Commonwealth Bank of Australia v Hamilton
[2012] NSWSC 242
•14 March 2012
Supreme Court
New South Wales
Medium Neutral Citation: Commonwealth Bank of Australian v Hamilton [2012] NSWSC 242 Hearing dates: 27 September 2010; 28 September 2010; 29 September 2010; 30 September 2010; 5 October 2010; 6 October 2010; 21 March 2011; 22 March 2011; 23 March 2011; 24 March 2011; 25 March 2011; 30 May 2011; 31 May 2011; 1 June 2011 Decision date: 14 March 2012 Before: Price J Decision: (1)Verdict and judgment for the first defendant (Jason Hamilton) against the plaintiff (the bank).
(2)Verdict and judgment for the second defendant (Karen Hamilton) against the plaintiff (the bank).
(3)Verdict and judgment for the plaintiff (the bank) against the third defendant (Peter Webb) in the sum of $497,056.00
(4)The cross-claims of the cross-claimants (Jason Hamilton and Karen Hamilton) against the cross-defendant (Peter Webb) are dismissed.
(5)Verdict and judgment for the cross-defendant (LawCover) in the second-cross claim against the cross-claimant (Peter Webb).
Catchwords: CONTRACTS - loan contracts and mortgages - fraud of investment consultant - loans approved on fraudulent financial information - forgery of signatures on loan documents and mortgage - loans approved on consideration in contracts of sale without external valuation - consideration reduced by deeds of variation - settlement moneys obtained by solicitor's direction to bank - surplus of settlement moneys transferred to fraudulent agent - whether borrowers liable to the bank - BREACH OF WARRANTY OF AUTHORITY - whether solicitor dishonest - whether warranty of authority breached - whether cause of action available to the bank - CAUSATION - whether Civil Liability Act applies - whether contributory negligence is a defence to breach of warranty of authority - whether proportionate liability applicable - damages Legislation Cited: Australian Securities and Investment Commission Act 2001 (Cth)
Civil Liability Act 2002 s 5, s 5D, s 5E, s 34,
s 34(1)
Civil Procedure Act s 100
Contracts Review Act 1980
Conveyancing Act 1919 s 38
Fair Trading Act 1987
The Law Reform (Miscellaneous Provisions) Act 1965 s 8, s 9
Trade Practices Act 1974 (Cth)Cases Cited: Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309
Black v Smallwood (1966) 117 CLR 52
Beach Petroleum NL v Abbot Tout Russell Kennedy (1999) 48 NSWLR 1
Booksan Pty Ltd v Wehbe [2006] NSWCA 3
Boulas v Angelopolous 5 BPR NSW (SC) 11,477
Brownett v Newton (1941) 64 CLR 439
Caltex Oil (Australia) Pty Ltd v The Dredge Willemstead (1976) 136 CLR 529
Collen v Wright (1857) 8 EI BI 647; 120 ER 241
CSG Limited v Fuji Xerox Australia Pty Ltd [2011] NSWCA 335
Essington Investments Pty Ltd & Ors v Regency Property Pty Ltd [2004] NSWCA 375
Fisher v Rummey [1911] Tas SR 104
Firbank's Executors v Humphrey's 18 QBD 54
Galea v Bagtrans Pty Ltd [2010] NSWCA 350
Heald v O'Connor [1971] 1 WLR 497; 2 All ER 1105
In re Evans, ex parte Jones [1911] Tas SR 122
In re Vince, Curator of Intestate Estates v Kile [1911] Tas SR 33
Jones v Dunkel [1959] HCA; (1959) 101 CLR 298
Kuhl v Zurich Financial Services Australia Ltd [2011] HCA 11; 27 ALR 375
Lakeman v Mountstephen (1874) LR 7 HL 17
Lee v Irons [1958] VR 436
Leggo v Brown & Dureau Ltd (1923) 32 CLR 95
Mallesons Stephen Jaques v Trenorth Ltd [1999] 1 VR 727
Medlin v State Government Insurance Commission (1995) 182 CLR 1
Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449
Nguyen v Cosmopolitan Homes [2008] NSWCA 246
Nguyen v Taylor (1992) 27 NSWLR 48
Perpetual Trustees v Tsai [2004] NSWSC 75
Perpetual Trustees Victoria Limited v English & Anor [2010] NSWCA 32; (2010) 14 BPR 27, 339
Pianta v National Finance & Trustees Ltd (1964) 180 CLR 146
Polkinghorne v Holland (1934) 51 CLR 143
Rogers v Resi-Statewide Corporation Limited and Others (No 2) (1991) 32 FCR 344
Starkey v Bank of England [1903] A.C 114
Strangas v Young (1975) 1 BPR 9123
Vukmirica v Betyounan [2008] NSWCA 6
Wynn Tresidder Management v Barkho [2009] NSWCA 149
Yonge v Toynbee [1910] 1 KB 215Texts Cited: Carter, Contract Law in Australia, 5th ed, (2007)
Bowstead & Reynolds On Agency (17th Ed)
Dal Pont Law of Agency, 2nd ed, 2008 LexisNexis ButterworthsCategory: Principal judgment Parties: Commonwealth Bank of Australia
Jason Hamilton
Karen Hamilton
Peter Webb
Lawcover Insurance Pty LtdRepresentation: Mr D A Smallbone & Ms L J Freiwald
Mr K Ginges
Mr D Lloyd
Mr S R Donaldson SC & Mr G Ng
Gadens Lawyers (Commonwealth Bank of Australia)
A.Luong & Associates (Jason Hamilton, Karen Hamilton
Tress Cox Lawyers (Peter Webb)
Yeldham Price O'Brien Lusk (Lawcover Insurance Pty Limited)
File Number(s): 2007/263396; 2007/263397
Judgment
Background
Jason Hamilton (the first defendant) and Karen Hamilton (the second defendant) are husband and wife. At the commencement of these proceedings, Jason Hamilton was the registered proprietor of unit 12/8-10 Lydbrook Street, Wentworthville in the State of New South Wales being the whole of the land in folio identifier 12/SP73061 (unit 12 Lydbrook Street). Karen Hamilton was the registered proprietor of unit 13 in the same building being the whole of the land in folio identifier 13/SP73061 (unit 13 Lydbrook Street).
A mortgage was registered on the title to unit 12 Lydbrook Street that identified Jason Hamilton as mortgagor and the Commonwealth Bank of Australia (the plaintiff) as the mortgagee. For ease of identification, the plaintiff will hereafter be referred to as 'the bank'. The mortgage was allocated dealing no AB825334R. A mortgage was also registered on the title to unit 13 Lydbrook Street that identified the second defendant as mortgagor and the bank as mortgagee. This mortgage was allocated dealing no AB825424Q.
By Home Loan Agreements dated 5 September 2005, the bank agreed to loan the amount of $448,000 to Jason Hamilton for the purchase of unit 12 and the same amount to Karen Hamilton for the purchase of unit 13 (the loan agreements). In order to secure their obligations under the loans, the loan agreements provided that the loans were to be secured by registered mortgages and by guarantees provided by Mr and Mrs Hamilton for each other.
Contracts for the sale of units 12 and 13 Lydbrook Street had been prepared which recorded the vendor as Napier 888 Pty Ltd, the purchase price for each unit as being $560,000, the purchaser for unit 12 as being Jason Hamilton, and Karen Hamilton as the purchaser for unit 13. Webb Lawyers were identified as the solicitors acting both for the vendor and the purchaser on each transaction. Peter Webb (the third defendant), a solicitor, was the principal of Webb lawyers. The contract date for each purchase was recorded as being 6 August 2005.
Prior to settlement, a deed a variation was prepared for each purchase which recited the vendor's agreement with the purchaser "to accept the reduced consideration of $365,000.00 in lieu of the consideration of $560,000.00 due to the reduced valuation obtained by the "Purchaser lender". Transfers were drafted whereby the transferor acknowledged receipt of the consideration of $365,000.00.
On 26 September 2005, identical facsimiles in each purchase were forwarded to the bank by Julie Abood, a solicitor employed by Webb Lawyers, directing the bank that 16 separate cheques, totalling $447,659.60, were required on settlement. Direction 14 was for a bank cheque or trust cheque, in the sum of $67,582.15, made payable to Webb Lawyers Trust Account (ex 2 CD2, T81-83).
Settlement of each purchase took place on 28 September 2005. On each settlement, the bank handed over cheques totalling $447,659.60 to Lawpoint Galloways, the third defendant's agent. There was in each transaction a cheque made in favour of Webb Lawyers Trust Account for $67,582.15.
Documents entitled Trust Authority had been provided in each transaction to Peter Webb which recited that each of the first and second defendant's authorised Webb Lawyers "to release the balance of funds in my Trust account to be paid to Graham Lee". Graham Lee is the first cross-defendant in Mr and Mrs Hamilton's cross-claims and for ease of identification, will be referred to throughout this judgment as Mr Lee.
Peter Webb was also in possession of letters of instruction which identified Mr and Mrs Hamilton and recorded in identical terms their instructions as being (ex 3 CD4, p205 - Mrs Hamilton):
"I hereby kindly advise that Mr Graham Lee is authorised to act on my behalf in relation to the above purchase for the purpose of authorising and distributing funds in relation to the subject purchase.
Mr Lee is acting in the capacity as my buyer's agent and is authorised to do so pursuant to this authority."
And (ex2 CD1 p 76 - Mrs Hamilton):
"I hereby authorise Webb Lawyers to place all surplus funds from the subject purchase into Trust on my behalf."
Peter Webb paid to Mr Lee $67,582.15 out of the monies that were held in his trust account for Jason Hamilton and the same amount which was held in his trust account for Mrs Hamilton.
Mr and Mrs Hamilton failed to make monthly repayments in accordance with the loan agreements. By notices dated June 2007, the bank demanded from the first and second defendants payment of money in the amount of $11,258.27 under each agreement that were not complied with nor were notices pursuant to section 57(2)(b) of the Real Property Act 1900. The bank then, demanded the full debt owing under each of the home loans ($465,348.08) but the demands were not met.
On 25 June 2007, demands were made by the bank to the first and second defendants in their capacity as guarantors. Neither demand was met nor were subsequent demands for payment of the full amount owing under each guarantee.
On 2 October 2007, proceedings in this Court were commenced by the bank against the first and second defendants, seeking possession of the land, leave to issue writs of possession and judgments in the amounts owing under the Home Loan Agreements as at 19 September 2007 and the Guarantees.
On 4 May 2010, the first and second defendants consented to orders being made for the bank to have possession of units 12 and 13 Lydbrook Street.
By an amended statement of claim filed on 27 August 2010, the bank joined the third defendant seeking damages as a result of a breach of warranty of authority. The statement of claim was further amended on 27 September 2010.
In September 2010, the bank and the first and second defendants entered into an agreement, whereby they agreed to "limit their dispute." The terms of the agreement (ex 2 CD, p13) included the following:
"1. The bank agrees that it will not enforce or proceed to execution upon any money judgment or costs judgment that it obtains against Mr & Mrs Hamilton or either of them in the above mentioned proceedings, whether for principal, interest, rents, profits or costs, except to the extent of any recovery made by Mr & Mrs Hamilton or either of them against the cross defendant Lee or the cross defendant Webb or against any other third party in respect of the same loss or indemnified liability.
...
8. Mr & Mrs Hamilton agree that they will forever withdraw and abandon their defences under the Contracts Review Act, the Consumer Credit Code, the Trade Practices Act and the ASIC Act..."
The bank sold unit 12 on 7 October 2010 for $350,000.00. As at 23 March 2011, the amount owing under the first defendant's account with the bank was $302,521.29.
The bank sold unit 13 on 26 November 2010 for $372,000. As at 23 March 2011, the amount owing under the second defendant's account with the bank was $220,728.38.
Mr Lee did not file a defence nor was he present during the proceedings. A notice of appearance was filed on his behalf on 29 April 2011. There had been 11 hearing days prior to that time. In any event, no one appeared on his behalf when the hearing resumed on 30 May 2011. Leave was granted for the first and second defendants to apply for summary judgments, which were obtained on 1 June 2011.
The evidence before me plainly demonstrates that Mr Lee was involved in a fraudulent scheme for the sale of units 12 and 13 in the apartment block at Lydbrook Street, which involved inter alia producing to the bank a copy of the front page of the contracts for the purchase of these units at inflated prices, supplying to the bank false material as to Mr and Mrs Hamilton's financial circumstances, the obtaining of bank finance on 80 per cent of those prices, the reduction in the purchase price after finance approval at a price substantially below that approved by the bank, forgery of signatures on documentation, collecting on settlement the loan funds and transferring the surplus funds to himself.
The bank was represented by D. A. Smallbone, the first and second defendants by K. Ginges, the third defendant by D. Lloyd and LawCover by S. R. Donaldson SC with G. Ng.
The Pleadings
The pleadings may be conveniently summarised as follows:
The bank's claim against Mr and Mrs Hamilton (the first and second defendants)
By further amended statement of claim dated 27 September 2010, the bank claims against the first defendant, judgment in the sum of $468,431.56 being the amount owing under the loan agreement as at 19 September 2007; plus interest, charges and expenses from 20 September 2007. The bank also claims against the second defendant, judgment in the sum of $448,000.00, owing under the Guarantee as at 27 September 2007, plus enforcement expenses.
By further amended statement of claim dated 27 September 2010, the bank claims against the second defendant judgment in the sum of $468,431.56 being the amount owing under the loan agreement as at 19 September 2007, plus interest, charges and expenses from 20 September 2007. The bank also claims against the first defendant judgment in the sum of $448,000.00, owing under the Guarantee as at 27 September 2007, plus enforcement expenses.
In an amended defence filed on 27 September 2010, the first defendant admits that he signed the document titled "Consumer credit contract schedule" (the Schedule), admits he is bound by the conditions in the Schedule and a document called "Usual Terms and Conditions for Consumer Mortgage Lending" referred to in the Schedule. The second defendant denies that she signed the Guarantee or authorised it to be signed on her behalf. She pleads that the Guarantee is void.
In an amended defence filed on 27 September 2010, the second defendant admits that the bank provided credit to her but denies that she signed or authorised the signing of the Schedule. She pleads that the Schedule is void or of no effect and denies that she agreed to repay the amount owing under the Agreement. The second defendant pleads that the signing of the Mortgage and loan agreement was done without her knowledge and consent and they are void and of no effect. The first defendant admits that he guaranteed payment of all money owing at anytime by the second defendant but pleads that if the Schedule is void or of no effect, then he is not liable under the Guarantee.
In their amended defences, the first and second defendants no longer rely upon defences founded upon the Contracts Review Act 1980, the Trade Practices Act 1974 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth). It seems that these defences were withdrawn in accordance with the agreement with the bank (see [16] above).
The bank's claim against Peter Webb (the third defendant)
In each proceeding, the bank makes a claim against the third defendant for breach of warranty of authority. The bank pleads that the third defendant held himself out as acting for the first and second defendants on the purchase of the properties and the loan agreement, that on 26 September 2005, the third defendant directed the bank to draw cheques on the settlement of the two properties including two cheques payable to Webb Trust Account each in the amount of $67,582.15 (the surplus funds), that in accordance with the direction, at settlement, the bank made each cheque for the surplus funds payable to Webb Lawyers Trust Account. The bank claims that, after settlement, the bank became aware that the surplus funds were not used to purchase the properties and were transferred to Mr Lee from Webb Lawyers Trust Account.
The bank pleads that the third defendant warranted to the bank that he was authorised by each of the defendants to receive surplus funds as his or her agent and the bank proceeded with completion in consideration for the warranty. The bank claims that in breach of the warranty, the third defendant was not authorised by either the first or second defendant to receive the surplus funds and by reason of that breach has suffered loss and damage namely approximately $448,000 paid on settlement, loss of the bank's bargain with the first and second defendants or alternatively the surplus funds.
In defences filed on 28 September 2010 to the further amended statements of claim, the third defendant says that by the time of settlement, the bank had been advised that the purchase price of each of the properties had been reduced to $365,000 and was aware or ought to have been aware before settlement that some of the funds (including the surplus funds) that the bank advanced at settlement were not used to purchase the properties. The third defendant admits that he held himself out as acting for Jason and Karen Hamilton in relation to the purchase of the properties, that he directed the bank to draw cheques on settlement including the two cheques payable to the Webb Lawyers Trust Account for the surplus funds and that he warranted to the bank that he was authorised by them to receive surplus funds as their agent. The third defendant pleads that at all times he held actual authority conferred on him by Jason and Karen Hamilton to act for them as the purchasers including the receipt of the surplus funds. Further, or in the alternative, the third defendant pleads that all times he held actual authority conferred on him by Mr Lee to act for Jason and Karen Hamilton in relation to the purchase of the properties including the receipt of the surplus funds. Contributory negligence is also pleaded, as is an apportionable claim under s 34 Civil Liability Act. The third defendant, further or in the alternative, says that any loss that the bank has suffered was caused by an intervening act of negligence by the bank, which severed the chain of causation by the third defendant and the bank's loss and damage.
In an amended defence filed on 25 March 2011, the third defendant pleads that at all times he held actual, ostensible and/or implied authority conferred on him by the first and second defendants to act for them in relation to the purchase of the properties, including to receive the surplus funds on their behalf. The particulars of actual, ostensible or implied authority are as follows:
(1) Jason Hamilton signed authority documents dated 7 September 2005 and 14 September 2005 authorising Webb to act for the first defendant in relation to the purchase of the units;
(2) Jason Hamilton signed a contract for the sale of land with Webb nominated as his solicitor;
(3) Jason Hamilton signed a costs disclosure agreement with Webb;
(4) Jason Hamilton had authorised Mr Lee to retain a solicitor to act for him and the second defendant in relation to the purchase of the units;
(5) Karen Hamilton had authorised Jason Hamilton to retain a solicitor to act for her to do all that was necessary on the transaction;
(6) Jason and Karen Hamilton had authorised Mr Lee to collect mail from Mr Webb's office and deliver it to them;
(7) Mr Lee had been given identification documents by Jason and Karen Hamilton and those documents were made available to Mr Webb;
(8) Mr Lee gave to Mr Webb authority documents signed or apparently signed by Jason and Karen Hamilton;
(9) In the premises, Mr Lee had actual authority to act as Jason and Karen Hamilton's agent in relation to the purchase of the units;
(10) In the alternative, Mr Lee had ostensible authority to act as Jason and Karen Hamilton's agent in relation to the purchase of the units.
(11) Jason and Karen Hamilton knew that a solicitor was retained to act for them in relation to the purchase of the units and in relation to obtaining finance, and knew that the solicitor would be making representations to the Bank on their behalf, but did nothing to stop Webb from making the representations;
(12) In the premises, Jason and Karen Hamilton would be estopped from asserting that Mr Webb was authorised to act and make representations to the bank including representations as to the surplus funds;
(13) Karen Hamilton signed a number of documents in relation to the unit she was purchasing;
(14) The action of Mr Webb in issuing cheque direction 14 to the bank was a subordinate act necessarily or ordinarily incidental to his authority to act for the first and second defendants, and was therefore within the scope of his authority.
Mr and Mrs Hamiltons' cross-claims
As summary judgments have been obtained, it is unnecessary to recite here the cross-claims against Mr Lee. As against the third defendant, Mr and Mrs Hamilton plead that in the course of acting for them in relation to the purchases of the properties, he owed a duty of care to them, and held a legal retainer to act for, and in their interests, which he breached.
In defences to the amended cross-claims filed on 28 September 2010, the third defendant admits that he owed a duty of care to, and held a legal retainer to act for and in the interests of the first and second defendants, but denies breach. The third defendant pleads that if he was found liable, the loss or damages alleged was caused wholly or partly by the first and second defendants' negligence. Further, he pleads that the claim is an 'apportionable claim' within the meaning of s 34(1) of the Civil Liability Act 2002 and that any breach by him did not cause the defendants' loss because they are not liable to the bank. The third defendant claims that the first and second defendants failed to mitigate their loss and damage.
Mr Webb's cross-claim against Law Cover Insurance Pty Limited (Law Cover)
The third defendant pleads that by a policy of professional indemnity insurance, Law Cover agreed to indemnify him in respect of certain losses and liabilities arising from the conduct of the practice of Webb Lawyers for the period from 1 July 2006 to 30 June 2007. On or about 28 April 2008 Mr Webb notified LawCover of these proceedings and sought indemnity under the policy, but indemnity was refused.
In its defence, Law Cover pleads that the third defendant is excluded from relying upon his insurance policy on the following grounds:
The proceedings have arisen either directly or indirectly from Mr Webb's dishonest or fraudulent acts or omissions (the dishonesty or fraud exclusion)
The claim arises from Mr Webb's knowing involvement in contract discounting (the contract discounting exclusion)
The claim arises from a breach of a warranty that Mr Webb was authorised to receive the surplus funds, which is a contract other than a contract to provide legal services in connection with Mr Webb's legal practice (the non-legal services contract exclusion)
The contract in question is one that extends Mr Webb's duty beyond exercising the standard of care and skill to be reasonably expected of a legal practitioner in the circumstances (the more onerous contract exclusion).
The bank and the first and second defendants
Units 12 and 13, having been sold, the bank's claims against the first and second defendants are for money judgments.
The bank's case against Karen Hamilton relies upon the loan agreement, registered mortgage AB825424Q and memorandum of mortgage (affidavit of Michael Quinn exhibit A pp1-30, 34-48). Furthermore, the bank seeks to enforce a guarantee against the first defendant (exhibit A pp 49-57).
In the case of Jason Hamilton, the bank relies upon the loan agreement, registered mortgage AB 825 334R and, memorandum of mortgage (ex B pp 1-30, 34-48). The guarantee that the bank seeks to enforce against the second defendant is found at pp 49-57 exhibit B.
The principal contention in Karen Hamilton's case is that the signatures that purport to be hers on the loan agreement and mortgage are forgeries. Jason Hamilton argues that as his wife has no obligation under a forged loan agreement, the guarantee given by him is invalid and unenforceable.
Jason Hamilton does not contend that the signatures on the loan agreement, mortgage and guarantee, which the bank seeks to enforce against him are not his, but Karen Hamilton says that the signature on the guarantee is not hers and is a forgery.
Mr Smallbone accepted that the signatures on the "Karen Hamilton" documents (the loan agreement and the guarantee) bear a striking pictorial similarity to the signatures on her driver's licence and on her affidavit. He said that the bank was not able to prove, by any independent evidence, that the signatures on the loan agreement or on the guarantees are Mrs Hamilton's. Mr Smallbone submitted that the only basis that could exist for a finding that the signatures were hers, must be by inference from the circumstances of her involvement in the transaction and to so find, would be to disbelieve her evidence denying the authenticity of the signatures. Mr Smallbone said that she appeared to be an honest and credible witness. Mr Smallbone pointed out that the circumstances of the transaction also involved the interposition of Mr Lee and Dorothy Adams, against whom there is credible reason to suspect fraud in relation to a large number of transactions, including this one. Mr Smallbone accepted that any circumstantial case that Karen Hamilton actually signed the contract is not strong.
Mr Smallbone argued that if it is found that the loan agreement with Mrs Hamilton was a forgery, the bank had no contract with her. However, had she chosen to instruct Mr Webb to direct payment of the advance by the bank that would have been a sufficient adoption of the loan agreement by her, because she knew that the bank would only be lending on the basis of a loan agreement and she would either enquire and discover its terms or, if she did not, would be proceeding on the basis that she was content to be bound by the terms of the contract, whatever the contract stated.
Mr Smallbone pointed out that Jason Hamilton, by his defence, admits that he signed the loan agreement. Mr Smallbone argued that Mr Hamilton could only be sued on the loan agreement for what was lent to him under it. Mr Hamilton denies, Mr Smallbone said, that he authorised Mr Webb to give the cheque directions, which meant that the solicitor was not authorised to direct that the advance be made or to give a valid receipt under it. As a consequence, the funds were not advanced under the loan agreement.
Mr Smallbone contended that, in each case, had the solicitor's warranty been true, the bank would have had a valid and enforceable loan agreement with respect to the amounts advanced on settlement as against the first and second defendants. The bank's submission was that is "the better view that Mr Webb is liable for the bank not having an effective claim in contract against each of Mr and Mrs Hamilton" (prs, par 1). Mr Webb could only succeed in relation to either case, on the basis that it is found that his 'client' in fact authorised him to direct the advance and thereby became liable for the advance under the relevant loan agreement terms.
During oral submissions, Mr Smallbone explained that the bank's case was "either or". Either Mr Webb had authority to direct payment of the advance in respect of either loan or he did not. The primary submission was that Mr Webb had no such authority and was liable to the bank, whereas Mr and Mrs Hamilton were not. Alternatively, the bank's case was that, if either Mr or Mrs Hamilton had given Mr Webb that authority, then Mr Webb's authority was true, there was no breach by him and whoever of them had provided the authority, would be liable.
Before venturing further, it is convenient to visit the evidence of the first and second defendants.
Some matters of evidence
In an affidavit sworn 10 June 2009 (ex 1), Jason Hamilton stated that he and Mr Lee had been friends since about 1998. Mr Lee had introduced him to an investment property in Queensland and had assisted he and his wife with the purchase of the property by arranging finance and legal representation.
During his oral evidence, Mr Hamilton said that he accepted Mr Lee's recommendation that it was a good idea to buy the property as he considered that Mr Lee was a close friend. Mr Lee had not only arranged for a lawyer to act on the purchase but had arranged finance. Mr Hamilton agreed that he had signed a contract for sale, bank loan agreement and mortgage. The property was sold in about 2002. The profit that he and his wife had made on the transaction was a little bit less than $20,000 after capital gains tax.
The first defendant recounted that he and his wife had purchased a block of land at Glenmore Park in 1996 for which they had used a solicitor and had obtained finance from the St George Bank. They had re-financed to build a house on the land in 1998. He had signed a bank loan application and mortgage for the land purchase and more documentation when they re-financed. He had purchased a tobacconist shop business in 2003 and had retained a solicitor and signed a contract for that purchase.
Mr Lee had approached him in 2004 about purchasing another investment property at Wentworthville. Mr Lee told him that he was working with developers to sell the apartments, which were being built. Mr Lee asked if he was "interested in getting into one of them". Some time later, Mr Lee told him that because the developers were struggling, they would guarantee the finance, as well as the rent at $400 per week for the twelve months. Mr Hamilton asked to look at the apartments and he and Mr Lee viewed the development at 8-10 Lydbrook Street, Wentworthville shortly thereafter. The development was close to completion. Mr Hamilton thought that the apartments' location "was good" and continued to be interested in purchasing an apartment as an investment property. He recalled having the following conversation with Mr Lee (ex 1 par 12):
"Around this time Graham and I had a conversation which included words to the following effect:
I said:"Roughly how much are the apartments?"
Graham said:"I am not sure. I am waiting on a price. Let's look at financing first. There is no point in discussing a price if you can't afford the mortgage repayments."
I said:"Didn't you tell me that finance is guaranteed?"
Graham said:"I won't let the bank lend you more money than you can afford to repay. I think that if I can get finance, your Misses should also get one unit."
I said:"See what you can do. If the rent is guaranteed and we don't have to pay too much from our own pockets, I don't see why Karen would not want one also."
In his affidavit at par 13, Mr Hamilton recalled that Mr Lee came to the tobacconist shop during business hours and asked him to sign some documents. He explained that he usually read briefly through the documents between serving customers. His recollection was that before signing each document, he had read it sufficiently in order to understand it. It was possible that, in relation to some documents, he had not read the document properly before he signed it. Mr Hamilton stated that a reason that he only read the documents briefly was because he trusted Mr Lee and believed he was acting in his best interests. When he signed the contract for sale of unit 12, 8-10 Lydbrook Street, he said that the purchase price of $560,000 was not on the contract. He recalled that when he signed the contract, no price was on it. Subsequently, he and Mr Lee had the following conversation (ex 1 par 16):
Graham said:"I have confirmed that the Commonwealth Bank will be lending you the money for the unit at Wentworthville. 100% finance approved for the purchase price, legal costs and stamp duty, everything is ready to go for you and Karen."
I said:"Cool. We don't have to pay anything correct?"
Graham said:"That's right, everything is covered. I will even deal with the Solicitors for you and Karen because I know how busy you are running the shop."
Mr Hamilton recounted that on some occasions, Mr Lee came to the tobacconist shop, gave him some documents and asked him to have his wife sign them. After work, he took the documents home and asked Karen to sign them, which she did. Mr Lee subsequently collected them from the tobacconist shop.
It was the first defendants' evidence that at no time did he and his wife sign any document in front of a solicitor or accountant. They never met Peter Webb.
When Mr Hamilton was questioned by Mr Smallbone as to the signature appearing on the document authorising "Webb Lawyers to place all surplus funds from the subject purchase into Trust" dated 7 September 2005 (ex 2 CD1, p 76: the surplus funds authority), he said that it looked like his signature but did not recall the document. He testified that he was totally unaware of that document until 2006. He said that he did not remember signing the document (ex 2 CD1, p 74: the buyer's agent authority), but it did appear to be his signature on it. His attention was directed to the Trust authority (ex 2 CD1, p 174), by Mr Smallbone and he gave the following evidence (T 98.37-50, T 99.1):
"Q. Is it your evidence that the first time you found out about any direction, or purported direction, to Webb Lawyers to release funds in a trust account in your name to be paid to Graham Lee was in 2006?
A. At the time we were speaking to the police, yes.
Q. And had you ever seen this document before 2006?
A. No.
Q. Is the first signature, which appears on that page, your signature?
A. It is very faint. It looks like my signature.
Q. Is it your signature?
A. I can't recall. I don't ever remember signing a trust authority document, but that does look my signature."
During cross-examination by Mr Lloyd, Mr Hamilton agreed that it was his understanding that Mr Lee would entirely deal with the bank and that he [Mr Lee] would deal with the solicitor retained to act on the purchase. He knew that the solicitor was going to be Webb Lawyers. He thought it was likely that he got identification documents from Karen, being her driver's licence and birth certificate and had given them to Mr Lee or the bank. He testified that he did not go to the bank nor did he see a mobile lender. Mr Lee handled it all. He said that the signatures on the bank's Acknowledgement and Consent document at (ex 2 CD1, p 4) appeared to be his as did the signature under Borrower(s) in the bank's letter dated 1 September 2005. He further agreed that the signature on the surplus funds authority (ex 2 CD1, p 76) appeared to be his, as did the signature on other bank documents including Authority to Complete and Pay (ex 2 CD1, p 86) Consumer Credit Contract Schedule (ex 2 CD1, p 92-97) and Home Loan - Direct Debit Request (ex 2 CD1, p 164).
On the topic of the unstamped memorandum of transfer, the first defendants' evidence included the following (T 127 .3-34):
"Q. What I suggest to you is that you when you signed the document that consideration of $365,000 was recorded on it?
A. Again, I can't recall.
Q. That that is something which you knew by the time you signed this document, correct?
A. No. I don't ever recall knowing the price for the property.
HIS HONOUR
Q. At all?
A. No. But, again, I can't recall. So, I'm not saying I did or didn't. I'm saying I just can't remember.
LLOYD
Q. In relation to the price of the property, the position was that you knew that you were borrowing $448,000 from the bank?
A. Yes.
Q. You say that the deal was that you didn't want to have to pay out any money from your own pocket?
A. Yes, for legal fees and other stuff as well.
Q. I suggest to you that if you knew the bank was advancing $448,000, you knew from that sum there had to be some deductions that would not be part of the purchase price?
A. Yes. I was under the assumption the property was worth $400,000, $420,000. It was a $448,000 loan. There is only so much that can be incurred for legal fees.
Mr Hamilton agreed that the transfer appeared to contain his signature. When Mr Lloyd suggested to Mr Hamilton that he signed the transfer knowing full well the consideration was $365,000, Mr Hamilton responded (T141.5-6):
"Well, I signed a lot of documents in the shop and in between customers and serving wholesale outlets. I can't ever recall seeing numbers."
Mr Hamilton maintained that he did not ever recall seeing a price. When he was signing documents, Mr Hamilton recounted that he signed where "a little tab" said, sign here. He briefly scanned what the document was and signed it. He did not ever recall reading the document in depth (T141.10-25):
Mr Hamilton stated that he was unaware that $67,582 would be paid to Mr Lee or another person. He believed that all of the money he borrowed, from the bank, namely $448,000, would be used to purchase unit 12. When Mr Lloyd suggested to him that he and Mr Lee had discussed before 28 September 2005 that there would be a surplus from the settlement funds that the bank was advancing, Mr Hamilton replied (T140 .44):
"We never knew there was any money left over."
Mr Hamilton could not tell whether the signature on the trust authority to release funds dated 14 September 2005 (ex 2 CD1, p174) was his. He said that he did not know there were any surplus funds and asked, "So why sign a little piece of paper saying that I'm going to release funds to anybody?"
He could not confirm or deny that he had read the deed of variation (ex 2 CD1, p 189), but accepted that the signature on the document appeared to be his. When questioned further by Mr Lloyd as to his knowledge that there was going to be a surplus of funds from the bank advance, Mr Hamilton said that he did not understand why he would borrow extra money. He rejected the suggestion that there was some agreement with Mr Lee about the surplus funds being available at settlement for Mr Lee's use for the purpose of a proper syndicate. He stated if he had known that $67,582 or any amount larger than a small commission was being paid to Mr Lee, he would not have proceeded to purchase unit 12. It would have been foolish to pay $448,000 for an investment property worth $365,000. The first time that he had been aware of surplus funds was when Karen Griffin, a police officer, attended his shop in late July or early August 2006.
During his oral testimony, Mr Hamilton remembered taking documents home for his wife to sign that had been given to him by Mr Lee. His evidence on this topic included the following (T129 .47-50; T130.1-11;
T131.1-15):
"Q. But you are sure the documents that Graham gave to you related to the purchase of unit 13 by Karen, didn't they?
A. No. I think it was for unit 12. I can't remember.
Q. Well, is your evidence to your his Honour, seriously that, you were not aware that your wife was also purchasing a unit?
A. We were looking at buying two units, but initially we were buying one.
Q. That position changed, and I suggest you knew that it had changed at some point before the bank advanced the money?
A. The position did change, but I'm not sure when.
Q. You knew before you acquired the property. You knew about that time that your wife was also buying a unit?
A. No, it wasn't until afterwards.
Q. How long afterwards?
HIS HONOUR
Q. After what?
A. After we got the two properties. I can't remember the exact conversation but I had a conversation with Graham about it.
Q. You mean after settlement?
A. Yes.
Q. That was when you first realised that your wife purchased a property?
A. Yes, we were originally buying one in both names."
And (T 134.3-47):
"Q. You discussed with him the prospect, you gave evidence about your wife purchasing a unit?
A. Yes.
Q. And you discussed that with him before settlement, correct?
A. Yes.
Q. Didn't you say when you were signing all these documents, well, what is the position with Karen's unit?
A. It was just a discussion at the time. We were still just doing the one.
HIS HONOUR
Q. Can I, in fairness to you, direct your attention to paragraph 20 of your affidavit?
A. 20?
Q. 20?
A. Yep.
Q. Having read that paragraph, does that assist your recollection?
A. I remember there was definitely discussion about getting two. And I know that Karen was opposed to getting two. So apart from that, that is all I remember.
Q. Can I just ask you what you meant by paragraph 20 as to your belief?
A. Well, that looks like we're purchasing two. But again, this was, a lot has happened since this so it is very hard to recollect what happened.
Q. Can I also refer you to paragraph 12, to the "I said", "he said" conversation?
A. Yep.
Q. In particular the last "I said" conversation, "See what we can do"?
Q. Yes?
A. Yep.
Q. Does that assist you in your recollection?
A. Yeah, that was, I had discussed with Karen about getting one for herself but she was against it.
Q. Is it still your evidence that you did not understand that Karen was buying a unit until after settlement?
A. Yes, that is correct."
Paragraph 20 of Mr Hamilton's affidavit is as follows:
"Graham showed me documents and I believe that Karen and I were each borrowing $448,000 from the CBA to purchase units 12 and 13 of the development."
When further questioned on this topic, he said that he could not remember. If he said yes or no, he would be lying but agreed it was likely that what was stated in paragraph 20 was true.
In her affidavit (ex 2), Karen Hamilton recounted that her husband informed her that Mr Lee told him about some investment property at Wentworthville for which he could arrange 100 per cent finance from the bank. She was not happy about going into further debt but said to Jason that she would support him if he decided to go ahead with the purchase. She recalled Jason brought documents home after work for her to sign but she did not read them. She stated that she signed the documents at her husband's request but had not read them. The police had shown her a copy of the contract for sale and the memorandum of transfer for unit 13 but the signatures appearing on those documents were not hers and were forgeries. She had also been shown by Peter Rosier for the NSW Law Society in March 2007, a bundle of documents and said that all of the signatures appearing on those documents were forgeries. The documents included a Trust Authority, solicitor's cost agreement, letter authorising Mr Lee to act as her agent, loan agreement, authority to complete and mortgage AB 825424Q.
During cross-examination, Mr Lloyd took Mrs Hamilton to various documents in the tender bundle on which appeared the signature "Karen Hamilton." She gave evidence that none of the signatures were hers. Amongst the documents brought to Mrs Hamilton's attention was the contract for sale for unit 13, 8-10 Lydbrook Street, Wentworthville, surplus funds authority, the loan agreement and the Guarantee of her husband's loan. When Mr Hamilton was being cross-examined by Mr Lloyd, he testified that the signatures appearing at pages 12, 75, 77, 81, 89 and 127 in the tender bundle were not those of his wife.
Mrs Hamilton said she originally thought that they were only buying one property but it was possible she and her husband had a discussion about buying two properties, instead of one, some time before the end of September 2005. She agreed that she had left the matter in Jason's hands. She agreed that in her mind, the people liaising with the financial institution about the money to purchase the property or properties would be Jason and Mr Lee, because that was the way it had worked for the investment property in Queensland. She agreed that Mr Lee had located solicitors to act for them for the Queensland purchase but did not know whether he had liaised with them. Mrs Hamilton agreed that she had, in her mind, left it to Jason and Mr Lee to look after finding a solicitor and retaining one to act for herself and Jason. On this topic, Mrs Hamilton was asked by Mr Lloyd (T181.36-40):
"Q. In dealing with that solicitor, in relation to whatever was required for the transaction?
A. Yes."
When Mrs Hamilton was recalled on 30 May 2011, her testimony included the following (T786.5-39):
"Q. Now, when you were having the discussion with Jason, about finding a solicitor for you, was that at some point before you had a conversation with him about a property having been found and the matter going ahead?
A. I didn't want to go ahead with the property at first. I didn't want to buy a property at all, and, then, it took some talking Jason talked to me about going ahead with a property and saying that it is all organised and everything is okay, so that was it, we bought one property.
Q. Did you have a discussion with Jason about buying two properties?
A. No. I don't recall. No.
Q. Did you have a discussion with Jason about he and you each buying one property?
A. No.
Q. Did you have a conversation with Jason in which you said, words to the effect, that once a solicitor was retained to act for you, he could then give to that solicitor such future instructions as might be needed by the solicitor to progress the transaction to completion?
A. No.
Q. And did you have a discussion with Jason in which you told him that he could authorise Mr Lee to give to your solicitor, once retained, whatever instructions were needed by that solicitor to progress the transaction to completion?
A. No.
Q. Did you have a discussion with Jason in which you said to him, words to the effect, that he could appoint Mr Lee to act for you as your buyer's agent?
A. No.
Q. Did you have a discussion with Jason in which you said to him, words to the effect, that he could give instructions to your solicitor to deal with any surplus funds on the financing of the purchase?
A. No."
In her affidavit, Mrs Hamilton stated that she was unaware that there were excess funds from the purchase of unit 13 and she had not authorised the payment of any funds to Mr Lee. She had never spoken to the bank or Webb Lawyers regarding the loan for the purchase of unit 13 nor was she offered legal advice for the purchase.
Can the bank succeed against Karen Hamilton?
Karen Hamilton bears the onus of establishing forgery on the balance of probabilities. Her evidence on this topic was supported by her husband. It is evident from Mrs Hamilton's testimony that she did sign some documents at the request of her husband, but I am unable to determine, on the evidence, the documents she in fact signed. However, by comparing Mrs Hamilton's signature on her driver's licence (ex 2.B) and her signatures on her affidavit with the signatures appearing on the documents shown to her either by police, Mr Rosier or Mr Lloyd, it is plain that she did not sign any of these documents and I accept her evidence. I am satisfied on the balance of probabilities that the signatures are forgeries. In the present circumstances, it is not necessary for a handwriting expert to be called. I find that the second defendant neither signed the loan agreement, the mortgage, nor the guarantee.
As Mrs Hamilton's signatures are forged, she neither entered into the loan agreement, the mortgage, nor the guarantee. Mrs Hamilton was not a party to the contract of loan as she had not in any way participated in its formation: Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 at 326G. The mortgage by reason of the forgery is "null and void for all purposes": Rogers v Resi-Statewide Corporation Limited and Others (No 2) (1991) 32 FCR 344 at 350
The mortgages were "all moneys" mortgages. Part A to each Memorandum of mortgage is found at p36 of exhibit A and provides:
"This mortgage secures all Amounts Owing under any Secured Agreement."
"Secured Agreement" is defined to mean (ex A p36):
"an agreement between one or more of you and us (including a guarantee given by one or more of you) whenever made, under which you undertake to pay or repay us money, and which you acknowledge in writing to be an agreement to which this mortgage extends..."
Mrs Hamilton did not enter into an agreement with the bank under which she undertook to repay money nor did she give a mortgage. In these circumstances, the registration of the forged mortgaged does not enable the bank to succeed in a claim in personam for a monetary amount against her: Perpetual Trustees Victoria Limited v English & Anor [2010] NSWCA 32; (2010) 14 BPR 27,339 per Sackville AJA at [13]. The question, however, remains as to whether there had been an adoption of the loan agreement by Mrs Hamilton, a topic to which I will return at [79] below.
Mrs Hamilton's signature was forged on the guarantee purportedly provided for her husband's loan. It was void at general law. The registration of the mortgage in which the first defendant was the mortgagor does not permit the bank to enforce the forged guarantee against the second defendant.
It seems to me, in dealing with Mr Smallbone's contention that Mrs Hamilton could be liable if she adopted the loan agreement, that Mr Lloyd's submissions on ostensible authority, although directed to the question of Mr Webb's liability to the bank, are relevant to this issue.
There is no suggestion that Mr Webb had actual authority from Mrs Hamilton to act on the purchase of unit 13. The signatures bearing her name on the contract for sale, transfer, authorities directed to Mr Webb dated 7 September 2005 and the Trust authority are forgeries.
Mr Lloyd submitted that Mrs Hamilton knew that her husband was dealing with Mr Lee in relation to the purchase of a unit by her, that there was a solicitor retained for her in relation to the purchase of the unit and that the solicitor would be doing certain acts, including in relation to finance. Mr Lloyd contended that Mr Webb had ostensible authority to act for Mrs Hamilton in relation to "whatever was required" for the transaction being the acquisition of unit 13, including obtaining finance. Accordingly, Mr Webb had ostensible authority to act for her in relation to the conveyance and the transaction with the bank.
Mr Lloyd drew my attention to what was said by Hodgson JA in Essington Investments Pty Ltd & Ors v Regency Property Pty Ltd [2004] NSWCA 375, at [41]-[46]. Particular emphasis was placed by Mr Lloyd on [42] where Hodgson JA, in citing Bowstead & Reynolds On Agency (17th Ed), referred to the learned authors' suggestion of a second type of case of ostensible authority "where the representation is only of a very general nature, and arises only from the principal's putting the agent in a specific position carrying with it a usual authority." Hodgson JA noted at [44] "that the representation of authority must either be made, or at least permitted to be made, by the principal." His Honour went on to say at [45]:
"In my opinion, one circumstance in which it may be said that representations are permitted to be made is where a principal knows that an agent engaged on the principal's behalf is making representations as to the agent's authority, is able to prevent such representations being made or countermand them, but does not do so. There is arguably, in these circumstances, something like a representation by silence: the circumstances call for some action by the principal to ensure that persons are not misled by the agent, and the principal does not take that action."
Mr Lloyd accepted, however, that a finding that Mr Webb had ostensible authority to act for Mrs Hamilton in relation to the transaction, is not determinative of the question of whether the representation in cheque 14 exceeded his authority, as Mr Webb did not have actual authority to issue that cheque direction. It was argued that Mr Webb had implied authority to issue cheque 14 and did not exceed his authority in requesting cheque number 14 on behalf of Mrs Hamilton.
Mr Hamilton was less than frank when he initially told me that it was not until after unit 13 was acquired, that he knew that his wife was buying a unit. Mr Lee had previously shown him some documents which lead him to believe that they were each borrowing $448,000 to the bank, which he did not disclose to Karen. He did not do so, as he was acutely aware that she would not have proceeded with the purchase. I have little difficulty accepting Mrs Hamilton's evidence that she did not want to go ahead with the purchase of a unit at all until he talked her into it and they bought, she believed, one property. Although Mrs Hamilton was unable to recall whether there had been a discussion about the purchase of two properties, she was able, without hesitation, to reject the suggestion that she and her husband spoke about each of them buying one property and I accept her evidence. In any event, if the subject had been raised by Mr Hamilton, I have no doubt that it would have been readily despatched by his wife. I find that Mrs Hamilton did not know that her husband was dealing with Mr Lee in relation to the purchase of a unit by her and there was a solicitor retained to act on that purchase. It is patently clear that Mrs Hamilton's signatures were forged to keep her unaware of the separate purchase.
No representations of authority were made, or permitted to be made by Mrs Hamilton, nor was there a representation by licence. Mr Webb did not have ostensible authority to do "whatever was required" for the purchase of unit 13, nor did he have implied authority to direct the bank as to the payment of cheques on settlement, including cheque 14. Mrs Hamilton did not adopt the loan agreement nor was she content to be bound by the terms of the contract, whatever the contract stated. Accordingly, the bank cannot succeed against Mrs Hamilton. Whether the bank can succeed in its 'either or case' against Mr Webb remains to be considered.
Can the bank succeed against Jason Hamilton on the guarantee?
Mr Hamilton guaranteed the monies advanced by the bank to his wife. I am satisfied that he signed the guarantee and questions of forgery do not arise. Mr Ginges submitted that as Mrs Hamilton had no obligation under the forged loan agreement, the guarantee that her husband gave was also invalid and unenforceable.
Little attention was given to this issue by the bank and the submissions upon this topic are indeed sparse.
The principle of co-extensiveness generally provides that if no principal contract is concluded, the guarantor's liability never arises. The illegality of and unforceability of the principal obligation will render the guarantee of that obligation similarly unenforceable: Heald v O'Connor [1971] 1 WLR 497; 2 All ER 1105. As Lord Selborne said in Lakeman v Mountstephen (1874) LR 7 HL 17 at 24-25:
"...until there is a principal debtor there can be no suretyship. Nor can a man guarantee anybody else's debt unless there is a debt of some other person to be guaranteed."
Mr Smallbone did not submit, in the circumstances of Mr Hamilton's guarantee, that the principle of co-extensiveness did not apply.
I am not satisfied on the balance of probabilities that the guarantee signed by Mr Hamilton is enforceable against him.
The bank and Jason Hamilton and Peter Webb
In the bank's 'either or case', the primary submission was that Mr Hamilton had not authorised Mr Webb to direct the advance and he was not liable to the bank. Mr Hamilton would only be liable if it was found that he had in fact provided that authority to the solicitor. Consequently, the focus of the bank's case was that Mr Webb warranted that he had authority to direct and receive the advance made by the bank on completion of the sales to Mr and Mrs Hamilton when he had no authority from them. Mr Smallbone said that in the case against Mr Hamilton, the problem was not forgery, but want of direction to make the advance. Mr Smallbone submitted that Mr Hamilton did not give that instruction and Mr Webb had breached his warranty of authority.
Mr Smallbone further submitted that Mr Webb knew that Mr Lee was engaged in a dishonest scheme and was a participant in it. Mr Webb knew or believed, Mr Smallbone argued, that Mr Lee was misleading the financiers. Mr Smallbone contended that Mr Webb's failure to make enquiries concerning Mr Lee's misdeeds occurred because he feared the truth and did not want to be told anymore. He was recklessly indifferent to the truth of Mr Lee's representations to financiers, as well as to his clients, but was prepared to do everything to facilitate the transaction. Mr Smallbone put to me that Mr Webb was dishonest and was a party to Mr Lee's fraud. Mr Smallbone said that Mr Hamilton had not conceded that he had signed the authorities and cost agreement. There could be no comfortable assurance that the material documents were in fact signed by him.
Mr Ginges relied on the submissions advanced by the bank on the question of breach of warranty of authority to support the submission that no funds were properly advanced to Mr Hamilton or in accordance with his 'authority' and as such the funds disbursed at the direction of Mr Webb were done so without proper knowledge or authority of Mr Hamilton. Mr Ginges argued that the bank's loss, by reason of that direction, was occasioned by Mr Webb's breach of warranty of authority rather than by reason of the mortgage entered into by Mr Hamilton.
Mr Ginges submitted that, given what is known about Mr Lee and his practice of forging and creating false documents, it is quite probable that the documents signed by Mr Hamilton would have been, or at least could have been, altered to suit Mr Lee's purposes. According to Mr Ginges, "that, therefore, gives credibility to Mr Hamilton's evidence and lack of recall in the face of his apparent signatures": DWS, par 72.
Mr Lloyd said that the first question to be asked is what authority did Mr Webb have from Mr Hamilton relevant to the question of whether he was authorised to receive the surplus funds into his trust account. Mr Lloyd submitted that there should be a finding that the surplus funds authority (ex 2 CD1, p 76) was signed by Mr Hamilton as was the buyer's agent authority (ex 2 CD1, p 74). The surplus funds authority gave Mr Webb express actual authority, Mr Lloyd contended, to issue cheque direction 14. That authority was confirmed by the buyer's agent authority and the Trust authority (ex 2 CD, p 174). In the alternative, if Mr Webb did not have actual authority, he had ostensible authority to act for Mr Hamilton in relation to the purchase and the principles in Essington Investments applied. Mr Lloyd argued that any assertion made of Mr Webb's dishonesty should be rejected.
I do not think that Jason Hamilton has discharged the onus of establishing on the balance of probabilities that the signatures on the surplus funds authority (ex 2 CD1, p 76), the buyer's agent authority (ex 2 CD1, p 74) and the Trust authority (ex 2 CD1, p 174) are forgeries. He accepted that the signatures on the surplus funds authority and the buyer's agent authority appeared to be his, but could not tell whether it was his signature on the Trust authority. It became evident during Mr Hamilton's oral testimony that he had signed documents at his shop upon Mr Lee's request, but paid little attention to the detail of the document that had been signed. Mr Hamilton's close friendship with Mr Lee, whom he trusted, the success of their prior real estate dealing and the skilful lure of the prospect of monetary gain, impacted upon the prudence of his consideration of the transaction.
I do think that his testimony of not seeing the authorities until 2006 is mistaken and arises from his failure to read the documents that he signed. I am satisfied that the surplus funds authority, buyer's agent authority, Trust authority, memorandum of transfer and deed of variation were signed by Mr Hamilton. However, I find that he had no understanding that the purchase price had been reduced and that he had directed that the surplus of the bank's loan be paid to Mr Lee. Mr Lee took advantage of Mr Hamilton's trust and fraudulently manoeuvred his dealings with him for his own financial gain. Mr Hamilton's naivety exposed his wife and himself to the serious risk of fraud. Yet, all of this emphasises the fundamental importance of Mr Webb and his employed solicitor, Ms Abood, acting honestly and exercising reasonable care in the provision of their services.
As Mr Webb's honesty is at issue, it is necessary to review the evidence of Mr Webb and Ms Abood in a summarised way, prior to advancing further.
Further matters of evidence
There are three affidavits sworn by Mr Webb that are in evidence. Exhibit H is an affidavit sworn on 17 September 2009 and exhibit 2CD8 are affidavits sworn on 23 September 2010 and 24 September 2010.
Mr Webb was admitted to practice in New South Wales as a Solicitor in August 2000. He was 28 when he completed his law degree in which he majored in intellectual property. Before becoming qualified to practice, Mr Webb worked with a firm of solicitors, primarily in the area of personal injury. Because of that work, he obtained an exemption from having to complete the college of law. Mr Webb said that he had performed "a simple house purchase" in 1999 or 2000. He did not do any other conveyancing between 1999 and 2003. When he started his own firm, he had only completed one conveyance.
In 2002 he obtained his unrestricted licence to practice as a solicitor and started his own Incorporated Legal Practice (ILP), Webbsite Enterprises Pty Ltd trading as Webb Lawyers Pty Ltd. The practice was located in Burwood, on the first floor of a building above a business known as Mortgage One. Mr Webb subleased the premises from Mortgage One (ex 2 CD8, par 12).
Mr Webb was first approached by Graham Lee and Dottie Adams in around August 2003. Mr Lee told Mr Webb that he worked for Mortgage One and gave Mr Webb his business card which described him as an 'investment consultant' (T451.39-44). Mr Lee also held himself out as being a 'mortgage broker' and 'buyer's agent'. Mr Webb stated that he understood these titles to mean that Mr Lee held himself out as being in the business of "providing investment advice", organising finance for potential purchasers, receiving instructions and assisting a person to find "a house or a property of some description" and to provide leads for developments for Mortgage One. Mr Webb agreed that his obligations to the purchasers who had been introduced to their property by Mr Lee as a buyer's agent were not in any way reduced or limited because an agent had found the property.
Mr Webb stated that shortly after his initial meeting with Mr Lee and Ms Adams, they tried to involve him in their investment syndicate, suggesting to him that he could use the equity from his home "to borrow for the purposes of funds required for the purchase of the investment properties". Mr Webb agreed that Mr Lee was persistent "when it came to pushing his investment scheme" but did not agree that Mr Lee was "dogged" or "pursued it relentlessly" (T454.28-32). Mr Webb said that on each occasion he told Mr Lee that he was not interested in the scheme (2 CD8, par 21).
In late 2003, Mr Lee brought a number of conveyances to Webb Lawyers. Then in early to mid 2004, Mr Lee and Ms Adams approached Mr Webb regarding a scheme, which involved purchasing seven parcels of real estate in the Scone and Worrigee area, building houses on them, and then on-selling them (ex H par 23; T455.29-30). Mr Webb was aware that Mr Lee and Ms Adams wanted "to attract investors to fund the cost of building those houses and with a view to on sale" (T455.39-41). He agreed to act for Mr Lee and Ms Adams on the purchase "free of professional charges" based on the understanding that Mr Webb would act for Mr Lee when the time came to on-sell the properties, for which he would be able to charge a higher fee. Mr Lee arranged his own finance with the bank for these purchases and Mr Webb provided documentation to the bank as it was requested.
In 2003, Mr Lee referred William and Donna Cooke, who wanted to purchase a unit in a complex at 8-10 Lydbrook Street, Wentworthville to him. He received documents in relation to the purchase from Mauric & Doyle, a firm of solicitors, who had apparently been acting for the vendors. The vendor of the unit (and the registered proprietor of the whole complex) was an investment company, Napier 888 Pty Ltd. One of the directors of Napier 888 Pty Ltd was Tony Sakr, whom Mr Webb knew reasonably well. Mr Sakr was married to Mr Webb's wife's cousin and they had met on several occasions including at family gatherings. Mr Sakr was also the finance broker at Mortgage One. At the time Mr Webb was instructed, contracts for sale had already been exchanged for a purchase price of $425,000. There was however, a deed of variation apparently signed by the vendor and purchasers, recording an agreement to reduce the price to $390,000.
In regards to what Mr Webb was told concerning the reduction in purchase price he stated (pars 34-35 ex 2 CD8):
"I met with William and Donna Cooke. William Cooke said to me:
'I am in a Syndicate of buyers organised by Graham Lee. Graham is going to organise surplus of funds, I am using my house as well as the unit in Lydbrook Street as security for the loan from the Bank. That will allow me to be in the Syndicate to purchase property with Graham.'
Graham Lee said to me:
The deal for the purchase of this unit is that I don't have to pay the deposit or stamp duty up front. The purchase price has been reduced because the valuation obtained by the Bank is less than we thought it would be'."
Mr Webb stated that he accepted what he was told. In hindsight, he accepted that it was unusual for the purchaser and the vendor to agree to reduce the price for a property after exchange, but it was an unusual transaction in that no deposit was actually paid and he was told that additional security was being provided at settlement. He said that it did not occur to him that the bank was not aware of the actual purchase price, because Webb Lawyers provided the transfer recording the purchase price as $390,000 to the bank before settlement. In cross-examination, Mr Webb denied that he had invented the conversation with the Cookes whereby they said that Mr Lee would organise a surplus for them to invest in the property syndicate. He recalled that Mr Cooke was lending the money to Mr Lee because he was "very keen to become an equity partner in it whereas Mrs Cooke wanted a fixed return" on an investment (T463.40-44).
After the completion of the Cooke purchase, Mr Webb was approached by Tony Sakr to also act on behalf of the vendor for the remaining transactions. Mr Webb expressed a concern that there may be a conflict of interest in acting for both the vendor and the purchasers. Mr Sakr suggested that any conflict could be resolved if Mr Webb acted for the vendor, and Julie Abood acted for the purchasers. The way that the firm handled the Lydbrook Street transactions was that Mr Webb would act for the vendor and Ms Abood would act for the purchasers. Mr Webb agreed, however, that there was a degree of overlap because he had to supervise Ms Abood's work (ex 2 CD8, par 49), as she was quite junior. The supervision involved his reviewing Ms Abood's files and checking them against an automatic checklist generated by the firm's software package LEAP. During cross-examination, he said this supervision may have involved sitting "down for an hour to talk over 100 files" (T649.1-2). He now recognised that as he acted for his wife's cousin's husband whom he knew socially and Ms Abood, as Mr Webb's employee, acted for the purchasers meant that the transaction was not an arm's length sale (T586.16-43) but denied that he recognised it at the time of the transaction. Mr Webb did, however, agree that at the time of the transaction he knew that it was not an arm's length sale because there was no real estate agent, and both Mr Sakr and Mr Lee worked for Mortgage One (T585.48; T586.49 - T587.3).
The next referral Mr Webb received from Mr Lee was to act on the purchase of unit 10 in the complex for Jason Paag and Julie Roberts. Contracts had already been exchanged for a purchase price of $440,000, however, there was a deed of variation apparently signed by the vendor and the purchaser, recording a reduction in price to $400,000. Mr Webb stated that Mr Paag told him (ex 2 CD8, par 38):
"I am in a Syndicate of buyers organized by Graham Lee. Graham has organized all funds to be available at settlement. You can deal with Graham in relation to the finance. I am also going to be involved in the building syndicate."
Mr Webb stated that as with the Cooke matter, he accepted what he was told for the same reason. A transfer was provided to the bank before settlement recording the reduced sale price of $400,000.
Mr Sakr provided to Mr Webb contracts that had been prepared by the previous solicitors and had already been exchanged between Napier 888 Pty Ltd (as vendor) and the following purchasers: Ms Beresford-Maning, Mr Christie, Ms Czyzewska and Mr Nolan (ex 2 CD8, par 46). Mr Webb acted for the vendor and purchaser for each of these transactions. Mr Webb stated that he had the following conversation with Mr Sakr around this time (ex 2 CD8, par 46):
"Sakr: We are not taking deposits from the purchasers. I have reached an agreement with Lee about this.
PW: How is it that contracts are exchanged without deposit?
Sakr: What's the difference - if the purchaser does not complete, Lee substitutes with somebody else. We have nothing to lose. We are just assisting to get the exchange to happen and get our money at the end of the settlement.
PW: There is no security or consideration - really exchange has not been effected.
Sakr: Graham doesn't exchange unless he knows he has the
finance. He screwed us with a couple at first - and we had to do variations and explain it to our bank - but the next few are all contract based - we just want him to sell them. With or without deposits [they will] [doesn't] make much difference to us.
PW: Well the contract is wrong. It says you hold the deposit.
Sakr: By the time we complete we have the deposit and the rest of the money to give to the bank."
During cross-examination, Mr Webb said that at the time he believed that if the purchasers failed to complete, Mr Sakr would have "no recourse to seek specific performance and recover any of the damages" from the purchasers because there was no consideration. Mr Webb believed that a deposit was required in order to make the contract enforceable. He did not agree that his belief that there was no consideration, notwithstanding the promise to purchase land, was because he thought the contracts were a sham. When cross-examined about the Hamiltons, Mr Webb gave the following evidence (T582.50 - T584.18):
"Q. So you understood that in relation to the Hamiltons, Mr Lee had provided the front pages of the contracts to the bank stating the purchase prices of $560,000?
A. I understood that they were provided. I'm not sure who provided them. I presume it was Mr Lee or someone on behalf of Mr Lee or Mortgage One, I'm not sure who, but I presume that they had front pages of the contract.
Q. And returning then to your conversation with Mr Sakr about the contracts not having been really exchanged that I was taking you to before lunch, it was your understanding that Mr Lee had provided signed front pages of contracts to the bank in circumstances where there had been no real exchange, is that right?
A. Yes.
Q. In relation to the Hamiltons, amongst others?
A. Yes, sir.
Q. And that it was your understanding at all times up to settlement of the Hamilton transaction that Mr Lee had provided those front pages to the bank as if they were front pages of valid binding contracts?
A. Yes, sir.
Q. That's right, isn't it?
A. That's correct.
Q. And you knew that he had done that, knowing that there had
been no real exchange?
A. Well, I don't know what was in Mr Lee's mind.
Q. Well, you knew there had been no real exchange?
A. No, I knew that they were defective, yes sir.
Q. And you knew that Mr Lee had told you that he doesn't exchange unless he knows that he has the finance?
A. That's correct, yes sir.
Q. And you also knew that he was providing these documents to the bank in order to get finance approval?
A. I presume that, yes sir.
Q. So you knew that his provision of those front pages to the bank, as if they were front pages of exchanged binding contracts, was a deception that he was practising on the bank, didn't you?
A. I presume so, yes.
Q. And you knew that prior to settlement of the Hamilton transaction, didn't you?
A. Yeah, I knew that the contracts were defective and that he may have provided them to the bank, yes.
Q. And you knew that he had been setting out to deceive the bank in providing them to the bank as if they were evidence of a valid, binding exchange?
A. No, I didn't know that he was - didn't know that Mr Lee was giving the front pages of the contract to the bank to deceive the bank, but I did know that he had given contracts to the bank.
Q. Well, you knew he wanted the bank to think that these were, these front pages were evidence of a valid binding contract, didn't you?
A. Yes.
Q. And you knew that was wrong?
A. Well, I knew that they were defective, yes.
Q. You knew that they weren't binding?
A. Well, I knew that they could be cured in time, but they weren't
binding at the time, yes.
Q. And you knew that there had been no real exchange?
A. Yes."
When further cross-examined, Mr Webb said that the Hamiltons' contracts were not binding until settlement and that they were "cured by settlement" (T598.18- 26). He did not tell the bank that the contracts were not binding. He agreed that he had provided deeds of variation to unbinding contracts, but notwithstanding the deeds, the contracts remained unbinding. Mr Webb did not tell the purchasers that the contracts were not binding on either the vendor or the purchasers. He admitted that this "was an error on [his] behalf". He thought that because the property's sale price had been significantly reduced the purchase was "still in their best interests" and he understood that they still "wanted to complete" (T598.47 - T599.18). As to when the contracts became binding, Mr Webb gave the following evidence (T599.33 - T600.31):
"Q. You are legally trained?
A. Yes, sir.
Q. What was it about that which upon which you founded your opinion that at that stage it was a binding contract?
A. That there was an offer and there was an acceptance. The offer was now to sell the unit at a reduced price and acceptance to buy the unit for the reduced price.
Q. Was there an offer of acceptance at the original price?
A. Yes, your Honour.
HIS HONOUR: Thank you.
SMALLBONE
Q. Well, you said a little while ago in answer to one of my questions that you were of the view that notwithstanding the deed of variation, the contract was still non binding; do you remember giving that answer?
A. I said that it was still defective, yes.
Q. So I take it that when you said a moment ago in relation to his Honour's question that the deed of variation made it binding, that is not a correct answer?
A. Well, it cured some of the issues, yes.
Q. But not all of them?
A. No, not all of them. There was no consideration at that stage.
Q. So it was still not binding?
A. Well, you had - it had defects, yes.
Q. And it was still not binding?
A. Well, I don't know if that's binding but it had defects.
Q. It was not binding; it was a sham?
A. No, sir.
Q. And because Mr Hamilton had never put his mind to it?
A. No, sir.
Q. And had never authorised anyone to exchange it?
A. No, sir.
Q. And because Mrs Hamilton had not put her mind to it?
A. No, sir.
Q. And Mrs Hamilton had not authorised anyone to exchange it?
A. No, sir."
Later when being cross examined by Mr Ginges, Mr Webb said that he believed the contracts became binding when "the deeds of variation were executed, because that was a true reflection and there was significant consideration, consideration that both the purchasers was getting a significant reduction in the price. That is really where [he] saw the contract being exchanged" (T652.16-19). He further said (T653.12-15):
"In my mind back then I understood that they had exchanged, but they were defective, they were going to be cured through time coming up towards the settlement. They were then interjected by the deeds of variation and that in my mind cemented the exchange."
Mr Webb agreed that "in a general sense... a solicitor [has] an obligation and a duty to go through the contract for sale and to explain the salient points to the client" (T650.24-27) and that the reason he had not done so with the Hamiltons was that their contracts had already been exchanged prior to him being instructed to act for them. Mr Webb agreed in hindsight that since he had admitted that the contracts had not been validly exchanged, the obligation still remained with him to go through the contract for sale with the Hamiltons. He agreed that he should have advised them of their rights during the cooling off period, under the contract and his failure to advise them of this statutory right was a serious failure of his duty to them.
For each conveyance, Mr Webb provided Mr Lee with a buyers agent pack consisting of costs agreements, letters of authority to act, a blank front page of the contract, trust authority and a disclosure document. As to whether he expected to receive the three documents that constituted the authority to act and trust authority for each conveyance Mr Webb gave the following evidence (T561.39 - T562.18):
"Q. And it was your expectation, wasn't it, that in each one of these matters that Mr Lee was introducing, that you would be receiving in the course of the transaction those three documents signed by the client?
A. Yes, sir.
Q. Because you understood that that was the way that these transactions involving the Lydbrook Street property were to be progressed by Mr Lee?
A. In particularly the authority to act, yes sir, as the agent.
Q. You expect, I'm putting to you, at the outset in every one of these matters, to receive all three of those documents at some point from Mr Lee, didn't you?
A. No, sir.
Q. Because the arrangement was from the beginning one that would involve the production of a surplus for distribution through your trust account to Mr Lee?
A. No, sir.
Q. And that was why you had those three documents as part of
the buyer's pack in each instance, wasn't it?
A. No, it was just that we happened to have them all in one file.
Q. It is just that you happened to have?
A. Those three documents contained in one file. It's like a word
document, but it had three pages to it.
Q. They were all in one file because you needed all three of them in every matter that Mr Lee was acting on, weren't they?
A. No, sir. I needed the authority to act primarily, but the other two were provided if there were to be surplus funds."
And at (T564.8-47):
"Q. But you expected that you would never be dealing with the client direct in relation to these Lydbrook Street transactions?
A. No, I didn't. I didn't expect to deal with them, no.
Q. And that is why you prepared this document?
A. That's correct.
Q. And it's also the same reason why you prepared the document at page 224 as a standard form precedent?
A. Yes, sir.
Q. And it's the same reason why you prepared the document at 239 as a standard form precedent?
A. Yes, sir.
Q. That is, you expected at all times and on all of these transactions that you would not be dealing with the client direct and that you would be generating a surplus that would be paid to Mr Lee through your trust account?
A. No, sir.
Q. In the standard form precedent at page 239, you see the words in the fourth line "to be paid to Graham Lee"?
A. Yes, sir.
Q. Those words were in every such trust authority that you received on all of the Lydbrook Street matters?
A. Yes, sir.
Q. And they were part of the standard form precedent, weren't they?
A. Yes, sir.
Q. And that was because you expected that on all the matters you would be paying a surplus to Mr Lee, wasn't it?
A. That's correct, yes. If there was a surplus, it would go to Mr Lee, yes.
Q. You expected on all the matters that there would be a surplus, didn't you?
A. No, sir.
Q. That is why you prepared as a standard form the document at
page 224?
A. No, sir. It was just that was part of that pack, that document."
The bank's failure to call Mr Rose to give evidence, Mr Lloyd said, was "bizarre and unexplained" and a Jones v Dunkel inference should be drawn. That the settlements proceeded anyway, occurred by an act of fraud on at least the part of Mr Rose, which severed the chain of causation. Alternatively, the conduct of the bank was said to be so extremely careless as to sever the chain. During oral submissions, Mr Lloyd made particular reference to documents in ex 2CD1, pp 8, 12, 21, 23, 25, 26, 48, 64, 84-85, 156-166, 169 - 171, 181, 185, 187, 191, 195-197. Further factual findings that the court was asked to make included that Mr Rose was aware of the transfer amounts by no later than 22 September when the transfers were sent to Sonia at the Loan Processing Centre; that Maggie Egeto saw the contract by no later than 18 September and that she received the transfer on 19 September showing the lower price and must have known about the funds that were ultimately advanced, when she got the internal memorandum (ex 2 CD1 p 196,198). Mr Lloyd made reference to "Sonia" from the Loan Processing Centre, who received the transfer on 22 September and invited the court to find that it was the loan processing group, who effected the settlement. Mr Lloyd put to me that that the bank was aware between the date of the representation by Mr Webb and settlement, of the true purchase price and that the settlements proceeded anyway, occurred by an act of fraud, on at least the part of Mr Rose which severed the chain of causation. Mr Lloyd cited, in particular, Mallesons Stephen Jaques v Trenorth Ltd [1998] VSCA 58; [1999] 1 VR 727 and Caltex Oil (Australia) Pty Ltd v The Dredge Willemstad [1976] HCA 65; (1976) 136 CLR 529.
Mr Smallbone emphasised that the cause of action was one of strict liability. If it was being said that Mr Rose signed documents containing false information, deliberately or recklessly, then that should have been squarely raised before the commencement of the hearing. Mr Smallbone submitted that the particulars to par 18 of the amended defence to the further amended statement of claim in each matter, do not mention either dishonesty or even mere negligence on the part of Mr Rose. Mr Webb's submissions that Mr Rose was involved in or had knowledge of the fraud are outside the pleadings, had not fairly been raised in time and should not be acted on. A Jones v Dunkel inference does not arise, since the issue was not raised.
The arguments made for the bank included that there was no doubt that the bank advanced the entirety of the payments in both transactions upon the faith of Mr Webb's warranty that he had the Hamilton's authority to direct those payments. Even if the bank had been informed of the changes in purchase prices, it did not mean that there can reasonably be attributed to the bank, an intention to make the advance without the direction of the customer. The making of the advance was something that was likely to happen as a result of the breach of warranty, and therefore, a finding of novus actus interveniens was not available.
The bank's complaint, that Mr Webb's assertion that Mr Rose was aware of and or involved in the fraud is outside the pleadings, is justified. I might add that it was not pleaded that Mr Rose, Maggie Egeto, Sonia or anyone else at the bank knew of the differences between the contract prices and the consideration recorded on the transfers prior to settlement. Paragraphs 18 and 20 of the amended defences to further amended statements of claim that were filed with leave on 25 March 2011, are in the following terms:
"18Further, if Webb is liable to the plaintiff as alleged or at all, Webb says that the plaintiff caused or contributed to its own loss.
Particulars
(a)Failing to read and/or have regard for the transfer before settlement;
(b)Failing to read and/or have regard for the Deed between the First and Second Defendants and the vendor before settlement;
(c)Failing to take reasonable steps to enquire about the purchase price and/or value of the Property before advancing the funds to the First and Second Defendants;
(d)Failing to obtain an external valuation before settlement;
(e)Failing to read and/or have regard to the notice of sale before advancing the funds to the First and Second Defendants.
...
20Further or in the alternative, Webb says that any loss that the Plaintiff has suffered was caused by an intervening act of negligence by the Plaintiff which severed the chain of causation between any breach of warranty of authority by Webb and the Plaintiff's loss and damage.
Particulars
(a)Webb repeats subparagraphs (a)-(e) of paragraph 16 (sic) above."
It is obvious from the pleadings that the repetition of subparagraph (a)-(e) was intended to refer to par 18 and not par 16.
As a matter of procedural fairness, the contentions of fraud and knowledge on behalf of the bank's employees should plainly have been stated in the pleadings. Ample opportunity was available for Mr Webb to ask for leave to further amend his defence, but he failed to do so. In these circumstances, I do not propose to accede to Mr Lloyd's invitation to draw a Jones v Dunkel inference, as the bank was not in the position to properly decide, whether Mr Rose (or any of its employees) should be called as a witness.
Although it is unnecessary to dissertate upon the un-pleaded assertions of fraud and knowledge, it is my view that, the evidence does not establish on the balance of probabilities that Mr Rose had knowledge of the reduced consideration in the transfers and notices of sale. Nor does it establish that Maggie Egeto or Sonia or any other bank employee, had detected the differences between the prices on the copies of the front pages of the contracts, the moneys being lent and the reduced consideration.
Colin Bourke, the bank's manager of quality assurance in mortgage services, described in his affidavit and oral evidence, the different "teams" that were involved in September 2005, when the bank was funding an acquisition of property for a retail customer. The lending team, it appears, received a loan application, which was either rejected or approved. After loan approval, a documents preparation team prepared the loan documents and forwarded them to the borrowers. Once the documents were returned, they were forwarded to a certifications team, who received the returned loan documents, and prepared and forwarded a settlement instruction sheet to the settlement team. A member of the settlement team attended on settlement.
Mr Rose was the lending officer on the Hamilton purchases within the bank's lending team. He received copies of the front pages of the contracts for sale of units 12 and 13 with purchase prices of $560,000, by facsimile from Mr Lee and Ms Adams on 13 August 2005. It was not the bank's practice to obtain external valuations for all properties being financed in September 2005. Mr Bourke was unable to provide a figure above which an external valuation would be required, but said that such a figure would be "determined by the system", which was run by a separate section of the bank with experts in the property market: T 48 L 49-50; T 49.1. In evaluating whether or not an external valuation was required, the bank could rely on one of three documents; the contract, the transfer, or a letter from the solicitor. For the Hamilton loan applications, external valuations were not required and the loans were approved on 22 August 2005, at a loan to valuation ratio of 80 per cent of the purchase prices of $560,000 (ex 2 CD 1 p 90,91).
Mr Roses's request by email to Farah Mansour (ex 2 CD 1 p 64) and the "comments" on the Loan Processing Memorandum (ex 2 CD 1 p 50) establish on the balance of probabilities that Mr Rose asked to collect the loan documents when prepared, but no more. There was nothing in the cross-examination of Mr Bourke or in the documentary material that demonstrated that Mr Rose was involved upon the settlement side of the Hamilton transactions. The last documents that bear his name are the "action guides" (ex 2 CD 1 p 166 - 171), next to which are the dates 12 September 2005.
The evidence does demonstrate that there was a weakness in the bank's procedures that involved different sections and personnel at the various stages from loan application to settlement. It is apparent that no attention was given by the bank officers, who were involved after the documents were sent to the certification team, to checking the consideration on a transfer against the copy of the front page of the contract for sale, upon which a loan approval had been granted. Moreover, it was not part of a settlement officer's task, when attending at settlement, to check the transfer amount on the original transfer against the front page of the sale contract. Neither were the settlement officers provided with this document, nor was it required to be produced by a purchaser on settlement. Mr Bourke told me: T 57.25-31
"...our lenders do not always check [the transfer] back to the contract as far as the value. They are looking more at are the names correct (sic), are the title references correct, and the like."
So much is evident from the failure to detect the reduced consideration when copies of the transfers were sent to the bank on 19 and 22 September 2005.
I draw the inference on the balance of probabilities that Maggie Egeto was the person to whom Ms Abood's facsimile of 19 September 2005 was addressed. Furthermore, I am satisfied that Ms Egeto had signed the "Action Guides" (ex 2CD 1 pp 166-171) on 18 September 2005 which recorded the amount of the loans to Mr and Mrs Hamilton as being $448,000 and initials appear beside the "contract for sale". She had also signed the "funding requests" (ex 2 CD1 pp 172 - 173). I find that Ms Egeto failed to exercise reasonable care and skill in failing to compare the consideration in the copy of the 'Jason Hamilton' transfer against the consideration in the contract and the amount of the loan. A copy of the 'Karen Hamilton' transfer was sent by facsimile to "Sonia" on 22 September 2005. Although there is no evidence that establishes that she was aware of the consideration in the contract of sale, it is reasonable to infer that Sonia was aware of the amount of the loan. I am satisfied that she failed to exercise reasonable care and skill in failing to compare the consideration in the copy of the 'Karen Hamilton' transfer against the amount of the loan. I do not find negligence on the part of the settlement officer, who attended upon settlement, as it was not part of the settlement officer's task to check the consideration in the transfer. There is no evidence that demonstrates that the bank was negligent in failing to obtain external valuations.
Mr Webb knew that the bank was being deceived when the cheque directions were forwarded to the settlements section on 26 September 2005 and cheque directions 14 were part of the deception. Mr Webb knew that he was falsely professing an authority to give those directions as the Hamiltons' solicitor. There is no evidence that establishes that the bank knew that the authority which he professed to have, did not in fact exist. Although there was negligence on the part of the bank's employees in failing to detect the reduced consideration, the material cause of the bank's loss was Mr Webb's dishonest participation in Mr Lee's fraudulent scheme by giving the cheque directions. In effect, he took advantage of the weaknesses in the bank's settlement system that had become apparent from the time of the Cooke and Paag transactions. Any negligence on the part of the bank's employees could not be regarded "as a matter of both logic or common sense", as being "a superseding cause or novus actus interveniens" which broke the chain of causation: March's case per Mason CJ at 518 - 19.
Another argument advanced for Mr Webb was that the conduct of Mr Lee and Ms Adams was an independent cause of the bank's loss, which was much more significant than any conduct of Mr Webb.
I have referred at [20] above to Mr Lee's involvement in the fraudulent scheme. Ms Adams, who is not a party to the present proceedings, played a role in the fraud. The fraudulent actions of Mr Lee and Ms Adams were undoubtedly, a significant cause of the bank's loss. It is, however, unnecessary for Mr Webb's breach to be the exclusive or dominant cause of the loss complained of. As the majority (Deane, Dawson, Toohey and Gaudron JJ) explained in Medlin at 7:
"Nor can the question of causation of damage in a negligence action be automatically answered by classification of operative causes as "pre-eminent" or "subsidiary". Regardless of such classification, two or more distinct causes, without any one of which the particular damage would not have been sustained, can each satisfy the law of negligence's commonsense test of causation. This can be most obviously so in a case where a "subsidiary" cause operates both directly as a cause of the particular damage and indirectly as a contributing component of a "pre-eminent" cause."
Mr Webb's participation in the deception of the bank was vital to the success of Mr Lee's fraudulent scheme. Without Mr Webb's warranty to the bank, the surplus moneys would not have been paid into his trust account to be paid thereafter, to Mr Lee and the bank's loss would not have been sustained. I do not accede to Mr Lloyd's argument.
The final argument on causation raised for Mr Webb was that the bank's agreements with the Hamiltons would never have been enforceable. I do not think that this argument has any force, as it was the deception on the bank that caused the bank's loss.
Contributory Negligence
Mr Smallbone submitted that as a matter of law, the defence of contributory negligence was not available as an answer to a cause of action for breach of warranty of authority. The partial defence of contributory negligence was only available in contractual claims, in respect of a contractual duty of care that is concurrent and co-extensive with the duty of care in tort, which, Mr Smallbone contended is not the situation here. Liability was strict in the present cause of action and it was not dependent on any failure to take reasonable care. My attention was drawn to Carter, Contract Law in Australia, 5th ed, (2007) at [35-32], where Professor Carter states:
"In cases of strict liability, a defendant who has exercised reasonable care may nevertheless be found to be in breach of contract...
This remains true even if the plaintiff has in fact been negligent, because the defendant's breach does not amount to the 'breach of a contractual duty of care that is concurrent and co-extensive with the duty of care in tort'. Thus, the only relevance of the negligence of the plaintiff in such cases is whether it breaks the chain of causation between the defendant's breach and the loss or damage." (italics added) (footnotes omitted)
The submissions for Mr Webb were principally founded on the contention that the cause of action was not contractual, but analogous to an action in tort. Mr Lloyd argued that if it be a contractual cause of action, the duty owed was co-extensive with a duty in tort. Professor Carter's comments, he said, should not be followed.
At common law, the contributory negligence of a plaintiff was a complete defence to an action in negligence, but was not available at all in a claim for breach of contract. The Law Reform (Miscellaneous Provisions) Act 1965 abridged that defence to make it a partial defence in negligence. In Astley v Austrust Ltd [1999] HCA 6; (1999) 197 CLR 1, the High Court held that the defence did not apply to a contractual claim. Since the decision in Astley, the Law Reform (Miscellaneous Provisions) Act was amended, so that the defence of contributory negligence applies to some claims for breach of contract.
Section 9(1) of the Law Reform (Miscellaneous Provisions) Act provides:
"If a person (the claimant) suffers damage as the result partly of the claimant's failure to take reasonable care (contributory negligence) and partly of the wrong of any other person:
(a) a claim in respect of the damage is not defeated by reason of the contributory negligence of the claimant, and
(b) the damages recoverable in respect of the wrong are to be reduced to such extent as the court thinks just and equitable having regard to the claimant's share in the responsibility for the damage."
Section 8 of the Act defines `wrong' as an act or omission that:
"(a) gives rise to a liability in tort in respect of which a defence of contributory negligence is available at common law, or
(b) amounts to a breach of a contractual duty of care that is concurrent and co-extensive with a duty of care in tort." (italics added)
The defence of contributory negligence is, relevantly, available where the claim is in respect of a breach of a contractual duty of care that is concurrent with and co-extensive with a duty of care in tort.
As the bank's cause of action is for breach of warranty of authority, to which strict liability applies, there is no act or omission by Mr Webb that amounts to a breach of a contractual duty of care, that is concurrent and co-extensive with a duty of care in tort. Professor Carter's observations are applicable to the present case.
I do not think that s 5A CLA has application, so as to enable a defence of contributory negligence to be raised. I appreciate that it is necessary to have regard to the substance of the action rather than its form: Booksan per Ipp JA at [166] - [167]; Wynn Tresidder Management Pty Ltd v Barkho [2009] NSWCA 149 per McColl JA at [99]. Mr Webb's liability does not arise because of negligent misrepresentation. He knowingly professed an authority that he never had.
In my judgement, therefore, in the present state of the law, contributory negligence is not a defence to a claim, which is founded upon and in substance is a breach of warranty of authority. Should my conclusion be incorrect, I assess the extent of the reduction in damages by reason of the bank's contributory negligence to be thirty five per cent.
Proportionate liability
The court was addressed at some length by the parties upon the issue of proportionate liability. Section 34 CLA does not apply, as the bank's action is not a claim for damages arising from a failure to exercise reasonable care. Moreover, Mr Webb's fraudulent conduct caused the bank's damage and s 34A(1)(b) CLA applies, so as to exclude the proportionate liability provisions.
Damages
The bank acted upon Mr Webb's profession that he had the authority of Mr and Mrs Hamilton to give the cheque directions and handed over cheques in each transaction amounting to $447,659.60 on settlement.
I have stated my conclusion at [80] above that the bank cannot succeed in its action against Mrs Hamilton.
A difficulty for the bank in the action against Mr Hamilton is that he did not authorise Mr Webb to give the cheque directions, nor the bank to make the advances. I have no doubt that if Mr Hamilton had understood the true nature of the transaction, he would have asked that it not proceed. Mr Webb's cheque direction caused the advance itself to be made, otherwise than in accordance with the agreed loan with the bank. As Young CJ in Eq observed in Perpetual Trustees Victoria Ltd v Tsai [2004] NSWSC 75; (2004) 12 BPR 22, 281 at [21] and [24]:
"It is clear that if no moneys are lent under a mortgage then the mortgage is just completely void...
...
If there was no loan to the appellant he could not be in default not repaying the loan."
The bank lost the ability to recover from Mr and Mrs Hamilton, all of the moneys advanced. It is for this reason that the bank's loss is not confined to the advances directed by cheque directions 14. In Leggo v Brown & Dureau Ltd [1923] HCA 19; (1923) 32 CLR 95 at 99, Knox CJ said that a person who commits a breach of warranty of authority "is bound to make good to the other contracting party what that party has lost, or failed to obtain, by reason of the non-existence of the authority."
In Bowstead and Reynolds on Agency, Professor Reynolds described at [Article 106] the measure of damages for breach of warranty of authority as being, "the loss which the parties should reasonably have contemplated as liable to result from the breach of warranty." [Article 106] in Bowstead and Reynolds, was cited with approval in Boulas v Angelopoulos by Kirby P at 11,489 - 11,491.
I conclude that Mr Webb is answerable to the bank for the loss caused by his dishonest profession of authority. The bank's loss has been mitigated by the sales of units 12 and 13. As at 23 March 2011, the amounts owing to the bank were $302,521.29 (Mr Hamilton) and $220,728.38 (Mrs Hamilton) (ex AA). I do note that these amounts include legal costs of $13,687.40 (Mr Hamilton) and $10,402.26 (Mrs Hamilton). Bank fees of $1,052.00 (round figures) are also included in each amount owing. These amounts are not to be included in the bank's loss.
I should mention that the agreement between the bank and the Hamiltons (see [16] above) has, in my opinion, no impact upon the bank's ability to recover its loss from Mr Webb.
Mr Smallbone raised the issue of the bank's costs, should the bank be unsuccessful in its actions against Mr and Mrs Hamilton. Although there is authority to suggest that such costs may be included in the damages award, the question is better addressed when orders for costs are to be made.
Mr Webb's cross-claim against LawCover
Clause 23 of the professional indemnity insurance policy (ex 2 CD 15) is as follows:
"We will not indemnify you under this Policy when the claim arises from any dishonest or fraudulent acts or omissions of a principal or of corporate firm, whether directly or indirectly."
As Mr Webb was the principal of Webb Lawyers and the claim arises from his dishonest acts, he is not entitled to be indemnified under the policy. His cross-claim against LawCover must fail. It is unnecessary to consider the submissions covering the other clauses raised by LawCover in its defence.
Mr and Mrs Hamiltons cross-claims against Mr Webb
The bank's lack of success against Mr and Mrs Hamilton renders their cross-claims nugatory. Accordingly, they will be formally dismissed.
Interest
The court may include interest up to judgement: s 100 CPA. I do not propose to accede to the bank's invitation to award such interest for two reasons. The first being that the bank's loss includes interest and the second is the bank's negligent contribution to its own loss.
Orders
For the foregoing reasons, I make the following orders:
(1)Verdict and judgment for the first defendant (Jason Hamilton) against the plaintiff (the bank).
(2)Verdict and judgment for the second defendant (Karen Hamilton) against the plaintiff (the bank).
(3)Verdict and judgment for the plaintiff (the bank) against the third defendant (Peter Webb) in the sum of $497,056.00
(4)The cross-claims of the cross-claimants (Jason Hamilton and Karen Hamilton) against the cross-defendant (Peter Webb) are dismissed.
(5)Verdict and judgment for the cross-defendant (LawCover) in the second-cross claim against the cross-claimant (Peter Webb).
I will hear the parties on the question of costs.
**********
Decision last updated: 23 March 2012
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