Fode v Stinton - [2000] WADC 291

JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CIVIL

LOCATION: PERTH

CITATION: FODE -v- STINTON [2000] WADC 291

CORAM: O'BRIEN DCJ

HEARD: 10-13, 17 & 19 OCTOBER 2000

DELIVERED : 14 NOVEMBER 2000

FILE NO/S: CIV 166 of 1998

BETWEEN: LENIN CON FODE
Plaintiff
AND
GARY COLIN STINTON
Defendant

Catchwords:

Negligence - Plaintiff claims that he and defendant arranged for plaintiff to borrow funds and for defendant to arrange on lending - Alleged breach of duty of care in failing to comply with terms of arrangement - Held no duty of care and no breach - Claim pursuant to s 10 of Fair Trading Act 1987 - Held no relevant representations - Not in course of trade or commerce - Claim of breach of fiduciary duty - Even if fiduciary duty existed, no breach - Turns on own facts

Legislation:

Fair Trading Act 1987

Result:

Plaintiff's action dismissed

Representation:

Counsel:

Plaintiff: Mr I L K Marshall
Defendant: Mr P A Kyle

Solicitors:

Plaintiff: Stables Scott
Defendant: Kyle & Company

Case(s) referred to in judgment(s):

Briesse v Woolley (1954) AC 333
Jaensch v Coffey (1984) 155 CLR 549
Re Ku‑ring‑gai Co‑operative Building Society (No 12) Ltd (1978) 36 FLR 134

Case(s) also cited:

Arcadi & Anor v CML Assurance Society Ltd & Anor (1984) ATPR 40-473
Ash v Hutchinson & Co (Publishers) Ltd [1936] Ch 489
Bourhill v Young (1943) AC 92
Bryan v Maloney (1995) 182 CLR 609
Dare v Pulham (1992) 148 CLR 658
Dominion Insurance Co of Aust Ltd v Finn, unreported; SCt of NSW; No 1308 of 1984; 18 December 1997
Gala v Preston (1991) 172 CLR 243
Hedley Byrne & Co v Heller & Partners Ltd (1964) AC 465
Hill v Van Erp (1997) 188 CLR 159
Magna International Pty Ltd v Westpac Banking Corporation (1992) ATPR 41-161
MLC Assurance Company Ltd v Evatt (1968) 122 CLR 556
Nocton v Lord Ashburton (1941) AC 932
R-registered Trademarks "Certina" (1970) 44 ALJR 192
State of Western Australia v Wardley Australia Ltd & Anor (1991) ATPR 41-131
Sutherland Shire Council v Hayman (1985) 60 ALR 155
Weitmann v Katies Ltd & Ors (1977) ATPR 40-041

O'BRIEN DCJ:

The plaintiff's claim

The plaintiff claims that in November 1991 the defendant offered to arrange a loan to the plaintiff using the security of the plaintiff's house ("home loan") and then on lend the loan moneys to another ("the arrangement"). The on lending was to be for a period of one year, properly and adequately secured with the interest payable to the plaintiff to be sufficient to pay the interest which the plaintiff was liable to pay consequent on his home loan. These transactions were arranged because the plaintiff owed a debt to Geneva Finance ("Geneva") and wanted to protect his private residence ("house") from any action Geneva might take to recover the debt. I shall detail this arrangement later.
The plaintiff's claim is grounded in three causes of action.
First, he claims that by reason of the arrangement, the defendant owed him a duty to ensure that the loan moneys were on lent in accordance with the arrangement. The plaintiff claims that the defendant breached his duty, in essence, by failing to on lend the moneys as arranged.
Secondly, the plaintiff claims that the defendant made false representations that he had complied with the on lending arrangement, and those representations were misleading or deceptive and were likely to mislead or deceive contrary to s 10 of the Fair Trading Act 1987.
Thirdly, the plaintiff claims that the defendant owed the plaintiff the obligations of a fiduciary. In this regard, he had an obligation to put into effect the terms of the arrangement and not to put himself in a position where his interests conflicted with his obligations to the plaintiff. The plaintiff claims that the defendant breached his fiduciary obligations by on lending the loan moneys without security to Sedan Holdings Pty Ltd ("Sedan"), a company owned by the defendant and that Sedan then on lent the loan moneys to another at a profit to Sedan, thereby placing the defendant "in conflict with his obligations to the plaintiff".
The plaintiff claims that he has been put to loss, expense and damage as a result of the defendant's breaches.

Background

The plaintiff is now a 62-year-old self‑employed roof plumber. He left school when he was 13 years old, subsequently completing an apprenticeship as a sheet metal worker and roof plumber. Over the years, he built up a successful business. In 1989 or 1990, the business went into voluntary receivership. It seems that the plaintiff got into financial difficulties as a result of business dealings which failed. At a date unknown, the plaintiff had entered into some sort of tax minimisation deal with Geneva which also went into receivership. The plaintiff owed Geneva $150,000. The receiver manager, Mr Peter Quigley, was pursuing the plaintiff for this sum. Geneva issued a writ on 17 December 1991.
In the meantime, the plaintiff and defendant had struck up a friendship through membership of the same golf club. The plaintiff said the defendant would pick him up and take him to and from golf. They never socialised outside of that. However, its does seem that they did attend golf tournaments overseas and interstate together. The plaintiff said that "down the track", the defendant told him that he was a "broker". He said that the defendant also told him that he had been a school teacher at one time. The plaintiff purported to be impressed by that, as school teachers "have brains".
The defendant described himself as a business consultant. On occasions, he said that he worked out of the offices of a licensed finance broker, but he was not licensed himself. I note that when he witnessed the debenture discussed below, that he recorded his occupation as "finance broker".
The plaintiff believed that, as a broker, the defendant would be able to arrange loans. The plaintiff said that he did not have a clue how to do that as people in the office always did that for him. The plaintiff said that he trusted the defendant because he was a broker.
Their relationship developed to the point where the plaintiff told the defendant of his financial concerns and of the debt to Geneva. At some stage, the plaintiff told the defendant that his house was unencumbered.
The plaintiff instructed a solicitor, Mr Ross Harrison, to act for him in connection with the Geneva litigation. The plaintiff said that he tried to do a deal with Mr Quigley to settle the litigation but was unsuccessful. Thereafter, the plaintiff agreed to a suggestion that one way of avoiding the sale of his house in satisfaction of the Geneva debt would be to encumber it and to on lend the loan moneys through a third party.
The following is clear from the evidence. The defendant assisted the plaintiff to apply for a home loan for $175,000 through Richards Lyon Ltd ("mortgage bankers"). Richards Lyon arranged the home loan. The mortgagee was Permanent Custodians. Security for the loan was the plaintiff's house in Karrinyup. The term of the loan was for three years. The interest rate was 12.15 per cent. The repayments were around $1,770 per month. The loan moneys of approximately $171,000 (the balance after fees were deducted) were paid into Sedan's bank account. The mortgage to Permanent Custodians was registered on the certificate of title on 10 March 1992 and discharged on 22 February 1995. The plaintiff and the defendant arranged that the loan moneys would be on lent with security protecting the plaintiff's funds and that the interest rate would be sufficient to cover the interest to be paid on the home loan to the plaintiff by Permanent Custodians.
Sedan then on lent the plaintiff's loan moneys to Lena Developments Pty Ltd ("Lena") for a period of three years. Lena was a company owned by a Mr and Mrs Cvetkoski. The total loan to Lena was for approximately $228,000. According to the defendant, around $171,000 was the plaintiff's money and the balance was lent by the defendant and Sedan. The loan was effected by lending the Macedonian Society $70,000 and lending the balance of the funds to the Cvetkoskis for the purpose of purchasing a liquor store. Lena's repayments on the loan to Lena were sufficient to pay the interest on the home loan.
The security which the defendant arranged for the loan to Lena was a debenture, a caveat over a property owned by the Cvetkoskis and an assignment by Mr Cvetkoski to Sedan of a debt owed to Mr Cvetkoski by the Macedonian Society. The defendant conceded that it was the debenture which constituted the security for the plaintiff's moneys. The security is discussed in more detail below.
Lena did not repay all the loan. By 1995, Lena had either gone into liquidation and/or was not trading and the Cvetkoskis had become bankrupt.
After three years, the plaintiff became liable to repay the loan from Permanent Custodians. In order to do this, he took out a loan from St George Bank as Lena had not repaid the loan from Sedan. The plaintiff borrowed $230,000 from the St George Bank ("the bank"). This included $50,000 which the plaintiff used for personal requirements. The balance was used to repay Permanent Custodians. The security for the loan was the plaintiff's house in Karrinyup. The mortgage to the bank is dated 22 February 1995 and was registered against the title to the house on the same day. The bank loan has not been repaid in full.

Observations on the evidence

By way of preliminary comments, I observe that the evidence was far from complete. Documentation critical to evidencing the various transactions was not adduced in evidence. That documentation included the letter to the plaintiff from Richards Lyon giving final approval of the home loan, the mortgage to Permanent Custodians, Sedan's bank statements and the original debenture which both parties considered supported various aspects of their respective cases. These documents should have been discovered or, if not, could have been subpoenaed. The plaintiff did not call the Cvetkoskis whose evidence, it is reasonable to infer, would shed some light on the role of Sedan and the defendant in arranging the loan to Lena and on the plaintiff's knowledge about the detail of the loan. Further, there was evidence that in February 2000, the defendant gave the plaintiff two cheques each in the sum of $500 which were ultimately dishonoured. Neither the plaintiff nor the defendant gave detailed evidence about the circumstances giving rise to the meeting between the two when the cheques were handed over in February 2000 when this litigation had been on foot for at least two years. The plaintiff relied upon the cheques as revealing a consciousness on the part of the defendant of his indebtedness to the plaintiff arising from the arrangement. However, the plaintiff's evidence about the cheques was very vague.
The case was argued on the basis that the on lending was to Lena, not to Sedan. The pleadings are somewhat confusing in this regard as the breaches alleged in negligence and of the fiduciary duty refer to an on lending to Sedan without security.

The evidence

The plaintiff testified that he entered into an arrangement with the defendant, whereby the defendant would arrange a loan for 12 months through Richards Lyon to the plaintiff using his house as security. The defendant was then to arrange through Richards Lyon to on lend the funds to another at an interest rate which would cover the interest payments on the home loan. The plaintiff testified that this was to be done "with all the securities of a first mortgage". This was also to be for 12 months only. The plaintiff testified that there was no mistake that the home loan was to be for 12 months only because the defendant told him that, after six or seven years, the receiver of Geneva would, in effect, be statute barred from recovering the Geneva loan. The plaintiff was not able to explain how this would occur and purported not to understand the advice, but he acted on it because he trusted the defendant and the defendant knew more about these sorts of matters than he did. The plaintiff was adamant that the arrangement was for 12 months and no longer, and that he made that clear to the defendant. The whole arrangement was to encumber the house to make it less attractive to the receiver as an asset to be used in satisfaction of the Geneva debt.
The arrangement was made after the plaintiff and the defendant had attended a meeting with the plaintiff's solicitor, Mr Ross Harrison. This was in October or November 1991, according to the plaintiff. The defendant asked him if he had any property in his name and the plaintiff told him about his house. The defendant then told the plaintiff that he ought to "lock it up", to get some "breathing space".
The defendant testified that he went to a meeting with Mr Harrison and the plaintiff at the plaintiff's request. The purpose of the meeting was to discuss the Geneva debt. The defendant testified that the main point of the meeting was to discuss a way of protecting the plaintiff's personal assets. The up shot of the defendant's evidence is that Mr Harrison advised that one way of protecting the house would be to encumber it and then on lend the proceeds through a third party. The defendant's company was mooted as a possible third party during the discussions, although probably not named. The term of three years was decided upon because Mr Harrison told the plaintiff and the defendant that the Geneva problem would not be solved for between one and three years. The defendant was adamant that Mr Harrison was the architect of the scheme.
The plaintiff denied discussing the protection of his house from the receiver with Mr Harrison. His account was that the suggestion about encumbering the house came from the defendant after the meeting with Mr Harrison. The only discussion about the house in Mr Harrison's presence occurred when the fact that the house was unencumbered was mentioned and Mr Harrison said, in effect, that it was "good" that the plaintiff had an unencumbered house but that it was also "bad" because the receiver could have recourse to it in pursuing the Geneva debt.
Mr Harrison testified on behalf of the plaintiff and denied that he gave the advice as outlined by the defendant. I do not need to explore this issue in depth, save to say that I accept Mr Harrison's evidence. Mr Harrison does not have a filenote recording the meeting. All participants in the meeting were recalling a conversation which took place nearly nine years ago. It may be that there were some discussions about protecting the plaintiff's personal assets. However, whether Mr Harrison suggested the course of action which led to the arrangement or whether it arose out of discussions between the plaintiff and the defendant, seems to me to be beside the point. The fact is that an arrangement was made between the parties. The defendant's insistence that Mr Harrison suggested the whole scheme might be relevant to the defendant's credibility on that issue and generally is otherwise not of any probative weight.
The defendant admitted, in an answer to an interrogatory, that he did offer to assist the plaintiff in obtaining finance using his house as security. However, this "offer" must be considered in the light of the relationship between the defendant and the plaintiff and in the context of a number of discussions they had about the plaintiff's financial position. The defendant said that he offered in response to the plaintiff's request for assistance. In my view, the reality was that the defendant and the plaintiff discussed the arrangement and the defendant offered to help.
The defendant testified that the amount of the loan was calculated by reference to the value of the house and the lending criteria of the lender. The defendant suggested the sum of $175,000 and the mortgagee came up with the offer to lend $175,000. The plaintiff testified that he had no idea how much the home loan was to be and only found out much later that he had borrowed $175,000. Further, he believed that the term of the loan was 12 months. He also had no idea of the identity of the third party borrower of the loan moneys, nor any other details about the on lending transaction. As far as the plaintiff was concerned, he wanted the loan moneys invested in "gilt", "blue chips", he thought the security would be a "fixed mortgage".
The plaintiff handed over the duplicate certificate of title to his house to the defendant. He said that he never saw any of the loan moneys and never made any interest payments. He said that the interest payments were arranged by the defendant.
The defendant testified that he discussed the whole arrangement with the plaintiff. The discussions included the identity of the borrowers, the two component aspects of the on lending, the return on the investment and the types of security which would be provided. The defendant said that he also investigated and discussed with the plaintiff investing the loan moneys with the Energy Credit Union. The defendant said that he discussed the relative risks of each option with the plaintiff. However, the investment in the credit union was not acceptable to the plaintiff as the interest rate was not high enough to cover the interest which he was liable to pay on the loan from Permanent Custodians. The plaintiff denied that this option was discussed, saying that he was not interested in the interest rate as along as the home loan repayments were covered.
The plaintiff maintained that the defendant took control of the whole deal. He never had any dealings himself with Richards Lyon. The defendant concedes that he controlled the payments to Richards Lyon, that he administered the loan to Lena, and that he was looking after his own and the plaintiff's investment. The plaintiff testified that he never read any of the documents which the defendant presented for his signature. He trusted the defendant and did not "bother any more with it". This was the way he had conducted all his business dealings as he was not educated and left financial matters to trusted employees. In his business, he employed a general manager, a manager, an accountant and a secretary who had run the office for 24 years.
The plaintiff testified that, in any event, after 12 months elapsed, he asked the defendant to return his certificate of title. The defendant told him that he had borrowed the money for three years but that obtaining the return of the certificate of title was "not a problem". About three months later, the plaintiff again asked the defendant for his certificate of title. It was then that he discovered that the home loan was for $175,000. The defendant also told him that the plaintiff's loan was for a period of three years as was the on lending, which had been invested in a liquor store. The plaintiff testified that he told the defendant that was not the deal and that he wanted his money back. The defendant said "not a problem". The defendant testified that the plaintiff could well have asked for his certificate of title back after 12 months but, if he did do so, he would have explained to the plaintiff that the loan was for three years.
However, on the plaintiff's evidence, it seems that the plaintiff resigned himself to the fact that the loans were for three years and he would just have to wait. In the meantime, he was not paying any interest and believed that the interest on the home loan was being off set by the repayments from the on lending. He believed that the deal was not costing him anything and that he would just have to "sweat it out".
The plaintiff testified that, at some stage, about two years after the initial loan, he discovered that the home loan moneys went to Sedan rather than through Richards Lyon to a first mortgagor. He testified that he had not authorised the defendant to invest this amount in Sedan. However, the evidence does not support a finding that the loan moneys were "invested" in Sedan. The most that can be said is that the plaintiff authorised the disbursement of the loan moneys to Sedan. I discuss this later in these reasons.

The plaintiff was shown an original of a loan approval document dated 19 November 1991 from Richards Lyon addressed to him at his home address which he denied receiving at the time, saying, in effect, that the first time he saw it was when his solicitors showed it to him. This document set out the terms of the loan including the amount to be borrowed ($175,000) and the maturity date (1 April 1995). The guarantor was to be Gnangara Metals Pty Ltd, a company owned by the plaintiff and two others. The document advised that if the plaintiff wished to accept the offer, an "attached letter" should be signed and returned with the requested fee and other documentation.
The plaintiff was also shown a copy of a letter dated 4 March 1992 from Richards Lyon, also addressed to him at his home address which referred to "the final approval dated 10 February 1992" and confirmed the interest rate at 12.15 per cent and the repayments of $1,772.94 per month. The letter requested that the attached acknowledgment be signed and returned and that "settlement cannot occur until the final signed acceptance has been returned to" Richards Lyon. This copy letter has a copy attached of an acknowledgment of the interest rate and that "all other terms and conditions contained in [the] notice of final approval dated 10 February 1992 remain unchanged". The acknowledgment bore the signature "L Fode" and was dated 5 March 1992.
The plaintiff testified that he was not sure that it was his signature and denied seeing those documents at the time of their date. He said "I just signed things, unfortunately". The defendant identified the plaintiff's signature and testified that he had discussed all aspects of the loan with the plaintiff.
The plaintiff had built up a successful business over many years. At its peak, it employed between 100 and 130 people and had an annual turnover of $16 M. The plaintiff had business projects in Western Australia and interstate. He had acquired a number of real estate properties and numerous vehicles, had been involved in the nightclub and liquor store businesses, he had family and other trusts and a number of companies. He admitted signing the financial statements of his companies as a director, but said that they were prepared by one of his staff and that he never read them. I find the latter proposition unbelievable, given the nature and extent of the plaintiff's business dealings. Without saying so in terms, the plaintiff presented himself as a person who knew little about the financial and legal requirements of business and simply signed whatever his staff put in front of him without reading the documents. If, indeed, he did that, then he did so at his peril. I do not accept that the plaintiff is as naive and disinterested in the management of his financial affairs as he portrayed himself to be. The plaintiff's evidence of the arrangement, particularly of the on lending, was vague and lacking in detail. I reject his assertion that he "wouldn't have a clue how to go about" borrowing money. Having seen and heard the plaintiff give evidence, I am of the view that he feigned ignorance of his financial affairs, attempting to erect a smokescreen as to his real state of knowledge.

Knowledge of the term and amount of the loan

In my view, Richards Lyon would not have arranged the loan to the plaintiff unless he had signed the final loan approval document. That document was not in evidence. No one from Richards Lyon gave evidence. However, I accept the defendant's evidence that the signature on the acknowledgment dated 5 March 1992 was the plaintiff's. I cannot accept the plaintiff's evidence that he had not seen the approval letter from Richards Lyon to the plaintiff dated 19 November 1991. He may not have read it, or, if he had read it, may not have taken in all the details. However, it defies belief that the plaintiff was not aware of the amount of the loan or the term of the loan. Even though the loan documentation and the Permanent Custodians mortgage documents of his house were not in evidence, the plaintiff must have signed these documents, otherwise the loan which the plaintiff now accepts was for $175,000 and for three years would not have been made. It is not to the point that he may not have read the documents. Further, the plaintiff specifically pleads that the defendant offered to assist him to obtain an advance of $175,000 (SOC par 3.1(a)).
The plaintiff also denied seeing a letter from the defendant dated 21 April 1992. This letter is discussed below but it basically was advice from the defendant as to the loan repayments. In summary, I have no doubt that the plaintiff knew the amount and the term of the home loan at the time he took it out.

The plaintiff's knowledge that Sedan received the loan moneys

The plaintiff testified that he found out years after the loan that the money had gone to Sedan. The defendant testified that the plaintiff authorised the disbursement of the moneys to Sedan.
In his statement of claim, the plaintiff pleaded that, in reliance on representations made by the defendant that he had arranged for the sum to be on lent through the agency of Richards Lyon on terms that it would be properly and adequately secured and would be repaid at the end of 12 months, he, inter alia, "made over the sum to the defendant in order that it could be on lent as aforesaid". In response to the defendant's request for further and better particulars, namely, as to how the plaintiff made over the sum to the defendant as alleged in the statement of claim, the plaintiff responded "by signing the mortgage document and loan documentation and authorising Richards Lyon to make the advance to the defendant or at the defendant's direction". In his evidence, the plaintiff said that he did not do that, to his knowledge. He testified that his understanding was that Richards Lyon would invest the sum and that the defendant "said it was going to Richard (sic) Lyon, that they would invest it with a first mortgage over my house and I thought for a year everything was okay and I never followed it up".
The plaintiff denied that he authorised the defendant to invest the loan moneys. However, the plaintiff agreed that Richards Lyon would not hand over the funds to anyone without his authority. The irresistible inference is that the plaintiff did authorise Richards Lyon to disburse the sum to Sedan.
I, therefore, find that the plaintiff knew the amount and period of the home loan and that he authorised disbursement of the loan moneys to Sedan.

The plaintiff's knowledge of Sedan's on lending

The plaintiff denied all knowledge of the on lending. He testified that he left the whole deal to the defendant and only found out that the moneys had been on lent well after the event.
When shown a copy letter addressed to the manager, Fode Nominees Pty Ltd dated 29 May 1995 and signed by G C Stinton, Sedan Holdings Pty Ltd, which set out the details of the investment with S Cvetkoski/Ocean Reef Liquor Store/Macedonian United Society, the plaintiff said that he did not receive the letter and did not agree to the investment detailed therein. However, according to the plaintiff, by then, he knew that his $175,000 had been invested in a liquor store because the defendant had told him so. The defendant testified that he sent the letter to the plaintiff as the Macedonian Society were to restructure their facility and the loans from the plaintiff and himself were to be repaid from this restructuring. The defendant denied a suggestion put by the plaintiff's counsel that the letter was written simply to "muddy the waters" or to justify his position.
The defendant testified that he discussed all aspects of the on lending with the plaintiff. Mr Peter Eley, a business and financial consultant, testified that the plaintiff consulted him in 1994 about his financial affairs. He testified that when the plaintiff came to see him, the plaintiff explained the detail of the mortgage of his house and the on lending of the loan moneys to the Cvetkoskis. He was happy with the transaction because it achieved his purpose of protecting his house from his creditors. Mr Eley testified that he saw the plaintiff alone and also with the defendant. Mr Eley testified that the plaintiff told him that he had full knowledge of the transaction and approved it. Mr Eley said that the plaintiff told him that he was aware that the money had been on lent through the defendant's company to the Cvetkoskis. The plaintiff told him that he became unhappy with the deal once there was some issue with the repayments.
On the plaintiff's account, when he saw Mr Eley, he then knew the details of the transactions as, by then, the defendant had told him. The gist of Mr Eley's evidence is that the plaintiff told him that he knew the detail of the transactions at the time they were done and that he approved them. The plaintiff denied that he told Mr Eley this. Mr Eley was not cross‑examined about the state of his memory as it related to conversations he had six years beforehand. It was simply put to him that the conversations did not take place. He was unshaken in cross‑examination. I accept Mr Eley's evidence that the conversations referred to by him took place. I also accept his evidence that the plaintiff's concern was directed towards securing repayment of the loan and that he made no complaint about the structure of the transactions.
In support of his evidence that the plaintiff knew the detail of the transactions at the time they were transacted, the defendant relies on a copy of a debenture dated 15 March 1992. The original was not produced and no explanation was given as to its whereabouts.
The debenture was between Lena as mortgagor, Fode Nominees Pty Ltd as mortgagee and the Cvetkoskis as guarantors. The mortgaged property was "all the undertaking and all the property, assets and rights of the mortgagor whatsoever and wheresoever both present and future including the goodwill of its business and its called but unpaid and uncalled capital."
The time for payment of the principal sum was 30 September 1994. No principal sum was specified. A prior charge was listed as a debenture in favour of the National Australia Bank Ltd ("NAB") dated 11 March 1992. The debenture appears to be dated either 15 or 18 March 1992. The date is not clear. The defendant said that he inserted the date and he did not dispute that it was 15 March. The debenture was signed by a director of Lena, the Cvetkoskis as guarantors (witnessed by the defendant) and by the plaintiff and his wife as directors of Fode Nominees. The common seal of Fode Nominees is affixed. It seems that Fode Nominees was the trustee for the Len Fode Family Trust. It did not trade and the plaintiff testified that he did not have a cheque account for the company. The plaintiff could not recall affixing the common seal, said his accountant had custody of it and conjectured that it could have been affixed after he signed the debenture.
The plaintiff was reluctant to identify his and his wife's signature, but ultimately did so. He claimed not to have seen the document in March 1992 and that if he did sign it, he was unaware of its contents. The defendant testified that the debenture was drawn by the plaintiff's accountant, Mr John Edwards, on the defendant's instructions and given to the plaintiff so that he could obtain advice about it if he wished.
The defendant was referred to his letter to Lena dated 17 March 1992 outlining the interest payments on the funds "provided by Fode Nominees Pty Ltd". The letter states that the "loan will be secured by a registered charge over the assets of Lena ... and further guaranteed by Lena and yourself". It goes on to say "... I have enclosed all documentation for your signature". That latter statement indicates that the security documents were sent to Lena for signature on 17 March 1992, in which case the debenture could not have been signed on 15 March 1992 (at least not by Lena and the Cvetkoskis). However, the date on the debenture is unclear, as I have said.
The plaintiff's counsel tendered the debenture for two reasons. The first was to establish that it did not provide security to the plaintiff for the moneys that Sedan had on lent to Lena. I discuss this below. The other reason was to establish that the document was a "fraud", the term used by counsel for the plaintiff. It was put to the defendant that, because the NAB debenture was not registered until 16 March 1992, the debenture could not have been signed on 15 March 1992 and was not a "genuine document and was manufactured" by the defendant as a self serving document to support his version of the arrangement. The defendant denied this. This latter point is tantamount to an allegation of fraud, as was reluctantly conceded by counsel for the plaintiff, and was not pleaded. In any event, I am not satisfied that the document was not "genuine". I do not intend to consider that submission further.
Putting aside the issue of whether the debenture provides security for the plaintiff's money, I am not satisfied, on the balance of probabilities, that the plaintiff did not see and sign the debenture in March 1992.
Although the debenture did not reflect that actual parties to the on lending, it indicated that Fode Nominees had lent the money to the Cvetkoskis. The plaintiff was, therefore, fixed with some knowledge of the involvement of the Cvetkoskis and Lena.
The defendant referred to a letter dated 21 April 1992 from Sedan to the plaintiff at an address in Landsdale purporting to confirm arrangements for the repayment of the plaintiff's loan through Richards Lyon. There was no evidence concerning the Landsdale address. The letter states "the amount credited to the ANZ account from the funds placed on fixed mortgage will be $2,178.80 which will leave an excess of $402.86 per month". The plaintiff submitted that this letter supported the claim that the arrangement was that the on lending was to be secured by fixed mortgage. The defendant purported not to be familiar with the letter. He said it could be a draft and/or prepared by someone else in his office. It is not signed by him and bears initials by way of signature which are not his.
On close reading of the letter in its context and totality, it makes no reference to the on lending and is concerned only with the plaintiff's loan through Richards Lyon. My interpretation of the letter is that it confirms that the first payment will be paid from the plaintiff's ANZ account and the amount of $2,178 refers to the first payment draw down from the Permanent Custodians loan. In any event, given that the plaintiff denies receiving the letter and the defendant cannot remember it, I am not satisfied, on the balance of probabilities, that the letter is referring to the on lending. Accordingly, it is not probative in determining whether there was a representation by the defendant that the moneys were on lent "on fixed mortgage".
The plaintiff's understanding of the reason for the encumbering of his house and the on lending of the funds was to make his house unattractive to Geneva's receiver. It is unlikely that receiver would be deterred from pursuing the debt of $150,000 if, in fact, the plaintiff received the proceeds of the home loan. Those funds would easily be traceable by the receiver. Accordingly, given that the whole rationale of the "arrangement" was to protect the house from the receiver, I infer that the on lending was through Sedan in order to put the receiver off the scent. Indeed, that was the tenor of the defendant's evidence. The plaintiff testified that, at the time, he was preoccupied with his own receivership and was attending to matters connected with that. In my view, the plaintiff did trust the defendant completely. Perhaps he did sign documents without reading them. However, it does not follow that he did not know the nature of the transactions. Even if he did not, the fact is that he signed the documents and is taken to have knowledge of their contents. It does not follow that the defendant did not keep the plaintiff advised of the nature and progress of the transactions.
The plaintiff denied receiving or sighting at the relevant time any documentation which refers to the on lending and any other document which would fix him with the knowledge of the whole arrangement. The plaintiff denied seeing at the time they were dated a number of documents such as the debenture dated March 1992, the loan approval letter from Richards Lyon to the plaintiff dated 19 November 1991, the letter from Richards Lyon to the plaintiff dated 4 March 1992, the letter from Sedan Holdings to the plaintiff dated 21 April 1992 and a settlement statement relating to the home loan from Murie & Edward (solicitors) to the plaintiff dated 10 March 1992. He gave no explanation as to why he did not receive or see these documents, nor were witnesses questioned with a view to providing any explanation as to why the plaintiff did not see or receive the documents. In my view, the plaintiff must have received or at least seen those documents which were addressed to him at his home address. In the absence of any explanation as to why the plaintiff did not receive or see these documents which would fix him with some knowledge as to the home loan and on lending, I cannot accept his evidence that he did not do so.
I am, therefore, of the view that the plaintiff knew that Sedan had on lent the funds.

The bank loan

The plaintiff had to repay the home loan to Richards Lyon in or about February 1995. The defendant then suggested to him that he would have to refinance the loan in order to make the repayment to Richards Lyon. It was then that the plaintiff said the defendant informed him that the entities to whom the money had been on lent "had gone into bankruptcy". The refinancing was arranged by the defendant through the bank. The bank paid out the loan from Permanent Custodians.
Initially the interest on the bank loan was not paid by the plaintiff. The plaintiff testified that three years ago, those interest payments stopped and he began to make payments of about $1,600 to $1,700 a month. At one stage, the plaintiff suggested to the defendant that the entities which had defaulted on the loan take over the bank debt. He was told by the defendant that it was not that simple, but assured him that he would get his money repaid.
The plaintiff produced 15 receipts from the bank which revealed that between 12 June 1996 and 16 May 2000, he had paid $44,313.43 by way of mortgage repayments. Some receipts were missing. He produced ANZ bank statements covering a period from February 1992 to 4 April 1996. An examination of those statements does not reveal that any regular debits were made even approximating the required repayments to St George. If the plaintiff personally made the mortgage payments, they must have come from a source other than the ANZ account. There was no evidence of any other bank accounts let alone the source of the payments.

The security

The plaintiff claims that the defendant breached his duty of care to the plaintiff by failing to arrange for the sum to be on lent, inter alia, on proper and adequate security.
A caveat was taken out over the Cvetkoskis' property at Wattle Street, Tuart Hill on 5 July 1994. The caveator was Sedan. Sedan claimed an interest in the mortgaged property by virtue of an acknowledgment of debt dated 19 March 1994 made between Mr Cvetkoski as mortgagor and Sedan as mortgagee. The defendant swore a statutory declaration on 5 July 1994, attaching the letter dated 19 May 1994 which acknowledged indebtedness to Sedan in the sum of $170,000. The letter acknowledges that the $170,000 "can be secured by registered second mortgage over 17 Wattle Street, Tuart Hill and an assignment of the debt owed to myself by the Macedonian United Society (Inc)".

The defendant had to admit that the caveat did not protect the plaintiff's funds but contended that it was done that way because the on lending of the plaintiff's funds had to be done at "arms length". The defendant testified that he gave the "original" documentation to the plaintiff to check and two years later decided to follow it up and register it. The defendant said that the plaintiff's security "was standing along side Sedan Holdings".
It is clear that the plaintiff had no standing at all to take action either pursuant to the debenture to which I have already referred or the caveat. Neither protected his interests. Nor did Mr Cvetkoski's assignment to Sedan of the debt he was owed by the Macedonian Society.
I take the defendant's evidence to be that whilst the caveat did not protect the plaintiff's funds, because Sedan could take advantage of the caveat in case of default on the $170,000 loan, the plaintiff was, in effect, protected because everything had been arranged at arm's length to avoid the Geneva liquidator being able to use the plaintiff's house in satisfaction of the Geneva debt. In other words, the whole transaction was arranged in the way it was to defeat the plaintiff's creditor, Geneva.
As previously mentioned, the plaintiff submitted that the letter dated 21 April 1992 from Sedan to the plaintiff at an address in Landsdale purporting to confirm arrangements for the repayment of the plaintiff's loan through Richards Lyon supported the claim that the arrangement was that the on lending was to be secured by fixed mortgage. I have already found, given that as the plaintiff denies receiving the letter and the defendant cannot remember it, I am not satisfied on the balance of probabilities that the letter is referring to the on lending. It is more probable than not referring to the home loan.
It is clear that the debenture, the caveat and the assignment of debt did not provide security for the plaintiff's $175,000 which was on lent to Lena. However, I am not satisfied on the balance of probabilities that the plaintiff was unaware of the securities arranged by the defendant.

The representation

The plaintiff pleads that the defendant represented to him that he had arranged for the sum to be on lent through the agency of Richards Lyon on terms that it would be properly and adequately secured and would be repaid after 12 months. The only evidence that I can find regarding the alleged representation is where the plaintiff testified as follows under cross‑examination:
"What did you believe was going to happen with the money that you were borrowing?
[The defendant] said that he would invest it with Richard Lyon (sic) and I said "Okay. Are they a good firm?" He said "Yeah, no problems." I didn't know the money was going from Richard Lyon (sic) onwards at the time."
The plaintiff testified that he believed this is what would happen and that he relied upon the representations. However, this is not a representation of fact but a promise to do something. The "representation" and the plaintiff's reliance upon them are pleaded as triggering a duty of care on the defendant's part to the plaintiff and the claim under the Fair Trading Act.
Even if those statements can be categorised as representations, then surely the plaintiff would expect to see some documentation evidencing the on lending. After all, it was his money that was being lent. Who did he think would sign the loan documentation? Surely he did not think that on lending could be arranged without him having to be involved in any way whatsoever, given his understanding that the loan was to be properly and adequately secured?
I have already found that the plaintiff knew of the broad details of the on lending when it occurred. I do not, therefore, accept that the defendant made the representation as claimed.
Were the loan moneys lent to Sedan? Did Sedan profit from the on lending?
There is no evidence that the loan moneys were lent to Sedan. I have already found that the plaintiff authorised Richards Lyon to disburse the loan moneys to Sedan for the purpose of on lending to another. That disbursement was not a loan. Further, I am not satisfied on the balance of probabilities that the on lending resulted in a profit to Sedan. The defendant sought to explain the $402.86 "excess" as being the amount owing to him from the composite loan made to Lena and/or out of pocket expenses he incurred in arranging the transaction on the plaintiff's behalf. The latter explanation was not put to the plaintiff. The defendant's evidence was not very convincing on this point. However, the plaintiff was not able to give any satisfactory explanation as to what this sum represented, other than to allege that it was profit to Sedan.
There is no satisfactory evidence of the interest rate charged to Lena and no evidence of Lena's monthly repayments to Sedan either for the plaintiff's share of the loan moneys, nor the defendant's share. There is some evidence that the repayments were greater than those made by the plaintiff to Permanent Custodians as that loan was repaid until such time as the principal became due and payable at the end of the term. However, the defendant's evidence that part of the loan moneys were lent by him was uncontested. It is reasonable to infer that the Cvetkoskis could have assisted on this point. I am not satisfied that the repayments by Lena which exceeded the repayments of the plaintiff to Permanent Custodians represented "profit" to Sedan.

Liability

I turn now to consider the liability of the defendant under the three causes of action pleaded by the plaintiff. I do so on the basis of the facts as I have found them to be. In summary, they are as follows. The plaintiff and the defendant agreed or arranged that the plaintiff would encumber his house by way of mortgage and the loan moneys would be on lent to a third party. The defendant offered to assist the plaintiff to carry out this arrangement. A mortgage was arranged through Richards Lyon and the loan moneys were disbursed to Sedan on the direction of the plaintiff. The disbursement was not a loan to Sedan. The plaintiff knew of the amount and the term of the loan. Sedan on lent the loan moneys to Lena with the securities as outlined above. The plaintiff knew about this at least in broad terms. The securities did not protect the plaintiff's funds.
The up shot of these factual findings is that all went according to plan, save for the fact that the securities did not protect the plaintiff's funds and, therefore, could not be regarded as "proper and adequate" for that purpose. The whole deal was arranged so that the Geneva debt would not be satisfied by the receiver having recourse to the plaintiff's house. The defendant did not represent to the plaintiff that he had made the representations as pleaded in the statement of claim. The plaintiff put everything in the hands of the defendant. He may not have fully appreciated that, as a matter of law, the securities did not protect his funds, the loan payments received by Sedan. The defendant was in total control of whether the payments were made to offset the plaintiff's loan.

Negligence

The plaintiff pleads negligence on the part of the defendant as follows.
"6.By reason of the matters pleaded in paragraphs 3-5 … [the offer, its acceptance by the plaintiff, the representations and the reliance on the representations] the defendant owed a duty to the plaintiff to ensure that the sum was on lent in accordance [with the] arrangement.
7.In breach of the said duty the defendant:-
(a)failed to arrange for the sum to be on lent on the terms pleaded. [ie for one year, with proper and adequate security and for the interest to cover the home loan]
(b)arranged for the sum to be advanced to Sedan without security; and
(c)thereafter caused Sedan to on lend the sum to another."
I have already found that the representation as pleaded was not made and it, therefore, follows that the plaintiff did not rely upon it. I have also found that there was no arrangement for the funds to be on lent for a period of one year. Therefore, the only foundation on which the duty of care may arise on the facts, as I find them to be, is that the defendant made an offer, accepted by the plaintiff, to assist the plaintiff to obtain a loan for $175,000 and to arrange for it to be on lent on terms that the sum would be properly and adequately secured and that the interest payable by the borrower would be sufficient to pay the interest. The facts constituting the alleged breach as pleaded are proved only insofar that the sum was not on lent with proper and adequate security. As to 7(b), this implies that there was a loan to Sedan. I have found this not to be the case. As to 7(c), the defendant did cause Sedan to on lend the sum to another, but this was with the plaintiff's consent and broad knowledge of the on lending.
Given my findings of fact, the only foundation for claiming negligence on the part of the defendant can be the defendant not arranging securities which protected the plaintiff's funds when they were on lent to Lena. In other words, the plaintiff's case insofar as a duty of care is said to arise, in the context of the facts as I have found them to be, is that by reasons of the offer as I have found it to be and the plaintiff's acceptance of it, the defendant had a duty to the plaintiff to ensure that the sum was on lent in accordance with the arrangement (as I have found it to be). Put this way, the claim would be a claim for breach of contract. However, there was no consideration and the plaintiff concedes that there was no contract between the parties.
The plaintiff's claim can be described thus: The defendant offered to do something for the plaintiff; the plaintiff accepted the offer; the defendant did not do what he offered to do, namely, ensure that the security for the on lending was proper and adequate. Despite the written submissions on behalf of the plaintiff in which it is said that the defendant gave negligent advice upon which the plaintiff relied, the plaintiff did not mount a case based on reliance on the professional advice of the defendant. It is not pleaded and does not arise on the facts.
The plaintiff relies on the "neighbour principle" as enunciated by the High Court in a number of decisions commencing with Jaensch v Coffey (1984) 155 CLR 549 [at 579]. The line of cases established that a duty of care arises under the common law of negligence only where there exists a relationship of proximity between the parties with respect to both the relevant class of act and the relevant kind of damage.
The plaintiff in effect submits that the defendant, having offered to do something for the plaintiff which offer the plaintiff accepted, it was reasonably foreseeable that if the defendant did not arrange proper security for the on lent funds and if the borrowers defaulted on the loan, the plaintiff would suffer the loss he claims. However, it seems to me that it would have to have been reasonably foreseeable that Lena would default and that, as a result of the default, if the security for the loan was insufficient, that the plaintiff would lose his money. The evidence of the defendant was that he took steps to ensure that Lena was a sound investment. He discussed with the plaintiff the return on money, the use to which Lena would put the loan and the amount of "equity" Lena had. The plaintiff's case concentrated on the adequacy of the securities rather than on the steps the defendant took to ensure that Lena was a sound investment. In my view the plaintiff has not proved that the defendant did not take reasonable steps to ensure that Lena was a sound investment.
The fact is that the plaintiff signed a debenture which purported to protect his interests. The debenture was part of the security arranged for the Lena loan. In the absence of a claim based on reliance on negligent advice, I cannot see how a duty of care arises on the part of the defendant when the plaintiff must be taken to know that he signed a document which was supposed to be for his benefit. That the debenture did not protect the plaintiff seems to me to be a different issue from the one pleaded.
However, the short answer to the defendant's claim in negligence is that when one looks at the pleadings, it is not negligence which is pleaded, but breach of an agreement falling short of a contract.
I would dismiss that plaintiff's claim in negligence.

Claim under the Fair Trading Act

Given my finding that the representation as pleaded was not made by the defendant, there is no substance to the claim that the representation was false and misleading or deceptive.
The relationship between the plaintiff and the defendant was one based on friendship, not on any professional or business basis. Without deciding the point as it is unnecessary for me to do so, I observe that it is doubtful if the conduct, even if proved, was in the course of trade or commerce. The Act applies (relevantly) to and in respect of supply of services if the services are supplied in Western Australia (s 4(1)(c)). "Services" includes any rights, benefits etc. which are provided, granted or conferred in trade and commerce (s 5(1)). "Trade or commerce" includes any business or professional activity (s 5(1)). The claim alleges in effect that the defendant, in trade or commerce, made a representation that was misleading or false. On the facts as I have found them to be and in the context of the pleadings as they relate to the claim under the Act, it can hardly be said that the representation (even if made as pleaded) was "in trade or commerce" (see Re Ku‑ring‑gai Co‑operative Building Society (No 12) Ltd (1978) 36 FLR 134 at 139‑167).
It was submitted on behalf of the defendant that a claim pursuant to s 10 of the Act is statute barred because s 79(2) provides that an action may be commenced within three years after the date on which the cause of action accrued. In this case the writ was issued on 22 January 1998. On whatever version of the plaintiff's evidence is applied, if he acted on a representation, he did so before 22 January 1995 and time began to run from that date (see Briesse v Woolley (1954) AC 333). In my view, even if the representation as pleaded were proved, the plaintiff's claim under the Fair Trading Act is statute barred.

Fiduciary obligation

The plaintiff pleads that the defendant undertook to put into effect the terms of the arrangement on behalf of the plaintiff and the defendant well knew that the plaintiff relied upon and trusted the defendant to put into effect the terms of the arrangement. Therefore, according to the claim, the defendant owed to the plaintiff the obligations of a fiduciary namely to put into effect the terms of the arrangement and not to put himself in a position where his interests conflicted with his obligations to the plaintiff.
The plaintiff claims that the defendant breached his fiduciary obligations in that contrary to the arrangement "he caused the sum to be lent to Sedan without any security" and, thereafter, the defendant on lent the sum to another at a profit to Sedan and thereby placed himself in conflict with his obligations to the plaintiff.
For the purpose of the argument, I assume that the defendant was in the position of a fiduciary and had the obligations as pleaded. I have already found that the loan moneys were not lent to Sedan. Further, for reasons previously stated, I am not satisfied that Sedan profited from the on lending to Lena.
Accordingly, even if the defendant was in a fiduciary relationship with the plaintiff, the plaintiff has not satisfied me on the balance of probabilities that he breached such fiduciary duty in the manner pleaded or at all.
In this case, the plaintiff wished to arrange his business affairs to achieve a particular result, he did not seek legal advice about the matter, he signed documents without reading them, he was preoccupied with his receivership and failed to take a prudent and reasonable interest in the transactions being arranged on his behalf. The defendant tried to assist the plaintiff as a friend who had some experience in arranging loans. He was clearly out of his depth in terms of the legal ramifications of the transactions and securities he arranged. The whole arrangement was designed to defeat Geneva as the plaintiff's creditor. The convoluted and inept way this was sought to be achieved and the disinterest the plaintiff had in the arrangement bore the sour fruit of financial detriment for the plaintiff. In a real sense, he must take a great deal of responsibility for his plight.

Damages

Although I have dismissed the plaintiff's action, I will deal briefly with the issue of damages claimed. The evidence as to the plaintiff's loss was unsatisfactory as the plaintiff simply testified that he took out a loan from the bank and for the last three years has been paying $1,600 to $1,700 off the loan. The mortgage document (apparently incomplete), the loan approval letter, a number of repayment receipts and a bundle of St George Bank statements were tendered to support the plaintiff's claim for damages.
In his schedule of damages, the plaintiff claims in respect of the bank loan the sums of:
(i)$199,067.98 being periodical payments of principal and interest since 15 January 1995;
(ii)$135,765.98 being the principal sum outstanding to discharge the loan at the date of trial; and
(iii)in relation to the home loan, an order that the defendant account to the plaintiff for the moneys received over and above the payment for the Richards Lyon mortgage for which the plaintiff was liable and an order that the defendant do pay to the plaintiff any amount found due together with interest.
In the alternative, the plaintiff claims the sum of $175,000 plus interest pursuant to the Supreme Court Act from 10 March 1993.
As to par (i), it is not clear whether the payments to the bank included both principal and interest although the bank statements seem to indicate this was the case. The original loan approval document refers to a mortgage for a term of five years only. However, the first bank statement refers to a term of 13 years and 4 months with the term diminishing over time. The mortgage document does not specify to a rate of interest nor to a term.
On the plaintiff's account, he did not pay any "money" until three years ago. Adopting the plaintiff's schedule of damages, the repayments in satisfaction of the loan from 15 June 1997 total $72,024.40. The monthly repayment approximates $1,600 per month. I deduct four months payments to calculate three years payments up until trial. Therefore, it would seem that the plaintiff has paid $65,624.40 in the last three years ie. $72,024.40 less $6,400 ($1,600 x 4 months).
As to par (ii), the plaintiff claims only the balance of the principal sum to be repaid as at the date of trial. There is no claim for interest on this sum.
As to par (iii), there was no evidence as to how much the defendant was alleged to have received over and above the sum the plaintiff was liable to pay under the home loan. This claim was not pleaded and, in any event, any "profit" alleged to have been made was claimed to have been made by Sedan pursuant to the on lending. I would decline to make the order as asked in par (iii).
Accordingly, on the basis that the defendant was negligent, the plaintiff appears to have lost the following:
$65,624.40 (payments for the last three years)
plus say
$135,000 (principal remaining to be paid).
Total: $200,624.40
The plaintiff made no submissions as to which alternative head of damages should be awarded. I assume interest is claimed on the basis that the original loan to the plaintiff should have been for one year only and after the expiration of a one-year period and to date, the plaintiff has been deprived of his $175,000.

This calculation of damages is hypothetical, given that I have dismissed the plaintiff's claim.