Lochel Holdings Pty Ltd v Adelaide Bank Ltd - [2001] WADC 21

JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CIVIL

LOCATION: PERTH

CITATION: LOCHEL HOLDINGS PTY LTD -v- ADELAIDE BANK LTD & ANOR [2001] WADC 21

CORAM: COMMISSIONER GREAVES

HEARD: 7-10 & 23 NOVEMBER 2000

DELIVERED : 8 FEBRUARY 2001

FILE NO/S: CIV 1365 of 1996

BETWEEN: LOCHEL HOLDINGS PTY LTD (ACN 009 184 230)
Plaintiff
AND
ADELAIDE BANK LTD (ACN 061 461 550)
First Defendant
INTERNATIONAL FINANCE AND INVESTMENT PTY LTD (ACN 009 396 454)
Second Defendant

Catchwords:

Contract - Liability of bank to customer for unauthorised progress payment under building contract - Whether loss arose from breach of contract between bank and customer - Loss too remote - Customer's claim against builder not known to or ascertainable by bank at time of payment

Legislation:

Nil

Result:

Claim dismissed

Representation:

Counsel:

Plaintiff:     Mr R I Viner QC & Mr J E Scovell
First Defendant             :     Dr J T Schoombee & Mr P T Keays
Second Defendant         :     Dr J T Schoombee & Mr P T Keays

Solicitors:

Plaintiff:     Healy Pynt
First Defendant             :     Downings Legal
Second Defendant         :     Downings Legal

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

Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd & Ors [1986] 1 AC 80
Ventura v Svirac (1961) WAR 63

Case(s) also cited:

ANZ v Westpac Banking Corporation (1988) 164 CLR 662
Bannatyne v D & C MacIver [1906] 1 KB 103
City Bank of Sydney v McLaughlin (1909) 9 CLR 615
Commissioner of State Revenue (Vic) v Royal Insurance Australia Ltd (1994) 182 CLR 51
Hungerfords v Walker (1989) 171 CLR 125
Liggett (Liverpool) Ltd v Barclays Bank Ltd [1928] 1 KB 48
San Sebastian Pty Ltd v Minister Administering Environmental Planning & Assessment Act 1979 (1986) 162 CLR 340

COMMISSIONER GREAVES:

Introduction

The plaintiff in this case is the trustee for the Overview Unit Trust. In September 1994, the plaintiff entered into a lump sum building contract with Orchis Marketing Pty Ltd as trustee for the Orchis Unit Trust for the construction of four strata titled units at Lot 6, Ormsby Terrace, Mandurah. The contract named Mr Richard Longley as architect. Mr Longley knew Mr Ron Theelen and introduced him to the plaintiff. Mr Longley was also a client of Ms Helen Goldfinch, a certified practising accountant, who among others invested in the project. The building contract provided for possession of the site to be given to the builder on 19 September 1994 and provided for practical completion on 17 April 1995.
Ms Goldfinch knew Mr George Jasper of Victory Finance. They discussed the plaintiff's obtaining finance for the development in June 1994 as a result of which Mr Jasper introduced the plaintiff to the second defendant, a mortgage originator. It is common cause in these proceedings that by an agreement made in September 1994 between the plaintiff and the second defendant as agent for the first defendant, the first defendant agreed to lend $705,789 to the plaintiff for the construction of the units. That agreement is evidenced by a letter from the second defendant to the plaintiff dated 14 September 1994. Practical completion of the building had not occurred by 17 April 1995.
The sequence of events which followed is not common cause in this action, but it is possible to say by way of introduction that in June 1995 the builder submitted a progress claim in the sum of $48,574 under the building contract which Mr Longley did not certify for payment under the building contract. The plaintiff alleges that without authority the first defendant drew down $48,574 from the plaintiff's loan account and remitted it to the builder via the second defendant and Victory Finance.
The plaintiff alleges that the plaintiff did not authorise the drawdown and that the first defendant had no authority to pay the cheque in the sum of $48,574. The plaintiff further alleges that the first and second defendants were negligent in that they failed to act on the express instructions of the plaintiff by remitting the cheque to the builder. The plaintiff alleges that as a result of the first defendant's breach of contract and the first and second defendants' negligence, the plaintiff suffered loss and damage in that, in short, the plaintiff was deprived of the opportunity to set off costs which it incurred in completing the units, and liquidated damages for delay under the building contract, after the plaintiff terminated the building contract in September 1995 upon the builder putting his financial affairs into management. The plaintiff seeks to recover the sum of $48,574 from the first and second defendants.
The defendants each resist the plaintiff's claim on a number of grounds pleaded in the further re‑amended statements of defence. In short, the first defendant denies that the payment to the builder was in breach of its authority and alleges that the plaintiff requested that payment. The first defendant denies negligence in drawing and paying the cheque to the builder. The second defendant denies negligence and alleges that the plaintiff requested the second defendant to obtain a cheque from the first defendant to pay the progress claim. The second defendant denies that it failed to comply with the plaintiff's instructions in relation to the progress claim.
The first and second defendants deny that the plaintiff has suffered the loss and damage alleged and further say that in any event the loss and damage claimed is causally unrelated and remote to the acts of negligence complained of. In the alternative, both defendants allege that the plaintiff received the benefit of the $48,574 and therefore suffered no loss; that the plaintiff accepted or adopted the benefit of the payment of the progress claim to the builder and is estopped from denying the corresponding debits in its loan account in circumstances where at the time the payment was made to the builder, the plaintiff did not protest the payment to the builder; that the plaintiff sold the units constructed under the building contract and received payment for the same, thereby appropriating to itself the benefit of the payment to the building; and that the plaintiff used the proceeds of sale to pay off its loan account with the first defendant. The defendants also rely on the defence of unjust enrichment.

The plaintiff's claim against the first defendant

By par 6 of its further re‑amended statement of claim against the first defendant, the plaintiff alleges that pursuant to cl 17(g) of its agreement with the first defendant the loan funds were only to be released upon request by the plaintiff to the first defendant or the second defendant as agent for the first defendant. Clause 17(g) provides:
"The funds will be subject to draw down against confirmed construction and on a 'cost to complete' basis. The lender and its valuer shall, at their sole discretion, decide on the amount to be released when a draw down is requested. There will be a nominal charge to the applicant for each progress payment inspection carried out by the valuer …"
In par 7 of the further re‑amended statement of claim, the plaintiff alleges that by invoice dated 6 June 1995, the builder submitted a claim for a progress payment for $48,574 to the plaintiff. The defendants admit that allegation. In par 8 of the further re-amended statement of claim, the plaintiff alleges that on 6 June 1995 George Jasper of Victory Finance delivered the progress payment claim and, on the instruction of the plaintiff, a letter to the second defendant from Victory Finance requesting the second defendant not pay the progress claim until it was advised to by Victory Finance. Not surprisingly, the defendants do not admit this allegation because it does not accurately reflect the request of 6 June 1995 from Mr Jasper to the second defendant in terms:
"Please refer attached progress payment claim, can you please arrange for valuer to inspect but do not draw cheque until advised by Victory Finance."
The evidence about the circumstances in which the builder submitted the progress claim and in which Victory Finance delivered the progress claim to the second defendant under cover of its letter of 6 June 1995 requires examination in relation to the issue whether the plaintiff requested a draw down in terms of par 17(g) of the agreement.
The evidence of Mr Longley in Exhibit 12 is that the builder did not submit the progress claim for $48,574 to him and he did not issue a certificate. In cross‑examination, counsel for the defendants drew Mr Longley's attention to Exhibit 21 which bears the imprint "Ron Theelen Longley Architects Date: 6/6/95 Time: 01:57:14". Mr Longley accepted it seemed the builder faxed Exhibit 21 to his office on 6 June 1995. When he was asked whether he very probably received it, Mr Longley replied: "I can't answer that definitely but I definitely didn't deal with it. I didn't approve it." Mr Theelen was not able to say other than that he presumed he sent the progress claim to Mr Longley because it bears the fax imprint. Mr Theelen confirmed that Exhibit 22 is the original of Exhibit 21, and accordingly does not bear the imprint. It will be observed that copies of the progress claim appear in the bundles of documents where the fax imprint is either not produced at all or otherwise in part.
Ms Goldfinch gave evidence before me that Mr Longley did not notify her of the progress claim for $48,574. She said at the time she did not know that Mr Jasper wrote to the second defendant on 6 June 1995 and did not know that the progress claim was attached to it. Her evidence was that in May 1995 she and other directors of the plaintiff were concerned about the quality of the builder's workmanship and delay. Her evidence was that this concern led her to ring Mr Jasper of Victory Finance and ask him to inform the defendants not to draw any further cheques in favour of the builder on any progress claim without express authority from two directors of the plaintiff. She said that when she rang Mr Jasper she did not know the builder had or was about to make a progress claim and Jasper did not say the builder had forwarded a claim to him. She said to be absolutely sure that no payment would be made to the builder without the plaintiff's express authorisation, on 8 June 1995 she sent the following letter to the first defendant care of the second defendant:
"This is to advise you that from today's date, 8th June 1995, all draw downs on the loan to Lochel Holdings Pty Ltd require the approval of at least two directors.
Directors of the company are:
Nicholas John Hill
Helen Mary Goldfinch
Richard Nicholas Longley"
Ms Goldfinch said about the same time she telephoned Jasper again and asked him if he had given her instruction to the defendants. She said Jasper told her that he had done so by letter to the second defendant dated 6 June 1995.
I find on this evidence that on 6 June 1995 Mr Longley knew of the existence of the progress claim. It is common cause that Victory Finance received the progress claim and submitted it to the first and second defendants. It is also common cause that Mr Longley did not certify the claim.
The evidence of Ms Goldfinch about how she first learnt of the fact that the first defendant had paid the progress claim is unclear. On her evidence, it is not clear whether the second defendant or Mr Longley told her. Mr Longley denied telling her. I find his evidence in this regard unreliable also. I find on the evidence of Ms Goldfinch in chief that Mr Longley told her of the payment and she telephoned the second defendant, to be more likely.
It is in the circumstances revealed by the evidence to which I have referred that the plaintiff alleges in par 7 of the further amended statement of claim and the defendants admit that by invoice dated 6 June 1995, the builder submitted a claim for a progress payment in the sum of $48,574 to the plaintiff. In my opinion the evidence of the builder, which was not disputed, establishes that on 6 June 1995 he faxed his progress claim to Mr Longley and to Victory Finance. On the evidence of Ms Goldfinch, I find that, at the same time, she telephoned Mr Jasper without knowledge of the progress claim and asked him to inform the defendants not to draw further cheques in favour of the builder on any progress claim without any express authority from two directors of the plaintiff. I find that Mr Jasper then forwarded the progress claim to the second defendant under cover of his letter of 6 June 1995.
The defendants deny par 6 of the statement of claim and the allegation that pursuant to cl 17(g) of the loan agreement funds were only to be released upon request by the plaintiff to the first defendant or the second defendant as agent for the first defendant. The first defendant asserts by par 5(ff) of its further amended statement of defence that the letter of 6 June 1995 from Victory Finance to the second defendant constituted a request for a draw down within the meaning of cl 17(g) for and on behalf of the plaintiff. The first defendant pleads that the request not to draw a cheque until advised by Victory Finance did not bind the first or second defendants. The defendants do not explain why. I find that Mr Jasper did not convey Ms Goldfinch's express instructions to the second defendant, but I find he clearly asked the second defendant not to draw a cheque until advised.
In these circumstances, in my opinion, the evidence establishes on the balance of probabilities that no‑one requested the first and second defendants to draw down funds from the plaintiff's account in terms of cl 17(g) of the agreement. The evidence establishes that the builder submitted a progress claim for payment to the architect on behalf of the plaintiff and to Victory Finance. There is no doubt that the builder submitted the progress claim for the purpose of payment but there is no evidence that the builder, Mr Longley, Ms Goldfinch or Victory Finance requested the second defendant on behalf of the first defendant to draw down funds.
The plaintiff alleges by par 9 of the further re-amended statement of claim that on or about 8 June 1995 the plaintiff sent and the second defendant as agent for the first defendant received a letter stating that as from 8 June 1995 all draw downs pursuant to the agreement with the plaintiff would henceforth require the approval of at least two directors of the plaintiff. The second defendant admits this allegation. The first defendant does not admit this allegation. The evidence is that the second defendant received the letter alleged on 12 June 1995 and I so find.
The plaintiff alleges by par 10 of the further re-amended statement of claim that the plaintiff reasonably relied on the first and second defendants not to cause the remittance of the progress payment claim or the making of any draw downs pursuant to the agreement unless such payment or draw down was made in accordance with the plaintiff's instructions. The defendants deny this allegation and the first defendant says further that it was entitled to and did rely upon the letter of 6 June 1995 from Victory Finance. I have found that no‑one requested the first or second defendants to draw down funds and make a payment to the builder.
By par 13 of the further amended statement of claim the plaintiff alleges that the plaintiff did not authorise the drawing of the cheque and in the circumstances the first defendant had no authority to pay the cheque. The first and second defendants deny par 13 of the statement of claim. They allege that if the plaintiff did not authorise the drawing of the cheque, the first defendant was entitled to and did rely upon the request. They further allege that Victory as agent for the plaintiff in collecting the cheque on 13 June 1995 without complaint or direction to the second defendant to cause the cancellation of the cheque and/or the draw down, accepted the cheque on behalf of the plaintiff, and in so doing ratified the drawing and paying of the cheque. In my opinion, the evidence does not establish that Victory Finance collected the cheque from the second defendant on behalf of or with the knowledge of the plaintiff.
Accordingly, I find as alleged that the plaintiff did not authorise the drawing of the cheque and the first defendant had no authority to pay the cheque.
The plaintiff further alleges in the alternative, by par 14 of the further re-amended statement of claim that the first defendant and the second defendant were negligent in that they failed to act on the express instructions of the plaintiff by remitting the cheque to the builder. By par 13 of its further amended statement of defence the first defendant denies negligence and repeats the allegation that it was entitled to and did rely upon the plaintiff's request for a draw down and that the amount to be drawn down was at the first defendant's "sole discretion", pursuant to cl 17(g) of the agreement. Once again, since no request for a draw down and payment of the progress claim was made to the first and second defendants, I find that the first defendant drew down the funds and paid the builder through the second defendant and Victory Finance without authority. Victory Finance collected the cheque from the second defendant contrary to the instructions of the plaintiff from Ms Goldfinch.
I conclude, therefore, that the first defendant was in breach of its contract with the plaintiff. I also conclude that the first defendant was negligent in drawing down the funds and paying the cheque without authority.
By par 15 of its further re-amended statement of claim, the plaintiff pleads that as a result of the first defendant's breach of the agreement and the first and second defendants' negligence the plaintiff has suffered loss and damage which it particularises as follows:
"15.1Theelen stopped building works as a result of his financial difficulties.
15.2The plaintiff had no prospect of recovering any monies paid to Theelen.
15.3Sub‑contractors of Theelen lawfully possessed building materials from the units or otherwise left the units incomplete.
15.4The plaintiff did not receive any benefit from the payment of $48,574 if the plaintiff received any benefit, which is denied, such benefit was minimal.
15.5The plaintiff was charged interest on the sum of $48,574 at rates pursuant to the agreement.
15.6Loss of use of money."
The plaintiff claims damages against the first defendant, including the sum of $48,574 and a declaration that the purported debit to the plaintiff's loan account on 13 June 1995 was without authority and of no effect, together with certain consequential relief. As I explained by way of introduction, to these allegations the first defendant pleads as follows in par 14, par 15 and par 16 of its re‑amended statement of defence:
"14.Loss and damages as alleged in paragraph 15 of the Statement of Claim, or at all, is denied. The First Defendant further says that in any event the loss and damage complained of is causally unrelated and remote to the acts of negligence complained of.
15.Further and in the alternative, the First Defendant says:
(a)The Plaintiff got or received the benefit of the cheque and thereby suffered no loss;
(b)Further and in the alternative to (a), the First Defendant says that the Plaintiff in the circumstances set out in (i) to (iii) below, accepted or adopted the benefit of the payment to Theelen and is estopped from denying the corresponding debits in its loan account with the First Defendant because:
(i)At the time the payment was made to Theelen, the Plaintiff did not protest the payment to Theelen or to the Defendants and in the result Theelen continued the building works to the benefit of the Plaintiff till on or about 29 August 1998;
(ii)The Plaintiff sold the units constructed under the building works and received payment for the same, thereby appropriating to itself the benefit of the payment to Theelen referred to in paragraphs 5 and 6 above, and of the continued building works pleaded in sub‑paragraph (i) above;
PARTICULARS
Unit 1 was sold in or about March 1996, and the other three units in or about January 1997.
(iii)The Plaintiff used the payment received in terms of sub‑paragraph (ii) above to pay off its loan account with the First Defendant, including the amount represented by the disputed payment to Theelen.
PARTICULARS
On or about 18 March 1996, the Plaintiff repaid a sum of $175,000 from the sale of unit 1, and the outstanding balance on the loan account was repaid on or about 29 January 1997, in the sum of $529,047.10.
16.In the further alternative, even if the Plaintiff were otherwise entitled to damages, or a declaration that the purported debit to the Plaintiff's loan account on 13 June 1995 was without authority and of no effect (which is denied), the Plaintiff would be unjustifiably enriched if such relief were to be granted, having received the benefit of the said cheque and the First Defendant refers to paragraph 6 herein."

In support of its claim in par 15 of the further amended statement of claim, Ms Goldfinch gave evidence and of course it was common cause that practical completion was not achieved under the building contract on 17 April 1995. She said she became concerned that progress payments had been made to the builder which Mr Longley had not certified. She said that in April and May 1995 she was concerned to keep control of the loan account and the plaintiff's rights under the building contract. In her evidence, she explained that at that time she really wanted the penalties for delay under the building contract to be considered and enforced. In cross‑examination, Ms Goldfinch agreed that Mr Longley had at that time avoided the question of the plaintiff's claim against the builder for delay in completion. Ms Goldfinch also agreed that at no time prior to August 1995 had the plaintiff told the first and second defendants that the plaintiff may make a claim against the builder for liquidated damages for delay. She said: "I wouldn't have thought that it was necessary to tell the bank." Later in her cross‑examination, Ms Goldfinch said:
"The dispute arose because we asked for nothing to be paid. The dispute was not necessarily over the specific invoice. It was over the payment of the invoice when we had disputes with the builder … This dispute arose because we asked the bank not to pay this money because we had problems with the builder."
It should be made quite clear that Ms Goldfinch's evidence in this regard was not to the effect that she or the plaintiff told the defendants in June 1995 that the plaintiff had problems with the builder. Her evidence, as I have explained, was quite to the contrary.
Counsel for the defendants submitted that the plaintiff is seeking to argue that the defendants should compensate the plaintiff for the loss of a "set off" opportunity against the builder. He submitted that at best the plaintiff cannot be more successful against the defendants than it would have been had it sought to enforce the contract, and notably the penalties, against the builder. He referred to the proper measure of damages against a building contractor for failure to properly complete the contract as the cost of proper completion less any unpaid balance of the contract price. He referred to Ventura v Svirac (1961) WAR 63.
Counsel for the defendant illustrated this approach in his adjusted schedule of 22 November 2000 where he seeks to show that on the plaintiff's own case it suffered no loss under the building contract. I repeat his table here for convenience.

Description	Amount
Contract sum - common cause [Ex 5, PB 189]	$578,800.00
Approved variations as per: Longley Certificate no. 8 (10.5.95) DB 360 [Compare Ms Goldfinch PB 189 (1/9/95): $26,809.00]	$26,924.00
Adjusted contract sum	$605,609.00
Amount paid to Theelen - common cause	($560,131.00)
Balance of money left to be paid for completion under contract	$45,478.00
Cost to complete as per Plaintiff's Schedule (Ex 2) of Extra Building Costs Incurred, minus items 2 & 18 that Ms Goldfinch and Hill accepted were quotes only	($39,036.52)
Positive balance, ie. no loss or damage	$6,441.48

For present purposes, it is sufficient to say that senior counsel for the plaintiff accepted the arithmetic including the adjustment to the plaintiff's schedule of extra building costs (Exhibit 2). He did not, however, for a moment accept the conclusion advanced by Dr Schoombee that the plaintiff suffered no recoverable loss from the defendants. He submitted that the whole of the money negligently paid out to the builder is recoverable as money lost because it was debited directly to the plaintiff's account at the bank and their overdraft was increased to that extent. He submitted there was no certification under the building contract for payment of $48,574 and that, therefore, the plaintiff was not liable to pay the builder that amount. He submitted that on the face of the figures "there is a balance that probably would have been found in favour of the plaintiff". He referred to the figures at p 7 of his opening submissions which, as I said, he accepted required amendment in accordance with the evidence, and which include the plaintiff's claim for liquidated damages against the builder in the approximate sum of $30,000. Finally, senior counsel submitted that it is irrelevant to look at the balance of money left to be paid for completion under the contract because to earn it, the builder had to complete the contract. It followed, in his submission that once the payment of $45,478 is excluded, there is not a positive balance in favour of the plaintiff, as demonstrated in the defendants' adjusted schedule.
Counsel for the defendants submitted that the plaintiff's case is that but for payment by the bank of the progress claim of $48,574, the plaintiff could have set off against a claim by the builder for that amount liquidated damages for delay in completion of the contract. Counsel submitted that when the progress claim was paid in June 1995, the plaintiff had not raised the issue of any claim for penalties under the building contract with anybody including the first defendant, as Ms Goldfinch stated in her evidence. Like the plaintiff, counsel for the defendants relied also on the absence of a certificate by the architect in relation to such penalties under the building contract. Finally, counsel for the defendants submitted that any unenforced claim for liquidated damages against the builder was too remote to be loss attributable for any breach of contract or tort relating to the June payment. Counsel put his submission hypothetically as follows:
"How can the fact that we paid Mr Theelen in June actually have contributed to delay on his part? I would have thought it prevented further delay on his part. It does not logically tie in to generating the delay. Refusing to pay somebody, yes. Say we had unjustifiably knocked back a request for payment and say we have not exercised even our discretion properly. Then you could say 'You caused the delay, a very serious consequence, because you didn't pay the man,' but paying the man is not causally linked to any delay, even assuming that you're looking at the end of the contract, but of course at that stage we were looking at minimal delay and no certificate had been issued at that time in any event …"
On the evidence in this case and on the facts as I have explained them, I conclude firstly that the plaintiff did not suffer loss as a result of the breach of contract of the first defendant and the negligence of the second defendant. I also conclude, as the first and second defendants allege, that in any event the loss and damage complained of is causally unrelated and remote to the plaintiff's breach of contract.
I accept the submission of counsel for the defendants that claims between banker and client are determined in the context of contract and no duty in tort can in any event impose a wider duty than would exist in contract. See Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd & Ors [1986] 1 AC 80 at 105 and 107.
In the absence of evidence of knowledge on the part of each defendant at the time of the first defendant's breach of its contract with the plaintiff that the plaintiff was then in dispute with its builder and might subsequently have a claim for penalties under the building contract, I am unable to find on the facts as they emerge from the evidence in this case that the first defendant's breach of contract caused any loss which the plaintiff may have suffered under the building contract. I am further of the opinion that such loss was in any event too remote to be recoverable, because at the time of the breach of contract the plaintiff had made no such claim against the builder and no such claim was known to the first defendant or was in any sense then ascertainable.
Accordingly, in my opinion, the plaintiff's claim against the first defendant should be dismissed.

The plaintiff's claim against the second defendant

In my opinion the plaintiff's claim in negligence against the second defendant as agent of the first defendant must fail on the same facts and for the same reasons.

Conclusion

Having reached these conclusions on the liability of the first and second defendants to the plaintiff in contract and negligence, it is not necessary for me to consider the alternative defences raised in equity. I am, therefore, of the opinion that the plaintiff's claims against the first and second defendants should be dismissed.