Cash Resources Australia Pty Ltd v Ken Gaetjens Real Estate Pty Ltd and Kofi Adih No. SCGRG 90/2655 Judgment No. 4548 Number of Pages 32 Valuation of Land Methods of Valuation Negligence (1994) Aust Torts..
[1994] SASC 4548
•12 May 1994
COURT IN THE SUPREME COURT OF SOUTH AUSTRALIA BOLLEN J
CWDS
Valuation of land - methods of valuation - Negligence - duty of valuer in preparing and proffering valuation to someone with whom he is not in a contractual relationship - duty of valuer to take into account the value of plant and equipment on the premises not owned by the registered proprietor but not fixtures
Breach of duty of valuer on the particular facts here contributory negligence of bespeaker of valuation also "on the facts" - measure of loss. Baxter v F.W. Gapp and Co Ltd (1939) 2 All ER 752 at 758; Trade Credits v Baillieu Knight Frank (NSW) Pty Ltd (1985) Aust Tort Reports 69,525 at 69,530 and 69,538; Johnson v Henderson and Ors (1983) 107 LSJS 98 at 107 and 108 and Hungerfords v Walker (1990) 171 CLR 125, applied. March v E.H. Stramare Pty Ltd (1990-91) 171 CLR 506 at 524 and Rogers v Whitaker (1992) 175 CLR 47, discussed.
HRNG ADELAIDE, 7-17 March 1994 #DATE 12:5:1994
Counsel for plaintiff: Mr N W Morcombe QC
with Mr M Randle
Solicitors for plaintiff: Randle and Taylor
Counsel for defendants: Mr G L Muecke
Solicitors for defendant defendants: Lawson Downs
ORDER
Judgment for plaintiffs.
JUDGE1 BOLLEN J This is an action for damages in negligence. The plaintiff says that the second defendant, the servant of the first, gave to the plaintiff negligent advice about the value of land over which he knew that the plaintiff would take security by way of mortgage. The plaintiff says that, although it and the defendants did not come into contractual relationship, the second defendant owed a duty to the plaintiff to take reasonable steps to offer sound advice, to give a sound valuation. The plaintiff says that the second defendant was in breach of that duty. The plaintiff relied on the advice, on the valuation given. The value ascribed to the property by the defendant was wrong. The plaintiff suffered loss. The second defendant could and must have foreseen that the breach would produce loss. Thus, says the plaintiff, the cause of action in tort is complete.
2. The defendants admit the existence in law of the duty. They deny any breach. They deny that the plaintiffs relied on the advice given by the second defendant, on the valuation. They deny any negligence. They say that if anyone was negligent it was the plaintiff. Even if there was some failing "in the valuation", the conduct of the plaintiff was so reckless that it became the only negligence causative of the loss (see per Deane J in March v E.H. Stramare Pty Ltd (1990-1991) 171 CLR 506 at 524. That last contention failing, the defendants assert that there was contributory negligence on the part of the plaintiff.
3. Much evidence was given. Many documents were received in evidence. Thorough and detailed submissions were made by counsel. If I may say so the case was very well presented and argued on each side. It often happens in a long or longish case that much said or exhibited turns out to be unnecessary for the reaching of the decision. That is said in no critical sense of those who prepare cases for trial. Those preparing and presenting a case must look forward, forward to the case in court. They must be astute to leave no stone unturned. But in a sense the Judge looks back. He reads and sees the evidence at the end with the relief sought in mind. To him, the Judge, after the assessing of the reliability of witnesses it often seems that some stones need not have been turned. To his or her mind the right decision may proceed from turning some stones which without more may lead to the decision. That is so here. I have read the evidence. I have looked at the exhibits. I have considered each submission offered by counsel. No submission lacked value. But I can, and do, cut my reasons more or less to the bone.
4. It is said that the second defendant gave to the plaintiff a "wrong valuation". I have kept steadily in mind throughout the hearing and on later consideration that a mistake is not necessarily negligence. There can be many explanations other than negligence for the making of a mistake. I remember that the defendants deny the making of any mistake at all. I must decide that issue but more than the mere making of a mistake is needed before the mistake can bear the stigma of negligence.
5. The incorporation of the corporate parties is admitted. The employment of the second by the first defendant is admitted. The first defendant is a "real estate company". The second defendant is a valuer.
6. The plaintiff is a money lender. At all relevant times its main line of business was the factoring of debts. That is the buying at a discount of debts owed to another (usually) company. It did so on terms which, if all went well for it, produced a profit. It often had its accountants conduct audits of the debts of a supplicant company. Did the debts exist? Could they be recovered? What, apart from the debts themselves, security would be desirable? These questions were often considered and answered by audit done by accountants acting for the plaintiff. The evidence shows that the plaintiff always wanted ample security often to the extent of 100% real estate security. That is dollar for dollar with the amount it was prepared to pay out.
7. A.J. and A.H. Cormack Pty Ltd ("Cormacks") was at all relevant time the registered proprietor of land at Main North Road, Gepps Cross (Certificate of Title Register Book Volume 4255 Folio 812). There was a mortgage over this land to AGC (Advances) Ltd. But that was discharged and at "really" relevant times Farrow Mortgage Services Pty Ltd was first mortgagee and the plaintiff became second mortgagee.
8. Cormacks was a meat processor. It carried on business in large premises on the land mentioned at Gepps Cross. The evidence is that in 1988 the factory and other buildings there were in active use as a busy place for the processing of meat. There was quite a large area of vacant land there. I use the word "vacant" in the sense that no buildings stood on the part of which I speak. However, that part had a sealed surface. From the point of view of looking at the premises there would appear, to the observer, to have been an apparently thriving business on the land. But the registered proprietor and its "wholesale arm" had a large amount of money owing to them by creditors. It and its "wholesale arm" had trouble in getting in those debts. The "wholesale arm" was a company which Cormacks had caused to be incorporated called Taj Meat Wholesalers Pty Ltd ("Taj").
9. In about August 1988 a Mr Dick of the Business Clinic, acting on behalf of Cormacks and Taj, approached the plaintiff "for finance".
10. The plaintiff is incorporated. Its main office in Melbourne. The Directors of the plaintiff company are (and were at the relevant time) William Roberts, Marcel Kaye and Alan Kaye. Roberts is the Managing Director. The manager of its branch in Adelaide was, and still is, David Thomas Ciccolella. Reckoning back from the time of trial in March 1994 he had been manager in South Australia for seven years. He called the Adelaide office a "sales administration office to the Melbourne office". All authority to grant loans or agree to the buying of the debts of other organisations and the terms and conditions of any such transactions, according to Ciccolella, "derive from our Melbourne office". But Ciccolella could, and at relevant times did, make recommendations to Melbourne. Ciccolella told the Court about the way in which the plaintiff went about factoring transactions. He gave this evidence:-
"Q. I think your company uses a standard agreement in
respect of its factoring arrangements.
A. Yes, it does.
Q. Could you tell His Honour just generally what factoring
involves.
A. It is the purchasing of book debts from a company or a
firm or partnership etc, for a discounted rate, in other
words 80% is our standard rate, of the face value of the
invoices.
Q. Could you just tell us in your own words, and briefly if
you can, the general structure of the factoring arrangements
that your company enters into.
A. Basically they are confidential facilities which means
that our client's debtors are not aware of our involvement.
They send the original invoice to the client, they submit us
with a copy of that invoice or schedule of debting
representing those invoices, to which we will advance our
80%. They then collect the cheques from the client or the
cheques are directed to our office which pay off the 80%
advanced. At the end of every month the 20% excess
collected over the 80% advanced from us is refunded to the
client.
Q. I think it is the situation that your company charges a
factoring fee.
A. Yes, a factoring fee is levied as per the invoice
finance agreement, the factoring document, on a month's
invoice.
Q. I think that fee in respect of a month's purchases is
struck only once.
A. Yes, it is.
Q. For that particular month.
A. For the month's invoicing, yes.
Q. I think that fee is struck at the point where the
discounted rate is achieved, is that right.
A. The 80% collection, yes. Once our original advance is
refunded or collected, the factoring fee is struck, yes.
Q. When you say once your original advance is struck, that
original advance is in fact 80% of the face value of the
debts which you purchase.
A. Yes, it is."
11. Ciccolella received much paper work relating to the applicants. It is the sort of paper with information about Cormacks and Taj which directors of a finance company would need to decide whether to enter into a transaction. Ciccolella said, too:-
"Q. I don't want you to go into the details of it, but did you
have a conversation with Mr Dick in those early stages on the
topic of real estate security for any moneys to be paid by Cash
Resources.
A. Yes, I did.
Q. Did you indicate the level of security required.
A. Yes.
Q. At that point in time, did you know what the requirements
of Cash Resources would be in respect of an advance.
A. Yes, this was for a loan facility originally. We were
looking for 200% cover.
Q. Looking at pp5 and 6, there is a client documentation
resum, is that in your hand.
A. Yes, it is.
Q. Is that based on information provided by Mr Dick and from
your own researches.
A. Yes.
Q. In particular title searches that you did.
A. Again, to obtain the client's name would have been a
corporate search, Taj meat, the fourth guarantor, would also have
required a title search - sorry, a corporate search. The Main
North Road Gepps Cross, the property etc, obtained from title
search there also.
Q. There is a number of names under the side notation of
'guarantors'. Is that information provided by Mr Dick.
A. Yes.
Q. Towards the bottom it has a heading 'special conditions
subject to A and B'. Had you had discussions with your Melbourne
head office at that point in time.
A. I don't believe I had.
Q. Can you tell me then how you came to write A and B and the
notations along those paragraphs.
A. Yes, the figure of $2.2 million was communicated to me from
the Business Clinic. I had not received a firm copy of the
valuation at that stage, so one of the special conditions was to
confirm the valuation of 2.2. (B) was confirmation of Farrow
Mortgage Services, first what their existing borrowings were and
also consent for our subsequent mortgage lodgment.
Q. Can I just be clear on (A) you had been told by Mr Dick of
a valuation that had been done and you mentioned the figure of
$2.2 million. Is it the case that at that point you had not seen
a written valuation.
A. No, I had not."
12. Ciccolella communicated with Roberts. But the originally proposed financing transaction did not proceed. It had in the end been a proposal to enter into a factoring agreement to the extent of $800,000 with a loan to Cormack (or Taj) of $500,000. And the plaintiff wanted an "assignment of existing valuations"
13. (Ciccolella p19). Speaking of a discussion with Business Clinic, Ciccolella said:-
"Q. What was that discussion.
A. Basically whether Cash Resources would require
revaluation of some properties or assignment of existing
valuations.
Q. What do you mean by 'assignment of existing valuations'.
A. Basically the assignment of existing valuation to Cash
Resources for our use for our valuation purposes.
Q. Did your company, Cash Resources, have a policy in that
regard.
A. Yes.
Q. What was that policy.
A. The policy of the valuation for us you're talking about?
Q. Yes. You mentioned obtaining valuation or obtaining
assignments of valuation. Could you indicate whether the
company had a policy on the topic of assignment of
valuations. First, did it have.
A. Yes.
Q. Could you tell us what the company's policy was in
respect of assignment of valuation.
A. Yes. The valuation had to be based on a mortgage
purpose 90 day quick sale.
Q. What about in respect of the assignment, what was its
policy in respect of assignments.
A. To be assigned to Cash Resources for our purposes and
uses.
Q. Was that policy something that was simply communicated
to you from someone, or did you have an understanding as to
the reason why.
A. Both, I dare say, but it was communicated from Mr Bill
Roberts in Melbourne on our company policy.
Q. Did you have an understanding as to why that policy
existed.
A. I certainly - for our benefit, yes.
Q. What was the reason that you understood.
A. The assignment to Cash Resources?
Q. Yes.
A. Quite simply so we can rely upon the valuation in
preparing our valuation."
14. The idea of an "assignment" was mooted some way into the negotiations leading up to the transaction which happened. But the plaintiff did not stand firm on the seeking of what is called an "assignment". It went ahead without any actual assignment. In my view of the case that does not matter at all.
15. Ciccolella received (probably from Cormacks) a valuation which Adih, acting in the course of his employment, had done for Cormacks and Taj on 6th June 1988. It bears date 7th June 1988 but it speaks of the value as at the day before, the 6th June 1988. Ciccolella received it in December 1988. Ciccolella rang Adih. Ciccolella gave this evidence:
"Q. You spoke with Mr Adih on the telephone.
A. Yes, I did.
Q. Could you tell us what was said by whom. In so far as
you are able, would you try and use the first person. It
was over the telephone.
A. Yes, it was.
Q. Try and tell us what was said.
A. I introduced myself to Mr Adih, 'Hi, I am David
Ciccolella from Cash Resources Australia Pty Ltd. I am
currently preparing a finance factoring application for Alan
Cormack's company, Taj Meat Wholesalers, AJ and AH Cormack
Pty Ltd. I currently have to hand' or 'I have to hand a
valuation prepared by you on 6 June this year'. Then I
would ask 'Do you remember this valuation' I can't remember
the answer. It was certainly - it wasn't a negative answer.
I then sought and requested of Mr Adih to have the valuation
assigned to my company, Cash Resources on mortgage purposes,
90 day. Mr Adih didn't - I can't remember a reply but to
put it in writing.
Q. Who said something on the topic of putting something in
writing.
A. Mr Adih.
Q. He requested you to put something in writing.
A. Yes.
Q. What did he ask you to put in writing.
A. My assignment to my company for the use and also the
purpose of the valuation, the basis that we required it.
Q. When did you write that letter dated 19 December which
appears at p.158 in relation to that telephone
conversation."
16. Ciccolella wrote to Adih on 19th December 1988. The letter is:-
"Dear Mr Adih,
I currently have in hand, 'Certificate of Valuation' for:
A.J. and A.H. Cormack Pty Ltd Property allotment 1 Main
North Road, Gepps Cross South Australia 5094 (TAJMEAT)
undertaken by yourself on the 7th June, 1988 at the request
of Mr Allan Cormack. After consulting Mr Allan Cormack,
Friday, 16th December, 1988 he suggested I contact you
direct, for the information I require. Could you please
supply to this office; correspondence addressed to Cash
Resources Australia Pty Ltd; a certificate of valuation re
the beforementioned property, on the basis that the
valuation is calculated at 'Mortgage purposes' or 'Quick
sale 90 day Auction purposes'. Your prompt attention to
this matter will be appreciated."
17. There was another telephone conversation between Ciccolella and Adih. The first defendant wrote to the plaintiff on 21st December 1988. The author was Adih. The letter is:-
"Dear Mr Ciccolella,
Re: Valuation Allotment 1 Main North Road Gepps Cross (Taj
Meat)
We confirm that the above valuation dated 6th of June 1988
is suitable for mortgage purposes. It was prepared, as
indicated in section 3.1 of our report, for mortgage and
refinancing of existing mortgages. However, for your
purpose we shall vary the definition of market value in
section 3.2 of the report to read as follows: 'For the
purpose of the above mentioned valuation, market value is
defined as the most probable price in cash, terms equivalent
to cash or any other precisely revealed terms that the
property can be expected to sell for with both the mortgagee
(exercising powers of sale) and purchaser acting prudently
knowledgeably and for self interest with neither of them
being anxious to sell or buy. In addition it is assumed
that the mortgagee will exercise reasonable care and
diligence in the exercise of his powers to realise his
security. We require you to read this amendment in
conjunction with our report.
We also confirm the value of $2.2 million as at the 6th of
June 1988 as being reasonable for security purposes. Merry
Christmas.
Yours faithfully,
KEN GAETJENS REAL ESTATE PTY LTD
(sgd) KOFI E. ADIH Licensed Valuer"
18. The letter of Ciccolella to Adih of 19th December 1988, the reply and the valuation made by Adih are the vital documents in this case.
19. Let us stand back and see what has been asked and given. Let me say, too, that no fee was sought (by the defendant) or paid by the plaintiff to the defendants for the valuation. Ciccolella had a copy of the valuation dated 7th June 1988. He had that with the approval of Cormacks. He spoke on the telephone to Adih. He wrote asking for a letter addressed to the plaintiff and said that he wanted "correspondence addressed to Cash Resources Australia Pty Ltd; a certificate of valuation re the beforementioned property, on the basis that the valuation is calculated at 'Mortgage purposes' or 'Quick sale 90 day Auction purposes'".
20. The meaning which Ciccolella and Adih respectively gave to the word "or" in that passage was never made really clear. I do not think Adih bothered much about the full sense of the letter in any event. Adih gave to the plaintiff, in purported response to the letter, a reminder that the valuation was prepared for mortgage and refinancing of existing mortgage, an altered definition of "market value" suitable (in my opinion) for the purposes of a prospective mortgagee and a confirmation to that value of $2.2 million as at the 6th June 1988 was reasonable for security purposes.
21. But Ciccolella was in touch with Adih in December 1988. He did not get something stated to be for "Quick sale 90 day Auction purposes". The confirmation of the value as being reasonable for security purposes coupled with the reminder would answer to the request for "mortgage purposes". But despite the vagueness of the evidence I cannot think that Adih attended carefully to the phrase "Quick sale 90 day Auction purposes". I think the evidence of the valuers would justify my saying that this expression is not frequently used when a valuation is requested. But it is sometimes used. Smithson, a valuer called for the plaintiff, gave ready valuations about various lending circumstances including "Quick sale 90 day Auction purposes". A valuer named Taylor called for the plaintiff knew of the expression.
22. Adih gave this evidence about his then knowledge of what "a 90 day quick sale auction purposes" meant. He said:-
"Q. Do you have an understanding at that time, mortgage
purposes or quick sale, 90 days auction sale purposes, as to
what your understanding of those terms were as a valuer.
A. As of 1988?
Q. Yes.
A. I never really have known what a 90 day quick sale has
been. As a valuer I have equipped to deal with quick sale
situations because that is a valuation of an anxious vendor,
and it depends on how anxious the vendor is as to how much
he takes on the day, and who is around to take the sale, so
I have not taken that as to a market question.
Q. Did you have a measure of valuation for mortgage
purposes.
A. Yes.
Q. Did the valuation you had done in June 1988 fall within
that description.
A. Yes.
HIS HONOUR Q. The expression 'quick sale, 90 days auction
sale purposes' was very strange to you.
A. It was, certainly.
Q. Did you ring Mr Ciccolella and ask him what he meant by
that.
A. No, I didn't, because I was requested to confirm a
valuation and that was what I did, not because the valuation
was for mortgage purposes and not for quick sale 90 day
auction, so I did confirm that it was for mortgage
purposes."
23. The reason for his not seeking clarification given in this last answer is quite unsatisfactory. The fact is that he assured Ciccolella that the valuation was suitable for security purposes without taking steps to understand exactly what he was asked. He did not give thorough attention or care to his answer. He did not refer to quick sale 90 days at auction.
24. Mr Muecke submitted with great earnestness that it was all a misunderstanding, that the one thought that he had received and the other that he had given a value for a "Quick sale 90 day Auction" purposes. Perhaps so. But how did that happen, if it did? It happened through the lack of care taken by Adih.
25. This brings me to a vital piece of evidence. Ciccolella said:-
"Q. When you received the letter from Mr Adih, did you do
anything subsequent to reading it.
A. Yes, I did.
Q. What did you do.
A. I contacted Mr Adih by telephone.
Q. Could you inform us of the conversation that occurred.
A. Yes. I sought clarification on the 2.2 million dollar
valuation still being the same as market purposes as for
mortgage 90 day purposes.
Q. Why did you have that conversation.
A. Basically I thought it was not quite right to be the
same figure.
Q. What did he say in response.
A. I can't remember the exact words but, to my best
knowledge, it was that the property had improved in value to
still be 2.2 under our valuation."
26. Adih denies that this telephone conversation happened at all. He said:-
"Q. After you sent this letter or the fax to Mr Ciccolella
did you have any further contact with Mr Ciccolella in
person, either face to face or on the telephone.
A. No.
Q. What was the next thing that you heard about this
particular valuation you had given to Mr Ciccolella.
A. It was a summons for negligence."
27. The happening of that telephone call and its content is vital. It depends on the credibility of the two concerned. I think that each was truthful. I do not think that either Ciccolella or Adih has fabricated evidence consciously. One of them must be mistaken. In my opinion, the evidence on this score, and in general, of Ciccolella is reliable. On this and on other issues the evidence of Adih is not reliable. He was, in my opinion, an unsatisfactory witness. He was defensive. I think that that arose from a consciousness that he had been lacking in care at important times. I think he lacked care in responding to the written and oral requests made by Ciccolella. I think that by the time of trial he realised, or at least suspected, that he had been careless. He talked around the question frequently as one who sought to obscure harmful information in a welter of words. I think that he had forgotten the telephone call to which Ciccolella deposed. As Mr Morcombe QC said the call was so important to Ciccolella that he could not have forgotten whether he made it or not nor have had a mistaken impression that he had made it. Adih could easily have forgotten. I am confident that Ciccolella did not invent the call or its contents. I find that that telephone call happened and that its content was as deposed to by Ciccolella.
28. This finding leads to a finding that the plaintiff did rely on the valuation as received, recast and confirmed by Adih expressly in the telephone call. Much follows from this finding. Adih assured Ciccolella on the telephone that the value of the land had increased and that the value of 2.2 million was suitable for the purposes of the plaintiff. That means that Adih, without using the expression, confirmed that it was suitable for a sale at auction after the expiration of 90 days. That is what he had been asked. The telephone call sought to clarify that. Ciccolella told Adih that he was seeking to clarify that. Adih gave that confirmation. Perhaps he did not understand himself to be speaking of the "Quick Sale" idea. He should have so understood. It had been mentioned in the letter which Ciccolella had written on the 19th December 1988. Here was a call seeking confirmation. It behove Adih to appreciate that Ciccolella was speaking about quick sale at auction after 90 days and to have dealt with that in what he said. Had he been careful he would readily have appreciated all this and, for example, could have asked what Ciccolella meant by a "Quick Sale at Auction after 90 days" before he offered his confirmation. He did not intend to mislead but lack of care threw him into misleading Ciccolella and the plaintiff.
29. Mr Muecke made a powerful submission that I should not accept the evidence of Ciccolella about the telephone call. But despite those submissions I do accept that evidence. Mr Muecke referred on the issue of causation as well as credibility of Ciccolella to different and differing expressions in writing and in conversation used between the directors of the plaintiff and Ciccolella and amongst the directors themselves about what was needed by way of security. I have attended to all this but despite it all I hold, as I have said, that the telephone call and its content entitled the plaintiff to think that it had confirmation that the property at Gepps Cross was likely to realise 2.2 million on a sale both in June or December 1988 if the property was sold for mortgage purposes or sold on a quick sale at auction after 90 days.
30. Mr Muecke submitted:-
"They didn't believe he had done the original valuation on a
90 day quick sale, that is why they went back to him and
said 'This is not good enough'. They didn't tell him that.
If they had it might be a different case. If they had said,
'Look, we have got this valuation, it is not good enough for
us. We want some valuation on some other basis'. Rather
they went back to him and said 'We want you to confirm your
valuation for mortgage purposes or quick sale 90 day
purposes'. Mr Adih writes back, 'I confirm it. I redefine
my market value', redefine it in a way which was read by
both Mr Roberts and Mr Ciccolella as being inconsistent with
a 90 day quick sale. He not only did that, but he said 'I
require you to read this in conjunction with my other report
where both Mr Roberts and Mr Ciccolella accepted there were
comments which were inconsistent with this property being
appropriate to be sold in a 90 day quick sale condition.
That is consistent. All he was doing was confirming his
original valuation, that is even consistent with an
assignment, assignment on Mr Ciccolella's own evidence. One
alternative to a revaluation. What he said in evidence was
that what he wanted before we act was a revaluation of the
property or an assignment of the existing valuation. That
is at p19 of the transcript, so by asking Mr Adih to assign
it, he was asking Mr Adih to do exactly whether Mr Adih did,
not revaluing, not revisiting, not doing his sums again but
simply saying 'That is my valuation and I confirm it. I
confirm it to you with a different definition than I
confirmed it to Mr Cormack, because you, as I understand
you, you are either a broker or in some way putting a deal
together for a financier who is going to be a mortgagee, but
I define it in a way which is not consistent with a quick
sale and I require you to read this letter with my valuation
which highlights that it is not consistent with a quick
sale'.
The foundation of the case by the plaintiff that it obtained
a 90 day quick sale valuation by way of an assignment and
that it wouldn't have acted other than if it had have done
that or obtained such a thing, were not expressed in Exhibit
D3 or in the first statement of claim, and a case is now
being sought to be constructed around inferences that are to
be drawn from the letter of Mr Adih. Those inferences must
be absolutely irresistible to found the case against the
defendants, and in my submission the inferences were not
reasonable to be drawn from that letter in all the
circumstances of the case that I have just put to Your
Honour."
31. I cannot accept this submission. Adih was asked for a 90 day quick sale at auction value. He did not speak of that in his letter. Ciccolella rang him and believing the value had increased Adih spoke in a manner clearly suggesting that on a quick 90 day sale at auction price of 2.2 million could reasonably be expected, even if it was a mortgagee sale.
32. Mr Muecke further submitted:-
"I have dealt at some length with that first issue, because
when we come to look at the question of whether the
valuation was negligently performed, we have to establish in
our minds the context in which we are considering that. Mr
Adih says he valued market value for mortgage security
purposes, not 90 day. Mr Ciccolella said if not 90 day, it
is no good to them, they wouldn't have acted at all, and Mr
Roberts says 'That's not good enough and we wouldn't act on
it'. It is alleged that the representation that market
value for mortgage purposes was false and untrue, and that
the property couldn't reasonably be expected to realise 2.2
million when read in that context, is pleaded against the
defendants in para 13 of the Statement of Claim.
Representations, that is the representation that it was
valued at $2.2 million for mortgage purposes, was false and
untrue in that it could not reasonably be expected to
realise that sum, sale whether by mortgagee or otherwise.
The property could not properly be described as having a
value of or about the sum of $2.2 million, para (c). The
value of the property for mortgage purposes was in the
vicinity of $1.12 million or alternatively a figure
substantially less than $2.2 million, (d) and (f) refers to
the items included in the valuation not owned by Cormack Pty
Ltd. They form the thrust of the plaintiff's case against
the defendants on the negligently performed valuation even
in the manner in which it was performed, if that becomes
relevant in this case."
33. Again the telephone call defeats this submission. Was Adih negligent? It is necessary to see what values other valuers put on the land. Of course, the mere number of valuers who give evidence of different values is not decisive. But the evidence of others, that is other than Adih, can be helpful. We know that Adih valued at $2.2 million in June 1988 and in the telephone call said that that was still applicable in December 1988 for security purposes, for mortgage purposes and for refinancing and, as I have held, for a quick sale at auction after 90 days.
34. Raymond John Taylor was called by the plaintiff. I will not recite his qualifications. Suffice it to say that he is a very experienced valuer. He has "been engaged in valuation work since 1961". He has been a member of the South Australian Divisional Board of the Institute of Valuers. He has been a councillor representing the South Australian division of the Institute of Valuers. At the request of the solicitors for the plaintiff he valued the land on 20th July 1990 as it would have been on the 6th June and 21st December 1988. He had to cast his mind back to June and December 1988. In ordinary circumstances a valuer has no difficulty in doing that. Taylor gave this evidence:-
"Q. When did you inspect the property.
A. 20 July 1990.
Q. Could you tell me what you noticed about the property
when you inspected it.
A. At the time of my inspection, the property was
unoccupied, and obviously had been for quite some time. It
was in a rather unkempt state. The offices were vacant, the
cold store facilities were also vacant, and generally, it
had a somewhat run-down appearance, and most of the
refrigeration equipment, if not all the refrigeration
equipment, in fact, had been removed from the property.
Q. Looking at the valuation which I now hand to you, is
that a report of the valuation that was written by you.
A. Yes, it is.
EXHIBIT P81 Report and valuation of this witness of 25 July
1990, tendered by Mr Morcombe. Admitted.
Q. When you observed the property, did you notice anything
about the type of property that it was.
A. It was most apparent that it was a particularly
specialised property; I guess, basically, specially built as
an, essentially, cold store facility.
Q. Was that an important factor to you as a valuer.
A. Yes.
Q. Why.
A. Specialty properties generally need to be regarded with
some caution by valuers, because of the very limited demand
in the marketplace for such specialised properties.
Q. Over the 30 odd years in which you have performed
valuations, have you valued specialist properties.
A. Yes.
Q. Including meatworks.
A. Yes.
Q. Meat processing works.
A. Yes.
Q. Wineries.
A. Yes.
Q. And other properties having cold storage facilities.
A. Yes.
Q. I think that you personally have an interest in an
investment property at Regency Park.
A. That is correct.
Q. Which also is a specialist building.
A. No, it is not. That is an office warehouse type
facility, which is not a specialised building, as such.
Q. Looking at your report, the certificate of valuation,
being the page that bears your signature and dated 25 July,
you determined the market value as 1.6 million dollars and
security value as 1.35 million dollars.
A. That is correct, yes.
Q. Could you explain what you meant by the term 'Market
value', where you there use the term.
A. The market value at that time I determined at 1.6
million, being the value that I considered the property to
be worth on that particular day, on that date.
Q. When you say 'on that date' -
A. As at the relevant date, being 6 June 1988, and also 21
December 1988.
Q. So in July 1990, you valued the property as at those two
dates in 1988.
A. That is correct.
Q. Perhaps if you wouldn't mind expanding on the expression
'market value', as to what you meant by that term.
A. As I was saying, the market value as at June and
December 1988 I considered to be the worth of the property
on these specific dates, rather than the long-term worth of
the property which, in my opinion, is the security value: In
other words, a value that would withstand the highs and lows
in the marketplace.
Q. Did you make certain assumptions in respect of the
property as at those two dates in 1988 when you valued it in
July 1990.
A. Yes, I did. I needed to do that because, as I have
already mentioned, the property was vacant when I inspected
it, whereas in June and December 1980, I believe the
property was functional, was fully operative, and so I had
to assume that that was its condition when I did the
valuation.
Q. Did you assume the existence of items which were not
there in July 1990.
A. Yes.
Q. Did you assume anything about the ownership of those
items.
A. I assumed that the items of plant and equipment and the
property were owned by the one party. I was unable to do
otherwise, because there was nobody there to assist me. The
plant and equipment wasn't there. So I had no opportunity
to differentiate between the two.
Q. I think in February 1992 you were then asked to do
something else in respect of that same property, is that
right.
A. Yes.
Q. Looking at the document which I now hand to you, is that
a document under your hand and dated 4 February 1992.
A. Yes, it is.
Q. Could you please tell me what you were asked to do that
led to you producing that document.
A. I was asked to determine a mortgage value and security
value based on a quick sale in a limited 90 day period.
Q. As at the same two 1988 dates.
A. That is correct.
Q. Then you produced that document dated 4 February 1992.
A. Yes.
Q. That document sets out the premise, that is, the
valuations determined for mortgage purposes, but assuming a
quick sale by auction within 90 days, and you put a figure
of $960,000 on that.
A. Yes.
Q. Could you explain why there is that difference between
the 1.35 million dollars which you gave in July as at those
two dates in 1988 for security value, but then you came up
with a lesser sum in respect of mortgage purposes, but
assuming a quick sale by auction within 90 days.
A. I believe that for a specialised property, as this one
is, that 90 days is too limiting a period in which to
attempt to sell such a property. I believe that properties
of this nature which attract a very small proportion of the
market may take 12 months, 18 months, even two years to
sell, and I think to have it sold within such a limited
period with the stigma attaching to it that it is, in fact,
a mortgagee sale, reduced very substantially the end result,
the end price.
EXHIBIT P82 Certificate of valuation of the Gepps Cross
land on the assumption that the valuation is required for
mortgage purposes, but assuming a quick sale by auction
within 90 days (dated 4 February 1992) tendered by Mr
Morcombe. Admitted."
35. Then in May 1992 he was asked to cast his mind back again and make further valuations as at June and December 1988. He did so. He produced a certificate (Exhibit P83). Part of it said:-
"Values I determine as hereunder, and I believe each
valuation to be appropriate at both the 6th June, 1988 and
21st December, 1988.
a. Fair market value unencumbered $ 1,600.000
b. Fair market value encumbered by purchase agreement
$1,318,000
c. Security value encumbered by purchase agreement
$1,120,000
d. Quick sale security value encumbered by purchase
agreement $ 925,000"
36. Plant and equipment was included in the first and excluded from the other values.
37. Alexander McLeod Smithson, another experienced valuer, was called by the plaintiff. He valued the land in December 1989 and cast his mind back to June 1988. In December 1988 he valued the land (market value and for mortgagee sale) as at December 1989 at $1.75 million.
38. In April 1992, looking back, he valued the land thus:-
As at 6/6/88 for mortgage security $1,250,000
For quick sale 90 days auction $1.1 million
As at 21/12/88 mortgage security $1,350,000
Quick Sale 90 day auction $1,150,000
39. For the defendant Alfonso Taormina, another experienced valuer, gave evidence. He saw the land on 27th July 1988. He was asked by a broker acting for Farrow Mortgage Services to review Adih's valuation. He valued the land at $2 million - market value. Taormina rang Adih to speak to him about it. He gave this evidence:-
"A. ...I rang Kofi and I was supplied with a copy of his
valuation. We worked through it. These are the rates I
have adopted. We talked through the logic he went through
and we discussed it on a professional basis.
Q. Was there one aspect of the figure that he used that you
had a different view about.
A. I do recall part of that conversation. I do recall
agreeing with him on the majority of the rentals and the cap
rate that he adopted. I recall him saying that he talked
about the potential for further development of the property.
That is the potential to extend the building further under
its current zoning. I don't know if he had specifically
made a treatment of that in his valuation. I do recall
debating that with him. I didn't disagree with him in
total, but I made a point in my letter to my clients that
there was a bit of a difference of opinion on that point.
However, as to the treatment, if any, that he had made of
the site's potential for future expansion, that I disagreed.
I expressed from his valuation I don't think he specifically
accounted for that potential. The reason I put that comment
in is because my valuation differed by some $200,000 from
his. I thought it a courtesy to our clients to explain
possibly that difference or go some way to explain that
difference.
Q. Was that a significant difference.
A. No. In my opinion, no, not for that sort of sum of
money, in the order of 2 million dollars."
40. In March 1990 Taormina valued the land as for market value for mortgage security purposes at $1.7m.
41. These valuers all came to different conclusions. There is quite a wide divergence. But the value reached by Adih, on any view, is greatly in excess of that of any other valuer. Taormina arrived at $2m market value as at July 1988. He said that the divergence of $200,000 between his and the value at which Adih arrived was not, for this amount of money, very great. But I cannot agree. I think that a difference of $200,000 is substantial.
42. Each valuer used the same method. He reached an imputed rent and capitalised it. There is no difference of method. In my opinion, the valuation or valuations which should be accepted as correct is that or those of Taylor. I suppose that there is no such thing as absolute right or wrong with valuations. But the evidence of Taylor carried the most conviction. He spoke from a wealth of experience. I am sure that he is competent. It is true that Adih and Taormina saw the property in full swing in 1988. Taylor did not. Operations had ceased. Still I find his evidence convincing. It will be seen that on any of his figures he arrives at much less than did Adih. On security value it is $1,120,000 as opposed to $2,200,000. No valuer other than Adih suggested the value "on any definition" (Mr Morcombe's apt expression) was more than $2m including the value of plant and equipment in or on the premises.
43. In capitalising imputed rentals Adih used 11%. Taylor said from his experience that he was amazed that anyone would use only 11%. He thought 12% the least value to be appropriated. Adih arrived at $241,300 as the imputed rent. Taylor was some $35,000 less. The range of imputed rents arrived at by the valuers was from $193,500 to $213,360 (excluding Adih). Adih was well out of the range. Mr Morcombe submitted that Adih made an error of arithmetic in working with "freezer and chiller rates". Mr Morcombe submitted:-
"We say Mr Adih made specific errors when calculating his
imputed rental, and we say that is the reason why he is so
far ahead of everyone else.
First as to the freezer and chiller rates, I have an
amendment to the transcript at p495 where the transcript
indicates in line 21 that the freezer was approximately 590
cubic metres and in line 25 that the chiller was 100 cubic
metres. Exhibit P91, which is a working sheet from Mr
Adih's file, indicated that those figures should be 509
instead of 590 and the 100 cubic metres should be 3,700.
They in fact are the figures that I put to him subsequently
in cross-examination. I think my friend agrees to changing
that.
If we could also go to p585 from Mr Taormina, lines 18 and
22, that 276,000 should be 207,600.
On the topic of freezer and chiller rates, if Your Honour
has before you Exhibit P91 Your Honour will see in the
left-hand side column two items, freezer and chiller, and
Your Honour will see then some rates and 509 leading to an
equation sign and then 33,350. Underneath that line you
will see 70 divided by 36 multiplied by 60 multiplied by 52.
The witness agreed with me in cross-examination that 75
cents per cubic metre per week was the rate at which he
worked for the freezer space and he said that the freezer
space was 509 cubic metres. If you multiply, as he has, by
60 and divided by 36 you increase dramatically the actual
freezer space that you have and it is significant that he
has done that, not only in respect to the freezer but also
the chillers, and my cross-examination on that topic starts
at p527 of the transcript but at p528 in the second line he
confirmed that the current charge rates were 75 cents for
freezing and 50 cents for chilling, and in respect of
freezing space he confirmed 509 cubic metres and then he
agreed that he had multiplied by 60 and divided by 36.
We say that logically that has to lead to a return greater
than what you can get from 509 cubic metres you multiply by
the rate of 75 cents per cubic metre. Given that he has
also done that in respect of the chiller income, and that
cross-examination on that stock extends to between pp528 and
534, and accounts for the reason why he attributes greater
income to the freezer and the chiller than does any other
valuer. In particular, if you add that $33,000 odd to the
$161,000 odd you get to about $195,000 imputed income just
from the freezers, whereas if you look at Mr Taormina's
valuation in D10 on p5 of his valuation, he gives an imputed
rental of $168,000 for the cold store, which is a
combination of cold store and freezer.
In our submission that explains in part why Mr Adih was so
high in that regard."
44. I accept this submission. I had spoken earlier of vacant land. Mr Taylor said that the land was fully developed. He said that you could not get any more out of it. That is to say that nothing could be done by producing extra rent with the vacant land. Adih did allot rental to that space. No other valuer did so. Each said it was not appropriate to attribute rent to that space. I accept this submission.
45. Adih made an error, which he should not have made, when using freezer and chilling rates. He made an error in attributing rent to a space to which no reasonably prudent valuer would have attributed rent.
46. In Baxter v F. W. Gapp and Co Ltd (1939) 2 All ER 752 at 758 Du Parcq LJ said:-
"It is, of course, quite clear that the mere fact that there
is an over-valuation does not of itself show negligence.
Gross over-valuation, unless explained, may be strong
evidence either of negligence or of incompetence."
47. This remark was adopted by Clark J (as he then was) in Trade Credits Ltd v Baillieu Knight Frank (NSW) Pty Ltd (1985) Aust Torts Reports 69,525. After quoting from the reasons of Du Parcq LJ, Clark J said (p 69,530):-
"The over-valuation in this case is properly categorised, in
my view, as gross, and the disparity between it and the
other valuations provides a clear indication that the
defendants valuer...carried out his task negligently."
48. I hold that Adih was negligent. His valuation was grossly excessive. He did not exercise the care and skill of a reasonably prudent and competent valuer in the circumstances. He made errors for which there is no exculpatory explanation. Adih took no heed of the plant and equipment in or on the premises, in the sense that he did not consider whether that should affect his valuation. That plant and equipment kept operations going. It was in the main refrigeration or freezing plant and equipment. AGC owned it. It was entitled to take it out when the Cormacks went into liquidation (as it did). AGC removed the plant and equipment. Farrow Mortgage Services decided to sell the real estate "under" its mortgage. It engaged the firm of Hookers to do the selling. Mr Davies of Hookers advertised and arranged the sale. He negotiated with AGC to have the plant and equipment put back. At that time the plant and equipment was put back at a cost of $12,500.
49. The land was sold at auction on 15th August 1990 for $715,000. But the price paid for the real estate as the Memorandum of Transfer shows was $597.500. The balance was a value attributed to the plant and equipment.
50. The evidence of Davies about his efforts to sell and the deterioration of the property since it had become idle defeat the suggestion of the defendants that there was any fault in the selling at the price received. I accept the evidence of Davies about all the efforts that he made and about the state of the premises. I think that Davies took reasonable steps to get the best price and have the premises put in reasonable order for sale.
51. I come back to plant and equipment in or on the premises in June and December 1988. That is to say at the times when Adih and Taormina saw the place working. They valued it as a going concern.
52. Some of the valuers other than Adih started with the proposition that it was not the concern of valuers to consider or enquire about ownership of plant and equipment nor whether it was in any way encumbered. But as Mr Morcombe said those that took that view, in particular Taormina, rather resiled from it during the course of evidence. At all times Adih maintained his stand that there was no obligation on him to think about the ownership of plant and equipment or whether it was encumbered or anything about it at all in relation to expected sale price. There was discussion about the difference if the registered proprietor was the owner of the plant and equipment and owed money on it as opposed to the plant and equipment being owned by somebody else, such as a finance company. I expect that there is a difference. Taylor was consistent on this score. He gave this evidence:-
"Q. You are now aware that some of the plant and equipment
was in fact owned by AGC, is that right.
A. Yes, correct.
Q. Could you tell me what approach you take in valuing an
industrial property which has on it plant and equipment, and
can I ask you to draw a distinction, if you wouldn't mind,
as to plant and equipment which appears to be part of the
fixtures on the one hand, and plant and equipment which does
not to the eye seem to be a fixture.
A. At the very outset of inspecting a property I need to
define precisely what I am valuing. In other words, I need
to be quite clear as to what I am expected to value,
particularly if it's for mortgage purposes, it's even I
think more important to define the article being valued, and
to determine the ownership. If it is a property that
involves plant and equipment such as air-conditioning, such
as refrigeration, to determine whether or not that is owned
by the owner of the real estate, whether it is in fact part
and parcel of the real estate. If not, to exclude that from
the valuation, and to exclude of course any items of
moveable plant which would normally not be valued anyway."
53. When Smithson valued the land he had some information about the nature and amount of the plant and equipment. He mentioned that "the amount financed was $486,000". That is, that Cormacks owed that sum on plant and equipment. He took plant and equipment into account in rather an imprecise way. He said:-
"Q. When you looked at the schedule, did you make an
observation as to whether all of it or part of it may have
been of the type that would normally be a fixture to real
estate.
A. I certainly looked at it to decide which part of it or
all of it was a fixture, yes.
Q. What did you observe.
A. There was clearly, in my opinion, some of it that was
integral plant. Also things like office furniture,
computing equipment that clearly wasn't a fixture.
Q. In the second last paragraph on p9 you have said 'We
have not sighted valuations of the plant and equipment or
received a break down of the individual items and therefore
assume that the value of the integral plant and equipment as
at the date of valuation in situ was in the order of
$300,000'. I think it is the case you have not specifically
set out to value the equipment that was an integral part.
A. I didn't have enough information to individually value
the items. I made a valued judgment as to what proportion
may have been reasonable for being integral plant and
equipment."
54. Taormina said:-
"Q. At either mid 1988 or early 1990, for the purposes of
performing your task to value this property, did you make
enquiries as to exactly what plant and equipment was in the
property, who owned it, whether it was under finance, and
the value of that finance, or the extent of that finance.
A. I had made enquiries as to part of those points. On the
first occasion, I asked about the computer operated weighing
and invoicing network that was in place, and I decided to
exclude that item of the property as it, I felt, formed part
of the chattels or the moveable items. It didn't form part
of the real property. I had asked about the cost of the
plant, the refrigeration plant. I didn't make enquiries as
to the ownership of it. We tend to do a lot of insurance
valuations where our valuers have been asked to put values
of building and plant and equipment and we would have two
valuers, a building valuer and a plant and equipment valuer.
When we would value a property like this for insurance
purposes, our definition of what formed part of the building
and what formed plant and machinery was we felt decided by
court cases and we had drawn up lists of items that fell
into those two categories. Our criteria for determining
whether something was part of the real property was whether
it was fixed to the property and what damage might be
occasioned by trying to move those items. Where a gantry
crane is installed as part of the frame of a roof, to take
that gantry crane away would mean rebuilding the frames of
the roof we would include that as part of the building.
Where a gantry crane is suspend and bolted to the floor, we
might take it as plant and machinery, if it was easily
moveable. Having that in the back of my mind, and having
seen the refrigeration equipment in place at lot 1 Main
North Road, I made the decision in the first instance when I
did the valuation that the plant and equipment formed part
of the buildings. It was integral to the buildings, and I
didn't make enquiries as to whether it was owned by the
owner, or if there was some sort of lien over that.
Q. Why not.
A. For the same reason - when I inspect any other property,
I assume what I see is part of the property. If I value a
residential property, I don't ask whether the
air-conditioner is owned by a hire purchase company or a
finance company. I assume that it is there and would form
part of the sale if the property was offered, if I felt it
couldn't be moved out of the building.
Q. In failing to make those enquiries, did you consider
that you were not discharging your proper function as a
valuer.
A. No, I didn't feel that way."
55. But later in cross-examination he said:-
"Q. Would you agree with me that if the land owner was not
the owner of that plant and equipment which formed a part of
the fixtures, then there would be, at the very least, a
possibility that a company taking a mortgage over the
premises would not in fact have a mortgage over that plant
and equipment.
A. I would agree with that statement. I would add to that.
I would say that a mortgagee taking out a mortgage would
always look at what existing encumbrances are registered on
the title. From what I recall of the title and what
evidence there is here, AGC's interest was shown. Normally,
the valuers says 'This is what you would get for the
property on the day of inspection in the open market'. We
don't normally go behind those encumbrances and say 'You
better watch out, there is a mortgage to the Commonwealth
Bank for $5m. We advise you not to lend against this'.
That is normally part of the credit search, or the credit
research, that they do with the lending application. We
give them a basis for them to start. In the case of an
individual, it might be they do a credit check on that
person to see if they are capable of making repayments. We
give them a basis, a figure to start from. They have a
lending ratio, and that is an internal decision, and that
decision is based often on the type of property their
calculation of the type of applicant or the borrower, and
other research they do."
56. And later he rather resiled from his earlier stand. But it is clear that both Taormina and Adih regarded Cormack and Taj as one and the same entity. I think this played a part in Adih's taking no heed of the plant and equipment or offering no warning to the plaintiff about its effect on value if it was taken out.
57. I think, with the support of the evidence of Taylor and Smithson, that a valuer should take some steps to check on the ownership of plant and equipment in real estate which he is valuing. The steps will depend on the circumstances. He should be striving to ascertain what property should be valued. Should it be the land proper with buildings or should it include plant and equipment. Are some things not fixtures? Will they, therefore, not pass on sale? May they have been removed by the time sale comes around by whomsoever is owed money on them? The valuer should be on guard to take steps to avoid including in his valuation something which may not pass on sale. If he can get no information to help him know enough about the state of plant and equipment he should warn his client that there may be a danger of reduced value by the removal of plant and equipment not owned by the registered proprietor.
58. Whatever would be the view of valuers I hold as I have suggested. I hold it to be the duty of a valuer to take the steps about plant and equipment which I have stated, that is the steps which a reasonably prudent valuer would take in considering the effect of removal of plant and equipment before sale. In fact I think that the evidence of Taylor and Smithson support my opinion. But we know that on questions of negligence the Court must make up its own mind without merely following the views of experts in the field. Experts can guide but not lead. (See in a different context Rogers v Whitaker (1992) 175 CLR 479). In further support of my opinion, I refer to Johnson v Henderson and Others (1983) 107 LSJS 98 at 107, 108 where Matheson J said of the duty of the valuer there:-
"I turn now to consider the law relating to the duty of care
of valuers. As long ago as 1888, a valuer was held liable
to the mortgagee in respect of a valuation paid for by the
mortgagor on the ground that he knew the purpose for which
it was to be used, see Cann v Wilson 39 Ch D 39. In that
case Chitty J said at pp42-43: 'In this case the document
called a valuation was sent by the Defendants direct to the
agents of the Plaintiff for the purpose of inducing the
Plaintiff and his co-trustee to lay out the trust money on
mortgage. It seems to me that the Defendants knowingly
placed themselves in that position, and in point of law
incurred a duty towards him to use reasonable care in the
preparation of the document called a valuation.... I
think,...the Defendants stood with regard to the Plaintiff -
quite apart from any question of there being a contract or
not in the peculiar circumstances of this case - in the
position of being under an obligation or duty towards him;
and then, I think, they failed negligently by their gross
negligence to discharge that obligation.'
This case was overruled in Le Lievre v Gould (1893) 1QB 491,
but specifically reinstated as authority by the House of
Lords in Hedley Byrne and Co Ltd v Heller and Partners Ltd
(1964) AC 465, see per Lord Reid at p489, per Lord Morris of
Borth-y-Gest at p501 and per Lord Pearce at p535.
In the case at bar the first defendant specifically states
in his 'valuation report' that he was instructed 'to
determine the market value of the property and its
suitability as security for mortgage advances'. He must
have known that his valuation would be passed on to the
plaintiffs. In the circumstances, I have no difficulty in
holding that he owed the plaintiffs a duty of care.
In my opinion, the first defendant was in breach of his duty
in a number of respects. I have no doubt in all the
circumstances of this case that he should have disclosed the
purchase price of the existing contract for the sale of the
land (cf Inez Investments Pty Ltd v J.L. Dodd. The Valuer,
April 1981, p502). He did refer to the existence of a
caveat, incidentally by the wrong number, but that was not
enough. If he thought the purchase price was not a
reasonable pointer to value, because the transaction was not
'an arm's length one', or because the purchaser had
substantially improved the said property or for some other
reason, I think he should have said so in his valuation
report.
Next, the first defendant should have stated clearly what
plant and equipment was included in the valuation. Many of
the items of plant and equipment, which he says he included
in the figure of $198,000, were not mentioned in the
valuation report, and, as I have said, were not even owned
by Whelan Holdings. He was aware of the existence of the
two Whelan companies, and if he had made due inquiries, he
would have ascertained that many of the items he claims to
have included were owned or leased by Whelan Investments,
and certainly could not have afforded 'security for mortgage
advances'.
In my opinion, the first defendant was in breach of his duty
of care to the plaintiffs. There is no doubt that it was
reasonably foreseeable that they would rely on his valuation
in assessing the adequacy of the said property as security
for a loan, and the amount of the loan."
59. We have then duty, breach amounting to a negligent breach, foreseeability of possibility of loss and causation. As to causation the plaintiff relied on the valuation of Adih. I find that it would not have ventured into the factoring contract without that valuation, confirmed as it was by the telephone call of which I have spoken. In that call Adih really said that the value of the property was such that there would be enough to cover the outlay of the plaintiff after paying out the first mortgagee on a first mortgagee's sale at auction after 90 days' notice.
60. The plaintiff, through Ciccolella, sought a valuation. Why? To help it decide whether it would enter a factoring arrangement. It got something not quite precise. What did Ciccolella do? On behalf of the plaintiff he rang Adih and asked if the valuation was suitable for what the plaintiff wanted, ie confirmation that on a quick sale at auction after 90 days' notice the property could reasonably be expected to sell for $2.2m. What did the plaintiff get in response to that call? It got from Adih the answer "Yes" with an explanation that he could say "Yes" because the value of the property had risen. The plaintiff went on with the proposed transaction. It signed an invoice finance agreement. It did rely on the valuations confirmed by Adih. It did so no matter what else was said or written, "within house" by Roberts or the Kayes. Moreover, I think that the plaintiff always did want a 90 day quick sale value and all other discussion about cash or dollar for dollar, or anything else touching security were reasons for wanting that value for 90 days sale at auction or other ways incidental to that wish.
61. What of loss and foreseeability of type of loss? I think that the defendants must, or should in short, have foreseen that if the valuation was too high, upon a forced sale at auction after 90 days notice, there might not be enough to satisfy the amount due to the plaintiff, and consequently it may suffer loss. In a general way there is foreseeability of loss. Mr Muecke denied that the defendant could have foreseen the type of loss said to have been sustained. I do not think that, subject to remoteness, the law requires that the plaintiff prove that the defendants should have foreseen the exact source or nature of loss. Here if the defendants could foresee financial loss through there not being enough value in the security that will suffice.
62. I bear in mind the need to consider "remoteness". Was there loss? What sort of loss? How does one assess calculating any loss? These are very difficult questions. But there was loss. The evidence of Ciccolella and Mrs Bottin, the administrator of the office of the plaintiff in Adelaide, and of its solicitor, Mr Taylor, proves that there was some loss. Moreover, there are some agreed facts. The loss was an inability to recover as much as the plaintiff paid out together with its expected profit because Taj and Cormacks went into liquidation and the property sold for an amount not enough to pay out even the first mortgagee (Farrow).
63. In considering the loss it is necessary to look at the way in which the factoring was done. Mr Morcombe explained the "concept of the factoring agreement" very clearly in opening. His explanation is supported by the evidence offered by the plaintiff. He said:-
"If I can perhaps digress for a moment to outline the
concept of the factoring agreement. I will come to the
documents in a moment, but frankly it's not a subject matter
that I found easy to comprehend, particularly in the
details. In broad concept, the client sold to my client its
debts. My client agreed to advance 80% of the book value of
those debts. It was also part of the agreement that, of
that 80%, my client would retain 3% as a guesstimate of the
fees that would be involved, the charges that would be
involved for the factoring of the debts. My client did not
charge interest as such, its profit was in this 3% which was
the guesstimate. That 3% nominally was put to one side. It
was, in fact, retained by my client but put to one side and,
from that 3%, a factoring fee was subsequently calculated,
and that factoring fee was then deducted from the 3% and the
balance refunded to the client. If the factoring fee
exceeded 3%, then there was additional charge to the client
and my client kept the 3%.
The point at which the calculation is made is significant.
Again I will come to the detail but, in broad, it's this;
the time at which the fee is raised is the point at which my
client has collected in excess of 80% of the debt as
factored, so that if in February of 1989, a client sold to
my client a $100,000 worth of its debts, my client would
advance $80,000. From that $80,000, it would subtract
$3,000, put it nominally to one side, and the client would
get $77,000. My client would then start collecting the
debts. It was a confidential arrangement. My client's name
did not appear on the invoices that were sent to our
client's customers, but all of the moneys were to be sent to
my client's address, a post address, so that if, for
example, Coles or Woolworths purchased meat from our client,
they would have a bill for, say $2,000, and they would send
the bill to the client but at our address, so that their
customers didn't know that the money was coming direct to
us. After we had collected money, there would be a point at
which we had collected 80% of the face value of the debt.
That 80%, of course, was the amount that we had advanced to
the client. After we had collected the 80%, the calculation
was then done as to what the fee would be for our factoring
facility and, of course, the formula, whilst reasonably
complex, took into account how long it took us to collect
the money. So if the moneys were outstanding for two
months, the factoring fee that we would charge would be
considerably less than if the moneys were outstanding for
four months, so the time was built into the fee."
64. The plaintiff suffered loss because it could not collect debts to the amount which it paid out, because it lost profit and because it spent money in seeking to recover debts which it had purchased.
65. The first defendant is liable for the negligence of the second defendant. The second defendant was negligent.
66. I turn to contributory negligence. The defendants pleaded and argued that the plaintiff was guilty of negligence which was the sole cause of loss. I have disposed of that plea. The defendant alleges also contributory negligence. Mr Muecke submitted that "the plaintiff knew that extensive and very valuable plant and equipment at the site were not owned by Cormack Pty Ltd but were owned by AGC under consumer mortgage in the books of Taj Meats". I think that the evidence to which Mr Muecke referred in detail on pp637 to 643 inclusive of the transcript supports this submission. Or at least the evidence supports the view that the plaintiff should have known or at least suspected that AGC owned the plant and equipment and could take it out in certain circumstances. That is, the plaintiff knew or should at least suspected that plant and equipment might not pass to a purchaser of the land. I do not recite all that evidence. But a telling piece of evidence given by Mr Roberts under cross-examination is:-
"Q. Do you remember as at early January, having any
understanding or information regarding AGC's exposure to
your prospective client.
A. I was aware at the time that AGC I believe was owed in
the vicinity of 1.2 million dollars.
Q. Were you aware that there was any leasing finance given
to your prospective client by AGC.
A. I was aware that there were facilities given to our
prospective client, but I did not go into any detail as to
what they were; whether it is lease, hire purchase, I don't
know.
Q. You didn't know whether that was lease, is that right.
A. Yes.
Q. P24 I ask you to look at starting at p225, second page,
para 3. Could you read that. Do you still say that as of
January 1989, you were not aware of any leases to AGC.
A. I was not aware of the actual break up of the account
and I don't recall that.
Q. You told us a moment ago that you didn't know that they
were leases.
A. I beg your pardon. I said I can't recall the specific
memo.
Q. You had no knowledge, you told us a moment ago, that
there were leases to AGC in January 1989.
A. No. I said there was a lot of money owing to AGC. I
recall 1.2 million dollars, but I cannot recall specifically
how they were broken up; as to what was lease, hire
purchase, business loan or whatever. In fact I add, I am
not even sure, whilst that facsimile is addressed to me, I
was not in Melbourne at the time. I'm not sure.
Q. If you look at Exhibit 25A, p234A, that came to your
attention, didn't it.
A. I don't recall. Yes.
Q. That would indicate to you that Mr Cormack intended to
use $300,000 - I'm looking at the third paragraph up - to
pay out more urgent creditors if he got finance.
A. Which paragraph? Q. Third from the end of the letter.
A. That is what it states, yes.
Q. You knew at that stage that AGC would require half a
million dollars or something of that order.
A. Yes.
Q. To get your second mortgage on the title.
A. Yes.
Q. That was $800,000 straight away just to immediate urgent
creditors and to get your mortgage on the title. Is that
right.
A. That is what it states.
Q. That was your understanding.
A. Yes. I might add, at the time, this indicated a
facility of 1.3 million dollars. Not the facility I
formally approved.
Q. I understand that, but it indicated whatever facility
you were going to give, $300,000 had to go to meet urgent
creditors, and $500,000 had to be found before your title
could get on the Certificate of Title, before your mortgage
could get on the title.
A. I wouldn't know exactly, but I would assume. But that
still left a surplus of half a million dollars which is
still a considerable amount of money.
Q. But you didn't give them 1.3. You gave them $600,000.
A. This is irrelevant because this didn't proceed.
Q. I understand that. You understood that Taj Meat needed
$300,000 or wanted $300,000 for working capital.
A. With respect, that is not what it says.
Q. Don't worry about that. You understood that Taj Meat
wanted $300,000 for working capital.
A. No. I understood from the audit report prepared that Mr
Cormack had indicated to Howarth and Howarth that there was
$300,000 needed to pay more urgent creditors.
Q. You knew also that another $300,000 was required or Taj
Meat wanted $300,000 for working capital.
A. No. I can't say how the money was to be broken up.
This is indication here to me from our auditor. I
understand there was 300 plus 500 for AGC. What else had to
be paid out, I had no idea.
Q. Put it this way, you knew when you approved $600,000,
that $500,000 of it was to go to AGC.
A. At that time, yes.
Q. At the time you approved $600,000, you knew that
$500,000 was to go to AGC.
A. With respect, I never approved $600,000 either.
Q. That is what they got though. That is what Taj Meat got
from your company.
A. A little more than that.
Q. $610,000.
A. Whatever. I approved a facility of $800,000.
Q. Your company gave Taj Meat $600,000, did it not.
A. Yes.
Q. In February.
A. Yes.
Q. You knew at that time that AGC was going to get $500,000
of it.
A. Yes.
Q. And that there were other creditors urgently requiring
$300,000.
A. I was advised there were other creditors. I did not
specifically know myself.
Q. You took your accountant's word for that I assume.
A. If you recall in earlier testimony, I gave my accountant
a kick in the backside because it wasn't a satisfactory
audit report.
Q. Did you not believe that Taj Meat had $300,000 worth of
urgent creditors.
A. I can't recall. If I could refer to the application, I
can be more specific.
Q. Do you have to do that. You could look at this letter.
A. This letter is indicating to me from our accountant that
Cormack has stated he needs $300,000 from the 1.3 million
dollars facility to pay out more urgent creditors. As far
as I'm concerned, that is irrelevant as we did not proceed
with that application.
Q. This letter told you Taj had got $300,000 worth of
credit debtors knocking at his door wanting to be paid,
didn't it.
A. Yes, it would indicate that.
Q. You knocked back a proposal for 1.3 because of the audit
reports, didn't you.
A. Basically the audit report and the lack of security.
Q. Through the lack of security.
A. Wasn't sufficient security to warrant an advance of 1.3
million dollars."
67. And there is more evidence as mentioned by Mr Muecke to show that the plaintiff had sufficient knowledge of the involvement of AGC to put it on guard about the possibility that plant and equipment might not pass on the sale of the land. The audit reports which the plaintiff received were guarded. One said, in effect, that if all went well the company (Taj) should be able to trade out of its difficulties (Exhibit P28AA audit report by letter from Howarth and Howarth, accountants, dated 25th January 1989). So there were difficulties to be overcome. Mr Morcombe forcefully denied that the plaintiff was ever on notice that plant and equipment were not owned by the registered proprietor of the land.
68. There is no doubt that the plaintiff was embarking on a risky transaction (the factoring). Ciccolella said that he was keen to get the business. But after reading Exhibit P28AA he was aware of difficulties. He sent his memorandum (Exhibit P28) to Roberts. In it he said: "If unforeseen problems or difficulties arise in the future we are it. There is no room for negotiation with other financiers as we will hold the available securities". Yet the plaintiff proceeded. As I have said it did so in reliance on the valuation and conformation of that valuation given by Adih. The plaintiff was, of course, entitled to embark on a risky enterprise. But when it comes to seeking damages from the defendants I think its own conduct must be considered. It should (just like a personal injury plaintiff) behave before the event in a way which took some care of its own safety (here financial safety). It is said that it did enough by relying on the confirmed valuation. But I think it behove the plaintiff to do more. I speak only of the facts of this case. I lay no down no general proposition. But here the plaintiff could so easily have done more to protect itself. It did not know Adih. It did not know that he had, in effect, included the plant and equipment in the valuation. It knew nothing of his practices. Roberts thought that a valuer should enquire into the possibility of removal of plant and equipment. But he did not know whether valuers generally do that or not. And, as I repeat, he knew nothing of the practices of Adih. All that Roberts needed to do to avoid to the loss was to have caused Ciccolella or someone else to ask Adih about plant and equipment. That, I think, should have occurred to him, to his co-directors and to Ciccolella. But, particularly, to him. He was the one who said "yea" or "nay". He caused the plaintiff to fail to take adequate care of its own financial safety. The plaintiff was guilty of contributory negligence. I apportion responsibility for the loss in the proportion 75% against the defendants and 25% against the plaintiff. The claim was calculated "under" three headings. They are and the amounts are:-
- Uncollected "factored" debts $178,519.17 Costs of
collecting or attempt at collecting $105,774.13 (later
reduced to $104,890.30)
- Interest to 3/3/94 $204,375.00 $488,668.30 Mr Morcombe
correctly said that the plaintiff was entitled to damage
which would put the plaintiff in the position in which it
would have been had it not entered into the transaction. I
add the caveat that the putting into position must be as
nearly as possible. As to "interest" he said:-
"We don't seek to recover interest at a rate that we could
have received from employing our funds. All we seek to
obtain is the cost of the funds to us that we specifically
took out to advance to Taj."
69. He added -
"The question, is what position would we have been in? We
wouldn't have borrowed the money to lend to Taj. Therefore,
it is reasonable we should have the cost to us of the money
that we gave to Taj. Then if you look 6 months, 12 months,
two years down the line, my friend suggests we should have
written that off in our books. So what? It doesn't matter
how we treat the loan in the books. We borrowed money, gave
some to Taj, got some back and we were short. We had to
keep rolling over the bill to the extent we were short. In
our submission, it is a very clear and very appropriate way
of assessing quantum for interest."
70. I think all this sound. In Trade Credits v Baillieu Knight Frank (supra) Clark J said (p69,538)):-
"The defendant's final point concerned the inclusion within
the plaintiff's claimed damages of an interest component
calculated at 25% per annum. This rate of interest is
calculated in accordance with the default provision under
the second mortgage securing the plaintiff's loan. In fact
the rate of interest charged on the advance during its
currency was 34% with, somewhat unusually, a lower 25% as
the default rate. The defendant submits that no valuer
could be taken to have foreseen that his valuation would
form the basis of a loan which provided such extraordinarily
high interest rates. The plaintiff responds that the
defendant was well aware that the borrowing was to be used
for a rodeo venture which, on any view, was a speculative
investment. Accordingly, the defendant should clearly have
foreseen the likelihood of very high rates of interest.
In my view the proper manner of approach is to award
interest at a rate which would place the plaintiff in the
position it would have been in if the tortious conduct had
not occurred. That is a rate reflecting the plaintiff's
normal return from the investment of its funds. If it had
invested moneys in December 1981 on first mortgage security
for a period of three to five years it would have obtained a
return of 17% and if on second mortgage security between 22%
and 23%. It is impossible to be precise in his award for
the plaintiff's lending policies undoubtedly covered a wide
range or types of loans. In all the circumstances I believe
it appropriate to assess the particular component of
interest upon the losses flowing to the plaintiff, as
opposed to the cost of buying out the first mortgage, at
20%. Accordingly, the schedule which was handed up will
need to be recalculated in order to reflect an amount
calculated in accordance with the altered rate of interest."
71. There was, due to my intervention, some hesitation by Mr Muecke in his initial submissions about loss.
72. The transcript will speak. I quote from the transcript of the address of Mr Muecke:-
"MR MUECKE: ...The question of damages. There are three
heads of damages claimed. $178,000 for uncollected factored
debts, $105,000 for the cost of collecting those unfactored
debts, and $204,000 by way of interest, total $488,000 odd.
Subject to two riders, Your Honour might find that there is
an entitlement, if it comes to damages, for part of each of
those heads of damages.
HIS HONOUR: Does that mean that you are acknowledging that
these are legitimate heads of damage known to the law?
MR MUECKE: Yes. Perhaps three riders. Before I deal with
the riders, I deal with each head. First, the uncollected
factored debts. Your Honour does not have any evidence, nor
is it possible to put any evidence before Your Honour, on Mr
Ciccolella's evidence $207 and Miss Bottin's evidence, what
are the debts which were factored by this plaintiff that
have not been collected. It is asserted that they are
uncollectable. That is not surprising, because, on that
evidence, they don't know what they are. They certainly
haven't been put before Your Honour, and the evidence is
that they can't. Some allowance must be made on head of
damage 1 on the basis of remoteness of damage, that is not
foreseeable -
HIS HONOUR: You say there is no evidence to show what was
uncollected.
MR MUECKE: Yes.
HIS HONOUR: Doesn't that mean nothing to the plaintiff.
MR MUECKE: No. The evidence in a sense is that $178,000
they are short of debts.
HIS HONOUR: General shortage.
MR MUECKE: Yes, they work backwards from what they gave and
what they recovered. They can't tell Your Honour what debts
make up that $178,000.
HIS HONOUR: If that's right and sound, does not that mean
that they get nothing under that?
MR MUECKE: It may be that I am being too generous in my
allowance. I am happy to be less generous."
73. Mr Muecke then spoke of remoteness. The amount of loss for uncollected factored debts seems to be proved by worksheets tendered by the plaintiff through Mrs Bottin. She spoke of the calculations which she made and verified the worksheets Exhibits P56, 57 and 59 and the collating sheet (Exhibit P55). Although there was some substance in Mr Muecke's submission that the plaintiff did not know what debts they had bought and completely know what they could not collect, I think this general or overall calculation of a loss satisfactory. Mr Muecke did not dispute the amount of $178,519.17 as such. he made submissions which in the end denied the entitlement of the plaintiff to recover any sum under the heading of "Uncollected factored debts" but he did not submit that the amount was wrongly calculated.
74. The costs which lead to the second head of claim were proved or admitted as to quantum to be correctly calculated as to amount. Mr Muecke says that some were useless costs. I will return to that. The claim for interest is a seeking of damages to compensate for the cost of borrowing money to pay Taj for the factored debts purchased by the plaintiff. As will have been noticed Mr Muecke acknowledged that (subject to riders) the three heads were legitimate heads of damages. But as to all he raised the issue of remoteness. As to "interest" he spoke of failure to mitigate its loss. As to "costs" he spoke of failure to mitigate and to the issue of useless work done. the "useless work" related to work done by a solicitor in putting caveats on land including homes of directors of Taj. Otherwise the question of the quantum of collecting was agreed.
75. I do not think that the damages sought are "remote".
76. I deal with "useless work" first. I agree with Mr Muecke.
77. That means that the charge made for work done for the plaintiff by Mr Strappazzon in relation to caveats must be excluded.
78. I deal with "interest". I recite the submission of Mr Muecke:-
"MR MUECKE: ...They are entitled to something. Interest. I
go back to the Trade Credits case, Clarke J at p 69,538.
He calculated 25 per cent per annum: 'This rate of
interest...of its funds'. Normal return on invested funds -
the interest calculation before Your Honour has not been
done on that basis. It has been done on this basis: What
the plaintiff is claiming is that it wants interest which is
the cost of funds to it, not a return on what it could get
its funds for. The plaintiff has a duty to mitigate its
loss. It is not appropriate in my submission, and it is not
available to claim, interest on bills said to be required to
get the funds that it was going to give Taj Meats. It is
asserted that that's what happened, but in my submission
that defies commonsense. The plaintiff would hardly keep
drawing funds against a loss which had already become
manifest, especially where, and there is evidence in P58
that this occurred in 1990, may be earlier, that its account
was in credit, but it would have Your Honour accept that it
kept drawing funds on commercial bills to cover a loss
already incurred. It should have, as Mr Roberts said,
written off the Taj debt and not taken the subsequent bill
to cover a debt which had already been incurred. In my
submission, it has not mitigated its loss, it has aggravated
its loss to itself, where it gets itself into a position
where it can write off a debt incurred already, but doesn't
do that. It still borrows money, so it is said, and Your
Honour might have trouble accepting this as a matter of
commonsense and logic, still borrows money against something
it is not lending, but a book debt, and Mr Roberts accepts
that it could have written that off, as at the date leased
when it was in credit. There is no evidence of return on
investment. Your Honour must do something with interest, I
accept. Perhaps to use knowledge as to rates which may have
been used in assessing interest on economic losses in other
tortious cases, average that over four years, which was the
year since February 1990, perhaps at 10 per cent, $18,000 a
year for four years, $72,000.
HIS HONOUR: On what capital are we working?
MR MUECKE: $180,000, if Your Honour would allow the whole
amount of the uncollected factored debts."
79. I agree with this submission. I allow $72,000 as a reasonable assessment of loss on this aspect of loss.
80. I must say another word about "interest". I would not call this heading "interest". I would call it "loss of use of money" (Hungerfords v Walker
(1990) 171 CLR 125).
81. I allow damages for uncollected factor debts at $178,519.
82. I allow $101,900 for costs of collecting (costs claimed less the amont due to Mr Strappazzon).
83. As to the amount for loss of use until trial I allow the sum of $72,000 earlier mentioned. As there is the award of the loss of use of money until trial there can be no interest pursuant to s30 of the Supreme Court Act. The total of damages is $352,419.
84. There will be judgment for the plaintiff for $264,315 (75% of the amount of damages - ignoring cents).
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