Donkin, C.J. v A.G.C. (Advances) Ltd

[1991] FCA 476

Re: COLIN JOHN DONKIN AND HEATHER KAYE DONKIN
And: A.G.C. (ADVANCES) LIMITED
No. G107 of 1989
FED Nos. 476 and 477
Trade Practices - Negligence - Damages

COURT

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Beaumont J.(1)

CATCHWORDS

Trade Practices - Consumer protection - misleading or deceptive conduct - whether statement was literally true but a "half-truth" - whether failure to speak when there was a duty to speak.

Negligence - Off-shore loan - whether duty of care owed by lender to borrower - whether breach - whether lender should have explained to borrower the availability of "selective" hedging.

Damages - Measure of damages in negligence - failure by off-shore lender to advise of existence of "stop-loss" mechanism.

HEARING

BRISBANE

#DATE 8:8:1991

Counsel and Solicitors for applicants: A. Harrison QC with T. Somers

Instructed by: Hempenstall O'Donoghue

Counsel and Solicitors for respondent: R. Morrison QC with J.C. Sheahan

Instructed by: Feez Ruthning

JUDGE1

REASONS FOR JUDGMENT (No. 3)

(On issue of liability)

The background to this matter appears in the two previous reasons for judgment, which I will refer to as Findings (No. 1) and Findings (No. 2) respectively. The representatives of the parties have now made submissions on the issue of liability, it being agreed that I should deal with this issue separately before going to the next issue of relief, if any, should this arise for consideration.

1. I propose to deal with the issue of liability by considering, in turn, each of the causes of action alleged. In this connection, I now note that the alternative allegation of a collateral, oral, warranty pleaded in para 32(a) of the statement of claim is no longer pressed.
   The first cause of action alleged: Misleading or deceptive conduct contrary to s.52 of the Trade Practices Act

2. This cause of action is said to arise in several ways. It is convenient to deal with the allegations in para.4 of the statement of claim in turn, noting that, by reason of the findings previously made, the allegations made in paras 5, 6(a) and 7(A) of the statement of claim cannot, in my view, be sustained.

3. It will be recalled that, in para.4, it is claimed that Mr Stagg made a number of oral representations to Mr Donkin.
   Para. 4(a)

4. It was here alleged that Mr Stagg said that both he and AGC were capable of offering skilled advice and management in respect of an off-shore loan. In Findings (No. 2) (at 10), I expressed the view that, "(i)n the light of my previous findings, this cannot now be seriously disputed." Counsel for AGC has now submitted that this matter is, in fact, truly contentious. He says, in particular, that neither Mr Stagg nor AGC said or did anything to suggest that they were experts in "managing" off-shore loans. On behalf of AGC it is said that it may be one thing to offer advice to a customer in respect of, and to arrange, an off-shore loan but it is a different thing to "manage" such loan.

5. In my opinion, there is some force in this submission in the present circumstances, but not much.

6. It is common ground that (1) AGC was one of our largest lending institutions; (2) AGC was associated with Westpac, one of our largest banks; (3) Mr Stagg was the manager of the Property Finance Division of AGC's Rockhampton branch. Further, I have already found, in Findings (No. 1), at 26, that Mr Stagg approached Mr Donkin against the background of (i) Mr Donkin's need to refinance two substantial loans; (ii) high domestic interest rates, and enquired whether Donkin had considered an off-shore loan. Then and at their later meetings (Findings (No. 1) at 26-8), Mr Stagg gave Mr Donkin information and advice with respect to the merits and mechanisms involved in undertaking an off-shore loan. In my view, it is legitimate to infer from this conduct on the part of Mr Stagg that he, and AGC, were able to offer all necessary expertise in this area of off-shore borrowing. It is true that Mr Stagg did not, in terms, represent that AGC would "manage" the loan either "actively" or "passively", matters to be considered and dealt with later in these reasons. However, I am satisfied that, by his statements, Mr Stagg represented that he and AGC could provide Mr Donkin with the expertise required to undertake an off-shore borrowing. There may be technical considerations to be taken into account in analysing what is involved in "managing" such a loan and I will defer dealing with this now.

7. The representations I have found were clearly within Mr Stagg's ostensible authority. They were also within his express authority since, as described in the earlier reasons, he had received written information from senior management dealing with the merits and mechanisms of off-shore loans in the expectation that this information and advice would be passed on to selected customers.

8. A separate question arises whether the representations I have found were likely to mislead or deceive. In my opinion, they were not. It is true, as I have already found (see (No. 2) at 8) that, in the period February and March 1986, Mr Stagg had "little knowledge" of these matters. However, it is clear, I think, that the considerable resources of AGC in this area were available to Mr Stagg if he needed them. If necessary, Westpac could be involved at AGC's request. I think that, given these combined resources of know-how, Mr Stagg and AGC were capable of offering skilled advice and management in respect of an off-shore loan.
   Para. 4(b)

9. According to Findings (No. 2) at 10, although the sum of $2 million was sought, the other allegations have not been made out.
   Para. 4(c)

10. According to Findings (No. 1), at 29, on 21 March 1986, Mr Stagg informed Mr Donkin that AGC Head Office had approved an off-shore loan of $1.5 million and an on-shore loan of $0.5 million. Subject to this, the allegations in this paragraph are not made out.
    Para. 4(e)

11. It is true that I have found ((No. 1) at 26), that in the first telephone discussion, Mr Stagg said that, at this time, the interest rate on off-shore loans was around 7% to 8% (sc. per annum). It is not claimed that this statement was false at the time it was made. The allegation made in para 4(e) goes, of course, well beyond this and has not been established.
    Para. 4(f)

12. In its form at the time of Findings (No. 2), this allegation was in the following terms:
    

"(f) that (AGC) is associated with Westpac Banking Corporation ('the Bank') which had expertise in matters of off-shore borrowing;"

1. It is not now seriously disputed that this statement was made. But, in my opinion, it was an accurate statement.

2. After the publication of Findings (No. 2), counsel for the applicants applied for, and obtained, leave to amend by adding the following allegation:
   

"that Westpac has an office in Singapore, that the difference between the Swiss Franc interest rate and the 7 or 8% that the applicants would be paying was paid for the expertise in the organisation of the loan, the good standing and prestige of Westpac, and protecting the applicants."

1. The Findings (No. 1) at 27 included a statement by Mr Stagg that Westpac had a Singapore office. This was true. It was also there found, inter alia, that Westpac charged a 4% margin for its expertise in acting in the transaction and that Westpac was continuously involved with Euromarket funding. The additional allegation now made in para 4(f) cannot be sustained by these findings.
   Para. 4(g), (h)

2. In the light of my findings, these allegations cannot be sustained.
   Para. 4(i)

3. It is here alleged that Mr Stagg said that hedging was unnecessary, for two stated reasons. I have found ((No. 1) at 27) that Mr Stagg explained that hedging was possible but that because of its cost, hedging was not a worthwhile exercise.

4. As I followed the arguments, it is now not seriously disputed that the cost of hedging for the full term of the loan is so great that it is not a feasible exercise. To this extent, Mr Stagg's statement should be treated as accurate.

5. But counsel for the applicants contended that AGC should have explained to Mr Donkin that he should have "selectively" hedged and "managed" the loan either actively or passively in the sense described below. Counsel said that the failure to make this explanation amounted to misleading conduct for two reasons: (1) it was a half-truth; (2) in the circumstances there was a duty to speak and AGC failed to do so.

6. I have difficulty accepting that there was a half-truth only in what Mr Stagg said. It is, of course, possible to conceal the truth, and thus mislead, by, e.g., a technique of selective quotation from a document (see R v Kylsant (Lord) (1932) 1 KB 442). A statement may be literally true but in substance may be false. However, I do not think that this is a proper characterisation of what happened here. Mr Stagg addressed the possibility of hedging for the term of the loan and correctly pointed out that its cost was prohibitive. This was true literally and in substance. It may be accepted that he did not address the discrete possibility of "selectively" hedging or "managing" the loan actively or passively. But, in my opinion, this was a separate and real alternative to fully hedging and could not bear, or have any impact, upon his statement with respect to the cost of hedging for the whole term. It may have been different if Mr Stagg had not fully explained all that was involved in the cost of hedging for the full term.

7. Counsel for the applicants also made the point that s.52 may be contravened even though common law misrepresentations may not be established, for instance, where there is a duty to speak (see, e.g., Rhone-Poulenc Agrochemie SA v UIM Chemical Services Pty Ltd. (1988) 12 FCR 477). This question will arise for consideration in the claim in negligence, to be dealt with later in these reasons, and I will turn to it then.
   Para. 4(j)

8. In Findings (No.2) at 13, I found that it was contemplated that AGC would attend to the mechanics of the loans. Whether any other "implication" should be made will depend upon whether there was a relevant duty to speak and I will also defer this question until I come to the claim in negligence.
   Para. 4(k)

9. Again, this will be deferred as it depends upon the scope of any relevant duty to speak.
   Para. 9

10. This cannot now be sustained - see Findings (No. 2) at 15.
    Para. 10

11. See Findings (No. 2) at 15. As I followed the argument for the applicants, this is merely a "defensive" pleading, designed to forestall a contention from AGC that the relevant chain of causation was broken when the applicants entered into these transactions. As such, it may be more appropriately pleaded in reply. So far as the merits are concerned, it appears to be common ground that, at all relevant times, the applicants wished to borrow $2 million to meet existing and future commitments and further wished to borrow as much of this off-shore as AGC was willing to lend.
    The second cause of action alleged: common law fraud

12. By para 19 of the statement of claim, it is alleged that Mr Stagg made the representations pleaded in para 4(c) and (f) knowing them to be false, or reckless. I have already dealt with these claims.
    The third cause of action alleged: common law negligence

13. By paras 15, 16, 16B and 24 of the statement of claim, it is alleged that, in the premises previously pleaded, AGC owed a duty of care to the applicants and breached that duty in several respects. In essence, it is said that the duty includes a duty to disclose and explain to the prospective borrower such risks as the lender ought to be aware of and which the lender ought to know a prudent borrower would be likely to attach significance to, in deciding whether or not to take the proposed loan. It is further submitted that the duty also includes a duty to advise of the steps available to minimise such risks should the prospective borrower decide to proceed, in particular, the possibility of hedging, be it selective or stop loss hedging, so that the prospective borrower may make an informed judgment as to whether or not to proceed with a transaction in which it is proposed that such steps shall not be taken.

14. In my opinion, AGC did owe the applicants a duty of care in the circumstances of this case.

15. In Hawkins v Clayton (1988) 164 CLR 539, Deane J. said (at 576):
    

"...a relevant duty of care will arise under the common law of negligence only in a case where the requirement of a relationship of proximity between the plaintiff and the defendant is satisfied. In the more settled areas of the law of negligence involving direct physical injury or damage caused by negligent act, the reasonable foreseeability of such injury or damage is, of itself, commonly an adequate indication that the relationship between the parties possesses the requisite element of proximity... That cannot, however, be said of cases in the area where the plaintiff's claim is for pure economic loss. In that area, the categories of case in which the requisite relationship of proximity is to be found are properly to be seen as special in that they will be characterized by some additional element or elements which will commonly (but not necessarily) consist of known reliance (or dependence) or the assumption of responsibility or a combination of the two..."

1. In the present case, the requisite elements of "known reliance (or dependence) or the assumption of responsbility, or a combination of the two" have, I think, been made out. The essential facts are that AGC, a large lending institution associated with a major bank with international connections, approached the applicants and suggested to them a type of dealing which appeared to have attractions but was complicated and had risks of loss (and gain) against the background that AGC knew that the applicants had no real understanding of the merits or mechanisms of such a transaction. In these circumstances, I agree with the submission put by counsel for the applicants that the content of the lender's duty of care included, first, a duty to disclose and explain the risks of loss and, secondly, a duty to advise of the steps available to minimise those risks.

2. In my opinion, AGC did not breach the first of these duties. Mr Stagg's reference to hedging could only reasonably be explicable on the footing that there was some risk. The warning implicit in this was reinforced by AGC's documentation which was brought to the attention of the applicants. For instance, in the loan approval document signed by the applicants, there is the following statment:
   

"CURRENCY FLUCTUATIONS: If at any time the amount outstanding under the Facility exceeds the facility limit by 20% as a result of adverse currency fluctuations, AGC may require cash cover or additional security or may require that the amount outstanding be reduced."

1. There was a similar provision in the Finance Facility Deed (cl. 26(a)).

2. However, in my opinion, AGC was in breach of its duty to advise the applicants of the steps available to a borrower to minimise the risks of an adverse fluctuation in the rate of exchange. In my view, AGC should have informed the applicants that it was possible to hedge "selectively" or to use a "stop-loss" mechanism.

3. In his expert evidence, Professor T.J. Valentine explained that there were a number of techniques available to remove or reduce the risks involved in off-shore loans. The most important was the forward foreign exchange contract. In his affidavit, Professor Valentine said:
   

"16. ...if a borrower hedges a loan when it is first taken out, its cost is raised to the Australian cost of borrowing ie the borrower can obtain no benefit from offshore borrowing. Also, forward contracts cannot be obtained to cover risks arising years in the future because the market is thin beyond one year. l7. Forward foreign exchange contracts can, however, be used in the active management of an offshore loan. That is, the borrower monitors the exchange rate and covers his loan when it is moving or appears likely to move in an unfavourable direction. If the borrower is successful in this approach, he will be able to take advantage of favourable movements of the exchange rate while avoiding losses from unfavourable movements.

l8. It is not difficult to monitor an offshore loan. This can be done by regularly consulting the Australian Financial Review. ...

19. Monitoring a foreign exchange loan is considerably less complex than monitoring a share portfolio. ...

20. The disadvantage which selective hedging can entail is that a foreign currency loss may be locked in. That is, if during the period of the hedge the AUD appreciates, the borrower will not gain any advantage from that appreciation. If the loan is unhedged, the borrower again becomes exposed to the risk of exchange rate fluctuations. If the AUD falls again, the borrower will make a further loss. Its advantage is that during the period of the cover a borrower has a known exposure fixed in AUD. The other major problem with this approach is that it must be based on forecasts of the exchange rate which, as noted above, can be quite inaccurate. In circumstances like these, selected hedging would cost the borrowers much more than doing nothing at all.

21. An alternative approach is to use forward foreign exchange contracts in passive management of the loan. The obvious approach here is the stop-loss mechanism which involves covering the loan when a loss of a certain percentage is suffered. A stop-loss rule is simply the putting in place of forward cover at a pre-determined point. Hindsight might show the covering of the exposure to be an error (that is, the exchange rate may go up again) and it is therefore a decision which should be made by a customer rather than his bank." In his oral evidence, Professor Valentine said this: "You say in paragraph 15 that there (are) a number of techniques which can be used to remove or reduce the risk involved in off-shore loans. For off-shore borrowers such as the Donkins the most important technique was the Forward Foreign Exchange Contract. Now, your view in - and I'm not sure whether I've absorbed this properly - your view in 1985 was that for a borrower such as the Donkins it would have been useful to engage in some kind of protection by means of Forward Exchange Contracts. Sorry 1986, I should have said?---For a borrower in their position, and this doesn't refer specifically to their case, but for a borrower in their position I would believe that they should - I believe then and believe now that they should have undertaken some management of the loan either active or passive."

1. I accept this evidence. In my view, AGC should have explained these techniques to the applicants. It could not be seriously suggested that giving such an explanation placed an unreasonable or onerous burden on AGC. It was a substantial lending organisation with a corporate association with a major bank which itself had extensive dealings in the form of international banking and lending transactions. Yet no mention of the techniques available was made except a full hedge which, it is common ground, was not feasible because of its prohibitive cost.

1. None of this is to say that AGC itself had any obligation to "manage" the loan for the applicants or to "monitor" its progress or regress. It is one thing to have a duty to explain the range of feasible techniques available. This is a duty to speak. It is a different thing to suggest that AGC had a duty to act. This it was not, in my opinion, bound to do in the absence of contract or some other independent source of legal obligation. In para 22 of the statement of claim, there seems to be a suggestion that the applicants are seeking to make such a case but there is no evidence, in my view, to sustain any cause of action.
   (On issue of the measure of damages)

2. In Reasons for Judgment (No. 3) I held that, in one respect, AGC was liable to the applicants in negligence. I said (at 12):
   

"AGC was in breach of its duty to advise the applicants of the steps available to a borrower to minimise the risks of an adverse fluctuation in the rate of exchange. In my view, AGC should have informed the applicants that it was possible to hedge "selectively" or to use a "stop-loss" mechanism."

1. I have now heard the submissions of counsel dealing with the questions of principle that arise on the measure of damages. I have deferred dealing with the matter of quantum until a later stage.

2. The general principles in this area were recently stated by Mason C.J., Dawson, Toohey and Gaudron JJ. in Haines v Bendall (1991) 99 ALR 385 at 386 as follows:
   

"The settled principle governing the assessment of compensatory damages, whether in actions of tort or contract, is that the injured party should receive compensation in a sum which, so far as money can do, will put that party in the same position as he or she would have been in if the contract had been performed or the tort had not been committed... Compensation is the cardianal concept. It is the 'one principle that is absolutely firm, and which must control all else'; Skelton v Collins (1966) 115 CLR 94, per Windeyer J. at 128. Cognate with this concept is the rule, described by Lord Reid in Parry v Cleaver (1970) AC 1 at 13, as universal, that a plaintiff cannot recover more than he or she has lost."

1. On behalf of the applicants, counsel argued that they were entitled to be placed in the same position as they were before the tort was committed. Counsel then submitted that it should be inferred that, if AGC had given the information or advice in question, the applicants would not have borrowed off-shore and that their damages should be measured accordingly.

2. Although the general proposition of law thus put may be accepted, I do not agree that its application in the present case leads to the result contended for.

3. In my opinion, if AGC had given Mr Donkin an explanation that "selective" hedging or a "stop-loss" mechanism was available, it is probable that Mr Donkin would have decided to adopt the latter procedure in an appropriate form.

4. In his evidence cited in Reasons (No. 3), Professor Valentine described the advantages of the "stop-loss" mechanism as follows:
   

"21. An alternative approach is to use forward foreign exchange contracts in passive management of the loan. The obvious approach here is the stop-loss mechanism which involves covering the loan when a loss of a certain percentage is suffered. A stop-loss rule is simply the putting in place of forward cover at a pre-determined point. Hindsight might show the covering of the exposure to be an error (that is, the exchange rate may go up again) and it is therefore a decision which should be made by a customer rather than his bank."

1. It will be recalled that in March 1986, the applicants needed substantial funds to refinance their existing borrowings and for other commitments then proposed. For this reason, they were seeking to borrow $2 million. Their assets overall had a value in the order of $4 million. Clearly, a borrowing of $2 million represented a significant exposure for them. As well, they knew that domestic interest rates were high (approximately 17% p.a.) and that an off-shore loan could be achieved at about 7% p.a., but subject to a risk of a currency fluctuation. In those circumstances, it would, I think, have been a logical step for the applicants to take (1) to borrow off-shore and (2) at the same time to protect themselves to a reasonable degree in terms of their exposure to currency fluctuations by arranging a stop-loss mechanism at an appropriate level - say 10% - representing the difference between the off-shore rates and local rates of interest at the time.

2. I do not accept the applicants' submission that, if advised of "selective" hedging or a "stop-loss" mechanism, they would have abandoned entirely the idea of an off-shore borrowing. In my view, given the potential saving in interest costs it offered, provided also the applicants could achieve the protection offered by the "stop-loss", it is reasonable to suppose that the merit of such a package would probably have proved attractive to the applicants and that they probably would have opted for it.

3. On behalf of AGC, it is submitted that it should not be inferred that, if the requisite explanation had been given by AGC, the applicants would have "selectively" hedged or actively managed the off-shore loan. As I followed the arguments of counsel, this contention is not seriously challenged by counsel for the applicants. However, counsel for AGC further argued that, because of Mr Donkin's business-like approach to these matters, it should be inferred that even if advised by AGC as required by law, the applicants would have elected to proceed off-shore without the benefit of any "stop-loss". If the amounts involved had been smaller, there may have been some force in this argument. But, in my view, the magnitude of the borrowing relative to the total assets of the applicants suggests that it would have been unlikely that they would have taken such a dangerous course. I think that it is more likely that they would have gone off-shore but with the benefit of a "stop-loss" operating at approximately 10%. I so find.