000 or thereabouts, but this counter offer was never made known to the defendant at any time before he accepted the original offer which he believed was on the basis that his land was worth no more than $577,000. I would refer also to the judgment of Walters J in Armour Coatings supra at pages 283 - 284.
140. In my opinion the plaintiff cannot recover on a contract which was signed at a time when the parties were not ad idem due to the material alteration made by the plaintiff Bank, see Outer Suburban Properties Ltd. v Clarke supra.
141. In my judgment the plaintiff has thus failed on the above findings and in law or equity to establish an entitlement to the moneys claimed in the plaintiff's counter-claim to the defendant's counter-claim. Thus, in the language of section 69 placitum I, the plaintiffs counter-claim must be dismissed.
THE LEGAL POSITION OF THE DEFENDANT'S AMENDED COUNTER-CLAIM
142. In my judgment the defendant has not established any recognisable loss caused by any of the claims made in his amended counter-claim, that is including claims under the Fair Trading Act, fraudulent misrepresentation, negligent misstatement or the Misrepresentation Act or fraud. As to the claim for breach of fiduciary duty, I consider no basis for such a duty has been established on the evidence cf James v ANZ Bank 64 ALR 347 at 391-394 per Toohey J.
143. In my opinion, the defendant has failed to establish any head of damage under any of those claims - see Yorke and Anor v Ross Lucas Pty. Ltd. and Others (1982) 45 ALR 299 particularly at 315-321 per Fisher J; Munchies Management v Belperio (1988) 84 ALR 700 at 707; Gould v Vaggelas (1985) 157 CLR 215 at 221-222.
144. As to damages for fraudulent misrepresentation, I would refer to Holmes v Jones (1907) 4 CLR 1692 and Howell and Anor v Bennett and Fisher Ltd. and Janz (1966) SASR 188 at 195-197 (FC).
145. Consequently, I have not made any findings on the claims for misleading and deceptive representation or conduct because it has become unnecessary having found that the defendant is entitled to an order under section 69 placitum 1 of the Real Property Act and consequently has a good defence to the plaintiff's claim for possession, and further that the defendant has failed to establish any relevant loss as discussed above.
146. The orders of the Court are that:-
1. The plaintiff's claim for possession of the land is
dismissed.
2. The plaintiff's claims in its counter-claim to the
defendant's amended counter-claim are dismissed.
3. The defendant's claims on his amended counter-claim are
dismissed, except that I make a declaration that the
registration of the mortgage deed does not create an
indefeasible title to the statutory charge in favour of the
plaintiff due to fraud, and should be removed from the
Register Book. But as the Registrar-General has not been
joined, I cannot make an order to that effect.
147. I shall hear the parties as to costs and such further orders as should be made in the light of these reasons.
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