Macko v Commonwealth Securities Limited

[2002] NSWCA 159

NEW SOUTH WALES COURT OF APPEAL

CITATION:     Macko v. Commonwealth Securities Limited [2002]  NSWCA 159 revised - 28/05/2002

FILE NUMBER(S):
40679/01

HEARING DATE(S):    24 May 2002

JUDGMENT DATE:      24/05/2002

PARTIES:
Victor Erwin Macko - Appellant
Commonwealth Securities Limited - Respondent

JUDGMENT OF:        Spigelman CJ Stein JA Hodgson JA   

LOWER COURT JURISDICTION:       Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S):     SC50132/00

LOWER COURT JUDICIAL OFFICER:   Brownie AJ

COUNSEL:
Mr. J. Gleeson SC with Ms. R. Sofroniou for appellant
Mr. M. Walton SC with Mr. R.S. Hollo for respondent

SOLICITORS:
Terrett Lawyers, Sydney for appellant
L.E. Taylor, Sydney for respondent

CATCHWORDS:
TORT
TRADE PRACTICES - Deceit - Misleading or deceptive conduct - Representation of authority to bind company, and of association with company - Company bound through ostensible authority - Company without assets - Representee suffers loss from transaction - Whether representor liable for loss. D

LEGISLATION CITED:
Fair Trading Act ss.42, 44, 68
Trade Practices Act ss.52, 82

DECISION:
Appeal dismissed with costs.

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40679/01
SC 50132/00

SPIGELMAN CJ
STEIN JA
HODGSON JA

Friday 24 May 2002

MACKO  V.  COMMONWEALTH SECURITIES LIMITED

Judgment

1. HODGSON JA:  On 8 August 2001, Brownie AJ gave judgment that the appellant, Victor Macko, pay the respondent, Commonwealth Securities Ltd, the sum of $869,282.09, and also pay the respondent's costs of the proceedings.  The appellant appeals to this Court from that decision.

2. I will begin with an outline of the circumstances. The respondent is a subsidiary of the Commonwealth Bank of Australia which provides share broking services.  From some time prior to February 1998 the appellant had been a client of the respondent.  From about February 1998 an employee of the respondent, Amanda Alexander, who was then a client advisor, became the appellant's main advisor.

3. On 14 April 2000, the appellant became sole director and secretary of a company which, on 17 April 2000, took the name Deutsche Securities Proprietary Limited.  I will refer to that company as DS.  It appears that by about this time, the appellant and his wife were the sole shareholders of that company.

4. During June 2000, on the appellant's application, the respondent opened thirty-five share trading accounts in the name of DS, each account being given an additional identification at the request of the appellant.  The appellant told Ms Alexander that he was director of DS and had DS's authority to give instructions to the respondent.

5. On 3 August 2000, the appellant ceased to be director and secretary of DS, and one Jane Corin became sole director and secretary in his place.  This change was in fact processed by ASIC on 7 August 2000.  From that time, that is 3 August 2000, the appellant no longer had any actual authority to give instructions or otherwise act on behalf of DS.

6. During August 2000, on instructions given by the appellant to Ms Alexander, the respondent purchased and sold some parcels of shares in NRMA Insurance Group Limited, purportedly on behalf of DS.  On 9 August, 1 million such shares were purchased for $2,888,166.06.  On 10 August, 266,000 shares were purchased for $796,053.10.  On 15 August, a million shares were sold for $2,995,470. On 17 August, 1.1 million shares were purchased for $3,386,057.72.  On 18 August, 1.2 million shares were purchased for $3,563,513.94.  At no time during these transactions did the appellant inform Ms Alexander or the  respondent that he had ceased to have actual authority to act on behalf of DS, or that he had ceased to be a director of DS.

7. When the time for settlement of the relevant purchases arrived, neither the appellant nor DS provided the respondent with the money for the purchases.  The respondent subsequently sold the shares at a loss of about $800,000, and it was that sum, together with interest, that made up the amount of the judgment that was given below.

8. The respondent first claimed this loss from DS. DS did not pay and went into liquidation with no assets. The respondent then sued the appellant. The claim originally included claims on the basis of breach of warranty of authority and negligent misstatement, but these claims were not pressed. What were pressed were claims for deceit and for breaches of sections 42 and 44 of the Fair Trading Act and equivalent sections of the Trade Practices Act.

9. Brownie AJ made the following findings. First, that the appellant knew he lacked actual authority to give the instructions that he gave to the respondent between 9 and 18 August 2000. Secondly, that the circumstances called for the appellant to disclose to the respondent that he lacked actual authority and had ceased to be a director of DS. Thirdly, that his failure to do so amounted to deceptive and misleading conduct within section 42 of the Fair Trading Act and also a false representation within section 44 of the Fair Trading Act. Fourthly, his Honour accepted the evidence of Ms Alexander that if she had been told either that the appellant had ceased to be a director of DS or that he had ceased to have actual authority to give instructions, she would not have accepted the instructions to buy the shares. In doing so, his Honour accepted that, from the perspective of the respondent and Ms Alexander, what was important was the relationship between the appellant and DS as it appeared to the respondent, and that Ms Alexander gave DS credit because it treated DS as being in substance the appellant's company. Finally, his Honour found that the respondent's loss of around $800,000 was caused by the appellant's deceit and breaches of the Fair Trading Act and Trade Practices Act.

10. The appellant relies on the following grounds of appeal.

    1             His Honour ought to have expressly found (if he did not):

    a.that the appellant acted with the apparent authority of Deutsche Securities on 9, 17 and 18 August;

    b.that the respondent entered into the share purchase transactions on the faith of that apparent authority; and

    c.accordingly, that the respondent obtained from those dates, by operation of law, binding and enforceable contracts with Deutsche Securities.

    2. His Honour ought to have held that the appellant's conduct between 3 and 18 August 2000 did not amount to misleading and deceptive conduct in contravention of s42 of the Fair Trading Act 1987 (NSW) or s52 of the Trade Practices Act 1974 (Cth) (or analogous sections) or to tortious deceit in circumstances where, by operation of law under the doctrine of apparent authority, the respondent obtained, immediately upon accepting the appellant's instructions for the purchase of shares on behalf of Deutsche Securities, binding contracts with Deutsche Securities.

    3.            Alternatively to the above, His Honour erred in holding that the respondent had suffered damage as a result of the conduct of the appellant.

    4.            His Honour erred in holding that any false representations made by, or tortuous conduct of, the appellant between 3 and 18 August 2000 in respect of any affiliation on his part with Deutsche Securities Pty Ltd ("Deutsche Securities") caused the respondent to suffer loss on 8 September 2000.

    5. His Honour erred in holding that the respondent had suffered any damage sufficient to constitute a claim in deceit against the appellant or to entitle the respondent to damages pursuant to s82 of the Trade Practices Act 1974 (Cth) or s68 of the Fair Trading Act 1987 (NSW).

    6.            His Honour ought to have found that the reliance evidence summarized at paragraph 25 of his Honour's Judgment dated 8 August 2001 did not in terms amount to a sufficient nexus between the appellant's conduct and the respondent's loss in the circumstances of the case.

    7.            His Honour erred in holding the appellant liable to the respondent liable for damages in respect of loss that the respondent would have suffered even if the appellant's representation to the respondent to the effect that he continued to hold a relevant authority from Deutsche Securities had been correct.

    8.            His Honour erred in awarding to the respondent damages in excess of any damages recoverable by the respondent in contract for breach of warranty of authority.

11. The issues argued on appeal come down in substance to two issues:  firstly, was there a material misrepresentation and secondly, if so, was it causative of the loss. 

12. Dealing first with the former of those questions, Mr Gleeson SC, for the appellant, submitted that the primary judge found, or should have found, that the appellant had ostensible authority to bind DS, and accordingly there was no material misrepresentation.  He submitted that where there was a representation of authority, and the representor in fact had ostensible authority, then there was no breach of any warranty of  authority; and he referred to Rainbow v Hawkins [1904] 2 KB 332 at 326 and V/Orasnoimport v Guthrie and Co Ltd [1996] Lloyds LR 1. He submitted that there could be no material misrepresentation so as to base a claim of fraud or misleading conduct where the respondent had obtained what was desired, namely, a contract binding on DS.

13. It is possible that there could be a question as to ostensible authority, having regard to the processing of the change by ASIC on 7 August 2000; but even on the assumption that there was ostensible authority, in my opinion, these submissions should be rejected.  Even if the appellant had authority to bind DS, that does not, in my view, mean that there was no material misrepresentation.

14. The respondent was dealing with the appellant as a long-standing client, claiming to be a director of DS on behalf of which it was giving instructions.  In those circumstances, as the primary judge found, the willingness of the respondent to give credit to DS for many millions of dollars was plainly related to the perceived association of the appellant with DS, the entity in whose name the transactions were being effected.  In my opinion, it made a very substantial difference to the position that the appellant no longer had that association with DS, and in fact, on the evidence of Ms Corin, which, according to the primary judge, was uncontradicted and to a large extent unchallenged, had arranged with the new director and secretary of DS that he would not enter into transactions on behalf of DS.  Thus the truth, which was concealed from the respondent, was not merely that the appellant no longer had actual authority, but also that he did not have the association with DS that he represented himself as having, and was dishonestly purporting to have an actual authority which he did not have and which was contrary to express arrangements made with the person now having authority to control DS.

15. Mr Gleeson did make a submission that the matters I have outlined were outside the pleadings.  In my opinion, the allegations in the pleadings that the appellant had previously informed the respondent that he was director and failed to inform the respondent that he was no longer director, and that the conduct amounted to a false representation by the appellant that he had an affiliation with DS that he did not have, adequately covered the matters which I have referred to.

16. Turning to the next question, whether the misrepresentation was causative of the loss, Mr Gleeson submitted that at most, the respondent was induced to acquire NRMA shares and enter into transactions with DS. As with regard to the former, he submitted that the measure of damages was the difference between the amount paid and the true value of the shares at the date of acquisition:  see Potts v Miller (1940) 64 CLR 282, Morgan Corporate Ltd v GWG Leviney Pty. Limited (1995) ATPR 41-414. He submitted that the “but for” test was necessary but not sufficient for establishing damages: see Chappel v Hart (1998) 195 CLR 232, Kenny and Good Pty. Limited v MGICA (1992) Ltd. (1999) 199 CLR 413 at [118].

17. As to the latter aspect, the entry into transactions with DS, Mr Gleeson submitted that the respondent obtained a contract with DS, as it believed it would, and in any event the loss was caused by the falling value of the shares and the inability of DS to pay, neither of which were related to the misrepresentation.  No claim was made that the appellant misled the respondent as to the credit-worthiness of DS.  He submitted that the respondent would have suffered the same loss as it did if the information had been correct, ie, if the appellant had been the director of DS, with actual authority to commit it to transactions, and accordingly any damages were too remote.  The loss actually suffered was not due to the appellant's conduct but the respondent's preparedness to give DS credit, and market changes:  see Doyle v Olby Ltd [1969] 2 QB 158 and Archer v Brown [1985] 1 QB 481.

18. Dealing with the submission based on Potts v Miller, this was not a case where the respondent was acquiring shares on its own behalf.  Although the respondent was liable under its contract for the purchase of shares to the vendors of those shares, it is clear from the evidence that was given that it was not contemplated by anyone that these shares were being acquired by the respondent on its own behalf so that it would become the beneficial owner of them. In those circumstances, in my opinion, Potts v Miller has little relevance.

19. As noted earlier, the falsity of the representations by the appellant did not merely relate to the question of authority:  the truth that was concealed was that the appellant was not a director of DS having a close relationship with it, as it appeared to the respondent, but was purporting to have a relationship which he did not have.  Those matters, in my opinion, were plainly relevant to the question whether the respondent, at the appellant's request, should give many millions of dollars credit to DS.  The primary judge accepted Ms Alexander's evidence that, had she known the true position concerning directorship, she would not have given that credit.  The “but for” test was thereby plainly satisfied.

20. As far as remoteness is concerned, it seems to me plain that the matters concealed were relevant to the question of whether credit should be granted and were relevant to the risks associated with the granting of that credit.  It was submitted by Mr Gleeson that no finding to that effect was made by the primary judge, and that the primary judge proceeded purely on a “but for” test.

21. Accepting that that is correct, in my opinion the materiality of these matters to the risk of loss is so plain that it is appropriate for this court to proceed on that basis.  In circumstances where the respondent had dealt with the appellant as its client for many years, and gave credit to DS, plainly in part on the basis of that long relationship, any substantial difference in the affiliation between the appellant and DS, particularly one involving dishonesty, was plainly in my view material to the risk involved in advancing credit to DS.  In those circumstances, in my opinion, any  submission based on remoteness of damage cannot be upheld.

22. For those reasons, in my opinion, the appeal should be dismissed with costs.

23. SPIGELMAN CJ:  I agree with the orders proposed by Hodgson J and generally with his reasons.  I wish to add a few observations of my own.

24. The appellant advanced four basic contentions. The first contention was that on the assumption that, the appellant had ostensible authority to act on behalf of Deutsche Securities, the respondent obtained exactly what it had bargained for and there was no conduct capable of constituting either the tort of deceit or of misleading conduct under the Trade Practices Act and the Fair Trading Act. The second contention was that by reason of the fact that there was no damage suffered, either in terms of deceit "by" the misleading conduct under section 82 of the Trade Practices Act and section 68 of the Fair Trading Act, there was no causal relationship between the conduct and the loss. The third contention was that the appellant should not be held liable for loss which the respondent would have suffered in any event, i.e even if the appellant's representations had been true. This was put in different ways, sometimes in terms that the person in the position of appellant should not be a “guarantor”, and other times in terms that a person in such a position should not be an “insurer”. The fourth contention was that the damages recoverable in either tort, or pursuant to the statutory provisions, should not exceed that which would have been recoverable in contract for breach of warranty of authority.

25. Each of these contentions, the last quite expressly, leads to a result equivalent to a contract measure of damages in the circumstances of this particular case.  However, it is well-established, and most recently affirmed by the High Court in Henville v Walker (2001) 75 ALJR 1410, that under the statute, and obviously with respect to the tort of deceit, the tort measure of damages, rather than the contract measure of damages applies.

26. It is not material in this context to determine a loss in accordance with what would have been the case if the representations had been true.  The focus of attention must be on the change of position of the respondent by reason of the misrepresentation.  See in this regard Henville v Walker paragraphs 130 to 133, 153 and 162.  In particular, I draw attention to the observation of McHugh J with respect to the statutory cause of action at paragraph 144 where his Honour drew attention to the purpose of the statute to protect consumers.  His Honour observed:

    A loss to a consumer from acting on such an inducement will usually be greater than the amount recoverable by treating the representation as a warranty.

    This proposition is also frequently true with respect to the tort of deceit.

27. In the present case, the trial judge accepted evidence, which was not challenged in cross-examination, that, if the respondent had known, through its relevant officer, that the appellant had ceased to be a director of Deutsche Securities, the respondent would not have entered into the transaction at all.

28. There is no doubt that in many circumstances the simple application of a but for test is not determinative of issues of causation.  However, in the present context, there is a significance that can plainly be discerned from the reliance placed on the status of the appellant as a director.  This would have encompassed, at the very least, the known liability for insolvent trading of directors, as a matter upon which persons in commerce are entitled to rely.

29. Other considerations, relating to the funds available to the appellant in all of his various capacities and also the commercial relationship established over a long period of time, are matters pertinent to an understanding of the trial judge's application of a but for test with respect to the misrepresentation about the appellant's status as a director.  In this regard, in my opinion, his Honour's finding that the respondent would not have entered into this transaction at all, if it had not been for that misrepresentation, is entirely justified.

30. For these reasons, I agree that the appeal should be dismissed with costs.

31. STEIN AJA:  I agree with Hodgson J and the additional remarks of the Chief Justice.

32. SPIGELMAN CJ:  The order of the court is the appeal is dismissed with costs.

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LAST UPDATED:               28/05/2002