I & L Securities Pty Ltd v Lamberts (Australia) Pty Ltd

[1998] QSC 153

IN THE SUPREME COURT

OF QUEENSLAND  No.  4846 of 1997

Brisbane

[I & L Securities Pty Ltd v Lamberts (Australia) Pty Ltd]

BETWEEN:

I & L SECURITIES PTY LTD (ACN 061 852 355)

Plaintiff

AND:

LAMBERTS (AUSTRALIA) PTY LTD (ACN 010 700 277)

carrying on business under the style or firm name Macallisters

Defendant

CATCHWORDS:     Negligence - mortgagee relying on misleading valuation of property - whether contributory negligence on part of plaintiff

Damages - assessment - other borrowers available

Counsel:  Mr J C Bell QC and Mr P P McQuade for the plaintiff

Mr P A Freeburn for the defendant

Solicitors:  McLaughlins for the plaintiff

Gadens for the defendant

Hearing Dates:  13, 14 and 15 July 1998

REASONS FOR JUDGMENT - CHESTERMAN J.

Judgment delivered 28 July 1998

The plaintiff carries on business as a money lender.  Its directors are the members of a firm of solicitors, Messrs Ingwersen and Lansdown.  The funds which it lends are provided by the firm's clients who wish to obtain a higher return on their moneys than can be obtained from bank deposits.  The plaintiff syndicates loans in the sense that money advanced to a borrower is made up of contributions from a relatively large number of clients.  This is done so that the firm's clients are not exposed to the risk that a bad loan will deprive them of the whole of their investment.  By advancing loans from a fund aggregated from part of their client's moneys the risk of loss is reduced in that a bad loan will cause a small loss to a number of clients rather than a large loss to one client.

The plaintiff lends only on a security of a first registered mortgage over real property and adopts a conservative loan/equity ratio.  It will not lend more than two-thirds of the value of the property taken as security.  In each case a formal valuation from a registered valuer is required before a loan is made.

The borrowers are required to pay the plaintiff's expenses incurred in connection with the advance.  The legal work is carried out by Messrs Ingwersen and Lansdown who are remunerated for it.  The interest charged on the advances is paid, without deduction, to the clients who contribute to the sum which is advanced.  The plaintiff charges a management fee, typically of 1 per cent per annum of the amount of the loan, to cover its expenses of administration and to provide a profit.

The defendant carries on business as valuers.

By contract dated 30 March 1995 Mrs Desley Duncan agreed to buy from Shepherds Investments Pty Ltd a parcel of land located at 95 Lutwyche Road, Windsor in Brisbane.  The land was 3,235 square metres in extent and was zoned general industry.  It was improved with industrial buildings and was tenanted by businesses selling motor vehicles and by a number of tradesmen concerned in various aspects of automotive industry.

The purchase price was $1,850,000.00.  Settlement was due on 21 July 1995.

Mrs Duncan engaged a firm of finance brokers, Messrs Ashe Morgan Winthrop, to obtain a loan for her to enable her to complete the purchase.  The brokers contacted the plaintiff.  Their approach led to the execution of a deed of loan dated 19 July 1995 between the plaintiff and Mrs Duncan by the terms of which the plaintiff lent Mrs Duncan $1,230,000.00 for twelve months from 19 July 1995 at an interest rate of 13 per cent per annum if paid punctually.  Interest was payable monthly in arrears.  By clause 5(c) it was agreed:

"Where the interest payments are made monthly the Borrower will pay a repayment management fee of 0.084% per month to KPMG Chartered Accountants or to the Lenders Solicitors for the term of the advance."

As a condition of the loan the plaintiff required a valuation of the property.  Mrs Duncan had already obtained such a valuation and sent it to the plaintiff.  It had been prepared by the defendant and valued the land as at 11 April 1995 at $1,850,000.00. 

When, in July 1996, the loan was due for repayment Mrs Duncan requested that its term be extended for a further twelve months.  This occurred, the loan being renewed for twelve months on the same terms and conditions save for interest which reduced to 12.5 per cent per annum.

On 21 September 1996 Mrs Duncan defaulted in paying interest.  She never remedied the default and the plaintiff was obliged to exercise its powers as a secured creditor.  It sold the property on 27 June 1997 for a price of $850,000.00. 

The plaintiff brings this action against the defendant to recover damages to compensate it for the loss it claims it suffered by relying upon the defendant's valuation.  The plaintiff puts its claim on three bases:

(a)in tort for negligence;

(b)for breach of an implied contractual term to take reasonable care in performing the valuation; and

(c)for contravention of section 52 of the Trade Practices Act 1974 by making a misleading or deceptive statement as to the reliability of the valuation.

The defendant does not admit that its valuation was negligent but it does not contest the issue.  It did not require the plaintiff's expert witness to be cross-examined and adduced no evidence of its own on this issue.  This aspect of the dispute can therefore be dealt with briefly.

Although the property produced a substantial income the defendant valued it on the basis that its highest and best use was as a redevelopment site.  The plaintiff accepts that this approach was correct.  It necessarily called for a comparison between the property and other similar properties.  The defendant relied upon three sales which were said to be comparable.  They were:-

(a)Land located at 82 Lutwyche Road, Windsor, 1,253 square metres in extent, zoned general industry, sold in May 1994 for $600,000.00 equating to a value of $478.85 per square metre.  It was improved with an old motor show room and a motor vehicle display yard.

(b)Land located at 118 Lutwyche Road, Windsor, 1,482 square metres in extent, zoned general industry, unimproved and sold in March 1994 for $710,000.00 equating to a value of $479.08 per square metre.

(c)Land located at 97 Lutwyche Road, Windsor, 405 square metres in extent, zoned general industry, improved with a home, sold in January 1993 for $250,000.00 equating to a value of $617.28 per square metre.  It was said that "the sale reflects a higher rate for a smaller site".

The defendant said in its valuation, "An analysis of the sales evidence shows that a rate of $570 per metre of land area is reasonable for this property.  3,235 square metres at $570 per square metre equals $1,843,950.  For practicable [sic] purposes adopt $1,850,000".

It will have been observed that the land value on a per metre basis adopted by the defendant is substantially higher than the derived per metre price for two of the three comparable sales relied upon by the defendant.  The third was for a much smaller parcel, 405 square metres, as opposed to 3, 235 square metres for the subject property.

The inverse relationship between area and price per metre is referred to by the expert witness, Mr Harris, on whom the plaintiff relies.  In other words, if one discounts the high per metre price indicated in the defendant's third comparable sale it can be seen that there is no evidence to support the defendant's per metre valuation of the subject property.

Mr Harris points to other errors.

The defendant's second comparable sale, that of the land at 118 Lutwyche Road, was not in fact vacant as the defendant asserted.  It was improved with a substantial masonry building.  That property cannot therefore have been regarded as a redevelopment prospect as were the other comparable properties.

The defendant overlooked entirely another relevant sale, that of land at 108 Lutwyche Road.  This is on the opposite side of the road to the subject property and only fifty metres to the north.  It was improved with dilapidated buildings and was a likely redevelopment site.  It sold in September 1993 for a price of $814,000.00, giving a derived value of only $156.83 per square metre.  It was zoned general industry.

In April 1997 Mr Harris retrospectively valued the property for the plaintiff.  In his opinion its value as at 11 April 1995 was $810,000.00 on the basis that its highest and best use was for redevelopment.  He relied upon six comparable sales which included the three relied upon by the defendant.  Of most assistance to Mr Harris' valuation was land at 104 Newmarket Road, Windsor, which sold for a price of $950,000.00 on 15 August 1995.  This land was zoned light industry and was 3,831 square metres in extent.  The derived price was $247.97 per square metre.  It was similar to the subject property in area, zoning and location.  The sale indicated to Mr Harris  that the value of the subject property was $250.00 per square metre.

It is to be noted that this sale occurred after the defendant's valuation and, indeed, after the loan to Mrs Duncan.  The defendant cannot be criticized for not having had regard to it.  However, I accept Mr Harris' evidence, in his valuation, that that sale provides the best evidence of the value of the subject property in April 1995.

In the absence of any contest, I further accept Mr Harris' evidence that the defendant was remiss in overlooking the evidence of value provided by the sale of the land at 108 Lutwyche Road and that it failed properly to analyse the sales on which it did rely for its expression of opinion.

In the absence of any explanation from the defendant I conclude that its valuation was not prepared with reasonable care. 

The defendant's valuation expressly stated that it was "for the use only of the party to whom it is addressed and for no other purpose.  No responsibility is accepted to any third party/parties who may use or rely on the whole or any part of the content of this valuation."

The valuation is not, in fact, addressed to anyone but it is clear that it was not prepared for the plaintiff or with it in mind.  Nothing turns on this point because the plaintiff expressly required what it called "an assignment" of the valuation before proceeding to approve the loan.  In response the defendant wrote to the plaintiff on 30 June 1995 and said:

"We refer to our valuation of this property dated 11 April 1995 and to the request from Ashe Morgan Winthrop for the valuation to be assigned and we reply as follow.

The valuation which is addressed to Mrs D A Duncan may be relied upon by I & L Securities Pty Ltd as thought [sic] it had in fact been originally addressed to them.  We trust that this is sufficient for your requirements and if you should require any further information in respect to this valuation please do not hesitate to contact us."

Mr Freeburn, counsel for the defendant, accepted expressly that the plaintiff had relied upon his client's valuation in deciding to lend money to Mrs Duncan.
CONTRIBUTORY NEGLIGENCE

Although the defendant does not dispute the allegation that it was negligent in the preparation of the valuation, it defends the plaintiff's claim by alleging that the plaintiff failed to take reasonable care to protect its own position when lending money to Mrs Duncan and that any loss it suffered was caused, in part, by its own negligence.  Although a number of separate allegations were pleaded as giving rise to contributory negligence, in the end only two aspects of the defence were advanced.  They were that the plaintiff failed to give adequate regard to the fact that the property was a specialized industrial property being valued as a redevelopment site.  The defendant's point appears to be that the plaintiff should have been sceptical of the defendant's valuation and concluded that the property was not adequate security for an advance of $1,230,000.00.

The second aspect is that the plaintiff was careless in not enquiring sufficiently into Mrs Duncan's ability to perform the obligations imposed on her by the deed of loan.

It is convenient to deal with the arguments separately. 

The defendant was a registered valuer who conducted the valuation for a fee.  It is true that the plaintiff did not pay the fee but the defendant expressly represented that the plaintiff could rely upon the valuation as though it had been the party who commissioned it.  A valuation was required because the defendant was expert in assessing the value of properties and the plaintiff was not.  The valuation was made available to the plaintiff for the express purpose of allowing it to decide whether the advance of a large amount of money to Mrs Duncan was properly secured.  The defendant knew that its valuation was being relied upon for that purpose.  It knew that the plaintiff would proceed on the basis that the valuation was the product of a careful consideration of all the relevant material competently compiled and carefully analysed. 

It is, in my view, no easy matter for a defendant who has negligently prepared a valuation to assert that his valuation, the result of his negligence, should not be relied on by those to whom he gave it without any warning that it was latently defective.

There seems to me nothing in the point that the property was a "specialized industrial" one.  It seems to have been a fairly typical industrial property.  It was zoned general industry and  was improved with sheds common to a diverse range of industrial uses.  It does not seem to have been specialized at all.

Even if it were, the effect on value that might have been caused by its being suitable only for a specialised or restricted industrial use should have been taken into account by the valuer.

The defendant relied upon the evidence of Mr Hall, an experienced banker, who said that the property was "very risky" security for a loan because:-

·it was an "industrial commercial property that has higher risk aspects to lending as compared to... residential property";

·the nature of the tenants and the terms of the tenancies; and

·being a redevelopment site, its value was "speculative" so that "a lender needs to look at the down side scenario that could apply at a time when the property is needed for realisation".

With respect to Mr Hall it is nonsense to suggest that industrial or commercial properties (the two are not the same) are necessarily unsuitable as security for a loan or that they are invariably a less desirable form of security than residential properties.  The worth of property as security depends upon the attributes of the property and the amount of the advance.  In this case the defendant was asked to value the particular property for "mortgage security purposes".  Whether this particular property was acceptable or sufficient security was the very question the lender had to address and for which he required the valuer's professional opinion.

Mr Hall's second point is no more convincing.  None of the tenants occupied their premises pursuant to a lease.  They were all monthly tenants but had been in occupation for substantial periods.  Because the site was sold for redevelopment the absence of leases was an advantage, not a disadvantage.  A lease, or leases, with a substantial part of their term to run could delay redevelopment or add to its cost.  This was Mr Parer's attitude and I think it sensible.       Mr Hall's third point is also unattractive.  It is, in essence, that the plaintiff should have noted from the valuation that the value of the property was speculative, that is, might fluctuate in accordance with the demand for development sites, but should have ignored what the defendant said about that very point.

The defendant said:

".... a mortgagee should consider this property is basically a redevelopment site with a holding return.  Its value therefore and market demand will be influenced by where property is in the cycle.  At the present time the cycle is entering a growth phase and therefore it would not be considered unusual if the property sold for more than valuation as a new benchmark of values is created by the next wave of development."

I do not understand how it can be said that this passage should have alerted the plaintiff to an apprehension that the value of the land may have been overstated by the defendant.  It says exactly the opposite.

The loan was to be for a term of twelve months which is relatively short for an investment in real property.  Mr Hall agreed that the shortness of the term would tend to reduce the chance of a fluctuation in the value of the property.

The defendant pressed the second aspect of its argument more vigorously.

The point was said to be that the plaintiff accepted at face value the information put forward by Mrs Duncan or on her behalf by the brokers.  It is submitted that had more searching enquiry been undertaken Mrs Duncan's asserted wealth might have been seen to be insubstantial.         The points particularly relied upon were that:

(i)the plaintiff did not speak to the credit referees supplied by Mrs Duncan;

(ii)the plaintiff did not verify that Mrs Duncan in fact had additional property she claimed, a house worth $350,000.00 and jewellery worth $70,000.00;

(iii)nor did the plaintiff verify that Mrs Duncan was in fact in receipt of an annual income of $75,000.00 paid pursuant to a divorce settlement;

(iv)the plaintiff did not seek verification that the plaintiff had or would receive a capital sum of $950,000.00 as asserted by way of divorce property settlement; and

(v)the plaintiff did not enquire into the level or sustainability of the rental income produced by the property which was to be used to pay interest.

Mr Parer, a member of Ingwersen and Lansdown and a director of the plaintiff, was the only witness called in its case.  It was he who transacted the loan on behalf of the plaintiff.  He agreed that he had not checked Mrs Duncan's references nor sought corroboration for what she said about her income or receipt of money by way of property settlement.  He did not seek verification that she owned jewellery worth $70,000.00.  He became aware, prior to the advance,  that Mrs Duncan did not own a home worth $350,000.00.  He learnt, from her finance broker, that the reference to that property in the statement of assets and liabilities prepared by Mrs Duncan should in fact have been a reference to a fish and chip shop that was heavily encumbered.

The material supplied to Mr Parer in support of the application for the loan may have contained different statements of the amount Mrs Duncan expected to receive from her husband.  Mr Parer did not investigate the discrepancy. 

The onus of proving contributory negligence is, of course, upon the defendant.  It must establish that the plaintiff has suffered damage partly as a result of its own fault.  The defendant has not, it seems to me, discharged that onus.  It has established that the plaintiff did not make enquiries which might have been made but it did not prove what the enquiries would have revealed, or that, had they been made, the result would have been a decision not to lend to Mrs Duncan.  There is no evidence that Mrs Duncan was not in receipt of the moneys she said she expected nor that she did not own $70,000.00 worth of jewellery.  The non-existence of the valuable house property was known to Mr Parer before he decided to advance the money.

Moreover there is evidence which suggests that further enquiries would have established  that Mrs Duncan was a good credit risk.  Interest payments due in the first term of the loan were made punctually.  The total amount paid was $159,900.00.  This is no small sum but it was paid in full and on time.  I do not feel able, with this evidence in mind, to infer that had Mr Parer made more enquiries he would have concluded that Mrs Duncan could not pay the interest.  The reality is that she did, and therefore could. 

Another way of looking at the matter is that the plaintiff suffered loss not by reason of its initial decision to lend money but because of its decision to lend the money for a second term commencing July 1996.  When this decision was made the plaintiff knew of Mrs Duncan's satisfactory performance of the first loan.  There would seem little point in undertaking the enquiries, the lack of which is complained of by Mr Freeburn, when it was in possession of more recent and more relevant evidence establishing, one might think conclusively, that Mrs Duncan was good for the money.

Mr Hall's evidence emphasised Mrs Duncan's assertion, later retracted, that she owned a house worth $350,000.00.  Mr Hall thought that a prudent lender would have required security over this property as well as the industrial property being purchased.  Not to insist upon the provision of the house property as additional security was, in Mr Hall's opinion, careless.  The same thought had occurred to Mr Parer who asked the brokers whether the house property could be mortgaged to secure the advance.  He was told that the information supplied by Mrs Duncan in her application was erroneous.  She did not own a house.  What she owned was premises in which a fish and chip shop was conducted, but this property was heavily encumbered and there was insufficient equity to provide any additional security.

Mr Parer said that he was satisfied with the explanation.  In his assessment the plaintiff could make the advance to Mrs Duncan on the security only of the industrial property without incurring an unacceptable risk of loss.  He dismissed suggestions that he should have been concerned by the inaccuracy in Mrs Duncan's statement of assets and liabilities.  He said that applicants for finance frequently overstated their asset position and invariably described their financial position in positive terms.  It did not concern him that Mrs Duncan had done the same.

Mr Hall thought that a prudent lender should have enquired more particularly whether the other property, house or business premises, was available as additional security.  If it was, the lender should have insisted upon a mortgage over it.  If it was not, the application for finance should have been reassessed and, in his view, refused.

The defendant did not lead evidence of Mrs Duncan's financial position.  It did not show whether Mrs Duncan had owned a house or a fish and chip shop or, if she did, the value of her equity in that property.  The only evidence is in Exhibit 5, an affidavit from Mrs Duncan's trustee in bankruptcy.  It confirms that the property was a fish and chip shop which had been encumbered by two mortgages.  The nett proceeds of sale of that property was only $10,800.00.

There is no substance in the argument that Mr Parer should have made more enquiries.  The questions he did ask accurately established the fact.  What is left of the defendant's point is that, in Mr Hall's opinion, a prudent financier would not have made the advance to Mrs Duncan without additional security.  I will address this argument later.

The last point relied on is that the plaintiff should have been sceptical of, or made further enquiries of, the rental income from the property which was to be the source of servicing the interest payments.  It was said that the plaintiff should have been concerned that the departure of some tenants may have caused a shortfall which Mrs Duncan could not make up from her other resources.

I do not think that this argument can be accepted.  The defendant's valuation dealt, in some detail, with the tenancies which occupied the property and the rental income they produced.  The rents were said to be market rates with the obvious implication that should one or more tenants leave, other tenants should be willing to pay the same amount.  The valuation did not, of course, warrant that there would be no vacancies or that a tenant who quit would be replaced.  Equally, however, there was nothing to suggest that there may be problems in maintaining the rental income. 

I have reviewed the three reported cases in which a negligent valuer successfully raised contributory negligence against a lender.  In each of them the circumstances showed an egregious failure on the part of the financier. 

In Banque Bruxelles Lambert SA v. Eagle Star Insurance Co Ltd [1994] 2 EGLR 108 the loans, which were huge, were "vastly in excess" of the value of the properties being purchased by the borrowers. The financier was in possession of information showing that the properties had been bought for prices substantially (i.e. millions of pounds) less than the amount they were said to be worth by the valuer. Moreover, not all of the loan moneys were to be used to acquire the properties. A surplus was to be retained by the borrowers and part at least was to be pocketed by one of the developers. Phillips J said (at 140):

"In my judgment, neither their past experience nor market information justified (the plaintiff) in treating as a normal feature of the property market the disparities between purchase prices and valuations that existed in this case.  A prudent bank would have required a specific and convincing explanation for the disparity in each case before relying on the property as the sole source of repayment of a loan of 90% of the valuation."

The question of contributory negligence does not seem to have been considered on appeal. See [1995] QB 375. This case was not one of those which went on appeal to the House of Lords. See South Australian Asset Management Corporation v. York Montague Ltd & Ors [1997] AC 191.

In Kendall Wilson Securities Ltd v. Barraclough (1986) 1 NZLR 576 the lender's agent made no enquiries at all in relation to a corporate borrower's capacity to pay interest and repay principal. As well, officers of the lender had notice that the proposed borrower had defaulted in performing financial obligations incurred in a separate transaction. See at 595 and 599.

Challenge Bank Ltd v. V L Cooper & Associates Pty Ltd (1996) 1 VR 220 appears to be in the same category. An applicant for a loan revealed, in his application, an income less than would be required to pay interest. The financier relied upon assurances that the applicant in fact earned more than was disclosed in its application for finance. The applicant concealed the additional income from the Commissioner of Taxation and the financier had notice of the concealment. Smith J held that the bank was negligent in not requiring security over additional property which was available and which the financier knew about.

These cases do not, of course, lay down any principle of law.  What is, I think, significant in each of them is that the lender had notice that the valuation might be unreliable or that the borrower would have difficulty in repaying the money.  Each of them involved more than an assessment of credit risk which turned out to be wrong.  Each lender had information, on which it was relying for the decision to make the advance, which revealed, at the least, the distinct possibility of a problem in recovering money lent.

This case is different.  The defendant's argument is that the plaintiff should have refused Mrs Duncan's application because it involved too high a risk of loss.  It should have been more cautious.  As a general proposition, in my view,  a lender in the plaintiff's circumstances will not have suffered damage partly as a result of its own fault by reason only of having been too sanguine in its assessment of the risk involved in making an advance.  Contributory negligence is not made out by proving only a difference of opinion between businessmen about the acceptability of a commercial risk.

There was an element of self-justification in Mr Parer's evidence of unconcern at Mrs Duncan's change of position.  He did, however, know the true position when he decided to make the loan.  He assessed the risk to be worthwhile.  It is not to be forgotten that the plaintiff was a relatively small lender occupying a place in the market frequented by those who could not obtain bank finance and who were compelled to pay higher rates of interest for their money.  The plaintiff was lending at rates 4 and 5 per cent higher than the banks, according to Mr Hall's figures.  The only reason Mrs Duncan, and people like her, would pay such rates is that they could not get cheaper money from the banks.  The only reason the plaintiff's contributors could obtain such returns on their money was that they took the risk of lending to people like Mrs Duncan.

Mr Hall's criticisms were inapposite to the plaintiff's business.  His reference point was that of a large publicly owned financial corporation lending to undoubted customers.  The risk that would be acceptable to such a lender is a lower risk than was acceptable to the plaintiff which obtained correlatively a higher return. 

The plaintiff sought to minimise the risk that default might eventuate in actual loss by lending no more than two-thirds of the value of the property mortgaged to secure the loan.  Had the valuation been accurate this would have ensured an adequate margin to recover the full amount of the advance in the event of default.

I find that the defendant was negligent in the preparation of its valuation and that the plaintiff relied upon it for its decision to advance $1,230,000.00 to Mrs Duncan. I find, as I have indicated, that the plaintiff was not contributorily negligent. It is unnecessary to go further and address separately the other bases, breach of contract and contravention of section 52, on which the plaintiff bases it case. Had I found that there was contributory negligence, an interesting but difficult question would have arisen, viz whether damages for contravention of the Trade Practices Act can be reduced by reason of a plaintiff's own lack of care contributing causally to his loss. I indicate that, if it become relevant, that the plaintiff has established a contravention of section 52. The valuation was not the product of the exercise of reasonable care and skill. It impliedly represented that it was, and constituted, therefore, a statement which was misleading and deceptive. See MGICA (1992) Ltd (formerly MGICA Ltd) v. Kenny & Good Pty Ltd and Anor (1996) 140 ALR 313 at 356-7; RAIA Insurance Brokers Ltd v. FAI General Insurance Co Ltd (1993) 41 FCR 164. The statement was made in trade or commerce.

The plaintiff, correctly in my view, did not persist in its claim in contract.  There was no evidence of any contract between the parties.

DAMAGES

From the sale of the property the plaintiff received, nett after expenses, $816,705.68.  The shortfall on the principal advance is $413,294.40. 

It is common ground that the plaintiff incurred expenses in the sum of $49,206.95 in maintaining the property between default and sale.  It is also common ground that the plaintiff spent $13,006.13 in advertising the property for sale and/or lease.  It is further common ground that the plaintiff paid $6,765.02 to insure the property between default and sale.  Against these amounts credit must be given for $60,913.00 received by way of rent.  The nett outlay is $8,065.10.

The parties were initially at odds in relation to the amount properly recoverable in respect of legal fees incurred by the plaintiff in connection with the default and the subsequent realisation of the security.  The amount now claimed by the plaintiff is $8,501.03.

There remains in contention the claim for lost interest and management fees, as well as interest pursuant to the Supreme Court Act 1995. In a case such as this, the lender would not have advanced money had it not been for the negligent valuation inducing it to do so. The lender can recover a sum equivalent to the amount he would have earned by way of interest on another loan. This award depends upon the lender having money available to make that other loan and evidence that the plaintiff had available to it an alternative borrower. See Swingcastle Ltd v.  Alistair Gibson [1990] 1 WLR 1223 at 1231-2; [1991] 2 AC 223 at 236; State Bank of New South Wales Ltd v. Yee (1994) 33 NSWLR 618 at 633-5.

The evidence of Mr Parer establishes that had the plaintiff not lent to Mrs Duncan there were other applicants anxious to borrow.  The plaintiff was in a situation where demand for its financial accommodation exceeded its capacity to supply loan funds.  There is no reason why I should not accept Mr Parer's evidence on this point. 

It does not follow that a loan would have been made on precisely the same terms as that to Mrs Duncan.  An analysis undertaken by the defendant establishes that at about the time of the advance the interest rates most commonly charged by the plaintiff were 12.5 per cent per annum for the first twelve month term and 12 per cent for the second.  For the third year the evidence suggests that 11 per cent is appropriate.  The defendant argued that interest should be at the lower rates given in evidence by Mr Hall but those rates were indicative only and in respect of bank loans.  The plaintiff was operating in a very different market.  I think the best evidence of what rate the plaintiff could have recovered is indicated by the other loans it actually made at about the time it lent to Mrs Duncan.

Applying those rates (12.5 per cent per annum from 21 July 1995 to 20 July 1996; 12 per cent per annum from 21 July 1996 to 20 July 1997; and 11 per cent per annum from 21 July 1997 to 21 July 1998) it appears that the plaintiff would have earned $436,650.00.  Mrs Duncan in fact paid $165,800.00 between 21 July 1995 and 20 July 1997.

Nett proceeds of sale were received in July 1997.  Thereafter those nett proceeds were available to the plaintiff to be lent out at interest.  The amount that could have been earned at 11 per cent for the last year is $89, 837.62.  The nett interest lost by the plaintiff is therefore $181,012.38.

As I mentioned the plaintiff's remuneration came by way of a management fee.  This varied between 1 per cent and 2 per cent as a margin on the interest rate.  The fee could be paid as a lump sum at the inception of the loan or by monthly instalments.  Most commonly, borrowers from  the plaintiff paid 0.084 per cent per month by way of management fee.  When the fee, or part of it, was paid in a lump sum it was paid, not to the plaintiff, but to Ingwersen and Lansdown and accounted for as legal expenses.  The plaintiff is entitled to recover only its losses, not those of Messrs Ingwersen and Lansdown.  It is appropriate therefore to allow the plaintiff a management fee on the basis that an alternative borrower would have paid the plaintiff 0.084 per cent per month of the amount of the loan in addition to interest.  This sum has been calculated in the same manner as the computation for interest.  The nett loss is $30,100.39.

The plaintiff then claims interest pursuant to section 47 of the Supreme Court Act on two amounts.  The first is the expenses incurred by the plaintiff in maintaining the property and preparing for its sale.  Interest is sought for twelve months, 1 July 1997 to 1 July 1998 at 10 per cent.  The period is reasonable.  Given the nature of the plaintiff's business, so is the rate.  The amount is $865.00.

The second claim is for interest on the income lost in the year ended July 1997.  The plaintiff claims that had it not extended the term of Mrs Duncan's loan it would have lent to an alternative borrower and recovered interest on the loan at 12 per cent, that is, $147,600.00.  It recovered in that year only $5,900.00.  The difference of $141,700.00 represents lost income which could have been lent out as capital to itself to earn income.  Interest for one year on that amount at 10 per cent is claimed, that is, $14,170.00.

The defendant resists this claim on the basis that it is an award of interest on interest which is prohibited by section 47(3)(a).

The submission misunderstands the nature of the award of $141,700.00.  Though  calculated by reference to interest that the plaintiff would have earned had it lent to an alternative borrower the award is in fact damages for the loss of the use of its money.  See Hungerfords v.  Walker (1989) 171 CLR 125. The award is of damages, not interest. This was the view of White J in Harvey v. Rogers (1983) 32 SASR 247 at 251 and appears to have been the view of Giles J in Trans-Pacific Insurance Co (Australia) Ltd v. Grand Union Insurance Co Ltd (1989) 18 NSWLR 675 at 708. To allow Supreme Court Act interest on that amount is not to offend the prohibition in the section which aims at precluding an award of compound interest.  There is no duplication because the component of damages in question is for a finite period ending July 1997.  Interest is claimed on the amount of the loss, $141,700.00 for the year after the loss was incurred, that is, July 1997 to July 1998.

There is no warrant for discounting the award for damages to take account of the chance that the alternative borrower might have defaulted.  Historically the rate of default among those who borrowed from the plaintiff is too low to justify such a discount.

The amounts for which there will be judgment for the plaintiff are:

(a)loss of principal   $413,294.40

(b)nett expenses of maintaining property   $    8,065.10

(c)legal expenses   $    8,501.03

(d)nett loss of income from moneys advanced to Mrs Duncan                 $181,012.38

(e)loss income by way of management fee   $  30,100.39

(f)interest on expenses   $      865.00

(g)interest on lost income   $  14,170.00

Total   $656,008.30

I order that the plaintiff's cost of the action be taxed and paid by the defendant.