MGICA (1992) Ltd v Kenny & Good Pty Ltd

CATCHWORDS

NEGLIGENCE - valuer - valuation provided for mortgage insurance purposes - mortgage insurer relying on valuation in providing mortgage insurance - default by mortgagor - shortfall after sale of security - mortgage insurer liable to indemnify mortgagee - if valuation arrived at with due care and skill, mortgage insurer would not have provided mortgage insurance at all - measure of damages - whether mortgage insurer's outlay minus recovery - misleading and deceptive conduct - limitation defence - time of accrual of cause of action - when loss suffered - whether at time when mortgage insurer provided cover or later when security sold or claim made - whether contributory negligence of mortgage insurer.

DAMAGES - valuer - valuation provided for mortgage insurance purposes - mortgage insurer relying on valuation in providing mortgage insurance - default by mortgagor - shortfall after sale of security - mortgage insurer liable to indemnify mortgagee - if valuation arrived at with due care and skill, mortgage insurer would not have provided mortgage insurance at all - measure of damages - whether mortgage insurer's outlay minus recovery - misleading and deceptive conduct - limitation defence - time of accrual of cause of action - when loss suffered - whether at time when mortgage insurer provided cover or later when security sold or claim made - whether contributory negligence of mortgage insurer.

TRADE PRACTICES - valuer - valuation provided for mortgage insurance purposes - mortgage insurer relying on valuation in providing mortgage insurance - default by mortgagor - shortfall after sale of security - mortgage insurer liable to indemnify mortgagee - if valuation arrived at with due care and skill, mortgage insurer would not have provided mortgage insurance at all - measure of damages - whether mortgage insurer's outlay minus recovery - misleading and deceptive conduct in contravention of Trade Practices Act 1974 - limitation defence - time of accrual of cause of action - when loss suffered - whether at time when mortgage insurer provided cover or later when security sold or claim made - whether contributory negligence of mortgage insurer.

LIMITATION OF ACTIONS - valuer - valuation provided for mortgage insurance purposes - mortgage insurer relying on valuation in providing mortgage insurance - default by mortgagor - shortfall after sale of security - mortgage insurer liable to indemnify mortgagee - if valuation arrived at with due care and skill, mortgage insurer would not have provided mortgage insurance at all - measure of damages - whether mortgage insurer's outlay minus recovery - misleading and deceptive conduct in contravention of Trade Practices Act 1974 - limitation defence - time of accrual of cause of action - when loss suffered - whether at time when mortgage insurer provided cover or later when security sold or claim made - whether contributory negligence of mortgage insurer.

NEGLIGENCE - Contributory Negligence - valuer - valuation provided for mortgage insurance purposes - mortgage insurer relying on valuation in providing mortgage insurance - default by mortgagor - shortfall after sale of security - mortgage insurer liable to indemnify mortgagee - if valuation arrived at with due care and skill, mortgage insurer would not have provided mortgage insurance at all - measure of damages - whether mortgage insurer's outlay minus recovery - misleading and deceptive conduct - limitation defence - time of accrual of cause of action - when loss suffered - whether at time when mortgage insurer provided cover or later when security sold or claim made - whether mortgage insurer had failed to safeguard own interests by inquiring into creditworthiness of borrower and its guarantors.

Trade Practices Act 1974, s 82

Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1995] QB 375

Baxter v F W Gapp & Co [1939] 2 KB 271

Forster v Outred & Co [1982] 1 WLR 86; [1982] 2 All ER 753

South Australia Asset Management Corporation v York Montague Ltd [1996] 3 WLR 87; [1996] 3 All ER 365

Kooragang Investments Pty Ltd v Richardson & Wrench Ltd,
unreported, Supreme Court of New South Wales, Rogers J, 4 July 1980

S W F Hoists & Industrial Equipment Pty Ltd v State Government Insurance Commission (1990) 6 ANZ Insurance Cases 76,688; (1990) ATPR 41-045

Laughton-Boyd v Moloney, unreported, Supreme Court of New South Wales, Yeldham J, 8 June 1979

Duncan & Weller Pty Ltd v Mendelson [1989] VR 386

Trade Credits Ltd v Baillieu Knight Frank (NSW) Pty Ltd (1985) 12 NSWLR 670; (1985) Aust Torts Reports 80-757

McElroy Milne v Commercial Electronics Ltd [1993] 1 NZLR 39

Lowenburg, Harris & Co v Wolley (1895) 25 SCR 51

Jobbins v Capel Court Corporation Ltd (1989) 25 FCR 226

Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514

Keen Mar Corporation Pty Ltd v Labrador Park Shopping Centre Pty Ltd (1988) ATPR 40-853

Henderson v Amadio Pty Ltd, unreported, Federal Court of Australia, Heerey J, 23 November 1995

March v E & M H Stramare Pty Ltd (1991) 171 CLR 506

Swingcastle Ltd v Alastair Gibson (a firm) [1991] 2 AC 223

Chapman v Hearse (1961) 106 CLR 112

Hughes v Lord Advocate [1963] AC 837

Mount Isa Mines Ltd v Pusey (1970) 125 CLR 383

Wroth v Tyler [1974] Ch 30

Parsons Livestock Ltd v Uttley Ingham & Co Ltd [1978] QB 791

Nader v Urban Transit Authority of New South Wales (1985) 2
NSWLR 501

MGICA (1992) LIMITED v KENNY & GOOD PTY LIMITED & ANOR (NO 3)

No NG 420 of 1994

CORAM:Lindgren J
PLACE:Sydney
DATE:30 August 1996

IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY )        No NG 420 of 1994
GENERAL DIVISION                 )

BETWEEN:

MGICA (1992) LIMITED (formerly MGICA LIMITED) (ACN No 000 488 362)
Applicant

AND:
KENNY & GOOD PTY LIMITED
First Respondent

AND:
LANCE KENNY
Second Respondent

CORAM:Lindgren J
PLACE:Sydney
DATE:30 August 1996

MINUTE OF ORDERS

THE COURT ORDERS THAT:

The proceeding be listed before Lindgren J Tuesday 10 September 1996 at 9.30 am for the making of orders, including orders as to costs.

By 5.00 pm on Monday 9 September 1996 the parties provide to the Associate to Lindgren J an agreed form of minute of the orders to be made, or if agreement has not by then been reached, the forms of minutes of orders for which they will respectively contend.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No NG 420 of 1994
GENERAL DIVISION )

BETWEEN:

MGICA (1992) LIMITED (formerly MGICA LIMITED) (ACN No 000 488 362)
Applicant

AND:
KENNY & GOOD PTY LIMITED
First Respondent

AND:
LANCE KENNY
Second Respondent

CORAM:Lindgren J
PLACE:Sydney
DATE:30 August 1996

REASONS FOR JUDGMENT (No 3)
TABLE OF CONTENTS

INTRODUCTION........ ........ ........ ........ ........ . 2

PLEADINGS........ ........ ........ ........ ........ .... 5

CHRONOLOGICAL OUTLINE OF KEY EVENTS........ ........ .. 9

MR KENNY'S VALUATION REPORT DATED 19 APRIL 1990..... 29

MR KENNY........ ........ ........ ........ ........ .... 40

THE HEARING; INTRODUCTION TO THE EVIDENCE........ ... 41

REASONING........ ........ ........ ........ ........ ... 44

7.1BREACH OF DUTY OF CARE AND SKILL........ ........ 45

7.1.1"Gross overvaluation"........ ........ . 45
7.1.2Mr Kenny's method and calculations.... 49
7.1.3Failure to take certain matters........ .
into account........ ........ ........ 78

7.1.4Inadequate allowances........ ........ . 91

7.2SECTIONS 52 AND 53A OF THE TRADE PRACTICES ACT 1974 (Cth) AND SECTIONS 42 AND 45 OF THE FAIR TRADING ACT 1987 (NSW) 91

7.3RELIANCE ON VALUATION........ ........ ........ ... 95

7.4CAUSATION; REMOTENESS; MEASURE OF DAMAGES....... 99

7.4.1Quantum of MGICA's claim ........ ..... 99
7.4.2The parties' initial submissions on causation, remoteness and measure of damages.... 103
7.4.3South Australia Asset Management Corporation v York Montague Ltd [1996] 3 WLR 87; [1996] 3 All ER 365........ ........ ........ ........ ..... 105
7.4.4Factual conclusions on causation, remoteness and measure of damages ........ ........ .. 109
7.4.5Legal conclusions on causation, remoteness and measure of damages ........ ........ ........ .. 112

7.5LIMITATION DEFENCE........ ........ ........ ..... 136

7.6CONTRIBUTORY NEGLIGENCE........ ........ ........ 143

CONCLUSION........ ........ ........ ........ ........ . 157

INTRODUCTION

By its amended application filed on 28 July 1994, the applicant ("MGICA") claims "damages under the common law and/or pursuant to Section 82 of the Trade Practices Act and Section 68 of the Fair Trading Act 1987 (NSW)". The case concerns a valuation of a prestige waterfront residential property at 10 Campbell Street, Hunters Hill ("the Property"). The valuation was furnished by the first respondent ("K & G") which carries on business as a real estate valuer and property consultant. The second respondent ("Mr Kenny") was the only person through whom K & G relevantly acted and it was not in issue that K & G was answerable for his conduct. It will generally be unnecessary to distinguish between K & G and Mr
Kenny and therefore convenient to refer to "the respondents" or "Mr Kenny" without indicating a distinction.

The Property was owned by Beca Developments Pty Ltd ("Beca"). Beca was a company associated with a Mr Gary Pselletes and his wife Malama Pselletes. At the relevant time the house and site improvements on the Property were in the course of construction. The builder was Centurian Constructions Pty Ltd ("Centurian"), another company associated with Mr and Mrs Pselletes.

Beca borrowed money from Permanent Custodians Limited ("PCL") on the security of a mortgage over the Property. MGICA agreed to indemnify PCL against any loss sustained by it by reason of default by Beca under the mortgage. The indemnity is of a kind commonly referred to as "mortgage insurance".

On or about 9 March 1990, Macquarie Bank Limited ("MBL"), as agent for, inter alia, MGICA, orally instructed the respondents to carry out a valuation of the Property for mortgage purposes and requested that the valuation be extended for the benefit of MGICA. This was followed much later by a letter of instructions dated 17 April 1990.

The critical valuation of the respondents was dated 19 April 1990 and was "as at" 18 April 1990, the date of the most recent inspection by Mr Kenny. It assessed the value of the Property "as is" in a sum of $5.35 million and "on completion"
or "as completed" in a sum of $5.5 million. On 11 May 1990, PCL lent Beca $3.575 million, but retained $150,000 pending completion of outstanding building work. MGICA provided mortgage insurance to PCL.

Subsequently, by a letter dated 13 February 1991, the respondents certified that the Property had been inspected again, that previously incomplete works had been substantially completed, and that $25,000-30,000 of work remained to be completed. In reliance on this letter , MGICA authorised the release to Beca of the sum of $150,000 previously retained.

The advance of $3,575,000 had included the first year's interest. At the beginning of the second year of the term of the loan, Beca defaulted. With the consents of PCL and MGICA, Beca eventually sold the Property on 6 January 1992 for $2.65 million.

MGICA claims to have incurred a liability to indemnify PCL in respect of its loss. It says that it was liable to pay, and did pay, to PCL $1,977,513.67, including interest unpaid by Beca and PCL's expenditures. It now claims to recover damages in this amount and interest from the respondents.

Shortly, MGICA's case is that it would not have provided mortgage insurance at all if it had not had a valuation of the Property of at least $5,500,000. It says that Beca applied for a loan of $3,575,000 from PCL and that MGICA's policy was
not to give mortgage insurance in respect of loans exceeding 65% of the market value of the security ($3,575,000 is 65% of $5.5 million). MGICA says that the true "as completed" value of the Property as at 18 April 1990 was substantially less than $5,500,000 and that the whole of its loss was caused by the excessiveness of the respondents' valuation.

PLEADINGS

The proceedings focus on the respondents' valuation dated 19 April 1990 and letter dated 13 February 1991. MGICA pleads contraventions of ss 52 and 53A of the Trade Practices Act 1974 ("the TP Act") and ss 42 and 45 of the Fair Trading Act 1987 (NSW) ("the FT Act").

In addition to these statutory causes of action, MGICA alleges breach of obligations of reasonable care, skill, diligence and competence arising under the general law and as implied terms of the respondents' contract of retainer.

The contractual obligation is pleaded in two ways. First, it is pleaded that when MBL engaged the respondents, it did so as agents for, inter alia, MGICA as a principal contracting party. Secondly, and in the alternative, it is pleaded that the party which contracted with the respondents was MBL itself, but that it was agreed between it and the respondents that the valuation was to be for MGICA's benefit and that as a result, MGICA became entitled to sue upon the contract. I was told that this last aspect of the pleading was an attempt to take advantage of Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 but that it would probably play no part in the case. It did not and I will say no more of it.

The following particulars of the respondents' negligence are relied on:

"(a)Failing to have any or sufficient regard for the existence of a right of way along the eastern boundary of the property both in so far as it affected improvements constructed on the right of way and in so far as if affected the privacy of the occupiers and the right of the occupiers to the exclusive use of that portion of the property affected by the right of way.

(b)Failing to have any or sufficient regard for the fact that the property valued was said to include an enclosed salt water pool fronting the Lane Cove river when no such enclosed pool existed, nor was there any title or right to occupy any such area by way of permissive occupancy or otherwise.

(c)Failing to have regard for the fact that the heated indoor pool area was without adequate or any ventilation.

(d)Failing to have regard for the fact that the tiling of the pool area was, contrary to assertions in the valuation, inferior and unsuitable.

(e)Failing to have proper or any regard to available 'comparable sales' and having regard to so-called 'sales' which were not truly comparable.

(f)Failing to make adequate or sufficient provision for the cost of completion of the buildings and other improvements on the land.

(g)Failing to have regard to the fact that the finish and fittings in the building were not 'superb' as
described in the valuation but were inferior in many respects.

(h)Failing to have regard to the fact that the area described as a 'dining room' was inadequate for a house of the quality and value described in the valuation and provided the means of access to the indoor pool and spa area.

(i)Failing to have regard to the fact that there was no bath room/shower/toilet facilities adjacent to the pool area so that pool users, unless they went outside the area of the residence, had to go through the small dining room area to use toilet and bathroom facilities. The valuation incorrectly asserts that there is a toilet adjacent to the pool/spa area.

(j)Failing to have regard to the fact that electronic gates and surveillance cameras said to have been installed were not in fact installed.

(k)Failing to have regard or sufficient regard for the fact that the general design and style of the house was not of a standard to be expected of a residence of the value ascribed to it by the Respondents.

(l)Ascribing to the buildings constructed on the land, a value greater than could reasonably be ascribed to them. The over estimate of the value of the buildings appears to be partly attributable to an incorrect calculation of the floor area of the buildings and partly to the allocation of an excessive rate per square metre for the value of buildings.

(m)Failing to have regard to the absence of air conditioning in a residence said to be of the very highest standard, especially having regard to the design and construction which would make it extremely difficult, if not impossible, to rectify the deficiency.

(n)Failing to have regard for the fact that improvements such as the pontoon and jetty fronting the Lane Cove River which were included in the property valued, should not have been so included for the reason that there was no title to them and no permissive occupancy in respect of them had been granted.

(o)Failing to have regard to the fact that the finish to the laundry and basement/bathroom area was inferior.
(p)Failing to have any or sufficient regard for the fact that there is no access from the living rooms on the ground floor to the waterfront and front garden area and that the only access is through the bedrooms.

(q)Authorising the release of retention moneys when significant items of work had not been completed, their non-completion was not recorded and the cost of completing other items which remained to be completed, was substantially greater than the certified provision.

(r)Failing to apply proper principles of valuation in reaching a valuation for the property."

The following are the particulars of the alleged contraventions of the TP Act and the FT Act:

"1.Providing a valuation which substantially overstated the value of the Property by reason of the matters set out above under "Particulars of Negligence".

2.Providing the letter of 13 February 1991 which substantially underestimated the cost of completion of the works and failed to have any or sufficient regard for works which had not been completed."

The respondents' further amended defence consisted largely of denials and non-admissions. In addition, limitation and contributory negligence "defences" were pleaded as follows (I need not deal with a "defence" of "failure to mitigate loss" which was pleaded but not pressed):

"22In further answer to the claim by the Applicant for relief pursuant to the Trade Practices Act and the Fair Trading Act, the Respondents say that any cause of action relied upon by the Applicant in those regards is not maintainable on the basis that such cause or causes of action arose more than 3 years prior to the filing of the Statement of Claim in these proceedings.

23In further answer to the whole of the Amended Statement of Claim the Respondents say that if they were negligent or in breach of contract (which are denied) the Applicant was guilty of contributory negligence.

(a)Relying on information other than the valuation.

(b)Failing to have any or any sufficient regard to the financial material provided by or on behalf of Beca Developments.

(c)Failing to carry out any or any adequate inquiries in relation to the financial information supplied by or on behalf of Beca Developments.

(d)Relying on the financial information supplied by or on behalf of Beca Developments.

(e)Relying on inquiries carried out by Macquarie Bank.

(f)Failing to read the valuation carefully."

3.CHRONOLOGICAL OUTLINE OF KEY EVENTS

17 October 1989.
Mr T J Davis of Jones Lang Wootton valued the Property under instructions from Beneficial Finance Corporation Limited ("Beneficial"). His valuations on various bases were made as at 17 October 1989. On the assumption that the Property was "completed to a high standard of finish" he assigned an open market value to it of $5 million. In its then incomplete state he assigned an open market value of $4,500,000. On an "as completed" basis, he assigned a "forced sale value" to the Property of $4,250,000. Mr Pselletes provided Mr Kenny with a

copy of Mr Davis's valuation report before Mr Kenny issued his own on 19 April 1990.

12 February 1990.
Under instructions from Eagle Star Trustees Ltd ("Eagle Star"), Mr Davis again inspected the Property with a view to providing an up-dated valuation of it to that company.

23 February 1990.
Mr Davis provided that up-dated valuation to Eagle Star. He recorded that the market had "eased considerably over the last four months" and assigned an open market value of $4,200,000 "assuming completion as at" 23 February 1990, and $4,000,000 in the Property's existing unfinished state.

9 March 1990 (Friday).
Mr Frank Ganis of MBL telephoned Mr Kenny and asked him to value the Property. Mr Ganis told him that the valuation was needed "as soon as possible"; that the Property was owned by Beca as "owner/builder"; that Mr Pselletes of Beca was on site in the course of completing extensive improvements; that he (Mr Ganis) thought that the Property would "come in at about $6 million"; and that he had arranged for Mr Kenny to inspect the Property the following day, Saturday 10 March, when he (Mr Ganis) would also be present. The time of 10.00 am the following morning was agreed, as was a fee of $1 per $1,000 of value. Mr Ganis said that a letter confirming the instructions would be sent. (In fact, the letter was not sent until 17 April 1990, some 5½ weeks later, by which time Mr Kenny had completed his valuation work and arrived at the amount of the value which he had decided to assign to the Property.)

10 March 1990 (Saturday).
Mr Kenny conducted a preliminary inspection in the presence of Mr Ganis and Mr Pselletes. Mr Pselletes identified the items of work which he said remained to be completed and gave estimates of the cost of completing them.

12 March 1990 (Monday).
Mr Pselletes forwarded to Mr Kenny a typed list of 16 outstanding items of work against which were typed in estimated costs of completing them totalling $226,500 and an allowance for an outside builder's profit of $20,000 making a grand total of $246,500.

13 March 1990 (Tuesday) and following.
Mr Kenny inspected the Property. Neither Mr Pselletes nor Mr Ganis was present. There were workers on site, one of whom gave him building plans. He subsequently returned them and did not keep a copy. He inspected the land and the improvements. (The Property has a street frontage to Campbell Street, a water frontage to the Lane Cove River and northerly views across the River.) The house under construction was of a "Mediterranean" style and in this respect was not in keeping with many of the traditional Federation style homes at Hunters Hill. Mr Kenny took colour photographs of the Property and made notes of what he had seen on 10 and 13 March.

Following the inspection on 13 March, Mr Kenny perused records of sales of other residential properties at the Hunters Hill Council and made three foolscap pages of handwritten notes relating to 14 properties. As well, he visited local real estate agents and discussed properties in the area, including features of sales which had occurred. He "scribbled" notes of what he was told.

He also looked at properties which he thought to be relevant to his task, made notes and from his notes assembled in handwritten form an analysis of "best sales/market info" which related to nine (on one view, ten) properties. His evidence is that he formed the view that it was difficult to find "comparable or indicative properties" and that the large size and out-of-character style of the house posed a difficulty for the task of valuation.

19 March 1990.
MGICA issued a "Pool Mortgage Insurance Policy" No PP21 in favour of PCL as trustee of "Mortgage Pool No 1990/18" ("the Pool Policy"). The Pool Policy had effect from 19 March 1990 to 15 July 1993. The "Insured" was defined to mean, in respect of each "Insured Mortgage" (as defined), PCL, and to include as "Trust Manager", "MGICA Securities Ltd". The expression "Insured Mortgage" was defined to mean any mortgage which MGICA agreed from time to time to insure, except a mortgage the "loan to value ratio" (LVR) of which exceeded, relevantly, 65%. (It was not suggested that this exclusion from the definition of "Insured Mortgage" had the effect of excluding the subject mortgage from Beca to PCL over the Property with which the case is concerned. I assume that this was because "value" was defined in the Pool Policy to refer to the value as determined by an independent registered valuer who was a member of the Australian Institute of Valuers and who was approved at the relevant time by MGICA, and Mr Kenny satisfied that description.)

21 March 1990.
MGICA (Mr Anderson) received from MBL (Mr Ganis) a completed standard printed form of MGICA application for approval for "Pool Mortgage Insurance" under cover of a letter dated 19 March 1990. The application was signed by Mr Ganis for MBL. It stated that what was sought was Pool Cover No 1990/18 in respect of a loan of $3.575 million to Beca for three years and four months at an interest rate of 16.5% p.a. with loan repayments of $589,875 per annum "interest only", in respect of which MBL was the "mortgage manager/originator". The purpose of the loan was stated to be to (a) pay out $2.1 million owed to the National Australia Bank ("NAB") on overdraft, (b) to cover the first year's interest on the loan, and (c) to reimburse development costs on a project at North Sydney in which Beca was engaged. The security was said to be the Property which was said to have been valued in March 1990 at $5.5 million by Lance Kenny. (This shows that by 19 or at latest 21 March, Mr Kenny had put a figure of $5.5 million on the Property and that this fact had been communicated to MBL (see later)).

An internal MGICA "Underwriting Summary" made at about this time recorded the purpose of the loan of $3,575,000 as being to "refinance bank overdraft" $2,100,000; to "prepay 1 year's interest" $600,000 (apparently, this was a slightly generous allowance but nothing turns on this since there was a loan establishment fee of $26,812.50); and to "fund new development" $875,000. (Apparently the rate of interest was later agreed to be reduced to 15.8% payable annually in advance and at the end of twelve months it was again changed, this time to 16.75% payable monthly, but I need not concern myself further with the question of the interest rate.)

3 April 1990.
MGICA received from MBL a copy of its "Credit Approval" and attached "Proposition Summary" of 11 pages. This showed, inter alia, that the facility of $3.75 million was to be used to re-finance Beca's overdraft ($2.0 million), to fund the first year's interest in advance ($0.6 million), to assist Beca with preliminary costs incurred in the development of a hotel at North Sydney in conjunction with the Elizabethan Theatre Trust ($.856 million), and to pay out a leasing debt of some $100,000 to Duke Pacific Finance. (These amounts total $3.556 million.) The "security" was stated to be the Property and joint and several guarantees by Mr and Mrs Pselletes and Centurian. The "loan to valuation ratio" was stated as 65%.

5 April 1990.
MGICA wrote to MBL (Mr Ganis) in relation to MBL's application for "Pool Mortgage Insurance" in respect of the loan of $3,575,000 to Beca. It advised that it had approved the application subject to the following conditions:

"1.Satisfactory valuation by MSL Panel Valuer.

2.Maximum LVR 65%.

3.Sufficient funds to be held by MSL to enable completion of the security as nominated by valuer pending issue of S317AE certificate.

4.First year's interest to be paid in advance.

5.Satisfactory inspection by MGICA.

6.Satisfactory signed assets and liabilities statement of Mr and Mrs Pselletes.

7.Macquarie Bank Ltd to monitor the Insured loan on a monthly basis.

8.Satisfactory refinance report by National Australia Bank." (emphasis supplied)

The letter also advised that MGICA's approval was subject to the mortgage's being accepted by MGICA Securities Ltd as a mortgage to be held in the MGICA Securities Ltd pool.

6 April 1990.
Mark Anderson, Assistant State Manager of MGICA, inspected the Property and shortly afterwards made a report of his inspection for MGICA's internal purposes which included the following:

"As the inspection of the property was external only we must rely upon the forthcoming valuation and I note also that David Sharpe of MSL has inspected the property internally.

From an external inspection at street level the property appears to be nearing completion and enjoys magnificent views of the upper regions of Sydney Harbour." (emphasis supplied)

10 April 1990.
Mr Kenny faxed Mr Pselletes of Beca as follows:

"We refer to our recent valuation instructions from Macquarie Bank Limited and your request that we provide written preliminary advice in respect of our opinion of current fair market value ‘on completion of the residence under construction. [sic]

Accordingly, it is confirmed we are of the opinion that a fair assessment of the current market value of the subject property as at 13 March, 1990 [the date of Mr Kenny's inspection] on the basis outlined is in the sum of $5,500,000 (FIVE MILLION FIVE HUNDRED THOUSAND DOLLARS) and that our formal report and valuation will issue to Macquarie Bank Limited as soon as possible."

As noted earlier, Mr Kenny must have arrived at his figure of $5.5 million by 19 or, at the latest, 21 March.

11 April 1990.

MBL wrote to Mr Pselletes advising that "the Bank" was prepared to offer a facility in a principal sum of $3,575,000 in respect of which the mortgagor would be Beca and the mortgagee would be "Permanent Custodians Limited as nominee for Permanent Trustee Company Limited as trustee for the MGICA Mortgage Securities Trust." The letter contained the following:

"Reference existing Facilities with National Australia Bank Limited and reimburse [sic] expenses incurred to date on North Sydney Hotel Project."

The security was stated to be a first mortgage over the Property and joint and several guarantees and indemnities by Gary Pselletes, Malama Pselletes and Centurian. Under the heading "Valuation" appeared the following:

"A sworn valuation report at the borrower's cost from a valuer under instructions from MBL to:

(i)establish the current market value of the security property. The value of the property is to be for a minimum of $5.5 million, or the advance is to be reduced to maintain a maximum gearing of 65%.

(ii)establish there are no features of the security properties which, in the opinion of MBL may be detrimental to its interests as mortgagee under the facility." (emphasis supplied)

The letter also referred to a loan establishment fee of $26,812.50 representing 0.75% of the principal sum of $3,575,000.

17 April 1990.
MBL (Mr Ganis) faxed to Mr Kenny a formal instruction for him to value the Property "for mortgage purposes". The letter included the following:

"Please note that the valuation must be addressed to Macquarie Bank Limited (MBL) and be extended to include Permanent Trustee, Permanent Custodians, MGICA Limited and MGICA Securities Limited, and that the appropriate trustee clause must be included as follows:

'We recommend the property as suitable security for investment of trust funds to the extent of 65% of our valuation for a term of three to five years, provided that an additional amount may be safely advanced in the event that mortgage protection insurance is effected, and this valuation can also be relied upon by any of the following mortgage insurers: MGICA Limited, Housing Loans Insurance Corporation, Australian Mortgage Insurance Corporation of AFG Insurances Limited.'

In residential valuations, please provide details of properties used for comparison while confirming your value by the summation approach.

In all valuations, please insert the following clauses and in commercial and industrial valuations ensure to compare capitalisation rates and confirm your value by the summation approach:

1.I certify that I have:

(a)internally inspected the property described in this report, or

(b)inspected the plans and specifications described in this report.

2.I have measured the occupational dimensions of the site which substantially agree/disagree with the Title provided.

3.I have no known interest in the property, the mortgage or the prospective mortgagor.

4.I acknowledge that this valuation is prepared for mortgage purposes, and do not disclaim any liability to any subrogated, transferred or assigned interests in any mortgage created as a direct consequence of this valuation.

5.I have perused the relevant leases and enclose a summary of pertinent conditions including:
-commencing rental
-review clauses
-term
-option periods.

6.I believe the current market valuation with vacant possession to be as follows:

.Value of Site $
.Value of site and improvements

excluding chattels                  $
.Estimated rental value per week     $
.Recommended insurable value             $    "

(emphasis supplied)

The letter stated under the heading "DESCRIPTION OF SECURITY" and against the entry "Anticipated Value" an amount of $5,500,000. It concluded by requesting Mr Kenny to forward his valuation report in quadruplicate to MBL.

In evidence, Mr Kenny conceded that he may have told Mr Ganis that the amount of his valuation was $5,500,000 but said that he could not recall whether he had done so. Another possibility is, of course, that Mr Pselletes had told Mr Ganis the amount.

18 April 1990 (day).

Mr Kenny inspected the Property, noting progress of work which had been made since his last inspection. He did not take photographs.

18 April 1990 (evening).
Mr Pselletes faxed to Mr Kenny a typed list of 16 items of work remaining to be completed against each of which was typed an estimate of the cost to complete it. The items dealt with the same general subject matter respectively as the 16 items in the earlier list, although they were expressed as up-dated versions. The costs totalled $125,700.

19 April 1990.
The respondents' written valuation report issued. It will be necessary later to discuss the report in detail. It suffices to note at this stage that it concluded that the current fair market value on an "as is" basis as at 18 April 1990 was $5,350,000 and on an "on completion" basis as at that date was $5,500,000, comprising land $1,800,000, site improvements $300,000 and "Residence comprising some 908m² including balconies", $3,400,000. The report set out in summary form the "cost estimate prepared by Beca Developments Pty Limited" totalling $125,700 to which Mr Kenny added "a contingency allowance (including builder's profit margin)" of $25,000 to give a "rounded off" figure of $150,000. Accompanying the report was Mr Kenny's memo of fees for $5,500 which was
described as being "fee on basis agreed @ $1 per $1,000 of value".

Between 19 April and 30 April.
Mr Anderson of MGICA received from MBL a copy of Mr Kenny's valuation report and read it. On the basis of the report he noted against item 3 in MGICA's copy of its letter dated 5 April 1990 to MBL (see earlier), "$150,000" as the amount to be retained.

30 April 1990.
MGICA (Mr Anderson) wrote to MBL (Mr Ganis) advising that special conditions numbered 1, 2, 5, 6 and 8 in MBL's letter dated 5 April 1990 had been satisfied and that the remaining conditions were to be satisfied at or before settlement.

6 May 1990.
MGICA Securities Ltd, as "the trust manager of the loan", advised MBL by facsimile that the loan of $3,575,000 to Beca was acceptable for inclusion in Mortgage Pool No 1990/18 subject to certain conditions. These included a condition that 12 months' interest be paid in advance, a condition that $150,000 be withheld pending confirmation from the valuer that the Property was completed to a satisfactory standard and "317A issued", and finally the conditions of MGICA itself as previously advised.

11 May 1990.

Settlement took place. There were executed a Loan Agreement between PCL as lender and Beca as borrower; a Deed of Guarantee and Indemnity between Gary Pselletes, Malama Pselletes and Centurian as guarantors and PCL as lender; and a Mortgage from Beca to PCL over the Property ("the Mortgage"). All were dated 11 May 1990.

Early February 1991.
Suzie Singleton of MBL requested Mr Kenny by telephone to inspect the Property and confirm that the items which required completion had been satisfactorily completed.

5 February 1991.
The Hunters Hill Municipal Council ("the Council") issued a certificate under s 317AE of the Local Government Act 1919 (NSW), identifying the applicant for the certificate as Beca and referring to an inspection on 5 February. Apparently Mr Pselletes supplied the certificate to MGICA.

12 February 1991.
Mr Kenny inspected the Property, having regard to the items on the up-dated list which had been faxed to him by Mr Pselletes on the evening of 18 April 1990. He also spoke to Mr Pselletes.

13 February 1991.

(a)Mr Kenny wrote to MBL reporting on his inspection of the preceding day and recording that his purpose had been to ascertain if the Property had been completed as outlined in his report dated 19 April 1990. Relevantly, the letter said this:

"The residence has been completed to a standard that provides for the issue of a Building Certificate under Section 317AE of the Local Government Act. A fax [sic] copy of a Building Certificate dated 5 February, 1991 has been forwarded to us.

Our inspection indicates that there is still relatively minor work outstanding for satisfactory completion of the residence as outlined in our report and valuation, including -

installation of electronic gates and surveillance cameras;
make good ceiling/skylight over indoor pool/spa area;
complete tiling of indoor pool/spa and surrounds;
complete internal painting and installation of PC's as required;
install carpet as required;
complete cabana, jetty/pontoon and waterfront pool.

Our estimate of the cost to complete all outstanding works is in the order of $25,000 - $30,000, inclusive of a contingency allowance.

Furthermore, we are of the opinion that the residence has been built to a prestige standard by competent tradesman [sic].

It is also noted that there has been considerable expenditure to provide a prestige standard of finish in areas not previously identified by us. In particular, we would note the conversion of the entrance level storerooms to very good in-law/flat accommodation providing a lounge/dining area, bedroom, kitchen and bathroom/laundry. Also, extensive built-in cupboards and wet bar have been provided in the games room/bar area and IXL heating/cooling units have been installed throughout."

MGICA submits that this advice did not take into account all items of work outstanding, did not allow sufficient amounts for the cost of completing those which Mr Kenny did acknowledge, and did not allow for the fact that those which had been completed had not been completed to the standard to which Mr Kenny had referred in his valuation. As will be seen later, in view of the conclusions which I reach in relation to the initial valuation report, I have not found it necessary to deal separately with these submissions in relation to the letter dated 13 February 1991.

(b)On the same day (13 February) MBL wrote to MGICA, noting that $150,000 was being held pending confirmation from the valuer that the Property was completed to a satisfactory standard and that a certificate under s 317AE had issued. The letter noted that MGICA now held the certificate under s 317AE, enclosed the letter dated 13 February 1991 from Mr Kenny, and requested MGICA to "arrange to release the $150,000 deposit".

14 February 1991.
By an internal MGICA memorandum, Mr Anderson recommended to Mr Eagar of MGICA's Commercial Services Division as follows:

"From the valuers [sic] letter, the remaining works are of a relatively minor nature, offset by other works not previously identified by the valuer.

A 317AE certificate has issued, and I recommend that MGICA agrees to the release of funds."

The memorandum bears a handwritten note (no doubt written by Mr Eagar), also dated 14 February 1991, reading: "Agree. Release of funds is approved as recommended."

14 February 1991.
MGICA replied to MBL agreeing to the release of $150,000 to Beca.

10 April 1991.
MBL advised MGICA that the Australian Elizabethan Theatre Trust had gone into provisional liquidation, that Beca had based much of its present and future operations on its joint venture with the Trust, and that, in particular, there would be a loss of income of approximately $900,000 for the second year of the loan which was due to commence on 11 May 1991.

6 June 1991.
Beca wrote to MBL advising that the liquidation of the Australian Elizabethan Theatre Trust had called for a "drastic reorganisation" of Beca's finances.

7 June 1991.

MBL as mortgage manager gave to MGICA notice that Beca had defaulted on 7 June 1991 in paying interest of $86,038.03.

25 June 1991.
Milne Berry & Berger, solicitors for PCL, made a demand on Beca for payment.

28 June 1991 or 1 July 1991.
Notices under s 57 (2) (b) of the Real Property Act 1900 (NSW) were served on Beca, Mr and Mrs Pselletes and Centurian.

2 July 1991.
The mortgagee, PCL, through the mortgage manager, MBL, took possession of the Property.

24 July 1991.
Mr Kenny provided to MBL an "on completion" valuation of $3.0 million as at 17 July 1991, comprising land $1,300,000, site improvements $200,000, and residence comprising some 908.2m² including balconies, $1,500,000. He was paid $2,200 for this valuation. The size of the fall from $5,500,000 as at 18 April 1990 to $3,000,000 only fifteen months later will not have escaped attention.

23 October 1991.
Mr Kenny orally advised MBL that his valuation of $3.0 million remained static.
24 October 1991.
Mr Kenny wrote to MBL, preceding a proposed auction of the Property on 26 October 1991, suggesting that with certain disclaimers the value of the Property still remained much as he had indicated in his report of 24 July 1991.

24 October 1991.
MBL wrote to MGICA recommending a reserve price of $3.5 million for the proposed auction, based on Mr Kenny's "on completion" valuation of $3.0 million as at 17 July 1991 and his advice on 23 October that the value had remained static.

25 October 1991.
MGICA replied, concurring in a reserve of $3.5 million.

26 October 1991.
The Property was passed in at auction.

4 December 1991.
Terence Alfred Large of Egan National Valuers (NSW) Pty Ltd, under instructions from Mr Ganis of MBL, inspected the Property with a view to providing a valuation of it.

6 December 1991.
Mr Kenny wrote to MBL giving his opinion in relation to an offer to purchase the Property for $2,650,000. He advised that under "forced sale" conditions, that amount was within the appropriate range.
10 December 1991.
Mr Large valued the Property as at 4 December 1991 (the date of his inspection) at $2.9 million (land $1,250,000; improvements $1,650,000) and as at 18 April 1990 at $3.9 million (land $1,750,000; improvements $2,150,000).

17 December 1991.
MGICA wrote to MBL concurring in MBL's intention to accept $2.65 million for the Property.

20 December 1991.
Thomas Matthew Phelan of L J Hooker (NSW) Pty Limited, under instructions from MGICA, inspected the Property.

27 December 1991.
Mr Phelan valued the Property, as at 20 December 1991 (the date of his inspection) at $2.45 million (land $1,200,000; improvements $1,250,000) and as at 18 April 1990 at $3.45 million.

6 January 1992.
With the consent of MGICA and PCL, Beca contracted to sell the Property for $2.65 million.

27 March 1992.
PCL made a claim on MGICA under the Pool Policy for $1,977,513.67 made up as follows:

$

Unpaid principal 3,575,000.00

Unpaid interest 500,252.52

Insurance premiums  3,541.41
Rates and taxes  4,485.27
Other statutory charges              43,560.00

Legal fees  6,374.30
    Selling agent's commission           54,100.00
    Advertising  14,632.40
    Preservation of property             45,408.33
    Other    380,159.44
    Total  4,627,513.67

Less gross proceeds of sale

of security 2,650,000.00

Total claim 1,977,513.67
============

22 April 1992.
MGICA paid PCL $1,500,514.41 which, with periodic payments which it had made to it previously of $476,999.26, made a total amount paid of $1,977,513.67.

29 April 1992.
Beca was ordered to be wound up.

4.MR KENNY'S VALUATION REPORT DATED 19 APRIL 1990

Mr Kenny's valuation report began by recording that the instructions for the valuation had been received from Mr Gannis of MBL and that he (Mr Kenny) was "required to carry out a valuation assignment to establish the current fair market value of the subject property" and in particular to establish its "as is" and "on completion" values. He recorded his understanding that the report and valuation were required "for mortgage consideration purposes by Macquarie Bank Limited, as intending mortgagee" and that "Permanent Trustee, Permanent Custodians, MGICA Limited and MGICA Securities Limited, may use and rely upon [the] report and valuation in the same manner as intended by Macquarie Bank Limited." The report noted that the dates of inspection were 13 March and 18 April, that the date of the valuation was 18 April and that the registered proprietor (as shown in Council records) was Beca. It gave an uncontroversial account of the location of the Property and its title references. Then it proceeded to address "ENCUMBRANCES AND NOTATIONS ON TITLE".

One notation which featured in the case was a right of way. This burdened the Property and provided access to the waterfront for the benefit of an adjoining property. According to a copy of the deposited plan 570267, the right of way was 1.525 metres wide and ran along and within the eastern side boundary of the Property down to the Lane Cove River. Mr Kenny's valuation report said:

"We are of the opinion that the subject property is not adversely affected by any of the above encumbrances or notations, however, a legal opinion should be obtained."

MGICA submits that the existence of the right of way detracted from the Property and that Mr Kenny was negligent in not making some discount for its existence. In particular, MGICA makes two points. The first is that the right of way adjoined
expansive windows which would have allowed users of the right of way to see into the indoor pool area of the house. The second point is that at the waterfront end of the right of way, a retaining wall and "Greek oven" within the Property obstructed access to the waterfront and that this constituted a potential source of future disputation with those benefited by the right of way.

Mr Kenny's report noted that the site area of the Property was some 970.2m² comprising an "area by traverse" of 959.5m² and an "offset area" of 10.7m². These figures appeared on DP 570267 a copy of which was annexed to the report.

The report stated that Mr Kenny had been advised that there had been some reclamation of land adjacent to the high watermark of the Lane Cove River which brought the available site area to just over 1,000m² but that he had not seen a survey report indicating that the reclaimed land was within the title of the Property.

The report stated that a "distinctive three storey ‘Mediterranean Villa’ style residence" was nearing completion on the Property. As examples of "many distinctive features" which the house would have on completion, the report referred to the following:

"vehicle access from Campbell Street is via a suspended reinforced concrete/brick paved driveway with ample parking/turning area and featuring a
central skylight over the indoor swimming pool/spa area below,

a 5-6 vehicle garage with easy access,

a spacious indoor swimming pool/spa area with a glass curtain wall to the Lane Cove River and a skylight from the suspended driveway above,

extensive site works including retaining walls and stairways from sandstone excavated and cut on site,

superb finish and fittings throughout,

boatshed and jetty/pontoon, with private sandy beach and enclosed salt water swimming pool to the Lane Cove River,

spacious accommodation totalling some 948 square metres (including ancillary areas)."

This statement of attractive features was attacked by MGICA. It was suggested that the "spacious indoor swimming pool/spa area with a glass curtain wall to the Lane Cove River" was such an unusual feature as to limit the number of persons who might be interested in purchasing the Property. MGICA submitted that the evidence showed that "superb" was not an appropriate description of the standard of finish and fittings. In relation to the boatshed, jetty/pontoon and enclosed saltwater swimming pool, there was evidence that because of lack of tenure and authority to build, it could not be assumed that those features would be lawfully completed so as to become permanent advantages of the Property.

Mr Kenny's report went on to describe "ACCOMMODATION and INCLUSIONS to be provided on completion". It did so in relation to the respective "levels" of the building, namely the entrance level, lower level 1, lower level 2, the basement level and the waterfront level. For example, in relation to the waterfront level the report noted: "jetty/pontoon and enclosed saltwater swimming pool to be provided at this level". The indoor swimming pool/spa facility was an important feature of the house. The report included the following:

"Other INCLUSIONS to be provided on completion will be most impressive and are (in part), briefly as -

........ ........ ........ ........ ........ ........ ....

the indoor swimming pool/spa and surrounding area will be completely tiled in pure white "carara" marble,

the swimming pool/spa will be fitted with high specification equipment including solar heating and separate heaters, as well as swim jets and automatic cleaners, ........ ........ ........ ........ ........ .

electronic gates and surveillance cameras will be installed, ........ ........ ........ ........ ........

jetty/pontoon and enclosed salt water pool to be provided at waterfront level."

There was a considerable body of evidence directed to the question of the correct size of the house. In this respect, Mr Kenny's report said this:

"SIZE of the residence and ancillary areas as advised by Mr. G. Pselletes and checked by scale from the building plans provided is -

Entrance Level:   Foyer            24m2
Garage          125m2
  Storerooms       76m2     225m2

Lower Level 1: Living Area 195m2
Indoor Pool/Spa 194m2 389m2

Lower Level 2: Living Area 185m2

Basement Level: Bathroom/W.C. 8m2

Waterfront Level: Boatshed 40m2
847m2

Plus, balcony areas to the Entrance Level
Lower Level 1 and Lower Level 2 101m2

948m2"

As will be seen later, Mr Kenny conceded that some of these areas were excessive. MGICA submits that a careful valuer would have checked the approved building plans at the Council and conducted on-site measurements as well. As Mr Kenny noted in the passage quoted above, he took the size of the residence and ancillary areas from Mr Pselletes and checked by scale from certain building plans supplied to him by or on behalf of Mr Pselletes, not the Council.

Under the heading "ESTIMATED COST TO COMPLETE", Mr Kenny recorded that he did not have a formal quotation of a price to complete the house and that a cost estimate prepared by Beca itself totalling $125,700 (exclusive of any allowance for builder's profit if outside supervision should be required) appeared to be fair and reasonable having regard to his discussions with Mr Pselletes. The valuation report recorded Beca's cost estimate together with a "contingency allowance (including builder's profit margin)" as follows:

"The cost estimate prepared by Beca Developments Pty. Limited is, briefly -

kitchen cupboards  $25,000
complete tiling to all bathrooms                $200
complete skylight over indoor pool/spa area    $1,000
complete internal and external painting      $22,000
complete all P.C. items  $3,000
install all doors  $5,000
complete all landscaping  $6,000
complete floorcoverings including marble and

ceramic tiles, parquetry and carpet as
        required  $28,000
      complete brick paving to driveway and garage   $6,000
complete all ballustrade [sic] railings       $3,000

complete electrical work  $3,000
install garage and entrance doors             $5,000
install pool equipment  $7,000
fitout sauna room  $3,500
complete jetty/pontoon and waterfront pool     $8,000
$125,700

Plus, a contingency allowance (including
builders profit margin) $25,000
$150,700

Say $150,000"

The report noted that $150,000 should be withheld until satisfactory completion of all outstanding works and the issue of a certificate under s 317AE of the Local Government Act 1919 (NSW). MGICA submits that Mr Kenny was negligent in accepting Mr Pselletes' word as to the estimated cost of completion and that the allowance of $150,000 was substantially inadequate.

On page 11 of his report Mr Kenny turned to the subject of "SUPPLY, DEMAND AND MARKETABILITY". He recorded that his inquiries of local real estate agents indicated that there were few properties within the selling price/value range anticipated for the Property, currently being offered for sale in the Hunters Hill/Woolwich area. The report noted that his
inquiries also indicated that very few of the properties currently being offered for sale had features similar to those which would be provided on completion of work on the Property. In relation to the state of the market, Mr Kenny's report said this:

"Local agents with whom we spoke were at [sic] differing points of view as to the current state of the market, with the more informed sources suggesting that whilst there has been a levelling out (and in some instances considerable reductions) of values in the area, the top end of the market (waterfront properties with a northern aspect to the Lane Cove River) appears to have remained relatively unaffected (although with no significant increases) as a result of the short supply of such property and the continuing keen demand. It is also suggested there have been fewer sales during the last 12 months because of the lack of properties available for sale rather than a lack of enquiry. Some agents suggest that the level of enquiry may soon pick-up given the anticipated fall in interest rates and the maintenance of a Capital Gains Tax by the recently re-elected Labour government.

Whilst the distinctive 'Mediteranean Villa' [sic] style of the subject residence is not typical of the more established traditional residences for which Hunters Hill and Woolwich is renown, it is compatible with residences which have been developed along the waterfront in recent years, several of which are shown in our photographic study appended.

It is acknowledged that many prospective purchasers of residences in Hunters Hill and Woolwich seek the traditional style of residence, however, the subject property has many features that would considerably overcome some of the market resistance to its relatively unique, albeit distinctive, style of appearance and construction.

One feature particularly favourable to the subject property is its size which considerably exceeds the permissable [sic] Floor Space Ratio of 0.5:1, thus requiring a much larger land area (if it was available) at considerably more cost to construct a similar residence."

Mr Kenny embarked on a description of his "VALUATION RATIONALE" on page 12 of his report where the following appears:

"Whilst we consider the subject property to be slightly disadvantaged in view of its 'Mediteranean Villa' style of appearance and construction which may slightly limit sale prospects, we are of the opinion given its overall spacious accommodation and excellent presentation with distinctive design features and inclusions throughout, it would generate good interest if offered for sale with a prudent marketing campaign, particularly in view of its desirable location.

Our basis of valuation is that of an analysis and comparison with recent available sales/market information in the surrounding area. In particular, we would instance available information in respect of the following properties -

18 The Point Road, Woolwich,
24B The Point Road, Woolwich,
6A Ellesmere Avenue, Hunters Hill,
11 & 13 Kareelah Road, Hunters Hill,
32 Viret Street, Hunters Hill,
7 Stanley Road, Hunters Hill,
5 Mayfield Avenue, Woolwich,
45 The Point Road, Woolwich
and
66 The Point Road, Woolwich

each of which are briefly discussed in our Sales/ Market Information Schedule appended."

The "SALES/MARKET INFORMATION SCHEDULE" annexed to the valuation report set out sales/market information relating to the nine properties mentioned. I need note only the information recorded in relation to the first two mentioned above. They were the properties which chiefly led Mr Kenny to arrive at his figures for the Property's house value and land value respectively:

"Property:18 The Point Road, Woolwich.
Consideration: $4,550,000
Date:Contracts exchanged 6 June, 1989.
Comments:This property comprises a substantial brick and tile residence with a main floor area of some 420m2, erected upon a large waterfront block.
It comprises typical accommodation including six bedrooms, formal lounge room, formal dining room, family room, three security garages etc. Excellent condition and presentation throughout.
It features a northern aspect with excellent water views to the Lane Cove River, an inground swimming pool, landscaped gardens, a white sandy beach with jetty and pontoon.
Land area larger than subject property, however, residence substantially smaller - considered to be a good comparison given lack of available evidence.

Property:24B The Point Road, Woolwich.
Consideration: $1,950,000
Date:Contracts exchanged March, 1990.
Comments:This property comprises a relatively modern style double storey brick and tile dwelling on a 'battle-axe' waterfront block having an area of some 784m2 (plus MSB Lease).
It comprises typical accommodation including four bedrooms, lounge room, formal dining area and family room etc. A small boatshed stands up to the waterfront.
It features a good level building block with a northern aspect and excellent water views across the Lane Cove River.
Despite the relatively good residence upon the land, the purchase price of $1,950,000 is essentially indicative of land value as the purchaser proposes to demolish the dwelling. We also note that this property sold in 1988 (Transfer date 4/11/88) for the consideration of $2,500,000.
Considered to be a good comparison in establishing land value of the subject property."

Mr Kenny was cross examined at length as to the use which he made of this sales/market information in arriving at his "as
completed" valuation of $5,500,000. In fact that figure comes somewhat "out of the blue" on page 13 of the report in the following passage:

"Accordingly, our assessment of current fair market value of the freehold interest 'on completion' upon a direct comparison with the above sales/market information is in the sum of $5,500,000.

It follows, that a check on our assessment of current fair market value of the freehold interest 'on completion' in the sum of $5,500,000 by the summation method may be apportioned as -

Land comprising an area of some 970.2m2 $1,800,000

Site improvements including extensive,

landscaping, fencing, inground swimming
pool/spa, on-site parking, boatshed,

jetty/pontoon etc $300,000

Residence comprising some 908m2

including balconies $3,400,000
$5,500,000

Furthermore, our assessment of the current fair market value of the freehold interest 'as is', is briefly -

Current Fair Market Value 'On Completion' $5,500,000

Less, allowance for cost to complete $150,000

Current Fair Market Value of the freehold
interest 'as is' $5,350,000"

Mr Kenny's report recommended the Property as suitable security for investment of trust funds to the extent of 65% of his valuation for a term of 3-5 years and stated that the valuation could be relied upon by, inter alia, MGICA. His report finally stated that his valuation assumed and was subject to

"[c]ompletion of the residence and site improvements to the statisfaction [sic] of all relevant authorities and as envisaged by the belowsigned valuer."

Following Mr Kenny's signature there appeared the following:

"This Report and Valuation has been prepared for and under the instructions of our Client - Macquarie Bank Limited, as intending mortgagee.

It is also noted that -

Permanent Trustee,
Permanent Custodians,
MGICA Limited
and
MGICA Securities Limited,

may use and rely upon this report and valuation in the same manner as intended by Macquarie Bank Limited.

We have no known interest in the subject property, the mortgage or the prospective mortgagor.

We acknowledge that this Report and Valuation has been prepared for mortgage purposes and do not disclaim any liability to any subrogated, transferred or assigned interests in any mortgage created as a direct consequence of this report and valuation."

5.MR KENNY

Mr Kenny was cross examined over six full days. Without any signs of annoyance or impatience, he seemed to be attempting to grapple with the questions put to him. I formed the impression that he was willing to give full and honest answers. He made concessions against his interest. So far as I could see, he did not attempt to tailor his evidence to suit his case.
Moreover, the notes which he made at the time of valuing the Property generally indicate that he went about his task methodically and in the manner of a person who knew what he was about. Whatever criticisms may be made of his work, it cannot be said that he did not go about his valuation in a generally organised manner or that he did not record the general lines of his thought processes.

All of this does not, of course, dictate a result in his favour. Indeed, as will be seen, I have reached a conclusion adverse to him on liability. But this is not because I found him not a generally credible witness or otherwise found his evidence unsatisfactory overall.

6.THE HEARING; INTRODUCTION TO THE EVIDENCE

MGICA led evidence from Mark Anderson and Paul Johnston who were, at the relevant time, officers of MGICA, directed to establishing the retainer of the respondents; that MGICA relied on the "as completed" valuation of $5.5 million; that MGICA would not have granted any mortgage insurance if the valuation had been less than $5.5 million; and the steps taken by MGICA to realise its security, including expenditures made in preserving the Property and in preparing it for sale and selling it.

The case proved to be a lengthy and strongly contested one, occupying 16 hearing days. Counsel's submissions on the facts and the law were lengthy, detailed and, I should add, helpful. Most, if not all, of the 18 particulars of negligence noted earlier were taken up with the various independent expert witnesses as well as with Mr Kenny. I will not attempt to give a detailed account of the considerable volume of affidavit and oral evidence.

MGICA led evidence from expert valuers directed to establishing that the respondents' valuation had been arrived at negligently and was misleading and deceptive and that the true value of the Property was substantially less than the amounts placed on it by Mr Kenny. Expert evidence was led in response.

MGICA called valuers, Messrs Large and Phelan, while the respondents called a valuer, Mr Ponton. A fourth independent valuer, Mr Davis, was in a special position. It will be recalled that he had initially valued the Property under instructions from Beneficial in October 1989 when he had assigned to the property an open market value as at that date of $5.0 million on an "as completed" basis and $4.5 million on an "as is" basis. The respondents filed an affidavit by Mr Davis annexing that valuation but did not read the affidavit. In ways which do not now matter, Mr Davis's report and his "updating" report dated 23 February 1990, according to which the comparable values had fallen to $4,200,000 and $4,000,000 respectively, were admitted as exhibits. The respondents called Mr Davis who was cross examined on behalf of MGICA.

In summary, the relevant valuations were as follows.

Respondents

As at 18 April 1990, as completed
"as is"

Terence Alfred Large of Egan National Valuers (NSW) Pty Ltd

As at 18 April 1990, as completed and subject to issue of Certificate of Compliance under s 317AE of the Environment Planning and Assessment Act 1979 (NSW)

$5,350,000
$5,500,000

$3,900,000

Thomas Matthew Phelan of L J Hooker (NSW) Pty Ltd

As at 18 April 1990, "as is" as at inspection on 20 December 1991

$3,450,000

Terence John Davis of Jones Lang Wootton

As at 23 February 1990, as completed

"as is"

$4,200,000

$4,000,000

Terry Ponton of Landsbury's (Aust) Pty Ltd

As at 18 April 1990, as completed

(Mr Ponton did not prepare a formal written valuation and the figure is based upon his notes (Ex A27) as explained by his oral evidence (T 1013, 1032))

$4,400,000

to

$4,500,000

Messrs Large, Phelan and Ponton performed their task retrospectively and with the "benefit" of hindsight, whereas Messrs Davis and Kenny valued in February and April 1990 respectively.

MGICA's expert witnesses analysed in detail Mr Kenny's valuation report in respect of what it said and left unsaid.

The evidence led in chief by MGICA and the cross examination of Mr Kenny were directed to showing (a) that the methodology which he adopted was not as instructed by MBL and as conformed to good industry practice, namely to apply the "direct comparison" method of valuation, followed separately and by
way of confirmation or check, by the "summation method"; (b) that he made factual errors in respect of dimensions and areas and did not allow, or allow adequately, for disadvantageous aspects of the Property as compared with other properties in the Hunters Hill/Woolwich area which had been sold and to which he referred; (c) that he had failed to take into account, or to take into account adequately, shortcomings of the Property; (d) that in allowing $150,000 for the cost of completing the work outstanding as at 18 April 1990, he had made a substantially insufficient allowance; and (e) that in allowing only $25,000-30,000 for the cost of completing the work still outstanding as at 13 February 1991, he had made a substantially insufficient allowance.

REASONING

The respondents emphasise in their submissions that valuation is a "very inexact science" (see too the cross examination of Mr Large at T 346.20), that the impression which a property makes on individuals is a subjective matter varying as between them, and that particular care must be taken "to sift from the evidence the inevitable contamination of hindsight" (respondents' submissions, para 4). I have no hesitation in accepting the validity and force of these submissions.

On the other hand, it is not in issue that the Property had a market value; that it is part of the expertise of the valuer of real estate to arrive at an opinion as to the amount of that market value; that although different valuers exercising due care and skill cannot be expected to arrive at the same figure, there is a range outside which the opinions of valuers so conducting themselves will not extend; and that, subject to allowance of the appropriate latitude, the opinion arrived at by a valuer so conducting himself or herself will be safe to be relied upon. Mr Davies of counsel for the respondents, in his usual attractive and persuasive manner, referred to numerous instances of differences of opinion of varying degrees of significance between the experts in the present case. In the end, however, in my opinion the evidence relating to certain central elements in MGICA's case is firm and should be accepted.

7.1BREACH OF DUTY OF CARE AND SKILL

It was not in dispute that Mr Kenny was under a duty to MGICA to exercise the standard of care and skill ordinarily exercised by professional valuers of residential property. MGICA submitted that Mr Kenny breached that duty in the ways referred to below.

7.1.1 "Gross overvaluation"
MGICA submits that Mr Kenny's valuation was a "gross overvaluation" and that unless explained, this itself provides some evidence of negligence or incompetence. In this respect, MGICA refers to Baxter v F W Gapp & Co Ltd [1939] 2 All ER 752 (CA) at 758 (du Parcq LJ) and Trade Credits Ltd v Baillieu Knight Frank (NSW) Pty Ltd (1985) 12 NSWLR 670; (1985) Aust Torts Reports 80-757 (NSW/Clarke J) ("the Trade Credits case") at (1985) Aust Torts Reports 69,529. Mr Kenny's valuation of $5.5 million is 22.2% higher than the next highest figure that any of the valuers was prepared to attribute to the Property. That figure is Mr Ponton's $4.5 million which was, in any event, not the product of a formal valuation. The next highest figure is Mr Davis's $4.2 million attributed to the Property as at 23 February 1990. Mr Kenny's $5.5 million was about 31% higher than that amount. (In the Trade Credits case, Clarke J held that a difference of 30.76% was so excessive as itself to bespeak negligence.)

MGICA submits that the "true value" of the Property as at 18 April 1990 was about $3.5-$4 million, based upon the sale of the superior property at 18 The Point Road in June 1989 for $4.55 million and a 12.5% fall in the market from that time to April 1990. (It is common ground that there had been some fall and MGICA's adoption of 12.5% was based upon evidence of a fall of between 10% and 16%.) On the basis of the midway point between $3.5 and $4.0 million, namely $3.75 million, Mr Kenny's valuation of $5.5 million was 47% in excess of the true value.

Importantly, the evidence of Messrs Large, Phelan, and Davis and, in effect, Ponton, was that Mr Kenny's $5.5 million was outside the range that could be obtained by the application of proper valuation principles. The respondents' own independent expert, Mr Ponton, said that he considered 15% to be a reasonable tolerance. The highest value which he would attribute to the Property was about $4.5 million and Mr Kenny's figure was 22.2% higher than this, that is to say, outside Mr Ponton's range of 15%.

Mr Davis's opinion cannot be affected by the criticism, which can be levelled at the opinion of other valuers, that it was arrived at with the benefit of hindsight. Mr Davis agreed that his figure of $4.2 million as at 23 February 1990 must be reduced somewhat to take into account the facts that the Property was not, according to the photographs which he was shown, finished to the standard which he (Davis) had anticipated and that the market fell between 23 February 1990 and 18 April 1990. Mr Davis's evidence was that in his view "a valuer applying proper valuation principles could not arrive at a figure of $5.5 million" (T 929.27-.28).

Mr Kenny correctly emphasises that the proposition that "gross overvaluation" is some evidence of negligence is activated only if it is first found that there has been a gross overvaluation. He submits that there is no reliable evidence of this in the present case. He submits that whether there was a gross overvaluation depends upon acceptance of the evidence of Messrs Phelan and Large whose evidence should not be accepted as establishing a gross overvaluation because the two differ significantly from each other.

There are differences, but this does not cause me to reject their evidence that Mr Kenny's valuation lay outside an acceptable range. In any event, I do not think that the premise is correct. Mr Davis valued the Property at 23 February 1990 at $4,000,000 "as is" and $4,200,000 "as completed". Allowing for the performance of some further work between 23 February and 18 April but the further fall in the market over that period of eight weeks (Mr Davis estimated a fall of $200,000 per month) and the "non-superb" quality of the fittings and finish, it would be unduly generous to Mr Kenny to treat Mr Davis's figures as remaining the same as at 18 April. It would conform better to Mr Davis's figures to conceive of them as establishing a range of $3,800,000 to $4,200,000 as at 18 April 1990, say $4 million.

Messrs Phelan, Large and Davis have given evidence that a valuer performing his task in accordance with proper valuation principles could not have arrived at Mr Kenny's $5.5 million. There is no evidence to the contrary. Even Mr Ponton's $4.5 million plus 15% thereof gives only $5,180,000. Accordingly, Mr Kenny's $5.5 million was $1 million above the highest figure that any other valuer would put upon the property and was $320,000 higher than 115% of that amount. It must also be remembered that Mr Ponton's figure was not produced by him in a valuation report and was given in the course of oral evidence, albeit based on notes previously made by him.

In my opinion, even after giving full weight to the respondents' submission, which was supported by numerous concessions made by the valuers in their evidence, that value is to a substantial extent a matter of opinion, impression and personal taste and preference, and further that in considering whether a duty of care was breached one must be careful to put to one side the benefit of hindsight, it should be accepted that the true value of the Property as completed as at 18 April 1990 was about $4 million. On this basis, Mr Kenny's figure of $5.5 million was a gross overvaluation and affords some evidence of negligence on his part. The suggestion that the gross overvaluation bespeaks negligence is consistent with the evidence of all the experts, Messrs Phelan, Large, Davis and Ponton, that the acceptable range of values that might have been attributed to the Property fell short of $5.5 million.

7.1.2 Mr Kenny's method and calculations
MGICA submits that Mr Kenny's methodology was defective in the respects mentioned below.

(a) The land value component of the sale for $4.55 million of 18 The Point Road, Woolwich in June 1989
Mr Kenny attributed a land value of $2.0 million to 18 The Point Road in June 1989, that is, as part of the sale price of $4,550,000 agreed upon in that month. Although Mr Kenny did not, in his initial affidavit dated 8 December 1994, seek to explain how he arrived at the figure of $2.0 million, he did so in a later affidavit dated 14 August 1995. That affidavit was filed and read without objection after Messrs Large and Phelan had given evidence on the matter. The affidavit was consistent with Mr Kenny's notes, suggesting that he thought that the land at the Property was a little better than that at 18 and 24B The Point Road. He said that he based his land value figure for 18 The Point Road and the Property on a sale of 24B The Point Road (784.1m²) in March 1990 for $1,950,000 and a sale of 5 Mayfield Avenue (677m²) in January 1990 for $1,650,000. He allowed $200,000 for the value of the improvements at 24B The Point Road and deduced a vacant land value of $1,750,000. In the case of 5 Mayfield Avenue he attributed no part of the price of $1,650,000 to the dwelling house. The site area of the Property was 970m² and, so far as he could determine, that of 18 The Point Road was a little less than 1300m². He compared the elevations, aspects and gradients of the parcels of land and concluded that the land component of 18 the Point Road was $2,000,000 and that of the Property was $1,800,000.

MGICA submits that the amount of $2.0 million which Mr Kenny attributed to the land component of 18 The Point Road was far too low and that, although given ample opportunity, Mr Kenny did not give any satisfactory explanation of how he had arrived at that amount at the time of preparing his valuation report. His notes did not reveal how he had done so. The explanation which he gave was, perhaps therefore necessarily, expressed in general terms.
Mr Ponton took the view (T 971.26-.30) that the land value component of the sale price of $4.55 million for 18 The Point Road in June 1989 was $3.0 million leaving only $1.55 million to be attributed to the residence and site improvements. He thought that $150,000 was a fair value for the site improvements, leaving only $1,400,000 for the house.

Similarly, Mr Phelan said that the land value component in the June 1989 sale price of $4.55 million for 18 The Point Road was "somewhere around $2.85 million" (T 379.23), leaving only $1.7 million paid for all improvements. He said that 18 The Point Road was "a vastly superior block of land" to 24B The Point Road (T 379.32).

Mr Large said that the land component of the June 1989 sale price of $4.55 million of 18 The Point Road was $2.7-$3.0 million (T 249.18-.19) and "somewhere about $3 million or a bit less" (T 278.08-.10). The mid-point of Mr Large's range, $2.85 million, leaves only $1.7 million paid for the improvements (on one view, Mr Large's range of $2.7 million to $3.0 million was as at April 1990 and his June 1989 figure was "about $3.0 million or a bit less").

Mr Kenny's figure of only $2.0 million for the land component for 18 The Point Road is clearly out of harmony with the figures of the other valuers. His explanation of how he arrived at this figure was not satisfactory. As noted above, Mr Kenny arrived at the figure of $2.0 million for the land at 18 The Point Road by comparing it with the parcels of land at 24B The Point Road and 5 Mayfield Avenue, which he considered to be worth $1.75 million and $1.65 million respectively. In sub-paragraph 2 (d) of his affidavit sworn 14 August 1995 Mr Kenny deposed that the blocks of land at 24B The Point Road and 5 Mayfield Avenue were superior to that at 18 The Point Road, notwithstanding the fact that 18 The Point Road was a larger block. According to Mr Kenny, they were superior because both were further from any main road, 24B The Point Road being a battle axe block with the house built at the bottom and 5 Mayfield Avenue being in a cul-de-sac; the land at 18 The Point Road was steeper than either 24B The Point Road or 5 Mayfield Avenue; and the position of 5 Mayfield Avenue afforded impressive views of the Sydney CBD and the Harbour Bridge. Further, Mr Kenny considered that the purchaser of 24B The Point Road had paid a "premium price" for the land as a "development opportunity" (T 841-842, 844).

However, in the course of cross-examination Mr Kenny said that 18 The Point Road was "more valuable" than 24B The Point Road (T 839.32), because:

"Firstly, it was larger, secondly, it was not a battle axe although in situations such as waterfronts that's probably not a great difference." (T 839.37)

Furthermore, the market was stronger in June 1989 when 18 The Point Road was sold than in March 1990 when 24B The Point Road was sold.

The respondents submit that reaching a view about the relative land values of 18 and 24B The Point Road was obviously a matter of impression and judgment. However, the evidence of all the other valuers who expressed an opinion on the matter is that the land value of 18 The Point Road was much higher than that of 24B The Point Road. The differences between their figures of $3.0 million (Ponton), about $2.85 million (Phelan) and say $2.85 million (Large) on the one hand and Mr Kenny's figure of $2.0 million represent 50%, 43% and 43% respectively of Mr Kenny's figure.

I think that Mr Kenny's figure of $2.0 million as the land component of the June 1989 price of $4.55 million was a very substantial understatement with the result that the figure of $2.55 million for the house and site improvements was an over-statement to the same extent. The "extent" of understatement and overstatement respectively I find to be of the order of $850,000. That understatement of the land value is, as noted above, 43% of $2,000,000 and it is 30% of $2,850,000. The extent of understatement by Mr Kenny is, to my mind, "gross", and bespeaks negligence unless explained. Mr Kenny's explanation, expressed as it was in generalities, I did not find convincing.

7.5 LIMITATION DEFENCE
In view of the conclusion which I reached earlier that the respondents are liable to MGICA for having negligently performed the task of valuing the Property, and the conclusion which I reach below that MGICA is not guilty of contributory negligence, it is, perhaps, not necessary for me to deal with the respondent's submission that the causes of action under the TP Act and the FT Act are statute-barred. However, as the issue was the subject of detailed submissions, it seems appropriate that I express my view on it.

Section 52 of the TP Act and s 42 of the FT Act are relevantly identical as are s 82 of the TP Act and s 68 of the FT Act. It is convenient to discuss the respondents' limitation submission by reference to the TP Act.

Section 82 is in the following familiar terms:

"82(1)A person who suffers loss or damage by conduct of another person that was done in contravention of a provision of Part IV or V may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention.

(2)An action under sub-section (1) may be commenced at any time within 3 years after the date on which the cause of action accrued."

Mr Davies of counsel for the respondents, after reviewing the authorities, submits that MGICA suffered loss when it accepted the Mortgage under the Pool Policy. He submits, correctly, that at that time MGICA undertook to pay any relevant loss suffered by PCL and that, ex hypothesi, it did not have at that time security worth $5.5 million. He submits that the entry into such a transaction was a suffering of actual damage. Since MGICA included the Mortgage in the Pool Policy subject to conditions on 5 April 1990 and unconditionally on 6 May 1990, and the present application was not filed until 6 July 1994, MGICA's "action" for the purpose of sub‑s 82(2) was, according to his submission, commenced outside the three year period referred to in that sub‑section.

MGICA submits that its loss did not arise until 6 January 1992 at the earliest, this being the date of the sale of the Property and therefore the date on which it was known that there would be a shortfall. It submits that the better view is that the cause of action did not accrue until 27 March 1992, being the date when PCL made its claim. Since MGICA filed its application on 6 July 1994, both of those events occurred well within the period of three years prior to that date. All payments made by MGICA to PCL were made within that three year period.

The critical issue which divides the parties concerns the point of time at which MGICA's cause of action arose. I will not refer to the various authorities relevant to this kind of question prior to the decision of the High Court in Wardley Australia Ltd v The State of Western Australia (1992) 175 CLR 514 ("Wardley"). In my view, that case, decided on 28 October 1992, resolves the present issue in favour of MGICA. In Wardley, the State of Western Australia granted an indemnity to NAB against a facility granted by NAB to Rothwells Ltd. The State sued Wardley Australia Ltd ("Wardley") in this Court, claiming damages for loss allegedly suffered by the State by reason of the fact that misleading and deceptive conduct of Wardley had led the State to grant the indemnity. The amended statement of claim alleged that the misleading or deceptive conduct was constituted by representations made on 24 and 25 October 1987 by Wardley, the indemnity having been executed by the State on 26 October 1987. The relevant pleading was introduced on 14 January 1991, more than three years after execution of the indemnity.

The joint judgment of Mason CJ, Dawson, Gaudron and McHugh JJ includes the following passage:

"With economic loss, as with other forms of damage, there has to be some actual damage. Prospective loss is not enough.

When a plaintiff is induced by a misrepresentation to enter into an agreement which is, or proves to be, to his or her disadvantage, the plaintiff sustains a detriment in a general sense on entry into the agreement. That is because the agreement subjects the plaintiff to obligations and liabilities which exceed the value or worth of the rights and benefits which it confers on the plaintiff. But, as will appear shortly, detriment in this general sense has not universally been equated with the legal concept of 'loss or damage'. And that is just as well. In many instances the disadvantageous character or effect of the agreement cannot be ascertained until some future date when its impact upon events as they unfold becomes known or apparent and, by then, the relevant limitation period may have expired. To compel a plaintiff to institute proceedings before the existence of his or her loss is ascertained or ascertainable would be unjust. Moreover, it would increase the possibility that the courts would be forced to estimate damages on the basis of likelihood or probability instead of assessing damages by reference to established events. In such a situation, there would be an ever-present risk of undercompensation or overcompensation, the risk of the former being the greater." (at 527)

Their Honours referred to Forster v Outred & Co [1982] 1 WLR 86; [1982] 2 All ER 753 ("Forster") and later cases in which Forster was accepted and applied, such as Jobbins v Capel Court Corporation Ltd (1989) 25 FCR 226 ("Jobbins"). In Forster the plaintiff executed a mortgage over her freehold property as security for a loan made by a company to her son. The son subsequently became a bankrupt. She executed the mortgage in the presence of the defendants who were acting as her solicitors. Following demand under the mortgage, she repaid the loan. She then sought to recover damages from the defendants for "contractual negligence" and for negligence under the general law for failing to advise her properly when she executed the mortgage. The English Court of Appeal held that the cause of action had accrued upon execution of the mortgage because the plaintiff had suffered actual damage at that time.

In the High Court in Wardley, Mason CJ, Dawson, Gaudron and McHugh JJ said that the result in Forster was "explicable by reference to the immediate effect of the execution of the mortgage on the plaintiff's equity of redemption" (at 529).

The Court was not, however, able to explain Jobbins so easily. In that case, the applicant had entered into an agreement to invest in a film, allegedly in reliance on misleading and deceptive statements. The applicant sought to recover "$60,000 being an amount paid under the agreement". The making of both the agreement and the payment occurred more than three years prior to the filing of the application in this Court. A Full Court of this Court held that the claim was statute-barred. That Full Court did not specify whether it treated the cause of action as having accrued upon the making of the agreement or upon the making of the payment. Since the making of the payment involved actual loss to the applicant, the Full Court's decision was, as their Honours in the High Court said, supportable. But they said that they had difficulty in accepting that the applicant had suffered loss or damage "on entry into the agreement merely because the
investment was alleged to lack the represented qualities" (at 529).

Finally, their Honours agreed with the decision of von Doussa J in S W F Hoists & Industrial Equipment Pty Ltd v State Government Insurance Commission (1990) 6 ANZ Insurance Cases 76,688; [1990] ATPR 51,599, in which his Honour held that under a liability indemnity insurance policy, the actual loss suffered by the insured occurs when the insured is called upon by a third party to make payments against which the insured would be indemnified under the policy as represented by the insurer. Until that time, and in particular until the events giving rise to the third party's claim against the insured occur (without a claim having been made), there is no more than a potential loss.

Brennan, Deane and Toohey JJ, in separate judgments, reached the same conclusion as that arrived at in the joint judgment of Mason CJ, Dawson, Gaudron and McHugh JJ.

The respondents submit that in Wardley the High Court did not overrule Jobbins or the earlier case of Keen Mar Corporation Pty Ltd v Labrador Park Shopping Centre Pty Ltd (1988) ATPR 49,185 (FCA/Pincus J) which was followed by the Full Court in Jobbins. To my mind, however, it is unmistakable that the High Court disapproved of Jobbins. Nor can any conclusion favourable to the authority of Keen Mar be deduced from the fact that the High Court did not refer to it.
Wardley has been applied by Full Courts of this Court in Karedis Enterprises Pty Ltd v Antoniou (1995) 59 FCR 35 and CAJ Investments Pty Ltd v Lourandos, unreported, 23 February 1996, as well as by Heerey J in Jaldiver Pty Ltd v Nelumbo Pty Ltd (1993) ATPR (Digest) 46-097.

In the present case, when MGICA included the Mortgage in the Pool Policy, it may be said to have incurred a contingent liability to indemnify PCL. But that contingent liability might never become an actual one. In these circumstances MGICA did not suffer actual loss by including the Mortgage in the Pool Policy.

Indeed, when MGICA entered into the transaction on 11 May 1990, the market value of the Property ($4,000,000) exceeded the amount of PCL's advance ($3,575,000). It was only at some undefined later time by which the market value had fallen sufficiently, that MGICA would have incurred loss if the Property had been sold and a claim made on it under the policy. Absent a sale, there would always have remained the possibility that the market might recover.

I do not find it necessary to choose between the time of sale of the Property and the time of the making of the claim on MGICA under the Policy as the time at which MGICA's cause of action accrued. On either basis, it accrued within the three year period which expired on 6 July 1994, and so the limitation defence fails.

7.6CONTRIBUTORY NEGLIGENCE

The respondents' submissions relating to contributory negligence are made under the heading "Reliance, Causation and Contributory Negligence" in their written outline of submissions. This is significant. The gravamen of the submissions is that MGICA, through Mr Anderson, did not rely on Mr Kenny's valuation but relied on other matters for which Mr Kenny was in no way responsible. The respondents' submission in this respect is encapsulated in para 6 of their written outline:

It is submitted that all this evidence shows that the cause of the Applicant's loss was the careless way Mr Anderson went about approving the inclusion of this loan in the pool policy. The provision of a Valuation by Mr Kenny was merely an incidental matter in the whole approval process. If Mr Anderson had carefully checked the material he had available to him and had not been prepared to rely so heavily on both Macquarie Bank and the borrower's accountant it is clear that the loan would never have been included in the policy. The financial position of the borrower was untenable."

Under part 7.3 "RELIANCE" above, I rejected this submission and found that MGICA had relied, at least substantially, on the valuation.

Does the issue of contributory negligence have any further potential role to play? In particular, if contributory negligence has been established, is it possible, and if so according to what principles, that the damages otherwise recoverable by MGICA should be reduced on that account? In principle, contributory negligence might have this result in relation to the cause of action for tortious negligence, but can it do so in relation to the causes of action under the TP Act and the FT Act, and if not, is it desirable that the facts said to prove contributory negligence be examined?

The respondents submit in para 7 of their written outline as follows:

"At the very least, there should be a reduction in any monies recovered by the Applicant because of the contributory negligence of Mr Anderson, and thereby the Applicant, demonstrated in the preceding material. ..."

But in the absence of any supporting argument, the submission is one of disarming and breathtaking simplicity. The question whether the Court has power to do that which the submission invites it to do in the context of the statutory causes of action is a difficult one which has been the subject of learned comment; cf J C Campbell, "Contribution, Contributory Negligence and Section 52 of the Trade Practices Act - Part II" (1993) 67 ALJ 177 at 187-190; J D Heydon, "The Relevance of the Victim's Level of Care in Misleading and Deceptive Conduct Actions" (1995) 2 Competition & Consumer Law Journal, 230. Perhaps, fortunately, I do not find it necessary to explore the various interesting possible bases which have been suggested on which damages otherwise recoverable by an applicant might be reduced on account of the applicant's contributory negligence. The reason is that I am not persuaded that the evidence pointed to by the respondents establishes a want of care on the MGICA's part for the safeguarding of its own interests and that even if this be wrong, any want of care which existed is not shown to have contributed to the loss suffered by it.

Three matters must be noted at the outset. First, MGICA did not deal directly with Beca or Mr Pselletes, but was a mortgage insurer which dealt with MBL on behalf of PCL and its role of a mortgage insurer must be taken to have been known to Mr Kenny. Secondly, the respondents did not lead any expert evidence as to the practices followed by mortgage insurers for the protection of their interests. Thirdly, in the absence of such evidence, I ask myself whether the documentary evidence and the evidence of Mr Anderson of MGICA show that MGICA failed to take reasonable care to ensure that there would not be a loss in respect of which PCL would be entitled to indemnity under the Pool Policy.

Mr Anderson gave evidence that MGICA normally relied on information provided by the mortgage manager, MBL. For example, he said this:

"MGICA would look at the information and make its own determination as to whether the application was a good risk and on occasion would ask for verification of some of the information that was provided but we would normally rely upon information provided by the lender - by the mortgage manager in this case, Macquarie Bank." (T 180.38-181.03)

There was much other evidence given by Mr Anderson in cross examination to the effect that he relied on information provided by MBL. Similarly, he gave evidence that in various respects he relied on information provided by Beca's accountants, William Stavrou & Co, and by NAB, and on a letter dated 26 March 1990 from "Project Consultants". It is not established that as a general matter MGICA was careless in relying on such information as distinct from itself in undertaking all inquiries into the creditworthiness of Beca and its guarantors.

It is, however, conceivable that information provided to a mortgage insurer might, on its face, raise suspicions or, for other reasons, demand further inquiry. Assume that the information showed, or that such further inquiry would have shown, matters which would have dissuaded the mortgage insurer from providing cover. In such a case it might be appropriate to decide that the mortgage insurer had failed to take reasonable care to safeguard itself from loss and further that its failure was a cause of the loss which it came to suffer. Assume that, as well, the mortgage insurer would not have entered into the transaction but for a negligent overvaluation. It might be appropriate in such a case to apportion responsibility equally as between the negligent valuer and the negligent mortgage insurer; cf AGC (Advances) Ltd v Baillieu Knight Frank (SA) Pty Ltd unreported, SA/FC, 12 October 1992 (financier/mortgagee and valuer).

The respondents point to evidence which they say suggests that Beca had overstated the value of various assets and submit that Mr Anderson should have appreciated that Beca was attempting to mislead MBL and, through it, MGICA. I will address these submissions of the respondents in turn.

(a)The respondents submit that MGICA should have been suspicious about the good faith of Beca because of circumstances surrounding its commercial/residential complex at 32-38 Montgomery Street, Kogarah on which Beca had placed a value of $8.5 million. The figure which MGICA came to treat as representing the value of that property was $7.5 million. MBL's "Proposition Summary" of 19 March 1990 repeated Beca's figure of $8,500,000. Mr Anderson, however, on 23 March 1990 required verification and obtained a copy of the letter from Honer & Johnstone United Realty Pty Ltd dated 26 March 1990 expressing the opinion that with proper marketing, the property would realise between $7.5 million and $8.0 million. Mr Anderson attributed a value of $7.5 million to the property in his Underwriting Summary of 3 April 1990.

I do not accept the respondents' submission that a suspicion should have been raised about the bona fides of Beca by reason of its having assigned a figure of $8.5 million to this property. Mr Anderson gave evidence that it is not uncommon for a borrower to have an optimistic view of the value of its holdings. In the present case, Beca's figure of $8,500,000 was $500,000 above the top of the real estate agent's range and $1,000,000 above the bottom of that range. Mr Anderson said that he relied on the evidence provided by the letter from the agent. In fact, MGICA allowed in its figures $7,500,000 for this property, that is to say, the figure at the bottom of the range given by the agent.

I do not think that the over statement by Beca of some 6% - 13% of the value of this property is of such a dimension as should have alerted MGICA to the existence of bad faith on the part of Beca or those associated with it.

(b)The respondents' next submission is that MGICA should have been put on its guard by gross discrepancies between the "at cost" figures assigned by Beca to its real estate holdings and the costs of them as revealed by the prices which appeared in transfers registered under the Real Property Act 1900 (NSW). The two sets of figures are as follows:

Property

Costs assigned by Beca

Cost as revealed by R P Transfer

13 Columbus Circuit, Coffs Harbour transferred to Beca by Transfer bearing date 1 March 1974.

$179,500

$22,000

27 Arthur Street, Coffs Harbour transferred to Beca by Transfer bearing date 21 March 1974.

$221,947

$21,500

32-38 Montgomery Street, Kogarah transferred to Beca by Transfer bearing date 23 September 1985.

$1,357,640

$500,000

283 Miller Street, North Sydney transferred to Beca by Transfer bearing date 5 November 1987.

$2,639,113

$1,650,000

It is not in issue that the figures in the first column were ultimately supplied by Beca. MGICA submitted that there was no evidence that a mortgage insurer exercising due care and conducting itself in accordance with common practice should "conduct its own audit of the balance sheet" and seek verification of the "at cost" figures supplied to it.
I think that this submission should be accepted. While the discrepancies between the two columns of cost figures are gross, it must be understood that the respondents' case is not that Mr Anderson in fact knew of the prices appearing in the various Transfers. Its case must be that it was incumbent on a mortgage insurer exercising due care in its own interests to verify the cost figures supplied to it. In the absence of evidence, I would not reach that conclusion, particularly in view of the fact that MGICA's concern, no doubt like that of any other mortgage insurer,
is not with historical cost so much as with current market value.

(c)The respondents submit that the financial statements of Beca for the three financial years 1987, 1988 and 1989 showed a decrease in Beca's "net worth" from ($544,481) for 1987 to ($1,616,235) for 1989. While this is true, Mr Anderson pointed out that MGICA relied on current market values of assets rather than historical cost figures appearing in the balance sheet, and that if the assets in question were reflected at their then current market values, Beca's net worth would have been approximately $16 million, the figure to which, on the evidence, MGICA had had regard. Mr Anderson's "Underwriting Summary" recorded, in relation to the commercial properties shown in Beca's balance sheet at historical costs, that "if these assets were reflected at current market value in the balance sheet, net worth would be approximately $16M" (exhibit A1, p140). I do not think that the evidence demonstrates a failure by MGICA to exercise due care to safeguard its own interests in this respect.

(d)The respondents submit that Beca traded at a net loss of some $300,000 in each of the three years 1987, 1988 and 1989 and that this should have put MGICA on guard as to Beca's creditworthiness. The respondents submit that when questioned about this, Mr Anderson gave inconsistent responses. Mr Anderson said that he had relied on a letter dated 26 March 1990 from Beca's accountant, William Stavrou & Co, addressed "TO WHOM IT MAY CONCERN" referred to earlier. I do not think it necessary to address the detail of that letter. It suffices to say that it offers an explanation for the annual losses in terms of an increase in the value of Beca's holdings and Beca's ability "to acquire and develop assets in a viable manner".

(e)The respondents point to the fact that Beca's overdraft increased between December 1988 and November 1989 from ($637,764.00) to ($2,034,476.00). The respondents criticised Mr Anderson for failing to check the deposits into Beca's bank account which totalled only $900,000 as against what the respondents said was its stated income of $2,714,619. Mr Anderson said that he relied on Beca's accountants to provide him with information relating to Beca's income and expenditure.

I think that the respondents' submission is not persuasive. First, there was no expert evidence to the effect that a prudent mortgage insurer would have added up the bank deposits. Secondly, the figure of $1,763,044 which appears in the letter dated 26 March 1990 of William Stavrou & Co "TO WHOM IT MAY CONCERN" as representing the total revenue of Beca for the year 1988-1989, deals with an historical period as distinct from the then projected year ended 30 April 1991 for which the predicted income was stated to be $2,714,619 (including $900,000 from the Independent Theatre project).

(f)The respondents point to the fact that the evidence showed that Beca had exceeded its overdraft limit at the NAB. I think, however, that this fact, without more, is not something which should have caused MGICA to think that Beca would default under the Mortgage, and, a fortiori that MGICA would incur a liability as mortgage insurer. A diary note records that the manager of the Brighton‑Le‑Sands branch of NAB advised:

"Present overdraft facility has been exceeded. Directors considered honest and reliable and would not enter into any commitment that they could not fulfil."

While Mr Anderson conceded that to exceed an overdraft limit was not to fulfil a commitment (T 184.30) what was said by the branch manager of the NAB must be understood as whole. At least, what he said is ambiguous and does not persuade me that MGICA was careless in entering into the transaction without further inquiry as to the circumstances surrounding the exceeding of the overdraft limit.

(g)The respondents criticise Mr Anderson for failing to note what they suggest to be a discrepancy about the income of
Beca and "the matter of sales". The "sales" referred to are historical figures of $156,943, $505,270 and $1,209,231 for the years 1987, 1988 and 1989 respectively. However, the explanation given by Mr Anderson (T 1047) is acceptable, in my view. The projected "income" figure at exhibit A1 p 128 does not include any income from sales because, apparently, the author did not contemplate that there would necessarily be sales in the then future period for which the projection was being made.

(h)The respondents submit that "Mr Anderson did not even know if the land adjoining the Elizabethan Theatre Trust land had been bought by Beca, the borrower". The evidence relied on (T 185.15), however, is merely to the effect that Mr Anderson could not, then and there in the witness box, recall whether Beca had purchased the land.

(i)The respondents raise the criticism that Mr Anderson failed to identify the fact that income from the property at 961 Anzac Parade, Maroubra was included in the consolidated income of $2.7 million for serviceability of the loan, while in truth that property was owned by Anthony Developments Pty Limited, not a company beneficially "owned" by Mr and Mrs Pselletes. The reply of MGICA is twofold. First, MGICA submits that there is no evidence that the rent from that property was not to be made available to Beca. Secondly, MGICA submits that Mr Anderson's analysis of Beca's capacity to service the debt was based on a cash flow statement provided by its accountants which did not include rent from the Anzac Parade property. It is true that the "project[ed] cash flow analysis Beca Developments Pty Ltd" supplied by the accountants did not include any cash flow from the property at 961 Anzac Parade, Maroubra. I, therefore, think that Mr Anderson's latter answer, at least, is a sufficient basis on which to reject the respondents' submission.

(j)The respondents make the point that a lease commitment to "Duke Pacific Finance" was not included in Beca's finance commitments on p 135 of exhibit A1. Although this was not put to Mr Anderson in cross examination, the answer seems to be clear: the leasing debt (some $100,000) was intended to be "retired"; see para 1.3 of the Proposition Summary at p 126 of exhibit A1.

(k)The respondents submit that Centurian, which was to provide a guarantee, was in a worse financial state than Beca. Mr Anderson said that MGICA placed little value on Centurian's guarantee but that, since it was part of the Pselletes group of companies, he thought it prudent that it should join in as a guarantor. I see no reason not to accept this evidence. MGICA was being offered real property security which it thought satisfied its 65% LVR ratio and the guarantees of Mr and Mrs Pselletes. It should not tell against it that a superfluous third guarantee, that of Centurian, may not have come from as substantial a guarantor as one might have looked for in different circumstances.

(l)The respondents criticised Mr Anderson for not having been concerned about other statements in the letter of William Stavrou & Co, Beca's accountants, which indicated that they were unfamiliar with Centurian's business activities. However, I think that the criticism is met by the evidence of Mr Anderson at T1055.30-.32:

"I placed very little value on the guarantee of Centurian but being part of the group of companies we felt it prudent that it should be obtained."

(m)The respondents criticise Mr Anderson for having said that he thought that the "cost of the renovations was coming out of [Beca's] own cash flow" (T 1076.22‑.27). The respondents make the point that if that had been true, the amount of Beca's losses would have been even greater than those which the documents available to Mr Anderson showed. MGICA's response is that the documents already showed losses for Beca for the years up to 30 June 1989, and that expenditure on the Property would have been already reflected in those figures. It is true that this would leave unaccounted for, work done between 30 June 1989 and April/May 1990 when the proposal was before MGICA. However, the evidence does not enable me to attribute any
particular monetary amount to the cost of such work. The evidence on the point is so vague that it would be wrong to conclude on the basis of it that MGICA failed to take reasonable care to safeguard its own interests.

The respondents have not proved that MGICA failed to exercise reasonable care to safeguard its own interests. What will constitute the exercise of reasonable care must depend on the risk to be guarded against. The risk here was that PCL would suffer a loss against which MGICA had undertaken to indemnify it. MGICA would suffer that loss only if it transpired that Beca defaulted and the Mortgage and guarantee failed to protect PCL from loss. The greater the LVR ratio, the greater the care a mortgage insurer might be expected to exercise. The evidence does not persuade me to conclude that with its LVR ratio of 65% apparently satisfied, MGICA's failure to suspect, to seek verification and to make further inquiry, in the various ways indicated in the respondents' submissions constituted a failure by MGICA to take reasonable care to protect itself from loss.

Even if, contrary to the foregoing conclusion, it was careless of MGICA not to suspect, to seek verification or to make further inquiry in one or more of the ways suggested by the respondents, the evidence does not persuade me that this would have led to any different result for it. I will take, by way of example, the instance which may seem to be most favourable to the respondents' case, namely, the gross overstatement of the cost of the four properties referred to in (b) earlier. If MGICA had become aware of the prices in the Transfers, it may have been incumbent on it to seek an explanation. If it had, I do not know what explanation would have been given. It was the current market value of the properties with which MGICA was concerned. This may have signified that it was not incumbent on it to seek an explanation at all or that it was entitled to be easily satisfied by any explanation given.

While it cannot be said to be impossible that an inquiry would have revealed that there had been an attempt by Beca to deceive and that this revelation would have induced MGICA not to grant cover, this is mere guess work. In sum, it could not be concluded on the evidence that any negligence on MGICA's part had contributed to its loss.

8.CONCLUSION

My conclusions can be summarised as follows:

1.The respondents breached the duty of care and skill which they owed to MGICA and in the result provided an "as completed" valuation of $5,500,000 whereas the true value of the Property was only of the order of $3,900,000 to $4,000,000 and a valuation resulting from the exercise of due care and skill would have said so.

2.The respondents contravened s 52 of the TP Act and s 42 of the FT Act by providing a valuation which overstated the "as completed" value of the Property to the extent of some $1,500,000 to $1,600,000.

3.MGICA acted in reliance on the respondents' valuation by including the Mortgage in the Pool Policy and would not have provided mortgage insurance if the "as completed" valuation had been substantially less than $5,500,000 as it was.

4.The respondents are liable to MGICA for all the loss which it suffered from having entered into the transaction, not only for that represented by the amount of the difference between the valuation supplied and the true value.

5.The limitation defence fails.

6.The contributory negligence defence fails.

The respondents should be ordered to pay damages to MGICA of $1,977,513.67 plus interest under s 51A of the Federal Court Act 1976 calculated in the usual way on the amounts outlaid by MGICA from the respective dates of outlay to date of order. As well, the respondents will be ordered to pay MGICA's costs.

The parties should attempt to agree on the amount of interest. The proceeding will be stood over to a date for the making of final orders. The parties will be directed to bring in an agreed form of short minutes of the orders to be made on that date or, if agreement is not reached, the forms of short minutes of orders for which they will respectively contend.

I certify that this and the preceding 158 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lindgren.

Associate:

Dated:30 August 1996

Heard: 7, 8, 9, 10, 11, 14, 15, 16, 21, 22 August 1995; 5, 6, 7, 8, 9 February, 8 March 1996.

Date last submission

received: 25 July 1996

Place: Sydney

Decision: 30 August 1996

Appearances: Mr J J Steele QC with Mr R W White of counsel instructed by Hickson Lakeman & Holcombe appeared for the applicant.

Mr D Davies of counsel instructed by Colin Biggers & Paisley appeared for the respondents.

Property	Costs assigned by Beca	Cost as revealed by R P Transfer
13 Columbus Circuit, Coffs Harbour transferred to Beca by Transfer bearing date 1 March 1974.	$179,500	$22,000
27 Arthur Street, Coffs Harbour transferred to Beca by Transfer bearing date 21 March 1974.	$221,947	$21,500
32-38 Montgomery Street, Kogarah transferred to Beca by Transfer bearing date 23 September 1985.	$1,357,640	$500,000
283 Miller Street, North Sydney transferred to Beca by Transfer bearing date 5 November 1987.	$2,639,113	$1,650,000

[1996] FCA 766

30 AUGUST 1996