I L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd
[1999] QSC 320
•22 October 1999
IN THE SUPREME COURT
OF QUEENSLAND
No. 494 of 1997
Brisbane
Before Williams J
[I L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd]
BETWEEN:
I & L SECURITIES PTY LTD (ACN 061 852 355)
Plaintiff
AND:HTW VALUERS (BRISBANE) PTY LTD (ACN 052 004 672)
Defendant
CATCHWORDS: CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - Discharge, Breach and Defences to Action for Breach - no contract existed between the defendant and plaintiff - no contractual warranties existed in respect of the valuation.
TORTS - NEGLIGENCE - CONTRIBUTORY NEGLIGENCE - whether lender who imprudently approves loan which would not have been made but for the negligent valuation, may nevertheless by guilty of contributory negligence - whether plaintiff failed to act as a reasonably prudent lender because failed to properly enquire and assess borrower’s capacity to meet its obligations under loan agreement - relevant that the plaintiffs was experienced in first mortgage lending and was lending what in effect were trust funds - whether failure of plaintiff more than a mere difference of opinion between businessmen as to commercial risks.
Commissioner of Railways v Ruprecht (1979) 142 CLR 563; Kendall Wilson Securities Ltd v Barraclough (1986) 1 NZLR 576; Trade Credits Ltd v Baillieu Knight Frank (NSW) Pty Ltd (1985) ATR 80-757, considered.
TORTS - NEGLIGENCE - APPORTIONMENT OF RESPONSIBILITY AND DAMAGES - APPORTIONMENT IN PARTICULAR SITUATIONS AND CASES - plaintiff’s failure to take proper precautions as well as the negligent valuation caused plaintiff’s loss - default occurred in making the first monthly payment which indicates the degree to which plaintiff departed from the norm - plaintiff’s contributory negligence assessed as 1/3.
Chappel v Hart (1998) 72 ALJR 1344; March v Stramare Pty Ltd (1991) 171 CLR 506; Medlin v State Government Insurance Commission (1995) 182 CLR 1; Wynbergen v Hoyts Corporation Pty Ltd (1997) 72 ALJR 65, referred to.
TRADE PRACTICES AND RELATED MATTERS - MISLEADING AND DECEPTIVE CONDUCT - whether contributory negligence is available as a defence to a claim for damages pursuant to s.52 - whether relief under the Act is not limited by analogies with actions in tort or contract - whether facts giving rise to a claim of contributory negligence may be relevant to the issue of causation - whether other conduct must completely break the chain of causation flowing from the deceptive or misleading conduct - a court may allow recovery of only some part of the loss on the basis that there were two separate and distinct causes of the loss - whether plaintiffs failure to conduct sufficient enquiries was an independent cause of the plaintiff’s loss - approach to the division of loss broadly similar to apportionment for negligence.
Argy v Blunts and Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112; Elna Australia Pty Ltd v International Computers (Aust) Pty Ltd (1987) 16 FCR 410; Henderson v Amadio Pty Ltd (1995) 62 FCR 1 (Heerey J) and (1998) 81 FCR 149 (Full Court); Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 73 ALJR 901; Marks v GIO Australia Holdings Ltd (1998) 73 ALJR 12; Munchies Management Pty Ltd v Belperio (1988) 58 FCR 274; S & U Constructions Pty Ltd v Westworld Property Holdings Pty Ltd (1998) ATPR 40-854, considered.
Wardley Australia Ltd v Western Australia (1992) 175 CLR 514, referred to.
Trade Practices Act, s.52, s. 82, referred to.
Counsel:Mr J Bell QC with Mr P McQuade for the plaintiff
Mr B O’Donnell QC for the defendant
Solicitors:T F Wardrobe Esq as town agents for McLaughlins for the plaintiff
Thynne & McCurtney for the defendant
Hearing Date: 26 July, 27 July 1999
REASONS FOR JUDGMENT - WILLIAMS J
Judgment delivered 22nd of October 1999
1. The plaintiff, a company which carries on a money lending business, sues the defendant, a valuer, for damages arising from a negligent valuation made by the defendant of property at Acacia Ridge, Brisbane, on the security of which the plaintiff advanced a large sum of money. Three causes of action were relied upon; negligence, breach of contract, and misleading or deceptive conduct under the Trade Practices Act.
2. At the outset of the trial counsel for the defendant admitted that the defendant was negligent in making the valuation and that its conduct constituted misleading or deceptive conduct within the meaning of the Trade Practices Act. He further admitted that in consequence the plaintiff suffered loss and damage, but the quantum of that loss was left in issue. There was no admission of a contract between the parties or any breach thereof. That meant that, in addition to quantum, the real issue between the parties was whether or not conduct of the plaintiff contributed to its losses, and if so what were the legal consequences thereof.
3. The directors of the plaintiff are the members of the firm of solicitors, Ingwersen & Lansdown. The money lending business was conducted in compliance with the Rules of the Queensland Law Society Incorporated which regulate the conduct of such a business of which a practitioner is the beneficial owner (exhibit 5). The plaintiff also had the benefit of the Exemption granted by the Australian Securities Commission (exhibit 6).
4. The funds which the plaintiff utilised in carrying on its money lending business were essentially trust monies obtained from clients of the firm of solicitors. In advertising material soliciting funds for the business there was a blurring of the distinction between the solicitors, Ingwersen & Lansdown, and the plaintiff company. For example, the first sentence of that document (exhibit 17) is in these terms: “Ingwersen & Lansdown Solicitors are now one of the largest private lenders in Queensland and are Specialists in the area of First Mortgage Investments.” In that document it was asserted that investors would obtain “better rates than are offered by the main Financial Institutions.” Both the document, exhibit 17, and the oral evidence of W M Parer, make it clear that the plaintiff was not a lender of last resort; it was competing with, for example, merchant banks and similar financial institutions. By exhibit 17 the plaintiff was clearly representing to its investors that experienced solicitors were involved in the management of the business, that they were specialists in the field of first mortgage lending, and that the highest professional standards were adopted in managing each loan.
5. Usually the practice was followed of syndicating each loan; that is the money advanced to a particular borrower would be made up of contributions from a number of investors. The purpose behind that was to spread the risk over a number of clients. Also, no one client was usually in a position to advance the total sum required.
6. As is usual where monies are borrowed on security of a mortgage over land the borrower was obliged to pay the plaintiff’s expenses as mortgagee. Ingwersen & Lansdown carried out the legal work for the plaintiff and their costs were payable by the borrower. The advance was always on the basis that interest was payable monthly; it was collected by the plaintiff and distributed immediately among the investors who comprised the syndicate in question. The plaintiff charged a management fee for performing such services; that fee (usually 1% per annum of the amount of the loan) covered its expenses of administration and also represented its profit.
7. The borrower in the instant case was Camworth Pty Ltd; at the material time it was the registered proprietor of the land described as Lots 1 to 19 and Lot 999 on Registered Plan 887417, situated at Acacia Ridge. That land had been acquired by Camworth sometime prior to August 1994. Interestingly among the documents transmitted to the plaintiff by the broker who acted as intermediary between the plaintiff and Camworth was a letter from Catalano & Co, chartered accountants, dated 24 May 1994, reading as follows:
“I confirm that the above named company acts as trustee for the “Didar Mohammed Family Trust”.
To the best of my knowledge both Camworth Pty Ltd and the Didar Mohammed Family Trust are dormant and have not traded since the Trust was established on 20 December 1989.”
8. In or about August 1994 Didar Mohammed instructed the defendant to assess the current market value of the subject property with the aim of using the property as security for a loan from PJB Mortgage Management Pty Ltd (PJB). That valuation was dated 18 August 1994, and determined that “a reasonable assessment of the proposed residential sub division and townhouse development site for mortgage security purposes at date of inspection being 18 August 1994 is considered to be $950,000". At that time approval of the Brisbane City Council had been obtained for the subdivision of the property into 36 lots. Camworth had determined upon a stage development, with the first stage involving the registration of 19 residential allotments. That involved carrying out development works including the construction of roads. It was for the purpose of financing those works that the loan from PJB was sought.
9. On 2 September 1994 PJB advanced $650,000 to Camworth and took a first mortgage over the subject property. Interest on that loan was payable in advance, and in fact was deducted initially from the loan funds.
10. Camworth also owed Moggill Constructions Pty Ltd $300,105.59, undoubtedly for engineering works carried out on the development. By July 1995 Moggill Constructions held a second mortgage over the property in question.
11. The development works were carried out so that Lots 1 to 19 became registered and were on the market from at least early in 1995. In the beginning the asking price for those lots was in the range $60,000 to $65,000.
12. In a valuation dated 2 March 1995 (exhibit 15A) the defendant determined the market value of Stage 1 (Lots 1 to 19) at $1.026M and the value of the balance area at $550,000, a total of $1.576M. The calculation of the value of Stage 1 was based upon a value of each of the 19 lots of $54,000. The valuation expressly stated that at that price with “adequate marketing” average sales should be at the rate of two allotments per month.
13. Included amongst the papers constituting the valuation report was a copy of an advertisement for an auction of the 19 lots to be held on 4 March 1995 with a “bidding guide” of $55,000. Also included was an “advertising cost estimate” detailing advertisements in newspapers circulating in South East Queensland, Sydney and Melbourne during the period 11 February to 1 March 1995. It would appear that no sales were effected through such an auction; indeed not one lot had been sold by 28 July 1995.
14. Among the documents submitted by the broker to the plaintiff was a statement of assets and liabilities of Didar Mohammed dated 29 June 1995. It showed that he owned a house property valued at $207,500 which was encumbered to the extent of $150,000. He had cash of $20,00, furniture valued at $20,000 and two motor vehicles having a combined value of $27,000. The only other asset he disclosed was his “share” in Camworth which he valued at $1.576M in accordance with the defendant’s valuation. He disclosed a liability being Camworth’s indebtedness to the holders of the first and second mortgages over the subject land in the total sum of $938,000. The only other liability disclosed was $1,000 to MasterCard. The document does not disclose, and the plaintiff made no enquiries to ascertain, whether Didar Mohammed had any source of income or any employment.
15. That provides the essential background to the submission by the broker, Invest Lend (Aust), dated 3 July 1995, for a loan of $950,000. The application was primarily handled by Parer, a director of the plaintiff and a partner in the solicitor’s firm. The loan was sought “to refinance the existing facility which is not available for renewal upon the expiration of its term”. The letter from the broker also contained the following sentence which was the subject of much debate during the trial: “Since first speaking to you on this, Camworth has entered into fixed price contracts on 13 of the Blocks for Homes to be built, with the Builders carrying the cost until settlement of the sale of the Homes.” The broker went on to say that that would “greatly enhance the properties and make them more saleable”. There were two valuations by the defendant attached to the application. The first was that of 2 March 1995 to which reference has already been made, and the second was one dated 13 June 1995. The second valuation took into account houses constructed on all of the 19 sites; on all the evidence that was disregarded by the plaintiff and it need not be considered further for present purposes. I have already mentioned the letter from Catalano & Co and the statement of assets and liabilities of Didar Mohammed which were attached to the application. Brief reference need be made to some other material included therewith. There was a letter from Henderson Holyoake, solicitors for PJB, stating that Camworth “has met all of its obligations under the terms of the mortgage” to PJB. Parts of the building contracts referred to were also annexed, and they contained a reference to Condition 15, and a Security Amount of 5%. When the full building contract is looked at it appears clear that a deposit of $39,000 approximately was required with respect to the 13 contracts before the builders would commence work. There was nothing in the material submitted by the broker to suggest that such security deposit had been paid by or on behalf of Camworth.
16. By letter dated 11 July 1995 the plaintiff indicated it had “conditionally approved your loan application”; and then specified certain conditions which had to be fulfilled. An assignment of the valuation was required. There was also the payment of a commitment fee of $5,000 and the submission of specified documentation. In particular there was a requirement that there be a “Statement of the Borrower’s Assets and Liabilities signed by the Borrowers”.
17. The $5,000 was duly paid, but no statement of assets or liabilities of the borrower was ever submitted.
18. The assignment of the relevant valuations was evidenced by two letters from the defendant. The first was dated 12 July 1995 and referred to “our full valuation report undertaken on 18 August 1994 and our updated advices undertaken on 24 February 1995.” It went on to state “that the report is suitable for the purposes of Ingwersen and Lansdown” and “we extend our responsibility so far as the content of our report is concerned.” That was not acceptable to the plaintiff; it required more detail. In consequence by fax on 18 July the defendant submitted a further letter bearing date 12 July 1995; it was in these terms:
“We refer to the abovementioned full valuation dated 18 August, 1994 of $950,000 prepared for PJB Mortgage Management Pty Ltd and updated valuation undertaken on 2 March, 1995 for $1,026,000 for Stage 1 comprising 19 sub divided and sealed green street allotments together with balance englobo lands valued at $550,00 for Stage 2 and 3.
We wish to advise that the valuation report is suitable for your mortgage security purposes and acknowledge that you intend to loan $950,000 (60% thereof) in reliance on our valuation, secured by a registered first mortgage on the above property.
In the case of a mortgagee sale for the above property we recommend that a selling period of six months should be allowed to achieve the above valuation price.”
19. In those circumstances the loan was approved and settlement was effected on 28 July 1995. At settlement three bank cheques were handed over: one in favour of Henderson & Holyoake Trust Account in discharge of the PJB mortgage in the sum of $631,321.41; one in favour of Henderson & Holyoake Solicitors for $200; and one in favour of Moggill Constructions Pty Ltd in discharge of the second mortgage in the sum of $300,105.59. That makes a total of $931,627. The balance of the $955,000 (loan $950,000 and commitment fee $5,000) was retained by the plaintiff for costs and outlays and stamping.
20. The loan agreement provided for an interest rate of 19.5% per annum payable monthly in arrears with a reduction in the rate to 13.5% per annum if all payments were strictly met as and when they fell due. The term of the loan was for a period of 12 months from the date of settlement. No other terms of either the loan contract or mortgage need be referred to.
21. The first payment of interest was due on 1 September 1995 and Camworth defaulted in making that payment. In other words, the borrower defaulted with respect to its very first obligation pursuant to the agreement. At the default rate the required payment was approximately $15,000, and at the reduced rate approximately $10,000.
22. Thereafter the plaintiff, as mortgagee, took all reasonable steps to effect a sale of the mortgaged property. It was not sold until 8 January 1997 when it realised $610,000 gross, $592,367.69 nett to the plaintiff. There was no suggestion that the plaintiff had acted other than as a reasonably prudent mortgagee in exercising the power of sale. Camworth was wound up on 4 June 1997. The plaintiff has recovered nothing from Camworth or the guarantors of the loan other than the nett proceeds of sale referred to.
23. The plaintiff contended that $610,000 represented the true market value of the land as at March-July 1995, but it is not necessary to make any specific finding in relation thereto. It was not contested that the valuation of $1.576M was arrived at negligently and that the true market value at the relevant dates was substantially below that figure. It is sufficient to say that, given the plaintiff’s clear policy of lending to a maximum of 66.6% of the value of the property (here 60%), the loan of $950,000 would never have been approved or made if the defendant had furnished the plaintiff with the correct market value. That finding is important bearing in mind the reasoning of the High Court in Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 73 ALJR 901.
24. It is in those circumstances that the action is brought. The cause of action in negligence is based on the defendant’s failure to exercise due care and diligence in determining the market value of the subject land. The cause of action in contract is based upon an alleged agreement for reward to value the property in question and a breach of its implied terms. Finally the cause of action based on the provisions of the Trades Practices Act alleges misleading and deceptive conduct in representing that the market value of the land was $1.576M, that the valuation was suitable for mortgage security purposes involving a loan of $950,000, and that in the case of a mortgagee sale the property could be sold within a six month period.
25. The defendant meets the claim in contract by denying the existence of a contract between the parties. With respect to the claim in negligence, the defendant contends that the plaintiff caused or contributed to the loss by its own negligence or its failure to take reasonable care of its own interests. Essentially the contention was that the plaintiff failed to take reasonable steps to assess the ability of the borrower to repay and failed to perform any proper risk assessment with respect to the borrower. Finally, the defendant contends that not all the claimed loss was damage suffered in consequence of the defendant’s misleading statements. Here the same facts alleged to constitute contributory negligence are said to have been a collateral cause of the plaintiffs’ loss.
26. Essentially the matters raised by the defendant call for an examination of the enquiries made by the plaintiff prior to entering into the loan agreement. Many of the relevant matters have been referred to previously, but it is necessary to say something more about some aspects of the plaintiff’s conduct.
27. Parer said that he regarded the existence of the building contracts as a “positive point” but claimed he did not rely on them in deciding whether or not to advance the funds requested. That may well be so in a strict sense, but nevertheless it seems clear that the representation that there were building contracts in place was intended to induce, and did induce, in the mind of the lender a belief that the overall project was proceeding towards early sale of the lots. A prudent lender, in my view, would have made some enquiries with respect to the security deposit, and if that was done here the lender would have been alerted to the precarious financial position of the borrower. It is clear that the projected sales rate was seen by Parer as critical, and in that context the existence of 13 building contracts was a material consideration.
28. In my assessment Parer was remiss in not enquiring further of Henderson Holyoake what was involved in the statement that the borrower had met all its obligations with respect to the PJB mortgage. A simple enquiry would have elicited the response that full interest payment had been deducted initially from the loan advance and that in fact there was no other commitment which the borrower had to meet during the currency of the loan.
29. All of that becomes more critical when weight is given to the fact that the plaintiff was told that Camworth had been dormant for some years and, despite the request, no statement of assets and liabilities of Camworth was submitted. The statement of assets and liabilities of Didar Mohammed was vague and general and no enquiry was made, for example, as to how he was meeting his commitments under the house mortgage.
30. With hindsight it is clear that Camworth never had any realistic opportunity of meeting monthly interest payment pursuant to the loan. In my view if reasonable enquiries had been made prior to loan approval that would have been obvious to the plaintiff.
31. The only chance Camworth ever had of paying the interest each month was by regularly selling two blocks of land per month. To meet the first interest repayment it would have been necessary for the contract of sale with respect to those lots to have been settled within the first month of the loan being made. The plaintiff was alerted to the fact that the lots were difficult to sell because all had been on the market since the beginning of 1995 and none had been sold by the end of July when the loan was made. Though the valuation report referred to the auction and the advertising campaign, no enquiries at all were made by the plaintiff with respect to that. Given that the advertisement referred to a “bidding guide” of $55,000 it cannot be said that the plaintiff believed that the lots were over priced and that is why they were not selling. The valuation was based on a lot value of $54,000.
32. It is not without significance in my view that the whole of the loan in question was to be expended in paying out existing loans; there was nothing available to Camworth from the subject loan to permit some further development or increase its capital. That should have alerted the plaintiff to the precarious financial position of the borrower.
33. In all of those circumstances I am satisfied that the plaintiff made insufficient enquiries as to the borrower’s financial position, particularly having regard to the fact that it was trust monies which were being lent and that this transaction was not one which came within the category of a borrowing of “last resort”. In my view, and this was recognised by Parer in his oral evidence, it is always important for a lender to be reasonably satisfied that the borrower can meet repayments of both principal and interest. That test was not satisfied here.
Contract
34. In paragraph 15 of the statement of claim the allegation is made “that the Defendant agreed for reward with the Plaintiff to carry out a valuation of the property and agreed that the valuation could be relied upon by the Plaintiff and was for the benefit of the Plaintiff, with the consequence that the Plaintiff is entitled to sue upon the Agreement.” In response to a request for particulars the plaintiff referred to the two letters from the defendant bearing date 12 July 1995. Then in the following paragraph of the statement of claim it is alleged that the following were implied terms of that agreement; the defendant would:
“(a)Do all that was necessarily required to properly value the property as required of it by the Plaintiff;
(b)Properly advise the Plaintiff exercising proper professional care and skill in carrying out the valuation;
©Carry out the valuation exercising all reasonable care, skill, diligence and competence.”
35. Those matters were dealt with in the plaintiff’s written submissions as follows:
“There existed a contract as between the plaintiff and the defendant to the effect that in consideration of the defendant extending its responsibility in respect of the valuation (letter of 12 July 1995) the plaintiff advanced $950,000 to the borrower in reliance of the valuation and letter of 12 July 1995, secured by a registered first mortgage on the above property (defendant’s letter of 12 July 1995, plaintiff’s facsimile of 13 July 1995 to Investland; facsimile of 18 July from Investland to defendant; defendant’s facsimile of 18 July 1995 and attached letter of 12 July 1995).”
Thereafter those submissions set out particulars of the implied terms as stated in the pleading.
36. As already noted the defendant did not admit that there was any contract between it and the plaintiff. Counsel for the plaintiff did not refer to any authorities in his final address in support of the proposition that there was such a contract.
37. I cannot accept the submission as stated in the written submissions. If there were a contract in those terms then the plaintiff was contractually bound as at 12 July (or at latest 18 July) to advance the $950,000 to Camworth. That proposition is so absurd in the circumstances of the case that it only has to be stated in order to be rejected. Of course, the plaintiff was entitled to consider all of the circumstances relating to the borrowing before agreeing to make the advance and it was not bound by any contract with the defendant to do so.
38. There was no valuation made by the defendant pursuant to any contract with the plaintiff as suggested by the particulars of the implied terms.
39. There was, of course, a contract between the defendant and Camworth (or Didar Mohammed) to prepare the valuations of 18 August 1994 and 2 March 1995. Payment was made by either Camworth or Didar Mohammed. No consideration passed from the plaintiff to the defendant for the “assignment” of the valuation evidenced by the letters of 12 July. In strict terms there was no assignment by the defendant of any legal or equitable right derived from a contract enforceable either in law or equity.
40. I have considered this question from a number of aspects and, as already noted, I have not been assisted by any authorities cited by counsel for the plaintiff. I have had regard to whether or not the representation contained in the letter bearing date 12 July but faxed on 18 July could be regarded as in the nature of a contractual warranty of the type discussed in Shanklin Pier Ltd v Detel Products Pty Ltd (1951) 2 KB 854, but I have come to the conclusion that the situation here is clearly distinguishable.
41. By the two letters bearing date 12 July the defendant clearly made a representation to the plaintiff with the intention that the plaintiff would act upon it to its possible detriment. There is no doubt that in making that representation a duty situation existed between the defendant and the plaintiff, and also the circumstances gave rise to a potential claim under the Trade Practices Act. But there was no contract, and no obligations, express or implied, were imposed on the defendant pursuant to any contract between it and the plaintiff.
42. It follows that the plaintiff has no claim for damages for breach of contract. That has the consequence that the decision of the High Court in Astley v Austrust Ltd (1999) 73 ALJR 403 is not relevant for present purposes.
Negligence - Contributory Negligence
43. As already stated the defendant admitted that the valuations in question were negligently prepared. The issue is whether in the circumstances outlined above the plaintiff was guilty of contributory negligence.
44. It was conceded by Parer in evidence that the financial capacity of the borrower to service the loan was an important consideration in deciding to lend in any case, and that was the position here. As a general proposition a prudent lender would always have regard to the financial capacity of the borrower to service the loan (cf. per Kirby and Callinan JJ in Kenny & Good at 923).
45. In accordance with general principle it has been recognised in a number of cases that a lender who imprudently approves a loan which would not have been made but for the negligent valuation, may nevertheless be guilty of contributory negligence: Kendall Wilson Securities Ltd v Barraclough (1986) 1 NZLR 576, Challenge Bank Ltd v V L Cooper & Associates Pty Ltd (1996) 1 V R 220, and Oz Finance Pty Ltd v J L W (Queensland) Pty Ltd (unreported, Supreme Court of Queensland, No 1180 of 1995, Judgment 7 August 1998). In similar circumstances Clarke J in Trade Credits Ltd v Baillieu Knight Frank (NSW) Pty Ltd (1985) Aust Torts Reports 80-757 would clearly have reduced the plaintiff’s claim because of contributory negligence if he found that the facts warranted such a finding.
46. The real question here is whether the findings of fact justify a conclusion that the plaintiff was contributorily negligent. In considering that it must be remembered that the plaintiff held itself out as a lender of ordinary prudence with directors who were solicitors experienced in first mortgage lending. It was also lending what in effect were trust funds.
47. As already noted Parer conceded that the plaintiff would not have lent if it had concluded that the borrower did not have the capacity to meet interest payments. Against that background the failure on the part of the plaintiff to ascertain the borrower’s cash flow problems, to appreciate its lack of capital and income, and to assess the viability of its regularly selling two allotments per month is significant. It was not a sufficient answer for Parer to say, as he did in evidence, that the borrower could have taken out a second mortgage to enable it to make interest repayments.
48. In relation to contributory negligence one should always bear in mind statements such as the one by Mason J in Commissioner of Railways v Ruprecht (1979) 142 CLR 563 at 570, where he said:
“Contributory negligence differs from negligence. There is no duty of care owed to another person ...; and contributory negligence involves conduct which exposes the actor to the risk of injury without necessarily exposing others to risk. Nonetheless it has been repeatedly asserted that the standard of care in contributory negligence, like the standard of care in negligence, depends on foreseeability and it is that of the reasonable and prudent man, so that a defendant is guilty of contributory negligence if he ought reasonably to have foreseen that, if he did not act as a reasonable and prudent man, he would expose himself to risk of injury ...”.
49. I am satisfied on the evidence the plaintiff, through its directors, was aware of the importance of the borrower’s capacity to meet its obligations under the loan agreement. Given the facts as found I am also satisfied that the plaintiff failed to act as a reasonably prudent lender. Camworth was in a precarious financial situation, it had no realistic chance of regularly meeting interest payments, and those matters would have become obvious if the plaintiff had carried out the enquiries and made the assessments which a prudent lender ordinarily would have conducted. It failed to meet the standard it set for itself in its advertising material. The failure of the plaintiff was more than what could be described as a mere difference of opinion between businessmen as to commercial risks. This was not a situation such as that considered by Clarke J in Trade Credits. There the principal purpose of the loan was to enable the staging of rodeos, and the lender made the assessment that gate receipts would enable the loan to be repaid. It was regarded as a speculative venture but a commercial decision was made to go ahead with it. With hindsight the venture was never likely to be successful, but in those circumstances Clarke J held there was no contributory negligence. That is not the case here. The facts here indicated to a prudent lender that the borrower would have difficulty in meeting interest payments and further investigations would have been made by any prudent lender before approving the loan if it did so at all.
50. The risks associated with any sale by a mortgagee after default are well documented in the law reports and law texts. Such sales notoriously fail to fetch the desired price, and frequently there is a significant delay between the mortgagee taking the appropriate steps and finalisation of the sale. Even without fluctuations in the market there is always a deal of uncertainty as to the price which will be obtained. Because of that prudent lenders would always seek to avoid the possibility of having to exercise power of sale, particularly one month after approving the loan. Failure to take precautions to avoid or minimise that risk constitutes in my view contributory negligence. That accords with the approach in cases such as Kendall Wilson Securities and Challenge Bank.
51. But that does not detract from the fact that the defendant’s negligent valuation was a major factor which influenced the plaintiff to approve the loan. If a valuation at $1.76M had not been presented to the plaintiff undoubtedly more detailed enquiries would have been made. In those circumstances the negligent valuation was the major cause of the plaintiff’s loss.
52. Both the admitted negligence of the defendant and the conduct of the plaintiff in failing to take proper precautions was a cause of the loss. That conclusion is reached on the facts of this case by applying the test of “common sense and experience” in accordance with March v Stramare Pty Ltd (1991) 171 C.L.R. 506 at 515, Medlin v State Government Insurance Commission (1995) 182 C.L.R. 1, and Chappel v Hart (1998) 72 ALJR 1344. Applying that test there were two causes here of the plaintiff’s loss and it is therefore appropriate to apportion the loss according to the comparative degrees of culpability (Wynbergen v Hoyts Corporation Pty Ltd (1997) 72 ALJR 65 at 68.
53. The fact that the default in this case occurred in making the first monthly payment of interest demonstrates the degree to which the plaintiff departed from the norm and indicates the seriousness of its fault. Default at a later point in time could well have had less serious consequences for the plaintiff. There would have been no loan, regardless of the value placed on the land, if the plaintiff had made further and appropriate enquiries about the companies capacity to service the loan. In the circumstances the plaintiff’s contributory negligence is assessed at one third.
Trade Practices Act - Misleading and Deceptive Conduct
54. It was admitted by the defendant that its conduct in assigning a valuation negligently prepared constituted misleading and deceptive conduct within s.52 of the Trade Practices Act and gave rise to a remedy pursuant to s.82 thereof. In general the test for causation discussed by the High Court in March v Stramare applies to a cause of action based on s.82 (Wardley Australia Ltd v Western Australia (1992) 175CLR514 at 525). As noted above the principal contention of the defendant with respect to this cause of action was that there were two causes of the plaintiff’s loss which met that test. Operating independently of the defendant’s misleading statement was the conduct of the plaintiff in approving the loan without making proper and appropriate enquiries about the borrower’s capacity to service the loan. As found above, the plaintiff would not have approved the loan, regardless of the valuation represented by the defendant, if it had made the appropriate enquiries as to the borrower’s capacity to service the loan.
55. The real question for determination is the legal consequence of such a finding. I will review the authorities in a moment, but at the outset the observation should be made that if the claim were truly one in negligence, the facts as found, would be considered under the heading “contributory negligence”. But as this cause of action is created by statute, and embraces situations which would not give rise to a cause of action in tort, it is not appropriate to speak of the defendant establishing contributory negligence. But, in my view, that is not the end of the matter if there are two (or more) causes of the plaintiff’s loss, each of which satisfies the Wardley test.
56. I now turn to the relevant authorities.
57. Counsel for the plaintiff relied heavily on the decision in Henderson v Amadio Pty Ltd (1995) 62FCR1 (Heerey J) and (1998) 81FCR149 (Full Court). Heerey J. at 193 referred to decisions of a Full Court of the Federal Court in Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1998) 79ALR83 at 96 and Sutton v A J Thompson Pty Ltd (1987) 73ALR233 at 240 where it was held that an applicant’s failure to seek verification of the representations or his failure to check the accuracy of the representations did not affect the right of recovery of the loss pursuant to s.82. He considered himself bound by those decisions and concluded that a “plea of contributory negligence is not open” (194). On appeal Northrop, Ryan and Merkel JJ said at 265: “We are satisfied that his Honour was correct in concluding that no such defence is available under the Act nor can damages awarded be reduced on this basis. The facts giving rise to a contributory negligence claim may be relevant to issues of reliance and causation but cannot otherwise negate, or afford a defence to, the statutory cause of action under s.52.” It is of some significance for present purposes that the Full Court did not there expand on how the facts giving rise to a contributory negligence claim may be relevant to an issue of causation. Further, it should be again noted that in the present case the facts relied on by the defendant are not a failure by the plaintiff to investigate the valuation (the misleading statement), but rather conduct by the plaintiff which, independently of the defendant’s mis-statement, was a cause of its loss.
58. Further, in an earlier decision, a Full Court had also confirmed the conclusion of the trial judge that contributory negligence was not available as a defence to a claim for damages for breach of s.52: Munchies Management Pty Ltd v Belperio (1988) 58FCR274 at 286-7; but a passage in the judgment of Fisher, Gummow and Lee JJ at 286 is relevant for present purposes: “Section 82 serves to identify the classes of applicants and respondents in the action, to identify loss or damage as the gist of the action, and to mark out the measure of damages as the amount of that loss or damage. The measure of damages hangs on the words “by conduct”; the preposition “by” has been interpreted to mean “by reason of” or “as a result of”. There is thus an apparent telescoping of what to the common law would be concepts of causation, remoteness and measure of damages”.
59. Of more relevance for present purposes is the judgment of Pincus J. in S & U Constructions Pty Ltd v Westworld Property Holdings Pty Ltd (1998) ATPR40-854. There the prima facie assessment of damages consequent upon the misleading and deceptive conduct was $120,000. His Honour then referred specifically to s.87 (I) of the Trade Practices Act and went on to say that the court was empowered “to assess the relative weight of causes of action or inaction resulting in the loss complained of”. It was held that the applicant, having settled the contract, did little to resolve the difficulty of which it was then aware. That lack of activity in its own interests was found to have helped to turn what may have been an avoidable loss into a definite one. Pincus J. then went on to consider how the court should deal with “divided responsibility for a loss”. He observed that he could find no guidance in reported authority as to the way in which one should allocate the loss and went on: “but under s.87 it appears to me to be within the power of the Court in an appropriate case, to award only part of the loss actually suffered, on the basis that it had two causes. This is such a case, and the applicant will be awarded two thirds of the difference between the price and the value . . .” (49,217). That is the closest authority I can find to the position which exists here, where there are two separate and distinct causes of the plaintiff’s loss.
60. It is necessary to consider those authorities, and the observations made thereon, in the light of the reasoning of the members of the High Court in Marks v GIO Australia Holdings Ltd (1998) 73ALJR12 and Kenny & Good. In Marks the Court was concerned with a claim by a borrower that it had suffered loss and damage caused by misleading and deceptive conduct of the lender; the appeal called in question the application of ss.82 and 87 to the facts as found. Gaudron J. at para 17 stated that “there is no basis for thinking that relief under s.82 is to be confined by analogy either with actions in contract or in tort”. She also observed at para 24 that it “is apparent from its terms that s.87 allows for relief which is tailored to the particular case and is not confined to notions drawn from equity, although . . . the principles which govern equitable remedies may provide guidance as to the appropriate order in a particular case”. McHugh, Hayne and Callinan JJ dealt with the issues of relevance here in paras 38, 41 and 42 as follows:
“It can be seen, therefore, that both ss.82 and 87 require examination of whether a person has suffered (or, in the case of s.87, is likely to suffer) loss or damage “by conduct of another person” that was engaged in the contravention of one of the identified provisions of the Act. That enquiry is one that seeks to identify a causal connection between the loss of damage that is alleged has been or is likely to be suffered and the contravening conduct. But once that causal connection is established, there is nothing in s.82 or 2.87 (or elsewhere in the Act) which suggests either that the amount that may be recovered under s.82 (I), or that the orders that may be made under s.87, should be limited by drawing some analogy with the law or contract, tort or equitable remedies. Indeed, the very fact that ss.82 and 87 may be applied to widely differing contraventions of the Act, some of which can be seen as inviting analogies with torts such as deceit, or with equity, but others of which find no ready analogies in the common law or equity, shows that it is wrong to limit the apparently clear words of the Act by reference to one or other of those analogies.
. . .
This is not to say that no help can be had from the common law in deciding what damages may be allowed under s.82 in cases of conduct contravening s.52. Very often, the amount of the loss or damage caused by a contravention of s.52 will coincide with what would have been allowed in an action for deceit. But that is because the inquiry in both cases is to find out what damage flowed from (in the sense of being caused by) the deceit or contravention. Leaving aside questions of remoteness of damages in assessing damages for deceit . . . the damages for deceit will be the sum representing the loss suffered by the plaintiff because the plaintiff altered its position in reliance on the defendant’s misrepresentation. But the analogy cannot be pressed too far. It should not be pressed to the point of concluding that the only damages that may be allowed under s.82 are those that would be allowed in an action for deceit. The question presented by s.82 is not what would be allowed in deceit, it is what loss or damage has been caused by the conduct contravening the Act.
It follows, then, that a comparison must be made between the position in which the party that allegedly has suffered loss or damage is and the position in which that party would have been, but for the contravening conduct. Even this enquiry may not conclude the question. Analysing the question of causation only by reference to what is, in essence, a “but for” test has been found wanting in other contexts and it may well be that it is not an exclusive test of causation in this area either. But that is not a question which we need consider in this case. For the moment it is enough to say that s.82 requires identification of a causal link between loss or damage and conduct done in contravention of the Act.”
Gummow J. at para 103 also observed that “the measure of compensation which is recoverable in an action under s.82 is [not] confined by analogies with tort or otherwise. The measure of damages recoverable in actions of a varied nature for which s.82 provides is not to be determined on the basis that the appropriate guide in most cases will be found by asking “what would have the measure if the common law did what it does not do, namely treat as a tort any facts which happen to give rise to an action under s.82. Analogy, like the rules of procedure, is a servant not a master”. A similar approach was adopted by Kirby J. in para 150.
61. Those issues were re-visited in Kenny & Good. Dealing with the assessment of damages in an action for breach of s.52, Gaudron J. in para 30 made the following observations: “It may be that a contractual provision that operates to limit tortious liability will not avail in an action based on a breach of s.52 of the Act. Further, it is possible that liability under s.52 of the Act is limited neither by foreseeability nor remoteness”. McHugh J. in para 54 relevantly said: “The issue is not one of causation, but whether the loss caused by the breach is too remote to be recoverable. In principle, the valuer is only liable for losses of a kind that were sufficiently likely to result from the breach of duty to make it proper to hold that the loss flowed naturally from the breach, or that are of a kind that should have been within his or her reasonable contemplation”. Finally, and significantly, Kirby and Callinan JJ in paras 128, 129 and 130 said:
“Although there were differences in Marks concerning other questions, all members of the Court referred to the dangers of relying uncritically upon analogies with the remedies available for other civil wrongs when considering the relief to be provided under the Trade Practices Act. No member of the Court suggested that it was wholly unhelpful to consider the background of analogous common law remedies in deciding what damage should be allowed under s.82 of the Trade Practices Act in cases involving conduct in breach of that Act.
In Marks, all members of the Court acknowledged that help could be had from the common law in deciding what damages may be allowed under s.82 in the cases of conduct contravening s.52. Very often, the amount of the loss or damage caused by a contravention of s.52 of the Trade Practices Act will coincide with damages recoverable in an action at common law for deceit. This is because the inquiry in both cases is directed to ascertaining what damage “flowed from”(in the sense of being caused by) the deceit or contravention in question.
In this case, the Full Court of the Federal Court did look to the analogy of deceit, perhaps unnecessarily so, but not inappropriately because the loss which was sustained was loss or damage caused by the conduct of the appellant whether characterised as negligent conduct at common law, or a contravention of s.52 of the Trace Practices Act”.
62. In my view none of those passages from the High Court judgments preclude a court from determining that there were two causes of the plaintiff’s loss, in other words a divided responsibility for that loss, and in consequence only allowing the plaintiff to recover by way of damages pursuant to s.82 that part of the loss which is attributable to the conduct in breach of s.52. Experience shows that many, perhaps most, commercial losses have a number of causes which would satisfy the March v Stramare test. It seems abundantly clear that the legislature did not intend to deprive someone who suffered loss as a result of deceptive and misleading conduct of the right to recover at all if there was some other demonstrable cause of that loss. Equally, in my view, the legislature did not intend that the total loss should always be recoverable regardless of the number or significance of established causes other than the misleading or deceptive conduct in question.
63. Counsel for the plaintiff submitted that the other conduct must break the chain of causation flowing from the deceptive or misleading conduct altogether before it became relevant; in those circumstances no damages would be recoverable. Certainly Hill J. in Argy v Blunts and Lane Cove Real Estate Pty Ltd (1990) 26FCR 112 at 138 recognised that where the element of causation between misrepresentation and damage was severed by the intervention of the negligence of the applicant nothing would be recovered; in those circumstances the misleading and deceptive conduct was not an inducement. It was also submitted by Counsel for the plaintiff that that was the proper construction to place on the reasoning of French J. in Kewside Pty Ltd v Warman International Ltd (1990) ATPR (Digest) 46-059 at 53,233. There he spoke of deciding “whether or not a claimed loss was truly caused by the contravention in question”. In my respectful view the introduction of the qualification “truly” confuses rather than clarifies the test.
64. Further, Gummow J. in Elna Australia Pty Ltd v International Computers (Aust) Pty Ltd (1987) 16FCR 410 at 419 clearly recognised that the conduct in contravention of s.52 need not be the only cause of the loss or damage which may be recovered pursuant to s.82. As he there said, the “presence of other operative causes . . . is not necessarily fatal to the applicants claim”. In a situation where there were other causes “the court might treat those other causes as the essential or effective cause of the loss or damage and hold there was no right to damages under s.82". Or, as that learned judge noted, some more limited relief under some other provision of Part VI might be appropriate. Again I do not construe those remarks as precluding the court from allowing recovery of only some part of the losses on the basis that there were two separate and distinct causes of the loss; the amount recovered being that part of the total loss assessed to have been caused by the deceptive and misleading conduct as distinct from the other cause.
65. I have come to the conclusion that here there were two independent causes of the loss sustained by the plaintiff. Firstly, the misleading and deceptive conduct of the defendant in representing that the market value of the land was $1.576M, that the valuation was suitable for mortgage security purposes involving a loan of $950,000, and that in the case of a mortgagee sale the property could be sold within a 6 month period. Secondly, the conduct of the plaintiff in failing to make reasonable enquiries as to the financial position of the borrower and specifically its capacity to meet its obligations pursuant to the loan agreement. In deciding how the consequences of how those two causes should be divided I am of the view that the approach that should be adopted is broadly similar to that which would apply in determining apportionment of negligence. I will not repeat here the considerations stated above which were material to my assessment that the plaintiff was contributually negligent to the extent of one third. Those considerations satisfy me that the loss occasioned by the deceptive and misleading conduct should be assessed as two thirds of the total loss. To that extent, and to that extent alone, the deceptive and misleading conduct of the defendant caused loss to the plaintiff.
66. It follows that under s.82 of the Trade Practices Act, the plaintiff is entitled to recover two thirds of its established loss.
Quantum
67. The plaintiff’s material relevant to the assessment of damages was contained in exhibit 12. By the time of final addresses, some amendments to the figures contained therein were conceded. The headings and amounts claimed were as follows:
Particulars
Claim as per exhibit 12
Claim as at address stage
1. Loss of principal
$357,632.31
$357,632.31
2. Interest
$282,752.79
$275,152.79
3. Management fee
$22,958.67
$22,958.67
4. Expenses
$35,479.35
$34,103.35
5. Interest on expenses
$9,264.37
$8,962.19
6. Interest under Supreme Court Act 1995
$57,651.79
$55,382.21
7. Ingwersen & Lansdown Costs
$6,351.31
$6,351.31
Totals
$772,090.59
$760,542.83
68. Item 1 was not disputed. The amount specified is arrived at by simply deducting the net proceeds of sale ($592,367.69) from the amount of the loan ($950,000). Clearly the amount of $357,632.31 is a component of the plaintiff’s loss in accordance with the reasoning in Kenny v Good.
69. Item 2 is said to be the amount of interest the plaintiff could have earned on $950,000 from 1 August 1995 to date, less the interest notionally earned on the proceeds of sale from 8 January 1997 to date. This item, as claimed, is challenged by the defendant.
70. It is important to remember here that the plaintiff was not lending its own monies. The monies belonged to investors who had provided the funds in accordance with exhibits 7 and 17. As the former document (General Mortgage Investment Authority) makes clear, the term of the investment was to be for a period no longer than one year. Further, as item 12 in the second document indicates, the investor has “the ultimate say in which mortgage your money is invested”. No evidence was called from any of the investors who made money available making up the $950,000 in question here. The evidence does not establish whether or not any of them would have reinvested funds at the expiration of the one year period. In my view the Court ought not to draw such an inference in the absence of any evidence. It was, of course, those investors who lost interest because of the borrower’s default. If Camworth had not defaulted, then the interest would have been paid by the plaintiff directly to the investors; the plaintiff would not have benefited.
71. The only recoverable loss of interest is for the period 1 August 1995 to 31 July 1996. Ultimately it was agreed that the average quarterly interest rate during that period was 12.7% p.a., and interest should be allowed on $950,000 for one year at that rate. That gives a figure of $120,650. In those circumstances it is not necessary to make any deduction for interest notionally earned from the net proceeds of sale after 8 January 1997.
72. Item 2 should therefore be allowed in the sum of $120,650.
73. Item 3 is said to be the loss of management fee to which the plaintiff was entitled. It will be recalled that the plaintiff charged a management fee for performing the services of collecting interest from the borrower and distributing it amongst the investors who comprised the syndicate. The balance after satisfying the administrative costs in so doing represented profit.
74. In this case the plaintiff claimed a management fee on the principal advance of $950,00 at 0.084% per month ($798 per month) for the period 1 August 1995 to 26 July 1999, a total of $38,175.29. From that it deducted the notional management fee on a net proceeds of sale of $592,367.69 at 0.084% per month ($497.59 per month) for the period 8 January 1997 to 26 July 1999, an amount of $15,216.62. The difference, namely $22,958.67 was the amount claimed in item 3. This item was disputed by the defendant.
75. I am not satisfied on the evidence that an entitlement to that amount is established. The evidence does not disclose what were the administration costs and what was the profit component. At best, the plaintiff would only be able to recover the profit component; it did not in fact incur the administration expenses to which the charge related. Further, there is no basis on the evidence for charging that fee beyond the 12 month period of the loan in question. As already noted, there is absolutely no evidence as to the effect that the funds in question would have been reinvested beyond that period.
76. As the evidence does not permit of an assessment under this head, item 3 is rejected in total.
77. Item 4 represents the expenses incurred by the plaintiff as mortgagee in possession and as mortgagee exercising power of sale. During cross examination, Counsel for the defendant established that there were arithmetical errors in two of the bills of costs prepared by McLaughlins, Solicitors, who acted for the plaintiff in seeking to recover its losses from Camworth and the guarantors of the loan. The bill dated 18 April 1997 was delivered in the sum of $3,826.25 whereas the arithmetically correct figure was $2,826.75. The bill of 1 May 1997 was delivered in the sum of $4,265.25, whereas the arithmetically correct figure was $3,888.75.
78. When the adjustments occasioned by those arithmetical mistakes are made, the total for item 4 becomes $34,103.35, and that amount was not seriously contested by the defendant. That amount should be included in the assessment of the plaintiffs damages.
79. Item 5 is a claim for interest on the expenses detailed in item 4. The amended schedule handed up in the course of addresses claimed interest on each of the items therein at the rate of 10% p.a. to 26 July 1999. The only challenge by the defence was as to the appropriate rate of interest.
80. Exhibit 24 is a document from the National Australia Bank setting out interest rates over a period of time. Having perused that document, I have come to the conclusion that interest should be allowed on the items in question at the rate of 7.5% p.a. I have calculated interest on the items in question up to 25 October 1999 and the total of interest so calculated is the figure of $7,302.66. That should be allowed as item 5.
81. Item 6 was headed “Interest under Supreme Court Act 1995", but that is somewhat misleading as a perusal of the schedule and amended schedule discloses; it was really a claim for interest at 10% p.a. on the interest which it was asserted the plaintiff could have earned but for the borrower’s default (the particulars in schedule 2), less the interest notionally earned from the net proceeds of sale. For the reasons given above I have rejected the plaintiff’s claim as advanced; all that has been allowed is $120,650 being the actual interest lost for the period 1 August 1995 to 31 July 1996.
82. But whilst the plaintiff is not entitled to interest as claimed in item 6, it is nevertheless entitled to interest pursuant to the Supreme Court Act 1995.
83. Having regard to the details of interest rates set out in exhibit 24, I have come to the conclusion that interest under this head should be allowed at the rate of 7.5% p.a.
84. As at 1 August 1996 the amount owing to the plaintiff was $1,070,650, being $950,00 outstanding loan and $120,650 by way of interest. That amount remained owing until the proceeds of sale were received on 8 January 1997. Thereafter, until 25 October 1999, the amount owing was $478,283. At all times those figures represented, in accordance with the reasoning in Kenny & Good, the base measure of the plaintiff’s damages. It is on those amounts that the plaintiff is entitled to interest under the Act. I therefore allow interest as follows:
(a) interest on $1,070,650 from 01.08.96 - 08.01.97 = $35,199.45
(b) interest on $478,283 from 08.01.97 - 25.10.99 = $100,242.45
Interest under the Act is therefore allowed in the total sum of $135,441.90.
85. Item 7 related to the plaintiff’s costs in the sum of $6,351.31; included in exhibit 12 is a bill in taxable form arriving at that amount. This claim was not seriously challenged and should be allowed in the sum claimed.
86. My assessment is therefore made up as follows:
i. Difference between amount of loan and proceeds of sale $357,632.31
ii. Lost interest for period 01.08.95 - 31.07.96 $120,650
iii. Expenses incurred by plaintiff as mortgagee in possession
and as mortgage exercising power of sale $34,103.35
iv. Interest on amount claimed in item (iii) $7,302.66
v. Interest pursuant to the Supreme Court Act 1995 $135,441.90
vi. Plaintiff’s legal costs $6,351.31
Total $661,481.53
Judgment
87. The amount of damages so assessed has to be reduced by one third for the reasons stated above.
88. There will therefore be judgment for the plaintiff against the defendant for $440,987.68.
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