Damiano and Caterina Marando v Swan & Baker Pty Limited
[2012] NSWDC 131
•30 August 2012
District Court
New South Wales
Case Title: Damiano and Caterina Marando v Swan & Baker Pty Limited & Anor Medium Neutral Citation: [2012] NSWDC 131 Hearing Date(s): 9/7/12, 10/7/12, 11/7/12, 12/7/12, 13/7/12 and 16/7/12 Decision Date: 30 August 2012 Jurisdiction: Before: Mahony SC DCJ Decision: Verdict and Judgment for the Plaintiffs
Catchwords: Misleading and deceptive conduct; unconscionable conduct and negligent advice. Legislation Cited: Trade Practices Act 1974 (Cth)
Fair Trading Act 1989 (Qld)
Australian Securities and Investments Commission Act 2001 (Cth)
Corporations Act 2001 (Cth)Cases Cited: Mutual Life & Citizens Assurance Co Ltd v Evatt (1968) 122 CLR 556
Craig v Troy (1997) 16 WAR 96
Cade v Simmons (1998) 71 SASR 171
Perre v Apand Pty Limited (1999) 198 CLR 180
Hawkins v Clayton (1988) 164 CLR 539
Waimond Pty Limited & Anor v Byrne (1989) 18 NSWLR 642
Riz v Perpetual Trustee Australia Limited [2007] NSWSC 1153
City Corp Australia Limited v O'Brien (1996) 40 NSWLR 398
Indigo Mist Pty Limited v Palmer [2012] NSWCA 239Youyang v Minter Ellison (2003) 212 CLR 484
Texts Cited: Professional Liability in Australia, 2nd Ed Walmsley, Abadee & Zipser Category: Principal judgment Parties: Damiano Marando - First Plaintiff
Caterina Marando - Second Plaintiff
Swan & Baker Pty Limited - First Defendant
James Legat - Second DefendantRepresentation - Counsel: M Evans - Plaintiffs
P Gray SC - Defendants- Solicitors: Cohen & Krass - Plaintiffs
All Courts Lawyers - DefendantsFile number(s): 10/298199 Publication Restriction: Nil
JUDGMENT
The Plaintiff's Claim
By an amended statement of claim filed on 19 April 2011, the plaintiffs claim damages in respect of losses they allege have occurred as a result of an investment by them of the sum of $500,000.00 in the City Pacific First Mortgage Fund ("the Fund") on 26 February 2008. For 20 years prior to 2008, the second defendant, James Legat, a director of the first defendant, had acted as the plaintiffs' accountant. The plaintiffs framed their claim against the defendants in three ways:
(1)On the basis of certain representations made by the second defendant at consultations held on 29 January 2008 and 18 February 2008, the defendants engaged in conduct that was misleading and deceptive or likely to mislead or deceive contrary to s 52 of the Trade Practices Act (Cth) 1974 ("TPA") and s 38 of the Fair Trading Act 1989 (Qld) ("FTA").
(2)On the basis of the said representations, by failing to advise the plaintiffs of certain matters and to properly warn the plaintiffs in respect of the financial position of City Pacific Limited ("CPL") which "operated" the Fund, the defendants engaged in unconscionable conduct in contravention of s 12CB of the Australian Securities and Investments Commission Act 2001 ("ASIC Act") or alternatively s 51AC of the TPA;
(3)In negligence, in that by making the representations referred to and by giving certain advice and failing to do certain things, the defendants breached their duty of care to the plaintiffs.
At the conclusion of the evidence, Counsel for the plaintiff announced that the plaintiffs were amending their claim by limiting the three causes of action outlined above, to events that occurred after 26 February 2008, the date of the investment of the plaintiffs' money into the Fund. The plaintiffs were given leave to further amend their statement of claim, and directed to file, within seven days of 13 July 2012, a further amended statement of claim in a form reflecting the amendments announced in court. The effect of that further amended statement of claim will be described in more detail below.
Background to the Dispute
Mr Marando had left school just before his fifteenth birthday and had thereafter worked on his family's farm outside Griffith, New South Wales. After they married, Mr and Mrs Marando purchased a citrus farming property near Griffith, which they operated in partnership, and together with other family members, operated a partnership in respect of several properties. In 1987 they sold their farm and moved to the Gold Coast. Thereafter, Mr Marando worked on a sub-contract basis as a stonemason and from 1987 he retained James Legat as his accountant.
The plaintiffs purchased a house at Rundle on the Gold Coast in 1989, which they sold in 1993 when they purchased a property at Coomera. In August 2007 the plaintiffs exchanged contracts to sell their Coomera property for $1,950,000.00. The purchasers paid a nonrefundable deposit which the plaintiffs used to pay off their mortgage on the property.
On 2 October 2007 Mr Marando met with James Legat to advise him that he had sold the property and that he wanted to invest the proceeds until he found a suitable long-term investment to buy, meaning a property. It is common ground that Mr Marando advised that the settlement would take place in February 2008 and that he wanted to invest the proceeds of sale.
On 29 January 2008 Mr Marando had another meeting with Mr Legat. On that occasion a conversation took place, the content of which is disputed. However, it is clear that Mr Marando advised Mr Legat that the sale would settle in February, and that there was a discussion about investment of the proceeds. The extent of the conflict between the parties is set out below.
The plaintiffs had purchased another property at Parkwood for which they raised bridging finance of $550,000.00 which was to be repaid from the proceeds of the sale of the Coomera property. That left, on completion of the sale, approximately $1.2 million for them to invest. On settlement, $500,000.00 was paid into a term deposit at Westpac Bank.
The plaintiffs attended the offices of the first defendant on 18 February 2008. A discussion took place about investment of the proceeds, the terms of which are in dispute. The extent of the dispute, in terms of what was discussed, is set out in more detail below, however, it is clear that the plaintiffs only wanted to invest the money for 90 days.
The plaintiffs allege that at that meeting Mr Legat completed an application form for the Fund which the plaintiffs signed. The plaintiffs allege that Mr Legat also wrote out a post-dated cheque for $500,000.00 payable to the Fund and completed the cheque butt. Mr Marando then signed the cheque.
There was a Product Disclosure Statement ("the PDS") displayed in the waiting room of the offices of the first defendant at the time the plaintiffs visited those offices. How the plaintiffs gained possession of that document is a matter in dispute between the parties, however, the plaintiffs had access to the PDS prior to the application form being signed by them. The PDS for the Fund provided for various "investment options" with different redemption periods, whereby investors could redeem their investments.
The defendants relied on file notes made by Mr Legat in respect of each of the meetings that took place on 2 October 2007, 29 January 2008 and 18 February 2008. Mr Legat contends that a further meeting took place on 20 February 2008 and it was at that meeting that Mr Marando signed the application form and the cheque. The plaintiffs assert that that meeting did not take place.
The first defendant processed the plaintiffs' application form and the cheque was lodged with the Fund on 26 February 2008.
Shortly after their last meeting (whether it occurred on 18 February 2008 or 20 February 2008), the plaintiffs left the Gold Coast for the purpose of visiting family in Griffith New South Wales. They were away for up to four weeks. Mr Legat knew they were going away, but had a record of Mr Marando's mobile phone number.
Allegedly unbeknown to the plaintiffs, the PDS also included provision for a cooling off period, for new investments into the Fund, of 14 days commencing "when the investment confirmation is received by you or 5 business days after [the] units were issued, whichever is the earlier". It is common ground that the cooling off period expired on 18 March 2008, either shortly before or shortly after the plaintiffs' return from their trip to Griffith.
Following adverse criticism in the financial press and the deconsolidation of CPL and the Fund, CPL announced on 3 March 2008 that the redemption period for investments in the Fund had been extended to 180 days. The following day trading in CPL shares was halted on the share market for a period of eight days.
On their return from holidays sometime in late March, the plaintiffs received mail informing them of the extension of the redemption period to 180 days. Mr Marando contacted Mr Legat, as he believed that was not the arrangement he had entered into. He was informed that nothing could be done about it. The plaintiffs completed a redemption request on 3 April 2008 for a full redemption of their units.
On 25 September 2008 the audited accounts of the Fund for year ending 30 June 2008 were released revealing asset impairment of $53 million. On 13 October 2008 CPL resolved that existing redemption requests (including the plaintiffs') were extinguished and future redemptions were to operate in accordance with the Corporations Act 2001.
In June 2009 CPL was removed as manager of the Fund, and it was placed into liquidation in August 2009.
The plaintiffs have received a return of capital of approximately $36,000. Their units are currently valued at between 20 and 25 cents per unit (for $1 par value), and they claim the total loss of their investment plus interest, with adjustment for the amount received by them.
The Plaintiffs' Evidence of the Representations Relied On
Mr Marando alleges the following conversation took place between himself and Mr Legat on 29 January 2008 (Exhibit A, Tender Bundle p 5, [25]):
"Marando: I've sold the farm. We will settle on 26 February. When the money comes through, we will have about $1,000,000 to invest while we look around for a suitable long-term investment.
Legat: I wouldn't put all my eggs in one basket. We can put it in shares and find other ways of investing it.
Marando: No, I don't want shares - I only want to put it in for three months and I only want a bricks and mortar investment.
Legat: Then I suggest City Pacific. I've invested some of father's money in it.
Marando: I only want to invest $500,000 with you. The rest of the money will go to Westpac. Is City Pacific safe? I've never invested before. I've never had the money to invest.
Legat: Tom Swan is on the board of City Pacific.
Marando: Seeing as Tom is involved, you go and talk to him and make sure it is 110% safe."
Mr Marando deposed that prior to that conversation he knew that Tom Swan was one of the directors of Swan & Baker Pty Limited ("Swan & Baker"), but that he had never heard of City Pacific, nor had he heard of Mr Swan having any involvement in that corporation.
He deposed that he met Mr Legat again on 18 February 2008 and the following conversation took place (Exhibit A, TB p 5-6, [27]):
"Marando: Did you speak to Tom Swan?
Legat: Yes I did.
Marando: Is it safe?
Legat: Yes it is safe, but if anything were to happen then we in this firm would be the first to get our money out.
Marando: How do we do this? I'm going to Griffith now. We are going to be away for three or four weeks.
Legat: You can write the cheque out now and I will put it into City Pacific on 26 February when we have got the funds from your settlement.
Marando: Well you write out the cheque and I will sign it."
Mr Marando went on to state in his affidavit:
"33. At no time before or after I signed the application form did James show to me or discuss with me the Product Disclosure Statement dated 21 December 2007. For convenience, a copy of that PDS is at pages 3 to 41 of the Exhibit.
34. At no time did James advise me to seek independent financial advice about this investment.
35. At no time did James discuss with me or warn me of any of the risks associated with my investment in City Pacific.
36. Based on my discussions with James, at the time when I made the investment, I believed that it was a risk-free investment for a limited period of 90 days only.
37. It was never intended to be a long-term investment. I wanted to use the money to buy an investment property as soon as I found one. I had discussed all of that with James as set out in the conversation above.
38. If I had been advised by James or another accountant or financial adviser that there was a possibility that redemptions could be deferred or frozen for longer than 90 days, I would not have invested in the City Pacific fund.
39. If I had been made aware of any of these risks, I would have put the $500,000 in the bank instead."
Mr Marando was challenged in respect of each of the allegations, assertions or contentions contained in those paragraphs.
Mrs Marando left school when she was 15 years of age and whilst she could speak, read and write in English, she left the financial affairs to her husband, although he would invariably discuss any major financial decisions with her before those decisions were made.
Mrs Marando deposed that at one of three meetings that took place on 2 October 2007, 29 January 2008 or 18 February 2008 Mr Legat said to her and her husband:
"What about a high risk investment?"
Danny said, "No we're only interested in investments with no risk."
Mrs Marando deposed that the application form for investment of $500,000 in the Fund was completed by James in her presence and then signed by her and her husband. She did not read the fine print on the form and did not ask Mr Legat to read it to them.
Mrs Marando went on to depose as follows:
"23. At no time before or after we signed the application form did James show to us or discuss with us the Product Disclosure Statement dated 21 December 2007. A copy of that PDS is at pages 3 to 41 of the Exhibit.
24. At no time did James advise Danny or me to seek independent financial advice about this investment.
25. At no time did James say there was any risk associated with our investment in City Pacific."
Mrs Marando was challenged in respect of the various assertions contained in the above paragraphs.
Mr Legat's Evidence in Chief as to the Meetings
Mr Legat deposed as follows concerning the meeting on 29 January 2008:
"Danny: Settlement of the farm is on 13 February and I want to come in on 18 February 2008 with a view to putting some money in a term deposit for six months. What are my options?
JL: There are numerous options you could look at such as the bank, or a fund.
Danny: The bank doesn't give a high enough interest rate."
Mr Legat then deposed that a very brief and general discussion took place, during which, City Pacific was mentioned. He said:
"I do not recall who first mentioned City Pacific, it could have been either of us. City Pacific advertised heavily in the Gold Coast at the time, and I would not have been surprised at all had Danny known of it independently of me."
Mr Legat deposed that he recalled saying words to the effect that:
"City Pacific has been going for a long time and has been paying some good returns. People I know who have invested tell me that they're happy with it."
When he met with Mr and Mrs Marando on 18 February 2008, Mr Legat deposed that the following conversation took place:
"JL: If you want a safe three or six month investment, you could just put it in the bank, as I said before.
Danny again said: No, the interest rates are too low for me. What else can I do?
JL: Well, a fund with a higher return is an option, as we discussed last time.
Danny: What do you know about City Pacific?
JL: Well, I can tell you that my parents have invested in City Pacific and have been happy with the returns, which are currently about 2% higher than the banks. Tom Swan, who is on the board of the fund manager, has also told us that the fund's asset reports are good. But in the end, Danny, it is up to you. I can only tell you what I know and you need to make your own decision.
Danny: I want the higher interest rate so I think we'll put the $500K with City Pacific.
JL: If you think you want to do that, here is a product disclosure form for the fund. You should go home and read it first.
Mr Legat then deposed at paragraph 26(c) of his affidavit:
"I then handed Danny a copy of the Product Disclosure Form for City Pacific, copies of which were publicly available and with which I was familiar."
The Further Amended Statement of Claim
By the further amended statement of claim the plaintiff relies on the following representations set out in paragraph 5 thereof, (relying on the evidence set out in paragraphs 20-23 above):
"5.2 That the plaintiffs would be able to redeem their investment plus any accrued interest at the expiry of three months from the date of investment.
5.3 That the right of the plaintiffs to redeem their investment in three months time was as '110% safe';
5.4 That, because Mr Thomas Swan of Swan & Baker was a director of City Pacific, if anything went wrong, they (the plaintiffs) would be the first to get their money out."
"Particulars
(a)The representations set out in 5.2 and 5.3 were oral;
(b)The representations set out in 5.2 and 5.3 were made to the plaintiffs by the second defendant on his own account and on account of the first plaintiff at consultations held on 29 January 2008 and 18 February 2008;
(c)The representation made in 5.4 above was oral, was made by the second defendant to the plaintiff at a meeting between the plaintiffs and Mr Legat on 29 January 2008."
The representations were relied on in support of the plaintiffs' first cause of action, namely, they were misleading and deceptive or likely to mislead or deceive contrary to s 52 TPA and s 38 FTA.
The representations were also relied on in respect of the plaintiffs' second cause of action, namely, that the defendants engaged in unconscionable conduct. That cause of action is pleaded in paragraph 6A to 6L. 6J pleads relevantly as follows:
"6J. In the circumstances the first defendant engaged in conduct that was, in all the circumstances, unconscionable in advising the plaintiffs to invest the sum of $500,000.00 in the City Pacific First Mortgage Fund operated by City Pacific Limited for a 90 day term maturing on 25 May 2008 contrary to either s 12CB ASIC Act or s 51AC TPA, or otherwise, acted unconscionably toward the plaintiffs in accordance with general equitable principles.
PARTICULARS OF UNCONSCIONABILITY
(a) Advising the plaintiffs, in effect, in terms of the representations pleaded in paragraph 5 above;
(b) Failing, after 26 February 2008, to advise the plaintiffs of the matters underlying the actual financial position of City Pacific Limited, which facts must have been known to the first defendant by reason of the fact that Thomas Swan, a partner in the first defendant, was also a director of City Pacific Limited;
(c) Failing to properly bring to the attention of the plaintiffs an article in the financial media casting doubt on the financial position of City Pacific Limited during any "cooling off" period available to the plaintiffs, being the article: "City Pacific Peers into Abyss" by Michael West, which appeared in the Fairfax media on 27 February 2008;
(d) Failing to bring properly to the attention of the plaintiffs the further article: "By All Accounts, City Pacific is in Trouble", also by Michael West and published in the Fairfax media on 4 March 2008;
(e) Knowing the plaintiffs' lack of capability to read and comprehend English, failing to warn them properly, at the least by explaining to them the contents of the Michael West articles during the "cooling off" period;
(f) Failure to give any or any adequate verbal warning of the issues concerning the financial position of City Pacific Limited in the period from 26 February to 18 March 2008;
(i) Failing to advise the plaintiffs to seek independent advice after 3 March 2008."
The plaintiffs' third cause of action in negligence was pleaded in the further amended statement of claim as a breach of a duty of care "to give advice on a matter of the investment of the sum of $500,000.00 in a careful, considered and objective manner" (paragraph 10). The particulars of breach were pleaded as follows:
"11. In the circumstances, the defendants and each of them acting negligently in advising or failing to advise the plaintiffs, after 26 February 2008 on the matter of the investment of the sum of $500,000.00.
PARTICULARS OF NEGLIGENCE
(c) Failing to inform the plaintiffs as to the true financial condition of City Pacific Limited during the period from 26 February to 18 March 2008.
(f) Failing to warn the plaintiffs during any "cooling off" period applying after 26 February 2008 of the fact of and of the matters referred to in:
(i)The article "City Pacific Peers into Abyss" by Michael West published in the Fairfax media on 27 February 2008; and
(ii)The article "By All Accounts, City Pacific is in Trouble", also by Michael West and published in the Fairfax media on 4 March 2008,
copies of which articles are annexed to this amended statement of claim."
Issues to be Determined
The issues to be determined are therefore:
(1)Were any of the three representations, referred to in paragraph 5 of the further amended statement of claim, made by the second defendant?
(2)If so, were the representations misleading and deceptive or likely to mislead or deceive contrary to s 52 TPA?
(3)Whether the representations were established or not, did the first defendant engage in unconscionable conduct as pleaded in paragraph 6J contrary to either s 12CB ASIC Act or s 51AC TPA or otherwise?
(4)What was the scope of the duty of care owed by the defendants to the plaintiffs?
(5)Whether the defendants breached that duty of care in the manner particularised in paragraph 11 of the further amended statement of claim.
(6)
(6) If so, was such breach causative of loss to the plaintiffs.
(7)If any of the three causes of action are made out, what damages have the plaintiffs suffered?
Were the Representations Made By The Second Defendant?
Whether the three representations set out in paragraph 35 above were made by Mr Legat requires a close examination of the evidence of the plaintiffs and Mr Legat. Of some importance was that the plaintiffs were relying on their memories of conversations that took place some years previously. Mr Legat had the benefit of three file notes from which he was able to refresh his memory. They appear at Exhibit 6JL1, TB p 230 - 232. The file notes record the date, time and length of the appointment and contained the following descriptions:
(i) For the meeting on 2 October 2007:
"Danny & Cathy re sale of land. Danny sold house. Got paid a $50k deposit and balance (to 10%) is getting paid to him tomorrow. These are non-refundable deposits. Settlement is about Feb 08. CGT > Danny says house and 5 acres worth most of the land value as when went to sell previously then had to give 2 acres to council so only 5.5 value. Anyway, Danny hoping tax around 20k or something. Will stop centrelink then and wants to invest the money."
(ii) For the meeting on 29 January 2008, which went for one hour:
"Damiano Marando - phone: 0412 761 626 - Re: Settlement Details - settlement is 13 Feb. Coming in to see JL on 18 Feb with a view to put some on TD. Probably City Pacific and consider funds placement. Market been volatile at present so Danny wanting to invest money in about 6 months term. Settlement is $1.755m. Have to pay out bridging finance on house at Parkwood at $550k and of the net want to give some money to 2 of their kids. Re CGT on sale of Reserve Road. Council resumed 900 sq mt and the house represents greatest value. Will pay a small amount of CGT. Danny is 60 in Sep this year. Leave funds in BUS until that age. Consider simple SF to put funds into and reduce impact of taxation via pension to Danny that can be tax free."
(iii) The meeting on 18 February 2008 went for 30 minutes. The file note states:
"Danny & Cathy Marando. Discussed City Pac Mort Fund and bank rates. Investment only for short term 90 days as want to purch house later. JL noted that parents had funds there and always been happy with returns. Tom has always indicated quality of fund assets reports have supported this. Clients decided $500k investment, S&B complete forms."
It was clear from the cross-examination of Mr Marando that numerous factual matters were in dispute. They included:
(i) Who first suggested City Pacific as an investment.
(ii) Whether it was true that Mr Marando had never invested before.
(iii) Whether Mr Marando asked Mr Legat to talk to Tom Swan and make sure the investment was 110% safe.
(iv) Whether Mr and Mrs Marando had seen the PDS prior to signing the application form.
(v) When the application form was completed, ie on 18 or 20 February 2008.
(vi) Whether Mr Legat told Mr Marando that the investment was safe, "but if anything were to happen then we in this firm would be the first to get our money out".
(vii) Whether at the time of the investment Mr Marando believed it was a risk free investment for a limited period of 90 days only.
Also in dispute was whether Mrs Marando's recollection was correct in her evidence that Mr Marando said to Mr Legat "We're only interested in investments with no risk".
The credit of the plaintiffs, and Mr Marando in particular, was very much in issue in the proceedings. The defendants submitted that Mr Marando gave evidence that was "variously misleading, exaggerated, contradictory, evasive and in some respect, quite false, including in relation to the central, factual issues of the case". For example his assertion that prior to committing to the investment in the fund, Mr Legat did not give or show to the Marandos the PDS was demonstrated to be incorrect. It was submitted that Mr Marando's eventual concession as to that issue was made reluctantly. This was submitted to be such a profound credit point that it would be enough to be fatal to the plaintiffs' case, as so much turned on who said what at the various meetings. Mrs Marando's evidence was criticised as being "cavalier with the truth" in relation to this issue. In any event, it corroborated only very little of her husband's evidence. Mr Marando's credit was also successfully impugned in respect of his past business experience. Two matters were particularly troubling, the first being his loan to a corporation known as Harbrick Pty Limited and the second being his directorship and appointment as secretary of a corporation Kennrose Pty Limited, knowledge of which he disavowed. I accept that I am obliged to approach the evidence of the plaintiffs cautiously as a result of these matters, and I did so whenever it was not corroborated by contemporaneous documentation or objectively established facts. Given the background of both Mr and Mrs Marando, I have not taken into account their demeanour in the witness box as in any way being adverse to them.
Whilst resolution of the matters listed in paragraph 41 and 42 above are not all directly relevant to whether the representations in paragraph 35 above were made by Mr Legat, they are still indirectly relevant to resolving the issue as to whether the representations were made, and if so, whether they were false. Having regard to the whole of the evidence, I make the following findings:
(1) On the balance of probabilities, I find that Mr Legat introduced Mrs and Mrs Marando to the City Pacific First Mortgage Fund as an investment. The plaintiffs were not sophisticated investors. Mr Legat had been their accountant since 1987, and the PDS for the fund was displayed in the waiting room of the offices of the first defendant. It was the only brochure displayed in that waiting room. It had been on display there for some years, and no other brochures for investment products or funds were displayed in the waiting room. The reason why that PDS was displayed was given by Mr Legat as follows:
"Well, Tom being a director of City Pacific and still a director of Swan & Baker at the time, the - I would suggest was the reason."
(2) It was suggested to Mr Marando by the defendants that he had seen advertisements for the Fund in the newspaper, the Gold Coast Bulletin. I accept his evidence that he had never read those advertisements and never taken any notice of them. I also accept Mrs Marando's evidence that she did not read the Gold Coast Bulletin.
(3) I do not accept Mr Marando's evidence that he had never invested before. Whilst he may not have been interested in investing money in shares, the evidence amply demonstrated that he bought and sold properties, that he lent substantial sums of money to friends and relatives, was prepared to take court action to recover such monies and held deposits in bank accounts. In the broader sense of the word "invest", he understood such transactions and he conceded that when he lent money he knew there was a risk involved as to whether he would get it back.
(4) I accept Mr Legat's evidence set out in para 34 above that he handed the PDS for the Fund to Mr Marando, and that he was familiar with the PDS.
(5) I do not accept the evidence of Mr and Mrs Marando that they had not seen the PDS of the Fund prior to signing the application form. I accept the evidence of Mr Legat that he had given them the PDS form to take away and that they had done so. Mr Marando conceded as much in his cross-examination.
(6) I find that the application form was completed by Mr Legat and signed by Mr and Mrs Marando on 20 February 2008. Whilst there was no file note of that meeting, I accept Mr Legat's evidence that he had never postdated a cheque and the time sheets of the first defendant demonstrated that the documents were completed by staff that day, ie 20 February 2008 (Exhibit 6, TB 234).
(7) I find that there was no basis for Mr Marando believing, at the time the investment was made, that it was a "risk free" investment. He understood at the time of signing the application that the interest rate being paid by the Fund was greater than bank interest rates (having already deposited $500,000 with Westpac Bank at a lower interest rate).
(8) I find the evidence of both Mr and Mrs Marando was somewhat unreliable in respect of the conversations that took place with Mr Legat on 29 January 2008 and 18 February 2008. In resolving whether representations were made as contended for by the plaintiffs, I have had regard to the contemporaneous file notes made by Mr Legal in respect of the meetings. Having regard to those file notes, I find that a preliminary discussion took place between Mr Marando and Mr Legat on 29 January 2008, in which Mr Marando outlined to Mr Legat the settlement of his property transaction and the need to invest the proceeds. I find that on that occasion Mr Legat suggested City Pacific as an investment for part of those funds.
(9) I find that on 18 February 2008 Mr Legat met with both Mr and Mrs Marando and, as the file note corroborates, discussed with them the comparative interest rates for the Fund and bank deposits.
(10) I find that Mr Marando told Mr Legat that he required a short-term investment of 90 days as he intended to purchase a house property.
(11) I find that Mr Legat told Mr and Mrs Marando that his parents had invested money in the Fund and had been happy with the returns on their investment.
(12) I find that Mr Legat told Mr and Mrs Marando that Tom Swan was a director of the Fund and had told Mr Legat that the Fund had quality assets.
(13) I find that Mr Legat told Mr and Mrs Marando on that occasion that the financial reports on the Fund supported Mr Swan's advice to that effect.
(14) I find that it was on the basis of that discussion on 18 February 2008 that Mr and Mrs Marando decided to invest $500,000 in the Fund.
(15) I find that Mr Marando did not ask Mr Legal to talk to Tom Swan and to make sure the investment was 110% safe. This was an embellishment on the part of Mr Marando.
(16) I further find that on 18 February 2008 Mr Legat gave the PDS form to Mr and Mrs Marando who took it away with them. They returned to the office of the first defendant on 20 February 2008 and Mr Legat completed the application form for them to sign. Mr Legat then filled out the cheque, including the cheque butt of Mr Marando's chequebook and Mr Marando signed the cheque for $500,000 payable to the Fund.
Representations Not Made Out
On the basis of the above findings, the first representation alleged by the plaintiffs and set out in paragraph 35 above is not made out. Whilst I accept that Mr Marando informed Mr Legat that he wished to invest his money for 90 days in the Fund, I do not find that Mr Legat represented to him in words to the effect that he would be able to redeem his investment plus any accrued interest at the expiry of three months. The nature of the investment involved an application for redemption following investment of the funds. Mr Marando knew he had to apply for the redemption. In fact, Mr Legat had told him he would ring him "when it was time for redemptions". I find that the contention by the plaintiffs that the representation in paragraph 5.2 was made in those terms is made with the benefit of hindsight.
Nor do I find that Mr Legat represented to the plaintiff that their right to redeem their investment in three months time was "as 110% safe". Mr Marando conceded in cross-examination that no investment was 110% safe, that he had long known that to be the case, and that it was part of life. I find that the plaintiffs' assertion that Mr Legat made this representation in those terms was an embellishment on their part.
I also find that the representation alleged by the plaintiffs that because Mr Swan was a director of City Pacific, if anything went wrong then the plaintiffs would be the first to get their money out, was not made by Mr Legat. Whilst Mr Legal did tell Mr and Mrs Marando that Mr Swan was a director of City Pacific, the implication in the representation alleged would involve illegality in terms of them being favoured over other investors and it was, given the management of the Fund, an impossibility in any event.
I therefore hold that none of the three representations relied on by the plaintiffs in their further amended statement of claim were made by Mr Legat on his behalf or on behalf of himself and the first defendant. It follows that the first basis of the plaintiffs' claim, namely their claim for damages for breach of s 52 TPA or s 38 FTA must fail.
Did the Defendants Engage in Unconscionable Conduct?
The particulars of unconscionable conduct set out in paragraph 6J(a) of the further amended statement of claim have not been made out, given my findings in respect of the alleged representations above. The question remains however, whether the defendants acted unconscionably towards the plaintiffs, having regard to the matters set out in paragraph 6J(b) to 6J(i) set out in paragraph 37 above. Resolution of this aspect of the matter requires an examination of the defendants' knowledge from 26 February 2008 of the financial position of City Pacific Limited and whether, having regard to that knowledge, their failure to bring certain matters to the attention of the plaintiffs, to warn and advise them, amounted to unconscionable conduct.
This is not an exercise which should be carried out with the benefit of hindsight. The evidence established that as at December 2007 the Fund had in excess of $1 billion under management. Mr Thomas Swan was a non-executive director of CPL which managed the Fund. Swan & Baker Pty Limited filed the tax returns of both CPL and the Fund. Clients of that firm had invested in both CPL and the Fund, as had the family of Mr Legat, Miss Melanie Wear and Mr Swan. Half yearly accounts had been prepared for CPL up to 31 December 2007 which showed the Fund to be profitable. Minutes of the meeting of directors of CPL in December 2007 and January 2008 demonstrated a profit forecast of in excess of $27 million for the half year, an increase of 15% over the previous period. Further, at a meeting on 21 February 2008, it was noted that the group had secured debt of $132 million representing 29.4% on the group's gross assets (Exhibit 16).
On 21 February 2008 CPL issued a media release announcing a record "net half year profit of $27.47 million, up 13.3%" (TB 372).
It must be borne in mind that it was not until later in 2008 that what has become known as the global financial crisis occurred. Lehmann Bros, a US bank, collapsed on 15 September 2008. I accept Mr Swan's evidence to the effect that prior to issue of the financial accounts of the year ended 30 June 2008, he did not hold any belief that there was evidence of capital impairments in the Fund that would ultimately put investors' monies at risk. I also accept that in his discussions with Mr Legat and Ms Wear, up until March 2008, Mr Swan gave them no reason for concern for investors' monies. Both gave evidence that they had regular discussions with Mr Swan about both CPL and the Fund and were assured that both were sound investments. That is selfevident in the fact that both Mr Legat and Ms Wear had family members who had invested in both CPL and the Fund, and in the case of Ms Wear, she continued to invest in CPL. Neither Mr Legat nor Ms Wear raised any concerns with their own family members as to the soundness of their investments prior to March 2008.
The Michael West Articles Published on 27 February 2008 and 4 March 2008
On 27 February 2008 an article by journalist Mr Michael West entitled "City Pacific Peers into Abyss" was published in the Fairfax media. The article is reproduced as Schedule 1 to the further amended statement of claim. In the article Mr West described "City Pacific", without clarifying whether he was referring to CPL or the Fund, as a "high risk proposition" that needed to either "do a deal or raise some money urgently". The article referred to a purported takeover of another company, "MFS". Mr West stated that "City" had "recently revealed that it had deconsolidated two mortgage funds from its accounts". Its parent, "City Pacific", "is down to $2.7 million cash as at December". He went on to state:
"Although it declared a net profit of $27.5 million for the December half, it was $20 million cash flow negative on operations and showed $102.5 million in debts due this year in its balance sheet statement under current liabilities."
The article concluded, "Things are not pretty".
The second article published on 4 March 2008 was entitled, "By All Accounts, City Pacific is in Trouble". The article is reproduced as Schedule 2 to the further amended statement of claim. Again, Mr West refers to "City Pacific" without distinguishing between CPL and the Fund. It is described as a property developer whose "group's debts have been spiralling out of control", whose "stock prices have been in freefall" and whose shares went into trading halt that day.
Mr West stated that "City Pacific is veering towards collapse and, by its own admission, needs to refinance".
The article comments in some detail on the City Pacific 2007 annual report and the accounts contained therein, drawing adverse conclusions from information contained in the accounts. An objective reading of the article would cause concern for any investor or prospective investor in either CPL or the Fund.
Mr Swan gave evidence that the content of Mr West's article on 28 February 2008 misrepresented the state of the negotiations between CPL and MFS, and that his reporting of profitability and cash flow was incorrect.
Mr West's articles were not the only adverse press published in relation to CPL and the Fund. On 1 March 2008 an article was published in the Courier Mail newspaper entitled "City Pac's Tangled Tale Bankruptcy and Fraud Allegations Dog Founder", and on 3 March 2008 an article appeared in the Sydney Morning Herald by journalist Mr Scott Rochfort entitled "City Pac's Debt Up in New Books" with a sub-title "City Pac Debt Soars in New Set of Accounts".
The Fund's Decision to Defer Withdrawal Requests
Mr Swan was advised as a director on 3 March 2008 that the Fund had received over the weekend preceding $10 million in withdrawal requests, with numerous faxes containing withdrawal requests yet to be processed. It amounted to a run on the Fund and a decision was made by the Board to delay withdrawal requests for 180 days.
The financial regulator ASIC was notified and once that notification was public Mr Swan also advised Mr Legat and Ms Wear of that decision as he was aware that Ms Wear managed the financial affairs of many of his former clients who were shareholders in either CPL or had invested in the Fund, and that Ms Wear personally, as well as members of her family and those of Mr Legat's family, had invested in the Fund.
On 5 March 2008 CPL sent a letter to investors about the substantial increase in the level of redemption requests and the decision of the directors of CPL to defer the payment of redemptions in the Fund for up to 180 days (TB 411). In that letter the directors state:
"We are confident of meeting all redemptions. In taking this action the Directors have sought to protect all investors, including those in term investments which constitute about 80% in value of investments. ...
Recent investors are reminded that a 14 day cooling off period applies to all new investments. The cooling off period commences on the earlier of; the end of the fifth day after their investment is processed or when you received confirmation of your investment. The cooling off period does not apply to the reinvestment of Distributions. Please refer to section 2.8 of the PDS for more information."
The plaintiffs did not receive that letter until after their return from holidays. I find that the plaintiffs did have a capability of reading and comprehending English. They had conducted numerous business transactions during their lifetime in English. They had also been forwarded numerous documents and correspondence by the defendants over a period of 20 years and had never claimed a lack of comprehension of the English language. Having received this correspondence, Mr Marando contacted Mr Legat and was told nothing could be done about it.
Did the Defendants' Conduct Amount to Unconscionable Conduct?
Having regard to the particulars of the plaintiffs' second cause of action against the defendants, I find as follows:
(i)That in the relevant period after 26 February 2008, the defendants did not act unconscionably in failing to advise the plaintiffs of the actual financial position of CPL. On an objective view of the accounts of CPL, its financial position was basically sound. There was no evidence of any asset impairment at that time. Mr Swan's role in advising both Mr Legat and Ms Wear was consistent with the known facts at that time. Therefore, particular (b) set out in paragraph 37 above is not made out.
(ii)I find that the defendants did not act unconscionably in failing to bring to the attention of the plaintiffs the two articles of Mr West published in the Fairfax media on 27 February and 4 March 2008. Mr Swan, as a director of CPL was clearly of the opinion, reasonably held at that time, that the articles contained inaccuracies and wrong conclusions based on his knowledge of the accounts and dealings of the company. He reassured Mr Legat as to those matters. In those circumstances, I find that there was no conduct of the defendants which could be described as unconscionable towards the plaintiffs as set out in the particulars (c), (d) and (e) of the plaintiffs' claim (see para 37 above).
(iii)I further find that the defendants could not have been in the position whereby they acted unconscionably by failing to give "any adequate verbal warning of the issues concerning the financial position of CPL in the period from 26 February to 18 March 2008" as set out in particular (f) of the plaintiffs' claim. There was, in effect, nothing known to the defendants at that time that would rise to any duty to warn, or otherwise amount to unconscionable conduct given their state of knowledge as to the financial position of CPL.
(iv)Finally, I find that the defendants did not act unconscionably by failing to advise the plaintiffs to seek independent advice after 3 March 2008. Any provider of independent advice would have been in no better position than Mr Swan to assess the financial position of the Fund at that time.
I therefore find that the defendants did not engage in unconscionable conduct in contravention of s 12CB of the ASIC Act or s 51C of the TPA as pleaded by the plaintiffs.
The Plaintiffs' Claim in Negligence Against the Defendants
The plaintiffs' claim in negligence is outlined in paragraph 38 above. Clearly, Mr Legat owed the plaintiffs a duty of care as their accountant. However, it is the scope of that duty of care which is in issue, and whether it extended beyond his role as their accountant to the giving of financial advice in respect of their investment in the Fund.
Under the heading "Financial Advice", Mr Legat stated in his affidavit:
"21 Swan & Baker provide accounting services, but are not authorised to and do not provide financial advice. For the purposes of providing such advice, myself and three other people ... are directors of a company called S & B Financial Solutions Pty Limited ("SBFS"). SBFS is accredited through Count Financial Limited ("CFL"), the holder of the financial services licence.
22 SBFS is not authorised to give financial advice other than in relation to financial products that are approved by CFL. City Pacific is not, and never has been, one of the approved products. Consequently, neither myself nor, to my knowledge, anyone else on behalf of SBFS (or Swan & Baker) has ever given financial advice in relation to City Pacific or sought to influence anyone to invest in City Pacific. That is not to say, of course, that I have never told anyone what I knew of City Pacific. I strongly believed then, and I strongly believe now, that the distinction is a critical one."
And at paragraph 25:
"25 Being aware of the matters above, I am always extremely cautious when people ask my opinion about financial products or investments, which perhaps understandably, happens nearly every day of the week in which one can hardly avoid as a practising accountant. For example, I never say in these situations things such as 'you should invest in this product', or 'I recommend this product over that one'. If I am asked what I know about a product or products (as distinct from giving proper written financial advice), I simply relate what I know or don't know, and the person can make a decision for themselves. I am extremely cautious not to make any qualitative judgments, or to try to influence the person's decision."
In cross-examination Mr Legat gave the following evidence:
"Q: As an accountant, did you discuss investments with City Pacific with any of your clients?
A: Clients that ask, I gave them the benefit of my knowledge of the company.
Q: Did you put to them any other funds or vehicles they might invest in?
A: If clients ask me questions about products I would certainly - with any fund or share or whatever it might be - give them any knowledge that I might have had."
Mr Legat was also asked:
"Q: Have you read the product disclosure statement?
A: I've briefly read it.
Q: Briefly?
A: Yes.
Q: When?
A: I can't recall.
Q: Do you recall reading this document (the PDS) before you saw the Marandos on 18 February 2008?
A: Yes, I believe I briefly read it before that time."
Mr Legat also gave the following evidence:
"Q: If you go to page 20 of the bundle, page 4 of the PDS, you'll see that there's investment options, including the option to invest for a fixed 90 day term, see that?
A: Yes.
Q: There is also the option of investing for a fixed 180-day term?
A: Yes.
Q: You are familiar with those provisions?
A: Yes.
Q: Danny Marando clearly wanted the 90 day term, didn't he?
A: Yes.
Q: Do you recall at the time the form was filled in and - leaving aside the date - whatever date that might have been - before that 90 day box was ticked by whoever ticked it, whether there was any discussion about whether it was to be 90 days of 180 days?
A: At those relevant dates, it was clear that it was for 90 days.
Q: You understood by that that Danny wanted to be able to get the money out then to do something else with it. Correct?
A: Yes."
Mr Legat gave evidence that he did not discuss with the plaintiffs either the ability of CPL to extend the redemption periods or the cooling off period. As to risk, he gave the following evidence:
"Q: When you discussed the proposal to invest in City Pacific with the Marandos, that's when both Danny and Cathy were there, did you discuss anything about any element of risk in the investment with City Pacific?
A: We discussed, as I said, interest rates and reports back from Thomas about asset quality and historical returns on the fund.
Q: Do you recall using the word "risk" in any of those conversations with the Marandos?
A: I think the word "risk" was used when we were contemplating interest rates but I -
Q: Can you recall what you said to them about "risk"?
A: Words were to the effect that obviously there is a higher risk with a fund, but broadly, based on historical evidence and reports from Tom and everyone, all asset classes seemed to be secured enough."
Mr Legat understood the importance of the plaintiffs' decision to invest approximately half of their retirement monies in the Fund:
"Q: You understood that if they got it wrong the consequences for them could be catastrophic financially?
A: Yes."
Mr Legat was asked about the content of paragraph 21-25 of his affidavit as follows:
"Q: Is your purpose in giving that evidence to say in effect that you are not giving financial advice to the Marandos in the meetings of 29 January and 18 February 2008?
A: Yes, we were discussing my knowledge of the product.
Q: Sorry?
A: We were discussing my knowledge of the product.
Q: So you were giving them financial advice?
A: No.
Q: You weren't? Did you tell them that you were not giving financial advice to them on that day?
A: I don't believe I used those words.
Q: Did you tell them that they should go and seek financial advice before they made this investment from someone else?
A: No.
Q: Did you understand that they were relying on your advice in that meeting?
A: Yes."
In re-examination an attempt was made to clarify that answer by the following evidence:
"Q: Your answer to the question, 'Were you giving them financial advice?' was "No", but then a few questions on as I have just relayed, the question was 'Did you understand that they were relying on your advice in that meeting?', and you said, 'Yes'. What did you mean by that? What were you referring to when you gave the answer 'Yes' to that question?
A: That the things that I told them were truthful and honest."
With respect to the announcement that the period for redemptions was being extended, made on 3 March 2008, Mr Legat gave the following evidence:
"Q: When you go back a month earlier than this, when the announcement was first made that the mortgage fund was extending the redemption period to 180 days, when you heard about that, did it come to your mind that Mr Marando had made his investment for only 90 days?
A: Yes.
Q: But you didn't call him and tell him that the time had been extended, did you?
A: I didn't call him.
Q: Why not?
A: I had discussions with Tom at the time and the feeling was that the Fund was frozen obviously as a result of the media speculation which caused a run on redemptions, but the forward estimates and the projections of cash flow from the fund itself indicated to the fund that cash flow should restore itself in the normal course of events and that the expectation was that it wouldn't go the full 180 days.
Q: That was what Mr Swan told you?
A: Yes.
Q: And you accepted that?
A: To the effect of, yes, that's right.
Q: And that was why you didn't call Mr Marando?
A: Quite probably yes."
The Defendants' Duty of Care
Whilst is it clear that the defendants owed the plaintiffs a duty of care as their accountant, Mr Legat sought to limit his role, and disavowed acting as a licensed financial service provider to the Marandos for the purpose of filling in the application form on 20 February 2008 or providing financial product advice (as he was otherwise licensed to do). Further, he sought to establish that he was merely providing "information" about their investment into the fund, rather than "advice". The distinction is important, as liability in tort law for negligent advice causing economic loss has, since the High Court's decision in Mutual Life & Citizens Assurance Co Ltd v Evatt (1968) 122 CLR 556, been well established.
In Professional Liability in Australia 2nd Ed, Walmsley, Aberdee and Zipser, the learned authors cite (at [5.570]) Craig v Troy (1997) 16 WAR 96 and Cade v Simmons (1998) 71 SASR 171 as examples where accountants have been held liable in negligence for giving investment advice to their clients. The first case involved advice as to the feasibility of restoring or developing a hotel, the latter case, attempting a management buy out. Further, the proffering of investment advice is governed by the provisions of the Corporations Act 2001 (Cth) relating to financial services.
In determining whether a duty of care existed in respect of pure economic loss, in Perre v Apand Pty Limited (1999) 198 CLR 180 McHugh J at [100] said:
"In determining whether the defendant owed a duty of care to the plaintiff, the ultimate issue is always whether the defendant in pursuing a course of conduct that caused injury to the plaintiff, or failing to pursue a course of conduct which would have prevented injury to the plaintiff, should have had the interest or interests of the plaintiff in contemplation before he or she pursued or failed to pursue that course of conduct. ... If the defendant should have had those interests in mind, the law will impose a duty of care. If not, the law will not impose a duty."
The plaintiffs rely on the High Court's decision in Hawkins v Clayton (1988) 164 CLR 539 where at p 579 Deane J said:
"The content of the duty of care in a particular case is governed by the relationship of proximity from which it springs. It may, in some special categories of case, extend to require the taking of positive steps to avoid physical damage or economic loss being sustained by the person or persons to whom the duty is owed."
The plaintiffs also relied on Waimond Pty Limited & Anor v Byrne (1989) 18 NSWLR 642 in which the Court of Appeal held that the scope of the duty of care of a solicitor is not confined to his contract of retainer but may extend, depending on the circumstances, to require the taking of positive steps beyond the specifically agreed task or function the solicitor was employed to carry out where these are necessary to avoid a real and foreseeable risk of economic loss being sustained by their client.
In Riz v Perpetual Trustee Australia Limited [2007] NSWSC 1153, in a case again concerning the scope of a solicitor's duty of care, Brereton J having reviewed the authorities, stated that Waimond v Byrne remained good law - see [112] and [113] where his Honour stated:
"113 Accordingly, the prevailing position is that the scope of a solicitor's duty of care is not limited to the terms of the retainer but, depending upon the circumstances of the particular case, may require the taking of positive steps beyond the specifically agreed professional task or function, where these are necessary to avoid a real and foreseeable risk of economic loss being sustained by the client."
The defendants agreed that that statement of principle was applicable in this case, as well as the statement of principle from the judgment of Deane J in Hawkins v Clayton referred to above. However, the defendants submitted that there was no real or foreseeable risk of such loss given that the risk arising here fell into one of two categories, namely:
(1) The risk that Mr West might be right, and Mr Swan wrong about the financial circumstances of the Fund, or,
(2) The risk that the plaintiffs would only be able to redeem their investment after a longer period than 90 days, possibly up to 180 days. Such a delay in redemption would not sound in any economic loss at all, but merely delay the plaintiffs' plans to purchase real estate.
In Riz, supra, in determining whether the solicitor's duty of care extended in the circumstances of the particular case to require the taking of positive steps where such steps are necessary to avoid a real and foreseeable risk of economic loss being sustained by his client, Brereton J at [101] referred to the following passage from the judgment of Kirby P in Waimond Pty Limited v Byrne at 657:
"In the present case, the loss was foreseeable because the solicitor had knowledge of the respective interests of his several clients and the dealing which he arranged on the instruction of two of them had no apparent interest or benefit for the third. The burden which the 'positive step' required (namely, of securing instructions) was trivial. The burden of the loss which has accrued to the client from the solicitor's failure to take that step, is substantial. Because I believe the loss would not have occurred had the solicitor taken specific instructions, as reasonable care required, I consider that the want of care caused the loss sued for."
The defendants submit that to impose a duty of the kind the plaintiffs propound would be extraordinary in that it would "require an accountant who is merely aware of financial choices that his tax clients may have made or be intending to make - not being ones that he had recommended - to carry out ongoing monitoring of all such choices, by all such clients, in case of possible 'changes in circumstance'; to acquire detailed knowledge of all available options open to the clients - both pursuant to the particular contractual terms of any chosen contract or investment and in relation to alternatives thereto; and to provide advice, on an ongoing basis, in relation to those available options (even though not asked, at any stage, to do so)". In reliance on that proposition the defendants refer to City Corp Australia Limited v O'Brien (1996) 40 NSWLR 398 per Sheller JA at 418 E-G. What is clear, is that each case depends on its particular circumstances.
Here, it is clear that Mr Legat owed the Marandos a duty of care. The real issue is, what was the extent of that duty. Did it extend to a duty, having regard to all of the circumstances of the matter and Mr Legat's state of knowledge, to take positive steps to warn and advise the plaintiffs during the cooling off period of their entitlement under the PDS to withdraw their money from the Fund? The following are relevant matters that I take into account in determining that matter:
(i)The purpose of the plaintiffs seeing Mr Legat on 29 January 2008 was clearly to discuss with him how to invest the proceeds of settlement from the sale of their home. That included a discussion about the taxation implications including capital gains tax, together with Mr Marando's superannuation fund.
(ii)The meeting held on 18 February 2008 was for a far more specific purpose. That purpose was to discuss where the plaintiffs would invest their funds for 90 days. I have set out my findings in relation to that meeting in paragraph 44 above. Those findings included the finding that it was on the information given to them at that meeting by Mr Legat that the plaintiffs decided to invest $500,000 in the Fund.
(iii)Mr Legat understood that the plaintiffs were relying on what he told them in coming to their decision to invest.
(iv)The plaintiffs were not sophisticated investors. Rather, they were poorly educated people who understood basic money matters.
(v)I do not accept Mr Legat's evidence in cross-examination that he was not giving the plaintiffs "financial advice", but was discussing "his knowledge of the product". Mr Legat knew that the plaintiffs were relying on his advice which he understood had to be truthful and honest.
(vi)Also relevant are the facts as I have found them, that the PDS for the Fund was available in the waiting room of the first defendant. It had been displayed there for some years, and it was the only PDS for any financial product displayed in that waiting room.
(vii)The fact of Mr Swan's nonexecutive directorship of CPL added weight to the attraction of CPL as an investment vehicle for the plaintiffs.
(viii)Mr Legat facilitated the plaintiffs' investment in the Fund by filling out the application form for them to sign and by forwarding it to the Fund.
Having regard to all of those matters, I find that the scope of the duty of care owed by Mr Legat to the plaintiffs extended to taking reasonable care in advising the plaintiffs in respect of their investment of money into the Fund to avoid a real and foreseeable risk of economic loss. He had crossed the line of merely providing "information" and was in fact, advising the plaintiffs in respect of the investment of their money. He knew they were relying on his advice. His duty therefore extended to having knowledge of the PDS, which he had read prior to 18 February 2008, and with which he stated he was familiar (see para 34 above).
I do not accept the submission made by the defendants that the foreseeable risk of loss fell into the two categories outlined in paragraph 82 above. Given the extent of the run on the Fund, there was a real and foreseeable risk of economic loss being sustained by the plaintiffs, both in terms of the Fund delaying redemptions indefinitely or becoming frozen. Both were significant risks given the plaintiffs' insistence on the investment for a period of no longer than 90 days.
Breach of the Duty of Care
The pleading of the plaintiffs' further amended statement of claim of their cause of action in negligence is confined to allegations of failing to inform the plaintiffs both of the true financial "condition" of CPL, and of failing to warn the plaintiffs during the cooling off period of the fact and of the matters referred to in the two articles by Mr West referred to above. Those matters extended to the decision by CPL to extend redemptions for 180 days.
Whilst the pleading of the duty of care as set out in para 38 above is inelegant, and the particulars now relied upon somewhat deficient, it is clear from the evidence and the submissions of the parties that the following matters were fairly and squarely raised as issues in the proceedings. I therefore proceed to determine them (see Indigo Mist Pty Limited v Palmer [2012] NSWCA 239, per Hoeben JA at [66] and [67]).
As at 3 March 2008 Mr Legat knew that the plaintiffs had invested their money for only 90 days. He was familiar with the PDS and should have known of the cooling off period. The plaintiffs submitted that Mr Legat's evidence that he was unaware of the provision and terms of the cooling off period was no more than an admission of negligence on his own part. Whilst there was no evidence that the cooling off provision was a statutory requirement in Queensland, provisions for cooling off regimes are contemplated by the Corporations Act 2001 (Cth) as being information that must be included in a PDS, whether required by law or otherwise (see s 1013 D(1)(i)).
If Mr Legat was in fact unaware of the cooling off period in this case as at 3 March 2008, he should have become aware of it following the letter dated 5 March 2008 sent by CPL to investors referred to in paragraph 59 above. That letter set out in clear terms that recent investors were reminded that the 14 days cooling off period "applies to all new investments". The letter to investors was annexed to the affidavit of Mr Swan and was sent because the board of CPL were concerned that the media had substantially contributed to what appeared to be a run on the Fund. The purpose of the letter was to notify investors of their decision to delay withdrawal requests for 180 days as provided by the constitution of CPL. Mr Swan discussed with Mr Legat (and Ms Wear) matters relevant to the Fund and it was also his practise to email relevant ASX notifications or public announcements after release by CPL to Mr Legat (and Ms Wear) to invite them to contact him if they needed any clarification (paragraph 40 of the affidavit of Mr Swan).
Mr Legat discussed the decision by CPL to extend the redemption period to 180 days with Mr Swan (Affidavit of James Legat paragraph 31). He knew that the fund had had a run of redemption requests over the weekend prior to 3 March 2008 and that the board had decided to freeze redemptions for 180 days as a precautionary measure. Mr Legat was asked about the letter as follows:
"Q: If you go to page 411, do you see there a copy of a letter to investors by City Pacific Limited, that is investors in the fund, dated 5 March 2008?
A: Yes.
Q: Did you know on or about that date that such a letter had been sent out?
A: No. I knew there was a letter - yes - I knew there was a letter that had gone out post the freeze.
Q: Do you recall seeing that letter at the time?
A: No.
Q: Did you make any enquiry from Tom Swan or anyone as to the reasons for the 180 - day freeze on redemptions?
A: Yes, I did.
Q: What enquiry did you make?
A: I sought clarification from Tom on what it might mean for the short and long term of the fund.
Q: What did he say to you?
A: I was given assurances to the effect that the fund was put in place to protect the unit holders' positions, and it was as a result of a run on redemption requests from the recent press coverage it had been given, but they expected that in the normal course of the cash flows expected of the fund, the fund would restore itself.
Q: You just accepted that?
A: Yes.
Q: But a run on the fund could turn into a stampede, couldn't it?
A: It's possible.
Q: Did you make any investigations yourself of the accounts of the fund, consider what might happen in that event?
A: No. I was relying on Tom's assurances.
Q: Did you consider that Tom as a director in City Pacific Limited might have had a vested interest in maintaining the reputation of that company?
A: No.
Q: Did you give any thought at that time to contacting Danny Marando to advise him to get his money out of the fund?
A: I didn't know that he had the option at that time of getting his money out of the fund post the freeze."
As at 5 March 2008, at the very commencement of the 14 day cooling off period, Mr Legat knew that the plaintiffs had relied on him to invest $500,000 in the Fund. He knew that they required a 90 day investment and he knew that they left the documents with him to facilitate that investment. Mr Legat knew that the plaintiffs were away on holidays but that he had Mr Marando's mobile phone number. He knew within a very short time of 3 March 2008 that there was a run on redemptions on the Fund and he was mindful at that time of the plaintiffs' investment in the Fund.
I find that Mr Legat knew about the letter sent to investors dated 5 March 2008 and, notwithstanding his lack of recollection of seeing the letter at that time, he must have been aware of it and its contents. His own parents were investors in the Fund for example. He also discussed the Fund's position with Mr Swan at the time.
I find that Mr Legat's evidence as set out above, that he did not know that Mr Marando had the option at that time of getting his money out of the Fund, bespeaks a breach by him of the duty to take reasonable care he owed to the plaintiffs. It was not sufficient for him to fulfil his duty of care merely to rely on the assurances of Mr Swan at this time that the Fund would restore itself.
Having regard to all of the circumstances, and to Mr Legat's state of knowledge, I find that Mr Legat further breached his duty of care to the plaintiffs by failing to take positive steps to inform them prior to 18 March 2008 of their entitlement to withdraw their investment under the cooling off provisions in the PDS.
Causation
The defendants submitted that there was no evidence that any potential breach by the defendants or either of them, was causative of any loss to the plaintiffs. It was submitted that even if Mr Marando had been advised that he was "still in the cooling off period", he was never asked what he would have done, and therefore there was no evidential basis on the question of causation herein. Any finding that the Marandos, if advised by Mr Legat of their entitlement to withdraw the funds after 3 March 2008, would be based on pure hypothesis. Further, it was submitted that had the plaintiffs withdrawn their funds:
"They might have put it in an alternative fund, They might have put it anywhere. Wherever they might have put it, no one knows what would have happened to it. There are about cascading levels of hypothesis. If they had, for example, bought property, especially on the Gold Coast or thereabouts, it might have gone south at a greater rate of disintegration than a unit price in City Pacific. One just doesn't know".
I do not accept the defendants' submissions as outlined above. It was clear that Mr and Mrs Marando never intended to make a long term investment. Mr Marando stated in his affidavit as follows:
"38 If I had been advised by James or another accountant or financial adviser that there was a possibility that redemptions could be deferred or frozen for longer than 90 days, I would not have invested in the City Pacific Fund.
39 If I had been made aware of any of these risks, I would have put the $500,000 in the bank instead."
I adopt the reasoning of Kirby P in Waimond set out in para 83 above. I find that had Mr Legat properly advised the plaintiffs of their entitlement to withdraw their investment pursuant to the cooling off period provisions, the plaintiffs would have done so, and would have invested the money instead in a bank term deposit. It was the breach by Mr Legat of his duty of care to the plaintiffs that has caused the loss suffered by them by having their money locked in what is now described as a "non-liquid scheme". But for his breach, the plaintiffs' loss would not have occurred. I therefore find that the defendants' breach was causative of the loss suffered by the plaintiffs.
Damages
The plaintiffs rely on the following schedule of damages:
PLAINTIFFS' DAMAGES CALCULATIONS AS AT 13.07.12
Interest rate: 8.60% PA
| Principal invested on 26 February 2008 | $500,000.00 | $500,000.00 |
| Add interest on principal from 26.02.08 to 13.07.12 at 8.6% PA 4.38 yrs (4 years and 137 days) | $188,340.00 | $688,340.00 |
| Deduct return of capital on 12.10.10 | -$20,597.85 | $667,742.15 |
| Deduct return of capital on 29.04.11 | -$5,149.46 | $662,592.69 |
| Deduct return of capital on the 30.09.11 | -$5,149.46 | $647,443.23 |
| Deduct return of capital on 03.04.12 | -$5,149.46 | $652,293.77 |
| Deduct interest at 8.6% PA on $20,597.85 from 12.10.10 to 13.07.12 1.75 years (1 year and 284 days) | -$3,099.98 | $649,193.79 |
| Deduct interest at 8.6% PA on $5,149.46 from 29.04.11 to 13.07.12 1.21 years (1 year and 75 days) | -$535.85 | $648,647.94 |
| Deduct interest at 8.6% PA on $5,149.46 from 30.09.11 to 13.07.12 0.78 year (286 days) | -$345.43 | $648,312.51 |
| Deduct interest at 8.6% PA on $5,149.46 from 03.04.12 to 13.07.12 0.28 year (101 days) | -$124.00 | $648,188.52 |
| Deduct current value of units (514,946.33 units @ $0.22 per unit) | -$113,288.19 | $534,900.32 |
Plus interest at 8.60% PA on balance of $534,900.32 from 13.07.12 - $126.03 per day
The plaintiffs rely on the High Court's decision in Youyang v Minter Ellison (2003) 212 CLR 484 for the proposition that they were entitled to the whole of their lost investment. The defendants submit that that decision has no relevance in this case as it concerned breach of an express trust which led to the loss of the whole of the monies invested. They submit that here, the fate of the plaintiffs' investment is unknown. The plaintiffs may or may not suffer a loss at sometime in the future and therefore the quantum of any such loss is presently unknown and unknowable.
There was some evidence of the value of the units since the Fund was frozen. For example, in September 2010 the plaintiffs refused an offer to purchase their units on the basis of an offer of 30 cents per $1 unit (Exhibit 5 reveals the plaintiffs held 514,946.33 units, for which they were offered $133,886.05). In any assessment of damages, that evidence must be taken into account as evidence of the plaintiffs' failure to mitigate their loss. There is further historical evidence of a diminishing unit price - see for example Exhibit 24 where the net asset value per unit was recorded as being $0.48 in 2009 and $0.43 as at 30 June 2010.
There was no evidence before the Court of value in the units as at the present time. Their value has been as low as $0.22 per unit. The lack of precise valuation at the present time, and the speculative nature of estimates of future valuations, are matters that should not impede the Court from assessing damages where there has been a proven loss. The purpose of damages is to place the plaintiffs in the position they would have been, but for the defendants' negligence. Thus, any residual valuation of the units held by the plaintiffs should be discounted by virtue of the reduction made to any damages by their failure to mitigate their loss.
The defendants also submit that the plaintiffs have claimed interest at the rate offered by the Fund, ie, 8.6%, when the plaintiffs' case is that they would have invested the money with a bank (as they did with their $500,000 less deposit with Westpac, at 7.5% p.a.).
I find the plaintiffs are entitled to damages assessed as follows, calculated at an interest rate of 7.5% per annum using the same basic methodology advocated by the plaintiffs. The calculation is as follows:
| 1. Principal invested on 26 February 2008 | $500,000.00 | $500,000.00 |
| 2. Add interest on principal from 26/02/08 to 30/08/12 at 7.5% PA (4 years and 185 days) | $169,007.00 | $669,007.00 |
| 3, Deduct return of capital on 12/10/10 | -$20,597.85 | $648,409.15 |
| 4. Deduct return of capital on 29/04/11 | -$5,149.46 | $643,259.69 |
| 5. Deduct return of capital on the 30/09/11 | -$5,149.46 | $638,110.23 |
| 6. Deduct return of capital on 03/04/12 | -$5,149.46 | $632,960.77 |
| 7. Deduct interest at 7.5% PA on $20,597.85 from 12/10/10 to 30/08/12 (1 year and 332 days) | -$2,950.00 | $630,010.77 |
| 8. Deduct interest at 7.5% PA on $5,149.46 from 29/04/11 to 30/08/12 (1 year and 123 days) | -$516.00 | $629,494.77 |
| 9. Deduct interest at 7.5% PA on $5,149.46 from 03/11/11 to 30/08/12 (335 days) | -$354.00 | $629,140.77 |
| 10. Deduct interest at 7.5% PA on $5,149.46 from 03/04/12 to 30/08/12 (149 days) | -$158.00 | $628,982.77 |
| Total | $628,982.77 |
I find that the plaintiffs failed to mitigate the loss they have suffered as a result of their investment in the Fund being frozen by refusing to accept in September 2010 the offer made by Project Junior Pty Limited ("PJPL") to purchase their units in the Fund. The offer was 0.30 cents per unit and if they had accepted it the plaintiffs would have received the sum of $133,886.05. Allowance also should be made in the assessment of the plaintiffs' damages for a valuation of the units that are now held by them. However, any allowance for the residual value of the units held by the plaintiffs should take into account the amount deducted from the plaintiffs' failure to mitigate their damages.
The defendants submitted that the fate of the plaintiffs' investment is unknown and the plaintiffs may or may not suffer a loss at some time in the future. I do not accept that this is sufficient reason for not awarding damages, but given the extent of the evidence which showed a diminishing valuation of units in the Fund, I would adjust the amount payable to the plaintiffs by the defendants by a further 10% to take into account the present valuation of the plaintiffs' holding in the Fund. I therefore, having regard to both the plaintiffs' failure to mitigate their loss and the fact that they continued to hold units in the Fund which have a value, adjust the calculation of damages owing by the defendant by deducting 40% from the calculation above. I therefore assess the plaintiffs' damages at $377,390.00.
I find that as Mr Legat was a director and employee of the first defendant, that the first defendant is vicariously liable for his negligence, and therefore the plaintiffs are entitled to a verdict and judgment against both defendants.
Conclusion
I therefore find that the plaintiffs' loss to date is the sum of $377,390.00. There will therefore be a verdict and judgment for the plaintiffs in that amount and I make the following orders:
(1) Verdict and Judgment for the Plaintiffs against the First and Second Defendants in the sum of $377,390.00.
(2) The Defendants to pay the Plaintiffs' costs.
(3) The Exhibits to be returned.
(4) The parties to have Liberty to Apply in respect of the question of costs on 7 days notice.
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