Pirie Street Stage 1 P/L v Trotman & Anor and Stewart & Ors
[2015] SADC 123
•26 August 2015
DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
PIRIE STREET STAGE 1 P/L v TROTMAN & ANOR AND STEWART & ORS
[2015] SADC 123
Judgment of His Honour Judge Beazley
26 August 2015
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH
EQUITY - GENERAL PRINCIPLES - UNCONSCIONABILITY, UNCONSCIONABLE DEALINGS AND OTHER FORMS OF EQUITABLE FRAUD
Contract for sale of office suites 'off the plan' in a commercial development - settlement anticipated to occur approximately 2 years after contracts for 3 suites executed - and upon completion of the construction work - defendants/purchasers refused to settle - proceedings brought by plaintiff/vendor against defendants for damages for breaches of contracts - defendants brought third party proceedings against alleged agents - whether the defendants were clients of the third parties - third parties appointed by plaintiff/vendor to introduce potential purchasers for which they would be paid a commission - whether third parties received a 'secret' commission - whether third parties obliged to give investment advice to defendants - whether any investment advice given by third parties to the defendants - if so, whether advice appropriate for respective needs of the defendants - whether third parties encouraged the defendants to purchase the office suites - whether third parties agents of the plaintiff and/or the defendants - third parties obtained commissions from the vendor/plaintiff - whether secret commissions - whether fiduciary duty owed by third parties to the defendants - if not agents of the defendants, whether third parties made negligent misstatements to them - whether unconscionable conduct - unconscionable conduct at common law - meaning of conduct which is unconscionable - consideration of legislative indicia of unconscionable conduct - whether the defendants were under a special disability - whether conduct of the plaintiff or its intermediatries unconscionable in contravention of s 51AC of the Trade Practices Act (1974) (Cwlth) or Division 2 of the Fair Trading Act (1987) SA - whether investment advice acted upon by the defendants - whether defendants affirmed the contracts - whether losses sustained by the plaintiff in consequence of breaches by the defendants in failing to settle on the purchase of 3 office suites - whether plaintiff bound by purported election to invoke one of two alternative contractual remedies available to it upon the default of the defendants - relevance of global financial crisis.
AGENCY - whether a Corporation which 'referred' its clients as potential purchasers to the vendor acted as the agent of the vendor in relation to those transactions. Indicia of agency - requirements for liability of agent or sub agent to be imputed to agent's principal - scope of alleged agency - whether fiduciary duty owed by third parties to the defendants - whether proper disclosure made by the third parties of their commission agreement with the plaintiff.
TRADE PRACTICES - misleading or deceptive conduct - whether false or misleading statements made to the defendants - whether statement made to induce the defendants to invest in office suites - whether representors agents of the plaintiff/vendor - whether representations as to a future matter.
Trade Practices Act, 1974 (Cwlth) ss 51A, 51AC, 52, 53 and 84; Fair Trading Act, 1987 (SA) ss 56, 57, 58 and 59; Australian Securities and Investments Commision Act, 2001 (Cwlth); Corporations Act, 2001 (Cwlth) ss 1041E, 1041I and 1325; Misrepresentation Act 1972 (SA), referred to.
FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45 ; Perpetual Trustee Co Ltd v Burniston (No2) [2012] WASC 389; Lintrose Nominees Pty Ltd v King [1995] 1 VR 574; King v Lintrose Nominees [2001] VSCA 140; Quickfund (Aust) Pty Ltd v Prosperity Group International Pty Ltd [2013] FCAFC 5; Perpetual Trustees Victoria Ltd v Burns [2015] WASC 234; Gel Custodians Pty Ltd v Dewar [2014] WASC 177; Mirvac (Docklands) Pty Ltd v La Rocca [2006] VSC 48; Price v Powers [2005] WASC 154; HSBC Bank Australia Ltd v Mavaddat [2015] WASC 153; Selig v Wealthsure Pty Ltd [2015] HCA 18, and [2013] FCA 348; Molinara v Perre Bros Lock 4 Pty Ltd [2014] SASCFC 115; Vetesse v Kemp (2000) 77 SASR 53 at 64; NMFM Property Ltd v Citibank (No 10) (2000) 107 FCR 270; Campbell v Backoffice (2009) 238 CLR 304; Pappas v Soulac (1983) 50 ALR 231; Garcia v National Australia Bank (1998) 194 CLR 395; Agricultural & Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570; Micarone v Perpetual Trustee (1999) 75 SASR 1; Secure Funding Pty Ltd v Egan (2015) NSWSC 340; Tonto Home Loans Aust Pty Ltd v Tavares [2011] NSWCA 389; Landa v Perpetual Trustees Victoria [2013] NSWSC 1685; Petersen v Moloney [1951] 84 CLR 91; Perpetual Trustees Victoria Ltd v Xiao [2015] VSC 21; International Harvester Co of Australia Pty Ltd v Carrigans Hazeldene Pastoral Co (1958) 100 CLR 644; Violet Home Loans Pty Ltd v Schmidt [2013] VSCA 56; Prosperity Group International Pty Ltd v Queensland Communication Co Pty Ltd [2003]; General Newspaper Pty Ltd v Telstra Group [1993] FCA 473; Google Inc v ACCC [2013] HCA 1; Toll v Alphapharm [2004] 219 CLR 165; Mark Bain Constructions Pty Ltd v Avis [2012] QCA 100; Chew v Amanatidis [2009] SASC 334, considered.
PIRIE STREET STAGE 1 P/L v TROTMAN & ANOR AND STEWART & ORS
[2015] SADC 123Introduction
This is a claim, by a developer/vendor, for damages against brother and sister investors who contracted, in 2007, to purchase three office suites for a sum in excess of $1.4 million, but defaulted upon settlement in 2009.
The genesis of the subject proceedings,[1] is the marketing, in 2007, of a multi-storey strata office development, proposed to be constructed at 147 Pirie Street in the Adelaide CBD, and to be known as ‘Aurora on Pirie’ (‘AOP’).
[1] See Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7 at [35], where it was said that an 'appreciation of the commercial purpose or object [of an arrangement] is facilitated by an understanding of the genesis of the transaction, the background, the context [and] the market in which the parties are operating'.
There can be no doubt that in 2007, it appeared to be an exciting time to invest in commercial property in South Australia.
Amongst the marketing documents tendered at the trial was a ‘facts sheet’,[2] which relevantly described the ‘AOP’ as:
A $210 million project and is one of the largest developments being undertaken in Adelaide’s CBD. It involves the construction of two towers with construction due to commence in February 2008.
… The first tower will be a strata office tower, whereas the second tower will be pre-leased to major corporations and sold at completion in a single transaction for in excess of $100 million.
The development will result in a world class commercial development in this unique prime CBD location adjacent to Hindmarsh Square. During the 6 months to January 2007 … as the State moves into its resources boom, a flow on effect is seeing increased demand from engineering and mining groups seeking project space … the Adelaide office market is currently riding a wave of success buoyed by the mining industry’s recent activity.
Expansions by companies such as BHP Billiton and Santos are having immediate impacts on leasing activity … the Property Council of Australia also confirmed that the Adelaide core office market posted its lowest vacancy level on record …
The Property Council Report goes on to state that in the 6 month period to January 2007 the take up of office space was 900% higher than the Adelaide core market’s 15 year average. The Adelaide market has shown it represents a solid investment opportunity.
[2] Ex P 1.3A.
In the subject case in or about October 2008, what was called the ‘Global Financial Crisis’ adversely affected developments in South Australia. There cannot be any dispute that by October 2008, ‘banks had different lending policies, and valuers were being more cautious and conservative in their valuations … in respect of the ‘AOP’, prices were harder to achieve from original purchase prices’.[3]
[3] TP 58.
The Courts in various States of Australia have been inundated with actions arising out of losses incurred by investors in consequence of the ‘Global Financial Crisis’.[4]
[4] Perpetual Trust Co Ltd v Burniston (No 2) (2012) WASC 383. Landa v Perpetual Trustees Victoria [2013] NSWSC 1685; and Tonto Home Loans Australia v Tavare [2011] NSWCA 389.
Many of those cases involved the practice whereby developers would approach accountants, financiers, finance brokers and real estate firms inviting them to refer potential purchasers of the developer’s property. The benefit for the developer was that the potential referree would be assessed by the referring firm as a person of substance. This saved time and money for the developer. The benefit for the referring firm is the payment to it of a commission by the developer.
Such a practice however has risks. The referrer’s interest is to receive a commission. Depending on the circumstances, the referring firm may be placed in a conflict of interest having to choose between the developer from whom it is seeking a commission, and its duty to its client, whom it has referred to the developer.
In Lintrose Nominees Pty Ltd v King,[5] the Court of Appeal (Vic) said, at [576]:
The (developer) could not properly sell its property through its agent, knowing that the agent was retained to advise the purchaser, without knowing also that the dual allegiance of the agent was disclosed to the purchaser.
[5] (1995) 1 VR 575.
Amongst other risks are that the referrer may misrepresent aspects of the development, which representations induce the referred party to enter into a contract of purchase of the developers property. This raises the question as to whether the developer is liable for misrepresentations by the referring firm.
Such cases involve many complex issues of law, including the vexed question as to whether a fiduciary duty is owed by the referring firms to their clients, so referred; the extent of that duty, and whether the relationship between the developer and those firms is a relationship of agency.[6]
[6] Perpetual Trust Co Ltd v Burniston (No 2) (2012) WASC 383; Perpetual Trustee Victoria Ltd v Burns [2015] WASC 234; Gel Custodians Pty Ltd v Dewar [2014] WASC 177; Mirvac (Docklands) Pty Ltd v LA Rocca [2006] VSC 48; King v Lintrose Nominees [2001] VSCA 140; Permanent Mortgages v Vandenbergh [2010] WASC 10; Permanent Trustee Co v O'Donnell [2009] NSWSC 902; Permanent Trustees v Schmidt [2010] VSC 67.
The authors of Bowstead and Reynolds on Agency (19th Ed) describe such referrers or introducing agents as an ‘incomplete agency … who are on the fringe of the central agency principles used by the common law since their powers to alter their principal’s legal relations are at best extremely limited’.
The subject action raises some of these issues. It is further complicated by the corporate structure of the referring firm and whether the referred party was a client of the referring firm or some other albeit, associated, entity.[7]
[7] Prosperity Group International Pty Ltd v Queensland Communication Co Pty Ltd (No 3) [2011] FCA 1122.
In Perpetual Trustee Co Ltd v Burniston (No2),[8] in respect of a claim based upon loans to investors, Edelman J, in a very detailed judgment, analysed the principles of law, noting:
In the years following the Global Financial Crisis, Courts have seen numerous cases involving alleged misrepresentation and other legal wrongdoing which were not exposed until defaults occurred … a common structure in cases which have reached the Courts involve a [vendor] appointing an [intermediatory] whose function is to introduce [prospective purchasers] to the vendor.
The intermediatory sometimes appoints a sub-intermediatory. If either the intermediatory or the sub-intermediatory engages in unlawful conduct, then a host of legal issues arise.
Are the vendor and the intermediatory responsible for the conduct of the sub-intermediatory? Is the sub-intermediatory an agent of the vendor or of the investor? Is the vendor independently liable to the investor? Is the sub-intermediatory liable only to the vendor? What relief is available?
Different results have been reached in different cases because … of different transaction documents, different facts, and because some States have different legislation … the central issues involve difficult questions of Agency and vicarious liability. These concepts and their interrelationship remain unsettled in some respects.
[8] [2012] WASC 383 at [1]-[8].
In Tonto Home Loans Aust Pty Ltd v Tavares and Others,[9] the Court of Appeal (NSW) similarly detailed the relevant principles, and the risks faced by all parties by the practice involving developers and referring firms.
[9] [2011] NSWCA 389.
It concerned the approval of loans to individuals who, under no circumstances could afford to repay the instalments. Those making the loans were only concerned with the making of the loans and did not care about whether the borrowers could repay them. The subject case also involves the question as to whether there is a duty upon an ‘agent’ of a vendor of real estate to fully assess the financial capacity of an individual purchaser to purchase that property.
Brief overview of the parties and the background to the subject proceedings
Pirie Street Stage 1 Pty Ltd (‘the plaintiff’) was, relevantly, the vendor of the strata office suites to be constructed in the first tower of the ‘AOP’.
Wesley Trotman (‘the first defendant’) and Leticia Delmenico (‘the second defendant’) are brother and sister investors. The first defendant had invested in one previous commercial property development, (‘The Greencroft Property’); and the second defendant had operated a manufacturing business in Victoria. To borrow from the judgment in the Tonto Home Loans case, supra, ‘they were neither sophisticated nor naïve in financial matters’. At all relevant times they knew what it meant to enter into an unconditional contract for the purchase of real estate, and the consequences of default.
Neither of them had any knowledge of the ‘AOP’ until the month of November 2007. At that time both defendants were contemplating changes in their respective employment, and were concerned about their futures. The first defendant made the decision to speculate in the ‘AOP’ strata office development, and encouraged the second defendant to be involved in some form.
The first defendant had employed the services of a mortgage broker in respect of the Greencroft Road property in 2006. He assumed that that mortgage broker, ‘Nap Finance SA’, was a member of a group of companies referred to as ‘The Nap Group’.
The question as to whether ‘Nap Finance SA’ was, in fact, a member of that group, or merely had a loose association with ‘The Nap Group’, was in issue in the trial.
Various parties, joined by the defendants as third parties, were alleged to be members of ‘The Nap Group’. Those third party proceedings were brought by the defendants against Nathan Alan Stewart (‘the first third party’); Property (Aust) Pty Ltd (‘the second third party’); The Nap Group Pty Ltd (‘the third third party’); and JBL Enterprises (SA) Pty Ltd (‘the fourth third party’). There was a great deal of confusion as to what entities did in fact constitute ‘The Nap Group’ at relevant times.
‘JBL Enterprises (SA) Pty Ltd’ was placed into liquidation, and deregistered prior to trial. It filed no pleadings, and took no part in the proceedings.
In respect of the other parties, and in particular the defendants and the third parties, there were undoubtedly some shortcomings in the pleadings, because of the confusion as to ‘The Nap Group’. The defendants treated each of the third parties as, in effect, one entity, rather than as agents or sub agents of the others.
By way of example, in their defence to the third party proceedings, the first, second and third third parties pleaded that ‘The Nap Group Pty Ltd’ had ‘acted as the mortgage manager for the Greencroft Road property for the first defendant.[10]
[10] Third Party Defence, paragraph 5(c).
At the trial, however, there was evidence that, in fact, the fourth third party, ‘JBL Enterprises (SA) Pty Ltd’ had acted for the first defendant in respect of that transaction, and not ‘The Nap Group Pty Ltd’. As it transpired, the respective counsel for each of the parties addressed the Court on all issues, irrespective as to whether the issues had been adequately pleaded.
There was however no dispute that prior to the execution of the three contracts by the plaintiff and the defendants, in December 2007, ‘The Nap Group Pty Ltd’ had entered into an agreement with the plaintiff, which entitled it to receive a commission from the plaintiff for introducing potential purchasers of suites in the ‘AOP’.
The defendants assert, inter alia, that they were induced to enter into the three contracts by a series of misrepresentations allegedly made by the plaintiff, and/or its alleged agents, referred to by the broad description ‘The Nap Group’.
As against ‘The Nap Group’, the defendants assert that in consequence of the previous occasion when ‘they’ had acted for the first defendant, ‘The Nap Group’ was obliged to provide both defendants with financial advice as to their respective purchases of the office suites, and had failed to do so.
The defendants also assert that the third parties owed the first defendant, and by extension, the second defendant, a fiduciary duty to avoid placing themselves in a conflict of interest with the interests of the defendants. They assert that ‘The Nap Group’ breached their duties to them, so that instead of protecting them from an imprudent investment, they encouraged the defendants to contract for the purchase of the three office suites.
On 4 December 2007, and 7 December 2007, the first and second defendants, respectively, executed Contracts, in their joint names, for the sale and purchase of two office suites, namely suite 502A, together with one car park for the sum of $444,290 inclusive of GST, and suite 502B for the sum of $340,890 inclusive of GST. The said Contracts were executed by the plaintiff, as vendor, on 11 December 2007.
As is plain, the total price payable, for those two office suites at settlement, was $785,180.
Settlement was not anticipated to occur until the month of August 2009, and accordingly they made no application for finance prior to executing those contracts. Neither contract was subject to a special condition as to the obtaining of finance.
The question as to whether the defendants had the financial capacity to borrow sufficient funds to settle upon those two office suites, either in 2007 or 2009, was not specifically canvassed at the trial. This was because within a further 7 days, the defendants elected to purchase a third, and a much more expensive office suite.
On 13 December 2007, a Contract for the sale and purchase of that third office suite, being Suite 502C, in the sum of $626,890 inclusive of GST was executed by the plaintiff as vendor, and by the first defendant.
On 18 December 2007, the second defendant executed the contract for the third suite.
The total of these purchases then stood at $1,412,700. In addition to the total purchase price, the defendants would have been liable to pay stamp duty and other expenses at settlement. Again no application for funding was made by the defendants prior to executing this third contract. It was unclear, on the evidence, whether the defendants had turned their respective minds, in December 2007, as to what their financial position was likely to be in August 2009.
Amongst the issues in the trial was why it was that the defendants had elected to purchase that third office suite.
There was some evidence to suggest that they had considered the prospect of on selling one or two office suites prior to settlement in 2009.
The second defendant asserts that she was merely ‘named’ as a joint and several purchaser of the three office suites, and that, to the knowledge of the plaintiff, she was not to be liable for the purchase price.[11]
[11] Google Inc v ACCC [2013] HCA 1; Toll (FGCT) Pty Ltd v Alpha Pharm Pty Ltd (2004) 219 CLR 165.
Each contract for the sale and purchase of the office suites, obliged the defendants to pay a deposit, either in cash or by the provision of a bank guarantee.[12]
[12] Ex P1 - 8, special condition 16.1.
In any event, after the cooling off period for all three contracts, cash deposits totalling the sum of $128,370.00, were paid by the defendants as follows:
·the sum of $30,990 deposit for suite 502B on 16 January 2008,
·the sum of $66,390 deposit in respect for suite 502C on 17 January 2008,
·the sum of $40,390 deposit for suite 502A on 21 February 2008.
In February 2008 there were some variations to the respective contracts for suites 502A and 502C. There was no variation to the contract for suite 502B.
On 25 February 2008, the defendant executed a variation of the contract for suite 502A so as to remove the car park attached to it. This reduced the purchase price by $93,500 to $350,790, with the deposit to be reduced by $8,500 to $31,890.
On the same day the defendants executed a variation of the contract for suite 502C so as to include a car park.
This had the effect of increasing the purchase price of suite 502C by $93,500 to $720,390, and the deposit by $8,500 to $65,490.
After credits and debits had been made in respect of the varied deposits, it is not in dispute that the defendants had overpaid the varied deposits by the sum of $900.
A question which arises from the execution of the variations to the contracts, is whether the defendants thereby affirmed the contracts despite the alleged misrepresentations.
The defendants assert that they did not at any time have the capacity to fund the purchase of all three office suites, in that total sum of approximately $1.4 million. They also assert that their financial circumstances were well known to the plaintiff and its agents, the third parties. An evidentiary problem facing the defendants is that they did not apparently, at any stage, apply for loans to enable settlement to take place on the contracts. I say ‘apparently’ because there was only an oblique reference to a ‘confirmation by the Commonwealth Bank and other financial brokers’, in the termination letter forwarded by their solicitors on 14 July 2009.
Mr Trotman acknowledged that he became aware of the ‘Global Financial Crisis’ in late 2008 and 2009, and that it may have an adverse affect upon his employment at ‘GMH’. He said that there was a discussion at ‘GMH’ about possible lay-offs. He said that he had ended up taking a package because of it, effective from 11 December 2009.
In early 2009, about 6 months prior to the time anticipated for settlement the first defendant informally approached Keith Chandler. Mr Chandler had previously acted as the mortgage broker for the first defendant, in respect of the Greencroft Road property. At the completion of that transaction in 2006, the relationship between the first defendant and Mr Chandler was simply a friendship. Mr Chandler, in March 2009, informed him that, in light of the then lending arrangements of the banks, and the fees and other charges payable at settlement, that there was ‘little chance’ of the defendants obtaining sufficient funds to enable settlement to proceed.[13]
[13] TP 481.
Mr Trotman deposed that no affordability exercise was carried out by or on his behalf before the contracts were signed. He said that had one been carried out as to his financial capacity to purchase the office suites, he would have realised that he could not have paid the deposits and the purchase price. He said that he would not have entered into any of the contracts of purchase,[14] or implicitly would have exercised his rights under the cooling off provisions.
[14] TP 170.
On 3 April 2009, the first defendant informed the plaintiff by letter to an associated entity, ‘Pirie Street Management (Pty Ltd)’, that the defendants did not intend to ‘affirm’ any of the three contracts. On 14 July 2009 the defendants’ solicitors confirmed by letter to the plaintiff that the defendants would not settle on any of the contracts.
Mr Trotman denied that he decided not to ‘affirm’ the contracts because of the ‘Global Financial Crisis’. He deposed that his decision was based upon the information that he had received about the prospects of obtaining a loan, and the alleged misrepresentations made by the plaintiff and the third parties.
In August and September 2009, the plaintiff served notices to settle, and to complete, upon the defendants.
The defendants refused to comply with any of the respective notices of demand so served by the plaintiff. Pursuant to the terms of the respective contracts, upon breach by the defendants, the plaintiff was entitled to forfeit the cash deposits, and to either retain the respective suites, and sue the defendants for breach of contract,[15] or alternatively resell the respective suites by public or private auction, and sue for any deficiency.[16]
[15] Ex P1.8, at clause 7.1.5.2(a).
[16] Ex P1.8 at clause 7.1.5.2(b).
An issue in the trial was whether the plaintiff, prior to commencing the subject proceedings, had irrevocably elected to pursue the former rather than the latter remedy.
In the purported exercise of its contractual remedies, the plaintiff forfeited each cash deposit and, in the subject proceedings, claimed an entitlement to pursue the latter remedy by placing each of the office suites on the market, and selling them.
The plaintiff’s claim against the defendants, after allowing for the deposits so forfeited, is for the recovery of losses incurred by it upon the resale of the respective suites.
The defendants’ non compliance with the respective breach notices and their failure to settle on those contracts, has had significant adverse financial consequences for them, in addition to the forfeiture of the cash deposits paid by them. The most significant loss claimed against them relates to the third contract.
Each of the three purchases involved stand alone contracts. Whether the defendants could have borrowed sufficient funds to settle in respect of one or two contracts was, as I have noted, not explored at trial.
The pleadings
On 23 March 2010, the plaintiff instituted the subject proceedings against the defendants claiming damages against them, respectively, for their alleged breaches of the three contracts entered into by them.
The defendants filed a Defence and Cross Claim to the plaintiff’s claim.
On 3 September 2010, the defendants filed their third party proceedings against the four named third parties. They obtained judgment, by default of appearance against the first, second and third named third parties. That judgment was subsequently set aside and the third parties filed a defence to the third party proceedings on 23 December 2010.
The respective pleadings were amended, extensively, over time.[17]
[17] The final pleadings included the plaintiff's Fourth Statement of Claim; the defendant's Second Defence and Counterclaim; and the plaintiff's Second Reply and Defence to Counterclaim.
In addition, in their final addresses, counsel for the plaintiff and counsel for the defendants, each abandoned certain allegations which had been pleaded.
Accordingly there is no utility in detailing, at length, the respective pleadings of any of the parties. It is appropriate, nonetheless, to briefly summarise the relevant pleadings as at the commencement of the trial.
It is convenient to set out a summary of the defendant’s pleadings first.
·The defendants’ pleadings
The defendants were not separately represented. There was no allegation by the second defendant that she had been treated unconscionably by her brother, the first defendant, nor that she had failed to read or had misunderstood the contracts which she had signed.
In summary the defendants assert that the first defendant was at all times a client of the third parties, such that they owed him a general duty of care to provide appropriate investment advice and a fiduciary duty, the scope of which included an obligation to avoid a conflict of interest, both of which they breached.
It must be said that the defendants’ pleading in this respect was somewhat vague. They did not specifically refer to any duty other than a fiduciary duty. This may have caused both the plaintiff and the third parties to elect not to plead contributory negligence.
As against the plaintiff they assert that it knew that the defendants were unaware that the third parties would receive commission from it. They alternatively assert that both the plaintiff and the third parties acted unconscionably in the respective transactions. They assert that the plaintiff and the third parties made representations which were misleading and deceptive, or alternatively give rise to a claim for negligent misstatement.
The defendants seek relief pursuant to the Trade Practices Act for misleading and deceptive conduct which induced them to enter into the contracts. Alternatively they allege unconscionable conduct particularly by the third parties. They assert a duty of care to warn or guard against loss. In NSW, with reference to the Contracts Review Act, some Courts have determined that loans may be unjust where they involve ‘asset lending’ to individuals who have no capacity to meet the loan commitments in certain circumstances.[18]
[18] Tonto Home Loans, supra, at [155] and Kowalczuk v Accom Finance Pty Ltd [2008] NSWCA 343.
In their second defence and counterclaim, the defendants assert that:
·They were induced to enter into the subject contracts by misrepresentations made by individuals who were allegedly in a conflict of interest. They asserted that those individuals were employed by companies within the umbrella of the ‘Nap Group’.
·‘The Nap Group’ had since 2006 and, at all subsequent material times, provided financial advice and acted as the first defendant’s finance broker, and was at all times aware of his financial position.
·The plaintiff had entered into referral agreements, in mid 2007, with companies within ‘The Nap Group’, namely ‘Nap Group Pty Ltd’, and ‘Property (Aust) Pty Ltd’, which entitled them to receive commissions from the plaintiff for referring their clients who thereafter purchased the plaintiff’s properties.
·‘The Nap Group’ was the plaintiff’s selling agent, retained by the plaintiff to secure, for a fee, purchasers for its office suites in the ‘AOP’ development. [The essence of this pleading was that ‘The Nap Group’ was not merely a referring agent but, was, in effect a selling agent].
·The plaintiff expected that ‘The Nap Group’ would encourage clients of ‘The Nap Group’ to invest in the ‘AOP’ development so as to become entitled to a commission.
·Neither the plaintiff nor ‘The Nap Group’ told the first defendant that ‘Nap Group’ was entitled to a fee from the plaintiff in respect of any suite sold to a person referred by ‘Nap Group’
·The plaintiff authorised ‘The Nap Group’ to make financial and investment representation as to the ‘AOP’, to its clients, including the first defendant. Accordingly the plaintiff is bound by the pleaded misrepresentations made by the ‘The Nap Group’ in breach of its fiduciary duty to the first defendant.
·‘The Nap Group’ was ‘obliged’ to inform the defendants as to the total cost of their purchases including the stamp duty payable by them; the total deposits; the costs incurred in obtaining a bank guarantee in lieu of a cash deposit; the short fall in so far as a financier decided to fund only 75% of the purchase price on mortgage.
·‘The Nap Group’ acted in a conflict of interest in purporting to assist the defendants while acting for the plaintiff.
·‘The Nap Group’ made the following representations to the defendants:
· (1) At a seminar organised by ‘The Nap Group, that the ‘AOP’ was ‘an exceptional commercial property investment opportunity’.
· (2) That one of the benefits of the first defendant investing in the ‘AOP’ was that ‘it provided superior tax incentives and deductions’.
· (3) That a ‘Nap’ employee, Jennifer McNamara, told the first defendant that she could arrange a bank guarantee for the first defendant which meant that the first defendant would not need to pay a deposit of 10% of the purchase price.
· (4) That Jennifer McNamara told the first defendant that there was sufficient equity in the first defendant’s home and his Hunter Crescent investment property to obtain a bank guarantee.
· (5) That Jennifer McNamara told the first defendant that with his equity in his home and investment property the first defendant would have no difficulty in obtaining finance for the purchase of the first two office suites numbered 502A and 502B.
· (6) That Jennifer McNamara told the first defendant that the second defendant could be named as a purchaser on the first two contracts and be a part owner of the office suites without having to make any payments or have any financial responsibility for the contracts.
· (7) That Brian Rudd told the first defendant that as the Greencroft Road property had been sold, it was a good opportunity for him to recoup his losses on that development. Ms McNamara told the first defendant that she believed that his equity in his properties would enable him to look at buying two additional suites.
· (8) That after the first two contracts were signed, but before the cooling off period, Jennifer McNamara told the first defendant that both she and the first third party believed that there should be no problem with the first defendant being able to afford at least one more office.
· (9) That Nathan Stewart told the first defendant by telephone that the first defendant should ‘go for it … we are going to make a lot of money, and that he, Nathan Stewart, would cover any short fall’,
The defendants assert that the first defendant told the second defendant the effect of each of the above 9 representations, and that each of them relied upon those representations in either executing each of the contracts of purchase in December 2007, or alternatively not exercising their cooling off rights.
There was however no pleading that insofar as the second defendant relied upon misrepresentation by the first defendant, that the plaintiff and third parties ought be liable. See Gregg v Tasmanian Trustees.[19]
[19] (1997) 143 ALR 328.
At trial, the defendants very properly abandoned the above representations numbered 1 and 2. On any view, even if so represented, they were mere ‘puffery’. In General Newspapers Pty Ltd v Telstra Corporation,[20] the Court said:
In the ordinary course of commercial dealings, a certain degree of ‘puffing’ is to be expected. Indeed puffery is part of the ordinary stuff of commerce.
[20] (1993) 45 FCR 164.
In any event it was not established that such representations were untrue.
The defendants assert that following the termination of the respective contracts, the plaintiff irrevocably elected to retain ownership of the 3 suites, thereby limiting its claim to the difference between the respective contract prices and the market value of those suites at the time that notice was given to the defendants’.
They asserted that the plaintiff could not, at law, ‘re-elect’ so as to claim by reference to the actual sale prices, achieved by the plaintiff.
Given the state of the evidence as to the difficulty in selling office suites in the ‘AOP’ following the ‘Global Financial Crisis’, the defendants also properly abandoned the pleading that the plaintiff had failed to mitigate its losses.
At trial the defendants cross claimed against the plaintiff, inter alia, for a declaration that the three contracts are void and unenforceable, and that the deposits be returned to them with interest.
As against the first, second and third third parties, in effect, the defendants raised mirror image pleadings to those pleaded against the plaintiff. They sought the same remedies against those third parties as was sought against the plaintiff, save that they also seek an order that the defendants be indemnified by those third parties against any claim brought by the plaintiff against them.
At trial they abandoned the claim for relief described as damages for loss of investment profit.
They also abandoned the claim brought against the first third party as aider and abettor, properly conceding that they had not established that Nathan Stewart had the requisite knowledge.
Although they did not specifically abandon a claim for exemplary damages, no submission was made as to such a claim. In my opinion even if the defendants succeed in their principal claims, there could be no basis for an award of exemplary damages.
·The plaintiff’s pleadings
The plaintiff set out the terms of the respective contracts, detailing the alleged breaches by the defendants, and the remedies available to it under the contracts.
It pleaded that each contract was terminated on 18 September 2009 in consequence of the default of the defendants in failing to settle on the contracts. It asserted that pursuant to clause 7.5.1.2(b) of the contract it had forfeited the deposits, including the deposit of overpayment of $900, and had resold the respective office suites.
Save for the matters raised in their defence, the defendants did not assert that default and termination had not been proved by the plaintiff.
It pleaded that:
·It resold suite 502A on 29 January 2010 for the sum of $346,500 inclusive of GST.
There was a deficiency on sale of $4,290, and default interest until sale of $7,713.10.
The plaintiff initially asserted that it was entitled to also claim the sum of $24,091 being the rent return guarantee offered to the purchaser by the associated company ‘Pirie Street Property Management Pty Ltd’.[21] If allowed this would have resulted in a claim for the sum of $3,890 by the plaintiff after credit was given for the forfeited deposit of $31,890.
Ultimately the plaintiff abandoned the rent return guarantee claim. There was accordingly No loss suffered by the plaintiff on office suite 502A.
·It resold unit 502B on 31 March 2010 for the sum of $297,000 inclusive of GST. After giving credit for the forfeited deposit in the sum of $30,990, the plaintiff claims deficiency costs and default interest to 8 March 2013 in the sum of $18,465.61 in respect of office suite 502B.
·It resold unit 502C on 5 April 2011 for the sum of $451,000 inclusive of GST. This resulted in a large deficiency of $244,000 after giving credit for the forfeited deposit of $66,390 (which included an overpayment of $900). The plaintiff asserted a loss of $260,649.37 inclusive of default interest to 8 March 2014, in respect of suite 502C.
[21] TP 11.
In its Second Reply, the plaintiff denied each of the allegations raised by the defendants against it. It addition the plaintiff asserted that the defendants:
·had acknowledged in writing that, prior to executing the three contracts, they had been advised by the plaintiff that they should obtain independent legal and financial advice;
·did not exercise their statutory rights to cool off on each contract.
·Had affirmed the contracts by payment of the cash deposits between 16 January 2008 and 21 February 2008; and by entering into variations of the contracts for suites 502A and 502C respectively on 25 February 2008.
·The first, second and third third parties’ pleadings
The third party defence was filed prior to the defendants’ allegations in the Second Defence and Counterclaim.
To most of the allegations in the third party Statement of Claim, the third parties pleaded that the defendants’ particulars were inadequate to plead to.
Save for that plea, the third parties denied ever having provided financial advice to the defendants, and denied making any representations as alleged or at all. They asserted that they did not act as financiers in respect of the purchase by the first defendant of the Greencroft Road property; nor did they act as ‘selling agents’ for the plaintiff.
A preliminary point
In his final address, counsel for the defendants Mr Ross-Smith said:
The defendants maintain three defences to the plaintiff’s claim. The first is that the plaintiff has elected in a way that binds it and having elected it can’t re-elect. The second is connected to that, and that is having elected in the way that it has to keep ownership of the properties and sue for the difference between the sale price and the value at the time of the notice. The plaintiff has omitted to lead any valuation and prove that there was a loss occasioned on its elected suit. Thirdly, there’s the claim that we bring in misrepresentations. Those misrepresentations or misleading or deceptive conduct by NAP, that they attach to the plaintiff and the product of the misrepresentations is that the contracts are set aside on our contention. So your Honour is invited to declare them as void.
There is a money consequence for that order, and that is that my clients would have their deposits returned.
·Alleged election by the plaintiff
It is convenient that I deal now with the defendants’ submission that the plaintiff had irrevocably elected to proceed pursuant to clause 7.1.5.2(a) of the respective contracts. This is a significant issue. It is also a discrete matter of law. If the defendants are correct in their submissions then the plaintiff has failed to produce any evidence as to ‘market value’ and cannot establish any loss under that clause. The plaintiff has brought its claim against the defendants pursuant to clause 7.1.5.2(b) of the contract.
·The respective clauses
Pursuant to clauses 7.1.5 of each of the three contracts and by virtue of ‘Annexure A - Special Conditions to the Contract’, if, as in the present case, the agreement was allegedly terminated upon the default of the defendant, the plaintiff, as vendor, ‘may, at the vendor’s option, either’:
7.1.5.2(a)retain the property and sue the purchaser for damages for breach of contract; or
7.1.5.2(b)resell the property either by public auction or private contract and if the vendor resells a property and the resale is settled within 24 months from the date of termination [claim] the deficiency in price (if any) upon the resale together with all charges and expenses of and incidental to the resale or attempted resale and the purchaser’s default must immediately after such resale be paid by the purchaser to the vendor as and by way of liquidated damages (the purchaser receiving credit for any deposit paid). If the property resells at a higher price than was payable under this agreement the vendor is entitled to retain that higher price, free of any claim by the purchaser. In exercising any rights of resale, it is not necessary for the vendor to first tender a transfer to the purchaser.
The facts
By letter dated 18 September 2009[22] from the plaintiff to the defendants, in respect of each office suite, the plaintiff asserted that it had terminated each contract following the default by the defendants in attending settlement. Those letters noted that:
We hereby reserve our rights to take whatever legal action is available to us due to your default of the Contract, including but not limited to:
Exercising our right to retain the deposit paid under the contract by transferring out of trust the funds and/or by calling on any bank guarantee provided in lieu of a cash deposit and
Reserving our right to sue you for damages and reselling the suite (at your cost/and pursuing you for any shortfall in price compared to the purchase price in the contract.
[22] Ex P1.44.
By letter dated 30 October 2009 from the plaintiff’s solicitors to the defendants, the plaintiffs gave Notice that they intended to issue proceedings against them.[23]
[23] Ex P1.48.
The relevant parts of the letter in respect of office suite 502A are:
7. You failed to complete the Contract on 20 August 2009 as required by the Notice to Complete (the breach).
8. By Termination Notice dated 18 September 2009 (the Termination Date) our client terminated the Contract pursuant to its terms and called on the Bank Guarantee for reason of the breach. (this was in error as there was no bank guarantee).
9. Pursuant to its rights under clause 7.1.5.2(a) of the Contract, our client has decided to retain suite 502A and intends to sue you for damages for breach of the Contract. We are instructed that the current market value of the suite is $239,175 (the market value).
Damages
In accordance with the Contract, and in consequence of your breach our client is entitled to recover from you liquidated damages (my emphasis) calculated as follows:
1. In accordance with clause 7.1.5 of the Contract the difference in the Contract price and the current market value, being the sum of $79,725.00.
2. Default interest for 29 days being the period from the Settlement Date under the Contract until the Termination Date at the rate of 10.65 per cent on the Contract price being interest in the sum of $2,709.47.
3. Sub Total $82,434.47.
4. Less the called up Bank Guarantee Deposit of $32,651.84
5. Sub Total $49,782.63
6. Additional holding costs for 63 days being the period from the Termination Date until 20 November 2009 … being $4,802.29.
7. Sub Total $54,587.92.
8. Total sum now owing $59,345.10 (including GST).
The letter invites various questions. It refers, in error, to the bank guarantee instead of the cash deposit.
It referred to a claim for liquidated damages – which seems to be a reference to the remedy in clause 7.1.5.2(b) of the contract.
The claim for $59,345.10 in respect of suite 502A, is in contrast to the plaintiff’s claim of nil damages in respect of that suite.
In fact, despite the terms of that letter, the plaintiff had entered into a contract for the sale of suite 502A one day earlier on 29 October 2009 for the contract price of $315,000 or $346,500 inclusive of GST.
In respect of suite 502B[24] the current market value was referred to as $232,425 and the total sum owing of $58,103.44. Again by contrast the suite 502B was sold for $297,000 and the plaintiff’s claim is for the sum of $18,465.61 together with interest.
[24] Ex P1.49.
In respect of suite 502C[25] the current market value was referred to as $491,175.00, and the total sum owing of $121,232.42. Again by contrast this suite was sold for $451,000 and the plaintiff’s claim is in the sum of $260,649.37.
[25] Ex P1.50.
Mr Koutsoukos was asked whether he had any involvement in fixing the ‘market values’.
He explained that he had nothing to do with those figures nor had he had any involvement to do with these matters after the Termination Notices had gone out. He had not seen any valuations.
He said ‘that it would have been the CEO, Todd Brown and John Cavanagh working on that with all the defaults’.[26]
[26] TP 75.
Neither of those persons was called to give evidence nor were any valuations produced.
The claims by the plaintiff as at the date of the trial totalled $279,149.98. The claims as at 30 October 2009 if the values had been proved, totalled $238,680.96. When allowance is made for interest there would have been little difference.
It cannot be suggested that the plaintiff has acted oppressively.
The principles
In Agricultural and Rural Finance Pty Ltd v Gardiner,[27] the High Court explained at [56]:
In this Court, an intentional act, done with knowledge, whereby a person abandons a right by acting in a manner inconsistent with that right has been described as the ‘waiver’ of that right. But as later demonstrated, many such cases are applications of the doctrine of election between inconsistent rights. The same may be said of election between inconsistent remedies such as damages and an account of profits. … The doctrine of election is long established at common law. … If, then, something happens which gives rise to the existence of two alternative rights, and one of those rights is satisfied, the other is no longer available. A breach of contract by one party always gives the other party a right to recover damages for the breach. If serious, the breach will give the innocent party the right to treat the contract as at an end. But the innocent party need not accept the repudiatory breach and avoid the contract; the innocent party may choose to insist upon further performance. … In many cases about election, the central issue is whether an election has been made or only foreshadowed. So, for example, an election between alternative remedies in contract and in tort is not made merely by bringing one claim rather than the other. An election is not made at least until entry of judgment. (my emphasis)
[27] [2008] HCA 57.
In Tang Man Sit v Capacious Investments Limited:[28]
The law frequently affords an injured person more than one remedy for the wrong he has suffered. Sometimes the two remedies are alternative and inconsistent. The classic example indeed is an account of the profits made by the defendant in breach of his fiduciary obligations and damages for the loss suffered by the plaintiff by reason of the same breach. The former is measured by the wrongdoer’s gain, the latter by the injured party’s loss. … Faced with alternative and inconsistent remedies a plaintiff must choose, or elect, between them. He cannot have both. The basic principle governing when a plaintiff must make his choice is simple and clear. He is required to choose when, but not before, judgment is given in his favour and the judge is asked to make orders against the defendant. A plaintiff is not required to make his choice when he launches his proceedings. He may claim one remedy initially and then by amendment of his writ, and his pleadings, abandon that claim in favour of the other. He may claim both remedies as alternatives. But he must make up his mind when judgment is being entered against the defendant. Court orders are intended to be obeyed. In the nature of things, therefore, the court should not make orders which would afford a plaintiff both of two alternative remedies. (my emphasis)
[28] (1996) 1 AC 514 at 521.
In Higgins v Statewide Developments Pty Ltd,[29] Barrett J in the Supreme Court of New South Wales considered the same clauses, in a case where the vendor had failed to produce evidence of market value for a claim brought under clause 7.1.5.2(a).
[29] [2010] NSWSC 183.
His Honour said at [101] – [102]
A party seeking damages for breach of contract must prove that the party has suffered damage as a result of the breach, and the amount of the loss sustained … In this case so far as concerns the possibility of loss and detriment through reduced value of the property, the defendant has not proved that it has suffered any such loss or detriment as a result of the breach. For reasons that are unexplained (and about which one can only speculate) the defendant has produced nothing – not even evidence of market trends over the relevant period – that enables the court to conclude that … the value of the subject property at the time of breach was or even may have been less than the contract price.
Submissions
The defendants submit that in each case the plaintiff, faced with alternative remedies available to it, under clause 7.1.5.2, of the contract, had made an irrevocable election to proceed under clause 7.1.5.2. Counsel referred to the expressed terms of the letters of 30 October 2009. He submitted that this was no foreshadowing of an intention but a clear and irrevocable election. They submit that once that election was made the plaintiff was not permitted to in effect make a re-election so as to rely upon clause 7.1.5.2 (b) of the contract.
As I have explained this is a significant issue in the trial. If in some way the plaintiff was bound by the alleged election to rely upon clause 7.1.5.2(a), then at trial the plaintiff had not retained the office suites. It had not tendered evidence of market value, as at the date of ‘the election’, on 30 October 2009. The only evidence of ‘value’ was that obtained by it on the resale of the suites.
The plaintiff submits that it had made no election in law:
It made the submission that an election applies only to a choice between legal rights and not to a choice of remedies.
The plaintiff submitted that it only foreshadowed its intention in its letter of 30 October 2009. It submitted that a statement of intention does not create an election. He submitted that the time for election had not arisen, and the plaintiff could exercise its rights for up to 2 years.
It further submitted that a binding election under clause 7.1.5.2 could only arise upon the plaintiff retaining the property and suing the defendants for damages for breach of contract. As at the date of the alleged election the plaintiff had not done this. It submitted that there was no such election.
Discussion and finding
The High Court in Agricultural and Rural Finance Pty Ltd v Gardiner, supra, explained that the doctrine of election is not limited to rights, as asserted by the plaintiff, but may also apply to inconsistent remedies.
I accept the defendant’s submission that the letters of 30 October 2009 are clear on their face, namely that the plaintiff had chosen at that stage to rely on clause 7.5.1.2(a).
That however in my opinion is not the end of the matter. It remains to be determined whether this ‘choice’ constituted an irrevocable election at law. To the contrary, it is an undisputed fact that suite 502A had in fact been sold before the Notice was sent. The plaintiff was no longer in a position to retain it for the purpose of clause 7.5.1.2(a). Secondly the remaining two office suites were also sold prior to the proceedings being heard.
Against that it could not seriously be argued that the letters of 30 October 2009, merely ‘foreshadowed; its intention. The letter was too detailed for such a purpose. I have been unable to find any authority dealing with this factual position. In Higgins case, supra, there was no dispute about the sole remedy sought at trial.
In my opinion despite the plaintiff clearly having chosen its remedy on 30 October 2009, it did not at law constitute an irrevocable election.
As noted by the Privy Council in Tang Man Sit, supra, at 523, and impliedly approved by the High Court in the Agricultural and Rural Finance case, supra, until judgment, the plaintiff may pursue both remedies together, or pursuing one, may amend and pursue the other, but can only take judgment for the one. Accordingly, I do not accept that the plaintiff was bound by any alleged election on 30 October 2009.[30]
[30] See also Wu v Statewide Developments [2010] NSWSC 1016 per Palmer J.
The remaining issues
· The relationship between the third parties and the defendant
· The relationship between the plaintiff and the third parties
· Agency at common.
· Whether the third parties owed a duty of care or alternatively a fiduciary duty to the defendants.
· Whether the defendants engaged in misleading and deceptive conduct.
· Whether the defendants engaged in unconscionable conduct.
· Whether the defendants affirmed the contract.
· Damages.
A brief overview of the evidence, and my findings
Most of the evidence in the trial was not in dispute. It mainly consisted of documentary evidence.
At the trial, the parties tendered a large number of apparently contemporaneous documents. The defendants had filed, as an aide memoire an extensive chronology of the background to the proceedings. I see no utility in including that chronology in these reasons. The significant disputes in the trial involve what allegedly occurred between the parties at meetings in the days after a seminar attended by the first defendant in November 2007.
In order to resolve the disputes between some of the witnesses I have placed the most significant weight upon the apparently reliable contemporaneous documents, and the inferences which I can properly draw from them.
There was a delay of about 5½ years between the alleged misrepresentations in November and December 2007, and this action coming on for trial. One of the witnesses, Jennifer McNamara had been living overseas in 2009 and 2010 and had returned to Australia in 2011. She had only been contacted about the trial on the Thursday before the trial, and had not turned her mind prior to that date, to any of the relevant events.[31]
[31] TP 411.
Another witness, Brian Rudd had only been aware of the trial ‘for a couple of weeks’.
That delay understandably affected the memory of some of the witnesses. Many of them had changed employment in the intervening years.
In particular, some of the witnesses called by the third parties faced difficulties in recalling which, of a number of entities, had employed them at the time of the alleged events. As will become plain there were significant changes to ‘the Nap Group’ structure in 2007, before the subject contracts were entered into.
I respectfully adopt the remarks of the Court of Appeal (NSW) in Watson v Foxman,[32] where at p 319, the Court said:
… human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervenes, and the processes of memory are overlaid, often subconsciously by perceptions or self interest as well as conscious consideration of what should have been said or could have been said. All too often, what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience.
[32] (1995) 49 NSWLR 315.
These remarks apply with great force to the subject case.
The difficulty faced by the witnesses was that they tended to reflect upon the relevant transactions with the benefit of hindsight. As I have noted, it was an exciting time for investors to purchase commercial property in South Australia in 2007. It is necessary to reflect upon the financial position at the time when, it is alleged that the representations were made.
With the benefit of hindsight, and with knowledge of the impending ‘Global Financial Crisis’ it was obvious that the defendants should not have purchased any of the office suites, let alone committed to settle on contracts worth over $1.4 million.
In Capital Break Services Pty Ltd v Meagher, the Court of Appeal (NSW),[33] expressed the need for caution in making findings of fact and in forming conclusions as to liability because of the dangers associated with hindsight.
[33] [2003] NSWCA 225 at [30].
In Hall v Foong,[34] Debelle J, in a different context, said:
It is important that the Court does not allow hindsight to insinuate itself into its reasoning. Hindsight is no doubt useful in others contexts, but as a general rule, it must be avoided when determining liability.
As Megarry J observed in Duchess of Argyll v Beuselinck (1972) 2 Lloyds LR 172 at 185:
In this world there are few things that could not have been done better with hindsight. The advantages of hindsight include the benefit of having a sufficient indication of which of the matters are important and which are unimportant. But hindsight is no touchstone of negligence. The standard of care to be expected … must be based on events as they occur, in prospect, and not in retrospect.
·The witnesses
[34] [1995] 65 SASR 281.
Before turning to the issues between the parties it is appropriate that I say something about the witnesses.
The witnesses at the trial were Constantinos Koutsoukos – called by the plaintiff; Wesley Trotman; his sister Leticia Delmenico; and their mother Brenda Jean Totman – called by the defence; and Jennifer Anne McNamara; Nathan Alan Stewart; Keith John Chandler; and Brian Rudd called by the first, second and third third parties.
As will be plain, the events, the subject of the proceedings, occurred over a very short period of time. The first defendant had first met Mr Chandler and Mr Rudd in 2006, in respect of the unrelated Greencroft Road development. The first defendant had known nothing of the ‘AOP’ until sometime in November 2007. He made the decision to purchase two office suites between 2 December and 4 December 2007.
I was impressed by the honesty and reliability of the witnesses Mr Koutsoukos and Mr Chandler. Indeed none of the respective counsel were critical of their honesty. In my opinion there was no attempt by either of them to reconstruct the events to which they deposed.
As to the second defendant, Ms Delmenico, I was also impressed by her as a witness. She had little direct contact with witnesses other than her brother, the first defendant. I have no doubt that she recounted as best she could recall her discussions with Mr Trotman. The question which of course remains is whether Mr Trotman had accurately reported that which he said that he had been told by the other parties. Although nothing of significance turns upon it, I do not accept Ms Delmenico’s evidence that on a telephone conference call on 4 December 2007, in respect of which I find that she did take part, that she heard her brother say ‘my sister is not a financial contributor to the properties’.[35]
[35] TP 228.
I have largely, put to one side the evidence of the defendants’ mother Brenda Trotman. She was, perhaps understandably, a partisan witness who was worried about her children. She was undoubtedly at the contract signing meeting on 4 December 2007. She was mistaken about the roles played by Mr Koutsoukos and Mr Rudd. She alleged that when her son had asked questions ‘they were not answered but were avoided’. She asserted that she heard her son ask the person who we now know was Mr Koutsoukos, how he could pay for these first two contracts and that he had taken him to some documents to satisfy him that he could. I don’t accept that evidence at all. I find that at least while Mr Koutsoukos was present, on 4 December 2007 and, that was until the contracts were signed, there was no discussion about Ms Delmenico’s role, nor any questions about finance nor Mr Trotman’s capacity to pay.
While I am confident that all of the other witnesses honestly attempted to recall the relevant events, it became clear that some of those witnesses had unwittingly reconstructed some of the events.
An example involves the evidence of Jennifer McNamara. She deposed that she believed that an affordability assessment had been prepared for Mr Trotman before he was ‘referred’ to the plaintiff.[36] I have no doubt that no affordability assessment was done.
[36] TP 416.
I do not doubt the honesty of Ms McNamara, indeed no one was critical of her honesty. But she clearly reconstructed this aspect of her evidence because that generally was what happened.
As to Mr Trotman, I formed the view that he is a proud man who has convinced himself over time that someone other than himself is to blame for having entered into the respective contracts. He was obviously concerned about his sister, and having exposed her to what became a financial loss. Various assertions as to what was allegedly said and by whom, in his evidence in chief was exposed in cross-examination. Some of his evidence was inconsistent with the pleadings filed on his behalf. He rather baldly asserted that he had been continuously a client of ‘The Nap Group’ saying ‘I’d say I was, yes, that sort of thing’. He was reluctant to concede matters which he perceived may have been adverse to him.
Mr Trotman was asked about signing an acknowledgement that he had been told that he could get independent legal and financial advice:
Q You signed that acknowledgment.
A Yes but I didn’t get any legal advice or anything because (a) they couldn’t supply me with anything.
Q You could have gone to [your solicitor] Mr Grant if you had chosen to.
A Could have gone to Mr Grant?
Q Yes if you wished.
A I never got a copy of the contracts until long after the signing …
Q Before you signed it – you signed the acknowledgment I suggest.
A Yes.
Q Which you acknowledge that you advised that you should obtain legal and financial advice but you were happy to proceed even though you hadn’t obtained the legal advice.
A Yes, all right.
The evidence of one other witness did give rise to some concern. The third party Nathan Stewart appeared to take a casual approach to his evidence, especially with respect to the entities controlled by him. He sought to distance himself from Mr Trotman in discussing the evidence. I turn now to the roles of the various parties, and the findings that I make in respect of them.
The plaintiff
The plaintiff, is a member of the ‘Urban Construct Group of Companies’ (‘Urban Construct’). ‘Urban Construct’ was a development corporation undertaking major commercial and residential developments. He appeared to consciously distance his corporate entities and himself from any involvement in the defendants’ purchases. Amongst its subsidiaries were ‘Urban Construct Project Marketing (SA) Pty Ltd’ (‘Urban Marketing’), and the plaintiff.
The plaintiff was incorporated as ‘a special purpose vehicle’ specifically for the ‘AOP’.
It accordingly became the developer, and ultimately, the registered proprietor of the land upon which the first strata office tower was expected to be constructed between February 2008 and August 2009.
As there was a significant lead time between the marketing of the ‘AOP’ in 2007, and the date of practical completion of the building, the plaintiff commenced the marketing of the proposed office suites ‘off the plan’.
The form of contract, which was ultimately signed by the defendants in each case, provided that a prospective purchaser could on-sell those suites prior to the date for settlement.[37] The date for settlement was to be fixed by a Settlement Notice after registration of the division plans and the practical completion of the construction. The date was eventually fixed for 20 August 2009.
[37] Ex P2.21.
Another member of ‘Urban Construct’ was ‘Pirie Street Property Management Pty Ltd’ (‘Pirie Management’). Its role was to manage the office suites when constructed. One of the incentives for purchasers to acquire an office suite was a ‘commitment by Pirie Management to pay a 7.00% per annum gross return on the purchase price to a purchaser for a period of 12 months from the date of settlement’.[38] In addition it would ‘actively seek to lease the building (on behalf of owners) to corporate office tenants and will engage Adelaide’s most respected commercial real estate agencies to perform this task’.
[38] Ex P2.21.
On 8 June 2007, the plaintiff appointed ‘Urban Marketing’ as its sole marketing and sales agent upon the terms set out in an agency agreement.[39] ‘Urban Marketing’ was expressly authorised by the plaintiff to appoint ‘general agents to provide marketing and sales services to Urban Marketing’.
[39] Ex P4.
‘Urban Marketing’ appointed Mr Constantinos Koutsoukos, as a consultant, in June 2007, to start up its investment sales division. By the time that he was appointed, ‘fifty to sixty per cent of the ‘AOP’ office suites had already been sold’.[40]
[40] TP 36 - 38.
Mr Koutsoukos had been involved in the real estate industry in South Australia and Queensland since 1989. He described the ‘AOP’ as a ‘pure strata office commercial development’.
Glossy marketing material was prepared, with an appropriate disclaimer,[41] and seminars were organised, to acquaint potential purchasers with various Urban Construct developments, including the ‘AOP’.
[41] Ex P1 - 3A.
His role was ‘to find wealth creation investment groups, accountants, financial planners that would recommend our stock to their clients … they became referral agents, you could call them, or channel partners, and my role was just to supply them marketing material, pricing and then they would qualify their clients (my emphasis). They would then provide a referral back to ‘Urban Construct’, and we would prepare contracts and then the sale was hopefully made’.[42]
[42] TP 38 (xn).
He explained that it was for the ultimate purchaser to get its independent advice as to any taxation or financial benefits in acquiring an office suite. He said that ‘we made it clear that we don’t give financial advice or legal advice and we always just made that clear’, so that it was up to the client’s financial advisers or accountants.[43]
[43] TP 4.
Before anyone could start marketing any product of ‘Urban Construct’, including the ‘AOP’, a ‘Referral Agreement’ had to be signed.
·The third parties – ‘the Nap Group’
Amongst the various potential channel partners, approached by Mr Koutsoukos, was the organisation referred to in the evidence, as ‘The Nap Group’.
On occasions that name was employed as a shorthand reference to the group of companies controlled by Nathan Alan Paul Stewart at relevant times. They included ‘Property (Aust) Pty Ltd’ (‘the second third party’); and ‘The Nap Group Pty Ltd’ (‘the third third party’).
Other witnesses had assumed that ‘JBL Enterprises (SA) Pty Ltd’ (‘the fourth third party’) was also a member of ‘The Nap Group’.
As I have explained, the question of the identification of the members of ‘The Nap Group’ was a significant issue at the trial. In particular it was of importance to the defendants to identify which entity, was the alleged ‘agent’ of the plaintiff, and to which entity, the first defendant had allegedly been a client.
Some of the witnesses called by the first, second and third third parties had difficulty in recalling which of the entities had employed them.
This is not surprising. There appears to have been such informality in the management of ‘The Nap Group’ that the respective companies seem to have been used interchangeably. I have done my best to resolve the difficulties as to which company employed which employee by reference to the formal business names records, and such Income Tax Group Certificates as were tendered in evidence.
Mr Nathan Stewart deposed that in or about August 1999, he incorporated a company, ‘NAP Stewart Pty Ltd’ to operate a finance broking business in Adelaide.
He explained that this business exclusively involved ‘brokering home loans for mums and dad borrowers’.
He deposed that this business was effectively as a ‘mortgage broker’. He distinguished this role from that of a ‘financial planner’. He said that he would never give a client financial advice and that he was not licensed to do so.[44]
[44] TP 443.
He explained that this company changed its name to ‘The Nap Group Pty Ltd’, trading as ‘Nap Finance’. Its sole shareholder at all relevant times was Nathan Stewart.
Nathan Stewart was a director of ‘The Nap Group Pty Ltd’ at all relevant times.
Historical company records disclosed that his brother Gary Stewart had been a director until 12 May 2006. Brian Rudd had been a director until 15 August 2006.
‘The Nap Group Pty Ltd’ was registered as proprietor of the business name, ‘Nap Finance’ from 12 June 2002 until it was cancelled on 13 August 2008.
He said that he ceased as a director of that company in December 2012.
Nathan Stewart deposed that he decided to establish his businesses at the Docklands in Victoria. He was unclear as to whether that move occurred in 2002 or 2005.
He incorporated ‘Property (Aust) Pty Ltd’ on 1 August 2006. At all relevant times Nathan Stewart was its sole director and shareholder. He explained that its purpose was ‘to work with developers, and to assist in their marketing to investors of their developments’. He said that in 2007 the property market in Adelaide was booming.
Mr Stewart deposed that he ‘gave’ to his brother Gary Stewart, the South Australian Mortgage broking business at that time.
He said that his brother incorporated a company under the name ‘Nap (SA) Pty Ltd’ on 13 January 2005. It traded as ‘Nap Finance SA’, until its registration was cancelled on 6 June 2010.
Nathan Stewart deposed that he had no involvement in this company, which was solely the business of his brother. On 9 July 2007 ‘Nap (SA) Pty Ltd’ changed its name to that of the fourth third party, ‘JBL Enterprises (SA) Pty Ltd’.
It operated as a mortgage broker in South Australia, arranging loans for residential properties, until his brother ceased his own involvement.
The company records disclose that Gary Stewart was a director and shareholder until 30 March 2007. From that date, its sole director was Damon Gabison. The tendered documents disclosed that ‘JBL Enterprises (SA) Pty Ltd’was placed into liquidation, and deregistered prior to trial.
It did not file an appearance nor a defence. It took no part in the trial. The defendants did not seek the leave of a superior court to proceed against it. Neither Gary Stewart nor Damon Gabison were called as witnesses.
An issue in the trial was whether the first defendant had been a client of the entity which became ‘JBL Enterprises (SA) Pty Ltd’ and not ‘The Nap Group’.
It was not in dispute that, at all relevant times, Nathan Stewart resided in Melbourne, while his brother Gary Stewart resided in Adelaide.
Nathan Stewart said that none of his companies had been involved with the ‘Urban Construct’ until the subject ‘AOP’. He said that the role of ‘Property (Aust) Pty Ltd’ was to approach companies and firms to provide a connection between those firm’s client base. He said amongst those was his brother’s company ‘Nap (SA) Pty Ltd’. He said that persons who were referred by ‘Property (Aust)’ to the plaintiff were not qualified. (my emphasis)[45]
[45] TP 462.
When cross-examined he said:
Q And you described in that component of the money making, the introduction of the proposed purchasers.
A Yes.
Q Who were they?
A … it would be companies generally and proposed purchasers so yeah. What do you mean who are they?
Q Where did they come from?
A Different vehicles.
Q How did Property know these people?
A Via companies like Nap (SA) – for example like Mr Trotman who came from Nap (SA).
Q Property took Nap (SA)’s clients and introduced them to a project and you took it through Urban Construct.
A Yes it was something like that.
Q It wasn’t something like that it was exactly like that.
A Yes that’s right, that is what you are in business for.
Q You controlled Nap (SA) as well.
A No I didn’t … my brother did.
He said that people would come to a seminar by various means including advertising. ‘Property (Aust) Pty Ltd’ would not make any assessment about their capacity to buy. He said that his company was ‘just a mechanism of connecting people together’. He deposed that ‘… common sense would tell you if you wanted to buy a property, if you can’t raise the 10% then you don’t buy it …’ He said that there is a problem with off the plan purchases. ‘You can’t ascertain somebody’s ability to buy something because it is two years away, and every permutation of the loan charges’. He inferred that it is the payment of the deposit which is the focus of an ‘off’ the plan’ contract, and only the deposit.
Mr Koutsoukas’ initial contact with ‘The Nap Group’ was with Mr Brian Rudd.
Mr Rudd deposed to having been employed initially by Nathan Stewart as the supervising mortgage broker in ‘Nap Finance’. I infer that his employer was, at least initially, ‘The Nap Group Pty Ltd’, of which he was a director until 15 August 2006.
Despite this, Nathan Stewart was adamant that that Mr Rudd was employed by ‘Nap (SA) Pty Ltd’, as was Mr Keith Chandler. He was asked:
Q And they were engaged with Nap (SA) Pty Ltd
A Yes, that’s exactly right, yes.
Q In the period 2007 did the Nap Group Pty Ltd employ or engage Keith Chandler as a finance broker.
A No.
Q What about Brian Rudd.
A No.
Mr Rudd deposed that in 2007 he was working for ‘Nap Finance SA’. He had no clear recollection of Mr Trotman, but agreed that it was likely that he had met him in the past.
Mr Rudd explained that his task was to gather information to assist a client borrower to obtain a loan; to prepare an application for a loan on his behalf; and to pass it on to a finance company to approve or refuse the application for a loan. He deposed that he had never given taxation or financial advice. If a client had sought such advice, he would be referred to an accountant; or if he had sought investment advice, he would be referred to a financial planner.
In or about October 2005, Keith Chandler, a finance broker, commenced employment with ‘Nap Finance (SA)’.[46] In cross-examination, he was asked:
Q Who constituted the Nap Group?
A As far as I was concerned whatever the company was called, I guess, you know it was virtually one and the same. If Nathan was head of the group it didn’t really matter one way or another, what it was called, you know, it was part of Nathan’s corporate structure.
[46] Group Certificate Ex T. p13.
His role was to assist clients to seek finance or refinance from finance lenders. This included assisting the client in filling out their forms. Occasionally he would refer clients to seminars for property investments ‘in the sense of what they call, ‘fill the room’.[47] He said that ‘Nap Finance (SA)’ was a mortgage manager which favoured ‘Challenger Group Advantage’ as the lender. He regarded Gary Stewart as his ‘ultimate boss’.
[47] TP 471.
I infer that at least until Gary Stewart ceased being a director on 30 March 2007, Mr Chandler was employed by the company which became ‘JBL Enterprises (SA) Pty Ltd’. It is unclear as to which entity employed him after that time.
·The Referral Agreement
On 5 October 2007, the plaintiff executed a written ‘Referral Agreement’ with ‘The Nap Group Pty Ltd’. The ‘Referral Agreement’ specifically identified that company as the referrer, by its registration number – ACN 089 104 706.[48] The ‘AOP’ was the sole development referred to in the ‘Referral Agreement’.
[48] Ex P 27B.
The ‘Referral Agreement’ provided for the payment, to the third third party, of ‘a referral fee’, contingent upon the referrer forwarding to the plaintiff ‘a lead form’, as prescribed by the plaintiff, setting out the details of the client to be referred; the contract with the referred party being unconditional; and the full deposit paid.
It made clear in clause 6.1 thereof that the referrer was authorised only to use marketing material given to it by the plaintiff and to refer clients to the plaintiff to enquire and possibly purchase products from the plaintiff.
The referrer was expressly prohibited from accepting money; undertaking any form of marketing without express authorisation; purporting to bind the plaintiff in any of its dealing with its clients; or purport to be the agent of the plaintiff.
Nathan Stewart deposed that he had at all times intended that the referrer be ‘Property (Aust) Pty Ltd’ rather than the third third party. Mr Koutsoukos confirmed that some discussions had taken place with Nathan Stewart to that effect.
Subsequently on 4 August 2008, a referral agreement, in the same terms, was entered into between the plaintiff and ‘Property (Aust) Pty Ltd’.[49]
[49] Ex P1.25.
It is plain that all of the individuals including Mr Rudd and Mr Chandler worked out of ‘The Nap building’ irrespective of whom it was that they were employed. That building housed ‘The Nap Group Pty Ltd’ and ‘Property (Aust) Pty Ltd’.
I repeat that the ‘Referral Agreement’ specified that the third third party was not the agent of the plaintiff, and had no authority to bind the plaintiff in respect of any of its dealings with its referred clients. Mr Koutsoukos deposed that it was made clear to the referring firms that they were simply referrers and not a real estate agent for the sale of the ‘AOP’. I accept that evidence.
·The defendants
Mr Nathan Stewart denied making any such representation to Mr Trotman by telephone at the end of the 4 December 2007 signing meeting or at all.
Counsel for the defendants very properly abandoned that representation on the basis that at its highest it would be an indemnity given by Mr Stewart. He submitted that such was not his case.[90] His case was ‘that only if things went badly, then Mr Stewart would look after him.
[90] TP 528.
As that representation as pleaded has been withdrawn I do not need to discuss it further. However I make it plain that I do not accept Mr Trotman’s evidence that this was sold by Mr Stewart. I have no doubt that all parties were excited on 4 December 2007, but that statement was not made.
Did any of the third parties owe a fiduciary duty to the defendants?
·Relevant applicable principles
In FHR European Ventures LLP v Cedar Capital Partners LLC.[91] Lord Neuberger said at [261]:
The following three principles are not in doubt and they are taken from the classic summary of the law in the judgment of Millett LJ and Bristol and West Building Society v Mothew. First, an agent owes a fiduciary duty to his principal because he is someone who is undertaking to act for and on behalf of his principal in a particular matter in circumstances which give rise to a relationship of trust and confidence. Second, as a result, an agent must not make a profit out of his trust and must not place himself in a position in which his duty and interest may conflict – and, as Lord Upjohn pointed out in Phillps v Boardman, the former proposition is part of the wider rule. Third, a fiduciary who acts for two principals with potentially conflicting interests without being formed a consent of both is in breach of the obligation of undivided loyalty; he puts himself in a position where his duty to one principal may conflict with his duty to the other. Another well established principle which applies where an agent receives a benefit in breach of his fiduciary duty is that the agent is obliged to account to the principal for such a benefit, and to pay, in effect a sum equal to the profit by way of equitable compensation.
[91] [2015] AC 250.
In Krypton Nominees Pty Ltd v Gutnick[92] Robson J said at [329] that there are various indicia which may indicate that a fiduciary relationship exists.
One is where a person has undertaken or agree to act in the interests of the other.
[92] [2013] VSC 446.
In Hospital Products Ltd v US Surgical Corporation, Mason J said that:
The critical feature of accepted fiduciary relationships is that the fiduciary undertakes or agrees to act for all on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense.
A second is where a relationship of trust and confidence exists.
A third is where a party has a disadvantage, vulnerability or unequal bargaining power giving rise to reliance on the other person.
In Hospital Products, Dawson J said:
There is, however, the notion underlying all the cases of fiduciary obligation that inherent in the nature of a relationship itself is a position of disadvantage or vulnerability on the part of one of the parties which causes him to place reliance upon the other and requires the protection of equity acting upon the conscience of that other.
Discussion
I have already addressed this issue when dealing with the question of agency.
The defendants submit that ‘The Nap Group’ and in particular Nathan Stewart, Jennifer McNamara, Brian Rudd and Keith Chandler undertook to Mr Trotman that they would help and act in his interests and that that undertaking justified Mr Trotman reposing his trust and confidence in them and therefore the imposition of fiduciary duties.
The Nap Group knew that Mr Trotman did not have access to funds necessary to settle upon the purchase of three office suites and that ‘The Nap Group’ and the others knew that Mr Trotman was relying upon them. They submit third parties breached their resulting fiduciary duties by failing to disclose their interest in and profit to be obtained from the three contracts for the sale and purchase of the office suites which objectively became transactions to their advantage and to the disadvantage of the defendants.
The third parties deny the existence of any fiduciary relationship. I have already concluded that the third parties were not at any stage acting as the agent for the defendants.
In Rawley Pty Ltd v Bell (No 2) [93] Finn J said:
Outside of commercial agency, partnership and trust relationships care needs to be taken in concluding that commercial parties are in a fiduciary relationship for some or all purposes … because such a relationship, commonly, possesses characteristics (for example, known adversarial interests, the reasonable expectation of self reliance) which negative a fiduciary finding.
[93] [2007] 61 ACSR 648.
In Hospital Products, Gibbs CJ said:
In the decided cases, various circumstances have been relied on as indicating the presence of a fiduciary relationship. One such circumstance is the existence of a relation of confidence, which may be abused. However, an actual relation of confidence – the fact that one person subjectively trusts another – is neither necessary for nor conclusive of a fiduciary relationship – an ordinary transaction for sale and purchase does not give not rise a fiduciary relationship simply because the purchaser trusted the vendor and the latter defrauded him.
In Breen v Williams[94]Gaudron and McHugh JJ said:
These circumstances, which are not exhaustive and they overlap, have included the existence of a relation of confidence, any quality of bargaining power, an undertaking by party to perform a task or fulfil a duty in the interests of another party, the scope for one party to unilaterally exercise a discretion or power which may affect the rights or interests of another, and a dependency or vulnerability on the part of one party that causes that party to rely upon another.
[94] [1996] 186 CLR 71.
I have no doubt that the third parties were aware of the financial circumstances of Mr Trotman in December 2007 at which time the three contracts were signed. Clearly at that stage, while he and his sister had sufficient funds to make payment of the respective deposits they were not in a position to borrow the full purchase price in excess of 1.4 million dollars at that time. Settlement however was due to occur no later than August of 2009. It was only in or about February of 2009 that Mr Trotman sought the advice of Mr Chandler as to whether he would be able to borrow the principal sum.
I cannot conclude that there existed any inequality of bargaining power between the defendants and the plaintiff or the defendants and the third party. At all times the defendants were aware of the purchase price. Care must be taken in imposing a fiduciary obligation between parties to a commercial transaction. It cannot be said that the third parties misrepresented the true state of affairs to the defendants. However I reject this defence and third party cause of action as there was in my opinion no fiduciary relationship established.
·Negligence
·Negligent misstatement
In light of my findings as to the alleged representations I do not need to consider this claim, nor the decision of the Full Court of the Supreme Court in Chew v Amanatidis (2009) SASC 334.
·Did the plaintiff or the third parties owe a duty of care to the defendants
I have already addressed this issue when discussing the question of agency.
It is trite that a vendor, such as the plaintiff, does not owe any duty to provide commercial advice to a purchaser of property. Indeed the same position applies to financial institutions in other than special circumstances with respect to the approval of loans.[95]
[95] Tonto Home Loans Aust Pty Ltd v Tavares [2001] NSWCA 389; Micarone v Perpetual Trustees (1999) 75 SASR 1. Beneficial Finance Corpn v Karavas (1991) 23 NSWLR 256; Permanent Mortgages Pty Ltd v Vandenbergh [2010] WASC 10.
In Woolcock Street Investments v CDG Pty Ltd[96] McHugh J said:
Speaking generally, a person owes no duty to prevent economic loss to another person even though the first person intends to cause economic loss to that other person. The particular immunity from liability reflects the common law’s concern with the autonomy of the individual and its desire to give effect to the choices of the individual by not burdening his or her freedom of action. Thus, as long as a person is legitimately protecting or pursuing his or her commercial interests, the common law does not require that person to be concerned with the effect of his or her conduct on the economic interests of other persons … In many cases there will be no sound reasons for imposing a duty of care … where it was reasonably open to [the defendant] to take steps to protect themselves … If they could have taken those steps but did not and were not induced by the other party from taking such steps, there is no reason why the court should stop in and impose a duty of care.
[96] [2014] 216 CLR 515.
As I have found the first defendant acknowledged that at the signing of the first two contacts, on 4 December 2007, the plaintiff, through its contractor Mr Koutsoukos had explained to the first defendant the terms of the contract. The first defendant conceded that he had signed an acknowledgement to the effect that he should obtain independent legal and financial advice, and informed Mr Koutsoukos that he was happy to proceed even though he had not obtained legal advice.[97]
[97] TP 302.
No such discussion occurred between Mr Koutsoukos and the second defendant, however, in my opinion, no duty was owed by the plaintiff to either defendant.
The defendants allege that the remaining third parties are liable to them in negligence for failing to give them financial advice, and their failure to undertake in November/December 2007, an assessment of their financial capacity to settle upon the three contracts of purchase due in September 2009.
In part the defendants rely upon the ‘Referral Agreement’ between the plaintiff and ‘The Nap Group Pty Ltd’ dated 5 October 2007,[98] and the essence of that agreement.
[98] Ex P 27B.
They assert that the plaintiff expected the defendants to ‘qualify’ the defendants’ that is to establish that they were buyer ready. This, after all was how the third parties became entitled to a commission.
In Micarone v Perpetual Trustee,[99] the Full Court explained that it was a matter solely for a lender, in that case, to make whatever enquiries it wished. In particular it may choose to make no enquiries to verify information given to it.
[99] (1995) 75 SASR 1.
The contract between the plaintiff and ‘The Nap Group Pty Ltd’ is of no relevance to the defendants in this respect. If ‘The Nap Group Pty Ltd’ did not ‘qualify’ them, then it may be contractually liable to the plaintiff, but is not, because of that, tortiously liable to the defendants.
In my opinion no duty of care was owed by either the plaintiff or the third parties to the defendants.
·Unconscionable conduct
·Preliminary
·Equity
In equity the principles of unconscionable conduct are limited to those cases where a party is under a special disadvantage.
The principles were set out by Murphy J in Permanent Mortgages Pty Ltd v Vandenberg.[100]
[100] [2010] WASC 10.
I adopt his Honour’s summary at [219]-[233]:
Equity's jurisdiction to set aside a transaction for unconscionable dealing is invoked where one party to the transaction is under a special disadvantage or disability in dealing with the other party, and that special disadvantage or disability was sufficiently evident to the other party to make it prima facie unfair or unconscionable for that other party to accept or retain the benefit of the transaction: Commercial Bank of Australia v Amadio; Louth v Diprose[1992] HCA 61; (1992) 175 CLR 621, 637.
The underlying equitable principle may be invoked 'whenever one party by reason of some condition or circumstance' is placed at a special disadvantage of which unfair and unconscientious advantage is taken by the other party: Commercial Bank of Australia v Amadio (462).
The special disadvantage will be sufficiently evident to the other party if the other party knows facts which would raise the possibility of the special disadvantage in the mind of a reasonable person: Commercial Bank of Australia v Amadio (467 468, 479).
Where such circumstances are shown to exist, the onus is on the other party to establish that the transaction was fair, just and reasonable: Commercial Bank of Australia v Amadio (474).
The special disadvantage need not have been created by the party taking the benefit of the transaction: Louth v Diprose (629).
The special disadvantage alleged must be one 'which seriously affects the ability of the innocent party to make a judgment as to his own best interests'; mere difference in bargaining power is insufficient: Commercial Bank of Australia v Amadio (462). The 'essence of such weakness is that the party is unable to judge for himself': Blomley v Ryan [1956] HCA 81; (1956) 99 CLR 362, 392; or 'to conserve his own interests': Blomley v Ryan (415); ACCC v C G Berbatis Holdings [12], [46], [55].
In this regard care must be taken not to 'eviscerate unconscionability of its meaning': NZI Capital Corporation v Fulton [1998] FCA 667 Black CJ & Lehane J, quoting Mason CJ in Stern v McArthur [1988] HCA 51; (1988) 165 CLR 489, 503.
In ACCC v C G Berbatis Holdings, Gleeson CJ [14] said:
Unconscientious exploitation of another's inability, or diminished ability, to conserve his or her own interests is not to be confused with taking advantage of a superior bargaining position. There may be cases where both elements are involved, but, in such cases, it is the first, not the second, element that is of legal consequence ...
In ACCC v C G Berbatis Holdings, Gummow & Hayne JJ [56] also said that even a person in a 'greatly inferior bargaining position' may nevertheless not lack capacity to make a judgment about that person's own best interests.
In all cases, the court's equitable jurisdiction is to be exercised according to recognised principles, and the courts are not armed with a general power to set aside transactions which in the eyes of the judges appear unfair, harsh or unconscionable: Louth v Diprose (654) (Toohey J, although in dissent in the result). See also the observations of Sir Anthony Mason in 'The Impact of Equitable Doctrine on the Law of Contract', (1998) 27 AngloAmerican Law Review 1, 12 cited by Debelle & Wicks JJ in Micarone v Perpetual Trustees Australia Ltd [1999] SASC 265; (1999) 75 SASR 1 [648]:
There is a strong objection to simply equating the concept to what is unreasonable and unfair. The object of the doctrine is not to protect people from the consequences of their own mistakes. Because our contract law, unlike that of the United States, does not impose a general obligation of good faith and fair dealing, it is preferable to think of unconscionable conduct in terms of that which shocks the conscience, something which is harsh or oppressive in that it involves taking advantage of another's special disability or disadvantage. So understood, the concept is not one which is openended, to be applied according to the subjective whim of the Judge, though like other standards, such as that of 'the reasonable person', borderline applications will require an element of value judgment.
In Bridgewater v Leahy [76], Gaudron, Gummow & Kirby JJ referred with approval to the Privy Council's observations in Hart v O'Connor [1985] UKPC 1; [1985] AC 1000, in which unconscionable conduct was described as:
[V]ictimisation, which can consist either of the active extortion of a benefit or the passive acceptance of a benefit in unconscionable circumstances.
In The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9][2008] WASC 239; (2008) 225 FLR 1 [4924], Owen J said that it is not enough for there to be unequal bargaining power - the conduct of the stronger party has to be exploitative or oppressive.
Whilst the categories of disability are not closed, the requisite special disadvantage often involves poverty, need, sickness, age, infirmity of body or mind, sex, drunkenness, illiteracy, lack of education and lack of assistance or explanation when assistance or explanation is necessary: Blomley v Ryan (405, 415); lack of or limited comprehension of the English language: Commercial Bank of Australia v Amadio; impaired intelligence: Wilton v Farnworth[1948] HCA 20; (1948) 76 CLR 646; or infatuation with or emotional dependence upon another person: Louth v Diprose.
Absence of independent legal advice may in a given case be a circumstance of factual importance in determining whether a special disability exists: Bridgewater v Leahy [41].
Physical frailty and enfeeblement, with diminished knowledge by the party in question of that party's property and affairs generally, are not necessary elements of a special disadvantage: Bridgewater v Leahy [116].
It is plain that these cases are not meant to be exhaustive. The underlying principle is that the person’s condition ‘seriously affects the ability of the innocent party to make a judgment as to his own best interests’.
·Statute
Section 51AC of the Trade Practices Act came into effect on 1 July 1998.
Section 51AC contains a general prohibition against corporations engaging in unconscionable conduct in connection with the supply of services for a business purpose.
It sets out a number of principles. I do not need to detail them.
There is now no doubt that the scope of s 51AC is broader than the common law. It involves notions of serious misconduct which show no regard for conscience and irreconcilable with what is right or reasonable.
In Perpetual Trustees Victoria v Burns[101] commenced his reasons with the question:
Who would lend more than $840,000 to a couple each of whom was on a disability pension with no prospect of employment … when each had nothing to offer but the desire to speculate in real estate. The answer is that the plaintiff did lend that money … when any semblance of precaution or independent advice for the vulnerable borrowers was absent and where the intermediaries were entities for which the plaintiff disavows any responsibility or relationship of agency.
[101] [2015] WASC 234.
There remains however the warning,[102]
One of equity’s enduring concerns has been the protection of the vulnerable. But that protection must be both principled and consistent. Neither principle nor consistency are served without a clear conception of both and that requires a careful identification of what is encompassed by the vulnerability which equity is prepared to protect … so, for example, while equity will sometimes intervene in circumstances where there has been an inequality of bargaining power, sometimes it will not. Again it may on occasion be proper for equity to protect people from themselves. Ordinarily, however, each must accept responsibility for his or her actions or inaction. The seeds of tyranny are to be found in the footsteps of those who profess to know more about what is good for the subjects of their attention than do the subjects themselves.
[102] Kakavas v Crown Melbourne Ltd [2009] VSC 559.
Discussion
The defendants did not assert that they were in a position of special disadvantage.
Their case was that they were clients of and placed their trust in the third parties and that they had breached a fiduciary duty to them.
I have no doubt that the third parties, and in particular Ms McNamara had a mistaken view as to the financial capacity of Mr Trotman. I also note that she and other employees of ‘Nap’ failed to ensure that an assessment of his ‘buyer readiness’ had been made and had failed to make an assessment of Ms Delmenico’s financial capacity.
They therefore failed to comply with their own internal procedures. This may, in some cases be an indicator of unconscionable conduct.
However, unlike other cases, such as Perpetual Trustees Australia Ltd v Schmidt[103] where an investigation may have disclosed fraud, the consequence of those failures is not so clear. On balance such an assessment would not have given rise to concern as to the defendants’ capacity to purchase the first two contracts, with settlement to occur in two years time. It was only subsequently with the purchase of the third office suite that concerns would have been raised. In my opinion the claim based on unconscionable conduct against either the plaintiff or the third parties cannot succeed.
[103] [2010] VSC 67.
I remain concerned about representations made by Mr Trotman to the second defendant. She did not receive, unlike the first defendant any direction to obtain independent financial and legal advice.
However the second defendant did not plead as against the first defendant that he had acted unconscionably against her or in any other way unduly influenced her. There was no plea that his conduct ought be borne by either the plaintiff or the third parties.
The claim based upon unconscionable conduct must also fail.
Did the defendants affirm the contracts?
In its second Reply the plaintiff pleaded that the defendants had affirmed the contracts by paying or arranging the payment of the respective deposits for suite 502A on 21 February 2008; suite 502B on 16 January 2008; suite 502C on 17 January 2008; and by entering into variations to the respective contracts to suite 502A and 502C on 25 February 2008.
The plaintiff submits that the defendants became aware in January 2008 that no bank guarantee for the deposits had been provided, so that the acts of payment of the deposit and entering into variations to the contracts were consistent only with their waiving any alleged misrepresentation as to the bank guarantees.
In light of my findings as to the alleged misrepresentation, I do not need to discuss the question as to whether the defendants knew of or even need at law to be aware of the rights available to them at the time, or the other ‘obscurities’ of the doctrine of election on affirmation. See Sargent v ASL Developments;[104] and Agricultural and Rural Finance Pty Ltd v Gardiner.[105]
[104] (1974) 113 CLR 634 at 641.
[105] (2008) HCA 57.
In my view, nothing turned upon the alleged misrepresentation as to the ‘bank guarantee’. The first defendant had sought a loan to enable a cash deposit to be paid by 6 December 2007 well before the first two contracts were signed by the second defendant. There is accordingly no need to even consider the question of affirmation.
Summary
In my opinion all of the defendants’ defences to the plaintiff’s claim have failed. The plaintiff is entitled to judgment on its claim. The cross claims against the third parties have also failed.
·Relief sought by the plaintiff
In his final address counsel for the plaintiff clarified the quantum of the plaintiff’s claim.
·In respect of suite 502A
The plaintiff had claimed a loss of $3,890 after credit had been given for the forfeited deposit of $31,890. Included in the losses was a claim for the sum of $24,091 being the rent return guarantee offered as an inducement to the ultimate purchaser of this suite. That payment had been made not by the plaintiff but by ‘Pirie Street Property Management Pty Ltd’.
The plaintiff properly abandoned that rent return claim. Accordingly no loss was suffered by the plaintiff on suite 502A.
·In respect of suite 502B
The plaintiff has established that it is entitled to deficiency costs and default interest, after forfeiture of the deposit of $30,990, to 8 March 2013 in the sum of $18,465.61.
·In respect of suite 502C
The plaintiff has established that it is entitled to deficiency costs and default interest after forfeiture of the deposit of $66,390 (inclusive of the overpayment of $900) to 8 March 2013, in the sum of $260,649.37.
The plaintiff is also entitled to interest to judgment upon the sum claimed in respect of suites 502B and 502C.
I will hear the parties as to the orders to be made in due course.
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