Finlay v Rowlands
[1987] TASSC 36
•21 May 1987
TASSC A26/1997
CITATION: Finlay v Rowlands & Ors [1987] TASSC 36; A26/1987
PARTIES: FINLAY
v
ROWLANDS
ANDERSON
HINE
TITLE OF COURT: SUPREME COURT OF TASMANIA
JURISDICTION: ORIGINAL
FILE NO/S: 640/1980
DELIVERED ON: 21 May 1987
DELIVERED AT:
HEARING DATE:
JUDGMENT OF: Wright J
CATCHWORDS:
REPRESENTATION:
Counsel:
Plaintiff:
Defendant:
Solicitors:
Plaintiff:
Defendant:
Judgment Number: TASSC A26/1987
Number of paragraphs: 37
Serial No A26/1987
File No 640/1980
FINLAY v ROWLANDS, ANDERSON & HINE
REASONS FOR JUDGMENT WRIGHT J
21 May 1987
It is alleged and I so find, that in August 1978 as the result of advice by the second named defendant Robert James Anderson the plaintiff, Simon Finlay, was induced to invest $15,000 by way of an unsecured loan with Associated Securities Ltd ("ASL"). For the purpose of minimising income taxation liability, the plaintiff invested the funds in the name of his wife. He was then married to Dianne Ellen Finlay, but they have since been divorced and she is now Dianne Ellen Hardie. Originally Mrs Finlay was the only party to these proceedings, but the present plaintiff applied for and was granted leave to be joined as a co–plaintiff in 1984. Subsequently his wife withdrew from, and discontinued the action insofar as her interest was concerned.
It was submitted on behalf of Mr Finlay that he had a sufficient interest in one half of the funds invested with ASL to maintain the present action. Defence counsel submitted that the plaintiff could not be heard to assert such a claim and relied on Martin v Martin (1963–64) 110 CLR 297. The plaintiff gave evidence which was supported by his former wife to the effect that the monies invested with ASL consisted of joint funds which had been accumulated by them for investment purposes over a period of time and that they regarded the proposed investment with ASL as a joint enterprise for their mutual benefit.
I fully accept that this was their attitude to and conception of relevant transactions but the fact remains that the plaintiff caused the funds to be invested "in his wife's name". I suspect that the average man (or woman) in the street does not always appreciate the significance of such a manoeuvre as this. In the present circumstances it seems to me to inevitably involve a finding that there was a gift by the plaintiff of his one half beneficial interest in the fund to his wife as from the moment he instructed the defendants to invest in this way and placed the funds in their hands for that purpose. As the High Court said in its joint Judgment in Martin v Martin (supra) at 306:
"The fact is that in very many cases where a husband places property in his wife's name he has no thought of any differences arising between them, none at all of a dissolution of marriage except by death, and he acts in simple confidence that as legal and beneficial owner of the property his wife will always consult his interests and probably comply with his wishes in exercising her proprietary rights … When, ... it is the true explanation of what the husband has done, it means that there is no resulting trust in the husband's favour."
Though the plaintiff has no legal or enforceable interest in the funds invested, it was submitted that he had a clear, reasonable and probable expectation of "the use and benefit" of half of the funds invested.
Accepting that this is a fair analysis of the plaintiff's position, it is nonetheless necessary to consider whether such a situation is sufficient to enable the plaintiff to establish a cause of action. The plaintiff has sued in negligence only. There is no alternative claim in contract which is perhaps, surprising because the plaintiff said that when he sought advice from Mr Anderson he was expecting to receive a bill for professional services even though he was never in fact charged. As I say, he has chosen to sue in tort alone.
To succeed in negligence the plaintiff must establish the existence of a duty of care, a breach of that duty and resultant damage.
Assuming that the funds invested with ASL have been lost, the plaintiff has lost no more than the expectation that his former wife would have shared the anticipated income and capital with him in an equitable manner at some future date. As I see it, his position is somewhat analogous to that of a beneficiary under a will whose prospective interest has failed as a result of a solicitor's carelessness in the preparation or execution of the will. There are a number of recent cases of strong persuasive authority which have discussed the question of the beneficiary's entitlement to sue the careless solicitor in such situations.
In Ross v Caunters [1980] Ch 297 Megarry VC concluded that the disappointed beneficiary could maintain an action. His decision was followed by Burt CJ in Watts v The Public Trustee of Western Australia [1980] WAR 97. However, in Seale v Perry [1982] VR 193, the Full Court of Victoria came to a contrary conclusion, although McGarvie J was inclined on principle to follow the earlier cases just mentioned and would have done so had he not regarded himself bound by the House of Lords decision in Robertson v Fleming (1861) 4 Macq 167.
In a New Zealand case, Gartside v Sheffield, Young & Ellis [1983] NZLR 37, the trial judge decided in similar circumstances that the plaintiff was owed no duty of care, but on appeal, the New Zealand Court of Appeal unanimously followed Ross v Caunters (supra) and overturned the primary decision.
In this conflicting state of authority and in the absence of a binding decision of the High Court, it is necessary for me to reach my own conclusion as to the law. On a purely numerical basis, it may be said that the weight of judicial authority supports the view that a duty of care is owed to anyone whose prospective economic interest may foreseeably be affected by negligent professional advice and that a loss of such a kind represents damage recognisable at law.
The members of the New Zealand Court of Appeal in Gartside's case did not specifically deal with the problem of stare decisis mentioned by McGarvie J, but chose not to follow Seale v Perry (supra) for more general reasons both of logic and policy. Of course, if McGarvie J was correct as to the binding effect of Robertson v Fleming (supra), I too should follow the House of Lords. With great respect to McGarvie J I think that he placed excessive emphasis upon the specific relationship dealt with in Robertson v Fleming (supra) and so characterised its effect upon the case before him that he tended to undervalue the considerable and progressive changes wrought upon the law of tortious liability by such subsequent decisions of the House of Lords as Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465, Dorset Yacht Co v The Home Office [1970] AC 1004 and Anns v Merton Borough Council [1978] AC 728. For this reason I tend to the view that Robertson v Fleming (supra) no longer has the binding force which he accorded it.
There is however a factor of not inconsiderable significance in the present case which enables me to distinguish it from the solicitor and beneficiary cases which I have been discussing. In the present case, Mr Finlay himself had direct dealings with at least two members of the defendant firm and, as I now find, he made the defendants fully aware, firstly that he was relying on their advice, secondly that it was joint monies belonging to himself and his wife which would be invested and, thirdly, that the investment in his wife's name was essentially for the purpose of securing a measure of taxation relief for the pair of them viewed as a family unit. In short, regardless of any contractual relationship of accountant or investment adviser and client, the defendants were fully aware that the plaintiff himself sought and received advice as to an investment of funds in which he had an obvious legal and beneficial interest at that particular time.
In Shaddock and Associates Pty Ltd v Parramatta City Council [No 1] (1980 – 1981) 150 CLR 225 at 250, Mason J adopted the test formulated by Barwick CJ in Mutual Life and Citizens' Assurance Co Ltd v Evatt (1970) 122 CLR 556, in the following terms:
"… whenever a person gives information or advice to another upon a serious matter in circumstances where the speaker realizes, or ought to realize, that he is being trusted to give the best of his information or advice as a basis for action on the part of the other party and it is reasonable in the circumstances for the other party to act on that information or advice, the speaker comes under a duty to exercise reasonable care in the provision of the information or advice he chooses to give."
Mason J's views were adopted by Aickin J in Shaddock at 256 and were echoed by Murphy J at 255 – 256.
I take the formulation to represent a correct statement of the relevant duty of care according to the common law in Australia at the present time. If, contrary to my belief, the proper test of liability remains that pronounced by the majority of the Privy Council in Mutual life and Citizens' Assurance Co Ltd v Evatt (1970) 122 CLR 628, [1971] AC 793, it is nonetheless my belief that the evidence provides a possible basis for the defendant Anderson to have brought himself within the ambit of delictual liability to the plaintiff. If from his dealings with other clients and his use of Mutual Nominees Pty Ltd as a conduit for investment of funds on their behalves, it may be said that Mr Anderson was in the business of giving advice as to investment even though that part of his overall professional practice was comparatively small, he would be liable according to the Privy Council's test. If from his conduct and dealings with the plaintiff Mr Anderson made it plain that he claimed to possess skill and competence in the field of monetary investment, an alternative basis for liability would exist.
For these reasons I have concluded that Mr Finlay may have established a basis for recognition of a duty of care owed to him by the defendants.
I am also fully persuaded that damages of the nature sought by the plaintiff are recoverable in the event that he establishes a breach of duty. My reasons for so concluding are well summarised in the following passage from the judgment of Richardson J in Gartside's case at 47:
"The object of an award of damages is to compensate the plaintiff for damage, loss or injury he has suffered. Difficulty of assessment is not a bar to recovery and certainty of proof is not required. It is well established that in tort as in contract loss of a reasonable prospect or chance of enjoying financial benefit is compensable (see, for example, Richardson v Mellish (1824) 2 Bing 229; Chaplin v Hicks [1911] 2 KB 786; Domine v Grimsdall [1937] 2 All ER 119; Mulvaine v Josephs (1968) 112 Sol Jo 927; Davies v Taylor [1974] AC 207; and see generally McGregor on Damages (4th ed, 1980) paras 275–280). Contingent or speculative benefits of that kind are quantified according to the likelihood of loss occurring. As it is explained in 12 Halsbury's Laws of England (4th ed) para 1137:
'Whilst issues of fact relating to liability must be decided on the balance of probability, the law of damages is concerned with evaluating, in terms of money, future possibilities and chances. In assessing damages which depend on the court's view as to what will happen in the future, or would have happened in the past, the court must make an estimate as to what are the chances that a particular thing will happen or would have happened and reflect those chances, whether they are more or less than even, in the amount of damages which it awards.'"
McMullin J in the same case at 56 said:
"… Whether the claim be in tort or contract the measure of damages must be 'that sum of money which will. put the party who has been injured, or who has suffered, in the same position as he would have been if he had not sustained the wrong for which he is now getting his compensation or reparation' – Livingstone v Rawyards Coal Company (1880) 5 App Cas 25, 39, per Lord Blackburn.
There will, no doubt, be difficulties in assessing the damages but such difficulties do not make assessment impossible – Chaplin v Hicks [1911] 2 KB 786. The question must be whether the plaintiff has lost some right of value, something which has reality and substance. Although it may be that this value is not easy to determine it is the duty of the Court to do so as best it can – Kitchen v Royal Air Forces Association [1958] 2 All ER 241. In a given case a Court may view the actual loss suffered through the negligence of a solicitor failing to prepare a will as much less than the testamentary provision to be made for him. The possibility of other claims being brought to the detriment of the disappointed beneficiary, had the will been executed, must be taken into account; any amount which the disappointed beneficiary may receive in a claim made under the Family Protection Act or the Law Reform (Testamentary Promises) Act will be relevant. In the end a value must be placed upon the benefit that has been lost …"
Having established that there is a foundation in law for the plaintiff's claim, I turn now to consider whether or not the evidence supports that claim.
I should say at the outset that there were areas in which the evidence of the plaintiff and Mr Anderson conflicted and I should indicate that in all such areas, unless indicating specifically to the contrary, I prefer the evidence of the plaintiff. I am fully persuaded that the defendant Anderson was perceived by the plaintiff to be both an accountant and an investment adviser, ie one purporting to exercise special skill and expertize in advising clients or customers upon the desirability and wisdom of investing money in various kinds of income or capital producing ventures.
The evidence also satisfies me that this was a correct perception and that Mr Anderson, both in the past and to the plaintiff, held himself out as having this status and capacity. I find that when the plaintiff called to see him, Mr Anderson had in his possession documentary material supplied by ASL The plaintiff was given a copy of ASL Prospectus No 36 in respect of an issue of First and Second Charge Debenture Stock (Exhibit P), not so much to induce him to invest in this particular form of security, but rather to interest him in ASL as a company of an appropriate kind for investment, although in the circumstances Mr Finlay may well have been led into thinking that the investment in contemplation was in a debenture issue rather than an unsecured loan. Mr Anderson did not suggest any alternative companies or investment avenues.
The plaintiff did not know and was not told that there had been speculation as to the viability of ASL over some years preceding August 1978, nor was he told that it was heavily exposed in the area of real estate. He was not warned of any risk in investing with ASL The plaintiff was told by Mr Anderson that "he could get 10% for 24 hour investment 10¾% for a thirty day investment or 11% for a sixty day investment". The plaintiff was not told that the investment proposed by Mr Anderson on these terms was by way of unsecured loan to ASL He was told however, that a company owned and operated by the defendants and their wives, Mutual Nominees Pty Ltd was to be the vehicle for the investment, but he was not made aware that Mutual Nominees Pty Ltd had an agreement with ASL entitling Mutual Nominees Pty Ltd to commission on investments which it introduced to ASL The significance of this financial interest is twofold.
Firstly, it tends to reinforce the duty of care owed by Mr Anderson to the plaintiff in tendering advice, irrespective of any contractual relationship which may or may not have existed between them (see Mutual Life and Citizens' Assurance Co Ltd v Evatt [1971] AC 793 at 805). Secondly it tends to explain Mr Anderson's readiness to recommend ASL as a suitable recipient of unsecured investment monies at a time when prudence should have dictated otherwise.
A proforma copy of the agreement between ASL and Mutual Nominees Pty Ltd was put in evidence and it is quite clear from its terms that Mutual Nominees Pty Ltd was constituted an agent of ASL, both in a legal and business sense (see International Harvester v Carrigan's Hazeldine Pastoral Co (1958) 100 CLR 644). According to Mr Anderson, a formal written agreement was not signed until January 1979 but when it was, it was made retrospective to at least May 1978 and in any event, whether written or not, the arrangement as to commission, substantially predated the date on which relevant dealings between the plaintiff and Mr Anderson occurred. As I have said the plaintiff was quite unaware of any agency relationship between ASL and Mutual Nominees Pty Ltd or ASL and the defendants.
A substantial body of evidence was led both in documentary form, and orally from Mr J D Chandler, an experienced Hobart stock broker and from Mr Anderson himself (principally in cross examination), which leaves me with very little doubt that a competent accountant, let alone an investment adviser, at the time the dealings between the plaintiff and Mr Anderson were taking place, would have appreciated that ASL was in a parlous if not precarious position.
In reliance upon the advice which he received from Mr Anderson, the plaintiff, after discussing the matter with his wife, placed $15,000 with the defendants for investment in her name as already described. I find that the plaintiff was not then familiar with the distinction between secured and unsecured investments and that the only possible significance of the Prospectus which had been given to him by Mr Anderson was to confirm in his mind that Sir Reginald Ansett was directly associated with ASL as a director and major shareholder. (In fact it appears that Sir Reginald Ansett was not a major shareholder, but Ansett Industries Ltd was.) This really only confirmed what Mr Anderson had already told the plaintiff during his visit to the defendant's office premises by way of additional persuasion to induce him to invest with ASL I do not think it was made clear to the plaintiff that the funds would be placed on unsecured loan at 11% ''at call" after 60 days. Nor do I think that he had any appreciation that an investment in the form in which it was made carried a significant element of risk.
After the expiration of the initial 60 day term in late January 1979, Mr Anderson rang the plaintiff and advised him that the rate of interest being paid by ASL had dropped from 11% and that a longer term investment which had been discussed between them at their earlier meeting was unlikely to eventuate. He told the plaintiff that he should look to some alternative long term investment but offered no word of warning about ASL's then impending collapse. Within a few days of this conversation, the plaintiff learned that ASL had gone into receivership on 8 February 1979.
It was argued that as this event occurred after the initial 60 day investment made by the plaintiff had expired, the defendants had no continuing exposure to liability, but I reject this contention. Mr Anderson had not just tendered some advice to the plaintiff and then faded from the picture. His firm had accepted and dealt with the placement of funds and he had a continuing awareness that those funds were with ASL as a temporary measure of unspecified duration whilst an alternative, more permanent form of investment was under investigation. His contact with the plaintiff on 29 January really serves to reinforce my conclusion that he acknowledged and was aware of a continuing responsibility to the plaintiff and his wife in respect of their investment. In any event, he should have foreseen when advising the investment in August 1978, that its duration was likely to be substantially in excess of the originally nominated term of 60 days. In my view this represented a minimum duration of the investment to qualify for the 11% interest, rather than a finite period during which the investment was to have effect and after which the defendants were entitled to regard any potential liability which they had incurred in their dealings with the plaintiff as at an end.
I find that it was the intention and understanding of the parties that the monies invested by the plaintiff and his wife were to be placed with, and remain with ASL, pending their placement in a future joint investment involving the plaintiff, his wife and one or more of the defendants. The continuation of the investment with ASL until this eventuality was within the clear contemplation of Mr Anderson and the plaintiff from the outset.
However, in my view, it matters not from the point of view of legal consequences whether Mr Anderson's duty to the plaintiff arose and also ceased on the occasion on which he tendered his advice to the plaintiff to invest with ASL or whether he had some continuing obligation to the plaintiff in the event that he subsequently became aware of facts or circumstances which suggested that the investment was at risk between August 1978 and February 1979. My reason for saying this is that in my opinion, Mr Anderson was aware of, or ought to have been aware of an abundance of information which, in August 1978, was pointing unequivocally to a substantial risk involved in the making or continuation of any form of unsecured investment of even short duration with ASL
It is also true as Mr Ayliffe submitted, that Mr Anderson did not give the plaintiff a balanced appraisal of ASL's financial soundness but chose rather to accentuate those factors which, no doubt quite genuinely, he believed gave cause for confidence as to ASL's future performance. In short, insofar as he gave any appraisal at all, he stressed the favourable but ignored the adverse.
A good deal of evidence centred around the existence of adverse factors and the defendant Anderson's awareness of those factors. Briefly stated, the factors which in my opinion, were or should reasonably have been apparent to him were as follows:
1ASL was over exposed in the area of developmental real property as a result of heavy buying in previous years. In December 1977 its holding had a value of about $58,000,000. This exposure had caused financial journalists within a few months before August 1978 to suggest that ASL had been forced to the "brink of oblivion" as a result of such dealings. Although expressed as a percentage of its total invested funds, real estate had declined from 23.4% in December 1976 to 19.4% in December 1977, ASL had a very high proportion of its monies tied up unproductively in a depressed property market with high servicing costs.
2Articles in respected financial journals were indicating in months prior to August 1978 that whilst there was some cause for optimism as to ASL's future, investment in ASL was distinctly speculative and in the absence of a substantial improvement in the real property market, should continue to be so regarded.
3ASL's Annual Report for the year ended 30 June 1978, though available to the defendant Anderson prior to his negotiating the plaintiff's loan to ASL, disclosed that there was a significant difference between the directors and the auditors as to the company's performance. The profit claimed by the directors was $178,000 whereas according to the auditors, there had been a nett loss of $666,000. This was explicable in part on the basis that ASL had changed to equity accounting as from 1 July 1977, but this very step, though apparently permissible in terms of accountancy practice, can suggest a rosier financial picture to the uninitiated than is justified. I accept Mr Thompson's submission that there is no evidence that Mr Anderson had actually seen or read the Annual Report at the time he advised Mr Finlay, but there is no reason to suppose that the Report or the information in it was not readily available to him.
4.During the 4 year period prior to 1978, ASL had incurred heavy trading losses amounting to approximately $23,000,000 with a concomitant dramatic decline in reserves to a dangerously low level.
5During the financial year ending 30 June 1978, Ansett Industries Ltd had injected $7,000,000 in capital into ASL by taking up cumulative preference shares in the company. However dividends payable on such shares had been deferred. If paid as due, these dividends would have increased ASL's loss for that financial year to approximately $1,300,000.
Taken collectively, it seems to me that these factors indicate that ASL was an ailing company which may have survived if continuing support from Ansett could be guaranteed but probably not otherwise. As it transpired, such continuous support was not forthcoming and I do not think Mr Anderson was entitled to assume that it would be. On the basis of ASL's performance in the four or five year period prior to its eventual failure, Mr Anderson was not entitled, simply because of some encouraging signs, to assume that the company had stabilised, and had returned or was returning to prosperity of such a kind that it was a fit recipient for the investment of large sums of money by way of unsecured loan. In failing to heed the available evidence and in failing to warn the plaintiff of the position of ASL before advising the deposit of funds with ASL as he did, I think that Mr Anderson breached his duty of care to the plaintiff and was negligent.
Defence counsel submitted that there was no acceptable evidence that the investment made by the plaintiff and his former wife is now valueless. The simplest method of proving this point may have been to call the Receiver of ASL but there was evidence from Mr Chandler, Mr Calvert, Mrs Hardie and the defendant Mr Anderson himself, from which the clear and inescapable inference can be drawn, (especially in the absence of evidence to the contrary), that ASL is not and has not been in a position to pay any sum, either in full or by way of dividend to its unsecured creditors since it went into receivership Nor is there any reasonable expectation that it will be in such a position in the future although it is not formally in liquidation at the present time.
Therefore, I accept that the plaintiff has sustained a loss and that he has done so as a result of negligent advice proffered by the defendant Anderson. It was not suggested that Mr Anderson was acting other than as a member of the firm of Rowlands, Anderson and Hine when he gave the advice, nor I think, could such a contention be established in the light of my findings. Consequently the firm is liable.
I turn now to the question of damages. The plaintiff's counsel disclaimed any entitlement in his client to interest under the limited provisions of s34 or s35 of the Supreme Court Civil Procedure Act 1932 and it is completely obvious that such a claim could not succeed. He submitted, however, that as the investment was contemplated by both the plaintiff and Mr Anderson as likely to produce 11% interest per annum, it would be appropriate to award damages calculated at 11% per annum in addition to the capital sum lost. Appropriate it may be, but in my opinion such a claim cannot succeed at common law in the circumstances of this case. The funds which the plaintiff caused to be placed with ASL were not intended as a long term investment. They were to be employed in some alternative venture in Queensland when the time was ripe. On the brief description given by the plaintiff of what he and his former wife had in mind, it may be surmised that such an investment may have had speculative features and may have depended for profitability upon capital gain, rather than production of income. Furthermore, though modest by current levels, an interest rate of 11% per annum in 1978 was attainable only upon a loan such as that in fact made to ASL with a high level of inherent risk. In light of these considerations and the dearth of any authority which suggests that interest is recoverable in circumstances such as the present, I cannot see that the plaintiff is entitled to interest upon his loss. Furthermore, for reasons already discussed, his measure of loss is not necessarily one half of the invested sum. The fact that his claim is founded upon "expectation of" as distinct from "entitlement to", the funds, puts his claim into a category of damage which may be susceptible to discounting for contingencies. If for example, his wife had maintained that the plaintiff had made a gift of the funds to her for her own exclusive use he would have been very hard pressed to establish a resulting trust of the funds in his favour – the more so because of the anticipated tax benefits which motivated the notional donation of the funds to her for investment purposes (see Gascoigne v Gascoigne (1918) 1 KB 223 and In Re Emery's Investment Trust (1959) 1 Ch 410). Similar factors were referred to by Richardson and McMullin JJ in Gartside's case in the passages I have quoted above and make it clear that in an appropriate case based upon "expectation" a substantial discount may be called for.
Nonetheless, I think this is a case in which no discount for contingencies should be applied. As the evidence has shown, his former wife always was and still is, prepared to acknowledge the plaintiff's fair expectation of a half share in the capital invested and I am satisfied that had it not been lost, she would have fully recognised and complied with an obligation to pay or credit him with such a sum.
Consequently, I allow the plaintiff's claim in the amount of $7,500 and judgment will be entered in his favour for this sum.
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