Qanstruct P/L & Ors. v Bongiorno Ltd

[1993] FCA 196

Re: QANSTRUCT PTY LTD; QANSTRUCT PROJECT MANAGEMENT PTY LTD; WALTER MAXWELL
PERCY and ROBERT STEWART NEILSON
And: BONGIORNO LTD; DON J BEARD; NATIONAL MUTUAL LIFE ASSOCIATION OF
AUSTRALASIA LTD and NATIONAL MUTUAL ROYAL BANK LTD
No. VG88 of 1991
FED No. 196
Number of pages - 21
Trade Practices - Practice and Procedure
(1993) 113 ALR 667, (1993) ATPR 41-235

COURT

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Ryan J(1)

CATCHWORDS

Trade Practices - Statutory limitation period - When cause of action accrues - Economic or financial loss

Practice and Procedure - Pleadings - Application to strike out - Not appropriate in interlocutory proceeding

Trade Practices Act (Cth) Part V; ss 52, 82

Forster v. Outred and Co (1982) 1 WLR 86

Jobbins v. Capel Court Corporation (1989) 25 FCR 226

Western Australia v. Wardley (1991) 102 ALR 213

Wardley Australia Ltd v. Western Australia (1992) 66 ALJR 839

HEARING

MELBOURNE

#DATE 6:4:1993

Counsel for the applicants: Mr C A Connor

Solicitors for the applicants: Wilmoth Field and Warne

Counsel for the first and second
respondents: Mr P C Cawthorn

Counsel for the third respondent: Mr G J Maguire

Counsel for the fourth respondent: Mr P Almond

Solicitors for the first and
second respondents: Minter Ellison

Solicitors for the third respondent: Darvall McCutcheon

Solicitors for the fourth respondent: Mallesons

ORDER

The Court orders:

1. That the motion on notice by the first and second respondents dated 23 September 1991 be dismissed with costs to be taxed in default of agreement.

2. That the motion on notice by the third respondent dated 25 September 1991 be dismissed with costs to be taxed in default of agreement.

3. That the motion on notice by the fourth respondent dated 25 September 1991 be dismissed with costs to be taxed in default of agreement.

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

JUDGE1

RYAN J This is the return of three motions on notice filed on behalf of the respondents. By notice of motion filed 23 September 1991, the firstnamed and secondnamed respondents moved the Court for orders striking out paragraphs 19, 20, 21, 22 and 23 of the applicants' amended statement of claim. The grounds set out in the notice of motion are that the action was not commenced within three years of the accrual of the cause of action and is thus precluded pursuant to s.82 of the Trade Practices Act 1974 ("the Act").

1. By notice of motion filed 25 September 1991 the thirdnamed respondent moved the Court for orders striking out the same paragraphs of the amended statement of claim referred to above. Judgment in favour of the thirdnamed respondent in respect of claims 1, 2, and 3 of the prayer for relief in the applicants' application dated 22 April 1991 or in the alternative a stay of proceedings was also sought in that notice of motion but neither was pursued in argument before me. The fourthnamed respondent by notice of motion filed 25 September 1991 sought similar orders although, its application to stike out the amended statement of claim was confined to paragraphs 19, 22 and 23 of that pleading.

2. The relevant cause of action invoked by the applicants is contravention of s.52 of the Act or s.11 of the Fair Trading Act 1985 (Victoria) ("the Fair Trading Act").

3. Section 82 of the Act provides:
   

"(1) A person who suffers loss or damage by conduct of another person that was done in contravention of a provision of Part IV or v. may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention.

(2) An action under sub-section (1) may be commenced at any time within 3 years after the date on which the cause of action accrued."

1. For the purposes of the present motions I have assumed that the applicants will be able to prove each of the allegations of fact contained in their statement of claim. Where necessary I have had regard to the material filed in support of the notices of motion by way of amplifying the assertions of fact contained in the statement of claim.

History of the Proceedings
6. By application filed on 22 April 1991 the applicants claimed relief in the form of declarations and damages against the respondents. The application, in so far as it is relevant to the present proceedings, is based on conduct of the respondents which, it is alleged, was in contravention of s.52 of the Act or s.11 of the Fair Trading Act 1985 (Victoria). Damages are also claimed for breach of contract and, alternatively, negligence, but for the purposes of the present notices of motion those claims may be disregarded.

1. The grounds of the application appear in the statement of claim filed on 22 April 1991, as amended by leave of Heerey J on 21 May 1991.

2. The applicants claim that as result of representations made to them they were induced to enter into, and finance the purchase of, four life insurance policies in respect of the lives of Messrs Percy, Neilson, Ritchie and Hefti. Each policy was known as a "Split Dollar Key-Person" policy. Three were issued to the secondnamed applicant, Qanstruct Project Management Pty Ltd ("QPM") as policy owner in respect of the lives of Percy, Neilson and Ritchie and the fourth was issued to the firstnamed applicant, Qanstruct Pty Ltd in respect of the life of Hefti.

3. In addition, it is alleged that the applicants were induced to enter into associated financial transactions for the purpose of financing the premiums payable on the insurance policies. To this end, Qanstruct and QPM entered into Term Loan Agreements with the fourthnamed respondent, National Mutual Royal Savings Bank ("NMRSB"), Qanstruct and QPM entered into loan agreements with the thirdnamed respondent, National Mutual, and Percy and Neilson gave personal guarantees and indemnities to NMRSB in respect of the term loan agreements.

The policies of insurance
10. The four "Split Dollar Key-Person" policies of life insurance were apparently the foundation of the financial arrangements entered into by the applicants. The other arrangements relevant to these proceedings were entered into for the purposes of providing funds to pay the premiums on the "Key-Person" policies. Those premiums were split into two components which are described as follows in the amended statement of claim:

"13(a) A component comprising that part of the total premium which related to the sum insured becoming payable on the death of the life insured before the life insured retired, being a sum calculated as such proportion of the basic benefit yearly premium as was fixed from time to time by the Taxation Commissioner pursuant to Income Tax Ruling No. IT2434 and the table of yearly renewal premium rates set out in that income tax ruling ("the risk component");

(b) A component comprising the balance of the basic benefit yearly premium after calculating the risk component, which related to the remainder of the basic benefit provided by the policy ("the investment component").

1. The division of the premium into two components was undertaken in order to obtain a tax advantage in relation to the outgoing. The structure of the premium suggests that taxation considerations were of importance to the decision, by the applicant, to invest in the policies of insurance.

2. On the return of the present motions on notice five events were identified as having possible significance. In the first place the proposals of insurance were executed by the applicants on 23 October 1987. Secondly, the respective policies were expressed to commence on 22 November 1987 in respect of Percy, Neilson and Ritchie and on 25 May 1988 in respect of Hefti. Thirdly, the risk acceptance dates for the policies were Percy 20 May 1988, Neilson 20 April 1988 and Ritchie 29 March 1988. The acceptance date for the Hefti policy was unstated. Fourthly, the policies were respectively issued on 23 May 1988 in respect of Percy and Neilson on 11 April 1988 in respect of Ritchie and at some time in May 1988 in respect of Hefti.

3. Finally, the premiums for the first year were paid out of the funds of the NMRSB term loan agreements on 28 March 1988.

The term loan agreements
14. The allegations in relation to these loans are set out as follows in paragraphs 14 and 15 of the amended statement of claim:

"14. For the purpose of paying the investment component of the first yearly premium payable under each of the Policies, Qanstruct and QPM entered into term loan agreements with NMRSB ("the Term Loan Agreements") as follows:

(a) Term loan account No. 200296879 in the name of QPM in the sum of $187,239;

(b) Term loan account No. 200296846 in the name of Qanstruct in the sum of $14,129;

(c) Term loan account No. 200296861 in the name of QPM in the sum of $8,792.

PARTICULARS

The term loan agreements are written and dated 28 March 1988. The originals are in the possession of NMRSB. Incomplete copies only are in the possession of the Applicants. Further particulars will be provided after discovery.

15. Further to paragraph 14 hereof, for the purposes of the payment of the yearly premium payable in respect of the second and subsequent years of the Policies (both the risk component and the investment component) and for the purpose of payment of interest on moneys borrowed from NMRSB, Qanstruct and QPM entered into loan agreements with National Mutual pursuant to which QPM borrowed against the security of the cash value of each of the policies referred to in paragraphs 9, 10 and 11 hereof and Qanstruct borrowed against the cash value of the policy referred to in paragraph 12 hereof."

1. For the present purposes, I accept that term loan agreements were applied for, accepted, and the moneys drawn down on 28 March 1988. On 28 March 1988 QPM drew down $187,239.00 on account No 200296879 pursuant to a term loan agreement. On the same day $158,217.00 was paid as premium to National Mutual. The remaining $29,022.00 was paid into a NMRSB account, No 200296887 in the name of QPM. From this latter account money was periodically debited for the purpose of paying interest on "a related account". The first debit occurs on 5 April 1988. That debit, it was submitted by Mr Cawthorn, who appeared for the first and secondnamed respondents, constituted the first payment of interest to NMRSB under QPM's the term loan agreement.

2. On the same date, 28 March 1988, Qanstruct applied for and received a term loan pursuant to which it drew down the sum of $14,129.00 on account No 200296846. Of that money $11,939.00 was appropriated to National Mutual as payment for the first year's premium on the policy on the life of Hefti. The remaining $2,190.00 was deposited in an NMRSB account, No 200296853 in the name of Qanstruct for the purpose of paying interest on the Qanstruct term loan agreement. It was submitted that 5 April 1988 was the date on which that account was first debited with an interest payment.

3. In summary, the applicants plead that by 28 March 1988 Qanstruct and QPM were committed to term loan agreements with NMRSB each for a period of three years under which they were obliged to pay interest only, in the sum of $14,129 and $187,239 respectively. Those commitments were undertaken in order to pay to National Mutual the premiums on the life insurance policies.

Loan Agreements with National Mutual
18. In order to pay the yearly premiums in respect of second and subsequent years and to pay interest on the term loan agreements with NMRSB, Qanstruct and QPM entered into further loan agreements with National Mutual. QPM borrowed against the security of the cash value of the Percy, Neilson and Ritchie policies and Qanstruct borrowed against the cash value of the Hefti policy. Those further agreements were concluded on or after December 1988.

Guarantees and Indemnities
19. As noted above, personal guarantees and indemnities were given in respect of the due performance by the borrowers of their obligations under the term loan agreements with NMRSB. These were given by Percy and Neilson on 18 March 1988.

The representations
20. The applicants allege that the financial arrangements were entered into in reliance upon representations by the respondents to the applicants. The representations complained of are set out in paragraph 16 of the amended statement of claim and went principally to whether payments to be made on the policies and on the loans would be tax deductible. The applicants allege that the respondents warranted or represented that the risk component of the yearly premium was tax deductible by Qanstruct and QPM and the interest, paid on the funds borrowed from NMRSB and National Mutual in order to service the debt due on the policies, was also tax deductible. The applicants allege that these representations were false and that in consequence of entering into the financial arrangements they have suffered loss and damage.

The claim for damages
21. Particulars of loss and damage are set out in the particulars annexed to paragraph 23 of the amended statement of claim. That paragraph reads:

"By reason of -

(a) the contraventions of the Trade Practices Act and the Fair Trading Act referred to in paragraphs 19 and 21 hereof;

(b) the involvement of the persons referred to in paragraphs 20 and 22 hereof in the said contraventions, the Applicants have suffered and continue to suffer loss and damage.

PARTICULARS

(a) Qanstruct and QPM have made payments of interest and premium which are thrown away. Full particulars will be provided;

(b) NMRSB claims that Qanstruct and QPM are indebted to NMRSB in the sum of $190,631 and that interest is accruing.

(c) National Mutual claims that Qanstruct and QPM are indebted to National Mutual in the sum of $90,137.69 and that interest is accruing. Each of Per;cy and Neilson has, pursuant to the Guarantees, agreed to guarantee and to indemnify NMRSB in respect of the sums (if any) owed by Qanstruct and QPM pursuant to the Term Loan Agreements. Further particulars of loss and damage will be provided prior to trial."

1. Further particulars to paragraph 23 have been provided by the applicants in:
   

i) Paragraph 16 of the Further and Better Particulars of Plaintiff's Statement of Claim pursuant to a request of the first and third respondents, filed on 19 June 1991; and ii) Paragraph 5 of the Further and Better Particulars of Plaintiff's Statement of Claim pursuant to a request of the fourth respondent, filed on 19 June 1991.

The submissions of the parties
23. Mr Cawthorn submitted that the applicants' claim to have suffered actual loss or damage as a result of obtaining the policies of insurance and entering into the loan agreements and that, accordingly the cause of action accrued when the agreements were concluded. He identified the following six events which, on the applicants' pleadings, could be said to have resulted in actual loss or damage at the time when they respectively occurred.

1. Commencement of risk under the policies;

2. Execution of proposals of insurance;

3. Entering into term loan agreements;

4. Giving the guarantees and indemnities;

5. Payment of premiums on the policies; and

6. Payment of interest on the loans.

1. Counsel further submitted that the accrual of the cause of action was not postponed because the applicants were under continuing obligations to make payments or otherwise to meet liabilities. Mr Maguire and Mr Almond, who appeared for the third respondent and fourth respondents respectively, adopted and expanded upon the submissions of Mr Cawthorn.

2. Support for the general proposition that the applicants suffered loss and damage when, before 22 April 1988, they entered into the agreements was said to be provided by the judgment of a Full Court of this Court in Jobbins v. Capel Court Corporation Ltd (1989) 91 ALR 314. In that case, representations were made to the applicant between November 1985 and March 1986 as to the profitability and security of investment in a film. In reliance upon those representations, the applicant on or about 24 March 1986 entered into an agreement to invest $60,000 in the film. The investment moneys were paid on 19 April 1986. The agreement provided for a guaranteed return, the first instalment of which was due in October 1986. The application, claiming relief on the basis of misrepresentations made in contravention of S.52 of the Act, was filed on 14 September 1989. The respondent moved to strike out certain paragraphs of the applicant's statement of claim on the ground that the cause of action accrued more than three years before the filing of the application and was thus precluded by s.82 of the Act.

3. In striking out the impugned paragraphs Davies, Burchett and Hill JJ observed at 317:
   

"The suffering of some damage (the other elements of the cause of action having occurred) will in general, start time running even although the damage continues to grow. The running of time is not suspended until all the damage which will be suffered has ceased to flow. Nor does further damage constitute a fresh cause of action."

At 319 their Honours continued:

"The applicant suffered damage immediately upon his entering into the agreement and the making of the payment thereunder, both of which occurred outside the three year period. According to the pleading, the investment lacked the represented qualities; as a consequence it was from the outset less valuable than it should have been ... It is really beyond dispute that what happened then was merely a reaping of the tares sown with the crop."

1. Counsel for the respondents in the present notice of motion sought to rely on Jobbins in support of their contention that, at the time of the commencement of the insurance policies, and certainly by the time of entry into the term loan agreements, the applicants had, on the pleadings, obtained something of less value than that for which they had bargained. Accordingly, they had commenced to suffer damage and their cause of action had accrued.

2. Reference was also made to a line of English authorities including Forster v. Outred and Co (1982) 1 WLR 86 in which Dunn LJ observed at 99, in relation to a mortgage executed on the negligent advice of a solicitor:
   

"... in cases of financial economic loss the damage crystallises and the cause of action is complete at the date when the plaintiff in reliance on negligent advice, acts to his detriment."

1. Counsel for the applicants, Mr Connor, submitted that loss or damage did not occur until after 22 April 1988. He submitted that there were four possible points of time at which loss or damage may be said to have arisen, all of which were within three years of the filing of the application. The first of these was the date of issue of the policies. As already noted, with the exception of the policy issued in relation to Mr Ritchie, the policies were issued in May 1988. It was submitted that until the policies had actually issued there could have been no loss because the premiums paid would have been refundabale had either party elected not to proceed with the policies. Before the issue of the policies there was no contract of insurance and accordingly, no damage could be said to have been sustained by the applicants.

1. The second point of time to which Counsel for the applicant adverted was the date when the National Mutual made the loans in December 1988. It was submitted that until those loans had been made, there was no contractual obligation on the applicants to continue the policies in force. On this analysis, it was not the borrowing of the money that attracted the loss and damage but the decision to renew the policies of insurance.

2. The next possible point of time to which Mr Connor adverted was the end of the financial year in which the policies and loan agreements were entered into, that being 30 June 1988. The basis for this submission was that the tax liability of the applicants arose at the end of the first tax year after the making of the loans in question, and until that time, it could not have been known whether the payments of interest and principal made by the applicants were tax deductible.

3. The final point of time relied on by Counsel for the applicants was the date on which they surrendered the policies of insurance.

4. Mr Connor further submitted that the determination of when loss or damage was occasioned to the applicants and thus when the cause of action accrued was not a proper matter to be resolved on interlocutory proceedings like the present.

5. All Counsel before me canvassed the extent to which assistance for present purposes can be derived from two decisions of a Full Court of this Court, Jobbins (supra) and Western Australia v. Wardley (1991) 102 ALR 213. Since I heard argument in this matter the High Court has given judgment in an appeal from the Full Court in Wardley; see (1992) 66 ALJR 839 sub nom Wardley Australia Ltd v. Western Australia. That case concerned an indemnity, given by the State of Western Australia to the National Australia Bank, indemnifying the Bank against any losses which might have arisen from a default under a loan facility provided to Rothwells Ltd, a merchant bank. It was alleged that the State was induced to execute the indemnity by certain representations, and did execute it in reliance thereon. Before the Bank could enforce the indemnity and, therefore, before the State would be liable to make a payment under the indemnity, it was necessary for Rothwells to have failed to discharge its liability under the facility and for the Bank to have proceeded, to the fullest extent of its rights against Rothwells, to obtain a payment out of Rothwell's assets. In view of the nature of the indemnity, the High Court found that it was not one which gave rise to an immediate, non-contingent, liability to pay upon execution of the instrument. Mason CJ, Dawson, Gaudron and McHugh JJ expressed the view, at 842 that:
   

"the indemnity, on its true construction, was one which created a liability on the part of the respondents (the state) to the bank to make payment if and when the bank's relevant net loss was ascertained and quantified. ... The liability was, therefore, in conformity with the opinion of the Full Court, contingent and executory."

1. The judgment of the High Court in Wardley makes it clear that the period of limitation contained in s.82 begins to run at the time when the cause of action accrues which does not occur until actual loss or damage has been sustained: 66 ALJR at 842. Where, however, a liability is properly classified as being contingent or executory then the accrual of the cause of action is delayed until the loss becomes actual, as their Honours observe at 845:
   

"The plaintiff sustains no actual damage until the contingency is fulfilled and the loss becomes actual; until that happens the loss is prospective and may never be incurred."

1. In a separate judgment, Brennan J regarded it as necessary, in cases of economic loss, to analyse and determine when the applicants' net worth was reduced. The Court, on that view, has to determine exactly what benefit has been acquired by the applicant and the value of that benefit at the time the cause of action is said to have arisen. His Honour observed, at 847:
   

"But if a benefit is acquired by the plaintiff, it may not be possible to ascertain whether loss or damage has been suffered at the time when the burden is borne - that is, at the time of the payment, the transfer, the diminution in value of the asset or in the incurring of the liability. A transaction in which there are benefits and burdens results in loss or damage only if an adverse balance is struck. If the balance cannot be struck until certain events occur, no loss is suffered until those events occur."

His Honour then continued (ibid):

"Each case requires an analysis of its particular circumstances in order to identify the transaction, the nature of the loss or damage actually suffered by the plaintiff, and where there are benefits and burdens, their components. Once the loss or damage is identified, the date when it is suffered can be ascertained."

1. Applying those principles to the present facts, it is necessary to determine the value of the policies and loans at the time at which the cause of action is said to arise. The question is whether actual loss can be said to have occurred, or may be said to have been reasonably ascertainable before 22 April 1988. In order to determine the loss and damage suffered by the applicants one has to ask: "What is the prejudice or disadvantage the plaintiff has suffered in consequence of his altering his position under the inducement of the misrepresentation?": Toteff v. Antonas (1952) 87 CLR at 650; Wardley Australia Ltd v. Western Australia (1992) at 844, 846.

2. On the pleadings the applicants have, in reliance upon certain representations, entered into various financial transactions. They claim that payments of premium and interest made to meet the financial obligations are payments thrown away. If the mere making of payments which would otherwise not have been made constitutes loss or damage, then payments were made outside the period of three years from institution of these proceedings. However, that conclusion reflects a contractual measure of damages rather than a tortious measure and it is the latter that is relevant to the present proceedings: Gates v. City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 at 14.

3. It is true that the applicants expended money on the financial arrangements and in doing so can be said to have altered their position in reliance on the alleged inducement. Mere expenditure of money, however, does not, of itself, entail that the applicants were, at the time of expenditure, worse off than they would have been had they not relied on the alleged misrepresentation and entered into the transactions: see Wardley (1992) 66 ALJR at 846. In order to determine the loss and damage it would be necessary to adduce evidence, or in this case, specifically plead, that at the time when the arrangements were made their value was less than that for which the applicants had bargained because of some quality or defect inherent in the arrangements themselves.

4. I am not satisfied that the allegations pleaded compel the conclusion that the applicants could have ascertained, before 22 April 1988, that they had then suffered some loss, by comparing the amounts paid under the financial arrangements with the benefits and detriments inherent in the proposals of insurance, the term loan agreements and the guarantees and indemnities as characterized in the amended statement of claim.

5. For example, if the applicants assert that their losses arose as a result of the fact that interest payments and repayment of principal were not tax deductible, it is not demonstrable on the face of the pleading that their non-deductible character existed before 22 April 1988. It is possible that whether the payments were deductible could only be determined at the end of the financial year, and depended upon some power in the Deputy Commissioner of Taxation to issue an assessment. In that case the loss could be said to be contingent upon the form and content of the assessment when it issued. Although different in character from the contingent liability in Wardley, the ascertainment that a loss has been suffered depends upon the application of the tax laws to the financial arrangements. In the language of Brennan J in Wardley, at 847, extrinsic circumstances beyond the mere passage of time had to intervene before it could be ascertained that a loss had been suffered. Accordingly, I am not persuaded that the pleadings disclose a cause of action which was necessarily complete before 22 April 1988.

6. The difficulty of determining the existence and extent of a loss on an interlocutory application in an action for economic loss was noted by the High Court in Wardley. In the joint judgment of Mason CJ, Dawson, Gaudron and McHugh JJ their Honors deprecated attempts to have questions of this kind determined in interlocutory proceedings, saying at 846:
   

"We should, however, state in the plainest of terms that we regard it as undesirable that limitation questions of the kind under consideration should be decided in interlocutory proceedings in advance of the hearing of the action, except in the clearest of cases. Generally speaking, in such proceedings, insufficient is known of the damage sustained by the plaintiff and of the circumstances in which it was sustained to justify a confident answer to the question."

1. I do not regard the present as one of "the clearest of cases" and accordingly, I consider that the question of when it was ascertainable that a loss had been suffered should be left to be resolved at the trial of the action.

2. For these reasons, the various motions by the respondents must be dismissed with costs.