Morgan, O.I. v State Bank of South Australia

Re: OWEN IDRIS MORGAN
And: STATE BANK OF SOUTH AUSTRALIA
No. S G193 of 1989
FED No. 582
Trade Practices

COURT

IN THE FEDERAL COURT OF AUSTRALIA

SOUTH AUSTRALIAN DISTRICT REGISTRY
GENERAL DIVISION
Von Doussa J.(1)

CATCHWORDS

Trade Practices - Misleading and deceptive conduct - allegations by applicant that respondent represented that it would provide finance for the purchase of a house property - applicant agreed to purchase house - respondent declined application for finance - factual basis for the claim alleged by the applicant not proved - claim dismissed.

HEARING

ADELAIDE

#DATE 23:9:1991

Counsel for the Applicant : Mr T.R. Anderson QC with

Mr P.A. Heywood Smith

Solicitors for the Applicant : Johnston Withers

Counsel for the Respondent : Mr D.A. Trim with Mr P.V. Slattery

Solicitors for the Respondent: Baker O'Loughlin

ORDER

The application be dismissed.

Question of costs reserved for further argument.

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

JUDGE1

On 1 October 1987 the applicant, through his agent, agreed at auction to purchase a house property at Vaucluse Road, Vaucluse, New South Wales ("the Vaucluse property") for $1.2m. He says he did so in the belief that the respondent would provide the finance required to enable him to settle the contract. The respondent subsequently refused to do so. The applicant now claims damages for costs incurred in arranging finance from other sources and for other losses resulting from a re-organisation of his investments consequent upon the respondent's refusal. The claim for damages is made on three grounds, breach of contract, misleading and deceptive conduct in contravention of s.52 of the Trade Practices Act 1974, and negligence.

The first ground alleges a contract reached between the parties that the respondent would provide finance for the Vaucluse property if the applicant were successful at auction up to $1.5m.
The second ground, pleaded in para.34 of the statement of claim, alleges that the respondent, primarily through its agents Ian Charles Dorman and Robert Howard Birt, stated to the applicant that the respondent "would never let the applicant down", that there would be no problem with a proposal made by the applicant for a loan facility to enable purchases to be made in the $1.2m to $1.5m section of the Sydney real estate market, and that the applicant could go ahead to bid on the Vaucluse property to $1.5m. It is alleged that there was no basis in fact for making those statements. At trial the misleading and deceptive conduct alleged also included an omission by the respondent and its officers to properly advise and warn the applicant "of the dangerous ground into which he (was) heading" if he proceeded to bid for the Vaucluse property, the dangers being that the respondent might not provide finance for a variety of reasons including that between the date of the auction and settlement there might be a collapse of the share market (or presumably some other adverse world event) which would give the respondent "cold feet", that the bank might decline finance because it was unfamiliar with the Sydney real estate market, that the applicant's proposal involved capitalising interest and assumed continuing increases in Sydney real estate prices to meet the respondent's lending margin of 85% of valuation of residential properties, that the purchase was not a self supporting investment, and that the respondent's decision could be influenced by a perception by the respondent's officers that the respondent had already been "generous" to the applicant.
The third ground of the claim, which is framed in negligence, is based on a breach of duty constituted by a failure to advise and warn the applicant. The particulars of negligence raise similar allegations to those made in support of the misleading and deceptive conduct claim.
In opening their respective cases counsel identified the crucial issue in the case as that of credit, as the applicant and the principal witnesses for the respondent gave conflicting versions of the events and conversations on which the applicant relies. The applicant's case asserts that the evidence of Mr Dorman in particular, but also that of Mr Birt about a meeting on 15 September 1987, should be disbelieved. Furthermore, the court has been invited to hold that the explanation for the conduct of the respondent's officers alleged by the applicant is that when the share market crash occurred on 21 October 1987 the respondent "bank gets the nerves and collywobbles and a whole series of retrospective justifications are put into place...". One of those justifications is identified in a file note which now appears on the respondent's files prepared by Mr Dorman and dated 1 October 1987. That note, if it truly records what occurred at a meeting with the applicant on 30 September 1987, is destructive of the applicant's case. The applicant's case contends that the note was created some time later to support a false story about the meeting of 30 September 1987, and about surrounding events.
On the other hand the respondent's case was opened with a submission that the applicant should be disbelieved because the evidence of the respondent's officers, and the picture clearly painted by the records of the respondent, establish that what the applicant says occurred did not happen.
I am unable to accept either of these submissions. The evidence has left me with the firm impression that no witness was deliberately attempting to mislead the court. The case is not one where the court can reject out of hand the evidence of one of the principal witnesses as not worthy of credit. I reject in particular the submission that Mr Dorman was guilty of concocting the file note dated 1 October 1987, or any other document. I find that each witness was doing his or her best to give an accurate account of what happened. However, the reliability of the accounts given is a matter which requires careful consideration as the events in question happened some four years ago. The recollections of all witnesses have faded, as would be expected. On many matters of detail Mr Dorman and Mr Birt frankly conceded they could not remember. Nevertheless I was impressed by both of them and I accept their evidence on critical events during the period 15 September to 1 October 1987. As will appear later in these reasons I do not accept every matter of detail in their evidence during this period but I do accept their denials that assurances of finance now attributed to them by the applicant were made.
Throughout the period from June to October 1987 the applicant was asserting supreme confidence in his predictions about the Sydney real estate market which he says was increasing in value at up to 2% per week. His forecasts did not permit the possibility of error. The refusal of the respondent to provide finance for the Vaucluse property halted the progress of the applicant's dreams and precipitated a serious cash flow crisis. Alternative finance for the Vaucluse property was arranged, but in late December 1987 when one of the new financiers lodged caveats to protect second mortgages over properties already mortgaged to the respondent, the respondent froze the bank accounts of the applicant upon which he depended for his day to day living. Then on 5 January 1988 the respondent informed the applicant by letter that if he did not bring his several accounts within their limits the bank would consider realising its securities. At this point the applicant became very angry with the respondent. He sought legal advice for the purpose of restraining the respondent from realising securities. On 14 January 1988 he asserted that he had bought the Vaucluse property on a recommendation by Mr Dorman. The applicant, at times, in the witness box vented continuing anger towards the respondent. I accept that the applicant now believes - and has since early 1988 believed - that he was wronged by the respondent. But an analysis of the evidence has led me to conclude that the applicant has placed interpretations on events which are not justified by what happened. I consider that he has also erroneously reconstructed a number of events which he now believes happened, for example that he gave cash flows, exhibits A4 and A5, to Mr Dorman and Mr Birt on 15 September 1987, and his explanation for asking his accountants, Wearne and Co., on 14 October 1987 to prepare a cash flow for the respondent's use rather than on a date closer to 1 October 1987.
I have made these general observations about the principal witnesses before turning to the evidence to indicate a preference, on critical events, for the evidence of Mr Dorman and Mr Birt. I shall however make specific findings on many less important facts as I discuss the evidence in dispute and in some instances I have accepted in part the evidence of the applicant.
The applicant is a 45 year old radiologist who moved to Adelaide from Sydney in 1983. He now carries on his practice in a large successful partnership in Adelaide. From his university days he has been interested in investing in properties and shares. By 1984 he owned a home unit in Perth (jointly with his wife), a house property at 81 Stafford Street, Paddington, New South Wales ("81 Stafford Street"), and a large house property at 30 Daphne Street, Prospect, South Australia ("Daphne Street"). In the mid 1980's he was also actively trading shares, and for this purpose operating a margins account with the merchant bank Harrisons in Adelaide. In the year or so before June 1987 he had been very successful. He then decided that the share market, which he followed closely, had peaked, and he sold his shares (or rather the family trust company through whom he operated did so). By July 1987 he had available for his investment approximately $300,000 from share trading profits.
The applicant had transferred his banking business to the respondent in June 1986. In February 1987 he was interested in purchasing another house in Stafford Street, Paddington, and enquired from the bank whether it would be prepared to make finance available. He was informed that provided he met the bank's guidelines there should be no difficulty. As events turned out the particular house was not purchased but the applicant purchased another at 35 Stafford Street, Paddington ("35 Stafford Street"). He entered into a contract on 13 June 1987 to purchase the property for $220,000.
After the contract on 35 Stafford Street was signed the applicant approached the officer of the respondent with whom he customarily dealt and enquired if the bank would be interested in providing finance to enable him to buy a portfolio of residential properties to the value of approximately $1m in Sydney, of which 35 Stafford Street would be one. The applicant was directed to another officer, Mr Wennan, who informed him that the bank would be interested if he met bank guidelines. Those guidelines were stated, namely that the proposed loan would not exceed 85% of valuation of the property, and that the applicant could establish that he could service the loan. Arrangements were made for the applicant to discuss his proposal in more detail with another bank officer, Mr Dorman. The applicant's first meeting with Mr Dorman was on 24 June 1987. Mr Dorman was at the time a commercial loans officer with the Adelaide branch of the respondent. Mr Birt was a district commercial manager for the respondent stationed in the commercial lending section, Pirie Street, and was several rungs above Mr Dorman in the ladder of authority within the bank. Officers in the bank were delegated lending authority depending on their position in the hierarchy of control. The authority of Mr Dorman was for loans up to $50,000 on first class security and up to $12,000 unsecured. Mr Birt had authority to approve loans up to $750,000 on first class security and $75,000 unsecured. Mr J.F. Farrell, the senior manager, commercial and rural lending, had authority for loans up to $1m secured and $100,000 unsecured. Mr V.R. Pfeiffer, the chief manager retail lending, had authority to $1.5m secured and $150,000 unsecured. The limits of authority applied to the total exposure of the respondent to a borrower, not merely to the amount of an increase in a facility.
Approval for loans exceeding $1.5m, up to $5m, fell within the lending authority of the retail lending committee, commonly referred to as the credit committee, to whom submissions for loans would be channelled through the commercial lending section.
At the time of their first meeting on 24 June 1987 Mr Dorman was handling an application by the applicant to roll over a fixed term fixed interest loan of $224,000 which the bank had made to the applicant on the security of the Daphne Street property in 1986. The meeting occurred at the applicant's home. This occurred at the applicant's request because his practice commitments made it difficult for him to go into the respondent's office during ordinary banking hours. At the meeting the applicant explained his belief that the Sydney residential market was set to escalate. He wished to acquire a portfolio of three to five properties, borrowing approximately $1m. He explained tax advantages which would flow to him from the proposal, and also his long term aim to realise the portfolio of properties to enable him to buy an expensive home when he returned from Adelaide to live in Sydney. The applicant produced a letter from his accountants, Wearne and Co., which gave details of his assets and of his proposal. The letter included cash flow predictions of income and expenses, and a projection of his assets and liabilities if the proposal went ahead. The letter was addressed to the applicant. The final paragraph reads:

"On the basis of these calculations, we believe that your proposal to purchase investment properties of approximately $1m with borrowings representing 85% of the initial cost with capitalisation of interest of approximately 10% p.a. for two years can be supported both by your income earning capacity and by your asset values."

The applicant's net worth, including his properties, his interest in his medical practice, his motor vehicles, and his furniture, was said to be just over $1m.

The notion of capitalising interest on borrowed moneys, which the applicant orally proposed would be to the extent of one half the interest, was discussed. The applicant explained his proposal to sell one or more of the properties in due course at increased prices to cover the unpaid interest. The applicant says Mr Dorman seemed very enthusiastic and said:

"Yes we are interested...If the bank's guidelines of lending only to 85% of valuation (are) met and that I (can) prove serviceability then there would be no problem in advancing the money."

The applicant alleges that at the conclusion of the meeting Mr Dorman went further and said that the bank would be prepared to lend approximately $1m provided that amount represented no more than 85% of the value of the properties, and that he, Mr Dorman, was happy, having looked at the applicant's assets and liabilities and income, that the applicant could service that loan. Mr Dorman also said that he would be able to capitalise part of the interest.

Mr Dorman agrees that the guidelines were mentioned and that he said he would recommend the proposal. However, he said that he did not have authority to approve the loan, and would get back to the applicant to advise the bank's response.
I find that Mr Dorman did not say that the bank would accept the proposal, or commit the bank to accept the proposal to capitalise interest. I find he did no more than say that he would recommend the proposal. I find that the applicant well understood that Mr Dorman did not have authority to commit the bank on any aspect of the proposal.
Mr Dorman made a submission to the commercial lending section. In addition to borrowings of $1m to purchase houses, the proposal sought authority for a fully drawn advance of $80,000 to cover the short fall on accrued interest, after allowing for rents and payments on account of interest from the applicant's earnings, over two years, that is to capitalise part of the interest. On 6 July 1987, a commercial lending manager informed Mr Dorman of the respondent's decision on the proposal. Mr Dorman advised the applicant of the bank's decision by letter dated 8 July 1987. The letter included the following statements:

"I am pleased to advise that the Bank is prepared to consider an application for finance to purchase residential properties in Sydney on the following terms and conditions:

Facility: 1. Initially Fully Drawn Advance with progressive draw down as properties are acquired. Final balance to be converted to fixed term/fixed interest if required.

2. Fully Drawn Advance facility to meet capitalisation of interest in part.

Amount: 1. $1.0M approximately

2. $30,000

...(then followed details of the term, the interest rate, and fees and security required)

General: Any formal request for finance is to be subject to the standard bank lending margin of 85% residential, providing no adverse comments are contained within the valuation report. The Bank will be seeking satisfactory revaluations of current securities held. A further revaluation of all properties will be undertaken by the Bank within 12 months of draw down to assess whether the Bank's lending margin of 85% has not been exceeded in respect of total outstandings to the Bank. If this margin is exceeded a 'topping up' of further security will be required."

The approval in principle given by the bank envisaged capitalisation of interest to the extent of $30,000 only.

Before that letter was received by the applicant a telephone conversation occurred between him and Mr Dorman. I find that telephone conversation occurred after the proposal had been approved in principle by the commercial lending manager. At the time the applicant was in Sydney where he had been for the weekend of 4-5 July 1987 with his wife looking at houses. The applicant was keen to instruct an agent to bid for a property at 100 Mill Hill Road, Bondi Junction ("100 Mill Hill Road").
The applicant says that he gave Mr Dorman information about the property and said he would like to bid for it - what did Mr Dorman think? The applicant says that Mr Dorman replied "Yes go ahead and bid". Mr Dorman however denies that he gave any approval for the purchase of Mill Hill Road. I think it is unlikely that Mr Dorman would have done other than indicate that the property, as described, would fall within the concept of the proposal approved by the commercial lending manager. The applicant concedes that he knew that each new acquisition would have to meet the bank's guidelines which had been stressed by Mr Dorman. It follows from those guidelines that Mr Dorman could not commit the bank to lend on a new acquisition until the property had been valued and the bank had considered the application of the guidelines to it.
The Mill Hill Road property was acquired by the applicant's agent at auction on 9 July 1987 for $192,000.
The applicant left Australia to travel overseas on 6 July 1987. He alleges that before he left he informed Mr Dorman about building plans he had seen for a unit development in Ocean Street, Woollahra, New South Wales ("the Ocean Street unit"). The applicant gave evidence:

"I said that it was a substantial high quality development. I said I thought there would be substantial capital gain in it. I thought that it was a good deal because I could put 5% deposit down and not settle until December-ish, and that I hoped to settle prior to completion of the building so that it was a contingent liability for the bank only, but if I couldn't settle, then I would want it to come on to the $1m facility...He (Mr Dorman) once again said: Yes go ahead that's fine."

An offer to purchase one of the units for $435,000 was made on the applicant's behalf by his agent on 9 July 1987. On 24 July 1987 an application went forward within the bank for the approval of a bank guarantee for $21,750 to secure a 5% deposit under a contract on the Ocean Street unit, and this was approved on 28 July 1987. I am not satisfied on the evidence that Mr Dorman was informed of this proposed transaction on 6 July 1987. I think it is more probable that he was told about it after the offer had been made. In July 1987, even on the applicant's case, it was not proposed to bring the property within his portfolio. Again, it must have been quite clear to the applicant that should he choose to do so in the future he would then have to comply with the bank's guidelines.

Mr Dorman undertook the steps necessary on the applicant's behalf to seek formal approval from the respondent to provide finance on the 35 Stafford Street and 100 Mill Hill Road properties. Valuations were sought on both properties. No. 35 Stafford Street was inspected by a valuer on 30 July 1987, and valued at $224,000 (i.e. $4,000 above the contract price). Mr Dorman put forward an application on 31 July 1987 for an advance of $190,000 on that property (being 85% of the valuation), and for a further $8,000 for the capitalisation of interest. Mr Dorman advised the applicant of the valuation, and I think it is probable that he also informed the applicant that he was seeking formal approval for 85% plus a facility to cover capitalised interest. Approval was given by Mr Birt on 4 August 1987. Settlement occurred on 7 August 1987. The applicant was advised of the outcome of the application by letter dated 5 August 1987. A copy of that letter was signed by the applicant on that day when mortgage and other documents were also signed to enable the settlement to take place on 7 August 1987. Mr Dorman attended the applicant at his rooms in the suburb of Marion to have these documents signed. The letter of approval clearly states that the amount of the facility in respect of 35 Stafford Street was $190,000. It states that "interest is presently charged on a quarterly basis at the end of September, December, March and June" thereby indicating that no allowance for capitalisation had been approved. The letter concluded with a general statement which reads as follows:

"Requests for finance for residential properties are subject to the Bank's standard lending margin of 85% of valuation providing no adverse comments are contained in Valuation reports. A further revaluation of all properties will be undertaken by the Bank within 12 months to ensure the lending margin has not been exceeded in respect of total outstandings. If the margin is exceeded, additional security will be required."

The valuation of 100 Mill Hill Road was carried out at an inspection on 5 August 1987. The property was valued at $189,000 in contrast to the contract price of $192,000. I am satisfied there was discussion between the applicant and Mr Dorman over that valuation. The applicant said he wished to borrow $172,000 on the 100 Mill Hill Road property as he had a pending tax liability and could contribute only $20,000 at that point in time. The application put forward by Mr Dorman for formal approval sought a loan for $172,000, and that loan was formally approved by Mr Birt on 13 August 1987 subject to certain conditions which were later incorporated in a letter dated 14 August 1987 to the applicant. The applicant signed that letter acknowledging receipt and acceptance of the conditions. The letter advised that the loan facility formerly of $190,000 had been increased to $362,000. The letter said the amount "may be further increased when finance for additional property acquisition is approved". Again, the letter said that interest was payable quarterly indicating thereby that no capitalisation was contemplated. The letter contained a similar general statement to that contained in the approval of the 35 Stafford Street facility about loans on residential properties, and concluded: "approval of further advances will be subject to a reassessment of serviceability including tenancy information for all Sydney properties, and the matter of capitalisation of interest being addressed".
It was contended at trial on the applicant's behalf that Mr Dorman's conduct in relation to 35 Stafford Street and 100 Mill Hill Road induced the applicant to believe that Mr Dorman had authority to speak on behalf of the bank, and that the applicant's proposal, including the capitalisation of interest, for the acquisition of Sydney real estate was not against bank policy. It was suggested that because at no stage did Mr Dorman inform the applicant that finance might not be granted in respect of either of the properties, the applicant was entitled, in future, to assume that once Mr Dorman said he could "go ahead" or "bid" on a property, he could assume that finance had been approved, or at least that any application of the bank's guidelines would be a "rubber stamping" formality. I am unable to accept these submissions. The contract for 35 Stafford Street, and in my opinion the offer for the Ocean Street unit, were signed without any reference to Mr Dorman. In the case of 100 Mill Hill Road, whatever expression may have been used by Mr Dorman, if the applicant told him about the property before agreeing to purchase it, I am satisfied that the applicant well understood at that time that the guidelines had to be fulfilled. In the case of both settlements, valuations were carried out. I am satisfied the applicant knew that the valuations were a prerequisite to approval.
It may be, as the applicant alleges, that he and Mr Dorman did not discuss how either settlement would be financed if the bank did not approve the loan application. However, that is hardly surprising as in the case of 35 Stafford Street the applicant had indicated from the outset that he initially intended to pay for that property with money that he had on call from his share trading, and once that property was settled the money on call would have been available, if required, to settle at short notice on 100 Mill Hill Road. Furthermore, even if Mr Dorman had in relation to 35 Stafford Street and 100 Mill Hill Road acted as if the provision of finance were never in doubt, it does not follow from that conduct that he, or the bank, would act in a similar way in respect of a markedly different transaction. The conduct must be judged in all the circumstances then existing. The 35 Stafford Street and 100 Mill Hill Road transactions were the first two transactions of an anticipated three to five which together would involve the bank lending up to $1m. Approvals on those transactions were given in light of the asset and liability position of the applicant then prevailing, and subject to conditions which restricted the capitalisation of interest. The need to prove serviceability was hardly likely to present any difficulty with the first one or two transactions, but obviously would assume greater importance as the level of the facility increased, as the respondent's letter approving the increased facility for 100 Mill Hill Road had identified. The later transaction in relation to the Vaucluse property involved a vastly different sum of money, and, as the applicant well knew, was beyond his ability to service unless a substantial part of the accruing interest on his borrowings was capitalised.
The next transaction to which evidence in the applicant's case is directed concerns a property at 313 Edgecliff Road, Edgecliff, New South Wales. This was a distinctive three-storey property which the applicant hoped to buy for his future family home. His agent in Sydney informed him of the property and of the prospect that it would sell at auction for between $1m and $1.2m. It was a property that he hoped would give a good return from rental until he returned to Sydney. The property was to be auctioned on 3 September 1987. The applicant says he flew to Sydney on the last weekend in August (29/30 August) and inspected the building with a builder. He discussed the possible purchase of the property with Mr Dorman, he says, both before and after that visit in face-to-face meetings. The applicant says he described the house to Mr Dorman, gave him information about proposed rentals, and about various assets that he would realise to contribute funds towards the purchase. The applicant says he asked if he could go ahead and include the property in the "scheme". The conversation continued:

Dorman: "Yes, I think you can go ahead and buy that. That's still within the $1m facility."

Applicant: "Well, it's not exactly. By the time I borrow 85% and contribute the money I have available in my share portfolio and dispose of some other assets I have which I am going to dispose of in a couple of months, I am going to have borrowed a total of about $1.15m. from the State Bank."

Dorman: "The letter originally said approximately $1m and I think that's approximately $1m, so I can see no problem with it."

Relying on that information the applicant says he instructed an agent to bid for the property at auction, but was unsuccessful. The property sold for $2m.

Mr Dorman does not remember either of the meetings described by the applicant, nor does he remember ever being involved in discussion about the Edgecliff Road property. He does not deny that there may have been passing mention of that property in the course of general discussion as, he says, many properties were discussed from time to time by the applicant. If it were mentioned, he has no recollection of the figure of $1.2m being discussed. He denied being handed a brochure on the property.
The applicant's wife was called as a witness in rebuttal to say that she remembered speaking with Mr Dorman one evening in her home, when he was waiting for the applicant, when the Edgecliff Road property was discussed. Her recollections were somewhat vague, but her evidence leads me to conclude that the probabilities favour a finding that there was at least one more attendance by Mr Dorman at the applicant's home than he now remembers, and that there was discussion about the Edgecliff Road property. I think it is unlikely, and I am not prepared to find, that in the discussion Mr Dorman said anything which led the applicant to believe that the normal banking guidelines were being waived or that he had any assurance from Mr Dorman that the bank would lend 85% of the purchase price of Edgecliff Road up to $1.2m. Short of that, it may well be the case that in the course of discussion about the property Mr Dorman said that a total borrowing of $1.15m was not far removed from "approximately $1m", and that so long as the bank's guidelines were met he could see no problem with it. However, that statement, or one like it, does no more, in my view, than restate what had already been stated by the respondent in its correspondence, and was not a statement that could have misled the applicant into believing that the conditions earlier imposed by the bank in relation to his proposal, particularly in the letter of 14 August 1987, as to serviceability and the capitalisation of interest, were being waived by Mr Dorman. The applicant knew that the borrowing proposal was beyond the authority of Mr Dorman.
When the applicant was unsuccessful in purchasing Edgecliff Road he concluded that the values of Sydney properties were escalating even faster than he had earlier believed, and so as not to miss out on the boom, he signed contracts to buy three units under construction. Reference has already been made to the Ocean Street unit. The offer which the applicant at first believed had resulted in a contract was not accepted by the vendor who wanted a higher price. When it became apparent that agreement had not been reached with the vendor, the guarantee established by the respondent for the 5% deposit was cancelled. On 4 September 1987 the applicant decided to make a further offer. This led to a contract being signed on 4 September 1987 for $545,000 with 10% deposit payable on the exchange of contracts. On 11 September 1987 the applicant entered into contracts to purchase units at Lot 3 and Lot 11, 56 Wrights Road, Drummoyne, New South Wales ("the Drummoyne units") at $735,000 and $800,000 respectively. It was anticipated that the units would be completed in about August 1988 when settlement would take place. These three contracts were entered into by the applicant without reference to Mr Dorman. Although immediate settlement was not anticipated in any instance, and there remained a possibility that the units could be resold by the applicant before he was called upon to settle, the deposits, stamp duties and legal fees would make a significant in-road upon the cash which the applicant had available for the purchase of other properties, and exposed him to substantial liability in the event of an adverse turn in the market. The fact that the applicant entered into these contracts without reference to Mr Dorman makes his allegations in respect of Mill Hill Road and Edgecliff Road that he only bid at the auctions because of the prior authorisation from Mr Dorman unlikely.
A meeting of major importance to the issues of this litigation occurred at the applicant's home on 14 or 15 September 1987. Although the parties are not sure of the date, 15 September 1987 seems more probable and I accept that as the date of the meeting.
The applicant says that the meeting was preceded by a visit by Mr Dorman to his home when the applicant asked for a meeting with someone with more lending authority. Mr Dorman denies that the meeting occurred. I think that it is more probable that the request for a meeting with a more senior bank officer occurred by telephone. Mr Dorman agreed to arrange a meeting with Mr Birt. The applicant says that he requested the meeting as he considered that the top end of the residential market was strong, he wanted to secure a home for himself in Sydney, and he was concerned that Mr Dorman did not have authority in relation to an expansion of the scheme previously placed before the bank. Mr Dorman has no recollection of the purpose of the meeting being discussed with him beforehand other than that the applicant wished to meet someone more senior.
Mr Dorman and Mr Birt attended on the applicant at about 6.00 p.m. on 15 September 1987. The meeting occurred in the applicant's study and lasted about one hour. The applicant says that after serving drinks he explained that he wished to expand his scheme for investment so as to secure all loans over all properties, and to increase the amount of his borrowing. For ten to fifteen minutes he outlined his understanding of the Sydney real estate market and his belief that values were increasing at about 2% per week. He referred to the facility already approved in principle, and to the two houses he had acquired. He referred to his failed bid on the Edgecliff Road property, and to the Drummoyne properties. He explained his intention to move back to Sydney during 1988, and to the possibility that he would give up his medical practice and go into business with a friend as a stockbroker. At the time he was studying for the degree of Bachelor of Business. He then gave to each of the bank officers a single sheet containing a typed cash flow (exhibit A5) and proceeded to explain his expanded proposal. The typed document was the product of an earlier handwritten one (exhibit A4) which he had before him but may not have shown to the bank officers. The cash flow included anticipated outgoings for deposit payments, stamp duty and legal expenses, on the Ocean Street unit and the two Drummoyne units. It included first the deposit, and then the settlement and outgoings on a house property in Ocean Street (the Ocean Street house) to be acquired at $800,000. The Ocean Street house was to be auctioned on 1 October 1987, and the pending sale had been brought to the applicant's attention shortly before the meeting by his Sydney agent. At the time of the meeting neither the applicant nor his wife had seen the Ocean Street house.
The exhibit A5 cash flow also included anticipated outgoings for taxation and included moneys available from the earlier share trading activities and moneys to be received from the sale of several assets. Anticipated interest commitments were shown. The applicant informed the bank officers that he proposed that he would meet half the interest from his earnings and the other half would be capitalised. The cash flow predicted maximum borrowings at 1 April 1988 (following a tax payment) of $2.24m plus capitalised interest.
The applicant then gave his estimates of the present values of his various properties and these were discussed. The applicant professed to have expert knowledge of relevant land values in Sydney, and said that the valuations currently held by the bank were too low. He expressed his opinion that the 85% lending margin by the bank would be met even at 1 April 1988. At the end of the discussion, his evidence is that:

"I said to Birt, because he was the one who I believed had authority, I said 'What do you think, Bob?' and he said 'I can see little risk in it for the bank. I think it looks good.' I said 'Do you think it's met the guidelines?' and he said 'Yes I do'."

The applicant says that at the conclusion of their discussion, he and the two bank officers walked around the Daphne Street house property as he had contended that its value was much above the bank valuation. The bank officers agreed with him.
The bank officers give a quite different version of the meeting. They both described it as a "social visit" for no particular purpose other than to allow the applicant and Mr Birt to meet. The bank officers agree that there was general discussion about the Sydney real estate market, the purchases that the applicant had made, and about his plans to return to Sydney and possibly go into stockbroking. They acknowledge that a copy of the brochure for the Drummoyne units was produced, but neither of them have any recollection of the Edgecliff Road property being discussed nor of there being any mention of an intention by the applicant to purchase the Ocean Street house at $800,000. Both deny that exhibit A5 was produced to them or that a cash flow was discussed. Both deny that any particular proposal was discussed or that they were asked to pass an opinion about a specific lending proposal. The recollections of both officers as to the detail of the conversation was imperfect, but both emphatically deny that there was any commitment, assurance or even encouragement that the bank would grant approval to the applicant's proposed extended scheme.
Significantly, there is nothing on the bank files to indicate that any action was taken by either Mr Dorman or Mr Birt to initiate any new approval by the bank in respect of a revised scheme or intended borrowing by the applicant in the two weeks which followed. The applicant says that he spoke frequently by telephone between 15 and 28 September 1989 with Mr Dorman who was seeking to clarify details of rentals and property values. There is, however, nothing on the bank files which would suggest any reason for this, and the telephone conversations are denied by Mr Dorman who says there was only one call when the applicant enquired how the meeting went, and Mr Dorman replied that "Mr Birt considered the personal factor okay". I accept Mr Dorman's evidence about these alleged telephone conversations.
The applicant's case now asserts that at the meeting on 15 September 1987 approval in principle was given to the extended scheme as outlined in exhibit A5 by both Mr Birt and Mr Dorman. This proposal, as events turned out, came to nothing as when the applicant inspected the Ocean Street house he decided against purchasing it, and directed his attention instead to the Vaucluse property. It is contended however that Mr Birt and Mr Dorman were guilty of misleading and deceptive conduct at the meeting in that they indicated approval based on the applicant's estimates of the values of his properties without expressing any reservation about his estimates, without giving him warning that even if the values were established the respondent might nevertheless not grant approval to the loans envisaged by the scheme, and without warning that the bank might decline approval because of concern whether property values in Sydney would continue to increase in the manner forecast by the applicant (that increase being necessary to maintain the bank's lending margin as interest was capitalised).

I am unable to accept the applicant's version of this meeting. It may well be that the applicant had among papers on his desk a draft cash flow (e.g. exhibit A4) but I find that he did not produce that draft or exhibit A5 at the meeting, nor did he go through the detail of the document in the manner that he now alleges. Had the document been produced I am sure Mr Birt and Mr Dorman would remember it. It is a confusing document, difficult to follow, and not the sort of document likely to be forgotten. Furthermore, had there been a discussion along the lines alleged by the applicant it could be expected that a copy of A5 would have been treated as important and maintained on a bank file. There is no suggestion in the bank files that exhibit A5 was ever produced. Counsel for the applicant asks rhetorically why would the applicant not have produced exhibit A5? This question assumes that the typewritten sheet had been prepared at the time of the meeting, an assumption which I am not satisfied is correct. As neither the applicant or his wife had seen the Ocean Street house at that time I think it is unlikely that a proposal to buy the house would have been put forward in any definite way. The applicant's wife inspected the house the following day. She was not asked in evidence to give her assessment of the house at that time but it seems reasonable to assume that she did not reject it out of hand as the applicant inspected the house on 26/27 September 1987, and then decided against the purchase not because the house was unattractive, but because the Vaucluse property was better. I think it is more likely that exhibit A5 was prepared after Mrs Morgan had seen the house. Be that as it may, there is another reason in my view why exhibit A5 would not have been produced to the bank officers. It is a cash flow not in a form which the applicant knew would be required by the bank and, more importantly, it is a confusing and incomplete document, a perusal of which was likely to indicate immediately to the bank officers that the proposed borrowings fell far outside the bank's guidelines based on the valuations held by the respondent.
The applicant's case sought to explain by reference to exhibit A5 how the 85% lending margin could be met at 1 April 1988 when the level of borrowing reached its maximum, shown on exhibit A5 as $2.24m. The applicant says that the values of the properties were:

Daphne Street $450,000

81 Stafford Street $330,000

100 Mill Hill Road $250,000

35 Stafford Street $330,000

Ocean Street house $800,000

Ocean Street unit $545,000

$2,705,000 85% $2,299,250

The values ascribed to the first four properties were the applicant's estimates at the time. Valuations on the respondent's files at 15 September, which were generally known to Mr Dorman and Mr Birt, were:

Daphne Street $360,000

81 Stafford Street $207,000

100 Mill Hill Road $189,000

35 Stafford Street $224,000

Furthermore, exhibit A5 does not include in the April 1988 maximum of $2.24m the proposed capitalisation of one half of the interest, which to that date would have added more than $50,000 to the borrowings. The inclusion of the Ocean Street unit as part of the security is contrary to the concept of the scheme. At 1 February 1988 the scheme anticipated that settlement would not have occurred on the Ocean Street unit. To include the value of the Ocean Street unit as part of the security would require an additional sum of $464,000 to be added to the borrowings, that is the balance of the purchase price outstanding at April 1988.

Had exhibit A5 been explained to the bank officers, or had the concept itself been explained in detail, it fell so far outside bank guidelines both as to security and as to serviceability that I think it is inconceivable that it would have gained any encouragement from the bank officers.
The primary case of the respondent is that the evidence of the applicant concerning the meeting of 15 September 1987 should be rejected. I have indicated my reasons for accepting that submission. However, there is force in a further submission put in the alternative by counsel for the respondent. Based on several answers given by the applicant in the course of his cross-examination it is contended that even on his own evidence the applicant fails to establish that at the meeting he received approval from the respondent for the extended scheme or that anything was said upon which he could reasonably rely as an indication that approval would be forthcoming. I find force in this submission.
The applicant well knew that Mr Dorman did not have authority. That was the reason for his request to see Mr Birt. The applicant says that he knew at the time of the meeting that Mr Birt was a member of the credit committee, and that his extended scheme would require approval from the credit committee. He also knew that approval was conditional on the guidelines being met. In cross-examination the applicant said:

Q. The purpose of the meeting on 14 September with Birt was particularly to draw his attention to what you had in mind as outlined on that cash flow sheet with a particular view to obtaining his approval. That is it, isn't it? A. No, I didn't think he was going to approve it. He said that it met the guidelines and said if the guidelines were met the committee would approve it. I wasn't seeking his approval. I didn't think he could approve it.

and

Q. Did you regard what Birt said as being approval to go ahead and bid on the Ocean Street house?

A. No. I have already said that I knew it had to go to the committee and that he said it would be approved because it met the guidelines.

Q. You knew it had to go to the committee. That is the...? A. Credit committee.

Q. He said it would be approved, that it met the guidelines? A. Yes.

Q. There was never any occasion was there that any officer of the bank indicated there would be a departure from the guidelines was there?...(the question was reread) A. No, there wasn't.

and

Q. I put it to you that Birt said nothing to you which indicated any form of approval to any prospective scheme to purchase real estate in Sydney?

A. No. He told me that the terms which would be met for approval. He didn't indicate that there was approval. Q. In terms again of the two guidelines we have been through over and over?

A. Yes.

The applicant well knew that the guidelines required the valuation of the properties. Nothing that Mr Birt may have said could have given the applicant any ground for believing that requirement was waived. There could be no ground arising from the statements alleged by Mr Birt for the applicant to assume that the bank had agreed or would necessarily agree to the proposal.

On the weekend of 26 and 27 September 1988 the applicant inspected properties in Sydney including the Vaucluse property which was to be auctioned on 1 October 1988. The applicant anticipated that it would sell for up to $1.5m. The evidence of the applicant and that of Mr Dorman over the events which followed leading up to the applicant's successful bid on 1 October 1988 for the Vaucluse property is again markedly different.
The applicant says that on Monday 28 September 1987 he telephoned Mr Dorman and said that he was now considering buying the Vaucluse property and would like to be able to bid to $1.5m. Mr Dorman said that he would have to see if that fitted in with the bank's guidelines. He rang back and said that he thought that it did. On the same day the applicant explained to Mr Dorman that he only had $80,000 in his current account and would need up to $70,000 immediately to cover the 10% deposit if successful at the auction. He asked whether the bank would accommodate him. Mr Dorman replied "that won't be a problem". Mr Dorman said "go ahead" to the applicant's proposal that he send a blank cheque to his solicitor in Sydney with instructions that the solicitor write out the amount of the deposit if the applicant's bid were successful (p 122). The applicant also requested, probably on the Monday, that Mr Dorman meet with him at his home on Wednesday 30 September 1987.
It is common ground that a meeting occurred at Daphne Street between the applicant and Mr Birt at about 6.00 p.m. on Wednesday 30 September 1987. It is also common ground that the applicant produced a handwritten cash flow which, at the end of the meeting, Mr Dorman took away with him. That document has been lost, but the applicant retained the draft copy from which it was prepared. The copy has been treated, for the purposes of the case, as identical in form to the cash flow produced at the meeting, although the draft, exhibit A7, was later changed by the applicant to reflect the actual purchase price for the Vaucluse property at $1.2m. Some other figures have also been changed. The document given to Mr Dorman was a projection based on a purchase price of $1.5m.
On the exhibit A7 cash flow, provision is made to settle on the Ocean Street unit contract in January 1988 so that the balance of the purchase price of $464,000 is included in the proposed borrowings. But no provision is made to settle on the two Drummoyne properties, and the prediction anticipates that both properties would be sold, before settlement, at a profit of at least $200,000 on each unit in about August 1988.
The cash flow indicated that apart from approximately $80,000 which the applicant would contribute to the deposit, and up to $90,000 from several assets to be sold over the next two months, the balance of the purchase price, and the stamp duty and legal expenses, in relation to the Vaucluse property would be advanced by the bank, the 15% equity margin to meet the bank's guidelines being provided by recent increases in the values of the other properties owned by the applicant.
According to the exhibit A7 predictions, borrowings would peak in January 1988, on settlement of the Ocean Street unit, at $2.813m., and additional provision would have to be made, once again, for the capitalisation of interest, which by January would be a further $40,000. Thereafter the cash flow anticipates the sale of properties, commencing with the Ocean Street unit for $700,000, on 1 February 1987, so that by late 1988 the borrowings would have been virtually repaid.
Exhibit A7 bears a note, which the applicant says reflects a question asked by Mr Dorman at the meeting, "How to service debt if property prices drop". The applicant says he replied that he had been advised that if the market dropped, this would be seen coming, and he would sell properties. Exhibit A7 incorporates estimates of property values by the applicant, this time showing the Daphne Street property as having a present value of $600,000 (against the valuation on the bank files of $360,000).
The applicant says the purpose of the discussion over exhibit A7 was to ascertain if the bank would lend him the purchase price if his bid succeeded. He denies that the purpose of the meeting was to consider whether the bank would cover him in the short term for part of the deposit. The applicant describes the outcome of the meeting as follows:

"Well at the conclusion I said to Mr Dorman, 'Well what do you think? Have these figures met the bank's guidelines?" and he said "Yes they have". I said "Can I go ahead and bid tomorrow or not?" He said "Yes you can go ahead."

It is the applicant's case that he would not have bid at all had he not had this assurance from the bank that he would be covered for the purchase price if he succeeded. The applicant argues that Mr Dorman's statement that he could go ahead was, on the bank's behalf, an acceptance of all the property values which the applicant had nominated, and an approval to the proposal to capitalise interest for the first few months until properties were sold during 1988 at a profit. He argues that the approval for capitalisation is to be implied because at the meeting on 15 September 1987, when the expanded scheme was discussed with Mr Birt, Mr Birt raised no objection to capitalising interest.

Mr Dorman on the other hand, says the purpose of the meeting was to consider a request, first made when the meeting commenced, for the bank to make a short term advance to cover the deposit. Mr Dorman had not earlier been informed about the Vaucluse property, and says he was "flabbergasted" when the applicant said that he proposed to bid to $1.5m the following morning. The cash flow, exhibit A7, was discussed. The applicant explained that he wanted a temporary facility up to $70,000. He described the assets which he proposed to sell. Mr Dorman said he would recommend that the bank make the facility available to cover the deposit. Then the applicant enquired whether the bank would consider lending him the purchase price. He said that he could refinance all the properties, or finance Vaucluse alone, with a merchant bank friend in Sydney but he suggested that all properties be put into one package with the respondent, and part of the interest be capitalised. Mr Dorman said the proposal was outside Mr Birt's authority and would have to go to a credit committee, but said he would put the proposal to the bank and seek an answer in time for the respondent to seek alternative sources of finance if necessary. For this purpose he would need a properly prepared cash flow from the applicant's accountants, and it would be necessary to have the properties revalued as the applicant's estimates of value were well above the bank valuations. To test the position he suggested having 81 Stafford Street valued first, and if the valuation were around the applicant's estimate, he would prepare a submission to the credit committee. The applicant estimated the present value of that property to be $350,000 whereas the valuation on the bank file was $207,000. The applicant had earlier contended that this property was grossly undervalued, and even if the originally proposed facility to $1m were to proceed further it would be necessary to have that property valued. The meeting concluded on the understanding that the applicant would contact Mr Dorman first thing the following morning to ascertain if the bank would grant him the temporary facility for the deposit.
There is also a dispute on the evidence of the applicant and Mr Dorman whether there was a communication between them first thing the following morning. The applicant denies that there was. Mr Dorman on the other hand says that he worked that evening and from 7.00 a.m. the following morning preparing a submission which was typed up at 8.30 a.m. and immediately delivered to Mr Birt. The applicant rang him at about 9.30 a.m. CST by which time Mr Dorman had obtained the oral approval of Mr Birt to a temporary advance of up to $70,000. The auction was at 10.30 a.m. EST.
The written submission which Mr Dorman says he prepared for the purposes of obtaining Mr Birt's approval for the temporary advance is identified by him as the bank file note dated 1 October 1987. If that note is accepted as one truly prepared by Mr Dorman immediately following his discussion on 30 September 1987 it is an important contemporaneous record which supports Mr Dorman's evidence, and is destructive of the applicant's case. I have already indicated my rejection of the attack made on the applicant's behalf to the genuineness of this note. I have closely considered the criticisms made of it but I am not persuaded by them. The applicant's case, as initially opened, anticipated an assertion that the diary note was manufactured after the collapse of the share market. As the case progressed this was modified to a suggestion that the note was prepared a few days after 1 October 1987, not as part of an orchestrated exercise by several bank officers to provide retrospective justification for refusing the loan after the collapse of the share market, but as one undertaken by Mr Dorman alone. It is suggested that he did so because he had offered finance on the bank's behalf for the purchase of the Vaucluse property, and later came to realise that the transaction would not fall within the bank's guidelines. I think it is unlikely in the extreme that Mr Dorman, who had been a conscientious bank officer for most of his working life, would have flouted the standing instructions of the bank to the extent of first authorising the deposit, then authorising the loan (both amounts far exceeding his authority), and then fabricating a note.
The evidence of Mr Dorman gains further support from the recollection of Mr Birt, poor though it is on the point, that he gave approval one morning to some proposition relating to the applicant which Mr Dorman brought to him. The genuineness of the diary date is criticised on the further ground that it does not bear Mr Birt's signed approval, but only a note from Mr Dorman to the effect that the approval had been given. I am satisfied on the evidence that there is nothing unusual in recording authorisation for an urgent temporary facility in this way.
The evidence of Mr Dorman that the applicant said that he could refinance all his properties, or alternatively finance the Vaucluse property with a merchant banking friend in Sydney was strenuously attacked on the applicant's behalf as a recent invention because no reference is made to that fact in the diary note of 1 October 1987. It is argued that the potential loss of a customer if the bank refused to finance the transaction would be a serious matter which was likely to have been highlighted by Mr Dorman. I do not accept this argument. It would be obvious in the consideration of any banking transaction that if the bank refused a proposal the customer could seek finance from a competitor. I accept the evidence of Mr Dorman about this conversation. From the impression I formed of the applicant in the witness box, the remark attributed to him is probable. A not dissimilar remark was apparently made by the applicant to Mr Birt in a conversation in November 1987 (see the transcript p 156).
It follows from my preference of the evidence of the respondent's witnesses that I find that on 30 September 1987 the respondent by its agents did not enter into a commitment amounting to a contractual commitment to provide finance in respect of the purchase of the Vaucluse property. I also find that the conduct of Mr Dorman, whether considered on that day alone, or in connection with the events which occurred on 15 September 1987, was not misleading or deceptive or likely to mislead or deceive the applicant. I find that the applicant was well aware of the limitation on the authority of Mr Dorman, and of the fact that credit committee approval was required. The applicant also well knew that approval from the credit committee would be conditional upon the bank's guidelines being met. Those guidelines required that the loan be serviceable and not exceed 85% of the bank's valuations of the properties. Further, I find that he was informed by Mr Dorman that a proposal to finance the purchase price of the Vaucluse property would only be put forward by him if the test valuation of 81 Stafford Street were around the applicant's estimation.
I am also satisfied that the applicant telephoned Mr Dorman on the morning of 1 October 1987 and obtained approval for the deposit, and then made a further call to his solicitor in Sydney to authorise him to proceed.
My description of the applicant's account of the events of 30 September 1987 is taken primarily from his evidence in chief. There is, however, an important passage in his cross-examination which not only illustrates the difficulty in his case, but probably reveals why he went ahead and bid for the Vaucluse property. I set out that passage:

"As at the evening of 30 September, after you had a discussion with Dorman about bidding for Vaucluse the next day, you thought you had a concluded and binding agreement with Dorman in respect of the advance by the bank - the moneys to facilitate the purchase of Vaucluse, is that the case?---Yes.

The question of values had been fixed, as it were - he had accepted your values?---Yes.

And nothing more needed to be done?---No.

So, thereafter, what should have happened was the simple processing of what had been agreed between you and Dorman on the evening of 30 September?---No - he did, in fact, mention during at the meeting that he was - would have a value checked. So the values hadn't been agreed?---He indicated that he believed my valuations but he would have one of the values checked. That was only 81 Stafford Street?---I think so, yes. That notwithstanding, you still believed you had come to an agreement with him as to the bank advancing the moneys in respect of Vaucluse?---Provided the valuation was all right, yes. So you knew, when you authorised someone to go to the auction the next day, namely, your solicitor, there was a prospect of the money not being forthcoming?---I didn't see there was any risk. I had given fairly conservative values. I didn't believe there was any risk the valuations wouldn't come up to scratch. You said valuations plural. I thought you mentioned there was only one valuation which Dorman said he would check. Which was it?---I think it was 81 Stafford Street but I am a little bit confused about the events which occurred later when he did that checking the value of 81 Stafford Street.

Is this all to say - this evidence you have just given to say that the agreement you had reached with Dorman, as you say, on the evening of 30 September was conditional upon an independent valuation - that is, by a third party, a valuer - coming up to the value you had ascribed to 81 Stafford Street?---No, I am not saying that. I am saying the issue of valuation was mentioned at the meeting of - at the conclusion of the meeting, I had asked Dorman if I could go ahead and make the bid or not. He said, Yes, go ahead. After my - my asking did he believe the guidelines had been met, I asked his permission to bid. I said, Can I go ahead and bid or not?

What was the point of the re-valuation of Stafford Street then - 81 Stafford Street?---As I said, I find it difficult to remember exactly what transpired at the meeting and what transpired later and Dorman started talking about valuations shortly after I'd bought Vaucluse.

But if you had, as you thought, a binding agreement, why was an independent valuation of 81 Stafford Street commissioned?---I can't answer that. That's why I started getting quite worried after I'd bought Vaucluse because I thought there was no risk."

It will be remembered that earlier in September the applicant had been so convinced that the Sydney real estate market was bound to continue rising that he entered into contracts for the Ocean Street unit and the two Drummoyne units. It seems that his unbridled enthusiasm and confidence in his own judgment of the Sydney real estate market led him to believe that there was no risk in him entering into the Vaucluse property transaction, nor was there any risk that his estimates of value would not be upheld by independent valuation. To him the proposal was not a speculative one, a view which he later repeated to an officer of the respondent (see exhibit R1, p 316).

On 1 October 1987 the applicant's bid of $1.2m for the Vaucluse property was successful. Mr Dorman was advised of that fact. Presumably the cheque for the deposit was cleared shortly thereafter in accordance with the temporary authority given by Mr Birt. On 5 October 1987 Mr Dorman gave written instructions to the valuation department to value 81 Stafford Street. This written instruction, it is argued on the applicant's behalf, discredits Mr Dorman's evidence that he instructed the valuer on 1 October 1987 (as stated in the file note of that date). I reject this submission. I accept Mr Dorman's evidence that he spoke by telephone with the valuer on 1 October 1987. The written instruction was given on the second working day after 1 October 1987 and includes information about sales on 2 October 1987. I think it is probable that the written instruction was delayed at the request of the applicant who had indicated that he would be conveying the results of sales on 2 October 1987 which would be relevant to the valuation.
The valuation was to be performed by Jones Lang Wootton - someone independent of the bank as the applicant had claimed that an earlier valuation of this property had been performed by someone not familiar with the Paddington market. The valuation is dated 13 October 1987. Mr Dorman says that he deferred any preparation of a submission for the credit committee because it was his arrangement with the applicant that the submission would only go forward if the valuation were around the applicant's estimate of $350,000. The Jones Lang Wootton valuation of $305,000 was below this figure, but well above the earlier bank valuation of $207,000. Mr Dorman considered that the valuation was sufficiently favourable to justify him putting forward a proposal.
On 14 October 1987 the applicant sent instructions by facsimile to his accountants in Sydney for the preparation of cash flows. It is argued on his behalf that this belated instruction to the accountants is inconsistent with Mr Dorman's evidence that he asked for the cash flows at the meeting on 30 September 1987. I do not accept that there is any inconsistency. The date of the instructions to the accountants is entirely consistent with an arrangement that there would be no submission unless the test valuation showed there was some point to it. The terms of the applicant's written instruction to his accountants, and the accountants' reply are revealing. The instructions to the accountants include the statements:

"General Plan

To take advantage of the rising residential market in Sydney. This market has been rising at approx. 2% per week since about Feb/March this year.

The State Bank will look at lending 85% of the valuation of the properties as a whole...

I have proposed that new values be obtained in order to provide collateral for funding the balance of the properties in progress together with tax payable..."

The accountants reply, dated 15 October 1987, addressed to Mr Dorman, commences:

"We understand that you wish to meet with Dr Morgan to review his application for financing of his investment property applications..." applications..."

and later says:

"It is proposed that formal valuations be commissioned on the properties to support the values included in the cash flows."

These statements are inconsistent with the applicant's case that he believed he had a firm commitment from the respondent on 1 October 1987.

Mr Dorman was scheduled to be absent for one month from Monday 19 October 1987 on annual recreation leave. However, he went to work on 19 October 1987 to prepare a draft submission for the credit committee. He had been awaiting the cash flows from the applicant's accountants which were enclosed under cover of the letter of 15 October 1987. A draft was prepared in which Mr Dorman gave qualified support for the proposal which sought credit committee approval subject to valuation of the applicant's properties, apart from 81 Stafford Street. His draft submission concluded in the following terms:

"Morgan's current position and substantial income attest to his keen mind with his integrity found in the past beyond reproach. The risk of failure in this venture is obvious in that it relies on the Sydney property boom increasing into 1988. Morgan has demonstrated in the past with the purchase of his portfolio that he is fully attuned to this market and has made it quite clear that if such a situation arises he will relinquish properties immediately to protect himself and the interests of the bank. RECOMMENDATION:

The above proposition would appear somewhat entrepreneurial but I have little hesitation in recommending approval of this increase in exposure due to Morgan's obvious personal qualities and the escalating value of the residential Sydney property market. Current indications are that this property market has not reached its peak at this time and that further increases in values should continue into early next fiscal year. Any initial shortfall in bank security margins should be met from this source. Recommended: I. Dorman."

The proposal included an overdraft facility to accommodate the capitalisation of $90,000 interest over two years.
The recommendation, as drafted by Mr Dorman, was favourable to the proposal, perhaps surprisingly favourable having regard to the nature of the scheme and its dependence upon the continuing property boom to have any hope of meeting bank guidelines as to lending margins. This fact is seized on by counsel for the applicant who contends that the favourable nature of the submission is further proof that Mr Dorman would have spoken favourably to the applicant about the proposal on 30 September 1987, and that by 19 October 1987 he was desperately trying to gain approval to protect himself from disciplinary action should it come to light that he had indicated bank approval for a loan outside his authority. If his motive were to protect his own position in the way alleged, his actions would be directly opposed to those attributed to him by the applicant's earlier submission that the file note of 1 October 1987 was concocted, before 19 October 1987, to provide a way out for the bank. Quite apart from that consideration, I reject the submission as the conduct of Mr Dorman thereafter is quite inconsistent with the motives which the applicant seeks to attribute to him. Having prepared the draft submission, Mr Dorman then delivered it to the commercial lending section in Pirie Street where it was left with Mr A.J. Kelly, a trainee analyst, to be checked and rewritten in the form required by the credit committee. Mr Kelly was experienced in preparing submissions for the credit committee, whereas this was the first one prepared by Mr Dorman. Mr Dorman then left on holidays, and took no further part in the processing of the application. If his motives were as alleged it would be extraordinary that he should depart in circumstances where the submission could be rewritten in a less favourable way.
The submission was substantially rewritten by Mr Kelly who added the following passages under the heading SAFETY ASSESSMENT:

"Viability of this proposal is reliant upon property sales being effected in line with projections, otherwise accruing interest will expand the debt beyond security margins. Unknown factor is growth in property values in the Sydney market which, sources suggest, could continue to grow at 5% per month. If so our exposure will be correspondingly protected. Should the market contract however it would probably have the twofold effect of stopping or slowing property value growth and slowing sales.

It is difficult to assess these variables quantitatively. All indications are that property values will grow and the market will remain buoyant...However the above risks must be appreciated when considering this speculative proposal.

The cash flow predictions which form part of the proposal indicated that by February 1988, borrowings, including a shortfall of approximately $32,000 in interest payments, would exceed $2.6m against an estimated lending margin of $2.533m at the date of the submission. The estimated lending margin included estimates of value on 30 Daphne Street, 35 Stafford Street and 100 Mill Hill Road that were above current bank valuations.

On the face of the proposal it did not meet the bank guidelines, either as to lending margins or as to serviceability as it was dependent on capitalising interest to a significant extent.
Once prepared, the submission followed the regular course. It was submitted by Mr Kelly first to Mr Farrell, the senior manager commercial and rural lending, and then to Mr Pfeiffer, the chief manager retail lending. The submission required the approval of these officers before it could be submitted to the credit committee.
Mr Farrell endorsed the proposal on 28 October 1987:

"Whilst applicant is obviously a man of substance with ability in the property field, I consider we have already been generous with investment finance, and the extent of further advances required, places bank at some risk should property values in Sydney not come up to expectation.

Cash flow provides for sales with substantial capital gains which may not be realised when the present uncertain state of the economy is taken into consideration.

I could not recommend it to retail lending credit committee."

Mr Pfeiffer endorsed the proposal thus:

"I support the views of the senior manager commercial and rural lending and therefore cannot support this application. Accordingly the application does not proceed to the retail lending committee."

The proposal therefore failed. On 29 October 1987 Mr Brammel who was filling Mr Dorman's position whilst he was on holiday, telephoned the applicant and advised him of the fate of the proposal. Mr Brammel prepared a file note immediately following the conversation which I accept as reliably recording what was said between them. The applicant expressed disappointment that the intense efforts of himself, his accountants, and Mr Dorman had resulted in the refusal as he thought the bank was aware, at least in part, of his future requirements and that initial approvals were part of a total package which the bank was supporting. The applicant did not in that conversation assert that he thought he already had a firm commitment from the bank. There was then discussion about the effects which the refusal would have on his position, and about an immediate short term cash crisis which it caused. The applicant hoped the bank would grant him temporary accommodation. A comparison of the evidence of Mr Brammel, which I accept, with the applicant's account of the conversation of 29 October 1987 provides an example of the way in which the applicant's present reconstruction and interpretation of events reflects an erroneous bias in favour of his case.
The allegation that the respondent failed to warn the applicant that he was heading onto dangerous ground cannot be sustained. The applicant was well aware of the risks. He professed to be an expert in the real estate market. He neither sought nor expected to receive advice on movements in market prices from the respondent, or as to values of properties. He relied upon his own beliefs and assessed the theoretical risks accordingly. In my opinion the bank was under no duty to warn the applicant that he was moving onto dangerous ground, nor was the bank under any duty to give a general warning that the share market might collapse or that there might be some other change in the economy which would alter the prospect of the bank advancing finance. The applicant professed a good understanding of the share market and was alive to the risk of a possible collapse in prices. He at no stage sought advice from the bank about the share market, the real estate market, or any other aspect of the economy. The allegations that the applicant's application for finance was denied because the respondent suffered "cold feet" because of the share market collapse is not made out on the evidence.
It was contended on the applicant's behalf that he was misled by the conduct of the respondent and its officers into believing that the respondent had no objection to the applicant's proposed scheme so far as it involved the capitalisation of interest. The evidence provides no ground upon which the applicant could have been misled. His original proposal, as set out in his accountants' report in June 1987 to capitalise one half the interest of the proposed $1.m scheme was not accepted by the bank in the provisional approval given in its letter of 8 July 1987, and the subsequent specific approvals, particularly that in relation to 100 Mill Hill Road set out in the respondent's letter of 14 August 1987, made it clear that the bank was concerned about serviceability and the capitalisation of interest even after the second property had been included in the portfolio. On the findings which I have made nothing occurred at the meetings on 15 September or 30 September 1987 which provided any ground for the applicant to think otherwise.
At times the applicant's case was inclined to suggest that there was only ever one scheme and that the application for finance for the Vaucluse property was in some way covered by the approval in principle given to the initial proposal in the respondent's letter of 8 July 1987; see for example para.32 of the statement of claim. It was suggested that because the bank had given approval in principle to the original proposal, and had made advances thereunder, the applicant was entitled to assume that the bank would give approval to his later proposals. In my opinion these submissions are without substance. The amounts involved in the proposal outlined in exhibit A7 (the cash flow produced on 30 September 1990) and as later modified to show the Vaucluse property at $1.2m rather than $1.5m, are so different and the risks inherent from the respondent's viewpoint so much greater, that no reasonable person could assume from the bank's approvals under the $1m proposal that the bank would view favourably the revised proposal, and I am unable to accept that the applicant at that time held any such belief.
Mr Birt has a recollection that early in October Mr Dorman discussed the applicant's request for funding for the Vaucluse property transaction, and Mr Birt advised Mr Dorman against putting up the proposal to the credit committee. Mr Birt was also away from his office in the latter part of October 1987. When he returned to the office early in November he was surprised to find that the application had gone forward. One of the complaints now made on the applicant's behalf is that the applicant was not advised by Mr Dorman that Mr Birt had advised against the proposal. In my opinion this is also a complaint without substance. The applicant's decision to buy the Vaucluse property was made, and the applicant was committed to the purchase, before this conversation between the two bank officers occurred. Even if Mr Dorman had said to the applicant early in October that Mr Birt advised against putting the proposal forward I have little doubt that the applicant would have asked Mr Dorman to do so none the less to get the decision of the credit committee.
On the findings I have made the applicant's case must fail on all grounds, and it is not necessary to canvass in any detail the events which followed after 29 October 1987. Suffice it to say that over the months which followed he placed the Perth unit, 35 Stafford Street and 100 Mill Hill Road on the market. He obtained temporary accommodation sufficient to enable him to settle the Vaucluse property from other financiers but at rates and fees somewhat higher than he would have paid to the respondent. The properties placed on the market sold during 1988 at prices which, it is agreed, were lower than the prices at which the properties could have been sold later in the year, as the applicant says he originally intended. The claim for damages covers these matters.

The applicant says that in his conversation with Mr Brammel on 29 October 1987 he was told that the bank wanted all its money back, and either then or shortly thereafter was directed by the respondent to commence selling his properties. On the other hand the respondent contends that the decision to sell the properties was entirely that of the applicant. Schedules prepared by Mrs Montgomery, the applicant's accountant at Wearne and Co., and by the respondent's expert Mr Lilley, show that had the properties not been sold, the applicant, with facilities that he gained from other sources, could have survived financially (but only just) had he not sold the properties until the latter half of 1988 as he originally intended. The respondent therefore disputes the claim in respect of losses suffered through the premature sale of the properties.
It follows from my acceptance of Mr Brammel's evidence that I find that he did not make a demand for the repayment of all the advances made by the respondent on 29 October 1987, and I am not satisfied that the bank at or about that time called on the applicant to sell the properties. On the other hand I am satisfied that the applicant's decision to realise some of his investments at that stage was a reasonable, indeed sensible, response to the respondent's refusal of the increased facility. It was a decision made at a time when he believed he may have to settle on the Ocean Street unit. As events turned out, that contract was rescinded in 1988 and the applicant recovered his deposit, legal fees and stamp duty. These recoveries, which are included in the schedules prepared by Mrs Montgomery and Mr Lilley, improved the applicant's cash flow during 1988. In November 1987 it was necessary for the applicant to improve his precarious cash flow, and to improve his prospects of obtaining alternative finance for the Vaucluse property. On the footing, assumed by the applicant's claim, that he had a commitment from the respondent to provide a loan facility for the Vaucluse property, the subsequent decision of the applicant to sell three of his properties was in my view a reasonable and natural consequence of the respondent's conduct. Had the applicant made out his allegations on liability, the "loss" brought about by their premature sale would be a proper item to include in the claim.
Another issue in dispute between the parties on damages was the date at which the applicant would have sold 81 Stafford Street, 100 Mill Hill Road and the Perth unit had his scheme gone ahead as planned. The applicant says he would have sold the properties in October 1988. However the respondent's case is that he would have been forced to do so by July 1988 and, furthermore, there are indications in various of the applicant's documents suggesting an intention all along to realise the properties earlier than October 1988. There is a suggestion in the applicant's instructions to his accountants for the cash flows prepared in October 1988 that he may have sold 100 Mill Hill Road as early as February 1988 which was about the date when it was sold. It is also possible that because of a decline in the real estate market which occurred late in 1987 that the applicant would in any event have decided to realise one or two of the properties sooner than he originally intended as a protection against further lessening of value. In my view, a reasonable compromise of the various possibilities would be to assume that the three properties would have been sold in July 1988 had the proposed scheme gone ahead.
I would, therefore, have assessed damages, had liability been established, as follows (and I have followed the structure of a written submission on damages prepared by the applicant's counsel which became the basis for discussion during the trial):

Item Loss (credit)

1. Forced sale of 81 Stafford Street 78,750 Interest thereon (160 weeks @ 14%) 33,862

2. Credit on "rental loss" (9,000) Interest thereon (3,870)

3. Forced sale of 100 Mill Hill Road 63,350 Interest thereon 27,240 Payment to tenant 2,264 Interest thereon 974

4. Credit on "rental loss" (6,037) Interest thereon (2,596)

5. Forced sale of Perth unit 5,000 Interest thereon 2,150

6. Cost of alternative finance

Items 6.2 agreed 1,502

interest 646

6.3 disallowed

6.4 agreed 2,250

interest 967

6.5 agreed 4,500

interest 1,935

6.6 legal fees 5,396

interest 2,320

6.7 legal fees 5,192

interest 2,233 26,941

7. Credit costs of loan from the respondent, - say (10,000) Interest thereon (4,300)

8. Difference in interest rates - say 8,500 Interest thereof 3,655

9. Refinancing costs - disallowed but

cost of extending other finance allowed 3,857 Interest thereon 1,659 10 and

11 Accounting and miscellaneous 3,500 Interest thereon 1,505 $227,404

However, for the reasons given there will be judgment for the respondent. I will hear the parties as to costs.

[1991] FCA 582

23 SEPTEMBER 1991