Nemur Varity Pty Ltd v National Australia Bank Limited
[1999] VSC 342
•14 September 1999
SUPREME COURT OF VICTORIA
CAUSES JURISDICTION Do not Send for Reporting Not Restricted
No. 10751 of 1992
| NEMUR VARITY PTY LTD (ACN 006 293 812) | Plaintiff |
| v | |
| NATIONAL AUSTRALIA BANK LIMITED (ACN 004 044 937) AND AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED (ACN 005 357 522) | Defendants |
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JUDGE: | Ashley J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 3-6, 9-13, 16-20, and 23 August 1999 | |
DATE OF JUDGMENT: | 14 September 1999 | |
CASE MAY BE CITED AS: | Nemur Varity Pty Ltd v National Australia Bank Limited & Anor | |
MEDIA NEUTRAL CITATION: | [1999] VSC 342 | |
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Banker and customer – conversion of cheques – breach of duty of care owed by banker to customer – measure of damages
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APPEARANCES: | Counsel | Solicitors |
For the Plaintiff | Mr D.J. Williams with Mr S. Palmer | The Law Offices of Barry Fried |
| For the First Named Defendant | Mr D.S. Levin QC with Mr A.T. Schlicht | Russell Kennedy |
HIS HONOUR:
Nemur Varity Pty Ltd ("NV" or "the plaintiff") has carried on business as an insurance broker in Shepparton for many years, offering a wide range of insurance, but specialising in truck insurance. Its driving force has at all times been Trevor Jarman. He, his wife, Glenda Jarman, and his mother, Dorothy Jarman, were at pertinent times directors of and employees in the business.
In late 1986 NV changed its banker. National Australia Bank Limited ("NAB" or "the defendant") supplanted Westpac. This happened after an approach initiated by Mr Len Carey of NAB. The detail of that approach and the negotiations that culminated in NAB becoming NV's banker was in some part a matter of dispute before me.
From 1984 Jarman knew a man named Charge. Charge was the moving spirit in a company named European Underwiting Agencies Pty Ltd. Later it changed its name to Australian National Intermediaries Pty Ltd (ANI). Jarman was led to understand that ANI had an agency for Lloyds underwriters. Between 1984 and 1988 NV placed a modest part of its business through ANI. It experienced no problems.
Charge knew that Jarman had knowledge of and involvement in the truck insurance market. At different times he discussed with Jarman the possibility of promoting insurance in that field making use of overseas resources that he said he was able to access. In 1988 he told Jarman that business could be done through an American company named Victoria Insurance. After investigation, Jarman was not satisfied of that insurer's substance.
In late 1988 the insurance of the plaintiff's largest client, whom I shall simply call Roccisano, fell due. Charge proposed to Jarman that Roccisano's business be placed through ANI with Commercial Guarantee Insurance (CGI) which was said to be an insurer based in the United States. He told Jarman that CGI had a syndicate arrangement with Lloyds underwriters whereby it was only a very small holder of risks, the rest being placed through Lloyds.
In the event, the terms of the proposed policy being favourable, Roccisano's truck insurance business was placed through ANI with CGI, cover commencing in early December 1988. Instalments of premium were paid in January, February and March 1989. From now on in these reasons I refer to insurance being placed, premiums being paid, policies being issued, and cover being provided as if those events in truth occurred. Certainly, as will be seen, that was the intention, and the belief, of Jarman (the personification of the plaintiff), and the plaintiff's clients.
In about March 1989 Charge told Jarman that he had available a new facility involving an insurer by name Reinsurance Co of America Inc (RCA). He provided Jarman with certain written material which was designed to satisfy the latter that RCA was in financial health. Some of the material in fact suggested the contrary, but Jarman told me that he made additional enquiries which put the company's apparently disappointing performance in another light. I am satisfied that Jarman did make additional enquiries, and that he did in fact become satisfied that RCA was of substance.
Charge put a proposal to Mr Jarman as to the manner in which business be done with RCA. The detail and the working out of the proposal, which involved a role for a company named International Insurance Exchange Pty Ltd ("IIE"), was the subject of dispute at trial. It is a dispute to which I will later return in detail.
Between late July and late September 1989 the plaintiff drew five cheques in favour of RCA. Their total face value was $202,112.55. They were drawn on the plaintiff's Insurance Broking Account No. 2 at the Shepparton branch of the defendant where the plaintiff did its banking business. The amounts for which the cheques were drawn represented premium payable on insurances which the plaintiff believed had been effected with RCA. The amounts of premium were net of the plaintiff's commission.
All of the cheques were drawn in favour of RCA. All the cheques were bearer cheques. The words "or bearer" were not crossed out. All the cheques were printed with two parallel crossed lines within which were printed the words "not negotiable".
Four of the cheques ("the NAB cheques") were posted to ANI's office in Melbourne in envelopes addressed to RCA. The face value of those cheques was $115,390.15.
One of the cheques ("the TT cheque") was taken by Mrs Dorothy Jarman to the Shepparton branch of the bank where the plaintiff had its accounts, and a teletransfer of the funds represented by the cheque was arranged. It seems clear that Mrs Jarman drew the cheque for an amount specified by her son, and that he also provided her with details of the intended beneficiary (that is, RCA) and of an account number at the North Balwyn branch of the bank into which the funds were to be transferred. It seems very likely that one of the ANI personnel told Jarman that there was urgency in getting the funds, and provided Jarman with the account number. I have no doubt that Jarman understood the account to be an RCA account.
Mrs Jarman provided details of the intended beneficiary, the account number and the transferee branch to a bank officer. He completed a credit slip. Mrs Jarman signed it. Consistent with instructions received from her son, and communicated to the bank officer, the slip identified RCA as the beneficiary and specified the branch and account number to which I have just referred. The transfer of funds was thereafter effected.
One of the four cheques that were sent to ANI's office was endorsed "pay Australian National Intermediaries", and signed. The signature was apparently that of Richardson, an associate of Charge.
Of the other three cheques that were sent to ANI's office, one was endorsed "pay International Insurance Exchange", and signed. Again, it appears, by Richardson. The two remaining cheques were not endorsed.
All four cheques sent to ANI's office were collected in favour of an account titled "International Insurance Exchange Pty Ltd Premium Trust Account". That account was at the relevant time conducted at NAB's North Balwyn Branch, it having been opened on 13 July 1989 by Richardson as director and Charge as secretary of that company.
The teletransfer was made into the account to which I have just referred. The number, but not the title of the account, coincided with the information set out on the credit slip which had been completed by the teller at NAB's Shepparton branch.
Subsequent to the five transactions to which I have been referring the plaintiff drew a further four cheques payable to RCA ("the ANZ cheques"). The earliest was dated 22 November 1989, the last was dated 6 February 1990. The face value of the four cheques was $63,410.11. For the most part the amounts represented by the cheques were client's premiums for RCA insurances net of 10% commission. Also included was premium for a professional indemnity policy taken out by the plaintiff itself.
The ANZ cheques, as in the case of the five earlier cheques, were drawn on NV's Insurance Broking Account No. 2. They were payable to RCA. The words "or bearer" were not crossed out. All the cheques were printed with two parallel crossed lines, between which were printed the words "not negotiable".
The ANZ cheques were collected in favour of an account maintained by ANI at the ANZ bank. So far as I can see, none of those cheques was endorsed before it was lodged with the collecting bank.
On 11 December 1989 the plaintiff drew a cheque for $74,293.21 payable to ANI, or bearer ("the ANI cheque"). That cheque was collected in favour of the ANI account to which I referred a moment ago. The cheque represented premium for a Roccisano insurance; probably an adjustment to reflect insurance against an additional risk. Roccisano's insurance had, as Jarman believed, originally been placed with CGI, the main part of the risk being held by Lloyds underwriters. But, he had later been informed by Charge, cover by CGI had been replaced by cover by RCA, the latter being a better insurance. Despite the fact that he was told what had allegedly happened after the event, Jarman had accepted it as a fait accompli; and explained what had occurred to his client.
When the cover had originally been placed, cheques representing premium had been made payable to ANI. That was in keeping with the plaintiff's practice of paying premiums to ANI where Lloyds underwriters were said to be involved.
After the plaintiff was informed that RCA had become the insurer, cheques should ordinarily have been drawn in favour of RCA, not ANI, in respect of Roccisano's insurance. The ANI cheque was one of several instances where (in respect of Roccisano or other of the plaintiff's clients) that did not happen. The defendant contended that these instances showed that the plaintiff intended to name ANI as the payee in respect of RCA insurances. I do not agree. They show that the plaintiff's system did not always work as it should have done; and possibly, in this case, that some part of the adjustment was due to CGI.
There were indications in the latter part of 1989 of problems with RCA insurances. Particularly, there was complaint of late payment of claims. A large repairer in the district, Shepparton Motor Panel Works Pty Ltd ("SMP"), took up matters with Jarman. He in turn took the matters up with Charge or Richardson, and was satisfied with the explanations given.
Problems continued to surface, but it was not until July 1990 that it became clear to Jarman that ANI had no business connection with RCA; and that, necessarily, no insurances had been effected or continued with the proceeds of the NAB cheques, the TT cheque, the ANZ cheques or the ANI cheque. Much later, Charge was, as I understand it, convicted of criminal offences in connection with these events.
NV now sues NAB. The writ was issued in 1992. At one stage ANZ was joined as a defendant in connection with the four cheques in respect of which it was the collecting bank. The plaintiff settled its claim against ANZ in early 1998. It discontinued against that defendant in May 1998, NAB having consented to that course.
The plaintiff's claim against NAB is for
· The face value of the NAB and TT cheques;
· the face value of the ANI cheque;
· loss of income and profits as a result of losing clients who had paid premiums the subject of the NAB, TT and ANZ cheques.
The pleadings
The Third Further Amended Statement of Claim (the statement of claim) pleads the matter elaborately. There is a good deal of overlap between the various allegations. Essentially, the allegations address four periods. First, the period in which the plaintiff and the defendant negotiated to the point that the defendant became the plaintiff's banker. Second, the period which commenced when the banking relationship began, and which continued until early 1990. Third, the period within which the NAB cheques and the TT cheque were drawn and transacted. Fourth, the period within which the ANZ and ANI cheques were drawn and transacted.
In respect of the first period, the plaintiff alleges that it was induced to enter into the banking relationship by representations made in circumstances giving rise to a common law duty of care; which representations were untrue and negligently so; alternatively, that the plaintiff entered into the relationship in consideration of a warranty which was breached.
The representation or warranty alleged is in substance that the defendant would provide expert banking services specially designed and suited to the plaintiff's business as an insurance broker, and providing total compliance with banking requirements imposed by the Insurance (Agents and Brokers) Act 1984 (Cth) ("the Brokers Act").
The untruthfulness or breach of warranty is alleged to be the defendant's failure to take steps to ensure that it would provide services of such a kind, its provision of "bearer" cheques to the plaintiff, its intention to pay on such cheques without proper investigation of the plaintiff's true wishes, and its adoption of defective procedures which would permit payment to be made contrary to such wishes.
The negligence of the defendant is said to be its making of the representations in those circumstances.
The consequence of the breach of warranty or breach of duty is alleged to be that the defendant, the plaintiff having entered into the banking relationship, mishandled the NAB and TT cheques whereby the proceeds were wrongly paid to IIE and debited to the plaintiff.
In respect of the second period, that is, the period commencing in October 1986, the plaintiff alleges that it was a customer of the defendant, that to the knowledge of the defendant it was an insurance broker, operated a broking account, and that it dealt through that account with premiums which the Brokers Act required to be paid to an insurer. In those circumstances, paragraph 4C of the statement of claim alleges, the defendant had contractual and/or common law duties to exercise the care and skill of a prudent banker, those duties being shaped by the bank's knowledge of the plaintiff's business and the banking requirements of the Brokers Act.
Breach of the duty so described is alleged to be the bank's failure to provide the plaintiff with "order" cheques, and its failure to advise the plaintiff to mark cheques "account payee only". But that is not the only breach alleged; see paragraph 17.
The plaintiff also alleges that, in circumstances where the defendant knew the nature of the plaintiff's business, knew that a particular account was a broking account, and knew that the plaintiff dealt through that account with premiums which the Brokers Act required to be paid to an insurer, the defendant either knew or reasonably should have known that the plaintiff intended cheques drawn on the account be paid to the payee only, and to an insurer – even if the words "or bearer" were left open. The allegation thus made further fleshes out of the contractual or common law duty said to have arisen in all the circumstances from the relationship of banker and customer. The paragraph which makes the particular allegation (para 4F) is subsequent to the paragraph which first alleges breach of the duty set up by paragraph 4C. But paragraph 4F leads into those paragraphs which deal with the various cheques, and later on a further breach of paragraph 4C is alleged.
Having set out its account of the transactions concerning the NAB cheques and the TT cheque, the plaintiff alleges (by paragraph 16) that "in the circumstances aforesaid" the defendant owed the plaintiff
"(a) a duty to take care that the cheques had not been stolen;
(b) further or alternatively, a duty to take care that each of the cheques was paid as Nemur Varity intended
that the cheques be paid, that is to say, that is to say (sic) to RCA;(c) further or alternatively, a duty to make inquiries as to whether Nemur Varity had authorised
the substitution of the name ofpayment toor ANIIIEfor the name of thein place of the named payee of the cheques."The "circumstances" to which the paragraph refers extend beyond the circumstances pertaining to the form of, and the bank's dealings with, the NAB and TT cheques. It may well be that those circumstances alone would give rise, in the context of a banker and customer relationship, to duties of the kind pleaded by paragraph 16. But in the present case the circumstances of the particular relationship of banker and customer which emerge from the matters alleged by paragraphs 1, 3A, 3B, 4(b), 4A and 4F could be pertinent to whether the duties alleged by paragraph 16 arose; and, if so, what action by the defendant would satisfy those duties. In other words, it might be argued, in respect of the duty alleged by paragraph 16(b), that in circumstances allegedly known to the defendant it should have been more wary than in the normal case of negotiating a bearer cheque made payable to an insurer but presented for collection by a third party.
According to paragraph 17 of the statement of claim, the defendant breached the duty of care set up by paragraph 16, and further or alternatively the duties (contractual and common law) pleaded by paragraph 4C (the latter duties being, probably, expanded upon by the matters pleaded in paragraph 4F). There is, having regard to the content of the circumstances taken up by paragraphs 4C and 16, a considerable degree of overlap between the allegations made by those two paragraphs. That does not affect resolution of the matter. In any event, the allegations of breach of duty made by paragraph 17 are these:
"(a)the National Bank did nothing to ensure that the cheques had not been stolen;
(b)the National Bank did nothing to ensure that Nemur Varity intended that the cheques be paid other than to RCA;
(c)the National Bank did not make any or any sufficient inquiry as to whether Nemur Varity had authorised the substitution of
the name ofIIEor ANIfor the namedof thepayee of the cheques;(d)the National Bank failed to make any or any proper enquiry as to whether the person to whom payment was made was entitled to the cheques so paid;
(e)the National Bank failed to make any or any proper enquiry as to how it was that IIE
or ANIhad obtained possession of the cheques when it knew or ought to have known from the fact that Nemur Varity was the drawer of the cheques and RCA was the named payee of the cheques that IIEor ANIwas or may not be entitled to the cheques;(f)the National Bank failed to make any or any proper enquiry of Nemur Varity as to whether it authorised payment of the cheques to IIE
or ANI;(g)the National Bank failed to make any or any proper enquiry of Nemur Varity as to the circumstances in which IIE
or ANIcame into possession of the cheques."
I go now to the third period addressed by the statement of claim – the period within which the NAB cheques and the TT cheque were drawn and transacted. In respect of the NAB cheques the plaintiff makes a claim against the defendant in conversion. No such claim was pursued at trial in respect of the TT cheque.
The fourth period embraces, as I have said, the time within which the ANZ and ANI cheques were drawn and transacted. The plaintiff alleges that by paying the NAB cheques and not advising it that they had been paid or (in the case of the TT cheque) that the funds had been transferred to someone other than RCA, the defendant represented that the funds represented by the NAB and TT cheques had been paid to RCA. That was an untrue representation, and negligently so. The plaintiff relied, it pleads, on those representations ("the further representations") and, inter alia, drew the ANZ and ANI cheques. Thereby it suffered loss and damage.
Having compromised its proceeding against ANZ, the plaintiff does not make claim for the face value of the ANZ cheques. It does claim the face value of the ANI cheque.
Relying upon various alleged defaults by the defendant, the plaintiff makes a claim for loss of income and profits attributable to loss of clients whose premiums or premium instalments were included in the amount of the NAB, TT and ANZ cheques.
It is unnecessary to describe the defence in detail. The plaintiff's allegations are for the most part simply denied - this creating some unnecessary inconsistency. I should, however, refer to some aspects of the pleading, and then refer to concessions made by the defendant at trial.
First, by its defence the defendant denies making the representations relied upon by the plaintiff. Second, it denies (in substance) that it knew that premiums were required by the Brokers Act to be paid out of a broker's account to an insurer. Third, it denies that the NAB cheques were converted. Fourth (in connection with the conversion claim) it denies that ANI received the RCA cheques as the plaintiff's agent. Fifth, it pleads that it collected the NAB cheques and debited the plaintiff's account in good faith and without negligence. Sixth, so also it denies any breach of duty – contractual or tortious – in its dealings with the NAB and TT cheques; and it pleads that it acted in good faith and without negligence. Seventh, it denies that it made the further representations. It says that they were not representations at all. Eighth, it pleads that the plaintiff is estopped from raising any claim for consequential loss in respect of the ANZ cheques by reason of an order made by a Master on 18 February 1998 and action consequential thereon by both plaintiff and defendant. Ninth, it pleads that the plaintiff was guilty of contributory negligence by failing to draw the cheques other than as bearer cheques, and failing to take proper care in delivering them to third parties.
I said a moment ago that the defendant made certain concessions at trial. It did not pursue either the allegation of contributory negligence or the allegation that (in several contexts) it had acted in good faith and without negligence. As to the latter see, particularly, ss.92 and 95 of the Cheques Act 1986.
What was said by the bank in pre-contractual communications
I noted earlier that there was an issue between the parties as to what was said by the bank's representative in the course of negotiations which led into the plaintiff commencing a banking relationship with the defendant. To that issue I now turn.
The plaintiff commenced to do business with the defendant in October 1986. It did so after communications both verbal and written between representatives of the two parties.
The evidence shows that between late September 1986 and 13 October 1986 there were three face to face meetings between Jarman and Mr Len Carey. The latter was then business development manager at the regional office of the defendant in Shepparton. At the first meeting only Jarman and Carey were present. Concerning the two later meetings there was a dispute in the evidence whether Jarman's wife and mother were also present.
Face to face meetings apart, Jarman gave evidence of phone contact with Carey in the relevant period. I do not doubt that there was such contact. Jarman's evidence, however, does not show it to have been important for present purposes.
Oral contact between the parties aside, two letters of offer were produced by Carey. They were dated 6 and 13 October 1986. The second and third face to face meetings were held on those days. The letters were handed by Carey to Jarman at those meetings.
The proposals made by the second letter of offer being accepted, formal documentation ensued. It was not said by counsel that such documentation bore upon the issue of present importance. I will identify that issue in a moment.
When the trial began, the proceedings before the court were more extensive than they were when the trial ended. A proceeding which was settled in running raised a particular issue concerning the meeting of 13 October. Jarman gave evidence‑in‑chief and was cross-examined about that matter. The proceeding having settled, the only relevance of the cross‑examination could have been as to Jarman's credit. But counsel for the defendant did not press any attack on Jarman's credit in such a way. Not, I add, did he press any such attack based upon Jarman's evidence in connection with the so-called "Vrantses claim", which also settled in running.
The statement of claim pleads, and the evidence shows, that the plaintiff was at relevant times a registered insurance broker within the meaning and for the purpose of the Brokers Act.
The Brokers Act requires that premium moneys received from an insured or intending insured be paid into an Insurance Broking Account. It authorises a broker to earn interest on such moneys.
The Brokers Act further requires that moneys received for premium be paid to the insurer, ordinarily within 90 days after commencement of cover or commencement of the period to which an instalment of premium relates. The opportunity for a broker to earn interest on deposits centres on the 90 day period to which I have just referred.
It is against the background that the plaintiff was a registered insurance broker, and the requirements of the Brokers Act to which I have just referred, that what took place at the meetings to which I have referred is said for the plaintiff to assume significance. In short, the plaintiff alleges that Carey, for the bank, made the representations or gave the warranty to the detail of which I earlier referred, the representations being negligently untrue, and the warranty breached.
The dealings between Jarman and Carey are made relevant by the statement of claim in another way. They are said to bear upon the content of the duty of care owed by the defendant to the plaintiff as its customer. They are said to show the bank's knowledge of relevant matters – the nature of the plaintiff's business, the banking requirements imposed upon brokers by the Brokers Act.
Evidence concerning the meetings was given by Jarman, his wife, his mother, and by Carey. Mr Taylor, the plaintiff's external accountant, may have been briefly present at the third meeting. He had no recollection of being present, and it was not suggested that he made any contribution to discussion on that occasion.
Of all the witnesses who gave evidence about what transpired at the meetings, I consider that Jarman had the best recollection of events. Mrs Dorothy Jarman, I conclude, was present for some portion of the second and third meetings. I accept her evidence that she asked Carey certain questions about accounts that were to be set up for the plaintiff. Otherwise, I conclude, her true recollection of what Carey said at those meetings was broad and imperfect – not surprising in light of her age (83), and the fact that the meetings took place a long time ago. I do not accept her evidence that she asked Carey a particular question concerning bearer cheques. Of this, more later.
Mrs Glenda Jarman, I conclude, was present during some part of the second and third meetings. She did not impress me as being a businesswoman who would have been acute to the detail of what was said at the meetings; nor, for that matter, acute to the business operations of the plaintiff in which she thereafter played a secretarial role.
I take Carey to have been a man who had virtually no recollection of what transpired at the meetings. My clear impression is that in parts of his evidence he attempted to reconstruct what occurred. In several instances I believe that his evidence, based upon reconstruction, ran counter to the probabilities. The understandable difficulties that he had with recollection – no doubt the plaintiff was one of many clients – says nothing about his honesty. I have no reason to doubt that he was an honest witness. The problem was rather his paucity of recollection.
Jarman gave the following evidence, which I accept as being truthful and reliable: In late September 1986 Carey came to the plaintiff's office and introduced himself. He said that the defendant had set up a special scheme for insurance brokers in consultation with its lawyers. He said that the scheme was especially designed for the insurance broking industry. He said also that it complied fully with banking requirements of the legislation. He sought an opportunity to quote for the plaintiff's business. Jarman gave him that opportunity.
On 6 October, Carey returned with the first letter of offer. In the course of discussion "he furthered some of the remarks that he had earlier made regarding the special facilities they had offering in our industry, that they were chasing industry (sic) from all insurance brokers because of the volumes of money we had and the value to them of having the investments."
On 13 October, Carey "continued the same strong selling recommendations of what his bank had to offer. They were the only bank around that had a special facility for our industry … ". He, Carey, said that interest earned on the insurance premium broking account would meet some but not all of the plaintiff's interest on intended borrowings.
On that day, 13 October, a decision was made to bank with the defendant. Various forms were completed. Carey requested details of the titles of accounts, the signatories and so on. Jarman's mother was mainly involved in those details. She gave Carey precise detail how the broker's premium account was to be titled.
So much of Jarman's evidence I accept , just as I accept his evidence that on 13 October there was no discussion whether cheques other than bearer cheques should be provided. I do not, however, accept his evidence that his mother asked Carey whether "it was still required to cross out 'or bearer' when issuing cheques … and Carey advised that the law had since changed. There is no need any longer." It seems an unlikely topic of enquiry, and a strange coincidence in light of the form of the cheques later drawn. The alleged remark finds no direct expression in any allegation of default made against the bank in the now often‑amended statement of claim. I think it is likely that there was discussion about the form of the cheques, but that it related to whether cheques would be provided by the defendant other than crossed cheques with the words "not negotiable" printed thereon. Mrs Dorothy Jarman said she had taken up that general topic with Carey; and I accept that part of her evidence.
Each of Jarman's wife and mother gave evidence of what Carey said. Bearing in mind the qualifications I earlier expressed about their evidence, their broad account of what was said accords, I consider, with the thrust of what Carey did in fact say. So, for example, speaking of 6 October Mrs Dorothy Jarman recalled Carey saying that the defendant "was seeking big insurance brokerage accounts; they were offering good terms"; and, "they had a special deal going for insurance brokers, and it would be quite suitable for us". Mrs Glenda Jarman's recollection of that meeting was simply that Carey had said that the defendant "had a special package for insurance brokers that was designed in conjunction with their lawyers". He had mentioned the Brokers Act.
I have said that I have accepted certain evidence given by Jarman. In doing so I have, of course, considered the evidence given by Carey. That evidence showed, as I previously noted, Carey's understandable lack of recollection of events. At first he could not clearly recall on how many occasions he had met with Jarman. Later, speaking of the first and second meetings, he said this:
"Can you remember any of the discussion which took place on that occasion?---I asked him what he had to do to secure his business from the Westpac Bank, and we took a proposal along those lines, and I, I made a letter of offer along those lines and gave it to him at the next interview."
Speaking of the third meeting, he said that he took to it the second letter of offer. People were walking in and out. But only Jarman asked him direct questions about the letter of offer. He could recall nothing more about that meeting. But in answer to direct enquiry whether at any of the meetings there had been discussion about the form of any cheques, he said: "Not to my knowledge".
Cross‑examination of the witness was, in the circumstances, a fairly pointless exercise. The witness affected a recollection of certain matters – that he had known before approaching Jarman that the plaintiff was an insurance broker, that he did not tell Jarman that the bank had developed a package particularly suitable for insurance brokers, that he was not then familiar with the bank's manual in respect of insurance brokers, that the first letter of offer was compiled without reference to the manual, that because the bank had developed a package for solicitors and accountants, and because insurance brokers had trust accounts he "would have" said that a package suitable for the requirements of brokers had been developed.
Nothing in Carey's viva voce evidence led me to doubt the reliability of those parts of Jarman's evidence which I have accepted. Moreover, the documentation suggests that Carey did know about the bank's manual in respect of insurance brokers (Exhibit P16, which dated from January 1986) when he met Jarman. The manual existing, it would be normal practice, I should think, to consult it before approaching a potential client, and the first letter of offer faithfully followed the manual in respect of interest offered on broking accounts. It was likely that, having read the manual, Carey emphasised points that it made when seeking Jarman's business. In particular, the existence and content of the manual enhances the likelihood that Carey made reference to the Brokers Act; and said words to the effect that a broking account complied with the requirements of the Brokers Act. The actual form of words he used was not, however, quite that; but rather that the bank's scheme complied fully with the banking requirements of the legislation.
The purport and consequences of the representations
Part III of the Brokers Act – which provided for the establishment by brokers of insurance broking accounts, and which permitted investment of funds placed therein, and the earning of interest on funds deposited in such accounts – only commenced on 1 January 1986. I have no doubt that the matter mainly pressed by Carey was the provision for interest which attached to premium broking accounts offered by the defendant. That was the broad impression gleaned by Dorothy and Glenda Jarman from what he said. It was a matter prominently dealt with in each of the letters of offer. It was a matter the detail of which was a subject of negotiation between Jarman and Carey; and which was improved from the plaintiff's standpoint between 6 and 13 October (compare Exhibits P1 and P2). It was a matter prominently dealt with by the bank's manual, to which I am satisfied Carey had referred.
I have accepted Jarman's evidence that Carey told him that the bank's special scheme complied fully with the banking requirements of the Brokers Act. It is my strong impression that this was said in the context of the bank providing an insurance broking account (as the Brokers Act required) in respect of the funds deposited in which interest could be earned, or investment made (as the Act permitted). I very much doubt that the remark was intended to refer, was understood by Jarman to refer, or should objectively be considered to refer, to means whereby the safe transmission of funds to insurers could be assured. The reason why I have reached those conclusions is apparent when one examines the source material for Carey's remarks, and the substance of the plaintiff's complaint that the scheme did not comply fully with the banking requirements of the legislation. From the defendant's standpoint, it may confidently be assumed that Carey had not read the Brokers Act. Anything he said was based on the manual. The manual did refer to insurance broking accounts being "designed to protect such deposits"; but apart from a note that such accounts "should not be nominated for use on 'full use' FlexiCards" no protective measures were described, or even hinted at, by that document.
From the plaintiff's standpoint, the complaint made, in substance, is that the banking requirements of the Brokers Act were not fully complied with because cheques payable "to order" were not provided, but rather "bearer" cheques; and because the bank intended to and did pay on such cheques without taking steps to ensure that payment was made in accordance with the plaintiff's wishes, having no proper procedures in place to prevent the contrary.
The plaintiff's complaint throws light on what it now says the "banking requirements" of the Brokers Act encompassed. It is true that s.27(1) requires payment of premium "to the insurer" accepting the risk. But it seems to me to go too far to contend that the "banking requirements" of the Act could only be fully complied with by the provision of cheques payable "to order". Such cheques may be negotiated. Moreover, a bearer cheque may be converted into a cheque payable to order.
Again, it seems to me to go too far to contend that the "banking requirements" of the Act could only be fully complied with by there being, in effect, special provisions in place to ensure that bearer cheques drawn on an insurance broking account were paid in accordance with the drawer's true wishes. The bank's procedures for dealing with third party cheques, if applied, should have given such protection. That is not to say, I add, that in the case of a cheque drawn on what the bank itself described as an account for "trust moneys", the bank should not have been the more cautious in negotiating that cheque if it was presented for collection by a third party.
The reading that the plaintiff now seeks to give to Carey's representation that the defendant's special scheme for brokers complied fully with the banking requirements of the Brokers Act points up the improbability that Jarman so understood it at the time. It also gives reason why objectively the representation should not be considered to have conveyed any such thing.
If it was the case that the plaintiff was induced to enter into the banking arrangement by Carey's representations, or if the bank gave some warranty in the form of those representations, it follows from what I have said that there was no representation or warranty whose content was as wide as the plaintiff contended for; which was breached by the provision of bearer cheques, by failure to provide cheques payable to order, or by failure to have some special procedures in place to ensure that bearer cheques drawn on the plaintiff's insurance broking account were paid in accordance with the true wishes. That said, however, I consider that it is potentially pertinent to the practical content of the duty of care imposed upon the defendant vis-à-vis the plaintiff as its customer, and pertinent to breach of such duty, that the defendant (as the manual reveals) in fact knew that the plaintiff's account was an insurance broking account through which "trust moneys" including premiums must flow; and that "protection" of such deposits – a broad and imprecise word, but one nonetheless conveying a need for "protection" – was an intended feature of such accounts.
Procedures for handling third party cheques
By its defence the defendant pleads, in connection with the transactions concerning the NAB cheques and the TT cheque, that it acted in good faith and without negligence; see paragraphs 14, 16 and 17. It claims the protection of ss.91, 92 and 95 of the Cheques Act.
At trial, counsel for the defendant neither called evidence nor advanced submissions in support of those pleas. That does not mean, in the plaintiff's claim founded in breach of duty (whether contractual or tortious) that the plaintiff is absolved from the need to prove want of reasonable care.
The plaintiff adduced evidence of the procedures that the bank ought reasonably to have followed in its role as collecting bank, and generally in connection with the teletransfer. In respect of the bank's role as paying bank the plaintiff relied upon conclusions said to flow from the bank's knowledge of its customer, its customer's business, the provisions of the Brokers Act, and as well circumstances known to the bank by reason of the fact that it was also the collecting bank.
The evidence adduced by the plaintiff was of three kinds. First, the viva voce evidence of Keith Harvey, whose expertise in relevant banking matters was not challenged, and whose evidence was not the subject of cross‑examination at all. Second, tender of the defendant's own manual pertaining to third party cheques. Third, tender of the defendant's non‑lending loss report pertaining to three of the NAB cheques (the first, third and fifth cheques drawn).
Mr Harvey's evidence, which I accept, was this: that where a third party bearer cheque is presented for collection, a teller has to put the customer on enquiry – ask him to explain how he came by the cheque, how he has good title to it. The teller has to assess whether the explanation offered is satisfactory. If the teller remains unhappy with the explanation given, he is to refer the matter to a more senior officer for decision. In some cases enquiries might be made of the payee.
A customer who is well and favourably known is not put on enquiry. Such a customer is a person whom the branch manager knows to be of substance; a person who has provided sufficient information concerning his business affairs that an assessment can be made that he is reputable and has sufficient financial means to cover any cheque that is later dishonoured.
Mr Harvey said that it is relevant whether a cheque is or is not endorsed. "If you were negotiating a third party cheque you would, as a matter of course, ensure that the cheque had been endorsed". Shown an NAB cheque endorsed to IIE and signed by Richardson, Mr Harvey said that the cheque would not be considered regular on its face. He would want to be satisfied that the person endorsing the cheque to IIE had authority to do so.
Mr Harvey described the appropriate procedure in the case of a teletransfer. In particular, he said that an officer at the transferor branch would use a coded system to transfer the amount to the transferee branch. That officer would then ring an officer at the transferee branch and provide details of the beneficiary, the account number to be credited, and the amount of the credit. Instructions would be confirmed, and the transferee branch would take over the processing of the transaction. Mr Harvey was clear in saying that a prudent bank officer at the transferor branch would convey both the name and account number of the intended recipient; and that a prudent officer at the transferee branch would compare the name of the intended beneficiary with the name of the holder of the account number. If there was inconsistency, further instructions would be sought from the transferor branch, which would refer back to its client. In the meantime, the funds would in some instances be placed in a manager's suspense account. If the problem remained unresolvable, the funds would be returned to the transferor branch.
I next refer to the defendant's manual concerning third party cheques so far as it was operative between December 1986 and June 1990. I need not refer to it at length. In substance it shows that the bank promulgated procedures at relevant times which were compatible with Mr Harvey's evidence. The fact that the procedures appear to have been at least largely directed to self preservation in the event of suit by an aggrieved drawer does not mean that the procedures were not pertinent to show the care that was appropriate as between the bank and the drawer.
The third item of evidence was the bank's non-lending loss report. It shows that, in respect of three of the four NAB cheques, bank staff failed to abide promulgated procedures. In particular, negotiation of the cheques was not authorised, the cheques not being recorded in the third party cheque register. Moreover, there was no company search of IIE, and a search that had been done of ANI (described as an "associated" company) was in some way incorrect.
The claims in conversion: the role of IIE
Charge's account of the situation in about March 1989 was that his company, ANI, had access to superior truck insurance offered by RCA, the latter company offering a commission of 25% of premium. Against this assumed background, ANI had a desirable insurance to sell, but had no particular experience in selling that kind of insurance. The plaintiff, on the other hand, had much experience in selling such insurance, and contact with the relevant industry.
The precise sequence of events that followed is not easy to discern, but its outlines are clear enough. Charge proposed to Jarman that RCA give NV an underwriting authority (known as an insurance binder) to write truck insurance. Some oral agreement was reached about the matter.
The proposal was not, however, quite as simple as that. For, if not at the outset of discussions then soon afterwards, Charge proposed that an entity be set up to market RCA's truck insurance widely – that is, not simply through NV. The plaintiff was to provide contact with the trucking industry, and was to run the marketing exercise. Not only the plaintiff, but any broker was to be able to place business with the entity, which was to be a non‑broker agent for RCA. The plaintiff or other broker was to be entitled to retail commission of 10% on any business placed through the entity. The entity was to be entitled to 15% commission. The entity was to be owned equally by ANI and the plaintiff. They would share equally in what was left of the 15% commission after deduction of running costs.
The proposals were agreed. Various steps were taken to give them effect. Importantly, a shelf company was acquired, and its name was changed to IIE. Richardson of ANI, and Jarman and his wife became the company's directors.
Another step taken was the preparation and execution of a very strange document (Exhibit P21) which was said by Jarman to be incomplete. That was not its only failing. It was not suggested by counsel that it assisted in the resolution of disputed issues. I do not think that it does.
A further step again was the preparation of a draft insurance binder (Exhibit P28) which plainly related to the IIE venture. According to Jarman the draft was relied upon to authorise the issue by IIE of a number of cover notes. The evidence shows that the draft was never formalised.
At about the time that Exhibit P28 came into existence two bank accounts were opened in IIE's name at the Shepparton branch of the NAB where the plaintiff banked. The account card for one of the accounts shows that IIE was to trade as "Transport and Heavy Equipment Insurances (underwriting agents)" ("THE"). That reflects the intention of the parties. THE was a (somewhat altered) business name registered years earlier by the plaintiff.
The signatories of the Shepparton accounts were Jarman, his wife and mother.
By letter dated 25 July 1989 ANI wrote to the plaintiff as follows:
"re: International Insurance Exchange
Further to our recent discussions, please bear in mind the Binding Authority we have which precludes any other party accepting business.
Accordingly, any request to your company for cover must be referred to this office.
…
P.S. Would you please supply a copy of all cover notes issued."
According to Jarman, the thrust of the "recent discussions" was that ANI had an exclusive binder to write insurance in the name of RCA. No business could be written by IIE. That account of the discussions is consistent with the thrust of the letter. The author was saying that any business got by the plaintiff had to be put to ANI, not IIE, for acceptance.
On 13 July 1989, that is, shortly before the letter to which I have just referred was sent to the plaintiff, application was made to transfer the IIE accounts from Shepparton to the North Balwyn branch of NAB. The application was signed by Richardson and (perhaps) Charge. Certainly it was not signed by any of the signatories to the IIE accounts.
Bank records show that the accounts (only one of them had been operated upon) were closed by the bank on 20 July. A cheque was written in respect of the balance in the operating account – designated a Premium Trust account. That balance was used to set up a credit balance in a new account which was opened at North Balwyn. The cheque was not signed by any of the Jarmans, or, indeed, anyone at all. Where the signature would normally appear the words "as per closure request form" were inserted.
The cheque to which I have just referred was one from a cheque book that had been held by the Jarmans. How it got to the bank was uncertain on the evidence. Counsel for the defendant submitted that it must have done so to the knowledge of at least Jarman, that reflecting his awareness that the balance was to be transferred to the North Balwyn branch, if not his awareness that the accounts were to be closed. Jarman, on the other hand, gave evidence that the cheque book must have been called in by the bank for some reason that he now could not recall.
I am not able to reach a conclusion how it was that the particular cheque got into the possession of the bank – evidently by 20 July. I do, however, conclude that the cheque getting into the bank's possession did not reflect Jarman's awareness either that the balance was to be transferred, or the accounts closed.
Two IIE accounts were opened at the North Balwyn branch of the NAB. That happened on 13 July, the same day that application was made to transfer the existing accounts from Shepparton. The persons who opened the accounts were evidently Charge and Richardson. The balance from the Shepparton operating account, having been transferred on 20 July, was used to pay SMP some $48,000. Two cheques were drawn. They were dated 21 July – that is, immediately after the transfer of funds from Shepparton, and prior to the ANI letter to the plaintiff of 25 July to which I referred a little earlier. SMP, the evidence showed, was a company which did many repair jobs on trucks owned in the Shepparton area – including trucks nominally insured by RCA. The clear inference is that in this instance Charge used the moneys in the IIE account to pay claims on RCA so as to conceal the fact that RCA was not providing insurance. This action by Charge, I add, was itself concealed from Jarman.
The funds that were until 21 July in the Shepparton operating account were the proceeds of two crossed cheques drawn by the plaintiff in favour of Transport and Heavy Equipment Insurance, or bearer. The cheques were dated 30 June 1989, were in total for an amount of $53,978.40, and were credited to IIE's account on 3 July. The cheques represented premiums or part premiums paid by not less then eight clients of the plaintiff for insurance with RCA (but net of 10% commission retained by the plaintiff). They were paid into the account by Jarman's mother, doubtless upon Jarman's instruction. It is not surprising that the cheques were made payable to THE. Nor is it surprising that the bank accepted the cheques for payment without question. They were drawn in favour of the name under which IIE was, according to the account card, to operate. They were drawn by a client of the branch. They were presented for collection by a person who the account cards showed to be a signatory not only of the drawer of the cheques, but of the payee also.
The reason why the cheques were paid into the IIE account was debated before me. I accept Jarman's evidence upon the matter. At a time when it was contemplated that IIE would be empowered to both write business and settle claims, the moneys deposited provided a necessary fund for the latter purpose, and thereby protection for the plaintiff's clients. So long as the account was at the Shepparton branch, and the Jarmans were the only signatories, the apparent security of the arrangement was underlined.
The fact that moneys were paid into the IIE account reflects, I consider, Jarman's belief – prior to 25 July – that the IIE arrangement was in place. That conclusion is consistent with statements made by Jarman to the police when Charge's criminal conduct was under investigation. (See Exhibit D11 at CB 1422; and Exhibit D51 at pp. 5-8).
It was not in dispute that, after 25 July, the plaintiff handed over to ANI all the IIE files which it had set up. In one of his police statements Jarman referred to handing over "all existing funds and relevant files". In another statement he referred only to handing over "relevant file (sic)".
Counsel for the defendant relied on the first of those versions when submitting that Jarman knew at the outset about the transfer of funds to the North Balwyn account. I do not consider that the submission was well-founded. In the same statement Jarman said that the Shepparton account was closed without notification to himself or his wife. Defendant's counsel argued that there is a difference between being aware that funds were transferred and being aware that an account had been closed. The particular police statement, however, is not to be construed as one would construe a statute. I think that Jarman was saying no more than that he gave to the ANI people the documentation in the plaintiff's possession, and disbursed to RCA any premiums that the plaintiff presently had in hand. Consistent with that conclusion, the first NAB cheque was dated 26 July 1989. The printout (Exhibit P29) shows that it contained premiums referrable to business earlier written through IIE. See the references to clients Grinter, Castleton Nominees, McCarthy and Gread in Exhibit D51, at pp. 7 and 8.
It was the defendant's contention that, notwithstanding the events of late July 1989, the IIE arrangement continued in operation throughout the period when the NAB cheques were collected for the benefit of that company's North Balwyn branch account, when the amount of the TT cheque was teletransferred into that account, and when the ANZ cheques were paid into ANI's account – that is, a period commencing on 26 July 1989 and ending on about 6 February 1990. According to the defendant's submission the plaintiff intended the NAB cheques to be paid into IIE's account and intended the teletransfer to go to the credit of that account. The object was, it was said, to secure to the plaintiff the additional commission which the IIE arrangement contemplated.
In support of that submission the defendant relied upon a number of documents. In the two police statements, for example, Jarman had said that he had "decided to allow ANI to operate the facility"; and that "all future dealings, cover notes, claims etc were to be handled" by ANI. "The facility" was said to be, by Jarman's concession in evidence, the IIE arrangement.
I do not accept the particular argument. Jarman gave some convoluted evidence about the matter at T449-50. It does not cause me to conclude that by his police statements he was saying that the IIE arrangement was to continue in ANI's hands. Bear in mind that in his first police statement he said also that from "August 1989 I advised … Richardson not to use any business identity involving myself and/or International Insurance Exchange Pty Ltd"; and that from about August 1989 all proposals were directed to ANI "who we believed were acting as agents for" RCA.
Counsel for the defendant relied also on Exhibits D6 and D7 in support of his submission. In Exhibit D7, a letter from the plaintiff to ANI dated 20 November 1989, Jarman complained about the form of policies being issued by ANI for RCA. He said, in part "All you (sic) staff needed to do was to continue the system we commenced, this was correct". According to the defendant's argument, this was a reference to the IIE arrangement. I cannot agree. The particular passage did no more than complains of problems with policy form which had not existed when insurance documents were being prepared by someone with experience in the relevant field – that is, Jarman and his staff when IIE was operational.
Exhibit D6 was a letter written by the plaintiff to ANI dated 7 December 1989. In that letter Jarman referred to the "total lack of knowledge, illegal actions, misleading, deceptive and defamatory actions" by ANI. He demanded "refund of all premiums paid". Referring, no doubt, to ANI's letter of 25 July he said that in another of that company's "invalid actions" it had attempted to cancel the insurance binder. According to the defendant's submission Exhibit D6 evidenced the plaintiff's contention that the binder could not be cancelled. No doubt, in a highly emotive letter, it did that. But rather than suggesting a continuing arrangement involving IIE, the letter suggests, and complaints about, the converse.
The defendant also called in aid Exhibit D10, a fax from Charge to Jarman dated 14 November 1989. It was a response to a fax from Jarman which was not put into evidence. In the course of the response Charge said that the ANI had never had a bank account in the name of THE; and that "the only accounts we are (sic) involved with in Shepparton were for (IIE) and the account in Shepparton was not closed but the balance transferred to … North Balwyn. At no time have we requested the National Bank Shepparton to close the banking account for (IIE)".
According to the defendant's argument, Jarman evidenced no surprise at what must have been, on his account, the revelation that the Shepparton account had been closed. That, it was said, was because he already knew about the matter – it being part of the arrangement whereby IIE's business was conducted by ANI in Melbourne. Jarman's evidence was that, reading the fax, he was shocked by the part of it to which I have just referred. He spoke with Charge and was told that the money had been transferred to the insurer – which he took to be RCA. For that reason, he said, the revelation did not raise concern.
I see no reason not to accept Jarman's evidence on the matter. Charge's fax does not say or imply, I add, that Jarman had earlier knowledge of the funds transfer.
The defendant relied, again, upon a letter (Exhibit D34) written by Jarman to an investigating police officer in December 1993. In that letter Jarman said that the plaintiff had a claim for 7.5% commission, on the basis that 15% wholesale commission was to be split between ANI and the plaintiff.
I place little store by the letter. It did not accord with the IIE arrangement, made no reference to the existence of IIE, and seems in truth to have been no more than an ambit claim not voiced in earlier police statements. It may be said that the letter reflects unfavourably on Jarman. Even so, I am not at all persuaded that it reflects a continuation in fact of the IIE arrangement beyond late July 1989.
Counsel for the defendant relied upon further matters again.
First, the computer printout pertinent to the TT cheque showed disbursements to RCA and ANI, notwithstanding that the cheque was drawn in favour of RCA. That was said to show, at least, that the plaintiff did not always make its cheques payable to the intended recipient; and at its highest that the plaintiff intended that ANI should negotiate cheques sent to it as it saw fit.
I am quite satisfied that the computer disbursement noted to ANI reflected a past situation concerning a particular client, Roccisano; and that the cheque, drawn in favour of RCA, reflected the plaintiff's true intent, compatible with the then‑current situation.
Second, the evidence showed that prior to 25 June 1989 ANI had stationery printed which referred both to IIE and THE in connection with the plaintiff's business and postal addresses (Exhibit D12); that some stationery was printed at ANI's instance which associated IIE and THE with ANI's then Melbourne address; and that stationery linking THE with ANI's Melbourne address was used after 25 June (Exhibits D14, D15). It was submitted for the defendant that the content of the stationery, and its use after 25 June, supported a conclusion that the IIE arrangement continued throughout the relevant period.
There has been moderation of inflation – particularly in recent years. The plaintiff's claim does not address the loss of prospective clients. Mr Phillips gave evidence that Phillips Transport now has many more trucks on the road than in 1990; but that competition between insurers is such that his premium is now no greater.
I take Mr Phillips' evidence upon this issue with a large grain of salt. Even so, I am not persuaded that it is safe to apply a 7.5% annual increase. I am satisfied, however, that some allowance must be made for likely premium (and thus commission) increases. I have fixed, I think conservatively, upon 2.5% per annum. That would not exceed the average annual rate of inflation over the nine year period.
On that assumption the adjusted loss of commission is (starting - unfavourably for the plaintiff - not until 1991/92, and rounded off)
1990/91 $67,350 1991/92 $69,000 1992/93 $70,725 1993/94 $72,500 1994/95 $24,500 1995/96 $25,050 1996/97 $24,975 1997/98 $25,515 1998/99 $26,060 $405,675
The plaintiff was required to pay premiums into its broking account. Interest was payable on deposits. Mr Munday's report shows that interest has continued to be paid since 1990 on moneys deposited. The average interest paid in the nine financial years since 1990 (expressed as a percentage of commission earned) has been 3.4.
Although Mr Munday's report made an assessment of interest lost, and although particular (c) to paragraph 19 of the statement of claim arguably could embrace that matter, I did not understand counsel for the plaintiff in his final address to press a claim for such interest. Perhaps he had in mind s.60(2)(a) of the Supreme Court Act 1986, notwithstanding the judgment of Vincent J in Saunders v Nash [1991] 2 VR 63 at 69-70, and notwithstanding that on the conversion claim interest would be payable under s.59 of the Act.
In the event, I have not made an assessment of interest lost, although had it been pressed I consider that the plaintiff would have proved a loss amounting to $13,793 as at 30 June 1999.
According to Mr Munday's report, most of the expenses relating to the plaintiff's insurance broking business are fixed. There have been, however, some savings by reason of the lower premiums in fact earned. Mr Munday refers in this connection particularly to commission paid, telephone, stationery and postage; and also to there being reduction in the wages bill.
I do not doubt that, speaking generally, reduction in the level of income generated by a business is likely to mean that there are cost savings. I see no reason to doubt the application of that general principle in the present case. The difficulty is to fix upon the amount of savings – which goes in reduction of the claim for lost commission. The difficulty arises in two respects. First, the plaintiff operated and still operates two separate businesses from the one address. The evidence of the accountant, Mr Taylor, shows that some expenses have always been allocated on an arbitrary basis – thus, by the fact that a cheque was drawn on the account of a business to pay a particular expense; or, by permissibly shifting the incidence of expenses for taxation purposes. Second, the plaintiff leases the premises from another family entity; that being the entity which operates the other business at the premises. Has the rental paid at any time been other than a fair market rental? If yes, then when; and what are the implications, if any, for the plaintiff's claims?
Having carefully considered Mr Taylor's evidence, and the accounting records which he prepared and which were introduced into evidence, I am satisfied that, whilst some arbitrary factors have always been involved in their preparation, they do not, relevantly for present purposes, distort in the plaintiff's favour the cost savings likely to have been gained since 1990. If anything, those reports, upon which Mr Munday relied, are likely to have exaggerated the amount of apparent savings, by assigning to the other company the incidence of costs beyond that which the plaintiff has had the capacity to bear; see Mr Taylor's evidence at T851. Moreover, the records show that rental paid much decreased after 1991; but there was no evidence of any lesser use of premises for purposes of the insurance business from that time. The reduction very probably reflects, in a non-arm's length dealing, the plaintiff's inability to pay the former rental.
Mr Munday, in his report, assesses variable costs saved (excluding wages) at 10% of total income. Counsel for the plaintiff submitted in his closing address, in my opinion correctly, that if I considered Mr Munday's assessment to be correct, I could reflect the impact of variable costs saved by a reduction of 10% of any lost income stream which the plaintiff had proved.
Counsel for the defendant cross-examined Mr Munday to show that there were items of expense which had a variable content, but which Mr Munday had not taken into account. Counsel referred to insurances, motor vehicle expenses, employee amenities and bank charges. I am not persuaded that Mr Munday's analysis of the situation in connection with these matters was wrong. Rather, I am satisfied of the converse.
In the event, I consider that the appropriate allowance for variable costs saved, wages excluded, is 10% of the lost income which the plaintiff has proved – that is, 10% of $405,675, equals approximately $40,565.
There has been a decrease in wages paid since 1990. In the year ended 30 June 1990 the amount paid was about $162,000. In the year ended 30 June 1991 the amount decreased to about $99,000. The amount decreased still further (to about $55,400) in the year ended 30 June 1992. Since then it has remained, broadly, at the 1991/92 level. In part the amount is lower because the Jarmans cannot afford to pay themselves a fair wage for the work done out of the income earned.
I do not accept the approach taken by Mr Munday in estimating wages saved. Nor do I consider that the wages reduction appropriate to reflect the compensable loss of business is disclosed by the actual decrease in wages paid. The compensable loss of business involved nine clients; and a loss of commission of $67,350 for the year ended 30 June 1991.
Over the six financial years to 30 June 1990 about 57.5% of every dollar of commission earned went in wages. That is extraordinarily high by the industry standards of which Mr Munday gave evidence. It may reflect the fact that salaries were being paid to each of Jarman, his wife and his mother as well as to others – that there was a degree of overstaffing. It may reflect a lack of cost control. Whatever be the situation, it seems to me that an assessment of wages saved should to some extent reflect the historical relationship between commission received and wages paid.
On the other hand the plaintiff's proved loss of business was the loss of only nine clients. It is clear that the plaintiff had very many clients as at 1990. Excepting Roccisano, Phillips Transport, Trease and Kreskas, the evidence shows that commissions earned were often small.
So, the evidence shows that the commission earned from Roccisano, Phillips Transport, Trease and Kreskas was about $98,300 per annum as at 1990. It also shows that the average annual premium earned from the other six clients whom the plaintiff has proved ceased doing business with it by reason of the defendant's default was about $550. It shows, again, that the average annual premium of all the clients whose premiums were caught up in the NAB, TT and ANZ cheques (excluding Roccisano, Phillips Transport, Trease and Kreskas) was about $380.
The evidence to which I have referred suggests the probability that as at 1990 the plaintiff had some hundreds of clients. A much higher number of policies (not clients) is referred to by Mr Munday in his report. But there was no evidence which made out that figure; or which related it to the number of clients. The point for present purposes is this: that there were probably some hundreds of clients to be serviced by the plaintiff. Work was necessarily involved in every case. Common sense suggests that the amount of work would be unlikely to directly correlate with the amount of commission earned in every case.
It would be wrong to conclude that wages saved should be determined by reference to the percentage which the number of clients lost bore to the client base generally (for example, nine clients out of 200 = 4.5%; or, nine clients out of 400 = 2.25%). But equally it would be wrong, in my opinion, to determine wages saved by simple reliance on the historical nexus between commission earned and wages paid.
It seems to me that a logical way of dealing with the matter is to fix upon a percentage saving in wages that reflects the percentage reduction in commission resulting from the loss of the nine clients. At the outset, the percentage reduction in commission was about 24.5%; for upon the conclusions I have reached the loss of commission attributable to the defendant's default was $67,350 per annum out of total 1989/90 commission of $275,717.
I have considered whether or not that percentage should be applied consistently over the period since 1990. There are competing considerations. I have concluded that E.F. Phillips and Roccisano would have ceased to do business with the plaintiff in 1994. Edge in fact returned in 1997. As a percentage of 1989/90 commission the compensable loss of commission would have much decreased, taking account of those developments. On the other hand, the client base shrank for reasons outside the reach of the claim as it has been formulated. It might be said that the assessment of compensable loss should take account of that consideration.
All in all, and it is a balancing exercise, I have concluded that it is appropriate to discount the gross loss of commission by 24.5% throughout the relevant period in order to allow for wages notionally saved.
In the event, I consider that in determining net loss of commission up to 30 June 1999 I should discount the gross loss by 24.5% - about $100,600 – in order to allow for wages notionally saved.
I assess net loss of commission, in all the circumstances, to be about $264,510 up to 30 June 1999. I see no need to discount that sum further for contingencies. In the various steps along the way I have taken an approach which fully meets the need for any discount for general contingencies.
I turn to the question of future loss (in which, for sake of convenience, I include the short period since 1 July 1999). I am not satisfied that it would be right to value the plaintiff's business as at 1990, as at today, and allow the plaintiff the difference between the two valuations. That approach assumes that the plaintiff's business will never recover from its present condition, which condition is wholly attributable to the defendant's default. Those two assumptions are unfounded. Two considerations are pertinent. Firstly, the effect of the award of damages will be in part to return to the plaintiff the premiums or instalments of premium that were the subject of the NAB and TT cheques. It should be anticipated that the plaintiff will account to his clients – present and former – in respect of those moneys. Second, it is for the loss of business of those clients that the plaintiff is to be compensated; none other.
In my opinion it should be concluded that the return of premiums is likely to positively affect the plaintiff's standing with its particular lost clients. Their business may well be won back; although that may not be immediate. I think that it would be reasonable to assume, taking an arbitrary approach which ignores the fact that some clients might very soon be won back, others later on, and still others not at all (in the last connection there are the particular problems of E.F. Phillips and Roccisano), that the plaintiff's loss will continue at the level current as at 30 June 1999 for a further three years from that date. Allowing for the impact of cost savings, and discounting the future component by a little for present value, I allow $50,000.
The ANI cheque
In dealing with the business loss claim I referred in passing to the uncomplicated way in which the plaintiff was able to put its claim in respect of the ANI cheque. Thus considered, I am satisfied that the plaintiff has made out a compensable loss in respect of the value of that cheque.
Conclusion
The plaintiff is entitled to an award of damages in an amount rounded off to $590,915. That amount represents the face value of the NAB, TT and ANI cheques, plus damages for net loss of business income, past and future, in the sum of $314,510.
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CERTIFICATE
I certify that this and the 73 preceding pages are a true copy of the reasons for judgment of Ashley J of the Supreme Court of Victoria delivered on 14 September 1999.
DATED: this fourteenth day of September 1999.
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Associate
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