Newman v Financial Wisdom Ltd
[2002] VSC 370
•4 September 2002
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 2066 of 2000
DALE NEWMAN & ORS
| Plaintiffs | |
| and FINANCIAL WISDOM LTD and TWENTY-FIRST AUSTRALIA INC | Defendants |
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JUDGE: | Mandie J | |
WHERE HELD: | Melbourne | |
DATES OF HEARING: | 30 August 2002 | |
DATE OF JUDGMENT: | 4 September 2002 | |
CASE MAY BE CITED AS: | Newman v Financial Wisdom Ltd | |
MEDIUM NEUTRAL CITATION: | [2002] VSC 370 | |
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Practice and Procedure – applications by defendants for summary judgment or to strike out parts of amended statement of claim – alleged liability of defendants for conduct of investment advisers – provisions of corporations legislation.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Dr C L Pannam with Mr B F Quinn | Corrs Chambers Westgarth |
| For the first Defendant For the second Defendant | Mr M Sifris Mr M Moshinsky | G S Ray Aitken Walker & Strachan |
HIS HONOUR:
The first defendant (“Financial Wisdom”) by summons filed 25 June 2002 seeks summary judgment pursuant to r.23.01(1) of the Rules of the Supreme Court on the ground that certain of the claims as pleaded in specified paragraphs of a 449-page amended Statement of Claim filed 10 September 2001 (“the statement of claim”) do not disclose any cause of action against Financial Wisdom. Alternatively, an application is made pursuant to r.23.02 to strike out those paragraphs on the same ground and on the further grounds that they may prejudice, embarrass or delay the fair trial of the proceeding or are an abuse of the process of the court.
The second defendant (“Twenty-First Australia”) by summons filed 26 June 2002 seeks the same relief in relation to specified paragraphs of the statement of claim which relate to it and on the same grounds.
This proceeding comprises a large number of claims for damages by numerous plaintiffs who each invested in a variety of “tax-driven” investment schemes and who each complain of the conduct of the individual investment advisers (“representatives”) who induced them to invest in those schemes. The representatives and the various scheme entities and promoters are not sued. The affidavit evidence filed on behalf of the defendants (which is uncontradicted) shows that the only connection between the representatives and the two defendants is that, at the relevant times of the alleged conduct by the representatives of which the plaintiffs complain, the representatives held proper authorities from the defendants pursuant to the relevant provisions of the Corporations Law dealing with securities and investment advisers. The representatives were not in any relevant respect acting on behalf of the defendants when marketing the various investment schemes which are the subject of the proceeding, nor did any of the defendants have any knowledge of the said investment schemes or any connection at all with those schemes. While the representatives had no relevant actual connection with the defendants (other than by the existence of the proper authorities to which I have referred), they did have connections with a company, Sentinel Financial Management Limited Pty Ltd, which has subsequently gone into liquidation. The plaintiffs became clients of Sentinel and in one way or another had dealings with Sentinel and other entities not connected with the defendants, but never with the defendants. Nevertheless, claims are made against the defendants, inter alia, under the Trade Practices Act 1974 (Cth) for misleading conduct, in negligence, for breach of fiduciary duty and under a variety of provisions of the Corporations Law. The pleaded liability of the defendants is alleged to arise, so it would seem, either directly or via the actual or ostensible authority of the representatives to act on behalf of the respective defendants or pursuant to certain then applicable provisions of the Corporations Law.
The precise effect of the transitional provisions of the Corporations Act 2001 (Cth) was not referred to but it was not contested on these applications that the former provisions of the Corporations Law which are principally relevant and applicable to the matters raised in the statement of claim provided as follows:
“Section 94. Securities representatives
(1)Subject to subsection (2), a person is a securities representative of another person if, and only if, the first-mentioned person:
(a) is employed by; or
(b) acts for or by arrangement with;
the other person in connection with a securities business or investment advice business carried on by the other person.
(2) Except for the purposes of paragraph 88 (1) (b):
(a)a person who holds a proper authority from a securities licensee is a securities representative of the licensee; and
(b)a person who holds an invalid securities authority from another person is a securities representative of the other person.
(3)Subject to subsection (4), a person does an act, or engages in conduct, as a securities representative of another person if, and only if, the first-mentioned person does the act, or engages in the conduct:
(a)in connection with a securities business or investment advice business carried on by the other person;
(b)while the first-mentioned person is a securities representative of the other person;
(c)as employee or agent of, or otherwise on behalf of, on account of, or for the benefit of, the other person; and
(d)otherwise than in the course of work of a kind ordinarily done by accountants, clerks or cashiers.
(4)Except for the purposes of Division 4 of Part 7.3, a person who holds himself, herself or itself out to be a securities representative of another person does an act as a securities representative of the other person.
….
Division 4 – Liability of principals for representatives' conduct
Section 817. Conduct engaged in as a representative
Where a person engages in conduct as a representative of another person (in this section called the "principal"), then, as between the principal and a third person (other than the Commission), the principal is liable in respect of that conduct in the same manner, and to the same extent, as if the principal had engaged in it.
Section 818. Liability where identity of principal unknown
(1)This section applies for the purposes of a proceeding in a court where:
(a)whether within or outside this jurisdiction, a person (in this section called the "representative") engages in particular conduct while the person is a representative of 2 or more persons (in this section called the "indemnifying principals"); and
(b)it is proved for the purposes of the proceeding that the representative engaged in the conduct as a representative of some person (in this section called the "unknown principal") but it is not proved for those purposes who the unknown principal is.
(2)If only one of the indemnifying principals is a party to the proceeding, he, she or it is liable in respect of that conduct as if he, she or it were the unknown principal.
(3)If 2 or more of the indemnifying principals are parties to the proceeding, each of those 2 or more is liable in respect of that conduct as if he, she or it were the unknown principal.
Section 819. Liability of principals where act done in reliance on representative's conduct
(1) This section applies where:
(a)at a time when a person (in this section called the "representative") is a representative of only one person (in this section called the "indemnifying principal") or of 2 or more persons (in this section called the "indemnifying principals"), the representative, whether within or outside this jurisdiction:
(i) engages in particular conduct; or
(ii)proposes, or represents that the representative proposes, to engage in particular conduct;
(b)another person (in this section called the "client") does, or omits to do, a particular act, whether within or outside this jurisdiction, because the client believes at a particular time in good faith that the representative engaged in, or proposes to engage in, as the case may be, that conduct:
(i)on behalf of some person (in this section called the "assumed principal") whether or not identified, or identifiable, at that time by the client; and
(ii)in connection with a securities business or investment advice business carried on by the assumed principal; and
(c)it is reasonable to expect that a person in the client's circumstances would so believe and would do, or omit to do, as the case may be, that act because of that belief;
whether or not that conduct is or would be within the scope of the representative's employment by, or authority from, any person.
(2) If:
(a) subparagraph (1) (a) (i) applies; or
(b)subparagraph (1) (a) (ii) applies and the representative engages in that conduct;
then, for the purposes of a proceeding in a court:
(c)as between the indemnifying principal and the client or a person claiming through the client, the indemnifying principal* is liable; or
(d)as between any of the indemnifying principals and the client or a person claiming through the client, each of the indemnifying principals is liable;
as the case may be, in respect of that conduct in the same manner, and to the same extent, as if he, she or it had engaged in it.
(3)Without limiting the generality of subsection (2), the indemnifying principal, or each of the indemnifying principals, as the case may be, is liable to pay damages to the client in respect of any loss or damage that the client suffers as a result of doing, or omitting to do, as the case may be, the act referred to in paragraph (1) (b).
(3A) Subsection (3) does not apply unless:
(a)the conduct was engaged in, the proposed conduct would have been engaged in, or the representation was made, in this jurisdiction; or
(b)the act referred to in paragraph (1) (b) was done, or would have been done, as the case may be, in this jurisdiction; or
(c)some or all of the loss or damage was suffered in this jurisdiction.
(4) If:
(a) there are 2 or more indemnifying principals;
(b)2 or more of them are parties (in this subsection called the "indemnifying parties") to a proceeding in a court;
(c) it is proved for the purposes of the proceeding:
(i)that the representative engaged in that conduct as a representative of some person; and
(ii) who that person is; and
(d) that person is among the indemnifying parties;
subsections (2) and (3) do not apply, for the purposes of the proceeding, in relation to the indemnifying parties other than that person.
Section 820. Presumptions about certain matters
(1)Where it is proved, for the purposes of a proceeding in a court, that a person (in this subsection called the "representative") engaged in particular conduct, whether within or outside this jurisdiction, while the person was a representative of:
(a)only one person (in this subsection called the "indemnifying principal"); or
(b)2 or more persons (in this subsection called the "indemnifying principals");
then, unless the contrary is proved for the purposes of the proceeding, it shall be presumed for those purposes that the representative engaged in the conduct as a representative of:
(c) the indemnifying principal; or
(d)as a representative of some person among the indemnifying principals;
as the case may be.
(2)Where, for the purposes of establishing in a proceeding in a court that section 819 applies, it is proved that a person did, or omitted to do, a particular act because the person believed at a particular time in good faith that certain matters were the case, then, unless the contrary is proved for those purposes, it shall be presumed for those purposes that it is reasonable to expect that a person in the first-mentioned person's circumstances would so believe and would do, or omit to do, as the case may be, that act because of that belief.
Section 821. No contracting out of liability for representative's conduct
(1) For the purposes of this section, a liability of a person:
(a)in respect of conduct engaged in by another person as a representative of the first-mentioned person; or
(b)arising under section 819 because another person has engaged in, proposed to engage in, or represented that the other person proposed to engage in, particular conduct;
is a liability of the first-mentioned person in respect of the other person.
(2)Subject to this section, an agreement is void in so far as it purports to exclude, restrict or otherwise affect a liability of a person in respect of another person, or to provide for a person to be indemnified in respect of a liability of the person in respect of another person.
(3)Subsection (2) does not apply in relation to an agreement in so far as it:
(a) is a contract of insurance;
(b)provides for a representative of a person to indemnify the person in respect of a liability of the person in respect of the representative; or
(c)provides for a licensee from whom a person holds a proper authority to indemnify another such licensee in respect of a liability of the other licensee in respect of the person.
(4)A person shall not make, offer to make, or invite another person to offer to make, in relation to a liability of the first-mentioned person in respect of a person, an agreement that is or would be void, in whole or in part, by virtue of subsection (2).
Section 822. Effect of Division
(1)Where 2 or more persons are liable under this Division in respect of the same conduct or the same loss or damage, they are so liable jointly and severally.
(2) Nothing in section 817, 818, or 819:
(a)affects a liability arising otherwise than by virtue of this Division;
(b)notwithstanding paragraph (a) of this subsection, entitles a person to be compensated twice in respect of the same loss or damage; or
(c) makes a person guilty of an offence.”
Paragraph 1 of the statement of claim pleads that, at relevant times, Financial Wisdom provided a proper authority pursuant to Part 7.3 Division 3 of the Corporations Law to three named representatives (Quarrell, Hughes and Schimana). Paragraph 2 of the statement of claim makes similar allegations in relation to the provision by Twenty-First of proper authorities to certain representatives (Healy, Hughes, Schimana and Lye). After alleging a series of representations and warranties made in relation to something called the “Sentinel Professionals Management Program” the pleading goes on to deal with a number of specific schemes.
The allegations in relation to the first investment scheme referred to in the pleading (the “Lucky Country Film Fund”) were taken by Counsel for Financial Wisdom as representative of the matters of which his client complained in the pleading. Paragraphs 6 to 9 of the statement of claim plead the documents constituting the Lucky Country Film Fund and para 10 identifies the particular plaintiffs who invested in that fund and executed various financial documents. Paragraph 11 alleges that Quarrell made, in trade and commerce, certain representations and warranties to those plaintiffs. Paragraph 12 invokes the presumption contained in s. 820(1) of the Corporations Law to plead that Quarrell made the various alleged representations as a representative of Financial Wisdom within the meaning of s. 817 of the Corporations Law and para 12A pleads that, in the premises, pursuant to s. 817 of the Corporations Law, Financial Wisdom is liable in respect of those representations in the same manner and to the same extent as if Financial Wisdom had made them. Financial Wisdom attacks paras 12 and 12A on the basis that it is clear on the undisputed evidence that Quarrell did not act as a representative of Financial Wisdom.
Paragraph 13 of the statement of claim invokes s. 819 of the Corporations Law as rendering Financial Wisdom liable for the representations of Quarrell irrespective of actual agency. Financial Wisdom contends that s. 819 does not have the effect alleged, but for the purposes of this application, accepts that the contrary is arguable and therefore does not seek to attack this paragraph.
Paragraph 14 of the statement of claim alleges that Quarrell made the representations as agent of Financial Wisdom acting with its actual or ostensible authority. Financial Wisdom attacks that paragraph on the basis that, on the undisputed evidence, Quarrell had no actual authority from Financial Wisdom and was not in any way held out by Financial Wisdom to any of the plaintiffs as its agent.
Paragraphs 15 to 20 of the statement of claim contain allegations of misleading and deceptive conduct within the meaning of the Trade Practices Act 1974 (Cth), and para 19 alleges that it was Financial Wisdom which engaged in that misleading and deceptive conduct.
Paragraphs 21 to 23 of the statement of claim contain a claim in negligence. Paragraph 21 alleges that Financial Wisdom owed a duty of care and para 22 alleges that Financial Wisdom acted negligently and in breach of that duty of care.
Paragraphs 24 to 28 of the statement of claim contain a cause of action based upon s. 851 of the Corporations Law and Financial Wisdom is alleged to have made securities recommendations without having any reasonable basis for doing so.
Paragraphs 29 to 40 of the statement of claim contain a series of causes of action based upon contraventions by Financial Wisdom of ss. 995, 999 and 849 of the Corporations Law.
Paragraphs 41 to 44 contain a cause of action in breach of fiduciary duty and in para 41 it is alleged that Financial Wisdom stood in a fiduciary relationship with each of the investors in the Lucky Country Film Fund.
Financial Wisdom attacks all of the foregoing paragraphs of the statement of claim from para 15 onwards on the basis that it played no part in any of the conduct or transactions referred to, and accordingly, had no direct liability for any of the conduct complained of and, in particular, did not owe a duty of care as alleged and did not stand in any fiduciary relationship as alleged.
Commencing with para 45 (and still dealing with the Lucky Country Film Fund) the statement of claim sets out what are referred to as “alternative bases of liability”. Paragraph 45 alleges that Quarrell made the representations “in his own right as principal and not as agent for and on behalf of Financial Wisdom” as if each reference to “Financial Wisdom” herein is a reference to “Quarrell”. Paragraph 46 alleges in effect that, in the premises, Quarrell had engaged in misleading conduct, acted negligently, contravened the various sections of the Corporations Law and acted in breach of fiduciary duty. Paragraph 48 then invokes s. 817 of the Corporations Law, further or in the alternative, s. 819 of the Corporations Law, to allege that Financial Wisdom is liable “for all loss and damage suffered by the Lucky Country investors in the same manner and to the same extent as if Financial Wisdom had engaged in the alleged conduct of Quarrell…”.
Paragraph 49 of the statement of claim pleads s. 75B of the Trade Practices Act 1974 (Cth) and/or s. 31 of the Fair Trading Act 1985 (Vic) and alleges that Financial Wisdom, knowing or being aware of the various representations and other relevant matters, had aided, abetted, counselled or procured, or was directly or indirectly knowingly concerned in or a party to the alleged contraventions by Quarrell of the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1985 (Vic).
The statement of claim goes on to deal with the various other investment schemes and makes much the same claims in relation to each scheme as described above, either against Financial Wisdom or Twenty-First or against both of them. Counsel for Twenty-First to a great extent made the same attacks on the pleading as were made by Financial Wisdom.
Both defendants also attacked another cause of action, which is exemplified by reference to para 443 of the statement of claim which alleges that Financial Wisdom and Twenty-First failed to disclose the existence or particulars of any commission or fee which each was to receive in connection with a particular investment scheme. The undisputed fact was that neither defendant received any commission and therefore had nothing to disclose.
The starting point for the consideration of these applications is the operation of s. 817 of the Corporations Law dealing with the situation where a person engages in conduct “as a representative of” another person. On the face of it, that section requires proof that in fact the person acted as a representative of the other person. This interpretation is strongly reinforced by reference to s. 94(3) of the Corporations Law which provides that a person engages in conduct as a securities representative of another person “if, and only if” the person who engages in the conduct does so in connection with the other person’s securities of investment advice business and while that person is a securities representative of the other person and does so as employee or agent of or for the benefit of the other person.
The proposition that ss.817-819 deal only with the liability of principals for the conduct of persons who are in fact their representatives is supported by what appears to be the only authority on ss.817–819 of the Corporations Law, a decision of Lindgren J in NMFM Property Pty Ltd v Citibank Limited (2000) 107 FCR 270 at [1223] – [1232]. However, the defendants concede that, notwithstanding the decision of Lindgren J, it is arguable that s. 819 has a wider scope than his Honour decided. In the light of that concession, I need not consider on these applications the scope of s. 819. That will be a matter for determination at the trial.
The question whether the pleaded reliance on s. 817 of the Corporations Law is arguable was debated on these applications. In that regard, the plaintiff relied on the presumption contained in s. 820(1) that a representative proved to have engaged in conduct at a time when he was a representative of another person is presumed to have engaged in that conduct as a representative of that other person “unless the contrary is proved for the purposes of the proceeding”. It was submitted on behalf of Financial Wisdom that s. 820(1) did not operate in relation to s. 817. Alternatively, if it did, it was submitted that the contrary had been proved and the presumption in s. 820(1) rebutted on undisputed evidence. It is, at the very least, strongly arguable that the presumption in s. 820(1) is intended to operate in relation to s. 817. Indeed, as Senior Counsel for the plaintiffs submitted, for what other purpose was s. 820 contained in Division 4 of Part 7.3 of the Corporations Law? However, there is much to be said for Financial Wisdom’s contention that the contrary has been proved in such a fashion as to render it most unlikely that the position will alter at trial.
Nevertheless, not without some hesitation, I do not think that the plaintiffs’ reliance upon s. 817 should be summarily rejected on these applications. As Kirby J said in Lindon v The Commonwealth (No. 2) (1996) 70 ALJR 541 at 544-5, a court should be very slow to reject any claim on a summary basis, and that “[e]ven a weak case is entitled to the time of a court [and that] [e]xperience teaches that the concentration of attention, elaborated evidence and argument and extended time for reflection will sometimes turn an apparently unpromising cause into a successful judgment” (see too what was said by Kirby P (as he then was) partly in dissent in Wickstead v Browne (1992) 30 NSWLR 1, 5–6 in relation to the minimal marginal utility of deleting an alternative cause of action).
It seems to me that there is no prejudice to the defendants in being required to deal with claims based upon s. 817 and as well as s. 819 of the Corporations Law, in relation to which the same facts and related questions of statutory construction will arise.
However the same considerations do not apply to the allegation of actual or ostensible authority. The evidence relevant to the question of common law agency is all one way and the case based upon common law agency is doomed to failure. None of the plaintiffs produced any evidence to the contrary. Their counsel did not suggest that this part of the pleaded case was arguable on any available evidence.
Further, I consider that the statement of claim is fundamentally insupportable and defective in form in the way in which it pleads the direct liability of the defendants in respect of a number of causes of action as if it were the defendants’ conduct which was in issue. In particular, the allegations that the defendants owed a duty of care to the plaintiffs, that the defendants stood in a fiduciary relationship to the plaintiffs and that the defendants failed to disclose any commission which they had received are all in my opinion misconceived in the form in which they appear. It is obviously wrong to require the defendants to answer allegations in open court, which are also contained in a document available in the Registry, when those allegations are unsustainable. Further, to do so would “prejudice embarrass and delay” the fair trial of the proceeding. It was submitted on behalf of the plaintiffs that the pleading could be justified because ss.817 and 819 spoke of a person in the position of the defendants as being “liable [for the conduct of the representative] in the same manner, and to the same extent, as if [the principal] had engaged in it”. It was submitted that these provisions, at least arguably, did not merely create vicarious liability but attributed the conduct of the representative to the principal so that the conduct could be treated as being the conduct of the principal and that, therefore, the pleading of direct causes of action was justified. There might have been something in those submissions but for the fact that that is not the way the pleading is framed. The statement of claim does not make it apparent in the offending paragraphs that it is attributed conduct that is being dealt with, nor do I think that is the intent of the pleading. It seems to me, again taking the Lucky Country Film Fund as the example, that paras 45 to 48 contain the allegations which are relevant to the so-called attributed conduct (or vicarious liability) and ss. 817 and 819 are not relied upon in those parts of the statement of claim pleading the direct causes of action in negligence, breach of fiduciary duty and the various other causes of action to which I have previously referred (compare paras 11, 12 and 12A of the statement of claim). I do not consider that the defendants should be required to meet a pleading in this form.
In addition, paragraphs such as paras 49 and 51 of the statement of claim which allege knowledge and awareness by the defendants of relevant matters are clearly unsustainable on the undisputed evidence before the Court.
For the foregoing reasons, the following typical paragraphs should be dealt with as follows:
(a)Paras 14, 49, 51 and 443 and like paragraphs should be struck out with no right to replead them;
(b)Paras 15-44 should be struck out with a right to replead them as allegations against Quarrell (insofar as that can be justified) and in relation to which Financial Wisdom may be alleged to be liable on the statutory bases which the plaintiffs referred to in argument.
The order to be made should deal with the corresponding paragraphs of the statement of claim covering each other investment scheme in the same fashion. There will also be general consequential liberty to replead.
I will ask the legal representatives of the parties to attempt to agree on detailed minutes of orders to be made in the light of the foregoing, specifying all affected paragraphs and time-frames for amendments and defences. I will hear Counsel in relation to costs.
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