NZI Securities Australia Ltd & Anor v Metcalfe

[1996] HCATrans 400

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S79 of 1996

B e t w e e n -

NZI SECURITIES AUSTRALIA LIMITED, NZI CAPITAL CORPORATION LIMITED

Applicants

and

PETER WILLIAM METCALFE

Respondent

Office of the Registry
  Sydney  No S80 of 1996

B e t w e e n -

PETER WILLIAM METCALFE

Applicant

and

NZI SECURITIES AUSTRALIA LIMITED, NZI CAPITAL CORPORATION LIMITED

Respondents

Applications for special leave to appeal

DAWSON J
TOOHEY J
KIRBY J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 13 DECEMBER 1996, AT 10.40 AM

Copyright in the High Court of Australia

__________________________

MR B.A.J. COLES, QC:   If your Honours please, in the first of those matters, I appear with, MR M.A. ASHHURST, for the applicant and in the second, with MR M.A. ASHHURST, for the respondent.  (instructed by Holmes & Bevan)

MR J.P. HAMILTON, QC:   If the Court pleases, we appear the other way around.  I appear for Mr Metcalfe with my learned friend, MR N.F. FRANCEY, in each application, who is the representative applicant.  (instructed by Blessington Judd)

DAWSON J:   Yes, Mr Hamilton, both matters can be ‑ ‑ ‑

MR HAMILTON:   It may be more logical if I go first, your Honours, as ‑ ‑ ‑

MR COLES:  Yes, we think that might be more helpful to your Honours in understanding the matter, yes.

DAWSON J:   Both applications can be dealt with together.

MR HAMILTON:   Yes.  I see.  I am quite happy to deal with both the applications at once.

KIRBY J:   You are the relief point and Mr Coles is the costs point.

MR HAMILTON:   Exactly, your Honour.  Your Honours, I have this morning prepared a very short outline that attempts simply to refine the argument as it is put in the submission.  It deals principally with the points we see as the points of law and

where they stand in the case, more than with their special leave quality.  Yours Honours are familiar with the conduct, I take it?

DAWSON J:   Yes, we are.

MR HAMILTON:   I need not take your Honours to that.  As your Honours see, there are two complaints.  The one in the forefront is on behalf of the guarantors and, to a lesser extent, the unit holders of the trust, that their prayer for section 87 relief simply was not considered squarely on its merits and against the principles that are involved in either court, in either the trial court or the Full Court.  To some extent, perhaps, this is because, as is apparent from the judgment of the primary judge, the actual long battle that took place turned largely on credibility of witnesses and very complicated evidence as to the measure of damages because, as we discovered, if anything is difficult to value, it is a retirement village.

When one came to the question of section 87 relief, his Honour the trial judge did accept, and the Full Court said he was correct in accepting, our argument that, indeed, a number of the guarantors ‑ there is no need for your Honours to go into which ‑ did have damage, causally connected with the conduct.  His Honour did not accept that any of them - himself, herself or itself - relied upon the actual conduct, but either Mr Poignand or Mr Courtney himself, both of whom were induced, and the others were either entered into by Poignand or Courtney as directors of companies, or entered into it because Poignand or Courtney put the document in front of them and said, “You trust me, sign this”.

TOOHEY J:   Why was that not a permissible approach, Mr Hamilton.

MR HAMILTON:   Your Honour, that was a permissible approach, but what then happened:  we got to the point where there was a causal connection between damage or likelihood of damage on those people’s part, and then, at that point of time, it was all suddenly swept under the carpet.  The trial judge said, “I won’t deal with them at all because the fact that I’ve given damages on a cross claim ends the matter.”  And, in the Full Court their Honours lit upon that and said, “Well, of course, it doesn’t, unless you actually reduce the liability through section 87 to exonerate them,” but did not and would not give consideration to what we always argued was the centre of the ‑ this was a mixed claim, of cours, but the centre of the claim for the guarantors and the unit holders was that, having reached that point, one ought consider section 87 relief, among the whole panoply.  We put it in the forefront and said it certainly should be considered with the panoply.  That, in reality, never occurred.

KIRBY J:   They signed the guarantees and the mortgages.  They were not, themselves, induced by the falsehood.  They got an awful lot of money out of the bank.  They want to be relieved from the guarantees and mortgages?

MR HAMILTON:   Yes, your Honour, and that, on one of the many bases, which ought not induce surprise, which is that the transaction that they wound up guaranteeing, by the execution of those documents, was not the contract that they set out to guarantee and, if you say it quickly, the difference between four plus one and four plus two, and the plus at the option of the bank alone, as opposed to be done by some objective criterion, I suppose in some cases may be a small matter, but the evidence in the case showed, as is found by both his Honour and the Full Court, to have been central in the bargaining process.  That is what the whole bargaining turned over, and that is where, somehow or other, it went hideously wrong. 

It is a quite strange and mysterious case in that, Mrs Middleton, on behalf of the bank, gave evidence that she acted quite deliberately.  It is not that there was an accident and it crept in somehow.  She instructed the solicitors to put the wrong clause in.  She swore that that she was aware at the material times, when they went along in March and April and the wrong documents were put forward; that she was aware that the documents were different, and that the divergence between the two documents handed over on 3 April existed but, as the Full Court said, in terms, her explanation of why this was is just incomprehensible.

So, we have this deliberate course of conduct, going to a matter at the heart of the contract, and we say that the centre of the argument - and in a sense, we cannot point in either the trial judge’s judgment or the Full Court’s judgment, to where they dealt with the matters that we say were squarely raised, and say, “Well, they applied the wrong principle here.”  It was simply brushed aside on each occasion, and I can assure your Honours that it was not for want of it being put to them that the question of some form of section 87 relief, whether it is by way of setting aside on the basis that the obligation that they wound up guaranteeing was quite different or whether it is because there was a subsequent breach or a subsequent change, they ought be relieved at that point of time, and there is realistic relief available at that point of time which does not free them from an obligation to repay the capital, that relief would be when four years later it went wrong and the breach occurred, that they should be relieved of interest after that point of time. 

There are many things that might be debated, but that is simply one.  Yours Honours, why we say that this is a special leave question, simply is that the relationship in these circumstances, between relief under section 87 and the various general law principles that are there relating to the transactions in any event, has never been determined.  My learned friends only highlight this when they give your Honour the reference to Webb Distributors where, in a comparatively recent decision, this Court has, as an aside - which I say without any disrespect at all, of course, because the whole nature of the case there, about a corporate structure, was totally different - said, “Well, you don’t declare a contract void at the start simply by reference to section 87, without reference to other principles of law”, but the whole relationship between the statutory scheme provided in the Trade Practices Act - and the importance of that and its objects is, for instance, emphasised by the comparatively recent Law Reform Commission Report on Compliance with the Trade Practices Act, and the fact that that Act has a policy out there to compel certain behaviour in the marketplace, of which section 52 is a very important part.  That relationship between that Act in section 87 as to what extent it is a discrete set of remedies, to what extent it relates to and ought be exercised by reference to underlying principles, is very much at large.

TOOHEY J:   But do you not have to say that an award of damages, no matter how benevolent, will not compensate your claims?

MR HAMILTON:   No, your Honour, I do not have to say that because one of the principles that requires consideration is - and I have just picked as one recent reference.  It was mentioned by Justice Deane in Ankar, at the passage that I have given, where the obligation for which the surety undertakes as a second obligation differs from the obligation intended to be undertaken, he is entitled to be relieved whether the departure injures him or not, because it simply is not the obligation which he was to undertake.  So that, certainly, in that line of country, you do not come to the question of whether damages is sufficient. 

The other problem about the sufficiency of damages in this case relates to the second point, which relates to Ratcliffe v Evans.  If your Honours look at the references that I have given in paragraph 9, your Honours will see that Justice Sackville set, we say ‑ and this relates back to the sufficiency of damages.  You have got a situation where damages are very difficult to assess.  The conduct takes place in 1987 and the contracts are entered into then.  In 1990 there is a breach.  Disaster overtakes early in 1992.  At that time the parties start looking at their rights.  The representative applicant then sets out to start proving what would have happened in February, March, April 1987 and, of course, in this commercial area where you are trying to prove whether a very complicated loan contract, with very particular terms, would or would not have been available, that becomes very difficult.

The error that Justice Sackville then commits is - we pressed upon him what Lord Justice Bowen said in Ratcliffe v Evans.  We produce a general manager from Jennings Limited, which was the biggest operator at that time in the retirement village industry.  That gentleman, of course, cannot say specifically, but as someone who was then in the market seeking finance for these, he says, in February, March, April 1987 ‑ he has got to say it in general terms - that finance of this magnitude was generally freely available and reasonably readily obtainable for retirement village projects.

The respondents, one imagines, thinking they are not likely to improve that evidence by cross-examining upon it, do not cross-examine it.  Justice Sackville, of course, refers to that evidence, but says, “Oh, that is only general”.  We managed to get a couple of people along who say what they may have done in 1987.  Of course, they have got to say, “Well, we don’t know all the ins and outs of this contract, and we can’t say definitely”.  Justice Sackville goes from that.  We, I do not hesitate to say again, being the wronged, attempting to bring the case against the wrongdoer, and say, “This isn’t particular enough.  You haven’t discharged your onus of showing there was other finance available”.  Once I have said that and that is no doubt right ‑ once that is so, well, of course, I then infer that Mr Poignand did the only thing he could and signed up.

KIRBY J:   Mr Hamilton, looking at it from the point of view of whether this is an appropriate vehicle to bring out the issue that you want to tender to the Court, the section 87.....the facts are extremely complicated and that, of course, may be inherent in the nature of 87 cases ‑ ‑ ‑

MR HAMILTON:   Yes.

KIRBY J:   But, they are also, as you opened, rather bizarre and unusual and the courts below do not seem to have analysed and dealt with the issue in a way that would help this court to refine questions and deal with it and nothing we could do - we certainly could not sort out all the details and the facts.  It would have to go back for rehearing, even if you were to get up and have the matter examined in this Court.  It just does not seem to be a very good vehicle for proffering this issue of section 87 relief and scope, its occasion, and this is the problem I have.

MR HAMILTON:   Yes.  Your Honour, one thing that must be looked at, essentially, this is an important question that needs examination.

TOOHEY J:   I am sorry, what is, when you say, “this is”?  Can you say with more precision the question that needs examination?

MR HAMILTON:   Yes, certainly, your Honour.  The question of the relationship between section ‑ there are two things really, the relationship between section 87, relief and damages, which arises squarely in this case because damages are said to be adequate, and the relationship between section 87 and the underlying general law principles as to the relief that will be granted in the case of guarantees, two of which I have set out there; the question of what should be done, and how that relates to section 87 ‑ ‑ ‑

TOOHEY J:   But, Mr Hamilton, it may not get to the question of section 87 if damages are an adequate remedy. 

MR HAMILTON:   Yours Honours, what we say is that the very thing that has gone wrong here is that the guarantors and unit holders were entitled to have the situation looked at by a court which looked at the overall situation without going off and assessing a set of damages and then brushing over their rights and saying, “That is enough”.  I suppose it is one of the difficulties that is inherent in representative litigation, because the applicant brings both the case of Ripoll, which clearly must have its damages assessed.  The evidence focuses on that.  The bloody battle ‑ and it was a bloody battle ‑ focuses on that.  That does not alter the fact that at the end of it we squarely put to his Honour the trial judge that when you come to the guarantors, section 87 is central and you must look at section 87.  And everybody has just done the damages, then put it aside and said, “Well that is enough”, in effect, without coming back to the question, looking at the guarantors and the unit holders, looking at all the facts:  what is the appropriate relief? 

Can I answer Justice Kirby very quickly by saying this:  whilst there is a mass of facts swimming around in 200 pages, which is discouraging, the central facts, as set out in the summary of argument, really ‑ the central facts, as in so many 52 cases, really are simple and we certainly would not be asking the Court ‑ the Court could not reassess damages.  If the Ratcliffe v Evans were argued, they may have to be reassessed, but one would not have to come to the question of assessment of damages on looking at the central section 87 point.  Your Honours, I have not managed to cover the question of my learned friend’s costs argument, but I will be able to do that in four or five minutes after he does.

DAWSON J:   You can do that in reply, I think, Mr Hamilton.

MR HAMILTON:   Yes, thank you very much.  I have managed to cover essentially in the time the matters that we tell your Honours ‑ ‑ ‑

DAWSON J:   Thank you, Mr Hamilton.  Mr Coles.

MR COLES:   May it please your Honours.  Dealing firstly with my learned friend’s application; may we put shortly these matters.  Essentially what confronted his Honour in the Full Court were issues of fact.  There was a great deal of material that radiated outwards from the disconformity between the facility letter and the facility agreement, which generated the litigation.  One matter that may be noted merely in passing is that the trial judge regarded this conformity as unintentional, at least on the part of the bank officer primarily concerned in the transaction.  Centrally, his Honour found the participants in the transaction would have signed the documents anyway, inasmuch as the bank would have, if it had noticed the disconformity itself, have amended the documents readily, and even if it had not ‑ ‑ ‑

KIRBY J:   That includes the guarantees and the mortgages?

MR COLES:   The guarantors would have signed and, indeed, the guarantors did not themselves rely on the contravening conduct.  So, in our respectful submission, the only issue put forward is the question of damages.  His Honour assessed damages pursuant to section 82.  It is not correct, in our respectful submission, that that left some remaining territory of residual and unsatisfied claim that could only be given effect to by annihilation of the guarantee documents.  Rather, in fact, the contrary is true.  Section 87, we would submit, as his Honour found in the Full Court appears to have agreed, operates according to its terms.  That is to say, orders may be made under that section where it is appropriate to compensate the applicants for loss or damage or to prevent or reduce loss or damage.  His Honour accomplished that task by identifying some damages under section 82, and no unremaining, unexplored, or unsatisfied territory has been identified.  The only point that is put is that the applicants in the representative proceedings were disappointed in their expectation that they might be able to avoid the guarantees and the transaction of documents in their entirety.

That brings me, if I may, your Honours, and I move straight to it, to my own application.  Yours Honours’ attentions would not ordinarily be readily engaged on issues of costs, given the generally discretionary nature of the issues involved.  Let me say at the outset, your Honours ‑ ‑ ‑

KIRBY J:   Is this a defensive appeal, or ‑ ‑ ‑

MR COLES:   No.

KIRBY J:   It was a separate application, was it?

MR COLES:   No.  It is a substantive matter of its own, your Honour, and was filed as such.  There are really two issues in our own application relating to costs.  The first of which is one which raised issues of substantial novelty and importance, we contend and, curiously, it is, in once sense, of greater practical importance than the second issue, even though it concerns as its subject matter the question of a stay.  That is to say, a stay of the execution of some costs to which Mr Metcalfe, the representative applicant ‑ because these were representative proceedings, we think the first of their kind under the amendments to the Federal Court Act, and an order for some costs was made in favour of Mr Metcalfe at the same time, of course, as these proceedings were commenced.  They had already been commenced in the commercial division of the Supreme Court, a claim by the bank against Mr Metcalfe and some others, for a very much larger sum of money, in the order of at least $15 million.  In a sense, directly, these proceedings which were commenced representatively in the Federal Court of Australia were themselves defensive proceedings which led to the bank’s own proceedings for recovery being transferred or cross-vested to the Federal Court and stayed pending the termination of the representative proceedings.  The result has been that the bank has been, in effect, unable to prosecute its own claims against the guarantors for about five years past.  Before Justice Sackville, who made an order in favour of Mr Metcalfe for some costs ‑ ‑ ‑

KIRBY J:   The result of that order of stay was there were two discrete proceedings; one stayed, one proceeded.

MR COLES:   That is right.  Can I invite your Honours’ attention to what Mr Justice Sackville did?  He acceded to the justness of the contention that there must be a stay of the costs order.  Would your Honours look at page 198, which contains his Honour’s ruling, drawing together some threads of some previous observations his Honour had made.  At the letter 17 his Honour says:

I confirm the view tentatively expressed in my earlier judgment, that the costs order should be stayed. Section 43 (1A) of the Federal Court of Australia Act 1976 provides that, subject to certain specified exceptions, the Court may not award costs against a person on whose behalf the proceeding has been commenced (other than a party who is representing such a person. Thus the costs award is made in favour of Mr Metcalfe as the applicant representing himself and other parties.

In the guarantee proceedings NZI Capital has claimed a sum in excess of $15 million against Mr Metcalfe.  A similar claim has been made against Mr Poignand, who was previously the applicant in the representative proceedings.  The guarantee proceedings also raise the issue of the extent of Ripoll’s indebtedness ‑

and he then goes to say:

I think that the enforcement of the award of costs made by me should await the conclusion of the guarantee proceedings.  Depending on the outcome of those proceedings, it may be that it will be appropriate to offset the costs orders made in the course of those proceedings against the orders made by me.  In any event, it seems to me that the early enforcement of the costs award in the present proceedings, independently of the outcome of the guarantee proceedings, could work injustice to NZI Capital by reason of the procedural circumstances for which it is not primary responsible.

Those procedural circumstances, your Honours, of course relate to the stay of NZI’s own proceeding while the representative proceedings were being determined and, in effect, the consequent inability of NZI - it had to have a judicial determination in its favour, if it were entitled to one, as to an amount that might be due by Mr Metcalfe, the applicant.  The Full Court dealt with the matter shortly at page 229, if your Honours please.  They said there:

The remaining matter in the appeal relates to a stay order, which the trial Judge granted on the basis that the only orders made in favour of the applicant were the award of damages to Ripoll and the costs orders.  Since a much larger sum was claimed by the respondents in proceedings yet to be heard, his Honour took the view that a stay should be imposed until the ultimate set‑offs could be ascertained.  Under the circumstances as they then appeared, that was plainly appropriate.

And this is the kernel of what their Honours saw as appropriate:

But the appellant has now achieved relief under s. 87, as well as the award of damages, and the s. 87 relief extends to represented parties against whom no claims are presently outstanding.  In that situation, it is proper that the costs, awarded against two parties each of whom has been proved to have been guilty of seriously misleading conduct so as to require grants of quite extensive relief, should be paid without delay, notwithstanding that one of those parties so found liable may later recover, against some only of the represented parties, sums of money in proceedings presently on foot.

What their Honours are referring to there is, in short, this:  they are saying that 87 relief has now been provided more extensively than the trial judge declared.  What that involved was simply, as your Honours will see on page 233, a declaration that the liabilities of the guarantors and, for that matter, the mortgagor, guarantors and the group members, should be themselves limited to the extent of the limited amount deducted from, or ascertained as Ripoll’s own entitlement.

The result, of course, was to reduce Ripoll’s liability to the bank of some $15 million by about $450,000, and their Honours are simply saying that the guarantors and unit holders should be afforded the same concession if their liability to the bank in the sum of at least $15 million is equally so established.  We say, your Honours, that although this is a matter of discretion, of course, there is to be discerned, if one looks at the costs provisions in the Federal Court of Australia Act and, in particular, those provisions dealing with the costs position in these novel representative proceedings, a significant error of principle.  I will identify that in just a moment.

In addition to that error of principle, and, of course, the circumstance which thereby justifies a grant of special leave, is a significant injustice to the applicant, which has substantial claims against Mr Metcalfe, in being obliged to pay him the costs of something like 28 days worth of hearings when its own claim against him ‑ ‑ ‑

KIRBY J:   But is this not an attempt to revisit, in this Court, the staying of those proceedings?  I mean, you had your chance to argue that you should have had the issue dealt with earlier, but a discrete issue was litigated; it was litigated fiercely; you lost, and why should you not have to pay the costs?  At least it is a discretion that could be exercised that way.

MR COLES:   Of course, the trial judge exercised his discretion in our favour.  The Full Court, in our respectful submission, committed an error of principle in interfering with that discretion in a way which I will - and I put aside completely as not of itself sufficiently special to mention ‑ ‑ ‑

KIRBY J:   Did they increase the percentage that was recovered?

MR COLES:   That is a separate matter, but, they did, yes.  They increased it from 60 per cent to 80 per cent.

KIRBY J:   That is right.

MR COLES:   But that is a separate complaint which, on its own, would not, we concede, justify any attention by this Court.  That probably, although we complain about it, is not the kernel of our complaint. 

TOOHEY J:   It is not just matters of discretion that we are concerned with, really, is it?  These are procedural questions.  I know you say that you will point to an error principle, but it is a bit difficult to do that, is it not, in the area of costs and when costs should be paid and by whom they should be paid?

MR COLES:   The error of principle is to indicate that because the representative persons, who have no liability for and no entitlement to costs, should be taken into account in the question of whether a stay in favour of Mr Metcalfe should or should not be granted.  Mr Metcalfe is the only person entitled to costs and, indeed, the only person who is liable to costs.  The Federal Court have injected in these novel representative proceeding provisions, injected in that context, the erroneous view that one is to consider, contrary, we would submit, to the general tenure of the statute itself, a need to regard the position of the represented parties, as opposed to the position of the representative party.

This, we suggest, your Honours, is going to be something of importance for the future given the fact that the Federal Court of Australia Act is, of course, the only Act of its kind that expansively provides a code for the conduct of representative proceedings of this kind.

TOOHEY J:   It is not unknown, is it, Mr Coles, for courts to make particular orders for costs in relation to specific issues and direct that those costs be paid, even while the litigation is on foot and may continue for some time?

MR COLES:   Yes. But we would point, your Honours - one needs to see this, we submit, not merely in general terms as to the ordinary discretionary features that relate to the award of costs, but to the particular provisions and their consequences that ordain and regulate the conduct of these representative proceedings. The provisions that are relevant are, shortly, these: section 43(1A) of the Federal Court Act, of course, exempts a represented person, as opposed to the representative of those persons, from liability from costs to the bank.  So that, in a sense, what the Full Court has done in taking into account the represented’s position is to arguably confer in their favour an advantage which they could never have asserted otherwise, and confer against the bank a liability to which it is not statutorily subject.

More importantly, section 33U provides that where you have this sort of situation, where Mr Metcalfe is a representative applicant and proceedings are also brought against him by the other party, then the court may order a stay of execution in respect of any relief awarded to the representative until the bank’s proceedings, in effect, are determined.  That is the major statutory expression governing the topic, and we would submit that as a matter of principle the purported discretion involved in the word “may” is plainly enough one of those discretions which, in the interests of justice, would ordinarily constrain the exercise of the jurisdiction unless there were compelling features to indicate the contrary.

In this case, not only were there not compelling features to indicate the contrary, there were compelling features to indicate that the discretion ought to be exercised because of the over‑reaching claim by the bank against Mr Metcalfe and, of course, the very great size that had been chalked up in costs in the meantime.

Of course, the last section to which we would add a reference is section 33ZG which, in general terms, disentitles a represented person to any consideration for costs without leave of the court, where the situation arises that the representative person is insufficiently indemnified for any order of costs to which he may be entitled by the unsuccessful party.  In other words, a represented person under this representative form of action has no recognised right of indemnity - I am sorry, I have put that badly.  There is no apparent right of indemnification on the part of the representative against the represented and, if he wants something out of what the represented have got, he has got to apply to the court for leave to extract it from any award of damages which the represented group may have established an entitlement to.

In our respectful submission, your Honours, it is a plain case of the Full Court interfering with the exercise of a discretion at first instance on a wholly erroneous principle; that is to say, by taking into account an entirely extraneous consideration, the extraneous consideration being simply the supposition that the class of unit holders recognised as afforded some relief may, themselves, have some notional interest in the costs order to which only Mr Metcalfe would be entitled to enforce.  In that respect, there was not before the Federal Court, either at appeal level or below, the slightest skerrick of evidence that these unit holders, as opposed to Mr Metcalfe

himself, had put any moneys forward into the representative litigation, or otherwise had any agreement or arrangement with Mr Metcalfe for indemnifying him.

In our respectful submission, for the Full Court to take into account, in removing the stay which Justice Sackville had granted, the fact that represented persons had been the subject of some grant of relief was, in the statutory context I have described, a wholly erroneous and grossly unfair situation.  If your Honours please.

DAWSON J:   Thank you, Mr Coles.  Mr Hamilton, you have a right of reply but the Court does not wish to hear you in relation to the costs or the stays.  You have a right to reply, of course, in relation to your own application.

MR HAMILTON:   I have nothing to say in reply.

DAWSON J:   These cases are an unsuitable vehicle in which to consider the point under section 87 of the Trade Practices Act which the applicant in the second matter seeks to raise.  Otherwise, no point of special importance arises in either matter which would justify the grant of special leave to appeal.  Special leave to appeal is accordingly refused.

AT 11.17 AM THE MATTER WAS CONCLUDED