Cromwell Property Securities Ltd v Financial Ombudsman Service Ltd
[2014] VSCA 179
•28 August 2014
SUPREME COURT OF VICTORIA
COURT OF APPEAL
| S APCI 2013 108 | |
| CROMWELL PROPERTY SECURITIES LIMITED (ACN 079 147 809) v FINANCIAL OMBUDSMAN SERVICE LIMITED (ACN 131 124 448) | Appellant First Respondent |
| and | |
| PETER RADFORD | Second Respondent |
| and | |
| ROBYN RADFORD | Third Respondent |
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| JUDGES | WARREN CJ, TATE and OSBORN JJA |
| WHERE HELD | MELBOURNE |
| DATE OF HEARING | 11 February 2014 |
| DATE OF JUDGMENT | 28 August 2014 |
| MEDIUM NEUTRAL CITATION | [2014] VSCA 179 |
| JUDGMENT APPEALED FROM | [2013] VSC 333 (Digby J) |
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CONTRACT and ADMINISTRATIVE LAW – Appeal against decision refusing application for review of decision of First Respondent – Where mandatory dispute resolution scheme established by s 912A Corporations Act 2001 (Cth) – Appropriate standard of review of a decision to exclude – Construction of Terms of Reference for mandatory dispute resolution scheme – Whether decision not to exercise power to exclude Wednesbury unreasonable – Australian Football League v Carlton Football Club Ltd [1998] 2 VR 546 and Mickovski v Financial Ombudsmen Services Ltd (2012) 36 VR 456 applied.
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| APPEARANCES: | Counsel | Solicitors |
| For the Appellant | Mr D J Batt QC with Mr P D Herzfeld | Allens |
| For the First Respondent | Mr M Wise | Arslan Lawyers |
| For the Second Respondent | No appearance | |
| For the Third Respondent | No appearance |
Table of Contents
WARREN CJ and OSBORN JA Introduction ....................................................................................................... 1 Background......................................................................................................... 2 Legislative regime and the TOR...................................................................... 7 Trial judgment.................................................................................................... 14 Notice of appeal……………………................................................................. 18 Ground 2: Should the Wednesbury test apply?.............................................. 19 Ground 3: Was the decision not reasonable?................................................ 35 Ground 4: Was the decision of FOS unreasonable?..................................... 35 (a) Contribution and proportionate liability……………………….. 39 (b) Access to evidence………………………………………………. 41 (c) Conflict of interest 43 Grounds 5 and 6: Did FOS give real and genuine consideration to Cromwell’s submissions that a court was a more appropriate forum?.... 46
Ground 7: Did FOS make an error of law...................................................... 49 Conclusions…………………………………………………………………… 51 TATE JA Introduction…………………………………………………………………... 51 The FOS external dispute resolution scheme……………………………… 54 The dispute……………………………………………………………………. 65 The judge’s reasons…………………………………………………………... 72 Grounds of appeal…………………………………………………………… 81 Ground 2: Does the Wednesbury test apply?........................................... 82 Ground 3: Was the Decision not reasonable?.......................................... 95 Ground 4: Did the judge err in concluding that the Decision was not unreasonable?.................………………………………………………... 95
(1) Proportionate liability/Wrongs Act claims……….. 100 (2) Is Garnaut in a position of conflict?...………............ 104 Grounds 5 and 6: Was real and genuine consideration given to Cromwell’s submissions that a court was a more appropriate forum?.....................................................…………………………..…... 110
Ground 7: Did FOS make an error of law? ………………………..….. 112 Conclusion…………………………………………………………………... 114
WARREN CJ
OSBORN JA:
Introduction
The first respondent (the Financial Ombudsman Service Ltd (‘FOS’)), has rejected an application by the appellant (Cromwell Property Securities Ltd (‘Cromwell’)) that FOS should refuse to continue to consider a complaint against Cromwell made by the second and third respondents (Mr and Mrs Radford (‘the Radfords’)). The application was made on the grounds that the complaint would be more appropriately dealt with by a court. In turn a judge of the Trial Division has dismissed an application by Cromwell for relief preventing FOS from continuing to assess the claim under its own dispute resolution process.[1]
[1]Cromwell Property Securities Limited v Financial Ombudsman Services Ltd [2013] VSC 333 (‘Reasons’).
Cromwell appeals from his Honour’s decision and orders.
For the reasons we elaborate below we would dismiss the appeal. In summary we agree with the trial judge that:
(a) to justify the relief sought Cromwell must demonstrate that FOS made a specific error of law or that FOS could not reasonably have made the decision it did;
(b) Cromwell’s case as to unreasonableness is premised upon contingent hypotheses of fact which may or may not eventuate;
(c) the Radfords’ claim is one of a kind ordinarily intended to be dealt with under the external dispute resolution scheme operated by FOS;
(d) in agreeing to be subject to the dispute resolution scheme Cromwell must be taken to have contemplated that clients who were represented by or received advice from financial advisors at the time of investing with it might subsequently bring claims against it pursuant to the provisions of the external dispute resolution scheme;
(e) the further determination of the complaint by FOS will not unfairly prejudice Cromwell in respect of rights it might otherwise have arising out of potential joint liability on the part of the Radfords’ financial advisor in respect of matters forming the subject of the complaint;
(f) the fact that Garnaut Private Wealth Pty Ltd (‘Garnaut’) is acting as agent for the Radfords in respect of the complaint to FOS did not require the conclusion that the identification of issues and evidentiary enquiry which FOS proposes to undertake would necessarily be compromised and unfair;
(g) the fact that Garnaut is acting as agent for the Radfords does not involve a relevant conflict of interest rendering the procedure necessarily unfair;
(h) Cromwell has not demonstrated that it was not reasonably open to FOS to conclude it was appropriate to continue to consider the claim;
(i) it cannot be concluded that FOS failed to give real and proper consideration to Cromwell’s application for FOS to disclaim jurisdiction; and
(j) the letter that FOS sent to Cromwell advising of its decision does not demonstrate that FOS made any specific error of law.
Background
Cromwell administers, and was the Responsible Entity of, the Cromwell Property Fund. It holds an Australian Financial Services Licence (‘the licence’) under the Corporations Act 2001 (Cth) (‘the Corporations Act’). As a result of holding the licence and being in the business of providing financial services to retail clients, s 912A of the Corporations Act required Cromwell to be a member of an ‘external dispute resolution scheme’. Accordingly, on or about 28 May 2008, Cromwell became a member of the dispute resolution regime operated by FOS.
The current constitution of FOS establishes Terms of Reference (‘TOR’) (which were agreed by Cromwell), which regulate the dispute resolution process undertaken by it. Under the TOR, FOS has the power to refuse to consider a referred dispute if it considers that this course is appropriate.
At trial, it was accepted by both Cromwell and FOS that on or about 1 July 2008 Cromwell and FOS entered into a contract which contained the terms set out in FOS’ constitution and the TOR (as amended from time to time). The TOR in force as at 1 January 2012 is the central document in dispute.[2]
[2]See Reasons [29].
In March 2007, the Radfords as trustees for their superannuation fund purchased 99,661.1520 units in a unit trust run by Cromwell for $100,000. The price of the units dropped from $1.0034 per unit to $0.18 as at 30 June 2011.
On 4 April 2012, the Radfords lodged a dispute form with FOS seeking to use the external dispute resolution scheme. The Radfords claimed that the disclosure documents associated with their investment in the unit trust were misleading and the subject of non-disclosures. Further, the Radfords claimed that they relied on the documents and but for the alleged misrepresentations and non-disclosures, they would not have invested in the fund, or would have withdrawn from the fund. The relevant sections of the complaint are:
THE INVESTMENT IN CROMWELL
12Our Fund purchased 99,661 units in the Cromwell Property Fund (the Fund) on 20 March 2007 at a price of $1.0034 per unit after I had read and carefully considered the Product Disclosure Statement [‘PDS’] dated 13 July 2006 and the Supplementary Product Disclosure Statement dated 17 October 2006. I understood that the investment carried similar risks and returns to a direct property investment.
13I have concluded that misleading or deceptive disclosure by Cromwell, both at the time of my original investment and subsequently, has contributed to a loss of our capital and reduced the income derived by Our Fund [the RJ & PF Radford Pension Fund], more than would be the case under ‘market’ conditions alone.
14Whilst I understand that property prices move up and down, I believe that my Cromwell investment is much worse than an investment in the properties themselves.
DISTRIBUTIONS OUT OF CAPITAL
15Since our investment in the Fund, we have been made aware that Cromwell supplemented income distributions to us in ways which were very different from those proposed in the PDS.
16We would not have invested in the Fund from the outset had we known that Cromwell intended to supplement income distributions with our own capital.
17Our Fund also receives the Fund’s quarterly updates on a regular basis. In all of the quarterly updates received to date, there had been no disclosure of income distributions being supplemented with our own capital.
18If I had been made aware of this matter by the Responsible Entity, I would have immediately instructed Garnaut to redeem the entirety of my holding in the Fund at the next available withdrawal date.
GEARING
19Since our investment in the Fund, we have been made aware within less than 12 months from the date of the PDS, the gearing ratio of the Fund was a dangerously high level of 83.2%, which was never disclosed to us.
20The Fund’s gearing ratio was not disclosed to us in the PDS or in other Cromwell documents, specifically quarterly updates to 30 September 2009. We understood that the money raised from investors like us was to be used to pay down the debts of the Fund.
21At that level of gearing, to me, the Fund was at risk of not being able to meet all its liabilities from its assets. Our Fund’s investment capital was therefore at risk.
22I believe that high gearing is very risky and is not compatible with the investment objectives of Our Fund. If I had been made aware of the Fund’s high gearing, I would have immediately instructed Garnaut to redeem the entirety of my holding in the Fund at the next available withdrawal date.
NET TANGIBLE ASSET BACKING
23If Our Fund had invested directly in property, the net assets backing our investment would be the value of the property less the loans outstanding. I understood that the Fund worked like a direct investment. Since our investment in the Fund, we have been made aware that Cromwell had not disclosed the net tangible asset backing per unit in the PDS. They have instead misleadingly disclosed a net asset value ‘NAV’ per unit as a representation of the underlying value of our investment.
24Due to accounting rules I do not understand, the real tangible assets per unit were less than the quoted NAV per unit disclosed by Cromwell and significantly less than the price our Fund had paid for the units.
25If I had been made aware of the real tangible asset backing by the Responsible Entity, I would not have invested in the Fund or, if it was after we had invested, would have immediately instructed Garnaut to redeem the entirety of my holding in the Fund at the next available withdrawal date.
At the time of the investment, the Radfords were advised by Garnaut. Importantly for the purpose of this matter, Garnaut also represents the Radfords in the dispute, including both the initial dispute with FOS and the subsequent litigation. A dispute form lodged by the Radfords with FOS sets out their position in relation to Garnaut. Mr Radford wrote:
9We are aware that if any recommendation by Garnaut to invest in the Fund fell short of Garnaut’s obligations to us as clients, then we may be entitled to pursue a complaint against Garnaut (either as well as, or instead of, our current dispute against Cromwell).
10We have not made a complaint against Garnaut and do not wish to do so at this time.
11Garnaut has been authorised by Our Fund to act on its behalf (without fee) in the dispute lodged by Our Fund with the Financial Ombudsman Service.
On or about 16 May 2012, Cromwell sent a document entitled ‘Application to Exclude Dispute’ to FOS. In that document Cromwell requested that FOS decline to continue to consider the dispute between it and the Radfords under cl 5.2 of the TOR.
Clause 5.2 of the TOR relevantly provides:
FOS may refuse to consider, or continue to consider, a Dispute, if FOS considers this course of action appropriate, for example, because:
(a)there is a more appropriate place to deal with the Dispute, such as a court, tribunal or another dispute resolution scheme or the Privacy Commissioner;
(b)the Applicant is not a retail client as defined in the Corporations Act 2001;
(c)the Dispute relates to a Financial Service Provider’s practice or policy and does not involve any allegation of either Maladministration or inappropriate application of the practice or policy;
(d)the Dispute being made is frivolous or vexatious or lacking in substance; or
(e)after the Dispute is lodged with FOS, the Applicant commences legal proceedings against the Financial Services Provider that are related to the Dispute.
In its application to exclude the dispute, Cromwell identified a number of issues which it submitted led to the conclusion that FOS should refuse to continue to consider the dispute, namely:
(a)the risk that all the evidence necessary for FOS to fairly decide the Dispute will not be available to FOS because of the position of Garnaut;
(b) the inability of Cromwell to join Garnaut to the FOS process;
(c)the inability of Cromwell, within the FOS process, to compulsorily obtain documents, and other evidence, from Garnaut and documents in relation to Garnaut;
(d)the inability of Cromwell, within the FOS process, to limit pursuant to statutory proportionate liability regimes any liability it may have to the Radfords, having regard to the liability of Garnaut to the Radfords;
(e)the inability of Cromwell, within the FOS process, to claim contribution or indemnity from Garnaut in respect of any liability Cromwell may have to the Radfords;
(f)the inability of Cromwell to have the FOS process bind all relevant parties by the rules of disclosure;
(g)the inability of Cromwell, within the FOS Process, to cross-examine witnesses of, or associated with, Garnaut.
It can be seen that the application raised issues of evidentiary and procedural limitations and of loss of rights with respect to potential liability on the part of Garnaut.
On 24 May 2012, FOS emailed Cromwell to inform it that FOS was denying the request to refer the matter to a court or tribunal. That email stated:
I refer to your response dated 16 May 2012 requesting to exclude the dispute.
FOS has reviewed the matter and advise that FOS will not exclude the dispute on this basis at the current stage. Please note that you are free to make this assertion again when a merit assessment is [sic] been conducted by a Dispute Analyst. However, as FOS has the ability to demand required information from all parties, and the ability to test this information for validity, it is unlikely that we would consider excluding the dispute on this basis.
FOS will be able to determine what, if any, loss is attributable to either party and it is up to the Applicant as to whether they wish to pursue losses against the advisor directly. It is also up to the Applicant’s discretion as to who they have acting as their representative.
Legislative regime and the TOR
The starting point is s 912A of the Corporations Act. Relevantly sub-s (1)((g) states:
(1) A financial services licensee must:
…
(g)if those financial services are provided to persons as retail clients – have a dispute resolution system complying with subsection (2)
Subsection 2 sets out the requirements of a dispute resolution system:
(2)To comply with this subsection, a dispute resolution system must consist of:
(a) an internal dispute resolution procedure that:
(i)complies with standards, and requirements, made or approved by ASIC in accordance with regulations made for the purposes of this subparagraph; and
(ii)covers complaints against the licensee made by retail clients in connection with the provision of all financial services covered by the licence; and
(b)membership of one or more external dispute resolution schemes that:
(i)is, or are, approved by ASIC in accordance with regulations made for the purposes of this subparagraph; and
(ii)covers, or together cover, complaints (other than complaints that may be dealt with by the Superannuation Complaints Tribunal established by section 6 of the Superannuation (Resolution of Complaints) Act 1993) against the licensee made by retail clients in connection with the provision of all financial services covered by the licence.
The background to these provisions is set out by Tate JA in her judgment. The legislative scheme reflects an intention to provide a low cost dispute resolution scheme to consumers as an alternative to litigation.
In compliance with this provision, Cromwell chose the scheme offered by FOS. That arrangement was governed by both the constitution of FOS and the TOR. There are several relevant parts of the TOR. The introduction commences as follows:
1.1 Purpose of the Service
The Service is conducted by FOS and has been established as an independent forum to resolve Disputes between Applicants and Financial Services Providers. The Service is free of charge for Applicants. The costs of the Service are met by the Financial Services Providers.
1.2 Principles that underpin FOS operations and processes
In dealing with Disputes, FOS:
a)must do what in its opinion is appropriate with a view to resolving Disputes in a cooperative, efficient, timely and fair manner;
b)shall proceed with the minimum formality and technicality; and
c)shall be as transparent as possible, whilst also acting in accordance with its confidentiality and privacy obligations.
Clause 4.1 of the TOR governs the eligibility of those who may refer a dispute to FOS. It provides, amongst other things, that FOS may consider a dispute if the dispute is between a financial services provider and an individual or individuals (including those acting as a trustee, legal personal representative or otherwise).
Clause 4.2 defines the types of disputes that can be considered by FOS:
FOS may only consider a Dispute between a Financial Services Provider and an Applicant:
a) either:
(i)that arises from a contract or obligation arising under Australian law; or
(ii)where the offer to invest was received in Australia by an Applicant in relation to a recognised Foreign Collective Investment Scheme; and
b) that arises from or relates to:
(i)the provision of a Financial Service by the Financial Services Provider to the Applicant;
(ii)the provision by the Applicant of a guarantee or security for, or repayment of, financial accommodation provided by the Financial Services Provider to a person or entity of the kind listed in paragraph 4.1;
…
c)if the Financial Services Provider is a Member at the time that the Dispute is lodged with FOS (even if not a Member at the time of the events giving rise to the Dispute); and
d)if the Dispute is otherwise within the jurisdiction of FOS under these Terms of Reference and all other requirements of these Terms of Reference are met.
Clause 5 of the TOR deals with exclusion of disputes from FOS’ dispute resolution process. Clause 5.1 sets out a number of claims that are automatically excluded from the process, including disputes where the claim is for more than $500,000, or where the main issue of the dispute is about confidentiality or privacy, level of fees, premiums, charges or interest, or assessment of the credit risk posed by the borrower.
Clause 5.2 (which we have quoted above) describes the circumstances in which FOS may disclaim jurisdiction in respect of a dispute.[3] Those circumstances specifically include cases where it is appropriate to do so because there is a more appropriate venue in which to deal with the dispute such as a court. FOS has also published Operational Guidelines to the TOR (‘the Guidelines’). These state that FOS will not lightly exclude a dispute that falls within its jurisdiction and will only do so if there is a compelling reason. They further provide:
[3]The clause is set out in full at [11] above.
Factors FOS considers when deciding whether to exclude a Dispute
FOS assesses whether it should exercise its discretion to exclude a Dispute after taking into account:
• the nature of the Dispute;
• any special circumstances or factors relevant to the Dispute;
• the principles stated in paragraph 1.2; and
• the requirements of ASIC's Regulatory Guides 139 and 165.
The guidelines also state with respect to the power to disclaim jurisdiction:
More appropriate place to deal with Dispute (5.2a))
In some cases, a court, a tribunal, another dispute resolution scheme, or the Privacy Commissioner may be a more appropriate place than FOS to deal with a Dispute.
For example, if the only way to determine the issues raised by the Dispute would be for a third party to give evidence subject to cross examination, then a court may be a better forum to deal with the Dispute. This may be the case where issues of fact or credibility cannot be determined by assessing the weight of the available information without testing it in court. However, in most cases, the assessment of fact can be made by FOS.
Clause 5.3 of the TOR provides for the exclusion process:
5.3 Process for exclusion of Disputes
a) Where a Dispute is lodged with FOS and:
(i)FOS considers that these Terms of Reference exclude the Dispute; or
(ii) FOS decides to exercise a discretion under these Terms of Reference to exclude the Dispute,
FOS will advise the Applicant … and provide reasons for this assessment.
b)If, within 30 days of receipt of this advice, the Applicant objects to an assessment made by FOS in accordance with paragraph a), FOS will review the matter if FOS is satisfied that the Applicant’s objection may have substance. If so:
(i) FOS will inform the other parties involved in the Dispute;
(ii)all parties will be given an opportunity to provide submissions;
(iii)all parties will be provided with copies of each other’s submissions; and
(iii)FOS will review the matter and provide the parties with FOS’s (sic) final decision referred to as a Jurisdictional Decision – this will set out the reasons for the decision.
Clause 7 of the TOR provides for a variety of methods of dispute resolution which FOS may adopt. It also provides for procedural powers. Importantly, cl 7.2 sets out the powers of FOS to seek information from the parties. That clause states:
7.2 Provision of information by the parties to the Dispute
FOS may require a party to a Dispute to provide to, or procure for, FOS any information that FOS considers necessary. That party must comply with FOS’ request within the timeframe specified by FOS except where the party satisfies FOS that:
(a)to provide information would breach a duty of confidentiality to a third party and, despite best endeavours, the third party’s consent to the disclosure of the information has not been able to be obtained;
(b)to provide the information would breach a Court order or prejudice a current investigation by the police or other law enforcement agency; or
(c)the information does not or no longer exists or is not within the party’s reasonable possession or control.
Similarly, cl 7.3 provides that FOS may require a party to a dispute to do anything it considers may assist them in considering the dispute. This includes attendance by a party at an interview. Clause 7.5 sets out the consequences of non-compliance with a request by FOS for information from a party or failure to take any other step required by FOS. These include proceeding with the resolution of the dispute on the basis of drawing an adverse inference from non-compliance with a request or refusing to continue consideration of the dispute.
Clause 8 provides further for the way FOS makes its decisions. Clause 8.1 provides that ‘FOS is not bound by any legal rule of evidence’. Clause 8.2 sets out certain criteria FOS must take into account in resolving a dispute. That clause states:
8.2 Dispute resolution criteria
Subject to paragraph 8.1, when deciding a Dispute and whether a remedy should be provided in accordance with paragraph 9, FOS will do what in its opinion is fair in all the circumstances, having regard to each of the following:
(a) legal principles;
(b) applicable industry codes or guidance as to practice;
(c) good industry practice; and
(d)previous relevant decisions of FOS or a Predecessor Scheme (although FOS will not be bound by these).
Clause 8.5 then sets out the procedure of the dispute resolution scheme. Where FOS does not use the expedited process set out in cl 8.6, it goes through a two step-process. First, after an investigation FOS makes a ‘Recommendation’. If the financial services provider does not agree with the Recommendation or either party asks for FOS to move to a ‘Determination’, then FOS will proceed to a Determination which is binding on both parties. For completeness, the clause states:
8.5 Process for deciding Disputes
Unless paragraph 8.6 applies, the process for deciding a Dispute is as follow.:
(a)After giving the parties a reasonable opportunity to make submissions and provide information about the matters in dispute, FOS makes an assessment referred to as a Recommendation.
(b)If both parties accept the Recommendation within 30 days of receiving it, the Dispute is resolved on the basis of the Recommendation.
(c) If, within 30 days of receiving the Recommendation, either:
(i)the Financial Services Provider does not accept the Recommendation in relation to the Dispute; or
(ii)either party requests FOS to proceed from a Recommendation to a Determination,
FOS will proceed to a Determination by either an Ombudsman or by a FOS Panel (as the Chief Ombudsman or his or her delegate decides is appropriate). Before the Determination is made, the parties will be given a reasonable opportunity to make submissions, and provide any further information, in response to the Recommendation.
Clause 8.7 provides that both the Recommendation and Determination must be in writing. Further, both the Recommendation and Determination must either reach a conclusion about the merits of the dispute or express the view that, given the procedures adopted by FOS, it would not be appropriate for FOS to reach a conclusion as to the merits of the dispute. In doing so, FOS must set out the reasons for its decision. Finally, the clause provides that FOS must stipulate a fair and appropriate remedy which must be provided to all parties to the dispute. A Determination is a final decision and is binding upon all parties if the applicant accepts the Determination within 30 days.
In order for the applicant to accept a Recommendation or Determination, cl 8.8 stipulates that the applicant must provide a binding release from liability in respect of the matter to the financial services provider. The release must be for the full value of the claim, even if that amount exceeds the amount of the remedy granted by FOS.
Clause 9.1 sets out the remedies that FOS can administer. The clause states:
9.1 Remedies
Subject to paragraphs 9.2 to 9.8, FOS may decide that the Financial Services Provider or the Applicant undertake a course of action to resolve the dispute including:
(a)the payment of a sum of money;
(b)the forgiveness or variation of a debt;
(c) the release of security for debt;
(d)the repayment, waiver or variation of a fee or other amount paid to or owing to the Financial Services Provider or to its representative or agent including the variation in the applicable interest rate on a loan;
(e) the reinstatement or rectification of a contract;
(f)the variation of the terms of a Credit Contract in cases of financial hardship…
Under cl 9.2, FOS can direct a financial service provider to compensate an applicant for direct financial loss, but such a direction is subject to a cap in accordance with cl 9.2. In respect of this case, the Radfords claim is capped at $280,000 (excluding costs and interest). Where an applicant does not accept the Recommendation or Determination, the applicant is not bound by it and may bring an action in the courts or take any other action available to them against the financial services provider.
Importantly, cl 13.1 provides that a member cannot instigate legal proceedings against the applicant or ‘any Other Affected Party’ while FOS is dealing with the dispute. However, the clause allows a member to commence proceedings where it is necessary to preserve assets or to preserve its legal rights where the limitation period would shortly expire.
Trial judgment
The trial judge dismissed Cromwell’s application to set aside the decision of FOS made on 24 May 2012 to refuse to exclude the dispute under cl 5.2 of the TOR.
His Honour rejected the initial submission of FOS, and held that there was no impediment to implying terms into the TOR.[4] While he noted the role of the Australian Securities and Investments Commission (‘ASIC’) in approving the express terms of the TOR, there was nothing to stop a court from implying terms into a contract such as this, where the implication is necessary.[5] The trial judge held that there was an implied term that FOS must exercise its discretion to exclude not unreasonably in the Wednesbury sense.[6]
[4]Reasons [41].
[5]Ibid.
[6]Ibid [38],[41],[49].
His Honour rejected the submission of Cromwell that a decision to exclude must be positively reasonable as opposed to Wednesbury unreasonable.[7] Cromwell relied on the following statement of principle by Gummow J in Service Station Association Ltd v Berg Bennett & Associates Pty Ltd:
Where one party has an express power the exercise of which will significantly affect the interests of the other party (eg by cancellation of their supply contract) if the holder of the power is satisfied that a certain state of affairs exists, the words of the contract are fairly readily construed (and the more so when the parties have given such a power to a third party) as requiring a reasonable as well as honest state of satisfaction… But this is a result arrived at by a process of construction of the express terms in the setting of the contract as a whole. It is best not seen at all as the implication of a further term.[8]
[7]Ibid [44], [49].
[8](1993) 45 FCR 84 (‘Berg Bennett’), 94 (citations omitted).
His Honour first considered the relevant notion of reasonableness[9] and noted that more than one decision might be regarded as reasonable in any one set of circumstances.[10]
[9]Reasons [50]-[52].
[10]Ibid [53].
Next his Honour characterised the decision as to the more appropriate procedural course made by FOS as discretionary in character in the sense that it called for a value judgment to be made by reference to a series of factors in respect of which there was room for reasonable differences of opinion. His Honour further concluded:
In the absence of clear language, a contract should not be construed as permitting a more generous scope of court review of a contractual discretionary decision-making power than the scope of review that would apply on appeal if the power were exercised by a court. It follows that the test of reasonableness on review of a FOS decision must be at least as deferential to the decision-maker as the House v The King test. The House v The King test is, in turn, closely related to the Wednesbury standard.[11]
[11]Ibid [56] (citations omitted).
In turn his Honour concluded that Mickovski v Financial Ombudsman Service Ltd[12] and Australian Football League v Carlton Football Club Ltd[13] were:
binding authorities for the proposition that, whatever may be the position with respect to contractual powers generally, the applicable standard on review of a FOS decision is Wednesbury unreasonableness.[14]
[12](2012) 36 VR 456 (‘Mickovski’).
[13][1998] 2 VR 546 (‘Carlton Football Club’).
[14]Reasons [60].
His Honour also held that Mickovski was clear authority for the proposition that the decision of FOS might be set aside by a court if that decision was attended by errors of law where the decision is not expressed to be ‘final’ by the relevant contract.[15]
[15]Ibid [87].
His Honour held that the decision of FOS was reasonably open to it and there was no error of law in this case.
In assessing the reasonableness of the decision his Honour took into account a number of factors. First, he noted that it would have been readily foreseeable by the parties that such disputes might well implicate a third party like the financial advisor.[16] Secondly, his Honour noted that the terms of the TOR contemplated the possibility of court proceedings, but that the parties knew of the restrictions placed on them when they entered into the TOR. He stated:
What the TOR provisions clearly reflect is that the parties, like the plaintiff in this proceeding, have contracted to empower FOS to determine a broad ranging scope of disputes, to do so in a manner which in the opinion of FOS is fair in all the circumstances, having regard to the matters listed in the TOR paragraph 8.2, and recognising that parties to the TOR are ordinarily bound to submit to the stipulated dispute determination process notwithstanding that there may be a related legal proceeding which the plaintiff, and/or the Applicant (in this case the Radfords), may wish to pursue, including involving third parties.
In my view, given the nature and scope of the dispute determination procedures, the parties to the TOR are bound to accept that the disputes defined as within the jurisdiction of FOS are to be addressed as provided by the TOR and, further, those parties necessarily thereby accept that it is reasonable for FOS to consider, or continue to consider, a dispute falling within its defined jurisdiction notwithstanding that potentially there are, in relation to a given dispute, possible court processes and remedies available which are not within the power of FOS to address.[17]
[16]Ibid [131].
[17]Ibid [135]-[136].
Further, his Honour held that when assessing submissions put to it by the parties, FOS was obliged to consider both the advantages and disadvantage to each party arising from FOS determining the dispute.[18] Notwithstanding this, it was up to FOS to assess, evaluate, and balance the competing weight accorded to the advantages and prejudice in question. This was FOS’ task and Cromwell had expressly agreed to this when executing its contract with FOS. Further, the parties would have realised that the enforcement powers of FOS would not extend to third parties like the financial advisor.
[18]Ibid [137].
His Honour also noted that the inclusion of the pivotal verb ‘may’ in cl 5.2 meant that the sole discretion as to whether to hear or exclude a dispute lay with FOS.[19] It was accepted by his Honour that FOS had considered, but then rejected, Cromwell’s argument in opposition to it hearing the dispute.[20]
[19]Ibid [139].
[20]Ibid [140].
In rejecting the application by Cromwell for prerogative relief and a declaration that the decision was a breach of contract, his Honour held:
The Dispute here is the dispute between Cromwell and the Applicants and is not at this time clearly intertwined with potential disputes between those parties and any disputes they may ultimately in the future have with third parties, including Garnaut. The Dispute is a dispute which the parties have agreed to have determined (or the subject of a Recommendation) pursuant to the TOR. It is clear that the parties have so agreed, notwithstanding that they appreciated that the FOS processes were materially different from the Court processes and, further it is clear that the parties appreciated that the FOS processes would not extend to the enforcement of procedures or remedies against or in respect of potential third parties like Garnaut.
Cromwell’s issues with the Dispute being dealt with by FOS are hypothetical and contingent at this point in time. Notwithstanding that it is possible that the Radfords have a valid claim against Garnaut which may succeed and that there may be apportionment and contribution claims which in due course could be available to Cromwell, FOS was in my view acting reasonably in not regarding the possible significance of apportionment and contribution proceedings … as rendering it unreasonable to refuse to exclude the Dispute from the FOS process. In the exercise of its discretion, weighing these hypothetical and contingent claims for apportionment and contribution in the balance with the many other factors I have referred to above which weigh in favour of FOS deciding that the Dispute should be determined as agreed under the TOR Processes, I consider that FOS cannot be said to have exercised the Power to Exclude unreasonably nor exercised that power in a manner which no reasonable decision-maker could have done.[21]
[21]Ibid [141]-[142].
His Honour also rejected the submission that FOS did not properly take into account whether a court would be a more appropriate forum.[22] Finally, the judge found that FOS was not required to provide reasons for refusing to exclude the dispute.[23]
[22]Ibid [165].
[23]Ibid [167].
Notice of Appeal
By Notice of Appeal dated 15 July 2013, the appellants set out the following grounds of appeal:
1.The primary judge erred in failing to conclude that the decision of the first respondent (FOS) made on 24 May 2012 (the Decision) not to exclude, pursuant to paragraph 5.2 of its Terms of Reference, the dispute between the second and third respondents on the one hand and the appellant (Cromwell) on the other (the Dispute) was amenable to judicial review by the Supreme Court in its inherent jurisdiction.
2.The primary judge erred in concluding that it was not an implied term of the contract between FOS and Cromwell that the power of FOS to exclude a dispute was required to be exercised reasonably (as distinct from not unreasonably in the Wednesbury sense).
3.The primary judge erred in failing to conclude that the Decision was not reasonable.
4.The primary judge erred in concluding that the Decision was not unreasonable in the Wednesbury sense.
5.The primary judge erred in concluding that, in making the Decision, FOS took into account the submissions put to it by Cromwell.
6.The primary judge erred in concluding that, in making the Decision, FOS gave real and genuine consideration to whether a court was a more appropriate forum for the Dispute.
7.The primary judge erred in concluding that, in making the Decision, FOS made no error of law.
Cromwell did not pursue the first ground of appeal.
Ground 2: Should the Wednesbury test apply?
Cromwell submitted that the trial judge erred by using the wrong test to assess whether the exercise of the power to exclude was reasonable.
Cromwell argued first that the principle elucidated by Gummow J in Berg Bennett required a positive standard of reasonableness in the formation of an opinion that conditions the exercise of a power that significantly affects another party.
In oral submission, Cromwell relied on a number of cases that set out a similar test of reasonableness in contractual disputes.
Cromwell further contended that his Honour erred in relying on decisions of this Court as establishing that the reasonableness standard was one of Wednesbury unreasonableness as opposed to positive reasonableness. Cromwell argued that Carlton Football Club does not provide guidance on the applicability of the Wednesbury test because the key finding was essentially that the AFL had to exercise its powers in compliance with the contract.
In relation to the Court of Appeal’s decision in Mickovski, Cromwell submitted that while the TOR under consideration in that case was similar to the TOR in this case, there were key differences. In particular, the power exercised under the TOR in Mickovski was expressed to be final.
In response, FOS made three main points in its submissions and on the oral hearing.
First, FOS sought to distinguish the cases relied upon by Cromwell to indicate that the test was higher than Wednesbury unreasonableness. FOS argued that the term ‘reasonable’ in the decision of Gummow J in Berg Bennett was imprecise, and it was unclear what level of reasonableness his Honour was referring to. Furthermore, and key to this ground of appeal, FOS submitted that there were two types of cases that apply different tests of reasonableness. Cases such as Berg Bennett are concerned with the exercise of a power by one party that has the ability to seriously affect the interests of another. The implication of a positive duty of reasonableness, FOS contended, is sound practice and gives effect to the long-standing position governing the implication of terms into contracts to provide ‘business efficacy’.[24] The second type of case is one where parties have contracted to allow a third party arbitrator to decide. In these cases, the third party has no interest in the result and cannot use the exercise of the power in a way that would be to its advantage, therefore a higher standard of reasonableness is appropriate.[25]
[24]BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, 283.
[25]See Dr Warren’s Case, (1835) reported in Grindrod, Compendium of the Laws and Regulations of Wesleyan Methodism, 5th ed, (1857), 371 (‘Dr Warren’s Case’); Dickason v Edwards (1910) 10 CLR 243; Mickovski (2012) 36 VR 456; Carlton Football Club [1998] 2 VR 546.
In elaborating this argument, FOS relied on the nature and purpose of the TOR. It argued that the provision of a cost-effective, informal, and efficient dispute resolution service is fundamental to the operation of FOS. Therefore, where a term is implied regarding the reasonableness of the exercise of a power, that term should not overly burden the contractual functions of FOS.
Secondly, in light of the first contention, FOS contended that the applicable standard was the one applied by his Honour, that of Wednesbury unreasonableness. FOS joined issue with the submission by Cromwell that both Carlton Football Club and Mickovski should be distinguished. FOS submitted that while the clause in Mickovski was different, the case gave the Court the opportunity to interpret the scope of judicial review of a decision of FOS. Further, that decision cited Tadgell JA’s decision in Carlton Football Club which FOS submitted set out clear authority that Wednesbury unreasonableness was the appropriate standard of review in a contract of this kind.
Thirdly, in relation to the discretionary nature of the decision, FOS argued that the real issue is the process of forming the opinion and not the consequences of the opinion being formed. The role of forming the opinion under the TOR meant that FOS had to take an evaluative approach and take into consideration the matters listed in cl 5.2. The power to exclude is conditioned on FOS forming an opinion after taking into account those considerations, it was therefore akin to the exercise of discretion and the rule in House v The King applied.
In order to assess this ground, it is necessary to consider what the contract demanded of FOS in exercising its power to exclude. To recapitulate, cl 5.2 of the TOR relevantly provides:
FOS may refuse to consider, or continue to consider, a Dispute, if FOS considers this course of action appropriate, for example, because:
(a)there is a more appropriate place to deal with the Dispute, such as a court, tribunal or another dispute resolution scheme or the Privacy Commissioner; …
In turn, in analysing the contractual obligations of FOS to Cromwell, the basis for implying terms into contracts must be kept in mind. Terms implied as a matter of fact such as that for which Cromwell contends are specific to the contract in question, and derive from the judge’s view of the intention of the parties taking into account surrounding circumstances, the language of the contract and its purpose.[26] The well-known test for a term implied by fact originates from the decision of the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings.[27] Lord Simon held that in order for a term to be implied:
[t]he following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract. [28]
[26]Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234, 255-6 (Priestley JA).
[27](1977) 180 CLR 266.
[28]Ibid 282.
On the other hand, unlike terms implied by fact, terms implied by law focus not on the intention of the parties to a specific contract, but on the nature of the contract itself. In implying a contractual term by law, a court must ask whether the contract belongs to a class whose inherent nature requires, as a matter of law, inclusion as an obligation in the terms advanced by the party seeking to imply it.
As the authorities we address below make clear, the power of a court to review the decision of a body such as FOS may be seen as deriving as a matter of law from the necessity for the attainment of justice in respect of the functions of tribunals of the general type in question, or it may be seen as deriving as a matter of fact from the necessity to give business efficacy to the particular contract in issue. In the present case, the contract contemplates that FOS will undertake an independent arbitral function in a rational manner, potentially giving rise to such an implication.
Because both FOS and Cromwell accept that, as a minimum, review can be undertaken by the Court on grounds of Wednesbury unreasonableness, it is strictly unnecessary to further analyse the conceptual basis of the Court’s power to enquire whether the decision of FOS was reasonably open to it. The situation is directly analogous to that adverted to by Hayne JA in the Carlton Football Club case:
… I did not understand counsel for the appellants, in the end, to deny that the court would prevent enforcement of a decision of the tribunal which was not reasonably open to it. … in reply senior counsel for the appellants acknowledged that … if a decision of the tribunal was not reasonably open to it, it could not be enforced.[29]
Whether this obligation derived from contract or from the application of general principles of law is, for present purposes, not important.
[29]Carlton Football Club, 567.
Tadgell JA also acknowledged that the basis of the jurisdiction to review which was in issue had never been exhaustively stated[30] and Ashley AJA, who dissented in the result, also recorded that the precise source of the power to interfere with a decision not supported by any evidence need not be determined.[31]
[30]Ibid 552.
[31]Ibid 578.
By contrast, the obligation to act reasonably for which Cromwell contends in the present case, must be derived from the terms of the particular contract itself.
In deciding this ground, we are confronted with differing conceptualisations of reasonableness. Both parties accept that there is an implied contractual provision that requires FOS to exercise its power under cl 5.2 reasonably; the dispute is about the level of reasonableness required.
We accept, as FOS submitted, that in a broad sense there is a division between the concept adopted in cases involving the arbitration of a dispute by domestic tribunals[32] and from invoking the decision of one party to a contract to exercise a power which seriously affects the interests of another.[33]
[32]See Dr Warren’s Case, (1835) reported in Grindrod, Compendium of the Laws and Regulations of Wesleyan Methodism, 5th ed, (1857), 371; Dickason v Edwards (1910) 10 CLR 243; Mickovski (2012) 36 VR 456; Carlton Football Club [1998] 2 VR 546.
[33]See Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234; Berg Bennett (1993) 45 FCR 84; WMC Resources Ltd v Leighton Contractors Pty Ltd (1999) 20 WAR 489; Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd [2013] VSCA 179.
In the former category of cases, courts have exercised limited grounds of review as is evident from early cases regarding decisions of ecclesiastical bodies. In Dr Warren’s Case,[34] cited by Tadgell JA in Carlton Football Club,[35] Dr Warren, a superintendent of the First Manchester Circuit, sought an injunction preventing his suspension by the Preachers of the Manchester District acting on the decision of their District Committee. In assessing the court’s jurisdiction to interfere with the decision, Sir Lancelot Shadwell V-C declined to overturn it, noting the limited nature of review of a decision of a tribunal where the parties had voluntarily agreed to be bound by it. The Vice Chancellor held:
It really appears to me, that although the Court has a jurisdiction over trusts, it cannot exercise any jurisdiction, in the nature of an appellant [sic] jurisdiction, over a local court of a voluntary society, who have agreed that certain affairs shall be managed in a certain manner by that local court; and I cannot say that all the District-Committee have done is a nullity, even if I were to think differently from that court, over which I have no jurisdiction. But I must say, that I cannot think the proceedings of this District-Committee are justly subject to the vehement charges that I have heard made against it. I do not myself think, that the accusations of tyranny, and violence, and malevolence, and so on, have been substantially made out. I admit, that if there had been anything in the shape of a legal fraud charged, that that is a case which, on general principles of law, we might have been able to understand; but I do not discover any such allegation, and of course we must take it that none exists. It does not appear to me that there has been anything like a fraud, or any of that unwarrantable tyranny, or disregard of the principles of justice and humanity, which might, in a very gross case, authorise me to say, ’The whole thing is a farce, the whole matter has passed in a violent gust of passion and prejudice, and cannot be sanctioned by the Court’. Now I do not think that has been the case.[36]
[34]See Grindrod, Compendium of the Laws and Regulations of Wesleyan Methodism, 5th ed, (1857), 371.
[35]Carlton Football Club 550.
[36]Grindrod, Compendium of the Laws and Regulations of Wesleyan Methodism, 5th ed (1857), 387-388.
The terminology of Shadwell V-C that ’the whole thing is a farce’ is a precursor to the standard of reasonableness expressed in Wednesbury; in effect, the decision must be absurd or wholly unreasonable for a court to interfere.[37]
[37]See Carlton Football Club 551-552.
In Dickason v Edwards,[38] the appellant sought review of a decision by an internal tribunal of a friendly society, the Ancient Order of the Foresters of the United Melbourne District, to expel him for use of vulgar and abusive language against the District Chief Ranger amongst others. The main thrust of the appellant’s claim was that the decision of the internal tribunal was erroneous as the District Chief Ranger sat on the tribunal and therefore was an interested party. The rules of the society gave the tribunal jurisdiction to remove members on the basis that their behaviour might reasonably be regarded as likely to have the result of bringing disgrace to the society. The Court set out its power to review decisions of an internal tribunal, grounding its decision in the contractual nature of the relationship. Griffith CJ held:
In the case of tribunals created by contract between the parties it is entirely a question of the construction of the contract whether the parties have agreed that an interested person shall or shall not be disqualified.[39]
[38](1910) 10 CLR 243.
[39]Ibid 250.
In relation to the standard upon which a court can review the reasonableness of a decision of a domestic tribunal, O’Connor J held:
I agree that it is open to the Courts to review the decision of a committee such as this on a question of that kind. The only ground, however, upon which the Courts could interfere is that no reasonable man could come to the conclusion that the facts proved amounted to the offence charged under the rules. Now what may be conduct calculated to bring disgrace on the Order is a matter peculiarly for the members of the Order themselves. There is a certain standard of conduct which necessarily obtains in the Order. Nobody can judge as well as they can what would or would not be a disgrace to the Order, and I think it may be taken generally that if the Committee honestly came to the conclusion that the conduct complained of was calculated to bring disgrace on the Order, and that conclusion is neither absurd nor unreasonable, the Court would be loth to interfere.[40]
[40]Ibid 254 (emphasis added).
In Carlton Football Club, the respondent at trial sought review of a decision of the Australian Football League (‘AFL’) tribunal to suspend a player, Williams, for nine games for interfering with an umpire. The Victorian Court of Appeal overturned a decision of the Trial Division and reinstated the decision of the tribunal. The majority of the Court of Appeal held that while the Court had jurisdiction to review decisions of the tribunal, it would only do so where the tribunal came to a decision ‘at which no reasonable man could honestly arrive.’[41] Importantly for the present case, the source of the referral of the matter and decision of the AFL tribunal was a matter governed by the individual contract between Williams, the Carlton Football Club, and the AFL. Tadgell JA set out the circumstances in which a court would interfere with the decision of a domestic tribunal in the following terms:
A necessary question underlying the appeal concerns the extent to which the civil courts can and should interfere with the decision of the A.F.L. Tribunal, a domestic tribunal by whose decision the parties have agreed to abide. Counsel for the respondents sought to distinguish this case from a long line of decisions in which the courts have declined to interfere, save on a strictly limited basis, at the instance of parties affected by decisions of domestic tribunals to which there has been consensual submission. Examples are legion in which the courts have consistently refused to review on the merits decisions made by private or domestic tribunals that had been established to deal with disputes within organisations to which people had become voluntarily affiliated, by contract or otherwise. Typically, disputes have arisen between such an organisation and a person who has agreed to owe allegiance to it, either as a member or in some other capacity, or who wishes to become a member of it, or between members. …
The reasons for the courts’ declining to interfere in cases such as these have been various. For one thing, where the parties have agreed to have their disputes decided by domestic tribunals designated for the purpose, the courts have been in the habit of respecting the agreement or, one might say, not countenancing a breach of it by one party wishing to desert it and to resort to the civil courts for resolution of a dispute that the tribunal was designed to decide. For another thing, the courts have been prepared to recognise that there are some kinds of dispute that are much better decided by non-lawyers or people who have a special knowledge of or expertise in the matters giving rise to the dispute than a lawyer is likely to have. Again, the courts have been willing to understand that not every aspect of community life is conducted under the auspices of the State, that it is right that this should be so and that, sometimes, it is appropriate that State-appointed judges stay outside disputes of certain kinds which a private or domestic tribunal has been appointed to decide. The courts have not taken the view that a privately-founded, privately-managed organisation — even one with numerous adherents or devotees and enjoying widespread community popularity — is necessarily to be subject to control by the courts. That is certainly not to say that such an organisation may treat itself as above the law: it is merely to acknowledge that the courts will not discourage private organisations from ordering their own affairs within acceptable limits.[42]
[41]Carlton Football Club 569 (Hayne JA) quoting Dickason v Edwards (1910) 10 CLR 243, 258; see also 557 (Tadgell JA), 578-9 (Ashley AJA).
[42]Ibid 549.
In explicating the nature of the review of such decisions, Tadgell JA set out a number of standard categories of circumstances in which a court would intervene:
Statutes aside, the courts have been disposed to interfere in a limited way with decisions of private or domestic tribunals in order to protect private rights that have been adjudged to deserve protection, including rights in property. The concept of property has been broadly interpreted for this purpose and, in cases within that category, I believe that there is no decision of a private or domestic tribunal with which the courts will refuse to interfere if interference be considered necessary for the attainment of justice. If a tribunal's decision purports to owe its binding quality, for example, to a contract or a trust the courts, exercising jurisdiction in respect of contracts and trusts, will recognise that the making of the decision is to be consonant with the contract or trust before it is binding… There are various bases on which the courts may adjudge a decision of a domestic tribunal to be inconsistent with an express or implied contract or a trust or other arrangement (or whatever consensual basis it is) upon which the decision must depend for its binding quality. If, for example, the effect of the decision is unreasonably in restraint of trade the courts will declare it invalid. If the decision is plainly contrary to any agreement on which its binding nature depends it will meet the same fate. If it is a decision that is seen not to be made in good faith, or to be the product of bias or other dishonesty, or not to be made in accordance with the principles of natural justice, the courts will upset it; and the basis for doing so in these several circumstances has been variously expressed.[43]
[43]Ibid 550 (emphasis added; citations omitted).
In considering what is necessary for a decision to be in accordance with the principles of natural justice, Tadgell JA reviewed the decisions in Dr Warren’s Case and Dickason v Edwards and held:
Hence it has been said that the courts will interfere if the conclusion reached by the tribunal is plainly absurd or unreasonable; or such that no reasonable man could come to the conclusion; or that ’no reasonable man could honestly arrive’ at it; or that the conclusion was reached in disregard of ’one of the fundamental principles of natural justice’ or of ’common justice’.[44]
[44]Ibid 551-2 (citations omitted).
In a concurring judgment, Hayne JA explored by way of obiter the nature of judicial review of a decision of the AFL tribunal. His Honour stated:
Rule 27.1(d) of the A.F.L. Rules and Regulations provides that ‘the decision of the Tribunal should be final and binding’. In my view that provision does not prevent a player suing for breach of contract if enforcement of the tribunal's decision would constitute such a breach. Likewise, it is not effective to preclude the court applying a general principle of law (if that is its proper characterisation) that enforcement will be restrained of decisions of domestic tribunals that are ‘absurd’ or ‘unreasonable’ or are decisions that ‘no reasonable man could come to’ or are decisions contrary to ‘fundamental principles of common justice’ or are decisions ‘at which no reasonable man could honestly arrive’ or are decisions for which there is ‘no evidence’ or are decisions affected by ‘Wednesbury unreasonableness’. (I need not and do not choose between these various expressions.)[45]
[45]Ibid 568-9 (citations omitted); see also Ashley AJA setting out unreasonableness in the Wednesbury sense as being a ground of review of a decision of a domestic tribunal at 578-9.
The principles stated by the Court of Appeal in Carlton Football Club have been applied in a number of jurisdictions in Australia.[46] In Rush v WA Amateur Football League Inc,[47] Commissioner Odes carefully analysed the relevant standard of review of a domestic tribunal. The Commissioner held:
A variety of formulae is used by the courts when arguments based on unreasonableness or absurdity are raised in relation to domestic and other tribunals. It is said that in order to overturn a decision on this basis it must be ’so unreasonable that no reasonable person could have reached it’ (Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223 (cited with apparent approval in Parramatta City Council v Pestell (1972) 128 CLR 305 at 327)) or “at which no reasonable person could honestly arrive” (Dickason v Edwards (supra) at 258), or ’looked at objectively, must be so devoid of any plausible justification that no reasonable body of persons could have reached it’ (Bromley London Borough City Council v Greater London Council [1983] 1 AC 768 (HL) at 821), or in more tempered language ’manifestly unreasonable’ (Commonwealth of Australia v Pharmacy Guild of Australia & Anor (1989) 91 ALR 65 at 87), or one ’devoid of any plausible justification’ (Halsbury: op cit para 10–2252). Other language to a similar effect, some more expressive than others, has been used in the authorities cited by Tagdell and Hayne JJA in Australian Football League & Ors v Carlton Football Club Ltd (supra) at 557 and 568–7 respectively (see also Mitchell v Royal New South Wales Canine Council Ltd (2001) 52 NSWLR 242 (CA) at 247–8)… But in my opinion perhaps the lowest common denominator to be derived from these authorities would appear to be that the decision must be so illogical that the tribunal could not have applied its mind to the matter at hand.[48]
[46]See Wilson v RSL of Australia (Qld Branch) [2006] QSC 376 [45]-[46]; Viskovic v Vuleta [2005] WASC 92 [33]; David Love v AFL Canberra Ltd [2009] ACTSC 135 [10]; Mitchell v Royal New South Wales Canine Council Ltd (2001) 52 NSWLR 242, 248.
[47][2005] WASC 206.
[48]Ibid [205].
The final case in this line of authority to which we will refer is the decision of this Court in Mickovski. In that case, the appellant sought to review a decision of FOS in relation to an assessment by MetLife Insurance to not provide benefits under a total and permanent disability policy. FOS made its decision under cl 15.3 of the TOR in question in that case. That clause provided that:
If a party to the complaint objects to the decision of the delegate, that objection will be considered either by the Investments, Life Insurance & Superannuation Ombudsman or by a different delegate of the Investments, Life Insurance & Superannuation Ombudsman (‘the second delegate’) of equal or greater seniority to the original delegate. If the Investments, Life Insurance & Superannuation Ombudsman or the second delegate is satisfied the party’s objection has substance, he or she will refer the decision to a Panel Chair for review, whose decision on the issue will be final.[49]
[49]Mickovski (2012) 36 VR 456, 460.
The Court of Appeal (Buchanan and Nettle JJA and Beach AJA) first agreed with the trial judge that the effect of the TOR was that Mickovski and MetLife Insurance were bound by contract to observe the rules of the process set out in the TOR.[50] Secondly, having regard to the terms of cl 15.3, the Court held that the decision was not one that could be reviewed because it was described as being ‘final’. However, their Honours observed as follows by way of obiter in relation to the level of review of the decision had cl 15.3 not described the decision as final:
Secondly, were it not for clause 15.3 of the terms of reference, we would also agree with the judge that the panel chair’s decision would be reviewable as a matter of contract.
As Tadgell JA stated in Australian Football League v Carlton Football Club Ltd, if a domestic tribunal’s decision owes its binding quality to a contract, the courts will recognise that the decision must be consonant with the contract and, if not, a declaration to that effect may be obtained and an appropriate injunction granted at the suit of an aggrieved person whom the decision purports to bind. Hence, although it is not open to turn what should be a hearing before a domestic tribunal into a hearing before the court, and of course there is no right of appeal as such from the decision of a domestic tribunal, if there is a doubt about the exact meaning of a law which it is the function of the domestic tribunal to interpret, a party to the contract is entitled to seek the opinion of the court about it.[51]
[50]Ibid 467.
[51]Ibid 467-8 (citations committed).
By footnote the Court further observed:
As Tadgell JA observed, there are several bases on which the courts may adjudge such a decision to be inconsistent with the contract on which it depends for its authority. They include a declaration of invalidity for restraint of trade, or as the result of the decision being plainly contrary to the agreement from which it purports to draw its authority, or as the result of bad faith, bias, dishonesty or breach of natural justice, or because the decision is one to which no reasonable tribunal could properly come on the evidence.[52]
[52]Ibid fn 26.
In this case, in stark contrast, Cromwell relied on the statement of principle by Gummow J in Berg Bennett and on a number of authorities not concerned with domestic tribunals to argue that the standard of reasonableness required of the decision-maker was significantly higher than the absence of Wednesbury unreasonableness. These authorities are predominately concerned with building and construction contracts.
In Renard Constructions (ME) Pty Ltd v Minister for Public Works[53] the New South Wales Court of Appeal was charged with reviewing the terms of a ‘show cause’ notice under a construction contract. The term allowed for a ‘show-cause’ notice to be given regarding breaches of certain other contractual provisions. The proprietor, if not satisfied with the response to the show-cause notice, could then take over the works. Priestley JA held that there was an implied term to give reasonable consideration as to whether the contractor had failed to show cause, and further ‘that reasonable consideration must be given to whether any power and if any which power should be exercised.’[54] Further, his Honour noted that the specific terms of the contract led to such an obligation:
It is clear that the power is only exercisable for ’cause’ and after the contractor has been given an opportunity to be heard. This is some indication that the contractor is entitled to appeal to objective considerations including questions of reasonableness in showing cause against the exercise of the powers. The very notion of showing cause seems inconsistent with the view that the principal will be entitled to act, within the limits of honesty, on his own idiosyncratic opinion.[55]
[53](1992) 26 NSWLR 234.
[54]Ibid 257.
[55]Ibid 279.
In WMC Resources Ltd v Leighton Contractors Pty Ltd,[56] Leighton Contractors had contracted to provide services under a contract. The contract provided that where the schedule of payments did not apply, WMC could determine the value of the work in its sole discretion. Leighton disputed a decision as to value of work and the question was referred to an arbitrator and then to the trial division of the Supreme Court of Western Australia. On Appeal, Ipp J (with whom Kennedy and White JJ agreed) held in relation to the contractual terms governing the exercise of the power to set a value for the work:
The appellant accepts that those criteria are that it should act honestly, bona fide, and reasonably. The respondent does not dispute that terms to this effect should be implied in the contract. In my view, it is indeed implicit in the contract that, in carrying out a calculation in terms of cl14.2(b)(iv), the appellant is obliged to act honestly, bona fide, and reasonably.[57]
[56](1999) 20 WAR 489 (‘WMC’).
[57]Ibid 501 [46] (citations omitted).
In Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd[58] the Victorian Court of Appeal addressed a provision in a building contract which gave a superintendent the power to ascertain the cost to complete works where a contractor had been removed due to defects. Maxwell P (with whom Ashley and Redlich JJA agreed) set out the circumstances in which the Court would interfere with the common practice of referring questions to independent experts. The President stated:
It is a commonplace in commercial contracts for provision to be made for the determination – whether by an independent expert or by one of the parties – of a particular cost, value or quantity. As a consequence, intermediate appellate courts have frequently had to consider whether, and to what extent, a determination of this kind can be reviewed by a court…[59]
[58][2013] VSCA 179 (‘Dura’).
[59]Ibid [14].
His Honour approved a series of general principles relating to such assessments of value identified by Ipp J in WMC.
1.By the contract, the parties agree to be bound by a determination made in accordance with the terms of the contract. If the valuation complies, the parties are bound.[60]
2.A court (or an arbitrator) will not set aside a determination merely on the ground that it is incorrect or that it reveals errors. The determination will only be interfered with if it is not made in terms of the contract.[61]
3.There will ordinarily be implied terms of the contract that the process of making the determination will be conducted honestly, bona fide and reasonably.[62]
4.Given that the parties have bound themselves to accept a determination which complies with the contract, a statement in the contract that the determination is ‘final and binding’ adds little.[63]
5.No different approach is required where, in accordance with the contract, the determination is made by one of the parties to the contract or its representative.[64]
[60]WMC (1999) 20 WAR 489, 499 [36]. See also Email Ltd v Robert Bray (Langwarrin) PtyLtd [1984] VR 16, 21; Yarraman Pine Pty Ltd v Forestry Plantations Queensland [2009] QCA 102, [44]; Khayat Investments Pty Ltd v Winston Holdings Pty Ltd (No 2) [2011] WASCA 196, [10]–[11]; Shoalhaven City Council v Firedam Civil Engineering Pty Ltd (2011) 244 CLR 305, 315–16 [26]–[27].
[61]WMC (1999) 20 WAR 489, 499 [37]. See also ShoalhavenCity Council v Firedam Civil Engineering Pty Ltd (2011) 244 CLR 305, 315–16 [26]–[27].
[62]Ibid 501 [46].
[63]Ibid 500 [41]. See also Holt v Cox (1997) 23 ACSR 590, 605.
[64]Ibid 504 [60], 508 [72].
The President further recognised that a difference may exist in the scope for review by a court of a ‘discretionary’, as distinct from a ‘mechanical’, judgment.[65] His Honour then considered the specific clause in issue and concluded that it was clear that the parties intended by the use of the word ‘ascertain’ to authorise a process of computation which would, where necessary, involve judgment, estimation and approximation. The determination of what might be ‘reasonable’ was, ‘quintessentially, an exercise involving judgment and experience.’[66]
[65]Dura [19]-[21].
[66]Ibid [28] (citation omitted).
We are of the opinion that the present case falls within the line of authority identified by the Court of Appeal in Carlton Football Club but not that for which Cromwell contends for the following reasons.
First, upon the lodgement and acceptance of the Radfords’ complaint FOS was bound by a tripartite agreement involving both Cromwell and the Radfords.[67] Such a contract is fundamentally different from those involved in the cases upon which Cromwell relies.
[67]Mickovski (2012) 36 VR 456, 467 [35]-[36].
Secondly, it was of the essence of the agreement that the parties including Cromwell would accept the independent arbitration of the dispute by FOS in accordance with its judgment as to what was fair. Such a case falls squarely within the line of authority identified in Carlton Football Club and is different in this essential characteristic from the cases upon which Cromwell relies.
Thirdly, the dicta of the Court in Mickovski directly supports the view that the relevant standard upon review of the decision of FOS is the Wednesbury standard although we accept that, as Cromwell submits, these are not determinative of the issue.
Fourthly, the use of the term ‘may refuse’ in the wording of the relevant clause coupled with the necessity to form a value judgment as to relative appropriateness indicates that the exercise of the power to exclude is intended to be discretionary and, by analogy, the principle in House v The King should apply. In that decision the High Court held that an exercise of judicial discretion could in the absence of specific error only be reviewed if it were plainly unjust or unreasonable. The Court held:
It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the court of first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred.[68]
[68]House v The King (1936) 55 CLR 499, 504-505.
Cromwell submitted that the phrase ‘FOS may refuse to consider’ meant that FOS could not decline to exclude once it was satisfied that such an exclusion was appropriate. The contention is erroneous. As FOS argued, it wrongly focuses on the consequence of the opinion, as opposed to the process of forming an opinion. The terms of cl 5.3 clearly provide that FOS may exercise the power to exclude if it decides that another forum is more appropriate. The term ’appropriate’ indicates that FOS will engage in an evaluation and judgment, weighing up the advantages and disadvantages of the FOS dispute processes and those available in a court.[69] In such a multi-factorial process, it is clear that reasonable minds may differ on the result and that the forming of such an opinion as to relative advantage is akin to exercising a discretion. The fact that FOS was exercising a discretion gives further support to the view that the level of review contemplated is one of Wednesbury unreasonableness as opposed to a more positive obligation.
[69]See Reasons [137].
Fifthly, the construction of the TOR as implying a positive duty to act reasonably, the performance of which is reviewable by the Court, is not necessary for the business efficacy of the contract. Nor is it so obvious that it goes without saying. Even more clearly, it is not necessarily implicit in the express terms of the contract. It follows that it does not meet the requirements for implication of a term as a matter of fact.
In summary, we consider that the relevant standard for review under the TOR, and in contracts of this type by reference to reasonableness is the standard set in Wednesbury. We do so on the basis that there is long standing authority in this Court and in other jurisdictions, that where parties contract into an arbitral process with a third party, a court should only intervene where the decision is plainly unjust. The decision can only be reviewed if it is ‘one to which no reasonable tribunal could properly come on the evidence’.[70] To set the standard of positive reasonableness, as Cromwell submitted, would defeat the intention of the contract and potentially play havoc with a scheme that is meant to be efficient, cost effective, and informal.
[70]Mickovski (2012) 36 VR 456, FN 26.
It follows that we reject Ground 2.
Ground 3: Was the decision not reasonable?
In light of our response to Ground 2, we do not need to answer this question.
Ground 4: Was the decision of FOS unreasonable?
His Lordship, Lord Greene MR set out the test for Wednesbury unreasonableness in the oft-quoted passage from that case:
It is true to say that, if a decision on a competent matter is so unreasonable that no reasonable authority could have come to it, then the courts can interfere.[71]
[71]Associated Provincial Picture Houses v Wednesbury Corporation [1948] 1 KB 223, 230.
As Hayne JA recognised in the passage we have quoted from Carlton Football Club above, the concept can be expressed with different shades of emphasis.[72] More recently, the High Court has examined Wednesbury unreasonableness in order to clarify the nature of the test. In Minister for Immigration and Citizenship v Li,[73] Hayne, Kiefel and Bell JJ made plain that Wednesbury unreasonableness does not simply catch decisions that are bizarre or irrational, the Court has to look at whether the decision was unreasonable in a legal sense.[74] The central issue for a court should be whether the decision lacks an evident and intelligible justification:
Unreasonableness is a conclusion which may be applied to a decision which lacks an evident and intelligible justification.[75]
The issue raised by Cromwell is thus not so much a question of its incapacity to join Garnaut in the FOS process as whether it will suffer irretrievable prejudice by being unable to do so. There would be no such prejudice if any liability Cromwell was found to owe to the Radfords by FOS could eventually be ventilated in a court by proceedings brought by Cromwell against Garnaut.
While it is unclear precisely what legal basis underpins the Radfords’ claim, it is useful first to consider that, for example, it may be based on a breach of s 1022 of the Act, namely, that the PDS or the SPDS was defective. Cromwell claims that if the dispute was referred to a court, a claim by the Radfords of such a breach, while not subject to a proportionate liability regime, could be the subject of contribution under Pt IV of the Wrongs Act.[247] As mentioned above,[248] it submits that it is at best uncertain whether liability established by the FOS process would provide a basis for a contribution claim against Garnaut under Pt IV[249] and that any claim may be statute-barred.
[247]Dartberg Pty Ltd v Wealthcare Financial Planning Pty Ltd (2007) 164 FCR 450.
[248]See [263] above.
[249]At the hearing of the appeal counsel for FOS submitted that a claim for contribution under s 23B(4) of the Wrongs Act would be available after FOS made a determination. However, this does not address the risk that the claim may be statute barred as the investment occurred in 2007.
Section 23B, within Pt IV, governs entitlement to contribution, which relevantly provides:
(1)Subject to the following provisions of this section, a person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with the first-mentioned person or otherwise).
…
(4) … a person who in good faith has made or agreed to make any payment in settlement or compromise of a claim made against that person in respect of any damage (including a payment into court which has been accepted) shall be entitled to recover contribution in accordance with this section without regard to whether or not the person who has made or agreed to make the payment is or ever was liable in respect of the damage provided that that person would have been liable assuming that the factual basis of the claim against that person could be established.
Section 23A(1) defines ‘liable’ in a manner that covers all forms of legal liability, whether in contract, tort or otherwise:
For the purposes of this Part a person is liable in respect of any damage if the person who suffered that damage, or anyone representing the estate or dependents of that person, is entitled to recover compensation from the first-mentioned person in respect of that damage whatever the legal basis of liability, whether tort, breach of contract, breach of trust or otherwise.
It is clear that a claim for contribution can be brought under s 23B on a conditional basis. This can be done to preserve rights and avoid the operation of limitation periods. The decision of this Court in Arthur Young[250] provides some guidance. In Arthur Young, Winneke ACJ and Brooking JA held[251] that a defendant may claim contribution in a separate writ before its liability to a plaintiff has been ascertained.[252] This includes a claim for contribution made under s 23B(4).[253] In Arthur Young the writ had been brought in respect of a report made by a firm of accountants that included allegedly misleading and deceptive statements. The defendant asserting the contribution claim had denied liability to the plaintiff in the original proceeding and also in its own writ. The Court held that it was necessary to a cause of action in contribution to plead that the person claiming contribution is liable, within the meaning of s 23A(1), but that such a pleading was consistent with a denial in the original proceeding, not having the status of an informal admission. Leave to amend the writ was granted.
[250][1999] 1 VR 387. As the judge observed: Reasons, [145]-[147].
[251]Callaway JA dissenting.
[252]Arthur Young [1999] 1 VR 387, 391 [12] (Brooking JA). This stood in contrast to a third party notice within the original proceeding which would have permitted a claim for contribution to be made on the basis of a conditional assertion of liability to the plaintiff.
[253]Ibid 392, [14].
I consider that the judge was correct to conclude that there is nothing to stop Cromwell from commencing by writ a proceeding against Garnaut for contribution of any liability it may be found to owe to the Radfords although that liability is as yet unascertained.[254] Cromwell could assert that it has in good faith agreed to make a payment to the Radfords in compromise or settlement of a claim, by reason of its submission to the FOS process; such an assertion is not inconsistent with its denials before FOS nor counts as an implied admission. It may be that by agreeing to an administrative method by which a determination may be made for a claim, Cromwell is to be taken as having agreed to make a payment in ‘settlement’ or a ‘compromise’ of the claim for the purpose of contribution proceedings, at least on a conditional basis. There is no need for the commencement of the contribution proceeding to await, in practice, the completion of the FOS process for the very reasons explained in Arthur Young. It could be made clear to a court, if necessary, that the proceedings are brought solely to preserve rights and no further steps should be taken until the FOS process has been completed. Alternatively, as the judge observed, service may be withheld for a time.[255]
[254]Reasons, [147].
[255]Reasons, [147].
If a Wrongs Act contribution claim can now be brought in a court, there is no irretrievable prejudice flowing to Cromwell from its inability within the FOS process to make a claim for contribution. While the determination of the contribution claim under the Wrongs Act would need to await the outcome of the FOS process, and thereby create delay, any prejudice consequent upon delay alone is insufficient, in my view, to support the claim that the refusal to exclude was unreasonable in the Wednesbury sense.
With respect to the issue of proportionate liability, it can be accepted that the principles of proportionate liability are not applicable in the FOS process.[256] As mentioned above, this stands in contrast to the position in a court in respect of a claim in negligence, which is subject to the proportionate liability regime provided for under Pt IVAA of the Wrongs Act, and to a claim under 1041H of the Act, which would be subject to the proportionate liability regime under Div 2A of Pt 7.10 of the Act. In contribution proceedings, a plaintiff has the ability to seek full compensation from a defendant although the defendant may recover contribution or indemnity from a third party. By contrast, in circumstances to which a proportionate liability regime is applicable, a plaintiff’s ability to obtain relief against a particular defendant will be limited and the defendant has the benefit of the limitation on liability.[257] The proportionate liability regimes are only available in the primary proceedings brought by a plaintiff and, unlike claims for contribution under the Wrongs Act, cannot be litigated after a Determination from FOS. There are significant advantages to a defendant from a proportionate liability regime and these advantages would be lost to Cromwell if the Radfords’ complaint was not litigated in a court. On appeal Cromwell relied on this factor as one of the primary forms of prejudice it will suffer by reason of the refusal of FOS to exclude the Dispute.
[256]Wealthcare Financial Planning Pty Ltd v Financial Industry Complaints Service Ltd (2009) 69 ACSR 418, 433 [47] (Cavanough J).
[257]See Dartberg Pty Ltd v Wealthcare Financial Planning Pty Ltd (2007) 164 FCR 450, 457 [24] (Middleton J).
I agree that an inability to rely on the proportionate liability regime provided for under Pt IVAA of the Wrongs Act or under Div 2A of Pt 7.10 of the Act is a matter of significant prejudice. However, Cromwell’s submissions face the difficulty that at this stage of the process the nature of the claim brought by the Radfords is uncertain. It is unclear whether the claim is properly characterised as one in negligence (to which the proportionate liability regime in Pt IVAA of the Wrongs Act applies) or misleading conduct contrary to s 1041H(1) of the Act (to which the proportionate liability regime in Pt 7.10 of Div 2A applies) or as a breach of s 1022B of the Act (to which no proportionate liability regime applies but which may be the subject of contribution proceedings under Pt IV of the Wrongs Act). As the judge recognised, the uncertainty of the nature of the Radfords’ claim renders Cromwell’s complaint about the inapplicability of the proportionate liability regime hypothetical and contingent.[258] In my view, the uncertainty attaching to the nature of the Radfords’ claim deprives Cromwell’s submission of the force required for it to provide a proper foundation on which to infer that the Decision was vitiated for Wednesbury unreasonableness.
(2) Is Garnaut in a position of conflict?
[258]Reasons, [59]. See [215] above.
What is of much more significance, in my view, is that Garnaut seeks to act on the Radfords’ behalf in the FOS process. Whatever the exact character of the claim made by the Radfords against Cromwell, amongst the central issues to be addressed will be questions of causation and/or reliance and, in my view, Garnaut, as the financial adviser to the Radfords, is inextricably intertwined in relation to those issues.
In their statement to FOS, the Radfords claim that they understood that the investment in Cromwell carried similar risks and returns to a direct property investment[259] and that the net assets backing the investment would be the value of the property less the loans outstanding.[260] They also say that the high gearing ratio of the Fund was never disclosed to them and that they understood that the money raised from investors was to be used to pay down the debts of the Fund.[261] Had they understood how the Fund actually worked, or what its gearing ratio actually was, they say they would have sought immediate withdrawal.[262] The obvious question to be asked is the basis on which they formed their understanding. A proper and fair inquiry into that question ought not to be limited to the PDS or the SPDS. Because Garnaut was the Radford’s financial advisor, and introduced them to the Fund, a proper inquiry cannot help but involve questions about what Garnaut told them when it introduced them to the Fund, what statements were made by Garnaut about how the Fund operated, and in particular whether Garnaut said that Cromwell carried similar risks and returns to a direct property investment. It will be necessary for the Radfords to provide information about conversations they had with Garnaut when they examined the merits of the investment in Cromwell, before investing.
[259]See [197] above.
[260]See [198] above.
[261]See [197] above.
[262]See [197]–[198] above.
The point is reinforced by the fact that Garnaut had been receiving commissions for introducing investors into the Cromwell property trusts and had been in a commercial relationship with Cromwell from at least October 2006. As mentioned above, there was evidence that approximately $10.8 million was invested in the Fund pursuant to applications made during 2006 and 2007 by investors advised by Garnaut.[263] The relationship between a financial adviser and a client means that a consideration of the circumstances of an investment cannot be properly explored, or findings of fact properly made, without investigating any representations made by the adviser both at the time of the investment and on an on-going basis whenever an available withdrawal date presented itself. Relevant to those issues must be the knowledge Garnaut had of the manner in which the Fund operated, its understanding of the PDS and the SPDS, and the manner in which it described the Fund to investors.
[263]First Respondent’s Outline of Submissions, [26].
These matters indicate that there are difficulties in the FOS process for Cromwell by reason of being unable to cross-examine Garnaut. This is a significant difference between the FOS process and that of a court. FOS submitted that there is a short answer to those difficulties in that the differences referred to are inherent in the process that the parties contractually bound themselves to when joining FOS (on the part of Cromwell) or making a complaint to FOS (on the part of the Radfords). So much may be accepted. The point remains that what is not inherent to the process is that the financial adviser would be responsible on behalf of the investors for presenting their case in the FOS process.
I consider that it is unreasonable, in the Wednesbury sense, to conclude that a person who advised investors to make an investment of which they now complain, and who may be sued by the investors, can act on their behalf in seeking to make out a claim that they were misled by others. It places the Radfords in an invidious position, during the course of the interview process with FOS, to have to give information about conversations they had with Garnaut, and how Garnaut explained the workings of the Fund and the manner of income distribution, when Garnaut is acting on their behalf. It places Cromwell in a an even worse position when not only is it unable to extract information directly from the other party to the conversations, namely, Garnaut, to test the accuracy of what the Radfords say, but also Garnaut, as the other party to those conversations, is managing how the Radfords’ case is presented before FOS.
I consider that there is an inevitable conflict of interest in the position Garnaut seeks to occupy. On the one hand, by offering to act on the Radfords’ behalf in the FOS process (for no fee) it is assuming the responsibility of presenting to FOS, fairly, the circumstances that led up to the Radfords’ investment in Cromwell, while, on the other hand, it has a direct personal interest in ensuring that no adverse inference is drawn about its involvement in the circumstances leading to the Radfords’ investment. In acting for the Radfords, Garnaut has a professional interest in recovering compensation for them from the body responsible for their loss. It also has an interest in extricating itself from the attribution of any responsibility. There is an existing potential for the two interests to conflict. In my view, that conflict of interest impairs the integrity of the FOS process. It detracts from the confidence in the FOS process which the parties are entitled to enjoy and which the Legislature must be taken to have intended them to enjoy. I consider that, given the position of conflict that Garnaut occupies, the limitations inherent in the FOS process, namely, the inability of FOS to join Garnaut, to permit cross-examination, or to make findings against it, render it unreasonable of FOS not to conclude that a court would be a more appropriate place to deal with the Dispute. It is my view that the Decision lacks ‘an evident and intelligible justification’[264] that renders it unreasonable in accordance with the Wednesbury standard.
[264]Minister for Immigration and Citizenship v Li (2013) 249 CLR 332, 367 [76] (Hayne, Keifel and Bell JJ).
I do not consider that the power FOS has, under paragraphs 7.2 and 7.3 of the TOR,[265] to require a party to provide to, or procure for, FOS any information that FOS considers necessary, or to give assistance, can overcome the problems I have identified. This is so for the following six reasons.
[265]See [181]–[183] above.
The first is that there are limits on what FOS can obtain in this way, because a party may be excused where the information is no longer within the party’s reasonable possession or control. Given that some of the relevant documentation surrounding the circumstances of the investment may now be solely in the possession and control of Garnaut, the Radfords would be excused from producing it. The situation is exacerbated, and not enhanced, by the role that Garnaut is playing in the FOS process, acting as an advocate for the Radfords while not itself being exposed to the coercive powers of FOS, limited though they may be.
The second is that a party may also be excused if providing the information would breach confidentiality to a third party and the third party’s consent has not been obtained. Here the Radfords may be excused because of an obligation of confidentiality to Garnaut and Garnaut may not have been forthcoming with that consent. Again the situation is exacerbated, and not enhanced, by the role that Garnaut seeks to play in the FOS process. FOS would have no recourse against Garnaut if it refused to waive confidentiality over its communications with the Radfords, despite Garnaut acting on the Radfords’ behalf before FOS. The incapacity of FOS to sanction Garnaut in those circumstances, while yet receiving submissions made by it on behalf of the Radfords, also places FOS in an unenviable position of knowing that there may be relevant matters which it has no power to uncover while simultaneously having to deal with the entity that is impairing its investigation. This is not to suggest that Garnaut would seek to impair the FOS process; it is rather to point to the potential for such impairment as indicating the conflicted nature of the current position Garnaut occupies.
The third reason is that the power under paragraph 7.2 is not a power that can serve as a substitute for a power to compel the attendance of third parties to give evidence or the power to subject them to cross-examination. This is because any information that a party procures from a third party, most likely documentary information, is information that only the party before FOS can be asked questions about; he or she may have little or no knowledge about the significance of the information obtained or where it fits in the overall picture. The production of the information may leave FOS no wiser and Cromwell at an unfair disadvantage.
The fourth reason is that the power under paragraph 7.2 is inadequate to compel evidence from a third party on those critical aspects of a case concerning misleading representations that I have identified above, namely, the content of the conversations between investors and their financial adviser relevant to the issues of causation and reliance. The power cannot be used as a means of discovering what a third party would say if questioned about its understanding of the nature of an investment; it could not be used to extract from Garnaut an answer to the question of whether it ever said that an investment in Cromwell was analogous to direct property investment, or whether the Radfords indicated they would rely on that.
Fifthly, the power under paragraph 7.3 to require a party to attend an interview does not extend to compelling the attendance of a third party for questioning; as the Guidelines indicate, the need to cross-examine a third party may support a decision to exclude a dispute on the ground that a court would be a more appropriate forum.[266]
[266]See [180] above.
Sixthly, attempting to use the powers under paragraphs 7.2 and 7.3 to compel relevant information from Garnaut is in truth an attempt to assimilate the process to that applicable in a court, yet the fundamental basis on which the FOS process has been established is that its investigative powers and processes are not curial. In my view, rather than attempting to replicate a court process within FOS, it is more important to acknowledge that the EDR scheme provided by FOS recognises that some disputes may be appropriately dealt with by a court.
Furthermore, I do not consider that it is premature or hypothetical for Cromwell to challenge the unreasonableness of the Decision. It is not a matter for Cromwell to ‘wait and see’. Garnaut currently has an existing conflict of interest. When professional people have a conflict of interest it is necessary for them to remove themselves from one of the positions that generates the conflict; it is neither necessary nor prudent for those who may be affected to wait until the conflict has done damage.[267] Garnaut cannot remove itself from having previously been the financial adviser to the Radfords; it can remove itself from acting on behalf of the Radfords in the FOS process. I consider that it was unreasonable for FOS to decide not to exclude the Dispute in circumstances in which Garnaut occupies a position of conflict. I do not consider that the limitations of the FOS process alone (being unable to compel a third party adviser to give evidence, and so on) would render the Decision unreasonable. The removal of Garnaut as the Radfords’ representative would eliminate the conflict of interest.
[267]See Re National Safety Council of Australia [1990] VR 29, 34.
It follows that I consider that Ground 4 has been made out. However, as the basis of my conclusion turns on the conflict in the position adopted by Garnaut combined with the limitations of the FOS process, and not on any inherent features or limitations of the FOS process alone, the risk that a finding of unreasonableness would result in a ‘mischief’ to the EDR scheme operated by FOS, as the judge feared,[268] is unsupported.
Grounds 5 and 6: Was real and genuine consideration given to Cromwell’s submissions that a court was a more appropriate forum?
[268]Reasons, [122].
FOS accepted that in considering whether to exclude the Dispute, it was under an obligation to consider proper submissions put to it by a party as to whether it is appropriate to exclude the Dispute and to consider whether the FOS process or a court process was more appropriate for the determination of the Dispute.[269] Cromwell submitted that this required an active intellectual process so as to give the matters real and genuine consideration.[270] It submitted that FOS failed to engage in that active intellectual process and the judge was in error in failing to find that.[271]
[269]See Reasons, [38](2) and (3).
[270]Tickner v Chapman (1995) 57 FCR 451, 462; Lafu v Minister for Immigration and Citizenship (2009) 112 ALD 1, [48]-[49].
[271]Reasons, [168].
Cromwell acknowledged that FOS was not required to give reasons for refusing to exclude the Dispute. However, FOS has done so and those reasons thus stand as evidence of what was and what was not considered.[272] Cromwell points to the fact that none of the matters it relied on in its application to FOS to exclude the Dispute[273] were mentioned in the Decision.[274] It argued that given the nature and significance of these matters, the reference in the Decision to Cromwell’s application and the statement that it has ‘reviewed the matter’ are insufficient to dispel the inference that matters not mentioned were not taken into account.[275] It did not suggest that these matters compelled the conclusion that the Dispute should be excluded but rather that, having been identified by Cromwell, it was necessary for FOS to give those matters real, genuine and proper consideration and there was no evidence that this had occurred.
[272]Karger v Paul [1984] VR 161, 163-5; Curwen v Vanbreck Pty Ltd (2009) 26 VR 335, 348-9 [24]-[25].
[273]See [200]–[205] above.
[274]See [206] above.
[275]Cromwell relied by analogy on Minister for Immigration v SZMDS (2010) 240 CLR 611, 623 [34]; that ‘from the absence of reasons the court may infer the absence of any good reason’.
Furthermore, Cromwell submitted that the Decision betrayed a misunderstanding of the matters raised by Cromwell. The statement in the Decision that ‘FOS has the ability to demand required information from all parties’ does not address the inability of FOS to compel production from non-parties or the inability of Cromwell within the FOS process to obtain information which it considers relevant and necessary to a determination of the Dispute from non-parties such as Garnaut. The statement that ‘FOS will be able to determine what, if any, loss is attributable to either party’ does not address the issue of loss attributable to the conduct of a non-party such as Garnaut.
FOS responded by emphasising that where a decision-maker is not obliged to give reasons or make findings of fact upon which the decision is based, a court will not lightly draw the inference that some matter was ignored. Where reasons are given, the mere absence of a reference to a matter does not readily lead to the inference that the matter was overlooked or not considered. It remains the case that the party alleging that there has been a failure to take into account a consideration that ought to have been taken into account carries the onus. As Gummow J said in Minister for Immigration and Citizenship v SZGUR:
[T]he usual position is that it is for the moving party to make out its case. … There was certainly no burden upon the Minister to demonstrate the positive proposition that the Tribunal had indeed considered the request.[276]
He continued:
An inference that the Tribunal did or omitted to do some act in the course of its review, not being a matter which [the Migration Act 1958 (Cth)] requires the Tribunal to set out, should not be drawn lightly.[277]
[276](2011) 241 CLR 594, 616 [67].
[277]Ibid 617 [70].
Moreover, it was submitted, where it is apparent that a decision-maker has read the correspondence that contains a discussion of the considerations alleged to have been overlooked or ignored, this will weigh heavily against the adverse inference being drawn, especially if the only evidence that a consideration was ignored is drawn from the absence of a mention of the matter in the reasons and there is other evidence indicating that it was taken into account.[278] The reference in the decision to FOS having received Cromwell’s request and having ‘reviewed the matter’ was argued to establish an evidentiary basis that FOS had read and considered the matters in the application.
[278]Ibid 618 [73].
In my view, Cromwell has not discharged the onus of establishing that FOS failed to take into account the submissions it made in support of its application to exclude the Dispute, or demonstrated that FOS failed to give real and genuine consideration to them. The reference in the Decision to the powers FOS has to demand information, and the ability to test it, at least with respect to parties, does testify to the fact that consideration has been given to the type of issues raised by FOS (the adequacy of its coercive powers), as does the reference to the role of ‘the adviser’. Moreover, FOS is not operating in a regulatory or statutory environment where it is obliged to set out findings of material fact, or other matters, when arriving at a decision whether or not to exclude a dispute. In those circumstances, I do not consider that the absence of any reference to the inapplicability of the proportionate liability regimes to the FOS process, or the other matters Cromwell relied upon, properly founds an inference that those matters were not properly taken into account.
I reject Grounds 5 and 6.
Ground 7: Did FOS make an error of law?
Ground 7 can be readily disposed of.
As noted above, the Decision included the statement that ‘FOS has the ability to demand required information from all parties and the ability to test this information for validity’. Cromwell argued that if FOS intended to assert by this statement that it has the ability to demand information from Garnaut, that was in error. So too, if FOS intended to assert that it could test documents and information provided by, or relating to, third parties such as Garnaut, that was also in error. Further, if by the statement that ‘FOS will be able to determine what, if any, loss is attributable to either party’ FOS intended to convey that it had the ability to assess the comparative responsibility of Cromwell and Garnaut so as to afford Cromwell the rights it would have in a curial process, that was also in error. FOS would have clearly misconstrued its powers.
Cromwell faces several immediate obstacles.
The first is that in order to accept its submissions that FOS has erred, it is necessary to adopt a strained construction of what it is that FOS has said. It is most likely that when it made the statement that it ‘has the ability to demand required information from all parties’ it intended to refer to the parties; that is, the Radfords and Cromwell. It may well have considered, as FOS submitted, that its powers under paragraphs 7.2 and 7.3 are adequate to procure relevant information, through the parties, of information in the possession or control of non-parties.[279] Moreover, when it said that it could ‘test this information for validity’ it is most likely that it intended to convey that it would utilise its standard methods for assessing information. As the FOS process does not include taking evidence from witnesses or permitting cross-examination, but rather involves considering information in context, asking for explanation (including by way of interviews) and applying logical decision-making, it is most unlikely that FOS erroneously meant that it could subject Garnaut to cross-examination, or otherwise directly test information in its possession or control. Furthermore, if it mistakenly believed it could apply principles of proportionate liability to the loss suffered by the Radfords as between Cromwell and Garnaut, it would not have said that it would be able to determine if any loss ‘is attributable to either party’ while in the same sentence referring distinctly to ‘the adviser’ against whom it said Cromwell could pursue any loss directly. The difference in the language used, ‘party’ on the one hand and ‘the adviser’ on the other, suggests much more plausibly that FOS was well aware ‘the adviser’ was not a ‘party’. An attempt to establish error on behalf of an administrative decision-maker is unlikely to be successful where proof of the error necessitates attributing a meaning to the language the decision-maker used which is both artificial and forced.
[279]See [181]–[183] above. I have identified in [286] to [291] above the limitations in those powers. Those limitations do not affect the interpretation of what FOS meant to say in the Decision.
The second difficulty is that Cromwell’s submission amounts to an allegation that a body whose powers are codified in the TOR, as approved by ASIC, could entertain such a fundamental mistake as believing that it had the power to make coercive directions against entities that had not voluntarily submitted to its jurisdiction. Given that the sole basis of its authority is contractual, it would not be easy to draw the inference that FOS believed it had jurisdiction over entities with which it had no contractual relationship.
I consider that the judge made no error in concluding that FOS did not intend to make the assertions Cromwell alleged.[280]
[280]Reasons, [173]-[182].
Ground 7 is without merit and I reject it.
Conclusion
Cromwell has succeeded in respect of Ground 4; that is, in impugning the Decision on the basis of Wednesbury unreasonableness. I consider that refusing to exclude the Dispute from the FOS process in circumstances in which Garnaut occupies a position of conflict, and in which FOS is limited in its powers, lacks intelligible justification and coherence.
It follows that the appeal should be allowed. I consider that a declaration should be made that the Decision is invalid and the matter be remitted to FOS for a re-determination according to law.
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