Henderson v Amadio Pty Ltd (No 1)
[1995] FCA 1029
•23 Nov 1995
CATCHWORDS
TRADE PRACTICES - misleading and deceptive conduct - syndicate for purchase of office building with negatively geared vendor finance - representations as to value, as to increase in rent and capital value, as to ease of re-financing and as to sale of share with no further liabilities - whether representations false or made without reasonable grounds - whether reliance - whether representations made by accountants introducing investors to promoters - alleged representation by silence - whether disclosure of accountants' commission - whether vendor's estate agent's opinion of value held honestly or on reasonable grounds - whether accountants represented to clients good repute of promoters - whether contributory negligence a defence - whether estoppel, affirmation or election - whether damages limited to difference between price and market value at time of purchase - whether subsequent unexpected fall in market value recoverable - whether tax benefits to be taken into account - whether failure to mitigate loss by accepting refinancing proposal
NEGLIGENCE - accountants retained to prepare cashflows for promoter of investment scheme - term of retainer that assumptions not be investigated - whether duty of care owed to purchasers
NEGLIGENCE - promoters of investment scheme - statements as to value of building, increase in rent and capital value, ease of re-financing and sale of share with no further liabilities - whether duty of care - foreseeability and proximity
NEGLIGENCE - accountants - investment advice - introduction of clients to promoters of syndicate for purchase of office building with negatively geared vendor finance - non-disclosure of commission from promoter - whether adequate investigation - whether adequate advice as to risk
NEGLIGENCE - solicitors - retainer - whether retained as conveyancing sub-contractors for promoters of syndicate for purchase of office building with negatively geared vendor finance - whether obligation to advise as to joint and several liability - whether obligation to advise as to lack of ratchet clause in lease
NEGLIGENCE - estate agents acting for vendor - provision of valuation letter to promoters of syndicate - non-disclosure of role as vendor's agent - valuation - relevance of market history of property - whether opinion held honestly or on reasonable grounds - whether duty of care owed to purchasers - foreseeability and proximity
REAL PROPERTY - valuation - evidence of market perceptions - application of rule in Spencer v Commonwealth - market performance of subject property
CORPORATIONS - prescribed interest - syndicated for purchase of office building with negatively geared vendor finance - whether investment in partnership - financial or business undertaking or scheme - investment contract - invitation to public - offer to public - partnership exclusion - illegality - restitution - unjust enrichment
EQUITY - Unconscionable conduct - vendor granting option to promoter of syndicate of purchasers - purchasers advised by solicitors and accountants - whether at special disadvantage
EQUITY - restitution - sale of office building with mortgage back to vendor - breach of prescribed interest provisions - retention of benefits by purchasers - setting aside transactions - whether unjust enrichment
CONTRIBUTION - liability for negligence and misleading and deceptive conduct - contribution under Wrongs Act - basis for assessing entitlement to contribution - causative potency and culpability
DAMAGES - purchase of office building with negatively geared vendor finance - negligence and misleading and deceptive conduct of promoters, valuers, accountants and solicitors - whether damages limited to difference between price and market value at time of purchase - whether subsequent unexpected fall in market recoverable - whether tax benefits to be taken into account - whether failure to mitigate loss by accepting re-financing proposal
INSURANCE - accountants' professional indemnity policy - advice to investors in property syndicate - non-disclosure of commissions - whether "conduct of professional business of chartered accountants - whether deliberate acts - whether investment in persons managed or controlled by insured - whether secret commission - whether corporate insured responsible - extension of policy to indemnify for acts of dishonesty by partners - whether contrary to public policy - retroactive date -excess
WORDS AND PHRASES - "actual fraudulent or dishonest purpose and intent" - "active and deliberate fraud or dishonesty" - "operated or controlled" - "direct or indirect financial interest" - "retroactive date"
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Meinhard v Salmon 249 NY 458 (1928)
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Midland Bank Trust Co v Hett, Stubbs & Kemp [1979] Ch 384
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Neagle v Power [1967] SASR 373
North Western Mutual Life Insurance Co v Johnson 65 US Law Ed 159
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Paintin & Nottingham Ltd v Miller, Gale & Winter [1971] NZLR 164
Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221
Parker v McKenna (1874) LR 10 Ch 96
Petelin v Cullen (1975) 132 CLR 355
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Riverbank Pty Ltd v Commonwealth (1974) 48 ALJR 483
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P Samuel & Co Ltd v Dumas [1924] AC 431
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Spencer v Commonwealth (1907) 5 CLR 418
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Waldron v Auer (1977-78) CLC 40-314
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Yorke v Lucas (1985) 158 CLR 661
Companies and Securities (Interpretation and Miscellaneous Provisions) Act 1980 (Cth) s 38
Companies (Victoria) Code ss 169, 170, 171, 562(2), 574
Fair Trading Act 1985 (Victoria) ss 10, 11, 37, 44
Trade Practices Act 1974 (Cth) ss 51A, 52, 82, 87
Wrongs Act 1958 (Vic)
Russell Fraser Henderson & Ors v Amadio Pty Ltd & Ors
(No. VG 260 of 1993)
Judge: Heerey J
Date: 23 November 1995
Place: Melbourne
IN THE FEDERAL COURT OF AUSTRALIA )
)
VICTORIA DISTRICT REGISTRY )No. VG 260 of 1993
)
GENERAL DIVISION )
B E T W E E N:
RUSSELL FRASER HENDERSON and ORS
Applicants
- and -
AMADIO PTY LTD and ORS
Respondents
JUDGE: Heerey J
DATE: 23 November 1995
PLACE: Melbourne
MINUTE OF ORDERS
The Court orders that:
Further hearing will be adjourned to a date to be fixed.
Direct written submissions as to the form of orders, including orders for costs, to be filed and served within 14 days.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules
IN THE FEDERAL COURT OF AUSTRALIA )
)
VICTORIA DISTRICT REGISTRY )No. VG 260 of 1993
)
GENERAL DIVISION )
B E T W E E N:
RUSSELL FRASER HENDERSON and ORS
Applicants
- and -
AMADIO PTY LTD and ORS
Respondents
JUDGE: Heerey J
DATE: 23 November 1995
PLACE: Melbourne
REASONS FOR JUDGMENT
TABLE OF CONTENTS
VOLUME 1
INTRODUCTION Page
The Problem 1
The Parties1
SELLING THE COLES MYER BUILDING 5
Acquisition 5
Earlier Attempts to Sell 6
The Gray & Winter Option Agreement 12
The Gray & Winter Brochure 18
Selling the Investment - Methods and Documentation 28
Gray & Winter and Richard Ellis 35
Gray & Winter and Metzke & Allan 43
Gray & Winter and Bird Cameron 42
(a)Bird Cameron Perth 48
(b)Bird Cameron Ballarat 58
(c) Bird Cameron Sydney 62
(d) Bird Cameron Port Lincoln 64
(e) Bird Cameron Millicent 67
(f) Bird Cameron Geelong 69
(g)Bird Cameron Melbourne 72
Gray & Winter and Huntley McArdle & Glass 74
10.Gray & Winter and Nevett Ford 78
THE APPLICANTS INVEST 84
Turner84
Gordon96
Dean105
Phelps114
Arthurson124
Schoeman 134
Haarsma 142
Lee 149
Green155
10.Henderson 160
11.Tranter 174
12.Walker 181
13.Trengove 187
14.Glass 196
15. Other Investors 198
SETTLEMENT OF THE PURCHASE 199
Preparation and Documentation 199
The Terrey Clause 201
The Condition Subsequent and the Escrow Settlement 206
The Borrowers' Acknowledgement 209
DECLINE AND FALL 211
The Management Committee 211
Defaults and Short Payments 212
May 1991 Valuations 213
1991 Rent Review 213
Refinancing Discussions 217
Default 223
VALUATION EVIDENCE 224
Melbourne Commercial Property Market May/June 1990 224
(a)Market Perceptions 224
(b)Oversupply 234
(c)Fringe v CBD 234
(d) Rental Incentives 236
The Coles Myer Building - Capital Value 236
Cash Equivalent of the Vendor Finance 239
Rental Value 242
VOLUME 2
AGENCY AND SUB-AGENCY ISSUES 245
Hudson Conway & Gray & Winter 245
Bird Cameron and Gray & Winter 249
Huntley McArdle & Glass and Gray & Winter 250
Richard Ellis and Gray & Winter 250
(a)Letter of 31 May 1990 250
(b)Material in Gray & Winter Brochure 254
CONTRACTUAL AND TORTIOUS DUTIES OF CARE - TO WHOM OWED?
CONTENT? 255
Hudson Conway 255
Gray & Winter 256
Bird Cameron 256
Huntley McArdle & Glass 256
Nevett Ford 259
(a)Who was the Client? 259
(b) The Extent of the Retainer 265
Metzke & Allan 274
Richard Ellis 276
BREACH OF DUTY 283
Hudson Conway 283
Gray & Winter 283
Bird Cameron 283
Huntley McArdle & Glass 291
Nevett Ford 292
(a)Joint and Several Liability 292
(b)Lack of a Ratchet Clause 296
(c)The Terrey Clause and the Condition Subsequent 298
(d)Independent Advice 303
(e)The Deans 303
Metzke & Allan 304
Richard Ellis 307
REPRESENTATIONS - WHETHER MADE 308
The Vendor's Sale Price was $14.835 million 310
The Market Value of the Building was at least
$14.835 million 311
The Property was Underlet 311
Rent and Capital Value would Increase 312
There would be no Problem with Re-finance in June 1993 313
A Partnership Share could be Sold with no
Further Liabilities 314
It was a Risk Free Investment 315
The Promoters were Reputable 315
REPRESENTATIONS - WHETHER FALSE OR WITHOUT REASONABLE GROUNDS 317
The Vendor's Sale Price was $14.835 million 317
The Market Value of the Building was at least
$14.835 million 317
The Property was Underlet 318
Rent and Capital Value would Increase 318
There would be no Problem with Re-finance in June 1993 318
A Partnership Share could be Sold with no
Further Liabilities 318
It was a Risk Free Investment 319
The Promoters were Reputable 319
SECONDARY LIABILITY FOR MISREPRESENTATION 322
Misrepresentation by Silence 322
Involvement 323
"A Sound Investment" (Mr Glass) 324
Hudson Conway and the 31 May Letter 324
Richard Ellis and the 31 May Letter 325
XIII RELIANCE AND CAUSATION 326
CONSTRUCTION OF THE TERREY CLAUSE 332
NON-DISCLOSURE OF FEES AND COMMISSIONS 334
Gray & Winter 335
Bird Cameron and Huntley McArdle & Glass 335
UNCONSCIONABLE CONDUCT 339
XVII ADDITIONAL ARGUMENTS OF THE WALKERS 347
Non Est Factum 347
Ultra Vires Execution of Guarantee 347
Securities Industries Code s 125 348
XVIII PRESCRIBED INTEREST - LACK OF PROSPECTUS 349
Statutory Provisions 349
Was Only a Partnership Interest Offered? 352
Offer or Issue by Whom? 359
Prescribed Interest 361
(a)"undertaking or scheme" - par (a) 361
(b)"investment contract" - par (c) 361
Offer to the Public 362
The Partnership Exclusion 366
Illegality 368
Severability 369
Restitution 370
Relief 378
ESTOPPEL 380
ELECTION AND AFFIRMATION 384
CONTRIBUTORY NEGLIGENCE 387
XXII MITIGATION 390
XXIII REMEDIES 393
Setting Aside 393
Damages 394
Allowance for Tax Benefits 400
Assessment of Damages 401
XXIV CROSS-CLAIMS 402
Contribution under Statute 402
Hudson Conway and Richard Ellis 405
Assessment of Contribution 405
INSURANCE INDEMNITY - BIRD CAMERON V SGIO 408
"Conduct of Professional Business" of
Chartered Accountants 408
"Act, Error or Omission" - Whether Deliberate 413
Exclusion Clauses 414
(a)Exclusion (c) 415
(b)Exclusion (e) 419
Secret Commissions 419
(a)Statutory Provisions 419
(b) "Agent" 421
(c)"Receives or Solicits" 423
(d) "Corruptly" 424
(e)The Liability of BPM 427
(f)Extension 3 428
(g)Corrupt Advice 431
Retroactive Date 432
Excess 433
(a)"Each and Every Claim" 433
(b)Multiplier 434
XXVI SUMMARY OF FINDINGS 435
XXVII ACKNOWLEDGEMENTS 442
I
INTRODUCTION
The Problem
On 29 June 1990 a group of investors purchased for $14.835 million an office building at 258 Queensberry Street, Carlton. The building was leased to Coles Myer Limited for a term of 15 years from 24 March 1989 with two further options of five years each. The vendor was Amadio Pty Ltd, a wholly owned subsidiary of the listed public company Hudson Conway Limited. The purchase was geared to more than 100 per cent. The vendor advanced $16.265 million secured by a first mortgage for three years with interest only payable and also by a joint and several guarantee by the purchasers and associated entities. The excess of the loan over the purchase price was applied towards payment of some of the acquisition costs and six months interest in advance, the balance being paid by the purchasers.
The expectation of the purchasers was that the building would steadily increase in value at a rate of 8.5 per cent per annum. When the vendor finance was repayable in 1993 the building would be worth $19 million. Interest only finance could then be obtained from a bank for 85 per cent of the value and that would be sufficient to pay out the vendor. The building would continue to increase in value at 8.5 per cent per annum and would be worth over $31 million after ten years. In the meantime, the purchasers would obtain taxation deductions for the difference between the interest paid and the net rent of the building. This could be set off against other assessable income of the purchasers.
The building did not increase in value, either at the rate expected or at all. It was caught up in the huge slump in property values which hit Australia and in particular Melbourne in the early 1990s. Precisely when that slump commenced, and the extent to which it could or should have been reasonably predicted, are among the many disputed issues in this case. But in any event within less than a year valuations put figures of $11.5 million and $11.9 million on the building. Today the building is worth $8 million. The purchasers, and the associated persons and entities which have guaranteed the purchasers' obligations under the mortgage, are jointly and severally liable for a figure which, with accumulated interest, amounts today to some $20 million.
Apart from the general collapse of the property market, the decline in value of the Coles Myer building was affected substantially by a feature of the lease. Clause 3 of the lease provides for rent reviews every two years, the review to be to "the then current market rental". The clause provides a machinery for determining disputes as to the appropriate figure. For present purposes the critical feature is that, apart from the first review in March 1991, as to which maximum and minimum figures were stipulated (the minimum being the existing rental of $172.22 and the maximum $199.13 per square metre per annum), the rent review clause does not provide that the rent cannot decrease. There is not, as there usually is in commercial leases, an underpinning or "ratchet" clause. The result is that the rental has declined from $1,279,807 at the time of purchase to $912,000 today.
The Parties
The vendor Amadio was a company whose sole function was to hold title to the building. It had no commercial existence separate from its parent Hudson Conway. Hudson Conway retained Richard Ellis (Victoria) Pty Ltd as an agent to sell the building and also an adjoining building at 31-47 Barry Street owned by another subsidiary and leased to Telecom Australia.
The purchase was promoted by a firm of solicitors called Gray & Winter. The partners in that firm were Mr Garrick Gray and Mr Michael Winter. Mr James Gray, the son of Garrick Gray, was an employee of the firm. Mr James Gray is not a solicitor. A company called Australian Investment Management (Holdings) Pty Ltd (AIMH) was controlled by the Gray & Winter interests. Mr James Gray and Mr Winter were directors of that company but, for reasons which have become an issue in this case, Mr Garrick Gray was not.
The purchasers all live in country areas of Victoria, New South Wales, South Australia and Tasmania. They are mainly farmers, small business people and doctors.
Most of the purchasers were introduced to the scheme by firms of chartered accountants to whom Gray & Winter had mentioned the scheme. One of those firms was Bird Cameron. The accountancy practice under that name is actually conducted by a company, BPM Pty Ltd. Its headquarters are in Perth. It had at the time some 38 branches in cities and towns throughout Australia including Ballarat and Geelong in Victoria and Millicent and Port Lincoln in South Australia. The other firm of chartered accountants was Huntley McArdle & Glass who carry on practice in Ballarat.
A third firm of accountants, Metzke & Allan, played a different role. In the late 1980s they developed some expertise in producing computer cashflows for real estate investments. At the request of Gray & Winter they prepared spreadsheet cashflows which were used by Gray & Winter in a marketing brochure for the sale of the Coles Myer building.
Nevett Ford are a firm of solicitors practising in Melbourne and Ballarat who acted as solicitors in connection with the purchase. There are disputes as to whether Nevett Ford acted for the purchasers or as sub-contractors to Gray & Winter and also as to the precise extent of their retainer and the obligations they undertook.
Bird Cameron have been denied indemnity by their professional indemnity insurer SGIO.
II
SELLING THE COLES MYER BUILDING
Acquisition
The Coles Myer building was built about 60 years ago for use as a warehouse by the Myer Emporium. In 1988 Coles Myer put the Coles Myer building and the Telecom building on the market for sale by tender. The tender conditions included stipulations that
the purchasers would lease back the Coles Myer building and level four of the Telecom building to Coles Myer with a right of first refusal in respect of the other levels of the latter building;
(ii)the Coles Myer building and level four of the Telecom building would be fully refurbished by the purchasers;
(iii)the leases would be in the form set out in the conditions.
Hudson Conway's tender for both properties was successful. Its subsidiary Amadio entered into a contract to purchase the Coles Myer Building on 30 June 1988. Hudson Conway then carried out refurbishment costing approximately $4.6 million. These works were completed in about May 1989. The refurbished building has since been used by Coles Myer for its retail credit facility operations.
Hudson Conway took title to the Telecom building in the name of Kotinga Pty Ltd, another wholly owned subsidiary. The term of the lease of level four of the Telecom building was from 31 July 1989 to 31 July 1999. That building was also refurbished, the work being completed in November 1989. Coles Myer leased level four at a rental of $199.13 per square metre per annum. It took up occupation of this floor in about September 1990 and by agreement commenced paying rental on 1 February 1991.
Earlier Attempts to Sell
Following the stock market crash of October 1987, a flight of capital into property investment resulted in a boom which peaked in about September 1988. By the second half of 1989 Mr Lloyd Williams, the Chief Executive and Joint Managing Director of Hudson Conway, had come to hold a negative outlook about the future of commercial property investments. As a result, Hudson Conway made a strategic decision to quit the majority of its property investments, if necessary by the provision of vendor finance. Mr Williams took the view that Hudson Conway was better off holding debt rather than assets, particularly if the debt generated a better rate of return.
In the course of implementing this strategy Hudson Conway put the Coles Myer and Telecom buildings on the market. In July 1989 Hudson Conway prepared an investment summary for the assistance of Richard Ellis, the agent retained for the sale. This report spoke of an "indicated market value" of $18 million for the Coles Myer building. Richard Ellis in turn prepared an investment report seeking to interest purchasers at that price. No sale was concluded. On 22 August Richard Ellis wrote to a potential purchaser advising that the price had been reduced to $15.1 million and stating that they "believed a lower price could be negotiated should you be interested". In October 1989 the property was taken off the market.
In February 1990 Hudson Conway initiated another attempt to sell both properties. It prepared an investment report for agents who would be seeking appointment. In relation to the Coles Myer building the investment report noted the present rental of $1,279,806, which included office space at $172.22 per square metre and stated:
Analysis of comparable rentals for similar office premises in this general area indicate that the present rental for this property is currently less than a fair market rent. Probably the best evidence is the Telecom lease at 47 Barry Street, where the rental equivalent to $196.36 per square metre ($18.24 per square foot p.a.) and $1,440 per car space per annum. It is our opinion that the present market value of the rental for office and carpark is in the order of $1,496,740 p.a. This is based on rents of $199.13 per square metre p.a. for the office area and rates of $1,440 p.a. and $900 p.a. per carpark p.a. for the permanent and casual spaces respectively.
The rental on the first review can only be increased to $199.13 per square metre for the office space, thereafter all reviews are on a market basis. The carparking can be reviewed to market levels.
Richard Ellis were invited to make a marketing submission, which they did on 13 February. The submission outlined a proposed campaign and included a "likely realisable value" for the Coles Myer building of $14 - 15.5 million and for the Telecom building of $11 - 12 million. By an "exclusive sole agency agreement" dated 2 March 1990 Amadio and Kotinga appointed Richard Ellis as exclusive sole agent for 60 days for the sale of their respective properties. The terms stipulated were a deposit 10 per cent and balance in 60 or 90 days.
Richard Ellis prepared an "information memorandum" dated March 1990 in respect of both buildings. This took the form of a substantial brochure with a red cover containing detailed information about both buildings. To a large extent it reproduced the material contained in the Hudson Conway investment report, and in particular the assertion as to market rental. On the first page appeared the words:
FOR PRIVATE SALE
TWO SPECTACULAR INNER CITY OFFICE BUILDINGS
CARLTON - 258 QUEENSBERRY STREET
CARLTON - 31-47 BARRY STREET
"The information contained herein has been supplied to us. In passing the information on, it should be noted that we do so without any representation on our part as to its truth or accuracy. All interested parties should make their own enquiries, and obtain their own independent advice, in order to verify the information."
MARCH 1990
The following page was headed "Introduction" and commenced:
Richard Ellis (Victoria) Pty Ltd have pleasure in offering the two properties situated at 258 Queeensberry Street and 31-47 Barry Street, Carlton, for private sale.
The page went on to list attractive features of the properties and concluded:
We believe both investments should be given favourable consideration as solid long term buildings with excellent growth prospects in the short to medium term.
The information memorandum stated that the properties were available for $15.5 million (Coles Myer) and $12 million (Telecom) and that in each case offers would be considered either (i) on a cash basis with 10 per cent deposit and balance in 60 days, or (ii) "subject to an approved purchaser", on a terms contract basis with 10 per cent on signing of contracts, a further 15 per cent within 30 days and the balance in two years with interest only payable to the vendor quarterly at 13 per cent.
Richard Ellis sent about 20 copies of the information memorandum to potential investors or their representatives in Australia and overseas, including Gray & Winter. Richard Ellis also mailed out about 1500 copies of a single page coloured flyer.
On 14 March Richard Ellis advised Hudson Conway of interest from a number of parties in Australia and overseas. Among these were said to be "private investors" represented by Gray & Winter, Solicitors". The dealings that took place between Richard Ellis and Gray & Winter will be examined in more detail in a subsequent section of these reasons. (Part II Section 6).
On 6 April Dr Eugene Chu, a Hong Kong resident, sent a fax to Richard Ellis expressing interest in buying both buildings for a yield of 11.5 per cent, the equivalent of a cash price of about $11.2 million for the Coles Myer building.
On 10 April Mr Anthony Rafaniello, the Hudson Conway executive responsible for the sale noted in his internal weekly report to his superiors that there was "strong interest from Gray & Winter solicitors".
On 1 May the Richard Ellis sole agency came to an end. By a fax of that date Mr Anthony Chiminello, a director of Richard Ellis reported to Hudson Conway as follows:
Following our telephone discussion today we advise of our marketing progress as follows:
In summary, the people who have formally made offers on the property and shown definite interest are outlined below:
ProspectComment
Mr Lai Te Wood Verbal offer of $9,650,000 balance 60 days.
Mr ChuWritten offer for both buildings at yields of 11.5%.
Mr BakerSerious interest in the property. However, yet to formalise an offer.
Gray & Winter Have expressed serious interest
Solicitorsand we are still awaiting offer.
Mrs TilleyStill considering properties.
Mr Alfred Abrahams Still considering details.
As you are aware the subject properties are competing with distressed sales on the market which we believe are being offered at yields in excess of 10%. Coupled with the above, many purchasers perceive the market to soften even further and therefore are adopting a wait and see approach.
Obviously, we are attempting to secure the highest price for the properties within the shortest period of time. therefore we need to respond to the relevant purchasers where necessary at lower sale prices in order to encourage them to further increase their offers.
In addition to the existing purchasers, we have commenced a further mailout to the south east Asian region and are contacting all large private investors on the basis of a reduced sale price which would need to be further discussed with yourselves.
Although sales evidence in this current market is limited, we have outlined recent sales as follows:
Address Type Building Market Sale Yield
Size Rental Price
224 Queen St 12 Level 5,430sq m Assessed $10,400,000 11.5%
Melbourne $1,200,000
17-21 Malvern 2 Level 1,988sq m $479,325 $ 5,120,000 9.36%
Rd Glen Iris Office
We are aware of additional sales currently being negotiated at yields of approximately 9.5% - 10% and shall relay these to you as soon as they come to hand.
Mr Rafaniello noted in his internal weekly report on 1 May that there was "(l)imited domestic interest in the two buildings" and that a "(n)ew approach (was) required".
On 2 May Mr Chiminello sent a fax to Dr Chu stating that Richard Ellis had
specifically been advised to respond to your offer of 6/4/90 on the following terms and conditions:
Sale Price:31-47 Barry Street $10,750,000
258 Queensberry Street $14,000,000
Balance:60 days from sale or exchange.
After pointing out some attractive features of the properties the fax concluded "We believe that you are in an excellent negotiating position at this particular point in time however, we cannot push the vendor until such time as we can meet with you in Melbourne".
There was no response. There was no evidence that this offer was authorised by Hudson Conway. It was put to Mr Chiminello in cross-examination that his statement as to being "specifically advised to respond" was a lie. Mr Chiminello said:
... it could be construed as a lie. I construe it as strategy.
However, I am satisfied that Mr Chiminello's belief at the time was that the Coles Myer building was worth something less than $14 million on a cash sale.
Mr Chiminello did say in evidence that he had discussed Dr Chu's offer with Mr Rafaniello and had told him the Hudson Conway asking price was too high. Mr Rafaniello encouraged him to get firm offers.
The Gray & Winter Option Agreement
The sale of the Coles Myer building that ultimately took place had its genesis in an approach by Mr Garrick Gray to Mr Lloyd Williams. The two men had known each other for about 20 years, but were not close. About 10 years previously there had been one business dealing in which Mr Williams sold to Mr Gray a number of property owning companies. Otherwise their contact had been confined to occasional meetings at social gatherings. Mr Williams was aware that Mr Gray had a reputation as being involved in the promotion of tax driven investment schemes, including negatively geared investments in commercial property. Mr Williams' understanding was that Mr Gray would package such investments for his clients for a fee.
On 15 May, on Mr Gray's initiative, a meeting took place in Mr Williams' office. Neither gentleman gave evidence of any other relevant meeting or communication. It was a fairly short meeting of about 30-45 minutes. After some discussion, in which Mr Gray asserted that the asking price of $15.5 million for the Coles Myer building was far too dear, Mr Williams told Mr Gray that the "bottom line" for the properties was $13.8 million for the Coles Myer building and $10 million for the Telecom building. He said that those prices were not the subject of negotiation. Mr Gray said that he was going to syndicate the properties for a group of investors (the conversation concerned both buildings - as will be seen, Mr Gray at that stage had one particular client in mind for the Coles Myer building), that he would like to take an option over each of the properties for his clients and that he would charge them fees for securing the properties. The amount of the fees were not mentioned and Mr Williams did not enquire about the subject. Mr Gray referred to the terms of sale mentioned in the Richard Ellis information memorandum, which were 10 per cent deposit, a further 15 per cent within 30 days and the balance to remain on mortgage to the vendor over two years at 13 per cent. Mr Gray asked Mr Williams whether his company would provide 100 per cent finance for up to five years. Mr Williams said that Hudson Conway would be prepared to provide 100 per cent vendor finance at 14 per cent for three years but only if it was satisfied as to the asset backing and capacity to service the borrowings of the purchaser. It seems likely that Mr Gray mentioned the figure of $6 million net assets and $2 million income for the proposed purchaser of the Coles Myer building without identifying him. In his witness statement Mr Gray said he spoke in terms of a syndicate which had those assets and income, but it may be that a syndicate was only mentioned in relation to the Telecom building. Mr Williams said in evidence that it was not his usual practice to grant options and that he told Mr Gray that the option would only be for 14 days because he was only interested in selling and not in a drawn out transaction.
On 16 May Gray & Winter sent a fax to Mr Williams in these terms:
Dear Lloyd,
re: Coles Myer Building
258 Queensberry Street, Carlton
We offer to take an option for acquisition of this property by a client with net assets of at least $6 million and net annual income in excess of $2 million based on the following:-
Purchase Price $14,560,000
Acquisition fees paid by Hudson Conway
at settlement 760,000
Non Refundable Option for 14 days to be
part of purchase price if exercised 10,000
Deposit paid by Purchaser 40,000
Hudson Conway to lend for 3 years on
first mortgage at 14.0% interest only
paid six monthly in advance 15,400,000
Settlementdate 24 June 1990
The result of the above is that Hudson Conway would receive by settlement the following:-
6 months interest in advance 1,078,000
Deposit40,000
----------
$1,118,000
Please let us know whether the above figures are acceptable to Hudson Conway Group
Yours sincerely,
GRAY & WINTER
Mr Williams accepted the fax as being consistent with the terms discussed on the previous day. He made a note on the Gray & Winter fax of the figures "13.8" against the figure for acquisition fees - thus recording that the subtraction of the fee would yield his stipulated $13.8 million. He then passed the matter over to Mr Barry Hamilton, the company secretary of Hudson Conway.
At about this time Mr Hamilton learned, probably from Mr Gray, the identity of the latter's client who was the prospective purchaser of the Coles Myer building. Mr Hamilton telephoned Mr Gray and told him that Hudson Conway would grant an option in accordance with the fax of 16 May in favour of that client. Mr Hamilton stated that Hudson Conway required the client to provide certain life and occupational disability insurance, a guarantee by his family company and trusts, and evidence that his net assets exceeded $6 million and his net annual income exceeded $2 million. On the same day Mr Hamilton sent a fax to Gray & Winter confirming those stipulations. It was in these terms:
Dear Sirs,
COLES MYER BUILDING
258 QUEENSBERRY STREET, CARLTON
I refer to your letter dated 16 May, 1990 and our subsequent telephone conversations.
We are prepared to offer you an option over the above property in terms outlined in your letter subject to:
a.your client being Mr. Alan Myers, Q.C.,
b.Mr. Myers providing us with a policy insuring against his death and his occupational disability during the term of the mortgage - amount no less than $3 million,
c.the unsecured guarantee of Mr. Myers' family companies and trusts,
d.evidence, to our satisfaction, that Mr Myers' net assets exceed $6 million and that his net annual income is in excess of $2 million.
I look forward to receiving your Option Agreement tomorrow.
Yours sincerely,
BARRY J. HAMILTON,
COMPANY SECRETARY.
On 17 May Gray & Winter submitted two drafts of an option agreement and on the same day Hudson Conway executed a written agreement, in the form of the second draft, for the grant to Gray & Winter's company AIMH or its nominee or nominees of an option to purchase the Coles Myer building. The terms were the same as in the fax of 16 May, except for the option fee, which was to be $5. In their evidence neither Mr Gray nor Mr Hamilton had any recollection as to how the option price came to be changed from $10,000. The agreement also provided that the option was to be exercised by 5 pm on 1 June. Clause 4 provided:
THE rights of the Purchaser to nominate are restricted to such persons or entities that satisfy the following criteria:-
a.Net assets exceeding $6,000,000 and a net annual income either singly or combined of in excess of $2,000,000. (Evidence to be supplied to the satisfaction of the Vendor).
b.The nominated Purchaser or Purchasers have in place a policy or policies insuring against death and occupational disability during the term of the mortgage for a total amount of $3,000,000. Such policies are to be assigned to the benefit of the Vendor to the extent that it is necessary to make up any shortfall in what is owed to the Vendor.
c.All family companies and trusts of the nominated Purchaser or Purchasers provide an unsecured guarantee of the said loan.
Clause 5(c) provided:
The Vendor will pay the sum of $760,000 acquisition fee to Australian Investment Management (Holdings) Pty Ltd.
On 18 May Mr Hamilton forwarded an executed copy of the agreement to Gray & Winter. On 21 May Gray & Winter's client Mr Myers inspected the building, but decided not to proceed with the purchase. Gray & Winter then set about organising a syndicate of purchasers.
Mr Gray told Mr Hamilton that he was forming such a syndicate. Mr Hamilton said that if the syndicate members did not have sufficient asset backing Hudson Conway would not proceed. On 1 June Hudson Conway confirmed that, as requested by Mr Gray, the option period would be extended to Friday 29 June and that the amount of vendor finance would be extended from $15.4 million to $16.265 million. About this time Mr Hamilton also agreed with Mr Gray that the "acquisition fee" would be increased to $1,035,000.
Since a central attraction of the proposed investment was tax deductibility to persons who were looking for substantial deductions, the transaction had to be completed by the end of June. In any event, it seems unlikely Hudson Conway would have extended the option period much further. Thus Gray & Winter had a month to find 20 investors prepared to invest some $40,000 immediately and to commit themselves to further annual instalments. If successful, Gray & Winter would earn themselves over a million dollars. At the same time Gray & Winter embarked on a similar campaign for the selling of the Telecom building. It will be convenient to deal at this stage with Gray & Winter's marketing approach in general terms, including documentation. Against that background I will then consider the arrangements Gray & Winter made with a number of the respondents for the marketing of the Coles Myer building before turning to the meetings with the applicants themselves.
The Gray & Winter Brochure
Gray & Winter prepared a brochure for the marketing of the Coles Myer building. On a glossy dark blue cover appear the words "Gray & Winter" and the firm's address, telephone and fax numbers. There is no indication on the cover or elsewhere in the brochure that Gray & Winter are solicitors. The brochure itself is divided into five sections. The first section consists of colour photographs of the interior and exterior of the building and a locality map. The second section is entitled "PROPERTY SUMMARY" and is in these terms:
PROPERTY SUMMARY
ADDRESS:258 Queensberry Street, Carlton
IMPROVEMENTS: Fully refurbished office premises
7,012 square metres (74,478 sq.ft.)
LAND AREA: 2,805 square metres (30,193 sq. ft.)
LEASE:15 years
OPTIONS:5 + 5 years
RENTAL:Office Rent - $1,207,607 p.a.
Permanent Car Spaces - $ 61,000 p.a.
Casual- $ 11,200 p.a.
$1,279,807.p.a.
RENT REVIEW: Two yearly to market
(Note:Office Rent on next
market review on 24.3.91
not to exceed - $1,396,300
Car Parking to increase to
market, anticipated rent:-
Permanent Car Parks - 61 cars
@ $1,440 each $ 87,840
Casual Car Parks - 14 cars
@ $900 each $ 12,600
$1,496,740
NEXT RENT
REVIEW: 24.3.1991
OUTGOINGS: Paid by tenant
PRICE:$14,835,000
The third section commences with a page bearing only the words "3. ORIGINAL RICHARD ELLIS BROCHURE WITH FULL PROPERTY DETAILS". The next page of the section is as follows:
Richard Ellis
Suburban Investments
INVESTMENT SUMMARY
258 QUEENSBERRY STREET
CARLTON
This page is not what it purports to be. It is not part of the "Original Richard Ellis Brochure". Someone, presumably at Gray & Winter, has photocopied the words "Richard Ellis Suburban Investments" on to a page on which has been typed the words "Investment Summary 258 Queensberry Street Carlton". The first two pages of the Richard Ellis memorandum, including the reference to both properties being "For Private Sale", the disclaimer, and the statement that Richard Ellis is "offering the two properties ... for private sale" have been left out. The result, and without doubt the result intended by Gray & Winter, is that the Richard Ellis document no longer appears clearly to come from the vendor's selling agent. What formerly would attract the cautious scepticism with which prudent buyers treat any statement by or on behalf of a seller now appears to be the statement of an independent expert. Some contrary arguments might be put. The word "Brochure" might suggest to a perceptive reader the original marketing nature of the document. The sub-section "Sale Price & Terms" (see below) could suggest that Richard Ellis was offering the property on the stated terms and not merely reporting what were the vendor's price and terms. Nevertheless I am persuaded to the conclusion that the alterations were deliberately made by Gray & Winter and the altered document used by them to create a false impression as to the true position of Richard Ellis.
To continue with the Gray & Winter brochure, the Investment Summary is divided as follows:
TABLE OF CONTENTS
1.00INVESTMENT SUMMARY
2.00LOCATION
2.01Location Map
3.00SITE PARTICULARS
3.01Site Dimensions & Area
3.02Town Planning
3.03Title Particulars
3.04Plan of Consolidation
4.00BUILDING DETAILS
4.01Building Construction
4.02Accommodation
4.03Services
4.04Building Areas
4.05Depreciation Allowances
4.06Building Plans
5.00TENANCY DETAILS
5.01Lease Terms & Conditions
5.02Income Analysis
6.00INVESTMENT POTENTIAL
7.00SALE PRICE AND TERMS
The Investment Summary sub-section is as follows:
1.00INVESTMENT SUMMARY
Property:Carlton, 258 Queensberry Street
Description: Modern office building comprising ground and three upper levels of office accommodation having a total lettable area of approximately 7,012 square metres (75,478 square feet).
Car Parking: There are a total of 75 undercover car parking spaces provided within the building.
Land Area:2,805 square metres (30,193 square feet approximately).
Current Income: The property has a total net income per annum of approximately $1,279,807 apportioned as follows:
Office Rental $1,207,607
Car Parking $ 72,200
Anticipated Income
@ March 1991: $1,496,740 per annum
Sale Price:$15,500,000 (fifteen million, five hundred thousand dollars).
Current Yield: 8.3% per annum.
Yield on Market
Rents:9.1%
The sub-sections on Location, Site Particulars and Building Details are not relevant for present purposes. The sub-sections on Tenancy Details, Investment Potential and Sale Price & Terms are as follows:
5.00TENANCY DETAILS
The property is securely leased in total by Coles Myer Limited, one of the largest retailers in the world.
5.01Lease Terms & Conditions
A summary of the terms and conditions of the lease are as follows::
Tenant:Coles Myer Limited.
Commencement: 24th March 1989
Lease Term:15 years.
Options:5 + 5 years.
Current Rental Office Rent $1,207,607
Permanent Car Spaces $ 61,000
Casual Car Spaces $ 11,200
TOTAL$1,279,807
Rental Reviews: At the expiration of every two years from the commencement date of the lease to comparable market rental evidence.
Next Review: 24 March 1991.
Outgoings:Coles Myer Limited are responsible for the payment of all rates and taxes including single holding land tax, all insurances and building operational costs.
5.02Income Analysis
The property is currently producing a total net income of $1,279,806 per annum which has been apportioned as follows:
FloorArea Sq M $Per Sq M PA $PA
Ground1,997 172.22 343,923.34
Car Park61 permanent @ 1,000 pa each 61,000.00
Car Park14 casual @ 800 pa each 11,200.00
Second2,492 172.22 429,172.24
Third2,523 172.33 434,511.06
Total Net Rental 1,279,806.64
It should be noted that analysis of comparable rentals for similar office premises indicate the present rental for this property has significant potential for growth. [Emphasis in original]
The best evidence is the Telecom lease at 31-47 Barry Street where the rental equates to $196.36 per square metre per annum ($18.24 per square foot per annum) and $1,400 per car space per annum.
Recent lettings are also resulting in rentals of $215.28 per square metre per annum net being achieved ($20.00 per square foot per annum) which would further enhance the income and capital growth potential of the subject property.
The current lease provided that the rental on the first review can only be increased to a maximum of $199.13 per square metre per annum for the office space with the car parking rates reviewed to market levels. Every subsequent review is based upon open market rental evidence.
6.00INVESTMENT POTENTIAL
The subject property provides a rare opportunity to acquire an outstanding building with security of income leased to one of Australia's most prominent and successful companies.
The property is available for sale at a price of $15,500,000 which reflects an initial yield of 8.3%.
However, if a current market rental is adopted together with allowances for depreciation it is evident that the initial yield can be increased significantly.
Assessed Market Rents
Area Sq MRental Sq M P Total Rental PA Yield
Offices7,012 $ 199.13 $1,396,300
Cars - Permanent 61 cars $1,440.00 each $ 87,840
Cars - Casual 14 cars $ 900.00 each $ 12,600
$1,496.7409.7%
Depreciation Allowances
We have also analysed the equivalent yield taking into account depreciation on items.
Capital Depreciation Year 1 $ 320,194
Tax Saving due to Building Allowance
Tax Rate at 39% $ 124,776
Equivalent Net Income $1,404,683
Equivalent Yield on Existing Rent 9.1%
Equivalent Yield on a Market Rent 10.5%
Note:The above equivalent analysis assumes that the purchaser pays tax at the rate of 39% and can take advantage of the tax loss created by the building allowance. We recommend any prospective purchaser seek advice from an accountant in respect of this taxation benefit.
7.00SALE PRICE & TERMS
The property is available for sale at a price of $15,500.00 (fifteen million, five hundred thousand dollars).
Terms of Sale
Offers will be considered on either of the following bases:
Cash Contract with 10% deposit on signing of Contracts and the settlement in full within 60 days from the date of that Contract.
We have been informed that subject to an approved purchaser a terms Contract would be available on the basis of a 10% deposit on the signing of the Contract with a further 15% payable within 30 days and the balance by way of interest only quarterly to the Vendor over two years at 13% per annum. [Emphasis in original]
In view of the location, security of tenure and prospects for income and capital growth in the short term, we believe the subject property should be given serious consideration.
The fourth section of the brochure contains a copy of the Coles Myer lease. The fifth section contains a series of fold-out spreadsheets. The first of these is in the following terms. It is headed:
COLES MYER BUILDING
-------------------
258 QUEENSBERRY STREET, CARLTON.
CASHFLOW SUMMARY FOR THE YEARS ENDED Jun-90 to June-2000
---------------------------------------------------------------
PROPERTY INFORMATION
--------------------
There then appear three columns side by side across the page. The first column is:
SCHEDULE 1 - SUMMARY OF RENTAL PROPERTY
PROPERTY SUMMARY
------------------------------
First Rental Receivable Jun-90
SettlementJun-90
Average Increase (1) 8.50%
Rental First Year $1,279,800
Lease Period 15 Years
Next Review Mar-91
Owners Retention 4.00%
Interest received 13.50%
Annual C.P.I. growth 8.50%
(For C.G.T. purposes)
(1) Based on annual C.P.I. Increase for
Melb. of 8.5% per annum average.
The second column is:
ASSUMPTIONS:
-------------
Property Cost $14,835.000
Stamp Duty816.000
Legal Fees 15,000
----------
Acquisition Cost 15,666,000
Accounting207.000
First Six Months Interest 1,134,000
---------
Total Funds Required 17,007,000
Owners Initial Contribution 807,000
---------
Borrowings Required 16,200,000
Yield on Acquisition 8.18%
Vendor Finance:
----------
First Mortgage Loan 16,200,000
Interest Fixed for Three
Years@ 14.00%
Payable Six Monthly in Advance.
Bank Finance: (After third year)
---------------------------------
Payout Vendor Finance 16,200,000
----------
First Mortgage Loan 16,200,000
Interest Fixed @ 15.25%
Payable Six Monthly in Advance
The third column is:
BUDGET RENTAL REVIEW:
---------------------
MONTHDATE RENTAL AVE.[sic] INCREASE MONTHLY
----------------------------------------------------
12Jun-90 1,279,800 106,650
21Mar-91 1,496.740 16.95% 124,728
45Mar-93 1,751,186 17.00% 145,932
69Mar-95 2,048.887 17.00% 170.741
93Mar-97 2,397.198 17.00% 199.767
117Mar-99 2,804.722 17.00% 233.727
141Mar-2001 3,281.525 17.00% 273.460
NOTES:
============
PREPAYMENT OF INTEREST:
----------------------
It is a condition of providing Vendor Finance that the purchaser pay six months interest in advance on $16,200.000 namely, the sum of $1,134.00
SECURITY PROVIDED FOR BANK FINANCE (In June '93):
# 1)anticipated Value at June '93 19,457,620
(refer cashflow summary) 85.00%
----------Bank lending to 85% of property value 16,538,977
==========
Cashflow allows $70,000 for legal and bank lending fee at June '93 on refinancing.
Refer to schedule 4 for additional contributions
Other spreadsheets show: (i) cashflow summary and value of the property over the period 1990-2000 with the value based on a yield of 9 per cent shown as reaching $31,163,577; (ii) interest calculations; (iii) arrears contributions required; (iv) proposed debt reductions; and, (v) monthly cashflow for each month over the ten year period.
As well as the brochure there was a single separate sheet of paper setting out a table of contributions. It has been referred to in the trial as "the one page summary". It is headed "Coles Myer Building, Queensberry Street, Melbourne" and is in these terms:
Assuming a tax rate of 48.25% the following table applies for a partnership of 20 owning the above building.
Year Cost to Partner Tax Deductions After Tax Cost After Tax Cost
at 48.25% at 39.0%
1 (to 30/06/90 40,350 61,900 10,484 16,209
46,330 62,325 16,255 22,024
39,505 55,505 12,724 17,858
40,427 56,427 13,201 18,420
37,068 53,768 11,125 16,098
32,224 48,924 8,618 13,144
22,370 39,070 3,519 7,133
16,702 33,402 586 3,675
Subtotal274,976 411,321 76,512 114,561
5,174 21,876 (5,380) (3,358)
(1,457) 14,543 (8,474) (4,215)
(16,045) (45) (16,023) (16,063)
TOTAL262,648 447,695 46,635 90,925
Note:The deductions are an average of $1.70 for each $1.00 paid out. Assuming the property is sold at the end of 10 years. The net tax free gain per partner should be $717,000 for an after tax cost of $46635 based on a tax rate of 48.25% or $703,307 for an after tax cost of $90,925 at a 39% tax rate.
Two general features of the Gray & Winter brochure should be mentioned. First, it is a substantial and professional looking publication, A4 size and 1.5 cm thick with a glossy cover.
Secondly, its contents are confined to the physical, legal and financial aspects of the building itself, the lease and the proposed mortgage. There is nothing in the brochure about the partnership and the joint and several liability the purchasers would assume as partners, mortgagors or guarantors. The one page summary does, it is true, use the words "partnership" and "partner" but is not concerned with the liabilities and obligations which flow as a matter of law from the relationship of partnership, co-mortgagors or co-guarantors. On the contrary, the table directs attention to the projected cost to an individual purchaser. In many cases investors, perhaps understandably, took the one page summary as indicating their maximum potential liability.
In any event, the joint and several liability which the present applicants now face is not founded on their status as partners, but on their covenants under the mortgage and guarantee.
As will be seen, investors were in many instances given a copy of the brochure and the one page summary to take away after their meeting with the Gray & Winter representatives. Such investors at least had the opportunity to read the brochure in their own time and seek independent advice. However they were never given a document which set out the basis of their liability in respect of the investment about which they were expected to make a decision.
The nearest approach to such a document was the Gray & Winter instruction letter to which I shall shortly refer. But this document was only produced on the subsequent occasion when the purchasers signed the instruments which bound them to the transaction. By this time the effective decision to invest had been made. In most instances the purchasers did not read the Gray & Winter instruction letter and were not asked to do so. They were not given a copy to take away. And, as will be later shown, there were serious inadequacies in such disclosures as were made in it.
Selling the Investment - Methods and Documentation
The following description is not true of all investors, but will give some understanding of the Gray & Winter modus operandi and the documentation used.
In the case of most investors Mr Garrick Gray, Mr James Gray or Mr Winter would visit the various offices of Bird Cameron, or the office of Huntley McArdle & Glass in Ballarat, and there make a presentation to clients of those firms in the presence of the accountant with whom the client usually dealt. Gray & Winter had already sent copies of their brochure to those offices.
If a person wished to proceed, the Gray & Winter representative would ask them to sign an Application for Finance. This document commenced with the words "Proposed Partnership Share". Against those words in most cases was some reference to "Coles Myer Building" - e.g. "One twentieth in Coles Myer Building" or "5 per cent in Coles Myer Building" but sometimes simply "5%" or "2.5%". The form required details of the name, address, age and occupation of the borrower and the name of any family company, trust or partnership. A second section required details of assets under the categories "cash", "property", "shares", "superannuation", "business goodwill" and "other assets". A third section required details of disposable income. A fourth section required details of the history of the applicant's company or business. A final section required details of liabilities under the categories "bank overdraft", "long term loans" and "other liabilities". The purchaser was to sign at the foot and immediately thereafter there was the following:
Accountant Verification
of verify to the best of my knowledge this is an accurate statement of my clients assets, liabilities and income.
The investor would be asked to sign a power of attorney in favour of William Ernest Balcam of Bird Cameron's Melbourne office. There were two versions of the power of attorney. The first appointed Mr Balcam attorney to execute
Any vendor's statement, contract and transfer with respect to the purchase of and any mortgage or mortgages over or in respect of any estate or interest in the land situate at and known as 258-274 Queensberry Street, Carlton in the State of Victoria and more particularly described in Certificate of Title Volume 4867 Folio 343 ("the Land") as security for the payment or repayment of any sum of money and without limiting the generality of the foregoing a mortgage securing a principal sum of $16,265,000 together with any other moneys payable to the Mortgagee by all and any of the Grantor and the other parties to such mortgage as mortgagors;
An assignment of the rental income in respect of the Lease of the land to Coles Myer Ltd. dated 8th of May 1989.
Any document, instrument, acknowledgment, guarantee, undertaking or consent required necessary or desirable for all or any of the following purposes:-
(a)the acquisition by the Grantor of an estate or interest in the Land;
(b)the borrowing of moneys on security of the Land whether alone or jointly with any other person; and
(c)securing the payment or repayment of moneys borrowed on the security of the Land (whether alone or jointly with any other persons) together with any other moneys.
Any Bill of Sale or other charge over chattels, providing security for the payment or repayment of any sum of money and without limiting the generality of the foregoing a Bill of Sale over chattels situated upon the land.
A Deed of Partnership between the owners of the land.
The second version, which came into existence at a late stage and was faxed from Gray & Winter's office to the accountants on 27 June, contained an extra category of document viz:
Any guarantee or guarantee and indemnity given with respect to any of the above.
Where a company was involved, either as the investing entity or as giving a guarantee, a standard form of minutes of a directors meeting was signed. The minutes authorised the execution of a power of attorney in favour of Mr Balcam. Before settlement a certificate under s 230(8) of the Companies (Victoria) Code was obtained.
Where an investor was to hold a share as to part on behalf of some other person a declaration of trust and sub-partnership agreement was executed.
The investor was asked to sign an undated letter addressed to Gray & Winter. I shall hereafter refer to this letter as "the Gray & Winter instruction letter". It was in these terms:
Messrs Gray & Winter
Barristers & Solicitors
1st Floor
474 St. Kilda Road
MELBOURNE VIC 3004
Dears Sirs,
re:Acquisition of the Coles Myer Building
258 Queensberry Street, Carlton
I confirm the instructions from Bird Cameron [or where appropriate Huntley, McArdle & Glass] Accountants for you to acquire the above building for a partnership including the undersigned for $17,072,000 including the costs set out below and to arrange a vendor loan on my behalf for an amount of $16,264,764 for 3 years at 14% per annum on security of a first mortgage of the property and joint and several guarantees of all the partners.
I undertake to promptly provide all financial documentation required for obtaining the loans to you when requested.
I confirm that the cash flow shown to me has been explained and I am satisfied to proceed. We authorise you to direct disbursement of the sum of $17,072,000 as follows at settlement:-
Property Cost (including acquisition
fee of 7.5% to Gray & Winter) $14,835,000
Stamp duty,816,000
Legals - Nevitts, Solicitors 15,000
----------Capital Acquisition Cost 15,666,000
Accounting Fees (1.5% of Purchase Price) 207,000
Stamp Duty - Mortgage 64,764
First Six Months Interest 1,134,000
Balance: Clients Account 236
----------
Total Funds Required 17,072,000
==========
We are aware that there is an acquisition fee of $1,035,000 which will be paid to Australian Investment Management (Holdings) Pty. Ltd. a company associated with Gray & Winter which currently holds the option over the property. The balance will be paid out as follows:-
Accountants Fees $207,000
I undertake to meet my share of the cost of any adjustment of rates and taxes which may be due to the purchasers at settlement together with any other costs certified by the Management Committee of the Partnership.
I authorise you to instruct solicitors on behalf of the partnership to act in the conveyance of the property and the mortgages.
I undertake to execute such documentation as is necessary to complete the purchase and mortgage of the property prior to settlement.
I authorise you to hand all documentation in respect of the acquisition to Huntley McArdle & Glass, Accountants to be held in trust for the partnership or to be handed over to any other trustee nominated by the management committee of the partnership elected by the partners.
The abovenamed building and the prospect of purchasing a part of it in partnership with others was brought to my attention by my accountant and I have decided to invest having received my accountant's advice and as a result of my own appraisal. I requested that your firm should further explain the legal documentation and the taxation consequences resulting from the cash flow and the proposed loan for the purchase and I confirm that you did not approach me or canvass my interest in any way.
Yours faithfully,
On 10 July Gray & Winter wrote to the accountants (a term which will be used where the context is appropriate to mean Bird Cameron and Huntley McArdle & Glass) enclosing a letter to which I shall refer as "the second Gray & Winter instruction letter". In their letter to the accountants Gray & Winter said:
Please arrange to have your client [name included] sign the two page letter of instruction again. The previous letter they have signed is not up to our accountant's requirements.
Please fax us a copy of their signed letter and send back the original to our office as soon as possible.
The second Gray & Winter instruction letter differed from the first in four respects:
The date "29th June 1990" was inserted.
(ii)The name "Nevitts" became "Nevetts"
(iii)The figure of $207,000 for "Accountants fees" was shown broken down as follows:
Bird Cameron - Ballarat $10,350
- Chatswood $10,350
- Geelong $10,350
- Millicent $31,050
- Port Lincoln $41,400
Huntley McArdle & Glass Pty. $62,100
John Cranston $41,400
--------
$207,000
========
(iv)In the second last paragraph "Huntley, McArdle & Glass" was altered to "Bird Cameron".
In the meantime, the transaction had been settled, in escrow at any rate, on Friday 29 June at the Melbourne office of Messrs Corrs, the solicitors for the vendor. What occurred at the settlement has given rise to a number of factual and legal issues. For present purposes it is sufficient to say that Mr Balcam as attorney for the investors executed a number of documents:
A borrower's acknowledgment;
(ii)A contract of sale between Amadio and the purchasers. The contract provided for a price of $14,835,000 with a deposit of $100 payable in full on 29 June 1990, and the residue payable on the same day. The contract described the purchasers' solicitors as "Nevett Ford of Level 42, South Tower, Rialto, 515 Collins Street, Melbourne, Ref: Paul Stephens";
(iii)A mortgage from the purchasers to Amadio in the sum of $16,265,000 for three years with interest at 19 per cent or substituted rate 14 per cent payable six monthly in advance. "The mortgagor" was defined in the mortgage as eighteen individuals or companies, two of which were "as to two one twentieth shares" and the remainder "as to one one twentieth share". These individuals and companies were in fact those who became partners in the Coles Myer Building Partnership, but were not referred to as such in the mortgage. "The mortgagor" covenanted to pay the principal sum and the interest thereon. Under cl 8 (i) of the Memorandum of Common Provisions (a complex document of some 11 pages) it was provided that
... where there is more than one Mortgagor the term shall include each one of them and the covenants on their part shall be deemed joint and several.
(iv)A guarantee and indemnity of the mortgage, under which the guarantors "jointly and severally" guaranteed payment of money, interest and damages due under the mortgage by "the Borrower" - described in a schedule as eighteen named individuals or companies, the same as those listed as mortgagors.
On either 8 or 9 August 1990 Mr Balcam as attorney executed a deed of partnership for the Coles Myer Building Partnership. The Coles Myer Building Partnership contained 20 shares. In some instances one share might be held in the name of one partner who had executed a declaration of trust on behalf of himself and his spouse or children. In other instances the share was held by one partner on behalf of himself and another unrelated investor who had entered into a sub-partnership agreement in respect of that share. Another variation was the holding of a share by a family company. Where an individual partner controlled a family company, the company was a guarantor. Whatever the form, the persons other than the named partner who had a beneficial interest were parties to the joint and several guarantee. The partners themselves were not parties to the guarantee but were, as previously noted, jointly and severally liable under the mortgage.
On 29 June at about 5.40 pm Nevett Ford sent a fax to the accountants in respect of each purchaser in these terms:
[Name of client]
As you may be aware we have been appointed by Messrs. Gray & Winter to act for a group of investors purchasing the "Coles-Myer" building at 258 Queensberry Street, Carlton.
We are instructed that it has been clearly explained to all investors that their liability under the mortgage, and that of their Guarantors is joint and several. In the event of default an investor's liability is not limited to his share.
Pursuant to the Powers of Attorney, Mr. Balcam, the attorney will be executing the following:-
1.Contract;
2.Transfer;
3.Mortgage;
4.Deed of Guarantee and Indemnity;
5.Deed of warranty of Trustee;
6.Partnership.
We are not aware of any other documents the Vendor/Mortgagee will require, however, there may be some further documents to complete the transaction.
With kind regard to your investments:
The Mortgagor is:- [Name inserted]
The Guarantors are:- [Name inserted]
Yours faithfully,
NEVETT FORD
Gray & Winter and Richard Ellis
Richard Ellis is a licensed estate agent, property consultant and valuer working principally in Melbourne commercial property. Richard Ellis is one of the leading Melbourne city commercial estate agents and property consultants, and has one of the largest commercial property valuation practices in Victoria.
At Richard Ellis the marketing of the two Hudson Conway properties was the responsibility of the Suburban Investments Division. Mr Anthony Chiminello, who has already been referred to, was in charge of that division. He was a director of the company and a registered valuer but for some three years or so had worked on the sales side of the business. He was assisted by Mr David Hemingway.
On 8 March Mr Garrick Gray's brother Mr Richard Gray, who also worked at Gray & Winter, phoned Mr Hemingway and said that he had seen Richard Ellis advertisements for the two properties and was interested. Mr Hemingway sent him a copy of the Richard Ellis information memorandum. On 21 March, at Mr Richard Gray's request, Mr Hemingway sent two more copies of the information memorandum, copies of the leases and photographs of the two buildings.
Throughout the remainder of March there was considerable contact between Gray & Winter and Mr Hemingway including two inspections of the buildings, the taking of more photographs, and the provision by Mr Hemingway of information about carpet replacement and fire rating. As already noted, Mr Chiminello kept Hudson Conway informed of these developments. On 20 April Mr Garrick Gray phoned Mr Hemingway and said that he would have a proposal for both properties by 25 April.
Mr Hemingway said in evidence that on 9 May he had two telephone conversations, one with Mr Garrick Gray and one with Mr Rafaniello of Hudson Conway. His evidence as to these conversations was hotly contested because if accepted it would suggest that Gray & Winter's company AIMH obtained an option to purchase the Coles Myer building well prior to the 17th. That in turn might support the applicants' case that the option agreement tendered in evidence was a sham and that Gray & Winter were in truth acting as the agents of Hudson Conway.
Mr Hemingway's version is essentially based on a typed summary which he prepared shortly prior to 13 July 1990. At this time Richard Ellis were considering suing Hudson Conway for commission on the sale of the two properties. Mr Hemingway made up his summary from a perusal of a diary in which he recorded all outgoing phone calls, his message book in which he or other staff recorded all incoming calls, and his memory. The message book has been lost but the diary was tendered in evidence.
The relevant parts of the summary were as follows:
9 MayMessage from GG to call before 9.55 am. I believe at this stage he was going to see Lloyd Williams at HC to provide offers. He had advised me that he had known Lloyd Williams for 20 years and that he was going to speak to him direct.
9 MaySpoke to AR of HC. Told of $23M offer at 14.25% over three years, no deposit. Was advised that GW had obtained an option to purchase over Q [the Queensberry Street property].
15 MayMessage from GG
16/18 MaySpoke to GG - unsure of conversation.
21 May Meeting at HC with AC and AR to have authority renewed. Discussion regarding GG and his associates purchasing the properties, with AR agreeing that GG was a separate issue to us regarding fee.
I am not satisfied that the two entries for 9 May record events which took place on that day. Rather, I think they represent Mr Hemingway's comments looking back from the time he prepared his summary in the light of knowledge he had since acquired. There was another instance in the summary where confusion of this type arose, viz a reference as at 29 May to Mr Gray wanting comparable rental evidence because he "needed it urgently for his Ballarat syndicate". In evidence Mr Hemingway was quite insistent that he did not learn of the "Ballarat syndicate" until 20 June.
I think it unlikely that Mr Hemingway had been told on 9 May of an offer of $23 million for both buildings and an option to purchase the Coles Myer building. Had that been the case, it seems likely he would have made immediate further enquiries about the option. There is no evidence of any such steps being taken. There were phone conversations with Mr Gray on the 16th and the 18th and it seems more likely that in the course of those Mr Hemingway heard of the option. Also, if there was an option in existence on the 9th in the sense suggested in Mr Hemingway's summary, it would have been in writing. There is no evidence that an option agreement bearing such a date ever existed. There is no basis for inferring that such an option agreement was lost or destroyed or that the option agreement which is in evidence and the correspondence concerning it were all fraudulently or mistakenly dated.
On 21 May, at the instigation of Richard Ellis, a meeting took place at Hudson Conway between Messrs Chiminello, Hemingway and Rafaniello. Richard Ellis were concerned to renew their extended authority which was due to expire at the end of the month. Also they wanted, in Mr Chiminello's words, "to find out exactly what was happening with Garrick Gray". By this stage Mr Hemingway had heard - probably from Mr Gray himself - about the grant of the option although not the details. At the meeting the Richard Ellis men pressed Mr Rafaniello for further details of the option, and in particular the price, but without success. The price was important to Richard Ellis because their commission depended on it. Richard Ellis believed, quite justifiably in my opinion, that a sale consequent upon Mr Gray's option would entitle them to commission.
On 24 May, at Mr Gray's request, Mr Hemingway sent to him a letter setting out his opinion as to the current market rent for the Coles Myer building. The letter was in these terms:
258 Queensberry Street, Carlton
Further to our recent telephone conversation, we write to advise you as to the current market rental levels we believe are applicable to the above property.
Bearing in mind market evidence, we believe the current market rental level for 258 Queensberry Street would be in the vicinity of $200 to $205 per square metre per annum ($18.60 to $19.00 per square foot) on a net basis.
Evidence from our Research Department and further works by our Valuations Department shows that CBD fringe office space should experience between 3% and 5% growth per annum in office rentals during the next two to four years. This low projected growth rate is a direct result of the forthcoming over supply of office space within the CBD.
Considering the length of lease to Coles Myer, this property represents a prime opportunity to acquire a securely leased investment to hold over the next five to eight years. Should the eventual purchaser contemplate the sale of this property at the end of that period there would still be a substantial length of lease remaining to Coles Myer. This would once again provide the opportunity of on selling this investment under the guise of a secure long term investment.
At this point we stress that the above information is our opinion only and should you require market evidence to support the above information, Richard Ellis would be pleased to supply this to you.
he shall be guilty of an offence against this Act.
"Agent" is defined by s 4(1) as including
any corporation, firm or person acting or having been acting or desirous of intending to act, for or on behalf of any corporation, firm, or person, whether co-owner, clerk, servant
... [There follows a long list of various offices and occupations] or in any other capacity, either alone or jointly with any other corporation, firm, or person, and whether in his own name or in the name of his principal or otherwise.
Section 16(2) makes provision as to the burden of proof:
If in any prosecution under this Act it is proved that any valuable consideration has been received or solicited by an agent from or given or offered to an agent by any person having business relations with the principal, without the assent of the principal, the burden of proving that such valuable consideration was not received, solicited, given, or offered in contravention of any of the provisions of this Act shall be on the accused.
The corresponding Victorian offence is to be found in s 176(1)(a) of the Crimes Act 1958 (Vic). The definition of "agent" appears in s 175(1) and the burden of proof provision is s 186(2). The language is not identical with the South Australian provisions but the differences are not material for present purposes.
(b) "Agent"
The statutory definition "includes many who would not be within the common law concept of an agent": R v. Gallagher [1986] VR 219 at 224. In that case, a prosecution under s 175 of the Crimes Act 1958 (Vic), a union official argued that he was not an "agent" of members of the union because he could not bring about a change in legal relations between someone who could be called his principal and a third party: International Harvester Co of Australia Pty Ltd v Carrigan's Hazeldene Pastoral Co (1958) 100 CLR 644 at 652. The Full Court of the Supreme Court of Victoria said (at 226):
The contention that it had not been shown that the applicant was the agent of the members of the BLF because he was not authorized to create legal relations between them and third parties cannot be sustained and the first ground of the application must accordingly fail.
However in the discussion immediately preceding that conclusion the Court referred to evidence of the applicant negotiating terms and conditions of employment on behalf of union members. Presumably such negotiations would or might lead to agreements binding on the particular members and their employers. Thus the conclusion quoted, which was relied on by SGIO, is somewhat ambiguous. It may only mean that there was evidence to show the applicant was authorized to create legal relations between members of the Union and third parties. So read, the conclusion might implicitly support the argument that agency in the strict legal sense had to be established.
Clearer support for SGIO's argument is to be found in R v Keane (1929) 30 SR NSW 63. Keane was a by-law inspector employed by the Municipal Council of Sydney. He was charged under s 3 of the Secret Commissions Prohibitions Act 1919 (NSW), which is relevantly indistinguishable from the South Australian provisions. A Mr Ormsby owned wagons from which spoil from an excavation site had been dropping onto city streets. Keane was alleged to have solicited money from Ormsby in return for not reporting the matter. Keane was convicted by a magistrate and upon appeal to Quarter Sessions the Chairman stated a special case for the opinion of the Supreme Court. The special case included the point that Keane was not an agent within the meaning of the Act. Delivering the judgment of the Full Court Ferguson ACJ said (at 64-65):
I was very much impressed with the argument of Mr Stacy that the Act was not intended to apply to cases of this kind; that it was intended to prohibit and to punish the taking or soliciting of secret commissions from people who had business relations with the principal of the agent. There are many expressions in the Act which certainly strongly suggest that that is what the Legislature had chiefly in contemplation; but the prosecution was under s.3 of the Act which I think is not so limited. It provides, as far as is material here, that if any agent corruptly solicits from any person any valuable consideration as an inducement or reward for forbearing to do any act in relation to his principal's affairs or business he is guilty of an offence against the Act. The question for us is whether the failure to report to his superior officer the breach of the by-laws was to forbear to do an act in relation to the Council's affairs. The argument of Mr Stacy was presented in this way: "A breach of the by-laws is a breach of the law and therefore a public offence. The prosecution of anybody for that breach is not an affair of the council's but an affair of the public generally, and anybody who prosecutes or refrains from prosecuting is not doing or forbearing to do any act in relation to the Council's affairs." If the appellant had been an officer nominated by the Council under some Act with authority under the Act to prosecute for a breach of the by-laws I should have been very strongly disposed to hold that that was not forbearing to do an act in relation to the Council's affairs. But that is not the position here. The appellant was not the person who had authority to prosecute. He was a person employed by the Council to obtain information for them, and I cannot see how in that respect he differs from any other employee of the Council who is employed with certain definite duties which are imposed upon him by the Council and for which he is paid by the Council. ...
I think therefore that it was proved that the appellant, who was an employee of the Council and was therefore their agent within the interpretation clause, did solicit from some person a reward for forbearing to do some act in relation to his principal's affairs, that is forbearing to report to his principal matters which he was employed to report. [Emphasis added]
Plainly enough a municipal by-law inspector would not be an agent of his employer in the strict legal sense.
I conclude that BPM and the Bird Cameron accountants were agents of their clients within the meaning of the legislation notwithstanding the fact that they did not have authority to bring about a change in legal relations between their clients and third parties. They acted "for" their clients.
(c) "Receives or Solicits"
In the case of Messrs Lynch, Korczak and Mayne there was a prior offer or promise of a fee of $10,350 for each client who invested in the scheme. Shortly after the settlement, those commissions were in fact paid. I do not accept the argument of Bird Cameron that in the case of these accountants who were only employees (i.e. Messrs. Lynch and Korczak), they did not "receive" the commissions because the payments went into the bank account of BPM. The statute speaks of receiving or soliciting by an agent "for himself or for any other person". The three accountants were the individuals who dealt with Gray & Winter. The payments did not magically pass from Gray & Winter into the bank account of BPM without human intervention. The cheques were sent by Gray & Winter with a covering letter addressed to the relevant accountants. In any case, the prior agreement with Gray & Winter, the acceptance of the promise to pay the commission amounted to soliciting. In Keane (at 66) Ferguson ACJ said:
... in order to prove solicitation it is not necessary to prove that the agent actually asked for money, but if he did something with the intention of obtaining money then that should be deemed to have been solicitation and equivalent to having asked for it.
The fact that the Bird Cameron accountants, on one view, might have obtained their commission from the clients themselves rather than from Gray & Winter is hardly an answer. The essential criminality of a secret commission lies in it being kept secret from the victim. If the victim, because of that very secrecy, unwittingly himself becomes the source of the commission it would be strange if that were an exculpatory factory available to the recipient.
(d) "Corruptly"
In R v Dillon [1982] VR 434 at 436 Brooking J said:
In my view, an agent does act corruptly if he receives a benefit in the belief that the giver intends that it shall influence him to show favour in relation to the principal's affairs. If he accepts a benefit which he believes is being given to him because the donor hopes for an act of favouritism in return, even though he does not intend to perform that act, he is, by the mere act of receiving the benefit with his belief as to the intention with which it is given, knowingly encouraging the donor in an act of bribery .. knowingly profiting from his position of agent by reason of his supposed ability in willingness, in return for some award, to show favouritism in his principal's affairs and knowingly putting himself in a position of temptation as regards to the impartial discharge of his duties in consequence of the acceptance of a benefit.
This statement was approved by the Full Court in Gallagher at 231.
I do not think I should rely on the statutory provisions which reverse the burden of proof (s 16(2) (SA) and s 186(2) (Vic)). These appear to be procedural provisions addressed to criminal courts trying prosecutions under the relevant statutes. Nevertheless at common law the mere fact of a secret receipt - a sum of money secretly received by an agent - was presumed to show that the money had been given with an intent to gain an advantage: R v Scott [1907] VLR 471 at 474 per Cussen J.
I draw the inference that the relevant Bird Cameron accountants knew, at the time the promise or offer of the commissions was made, that it was the intention of Gray & Winter to influence Bird Cameron to introduce to Gray & Winter clients whom Gray & Winter would not otherwise have met and to recommend and support the investment of those clients in the Coles Myer building investment scheme. Further, the relevant Bird Cameron accountants knew that Gray & Winter were to receive over a million dollars if sufficient numbers invested in the scheme. I also infer that the relevant Bird Cameron accountants knew their clients trusted them and knew that Gray & Winter knew this also.
The commissions were kept secret from the clients. The Gray & Winter instruction letter, even in its second version (which was of no practical use anyway since it came after the decision and investment had been made), was not a genuine attempt to inform the client about the commission. It did not tell the client what the accountant was receiving money for. It would make the ordinary reader think the payment was for a quite different purpose. On the question of disclosure of commissions, I think it excessively charitable to describe the instruction letter as ambiguous. But even if it were only ambiguous, it is remarkable that none of the relevant Bird Cameron accountants made any enquiry of their clients to see if the client properly understood the highly relevant fact that Bird Cameron would get $10,350 merely for the client's investing. See also Part XV Section 2.
It is not credible that the accountants merely overlooked the commission or that it was something that slipped out of their minds. It was a large amount, multiplied of course several times in the case of the Port Lincoln and Millicent offices.
I have come to the finding, serious as I recognise it to be and applying the standard laid down in Briginshaw v Briginshaw (1938) 60 CLR 336 and Rejfek v McElroy (1965) 112 CLR 517, that the Bird Cameron accountants at Port Lincoln, Millicent and Ballarat solicited and received these commissions corruptly within the meaning of the criminal law.
(e) The Liability of BPM
The rule that an insured cannot recover in respect of loss caused by his or her own deliberate criminal act does not exclude recovery by a party to the policy who was not privy to the wrongful act: P Samuel & Co Ltd v Dumas [1924] AC 431 at 457, Midland Insurance Co v Smith (1881) 6 QBD at 561, Lombard Australia Ltd v NRMA Insurance Ltd [1969] 1 Lloyd's Rep 575. Where the insured is a corporation, and loss is caused by the criminal act of an individual, the corporation's claim under the policy will only be defeated if, in accordance with the general principles of corporate criminal liability, the individual was "the directing will and mind of the company": H L Bolton (Engineering) Co Ltd v T J Graham & Sons Ltd [1957] 1 QB 159 at 172, Tesco Supermarkets Ltd v Nattrass [1972] AC 705 at 713.
The application of these principles is illustrated by S & Y Investments (No 2) Pty Ltd v Commercial Union Assurance Co of Australia Ltd (1986) 44 NTR 14, a case directly in point. A company operated an hotel. A manager employed by the company shot and killed a customer in circumstances which constituted manslaughter. The company was held by the Full Court of the Supreme Court of the Northern Territory to be entitled to indemnity under an accident policy against a claim by the customer's widow. The manager had authority to act for it in the management of the licensed premises but was not so closely connected with the company that his acts could be said to be its acts: see per Asche J at 38-40.
On the basis of these principles the wrongful acts of BPM's employees Lynch and Korczak were not the acts of BPM. As to Messrs Blyth and Swinney in Perth and Messrs Balcam and Tribe in Melbourne, even if any of them are to be treated as the "directing mind and will" of BPM, which I doubt, none of them were aware of the critical element of non-disclosure of commission.
(f) Extension 3
Extension 3 of the policy provides:
The Assured Firm shall be protected, within the terms of this Policy for any claim [i] upon which suit may be brought by reason of any alleged dishonesty, mis-statement or fraud on the part of the Assured Firm or its partners or its employees, [ii] unless a judgment or other final adjudication thereof adverse to the Assured Firm shall establish [iii] that acts of active and deliberate fraud or dishonesty committed by any partner or partners of the Assured Firm [iv] with actual fraudulent or dishonest purpose and intent [v] were material to the cause of the action so adjudicated [vi] and notwithstanding that such acts were not disclosed within the Assured Firm's proposal for insurance [vii] in which event this Policy shall only pay in excess of the full extent of such Partner's or Partners' assets in the firm. [viii] Any other personal assets of such Partner or Partners recovered by the Assured Firm shall inure, to the extent of the amount paid by the Policy, to the benefit of the Insurer.
(To facilitate reference I have divided the clause into numbered parts.)
The taking of secret commissions amounted to dishonesty. It is sufficient in my opinion for the claim to be "brought by reason of any alleged dishonesty" within the meaning of part [i] if acts amounting to dishonesty formed part of the alleged facts and circumstances on which the claim is based.
In the present case that dishonesty was "on the part of" the employees Messrs Lynch and Korczak in relation to the claims of the Millicent and Port Lincoln clients and "on the part of" a partner, Mr Mayne, in relation to the claim of the Ballarat clients. The dishonesty was not "on the part of" BPM itself because none of Lynch, Korczak or Mayne were the "directing mind and will" of BPM.
BPM is an insured covered under the policy for claims made against it. Since there was no alleged dishonesty, mis-statement or fraud "on the part of" BPM, it does not have to rely on extension 3 and meet the qualifications contained in that exemption, except for the case of Mr Mayne.
From part [ii] onwards there is a qualification of the cover provided by extension 3. For a start, that qualification is only concerned with partners, as distinct from employees (see part [iii]). Thus further consideration of extension 3 is only necessary in the case of Mr Mayne.
Have SGIO established that there were "acts of active and deliberate fraud or dishonesty committed by (Mr Mayne) with actual fraudulent or dishonest purpose and intent" (emphasis added)? This expression is to an extent oxymoronic since it is not easy to conceptualise dishonesty that exists without actual dishonest purpose. But the words appear in a commercial document and have to be given a workable meaning if at all possible. I am not satisfied Mr Mayne's conduct did fit that description. It was, as I have found, dishonest but arose from weakness and lack of candour rather than the deliberate act of saying something known to be untrue.
Therefore BPM is not prevented by the terms of extension 3 from claiming full indemnity under the policy, subject otherwise to its terms, against the claim of the Hendersons.
SGIO also argued that extension 3 (which of course was part of its own printed form) was void as being contrary to public policy. It relied on what was said by Lord Macmillan in Beresford at 602-605. I would however respectfully prefer to follow the decision of the United States Supreme Court in North
Western Mutual Life Insurance Co v Johnson 65 US Law Ed 159 (1920), a judgment written by Oliver Wendell Holmes J. In any event, the present case is a far cry from the rare and tragic fact situation in Beresford where Major Rowlandson, crippled by debt, shot himself three minutes before the end of the period of cover. The SGIO policy is a professional indemnity policy, typical no doubt of very many issued by insurers to accountants as well as solicitors and other professionals. Human nature being what it is, some partners and employees of accountants are going to be dishonest. Not only is it not contrary to public policy, but it is positively desirable that accountants who are not party to such dishonesty should be able to get the protection of insurance indemnity, for which of course they pay a premium which takes into account, amongst other things, the prospect of such claims. The position of the third party claimant must also be remembered. It is again positively desirable that persons suffering loss as a result of an accountant's dishonesty should have a right of recovery as far as possible against an insured defendant.
The principle that an individual cannot insure in respect of his or her own deliberate criminal act remains inviolate. But otherwise insurance along the lines of extension 3 serves a useful purpose, is not likely to encourage the commission of fraud, does not interfere with the administration of the criminal law, and is not contrary to public policy.
(g) Corrupt Advice
Section 8(1) of the South Australian Act provides:
Whenever any advice is given by one person to another, and such advice is in any way intended or likely to induce or influence the person advised -
(a) to enter into a contract with any third person ... and any valuable consideration is, without the assent of the person advised, given by such third person to the person giving the advice, the gift or receipt of the valuable consideration shall be an offence against this Act; but this sub-section shall not apply when the person giving the advice was, to the knowledge of the person advised, the agent of such third person, or when the valuable consideration was not given in respect of such advice.
The Victorian provision (s 179(1)(a)) is substantially to the same effect, except that it omits the expression "or likely to".
The words "advice given" are defined in s 4(1) of the South Australian Act to include:
... every report certificate, statement, and suggestion intended to influence the person to whom the same is made or given, and every influence exercised by one person over another.
See also s 175(1) of the Victorian Act.
The applicability of this provision was said to depend on the advice being given by the third person Amadio by its agent Gray & Winter. For reasons already given (Part VII Section 1) I find that Gray & Winter were not the agents of Amadio.
Retroactive Date
The schedule of the policy provides for a Sum Insured of $17.5 million and contains the following provisions:
RETROACTIVE DATE: UNLIMITED - Retroactive cover for
Sum Insured of $10,000,000
30/06/91 - Retroactive cover for
Sum Insured of $15,000,000
30/06/92 - Retroactive cover for
Sum Insured of $17,500,000
I accept the evidence of Dr Rodney Benjamin, a consultant with extensive experience in the insurance industry, to the effect that the technical term "retroactive date" means the date after which the events in respect of which the insured's liability is covered by the policy must have occurred.
Applying the principle to the present policy, cover is provided up to $10 million for claims made during the period of insurance, whenever the relevant acts, errors or omissions occurred. Cover is provided up to $15 million if the claim is made in respect of acts, errors or omissions which occurred on or after 30 June 1991. Cover is provided up to $17.5 million where the acts, errors or omissions occurred on or after 30 June 1992.
In the present case the relevant acts, errors or omissions occurred in May and June 1990 and thus before 30 June 1991. Therefore the relevant cover is $10 million.
Excess
The policy provides:
This Policy is only to pay in respect of each and every claim the amount of the claim which exceeds the sum stated as "the excess" in the Schedule except when the said excess is to be:
multiplied by a factor of five in respect of claims arising under Extension 3 of this Policy involving dishonesty of a partner where no six monthly internal audit has been conducted, or
(ii) ...
Should any claim made against the Assured involve more than one act, error or omission, then the excess specified in the Schedule shall apply to each such act, error or omission separately.
The Schedule provides for an excess of $100,000 "costs inclusive" except for certain specified practices, including Ballarat and Geelong, which are $20,000 "costs inclusive".
(a) "Each and Every Claim"
This expression applies to each and every claim against which the policy confers indemnity. Each applicant in this case (treating spouses and other related parties as a single applicant) makes a separate claim. Therefore the excess applies in relation to each claim by each claimant. The relevant criterion is claim, not occurrence. South Staffordshire Tramways Co v Sickness and Accident Assurance Association [1891] 1 QB 402, relied on by Bird Cameron, is therefore not applicable. Thus the applicable excess is:
Port Lincoln (4 claims) $400,000
Millicent (3 claims) 300,000
Ballarat (1 claim) 20,000
Geelong (1 claim) 20,000
$740,000
(b) Multiplier
For the reasons already mentioned, claims against BPM do not arise under extension 3 except in the case of Mr Mayne. But in any case, there is no evidence that a six monthly internal audit has not been conducted.
XXVI
SUMMARY OF FINDINGS
Gray & Winter did not become the agents of Hudson Conway. Gray & Winter did not become the agents of Bird Cameron or Huntley McArdle & Glass.
In respect of the various respondents, findings as to liability are as follows.
Hudson Conway and Amadio did not owe any duty of care to any of the applicants. They were not guilty of unconscionable conduct. However they are liable for the use by Gray & Winter of the Richard Ellis letter of 31 May 1990 although not for the use of the Richard Ellis information memorandum. The letter contained an opinion by Mr Chiminello, a director of Richard Ellis, that the value of the Coles Myer building on a cash sale was $14.8 million. I find that opinion was, to the knowledge of Hudson Conway and Richard Ellis, not held honestly or on reasonable grounds. Hudson Conway and Richard Ellis are liable for damages for misleading and deceptive conduct to the applicants Turner, Gordon and Dean who relied on the contents of that letter.
I find the sale of the Coles Myer building by Amadio to those of the applicants who were purchasers, coupled with the mortgage back to Amadio and associated guarantee, contravened the prescribed interest provisions of the Companies Code. Hudson Conway and Amadio would be unjustly enriched if they were to retain the benefit of those transactions. The transactions should be set aside on terms that the present registered proprietors execute transfers of their respective interest in favour of Amadio and that the mortgage and guarantee be discharged.
Gray & Winter in promoting this investment scheme were not acting as solicitors and did not owe a solicitor's duty of care to the applicants. However on ordinary principles of negligence they owed a duty of care to the applicants. Loss was reasonably foreseeable and there was sufficient proximity. They are liable for the following statements which were negligent as well as being misleading and deceptive within the meaning of the Trade Practices Act and Fair Trading Acts; (i) the market value of the building was at least $14.835 million, (ii) rent and capital value would increase, (iii) there would be no problems with re- finance in June 1993, (iv) a share could be sold with no further liabilities.
Bird Cameron owed to those of the applicants who were their clients a duty to exercise the care, skill and diligence of a reasonably competent accountant in giving investment advice concerning the Coles Myer building investment scheme. They breached that duty by failing to warn their clients of the inherent risk of the investment scheme arising from its extremely high gearing and its total dependence on substantial and uninterrupted growth in capital and rental value. Because of its high degree of risk and requirement for large and continuing contributions, the scheme was quite inappropriate for persons in the particular personal and financial circumstances of Bird Cameron's clients. Bird Cameron made no adequate enquiries as to the state of the Melbourne commercial property market and relied virtually entirely on assurances by Gray & Winter who, to Bird Cameron's knowledge, stood to earn over a million dollars in fees if all shares in the investment were taken up.
Bird Cameron implicitly represented to its clients that each of the persons involved in the promotion of the scheme was reliable and of good repute. This was misleading and deceptive because at the time Mr Garrick Gray was disqualified under s 562A(3) of the Companies (Victoria) Code from acting as a director of a company on the ground that he had taken part in the management of failed companies. Also Mr Gray had been convicted by a magistrate for issuing securities without a prospectus although on appeal to the County Court the charges were adjourned without conviction.
With one exception the Bird Cameron accountants failed to disclose to their clients that they would receive a commission of $10,350 for each client who invested in the scheme. The exception is Mr Peter Landers of Bird Cameron Geelong who not only disclosed to his client the proffered commission but declined to take it and charged, on a time basis, a much lower amount.
Huntley McArdle & Glass owed the same duty to their clients and breached it in essentially the same ways. They also failed to disclose the commmission of $10,350 for each of their clients who invested. The claim of Mr Robert Glass of that firm that his family company Wintarni Pty Ltd became a guarantor as a consequence of misleading and deceptive conduct of Gray & Winter is not made out.
Nevett Ford were retained generally to act as solicitors for the applicants in relation to the purchase, mortgage and guarantee. They were not merely sub-contractors of Gray & Winter and their obligations were not confined to conveyancing. Amongst other things they owed a duty to their clients to advise them as to the nature of the legal rights and obligations that would arise upon making the investment. Nevett Ford breached that duty by not giving adequate and timely advice as to the joint and several liability which their clients were undertaking. However in the circumstances of this case that breach was not an effective cause of their clients' loss. But Nevett Ford is liable in respect of another breach of duty, namely failing to advise their clients of the absence of a ratchet clause in the Coles Myer lease and the effect that would have on the security of the investment. Nevett Ford did not in the circumstances breach their duty in the way they dealt with two problems which arose at settlement, namely the Terrey clause and the condition subsequent. The claim by the Deans alleging negligent advice by Mr Peter Wilson of Nevett Ford is not made out.
Metzke & Allan owed a duty of care to the applicants but the extent of that duty was limited by the terms of the retainer they accepted from Gray & Winter. Metzke & Allan did not owe the applicants a duty to investigate the validity of the assumptions underlying the cashflow they prepared. Accordingly Metzke & Allan were not negligent and are not liable on any cross-claim for contribution by other respondents.
The Walkers argued additionally that they were not liable on the guarantee because the defence of non est factum was available and because the powers of attorney they signed did not confer power on their attorney to execute the guarantee on their behalf. Neither argument is made out. Nor does s 125 of the Securities Industries Code gave them any additional assistance.
The Terrey clause limits Mr Terrey's liability to his interest in the land. Effectively he is not liable on a personal covenant.
The defences of estoppel, election, affirmation and contributory negligence are not made out. There has been no failure on the part of the applicants to mitigate their loss.
Contribution between respondents in respect of their liability to the various applicants will be in the proportions set out in Part XXIV of these reasons.
As to remedies, the transactions should be set aside because of the breach of the prescribed interest provisions. There is no other ground made out for setting aside. In the absence of the prescribed interest ground, the applicants would be left to their rights in damages.
The amounts already paid are recoverable as damages. Interest at commercial rates is payable on these amounts. The damages would also include the applicants' liability under mortgage and guarantee, were they not to be set aside, less the present value of the building.
The decline in the property market after the purchase is not a supervening event breaking the chain of causation. In calculating damages, tax deductions or other tax benefits obtained are not to be taken into account.
As to the insurance indemnity claim by Bird Cameron against SGIO, I make the following findings. The claims made against Bird Cameron arose by reason of acts, errors or omissions of Bird Cameron in or about the conduct of the professional business of chartered accountants and are within the cover of the policy. Indemnity is not avoided on the ground that Bird Cameron's acts, errors or omissions were deliberate acts. Exclusion clauses (c) and (e) do not apply. The receipt of commissions by Bird Cameron accountants other than Bird Cameron Geelong constituted breaches of the criminal law against secret commissions. However BPM Pty Ltd, the company which carries on the practice of Bird Cameron, is not denied indemnity on this ground because it was not party to the wrongful acts within the principles which govern the criminal liability of corporations. BPM is entitled to cover under the terms of extension 3 in the case of the clients of Bird Cameron Ballarat. Extension 3 is not void as being against public policy.
The applicable cover under the policy is $10 million with an excess as provided in the policy in respect of each and every claim. Spouses and other related parties are to be treated as making a single claim. The total excess is $740,000 costs inclusive. The multiplier does not apply.
The further hearing will be adjourned to a date to be fixed to enable the parties to make submissions as to the form of orders, including orders for costs, which should be made in the light of these findings. I direct written submissions to be filed and served within 14 days.
XXVII
ACKNOWLEDGMENTS
Conventionally a judgment presents as the unassisted work of the judge alone. However the present case, containing as it does numerous parties, and claims and cross claims, and issues of fact and law, enough for a hundred or more trials, warrants a departure.
I shall therefore express my appreciation for a number of people who have contributed in different but essential ways. Counsel and solicitors advanced their clients' cases with skill and dedication while at the same time giving a high degree of co-operation to the efficient management of the trial. My secretary Mrs Judith Dikstaal, my Associate Ms Celia Conlan, and Mr Justin Ford and Mr Matthew Barrett who successively worked as research assistants, all provided assistance that was invaluable. I thank them and also the Court officers and Auscripts who provided their usual excellent standard of transcript services.
I certify that this and the preceding 442 pages are a true copy of the reasons for judgment of his Honour Mr Justice Heerey.
Dated:
Associate
Appearances
Counsel for the applicants: Mr E N Magee QC with Mr R H Smith and Mr I H Percy
Solicitors for the applicants: A P Kelly & Associates
Counsel for the Walkers: Mr D F Hyde
Solicitors for the Walkers: Barnfield Sommerville Verlarto
Counsel for Amadio/Hudson Conway Mr N J Young QC with Mr K W
Pty Ltd: S Hargrave
Solicitors for Amadio/Hudson Corrs Chambers Westgarth
Conway Pty Ltd:
Counsel for Gray & Winter Mr S K Wilson QC (20,21,24 March 1995
Mr S M Anderson (20 March - 12 April 1995)
Mr P K Searle (12 - 24 April 1995)
Mr A N Bristow (26 April - 31 August 1995)
Solicitors for Gray & Winter Gray & Winter
Counsel for Nevett Ford: Mr P G Cawthorn
Solicitors for Nevett Ford: Middletons Moore & Bevins
Counsel for Bird Cameron Mr J I Fajgenbaum QC with Mr D M Clarke
Solicitors for Bird Cameron Barker Gosling
Counsel for Huntley McArdle Mr A C Chernov QC with Mr
& Glass J D Elliott
Solicitors for Huntley McArdle
& Glass Lander & Rogers
Counsel for Metzke & Allan Mr Michael Shatin QC with Mr M A Robins
Solicitors for Metzke & Allan Maddock Lonie & Chisholm
Counsel for Richard Ellis Pty Ltd: Mr P N Vickery
Solicitors for Richard Ellis Minter Ellison
Pty Ltd:
Counsel for SGIO of WA Mr E W Gillard QC with Mr C M Caleo
Solicitors for SGIO of WA Phillips Fox
Dates of hearing: March:
20,21,24,27,28,29,30 and 31
April:
3,4,5,6,7,10,11,12,19,20,21, 24,26,27 and 28
May:
1,2,3,4,5,8,9,11,12,17,18,
19,22,24,25,26,29,30 and 31
June:
1,2,5,6,7,8,9,13,14,16,19,
20,21,22,23,26,27,29 and 30
July:
6,7,10,11,12,13,14,17,18,19, 20,21,24,25,26,27,28 and 31.
August:
1,2,14,15,16,17,18,21,22,23,
24,28,29,30 and 31
38
0
0