Randles v Ralph and Beattie Bosworth Pty Ltd trading as Ralph Beattie Bosworth [No 2] - [2020] WASC 313

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION:   RANDLES -v- RALPH & BEATTIE BOSWORTH PTY LTD trading as RALPH BEATTIE BOSWORTH [No 2] [2020] WASC 313
CORAM:   MASTER SANDERSON
HEARD:   20 AUGUST 2020
DELIVERED          :   29 SEPTEMBER 2020
PUBLISHED           :   29 SEPTEMBER 2020
FILE NO/S:   CIV 2344 of 2017
BETWEEN:   PETER RANDLES and LEONIE RANDLES
Plaintiff
AND
RALPH & BEATTIE BOSWORTH PTY LTD trading as RALPH BEATTIE BOSWORTH
Defendant

Catchwords:

Practice and procedure - Application to strike out amended statement of claim - Turns on own facts

Legislation:

Nil

Result:

Defendant's application successful in part

Category: B

Representation:

Counsel:

Plaintiff	:	In person
Defendant	:	T J Porter

Solicitors:

Plaintiff	:	In person
Defendant	:	DLA Piper

Case(s) referred to in decision(s):

Esanda Finance Corporation Limited v Peat Marwick Hungerfords (1997) 188 CLR 241
London City Equities Ltd v Ernst and Young [2019] NSWSC 963
Vantage Holdings Group Pty Ltd v Donnelly [No 4] [2019] WASC 398

MASTER SANDERSON:

This is the defendant's application to strike out the plaintiffs' amended statement of claim. An amended writ of summons and amended statement of claim was filed 6 December 2019. Although the plaintiffs are presently unrepresented, at that time they were represented by solicitors and the amended statement of claim was drawn by those solicitors. The application to strike out the amended statement of claim was filed on 12 June 2020. Given the time that has elapsed since the amended statement of claim was filed, leave was required to bring this application. Leave was given in an order made 4 May 2020.
Turning to the pleading, it identifies the plaintiffs as directors and shareholders of Cottage Holdings Pty Ltd (Cottage).[1] They were also owners as joint tenants of two properties in North Fremantle.[2] The defendant is a firm of quantity surveyors.[3]
[1] Plaintiff's amended writ and statement of claim filed 6 December 2019, [3].
[2] Plaintiff's amended writ and statement of claim filed 6 December 2019, [4].
[3] Plaintiff's amended writ and statement of claim filed 6 December 2019, [2].
By 'letter of offer' dated 8 June 2010 the Australian and New Zealand Banking Group Limited (ANZ) offered to lend money to Cottage to develop a mixed use development in Norfolk Street, Fremantle.[4] The loan was for just over $10 million.[5] ANZ took by way of security a mortgage over the Norfolk Street property and a charge over the assets and undertakings of Cottage.[6] They also took individual guarantees from each of the plaintiffs and mortgages over their properties in North Fremantle.[7] The ANZ also required the plaintiffs enter into a tripartite agreement between ANZ, Cottage and the builder, Condil Property Developments Pty Ltd, in relation to the construction of the development.[8]
[4] Plaintiff's amended writ and statement of claim filed 6 December 2019, [5].
[5] Plaintiff's amended writ and statement of claim filed 6 December 2019, [6].
[6] Plaintiff's amended writ and statement of claim filed 6 December 2019, [8(a)].
[7] Plaintiff's amended writ and statement of claim filed 6 December 2019, [8(b)].
[8] Plaintiff's amended writ and statement of claim filed 6 December 2019, [8(b)(v)].
The plaintiffs plead that it was a condition precedent to the financing by ANZ that ANZ appointed the defendant to confirm the feasibility of the project, the builder's ability to complete the project and to complete it by the due date.[9] The finance was subject to the defendant preparing a report that was satisfactory to ANZ.
[9] Plaintiff's amended writ and statement of claim filed 6 December 2019, [8(c)(i)].
The tripartite deed was signed on or about 15 June 2010.[10]
[10] Plaintiff's amended writ and statement of claim filed 6 December 2019, [9].
By par 11 of the amended statement of claim the plaintiffs plead that in or about June 2010 ANZ instructed the defendant to prepare what is defined as the 'due diligence report'. For present purposes, the crux of the plaintiffs' plea is found in pars 12, 13 and 14 of the amended statement of claim. These paragraphs read as follows:
12.At all material times, the Defendant well knew that the ANZ required the report for the purpose of considering whether to lend the money and proceed with the project at 20 Norfolk Street and if so, on what terms.
13.It was reasonably foreseeable by the Defendant that a failure to prepare the report in a proper and professional manner could and would jeopardise the securities put up by plaintiff and Cottage.
14.At all material times, the Defendant knew or ought reasonably to have known of the financial risk of the project at 20 Norfolk Street and was under a duty of care, to ANZ and the plaintiff to exercise all reasonable care and skill in carrying out the investigations and making the report, and in particular to investigate the builder's suitability to undertake the building of the project with reference to the builder's qualification, registration and experience.
The plaintiffs plead that on 18 June 2010 the defendant provided a due diligence report to ANZ and consequent upon that report ANZ granted unconditional finance approval.[11] On 15 October 2010 the defendant produced the first draw down report.[12] On 26 October 2010 the defendant advised ANZ Condil was not a registered builder, the building contract was therefore void and the building could not proceed.[13]
[11] Plaintiff's amended writ and statement of claim filed 6 December 2019, [15].
[12] Plaintiff's amended writ and statement of claim filed 6 December 2019, [18].
[13] Plaintiff's amended writ and statement of claim filed 6 December 2019, [19].
Paragraph 20 of the amended statement of claim then reads as follows:
In investigating, preparing and finalising the due diligence report for and on behalf of the ANZ, the Defendant, its servants or agents were in breach of their duty of care in:
a. Failing to observe or report to ANZ that the proposed builder, Condil was not registered as a builder in terms of the Builders' Registration Act 1939 (WA);
b. Failing to report that Condil was barred by statute from performing the building work contemplated in the building contract referred to in paragraph 9(a) above;
c. Failing to report that the project was not viable on account of Condil's lack of registration as a builder and that the securities were at risk in the circumstances;
d. Stating in the report that Condil Property Developments are suitable to undertake the works; and
e. Stating the building contract between the parties is suitable for the works.
The plaintiffs plead that as a consequence of the advice from the defendant to ANZ in relation to Condil there was a five month delay in building the development.[14] That in turn led ANZ to take steps to improve their security provision including a requirement the plaintiffs provide security over a tranche of shares they owned.[15] Ultimately the development could not be resurrected. ANZ threatened legal action and as a consequence the plaintiffs and Cottage executed an asset realisation agreement.[16] Ultimately ANZ obtained judgment against the plaintiffs for an amount of $5,634,998.36.[17] The only relief the plaintiffs seek in their prayer for relief is recovery of the amount of the judgment debt in favour of ANZ.
[14] Plaintiff's amended writ and statement of claim filed 6 December 2019, [21(b)].
[15] Plaintiff's amended writ and statement of claim filed 6 December 2019, [24(a)].
[16] Plaintiff's amended writ and statement of claim filed 6 December 2019, [29].
[17] Plaintiff's amended writ and statement of claim filed 6 December 2019, [35].
As the defendant correctly notes in their submissions the principles relevant to strike out applications were summarised by Smith J in Vantage Holdings Group Pty Ltd v Donnelly [No 4] [2019] WASC 398 [60]. I would incorporate those principles without repeating them.
The defendant has two complaints. The first of these complaints can be summarised by quoting par 3 of the defendant's submissions in support of the strike out application filed 26 June 2020. That paragraph reads as follows:
The ASOC does not disclose a cause of action by the Plaintiffs against RBB. The Plaintiffs do not plead anything capable of establishing a legal relationship between RBB and the Plaintiffs. There is no causal connection between the relief sought by the Plaintiffs and any conduct of RBB. Further, the ASOC is embarrassing.
This is a claim for pure economic loss. The leading authority on pure economic loss is Esanda Finance Corporation Limited v Peat Marwick Hungerfords (1997) 188 CLR 241. In London City Equities Ltd v Ernst and Young [2019] NSWSC 963 Fullerton J provided a detailed analysis of the principles which can be drawn from the Esanda decision. Her Honour said:
29.Given that Esanda Finance Corporation Limited v Peat Marwick Hungerfords (1997) 188 CLR 241; [1997] HCA 8 is the binding authority, it is necessary to refer to the decision in some detail. Esanda Finance Corporation Ltd lent monies to Excel Finance Corporation Ltd ('Excel'). Excel was unable to repay the debt, causing Esanda to suffer loss. Esanda commenced an action in this Court against Excel's auditors, Peat Marwick Hungerfords ('PMH') in which Esanda alleged that it obtained and relied upon audited and certified accounts and an audited report of Excel for the year to 30 June 1989 in considering whether to extend loan monies. Esanda further alleged that mandatory accounting standards applied and that PMH had breached those standards in conducting the audit. It was further alleged that Esanda was a member of a class of persons whom PMH foresaw, or ought reasonably to have foreseen, might rely on the audited accounts and report and that but for the audited accounts and report, Excel would not have extended finance or suffered the consequential loss.
30.PMH applied to strike out the claim on the ground that it disclosed no reasonable cause of action. The application was dismissed at first instance but reversed on appeal. The High Court affirmed the decision of the Full Court that the auditors, PMH, did not owe a duty of care to Esanda.
31.At 250-251 Brennan CJ cited with approval the decision of the House of Lords in Caparo Industries Plc Dickman [1990] UKHL 2; [1990] 2 AC 605. In that case, auditors were sued by plaintiffs who alleged that they had bought shares in reliance on the auditors' report and had suffered a loss as a result. In reliance on earlier cases in which the plaintiff had succeeded, Lord Bridge of Harwich pointed out, in a passage cited by Brennan CJ in Esanda at 250:
'The salient feature of all these cases is that the defendant giving advice or information was fully aware of the nature of the transaction which the plaintiff had in contemplation, knew that the advice or information would be communicated to him directly or indirectly and knew that it was very likely that the plaintiff would rely on that advice or information in deciding whether or not to engage in the transaction in contemplation. In these circumstances the defendant could clearly be expected, subject always to the effect of any disclaimer of responsibility, specifically to anticipate that the plaintiff would rely on the advice or information given by the defendant for the very purpose for which he did in the event rely on it. So also the plaintiff, subject again to the effect of any disclaimer, would in that situation reasonably suppose that he was entitled to rely on the advice or information communicated to him for the very purpose for which he required it. The situation is entirely different where a statement is put into more or less general circulation and may foreseeably be relied on by strangers to the maker of the statement for any one of a variety of different purposes which the maker of the statement has no specific reason to anticipate. (Emphasis added by Brennan CJ).'
32.Brennan CJ also observed that Lord Bridge of Harwich identified the elements of liability in the following passage in Caparo at 621:
'[L]ooking only at the circumstances of these decided cases where a duty of care in respect of negligent statements has been held to exist, I should expect to find that the "limit or control mechanism imposed upon the liability of a wrongdoer towards those who have suffered economic damage in consequence of his negligence" rested in the necessity to prove, in this category of the tort of negligence, as an essential ingredient of the "proximity" between the plaintiff and the defendant, that the defendant knew that his statement would be communicated to the plaintiff, either as an individual or as a member of an identifiable class, specifically in connection with a particular transaction or transactions of a particular kind (eg in a prospectus inviting investment) and that the plaintiff would be very likely to rely on it for the purpose of deciding whether or not to enter upon that transaction or upon a transaction of that kind.'
33.Likewise, Deane J, at 258 in Esanda, again by reference to Caparo observed:
'Informing potential investors in the company lay outside the purpose of the [auditor's] report and no duty of care was owed to them. There was the possibility that they might rely upon the report for the purpose of investing in the company but that was not the purpose for which the report was given and the possibility was insufficient to establish their reasonable reliance upon it. That is, of course, another way of saying that the report was not given with the intention of inducing potential investors to act upon it, which in turn pointed to lack of reasonableness in their placing reliance upon it for that purpose.'
34.At 252, Brennan CJ described the features of the requisite duty of care in the following seminal passage:
'But, in every case, it is necessary for the plaintiff to allege and prove that the defendant knew or ought reasonably to have known that the information or advice would be communicated to the plaintiff, either individually or as a member of an identified class, that the information or advice would be so communicated for a purpose that would be very likely to lead the plaintiff to enter into a transaction of the kind that the plaintiff does enter into and that it would be very likely that the plaintiff would enter into such a transaction in reliance on the information or advice and thereby risk the incurring of economic loss if the statement should be untrue or the advice should be unsound. If any of these elements be wanting, the plaintiff fails to establish that the defendant owed the plaintiff a duty to use reasonable care in making the statement or giving the advice.'
35.Toohey and Gaudron JJ, at 265, concluded that a 'relationship of proximity marked either by reliance or by the assumption of responsibility does not arise unless the person providing the information or advice has some special expertise or knowledge, or some special means of acquiring information which is not available to the recipient' and 'unless it is reasonable for the recipient to act on that information or advice without further inquiry ... for the purpose for which it is used'. Their Honours' reasons make clear that satisfaction of those conditions was a necessary but not sufficient condition to establish the required relationship of proximity.
36.At 266, they remarked that the pleading was incapable of sustaining a suggestion that PMH intended or encouraged Esanda to rely upon their audit of Excel's accounts, and neither were they capable of giving rise to a relationship of proximity marked either by reliance or the assumption of responsibility for information or advice which is voluntarily provided.
37.At 275, McHugh J observed that:
'Thus, the position in Australia to date with respect to liability for pure economic loss caused by negligent misstatement is that, absent a statement to a particular person in response to a particular request for information or advice or an assumption of responsibility to the plaintiff for that statement, it will be difficult to establish the requisite duty of care unless there is an intention to induce the recipient of the information or advice, or a class to which the recipient belongs, to act or refrain from acting on it. Mere knowledge by a defendant that the information or advice will be communicated to the plaintiff is not enough.'
38.At 281, McHugh J observed that there was no basis to extend the liability of auditors to those members of a class whom the auditor knows, or ought to know, will rely on the audit where the auditor has not assumed responsibility to those members or intended to induce them to rely on the audit. At 289-290, McHugh J upheld the correctness of the Full Court's observations to the following effect:
'There is no allegation that the defendant intended to induce the plaintiff, or a class of which he was a member, to enter into financial transactions with the company. Indeed there is no allegation that the defendant at the relevant times was aware that the plaintiff was engaged in financial transactions with the company or that any were in contemplation. There is no allegation of any act on the part of the defendant which could indicate or involve the assumption of a specific responsibility to the plaintiff to exercise care in the audit. Apart from the allegations with respect to the accounting standards the only relevant allegations are that the defendant certified the financial statements as auditors and that the plaintiff relied upon them.'
39.McHugh J then continued, at 290, to observe that the mere fact that it was foreseeable by PMH that Esanda and other potential creditors of Excel might incur economic loss from consulting and relying upon the audit report was not enough to establish a duty of care.
Before discussing those principles in the context of this case it is worth setting out the undisputed facts. It was a precondition of the finance approval from ANZ that a satisfactory due diligence report from the defendant be obtained. If that report had been unfavourable ‑ if, for instance, the defendant advised Condil was not a registered builder ‑ then finance would not have been approved and the project would not have gone ahead. However, the due diligence report satisfied ANZ and the loan was made. For the purposes of this application (and only this application) it must be assumed the failure to advise in the due diligence report that Condil was not a registered builder was negligent. It is the defendant's position the facts do not give rise to a duty of care as between the plaintiffs and the defendant.
In par 29 of their 26 June 2020 submissions the defendant puts the position this way:
In order to establish a case for pure economic loss it is necessary for the plaintiff to allege and prove that:
(a) the defendant knew or ought reasonably to have known that the information or advice would be communicated to the plaintiff;
(b) the information or advice would be so communicated for a purpose that would be very likely to lead the plaintiff to enter into a transaction of the kind that the plaintiff does enter into;
(c) it would be very likely that the plaintiff would enter into such a transaction in reliance on the information or advice and thereby risk the incurring of economic loss if the statement should be untrue or the advice should be unsound: Esanda Finance, 252 (Brennan CJ); and
(d) the defendant had some special expertise or knowledge, or some means of acquiring information which was not available to the plaintiff: Esanda Finance, 265 (Toohey and Gaudron JJ).
With respect, that formulation of the position correctly summarises the applicable principles in a case such as Esanda. But in the Esanda case, PMH had prepared an auditor's report and certified accounts in their capacity as auditors of Excel. PMH was not instructed by Esanda. The auditor's report and the certified accounts were available to the world at large – they were public documents. PMH had no knowledge that Esanda in particular would rely upon those documents. The case here can be formulated in this way:
(a)the defendant knew or ought reasonably to have known that the information or advice would be communicated to the plaintiffs and ANZ;
(b)the information or advice would be so communicated for a purpose that would very likely to lead the plaintiffs and ANZ to enter into a transaction of the kind the plaintiffs and ANZ did enter into, ie the loan agreement;
(c)it would be very likely that the plaintiffs and ANZ would enter into such a transaction in reliance on the information or advice and thereby risk incurring economic loss if the statement should be untrue or the advice should be unsound; and
(d)the defendant had some special expertise or knowledge, or some means of enquiring information which was not available to the plaintiffs.

There is a real difference between Esanda and this case. Esanda relied upon the information provided by PMH, entered into a transaction and suffered loss. Here ANZ relied upon the defendant, entered into the transaction and may or may not have suffered loss. The real question is whether or not the plaintiffs relied on the defendant's report, entered into the transaction as a consequence of that reliance and thereby suffered loss. The plaintiffs are arguing that there was such reliance. They may or may not be able to prove that at trial. But for the purposes of a pleading summons it could not be said they do not have a cause of action.
It was further submitted by the defendant there was no basis for suggesting it had some special expertise or inside knowledge sufficient to establish it had a duty of care. That may be right. It may be possible for the defendant to establish that a due diligence report such as it prepared would not consider whether the proposed builder had the necessary registration. But that is a matter for evidence at trial and is not a pleading point. Moreover, ANZ had required Cottage to enter into a tripartite agreement – that agreement included Condil. On the face of it, it would be reasonable for a report which was described as a due diligence report to at least note there was to be a tripartite agreement and a contractual relationship between ANZ and Condil as a builder. How much further that takes the position is a matter for trial. But on a pleading summons I could not conclude a failure to investigate the status of the builder was beyond the scope of the duty of care owed by the defendant to the plaintiffs.
The second point raised by the defendant is the causal link between any breach of duty owed by the defendant to the plaintiffs and the damage allegedly suffered by the plaintiffs.
The defendant in its written submissions maintains there is no possible causal link between the amount of the judgment in favour of ANZ and any breach of duty by the defendant. Relevantly the defendant's submissions read as follows:
40. First, the Plaintiffs plead that 'ANZ breached the building contract' because it had no right to 'declare the building contract "void"' (ASOC/21(a)(i)). This being the case, there is no causal connection between the alleged negligence of RBB and any loss claimed by the Plaintiffs. Even if the alleged negligence were made out (it cannot be, as addressed above), it did not affect the building agreement, and it is not alleged to have affected anything else.
41. Second, the Plaintiffs plead that they were unable to comply with the loan agreement milestones (ASOC/21(b)(vi), 22(III)), which appears to have caused ANZ to take certain steps (ASOC/22(I)). But the cause of that inability to comply is alleged by the Plaintiffs to be 'anticipatory breach or alternatively the frustration of the loan agreement by ANZ' (ASOC/21(b)(vi)). Again, if the pleaded cause of Cottage's inability to comply with the loan agreement is some contractual conduct of ANZ, then no claim lies against RBB.
42. Third, the Plaintiffs allege that RBB negligently prepared a report that it issued to ANZ in June 2010 in respect of an agreement entered into between the ANZ, Cottage and the Plaintiffs in June 2010 (ASOC/11, 15, 16). But that cannot be the agreement pursuant to which the ANZ obtained judgment against Cottage and the Plaintiffs in March 2013.
Properly viewed, this is what is sometimes called a 'no transaction' case. If the defendant had alerted ANZ and the plaintiffs to the fact Condil was not a registered builder, ANZ would not have provided finance to Cottage, the development would not have gone ahead and the plaintiffs would not have suffered loss and damage. That is the only way this case can be viewed. It would not be open to the plaintiffs to claim damages based upon the development being completed and sold at a profit. The plaintiffs' damages must be the losses then incurred consequent upon finance being granted, the development proceeding in part and then failing.
Looked at in that way, it may be the judgment obtained by ANZ is not a proper measure of the plaintiffs' loss. At the very least, the defendant is entitled to a plea which shows the causal connection between the plaintiffs entering into the finance deal and the position they would have been in had they not entered into that arrangement. In other words, it is necessary for the plaintiffs to give further consideration to the plea of damage.
On publication of these reasons, parties ought to confer and file an agreed minute of orders. If agreement cannot be reached, parties ought file competing minute of orders within seven (7) days. As to costs, the defendant has been partially successful and I am satisfied that the costs of the application ought be costs in the cause.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
CB
Associate to Master Sanderson
29 SEPTEMBER 2020