Denara Nominees Pty Ltd v Scolaro
[2003] WASC 90
•16 MAY 2003
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: DENARA NOMINEES PTY LTD -v- SCOLARO & ORS [2003] WASC 90
CORAM: MASTER SANDERSON
HEARD: 10 APRIL 2003
DELIVERED : 16 MAY 2003
FILE NO/S: CIV 2157 of 2000
BETWEEN: DENARA NOMINEES PTY LTD
Plaintiff
AND
ANTHONY SCOLARO
JOHN GREGORY SCOLARO
ANTHONY PETER BONAVITA
ROSANA PAMELA BONAVITA
DefendantsJURGEN WERNER PREUSS
First Third PartyBROADWAY FIDUCIARY PTY LTD
Second Third PartyFAIRFAX HOLDINGS PTY LTD
Third Third Party
Catchwords:
Practice and procedure - Application to strike out defence and counterclaim of each of third parties - Turns on own facts
Legislation:
Nil
Result:
Defence struck out
Category: B
Representation:
Counsel:
Plaintiff: No appearance
Defendants: Mr S F Popperwell
First Third Party : Mr K C Staffa
Second Third Party : Mr K C Staffa
Third Third Party : Mr K C Staffa
Solicitors:
Plaintiff: No appearance
Defendants: Pynt & Partners
First Third Party : Kevin Staffa
Second Third Party : Kevin Staffa
Third Third Party : Kevin Staffa
Case(s) referred to in judgment(s):
Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241
Modbury Triangle Shopping Centre Pty Ltd v Anzil (2000) 205 CLR 254
Case(s) also cited:
A-G of the Duchy of Lancaster v L & NSWR [1892] 3 Ch D 274
Bruce v Odhams Press Ltd [1936] 1 KB 697
Caparo Industries PLC v Dickman [1990] 2 AC 605
Caterson v Commissioner for Railways (1973) 128 CLR 99
Gala v Preston (1991) 172 CLR 243
Hawkins v Clayton (1988) 164 CLR 539
Heyman v Sutherland Shire Council (1984) 157 CLR 424
Johnson Tiles Pty Ltd v Esso Australia [2000] FCA 212
Katina Pty Ltd v Westfield Design & Construction Pty Ltd, unreported; SCt of WA; Library No 980059; 13 February 1998
Kimberley Downs Pty Ltd & Or v State of Western Australia & Anor, unreported; SCt of WA; Library No 6141; 25 August 1986
Mayor of City of London v Horner [1913] 111 LT 512
Mutual Life & Citizens Assurance Co Ltd v Evatt (1968) 122 CLR 556
Nagle v Fielden [1966] 2 QB 633
Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co Ltd (Wagon Mound No 1) (1961) AC 388
Perre v Apand Pty Ltd (1999) 198 CLR 180
Proprietors Units Plan No 95/98 v Jiniess Pty Ltd [2000] NTSC 89
Rassam v Budge [1895] 1 QB 571
Ron Hodgson (Trading) Pty Ltd v Belvedere Motors (Hurtsville) Pty Ltd [1971] 1 NSWLR 472
San Sebastian Pty Ltd v The Minister Administering Environmental Planning Act (1986) 162 CLR 340
Sullivan v Moody [2001] HCA 59
MASTER SANDERSON: This is the defendants' application to strike out each of the third parties' defences and counterclaims. In relation to each of the third parties' defences, the defendants raise three issues. Two of these issues are common to each of the third parties' defences. The third is particular to each defence. It is the defendants' case that if the strike‑out applications are successful in relation to the third complaint, leave to replead ought not be granted. The facts of the case, so far as they are relevant to this application, can be summarised in the following way. The plaintiff is the trustee of the Australian Independent Superannuation Fund ("AISF") which operates as a regulated superannuation fund under the Superannuation Industry (Supervision) Act 1993 (Clth) ("the SIS Act"). The plaintiff claims against the defendants in their capacity as chartered accountants. The defendants were the auditors of ASIF between 1 July 1994 and the end of June 2000. The plaintiff's claims arise in respect of losses it has incurred and continues to incur in relation to a fraud committed on ASIF by one Lindsay James Dods ("Dods"). The plaintiff says that the defendants, as auditors of ASIF, were negligent in not detecting Dods' fraud and consequently are liable to the plaintiff for damages.
Between 1 July 1994 and 28 August 2000 the second third party was the trustee of ASIF. During this period the third third party was appointed to act as the investment manager of ASIF. The first third party was at all material times a director and shareholder of the second third party, a director of the third third party and indirectly, beneficially entitled to an interest in the third third party. As against the first third party, the defendants allege that as a consequence of his position as a director of the second third party, he owed duties at law and in equity to the members of ASIF. It is said that these duties were breached and as a consequence, the first third party is liable to indemnify the defendants against any liability they may have to the plaintiff. Apart from these claims for breach of legal and equitable duty, the claim by the defendants against the first third party is put on a number of other grounds. For present purposes a reference to the alleged breach of duty is sufficient to indicate broadly the nature of the claim made by the defendants against the first third party.
The claims made against the other two third parties are based upon the same facts as the claim made against the first third party. However, as against the corporations, it is said that they are vicariously liable for the fraudulent activities of Dods. It is further said that there has been a breach by the second third party of the terms and conditions of the trust deed under which it was appointed and the third third party aided and abetted this breach of trust. Further claims are made for breach of statutory duty. One way or another then, the defendants claim a full indemnity from the third parties for any liability they may have to the plaintiff.
This is the third interlocutory application dealing with the third party proceedings. First, the third parties attempted to summarily strike out the third party notices. When that application failed they attempted to strike out the defendants' statement of claim against them. That too failed. Now it is the defendants' turn. They have applied to strike out parts of the third parties' defences. Unlike the applications made by the third parties, the defendants' application has merit and must succeed.
The first complaint made by the defendants can be illustrated by reference to par 12 of the defendants' statement of claim against the first third party and par 13 of the first third party's defence. Paragraph 12 of the statement of claim pleads certain facts in relation to a company known as Ramstone Holdings Pty Ltd. What is pleaded in par 12 are material facts which must be established if what is pleaded in par 15(7), that is, that the first third party had an indirect beneficial interest in the third third party - is to be established. In response to that plea the first third party in par 13 pleads:
"The first third party admits that Ramstone Holdings Pty Ltd was incorporated pursuant to the Corporations Law but otherwise does not admit the allegations in paragraph 12 of the DSOC (defendants' statement of claim) and says that the matters pleaded in paragraph 12 do not give rise to any cause of action against the first third party."
The defendants complain that the use of the phrase "do not give rise to any cause of action against the first third party" is embarrassing. It is not a plea that says anything in response to the defendants' pleaded material facts. Clearly that is correct. A party is free to admit, to deny or to traverse a material fact put against it. But it must do one of these three things. A pleading is not a proper place for a submission; and that is what the phrase amounts to. The complaint is made with respect to par 2, 13, 15 and 18 in the first third party's defence, par 2, 15, 17, 18 and 20 in the second third party's defence and par 2, 5, 6, 14, 16, 23, 24, 26, 28, 29 and 31 of the third third party's defence. In each case the reference is inappropriate and it will be struck out.
The second complaint made by the defendants can also be illustrated by reference to the defence and counterclaim of the first third party. Complaint is made at par 26 through to 42 which constitute a counterclaim made by the first third party against the defendants. The first third party seeks to recover from the defendants economic loss he allegedly suffered. The pleading is formulated in the following way. Paragraphs 26 to 31 detail the contractual relationship between the second third party when it was trustee of the AISF and the defendants as auditors. It is alleged that this relationship means that the defendants owed a duty of care to the first third party. Paragraphs 33 to 36 detail the facts said to disclose a breach of that duty. Paragraphs 37 to 40 plead the ingredients of a claim for misleading and deceptive conduct under the Fair Trading Act. Paragraphs 41 and 42 plead causation to support the first third party's claim to recover economic losses pleaded in the counterclaim.
The defendants say the pleading lacks the essential ingredients of a cause of action for negligence for economic loss. They say the bare allegation of a duty as pleaded in par 32 is not sufficient. By reference to Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241 they say that in pleading a claim for pure economic loss based on negligence a claimant must go further than a bold assertion that a duty of care is owed. It is said there must be something more than mere foreseeability of loss. It is said that what must be pleaded are the necessary components on a claim including foreseeability, intention, reliance and assumption of responsibility.
With respect, the defendants are clearly right. In the Esanda Finance case, Brennan CJ put the position as follows (at 252):
"… in every case, it is necessary for the plaintiff to allege and prove that the defendant knew or ought reasonably to have known that the information or advice would be communicated to the plaintiff, either individually or as a member of an identified class, that the information or advice would be so communicated for a purpose that would be very likely to lead the plaintiff to enter into a transaction of the kind that the plaintiff does enter into and that it would be very likely that the plaintiff would enter into such a transaction in reliance on the information or advice and thereby risk the incurring of economic loss if the statement should be untrue or the advice should be unsound. If any of these elements be wanting, the plaintiff fails to establish that the defendant owed the plaintiff a duty to use reasonable care in making the statement or giving the advice."
Measured against this test, the first third party's pleading is defective and it must be struck out. That is enough to deal with the defendants' application. However, there is a further difficulty with the way in which the duty of care is pleaded. The duty is said to arise out of the contractual relationship between the second third party and the defendants as its auditors. If that is so, what is the nature of the duty which arises? The answer at one level is, obviously, a duty to properly audit the accounts of the second third party so as to prevent the first third party as a director of the second third party incurring loss and damage. But to state the duty in those broad general terms may not be sufficient in the context of a case such as this.
The difficulty can be illustrated by reference to the High Court decision in Modbury Triangle Shopping Centre Pty Ltd v Anzil (2000) 205 CLR 254. The facts of the case taken from the headnote were as follows:
"A suburban shopping centre in which shops were leased to tenants had a large outdoor car park. A tenant operated a video shop business until 10pm. One night an employee of the tenant was attacked and badly injured while walking to his car in the car park. The shopping centre's floodlights had been turned off by the landowner at about the time the shop closed and there was no direct lighting in the carpark."
All members of the Court agreed that in general terms it was the landowner's duty as an occupier of the land to take all reasonable care to prevent injury to persons coming onto the land. The question was whether that duty extended to cover a person in the position of the respondent. Gleeson CJ put the position as follows (at 263):
"That an occupier of land owes a duty of care to a person lawfully upon the land is not in doubt. It is clear that the appellant owed the first respondent a duty in relation to the physical state and condition of the car park. The point of debate concerns whether the appellant owed a duty of a kind relevant to the harm which befell the first respondent. That was variously described in argument as a question concerning the nature, or scope, or measure of the duty. The nature of the harm suffered was physical injury inflicted by a third party over whose actions the appellant had no control. Thus, any relevant duty must have been a duty related to the security of the first respondent. It must have been a duty, as occupier of land, to take reasonable care to protect people in the position of the first respondent from conduct, including criminal conduct, of third parties. People in the position of the first respondent would include employees of tenants of the shopping centre, visitors to the shopping centre, including customers of tenants, users of the automatic teller machines, and, perhaps, any member of the public using the car park at any time for any lawful purpose."
Hayne J stated the position in terms of a pleading, in this way (at 290):
"In cases such as the present, where the extent of the relevant duty is not clear, it is useful to begin by considering the damage which the plaintiff suffered, and the particular want of care which is alleged against the defendant. Asking then whether that damage, caused by that want of care, resulted from the breach of a duty which the defendant owed the plaintiff, may reveal more readily the scope of the duty upon which the plaintiff's allegations of breach and damage must depend."
It is not to be doubted that auditors owe to a corporation they are auditing a duty of care. But the position pleaded by the first third party is more problematical. It is said that such a duty is owed by the defendants to the first third party in his capacity as a director of the company managing a fund which is being audited. Such a duty may well exist - an interlocutory application such as this is not the forum in which to make such a decision. But in pleading the duty it is necessary to consider the nature of the damage allegedly suffered by the first third party and then relate that back to the duty the first third party says was breached by the defendants. That requires some consideration of the nature of the damage allegedly suffered.
The first third party says he has suffered loss and damage in three separate ways. First, there are costs and expenses associated with obtaining independent auditors to carry out an audit of the books of AISF and legal fees incurred in taking proceedings against Dods and others, including the defendants. Secondly, the first third party claims legal fees incurred consequent upon taking proceedings in the Federal Court in an attempt to prevent the replacement of the second third party as trustee of ASIF. Thirdly, there are legal costs associated with the first third party attempting to overturn his disqualification from acting as a trustee of superannuation funds. In relation to this last matter it would seem after the default was discovered the Australian Prudential Regulatory authority conducted an investigation and consequent upon that investigation, the first third party received a disqualification.
As I have indicated above, I am satisfied that the pleading in its present form is not satisfactory. It can also be seen, given the nature of the loss and damage allegedly suffered by the first third party, that the duty of care would have to be pleaded with some precision. No doubt counsel will bear this in mind when redrafting the pleading. For present purposes I need say no more about this issue.
The defendants' final complaint relates to foreseeability. How the defendants ask could it ever be foreseeable that in the event of a fraud committed by an employee of the second/third third parties, which was undetected by the defendants as auditors, would lead to the loss and damage pleaded by the first third party. The defendants say that it was not foreseeable that the first third party would, in his own right, engage independent accountants and take proceedings himself against certain individuals. They say it is not foreseeable that he, in his own right, would take action to prevent the second third party being removed as trustee of ASIF. Further, they say that it was not foreseeable that the first third party would be disqualified from acting as a trustee of superannuation funds and that he would take proceedings to have that disqualification overturned.
On behalf of the first third party it was said that it was inappropriate at an interlocutory stage to determine questions of foreseeability. It was submitted that these matters must be determined at trial after all the evidence had been heard. Counsel pointed out this was a strike‑out application - it was not even a summary judgment application. In the circumstances it was said that there was not the requisite degree of certainty which would justify the third party being shut out.
It is very difficult to see how the loss pleaded by the first third party is foreseeable. However, as I have indicated above I am not satisfied that there has been a proper pleading of the nature of the duty owed by the defendants to the first third party. I accept, as submitted by counsel for the defendants, that it is difficult to see how, given the relationship between the loss claimed and the plea of the duty, it will be possible for the draftsman of the pleading to establish the necessary logical nexus between the breach of the duty and the loss. Nonetheless, given that I have concluded the present pleading of the duty is inadequate, I should provide the first third party with a further opportunity to plead out this aspect of his claim. Accordingly I will grant leave to replead.
In relation to the second third party's defence, the defendants took objection to par 24 through to 42. It was said that these paragraphs repeated the plaintiff's allegations against the defendants that they did not answer the defendants' claim against the second third party, nor did they form the basis of any counterclaim. I understand that the second third party now accepts that to be the case. Accordingly these paragraphs will be struck out with no leave to replead.
In relation to the third third party, objection is taken to par 17. In particular, it is said that the mere reference to a "tortious duty" (see par 17(a)) was insufficient, given that the claim was for pure economic loss. For reasons which I have outlined above, I agree. Paragraph 17(a) will be struck out with leave to replead. Objection is also taken to par 34 through to 55. I would agree these paragraphs should be struck out. There is a failure to properly plead the duty of care and there is also the difficulty with the foreseeability of the damage claimed. Furthermore, it is difficult to see how anything pleaded can give rise to the declaratory relief sought by the third third party. While generally speaking there is no need to strike out a prayer for relief, counsel during the course of redrafting both the second and third third parties' defence and counterclaim, ought give careful consideration to whether or not a claim for declaratory relief will be pursued.
In the result, the paragraphs of the third parties' defences, to which I have referred, will be struck out. I will hear the parties as to the precise form of orders and as to costs.
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