Rothschild Australia Limited v State Bank of South Australia

[1993] HCATrans 73

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Melbourne No M68 of 1992

B e t w e e n -

ROTHSCHILD AUSTRALIA LIMITED

Applicant

and

STATE BANK OF SOUTH AUSTRALIA

First Respondent

NATIONAL SAFETY COUNCIL OF
AUSTRALIA - VICTORIAN DIVISION

(IN LIQUIDATION) and JOHN

MALCOLM PERRINS

Second and Third Respondents

Application for special leave

to appeal

Rothschild 1 12/3/93

MASON CJ
BRENNAN J

GAUDRON J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 12 MARCH 1993, AT 11.12 AM

Copyright in the High Court of Australia

MR S.P. CHARLES, QC: If the Court pleases, I appear with MR

R.A. BRETT and MR M.J. COLBRAN, for the applicant.

(instructed by Blake Dawson Waldron)

MR A.H. GOLDBERG, QC: If the Court pleases, I appear with

my learned friend, MR J.G. SANTAMARIA, for the

first respondent, State Bank of South Australia.

(instructed by Darvall Mccutcheon)

MR J.M. BATT, OC: If the Court pleases, I appear with my

learned friend, MR F.M. McLEOD, for the second and

third .respondents. (instructed by Cornwall Stodart)

MASON CJ: Yes, Mr Batt. Mr Charles.

MR CHARLES:  Your Honour, we have some short outlines of

argument, if that would be of assistance to the

Court.

MASON CJ: Thank you. Yes.

MR CHARLES:  Your Honours, if special leave were granted,

this case would take nothing like the time

contemplated in the last case before the Court.

MASON CJ: What, six days?

MR CHARLES:  No, Your Honour. This matter lasted in the

Full Court slightly more than three days and we

would have thought it would not take very much more

than a day in this Court if the matter were to be

argued there. Your Honours, the - - -

GAUDRON J: But it is like the last case, is it not, in that

it really does depend substantially on the facts.

MR CHARLES:  Your Honour, there is no question that facts

are involved; the difference that we seek to put
before the Court in this case is that the Court

here is faced with a situation where there are a

number of possible representations alleged to have

been made in the letter which is the critical piece

of evidence before the Court. The problem arises

in circumstances where one particular

representation may have had an inducing

consequence, but in circumstances where that

representation was true and where other
representations, which assume for a moment were

false, had no impact on the representee at all, did

not induce.

Now, Your Honours, the point of general

importance that we seek to put is two-fold:

firstly, His Honour the trial judge heard the

witnesses, who were both representer and

representee, each of them gave evidence for

slightly more than a day and were cross-examined on

Rothschild 2 12/3/93

this point, and His Honour arrived at very firm

conclusions of fact in relation to that question of

inducement. And Your Honours will find them, and I

would wish to take the Court later to the point

very briefly, at page 38 of the application book.

Now, Your Honours, the second matter, on a

question of general importance, is that in

circumstances where a misrepresentation or
misleading and deceptive conduct under section 52

has been established, there has been a tendency

developing in inferior courts to make reference to

what various members of this Court have said in

Gould v Vaggelas and to the alleged inducing

tendency of misrepresentations in circumstances

where we would submit the consequence of great

reliance being placed upon inducing tendency has

the effect to reverse the onus of proof, even
though courts do not say, in those terms, that that

is precisely what they are doing and we would like

to take the Court to two other examples, again

simply by case reference, to indicate how that may

be happening.

So far as the question of general commercial

importance is concerned, Your Honours, it will be

our submission that the Full Court was quite

plainly wrong in the conclusion it drew, with

respect, on the question of inducement. The

consequence of that is that section 52 is now being

applied as between banking lenders, and so far as

we are aware, this is the first time that has

happened. It has ongoing significance in this

particular case because, as Your Honours will have

noticed, this was a trial on the question of

liability only; a question of the assessment of

damages will arise if the Full Court's verdict

stands. The case will then be sent back to the

trial judge to make an assessment of damages

flowing from the breach of s~ction 52.

We would wish to submit at the appropriate

time, in accordance with the commonsense approach

in relation to apportionment which, we would

submit, this Court has accepted, that there would

need to be an apportionment as between the various

events, causes, which gave rise to damage. The

verdict of the court will, we would submit, be

distorted if the Full Court was wrong and if its

verdict is allowed to stand.

GAUDRON J: But is it not all just a question of inducement,

apportionment, in any event?

MR CHARLES:  Your Honour, it is certainly a question of

inducement, but - - -

Rothschild 3 12/3/93

GAUDRON J:  And nothing else.

MR CHARLES: With great respect, Your Honour, no, it is more

than that, because in the first place we have the Full Court not only intervening to substitute its own assessment of inducement for that at which the

trial judge has arrived. It does so, putting to one side completely and ignoring the conclusions formed by the trial judge who saw the witnesses on

the question of inducement, and we - - -

MASON CJ: But just stopping you there, of course the

Full Court took a different view about the

representations.

MR CHARLES:	Oh yes.
MASON CJ:	Now that being so, was it not necessary for the

Full Court to apply its mind to a different question concerning inducement?

MR CHARLES:  I accept that, Your Honour, and as to that we

would submit that the Full Court has done so quite

plainly wrongly, and we would hope that we can

demonstrate that very shortly if Your Honours will

allow us to do so. That then means that the
question - and, I should add, Your Honours, that

even if that be right, that the court was dealing

with a different issue, we would submit that, none

the less, the Court was bound to take into

consideration, and did not, the views that the

trial judge had formed on the question of the

credit and the credit worthiness of the evidence

given by the two principal witnesses, Mr Ayoub and

Mrs Cartmer.

MASON CJ:  Mr Charles, there is one thing I should say, and

I would not want you to take too much comfort from

this, but it does seem that there is a rising

percentage of cases in Victoria in which the

contention is made that the Court of Appeal

division have wrongly interfered with findings of

fact made by the primary judge.

MR CHARLES:  I take no comfort from that, Your Honour, but

it is certainly a matter upon which we would - - -

MASON CJ:  I mean, from the point of view of a judge who

sits in special leave applications around

Australia, it is significant that there do seem to

be a significant number of cases in which this

point is raised here.

MR CHARLES:  Your Honours, may I invite the Court to go very

briefly to page 38 of the application book and

invite the Court's attention to the passage

appearing beginning at line 3 and proceeding down

Rothschild 4 12/3/93

to line 23. May I now take the Court back very

briefly to page 19 of the appeal book - - -

BRENNAN J: Before you leave there, there is a reference to:

property purchased with the RAL advance.

MR CHARLES:	Yes.
BRENNAN J:	So the hypothesis with which His Honour was

dealing here was that Mrs Cartmer believed that

there was property purchased with the RAL advance.

MR CHARLES: Yes, Your Honour. If I may say so,

Your Honour, so also did the applicant hold that

belief.

BRENNAN J: That may be so, yes.

MR CHARLES:  Now, Your Honour, may I take the Court back now

to page 19 to the first paragraph of the letter which is central to this case. We would accept

without hesitation, Your Honours, that there was a

representation contained in that paragraph, made
knowingly by the applicant and so understood by the

respondent, that Rothschild were saying that any

equipment that was given as security by the

National Safety Council for the loan to be made by

State Bank of South Australia, would be taken free

of any encumbrance from Rothschilds. In other
words, there was no question for the future of any

prior encumbrance in favour of Rothschilds. That,

Your Honours, is a representation which is plainly

included in that paragraph and, we would submit, it

is a representation which for practical purpose may

be regarded as true; there is no suggestion that

Rothschilds did not mean that, did not believe it

to be the case.

Then, Your Honours, what happens is - - -

BRENNAN J: But again, the relevant representation here is

that the letter conveyed that there was property

which might be the subject of a charge.

MR CHARLES:	I accept, Your Honour, that that is the construction that the Full Court placed on the
letter and I accept that that is a construction
that could be placed on the letter.  The point
that, if I may say so, that ignores, is that it
leaves to one side the question whether Mrs Cartmer
and State Bank of South Australia, believed that in
any event, regardless of any representation made by
that letter.

BRENNAN J: Not regardless, but whether the letter was a

real cause of their belief that that was so.

Rothschild 5 12/3/93

MR CHARLES:	I accept that, Your Honour.
BRENNAN J:	A real cause.

MR CHARLES:  A real cause. Now the evidence, Your Honours,

that was before the Court, and which we would

submit was uncontradicted, was that Mrs Cartmer had

had long experience of Mr Friedrich before these

events; she had dealt with him when she was

previously at the Australian Bank and at Midland

Bank. She believed the National Safety Council to be a particularly good credit risk, she had always

regarded it as an irrefragable credit risk, she was
anxious to assist the National Safety Council. In
previous dealings she had been prepared to advance
money, not only before any security documentation
had been executed, but in the absence of any check

being made on the existence of the property in

question. She plainly trusted Mr Friedrich. She

had been told by him that this property existed and

she accepted what he had told her. Now, Your

Honours, against that background - and if I may say

so, made none of the checks that would have been

possible for her to make - and for Mr Laird also -

made none of the checks that it would have been

quite possible to make to see whether that property

did exist.

Now, Your Honours, when one then goes to the

judgments of the members of the Full Court to see

what conclusion Their Honours substituted on a
question of inducement, I would invite Your Honours

to start first with His Honour Mr Justice Fullagar in the passage appearing at pages 57 to 58, and it

is two quite short passages from Their Honour's

judgments which we would seek to put to the Court

in support of our argument here. Your Honours will

see that at the bottom of application book page 57,

Mr Justice Fullagar says, on the question of

inducement, that:

His Honour found that "Mr Laird regarded the

letter from Mr Ayoub dated 15 February as

providing a sufficient safeguard to the

plaintiff that, upon its making payment to

(Rothschild), the plaintiff (bank) would
receive security from NSCA ahead of any
encumbrance in favour of (Rothschild),"

that was, indeed, entirely consistent with the

representation we concede was made, but correctly -

and in my opinion it is clear from the

evidence that Mr Laird communicated the

substance of this view to Mrs Cartmer. Next,

His Honour found that Mr Laird did not discuss

with Mrs Cartmer the question of obtaining a

Rothschild 12/3/93

Form 52 release from Rothschild. He found

that Mr Laird had given no explanation of his
failure to do this, save to say "I think the

security aspects were addressed by the

letter." Next, His Honour expressly found

that the bank made no search to ascertain what

security, if any, Rothschild had, and over

what property, and he added -"Mrs Cartmer and

Mr Laird decided deliberately that no search

should be undertaken."

Now, Your Honours, each of those matters is

consistent and consistent only, we would submit,

with Mrs Cartmer and Mr Laird having accepted the

first representation, that is that there would be

no prior encumbrance or security interest claimed

by Rothschild in whatever property it was,

unidentified at that time, that was to be given by

the National Safety Council as security for this

loan.

Now, in other words, Your Honours, the

representation which moved according to what
Your Honours have just seen stated in His Honour's

reasons for judgment, the representation which caused the bank to act as it did in making the loan, was not representations as to the existence

of this equipment; it was representations that

Rothschild would not claim any security interest

over it. Now, Your Honours, the - - -

BRENNAN J: But that rather assumes that there was something

that Rothschilds might, if it were not for the

letter, had been able to claim.

MR CHARLES:	Your Honour, we would respectfully submit, that that puts to one side the evidence which was
uncontradicted that Friedrich had been to
Mrs Cartmer, had told her that this equipment
existed, he discussed with her the way in which the
security would be given, ultimately by way of
chattel mortgage - - -

BRENNAN J: But, if there was no letter forthcoming from RAL

about this, it is unthinkable that - well, perhaps

it is not unthinkable, but it is unlikely that

Mr Laird or the State bank would not have made some

inquiry to see what the security position was.

MR CHARLES:  And if they had, Your Honour, they would have found the chattel mortgage which existed.

BRENNAN J: Over spare parts.

MR CHARLES:  Yes. And they were contemplating taking

security over spare parts.

Rothschild	12/3/93
BRENNAN J: Well, be it so, but that is scarcely the

property which would have been in mind having
regard to the size of the advance that was being

taken out.

MR CHARLES:	Your Honour, with great respect, it would have been for practical purposes, we would submit, the
same property or comparable property with what they
were expecting to get and taking on trust from
Mr Friedrich that they were going to get. They
would have found, had they made this inquiry, a
chattel mortgage.  And, if I may say so,
Your Honour, that is precisely the problem; the
matters to which Mr Justice Fullagar has addressed his attention on page 7, are matters which go to
the existence of a potential claim by Rothschild
for prior security interest over property.
Rothschild is saying, we will not be making any such claim and that, the fact that no prior claim
would be made, then causes them to act without
making these inquiries. All of that, Your Honours, is consistent, we would submit, with them acting on
the basis only of a representation about no prior
security interest being claimed, not a
representation as to the existence of property.
GAUDRON J:	You cannot really divorce one from the other,

can you?

MR CHARLES:  Your Honour, one can, we would submit, if one

has entirely separate information being given by

someone who is trusted in relation to the existence

of property.

GAUDRON J:  You can divorce though, if you start from the

assumption that the letter simply does not bear, is

not capable of bearing, the meaning that is set to

be the representation. But if you do not start

from that assumption you cannot, I would have

thought, make the arguments that you now make; you

cannot divorce them up.

MR CHARLES: Well, Your Honour, the difficulty of course is

that in this case both banks were being lied to by

the person in the middle, Mr Friedrich; both banks

were being told that the money that you have lent

or are going to lend, will be applied in the

direction of certain equipment and you will be

given security over that equipment. Now, so far as

Mrs Cartmer is concerned and the State Bank of

South Australia, Mrs Cartmer trusted Mr Friedrich,

accepted what Mr Friedrich had said about the

existence of this equipment, and we would submit on

what Their Honours have said in the Full Court, did

not need, did not rely upon, any statement from us

as to the existence of the property.

Rothschild 12/3/93

Now, Your Honours, to the same effect is what

His Honour Mr Justice Brooking had to say at
page 80 of the application book and following and

Your Honours will see His Honour approaches the

whole question of inducement, starting at the

bottom of page 80 and Your Honours will see that at

the top of the next page there is reference to
Mr Friedrich proposing the transaction to
Mrs Cartmer and giving her certain information.

Now her assumption in that paragraph is therefore

based upon Mr Friedrich's lies to her and the

second paragraph on that page likewise relates to

information given by Mr Friedrich. The third

paragraph, beginning at line 20, involves a

conversation which contains no representation on

behalf of Rothschild and then, Your Honours, going

over to the top of page 82, Your Honours will find

that by this stage, Mrs Cartmer, on her state of

mind:

she had always been told that the purpose of

the advance was to repay bridging

finance ..... the bank would be receiving

security, and she believed that the property
to be given to the bank as security was
identifiable and that Rothschild had a

security interest in it.

Those are her state of mind based on Mr Friedrich's

statement. Then, Your Honours, there is reference

to the 15 February faxed communication and to

Mrs Cartmer's annotation on it that:

"Attached is a letter from Rothschild stating

that, on settlement, title will pass to SASA.

Any questions, please call me."

And His Honour says that this is:

the most important thing contained in the

letter.

That, Your Honours, is a communication which is

referred to by the trial judge in application book

page 22 and Your Honours will see that near the

bottom of page 22, beginning at line 21, that:

Mr Laird was nevertheless concerned that the

plaintiff should be satisfied, as he said,

that the interest of RAL had been eliminated

and that there were no other interests which

would take priority to the plaintiff's

unencumbered title.

Mr Laird regarded the letter from

Mr Ayoub dated 15th February as providing a

sufficient safeguard to the plaintiff that,

Rothschild 9 12/3/93

upon its making payment to RAL, the plaintiff would receive security from NSCA ahead of any

encumbrance in favour of RAL.

And it certainly did. There was no untruth,

Your Honours,in that. Then, Your Honours, going

back to page 82, and continuing with His Honour's

elaboration of the facts relating to inducement,

Your Honours will see that Mr Laird makes a diary

note of his conversation with Mrs Cartmer,

"unencumbered title Rothschild":

This telephone conversation was unquestionably

in the context of the bank's being satisfied,
before paying money to Rothschild, that

Rothschild claimed no interest in the property over which the bank intended to take security.

And again it did not. Then, Your Honours, the next

page is the critical one, page 83.	Your Honours
will see:

Laird was concerned that the bank should

be satisfied that the interest of Rothschild

had been eliminated and that there were no

other interests which would take priority to

the bank's unencumbered title.

Laird regarded the letter as providing a

sufficient safeguard to the bank that, upon

its making payment to Rothschild, the bank

would receive security from the NSC ahead of

any encumbrance in favour of Rothschild.

And:

He took the letter to render unnecessary

an investigation of any interest of Rothschild

in the property over which the bank proposed

to take security.

And:  Both Laird and Mrs Cartmer assumed that

the letter constituted a sufficient release of

any security Rothschild might have asserted

over the property.

Now, Your Honours, each of those matters, with

great respect, goes to the question of security,

not to the existence of property. In other words,

Your Honours, what is being relied upon,as

His Honour sets out in this critical part of
His Honour's judgment, is reliance upon the

representation that Rothschild would be making no

claim to a security interest in the property which

Rothschild 10 12/3/93

was to be offered by the National Safety Council as

security.

Now, Your Honours, if I may assume for a

moment that the letter is capable of including

representations that the property exists, there is

nothing in the passages to which His Honour has

referred out of the evidence, which suggests that

that is any factor at all in the mind of

Mrs Cartmer as the basis for State Bank of South

Australia entering into this transaction and making the loan. What they are relying on is Rothschild's assurance, "We will be making no claim to a

security interest in it", and it is at that point

that we submit with very great respect, that

Their Honours in the Court of Appeal went wrong.

BRENNAN J:  What is the relevance, in the mind of

Mrs Cartmer, of the proposition that Rothschild

will be making no claim for any security?

MR CHARLES:  The relevance, Your Honour, was simply this:

both of them, both Rothschilds and State Bank of

South Australia, had been misled and lied to by

Friedrich into believing that property existed to

act as security for the relevant loan - both of

them. Now, we say that State Bank of South

Australia, in the form of Mrs Cartmer, acted on

that statement by Friedrich, did not act and were

not established to have acted on the basis of any

assertion by Rothschild that the property existed,

there was no evidence to that effect and the

recitation of the evidence Your Honours have seen

do not establish any reliance on such fact. The

evidence does establish that Mrs Cartmer plainly

relied upon a variety of statements by Friedrich

that the property existed and for that reason did
not feel it necessary to obtain any other
assurance; did not feel any necessity to go and

look at the property, did not feel any necessity to

go and check it, identify it and finally, before

making the loan, received an equipment schedule

which did give certain particulars as to its

existence, but again, from Mr Friedrich.

MASON CJ:  Mr Charles, from my point of view I can see this

question may be arguable, but it just does not seem

to me to be the type of question that the

High Court ought to take on.

MR CHARLES:  Your Honour, if we are capable of making good

that this is arguable, what follows from it is that

this Court has made conclusions on the basis of the

supposed misleading tendency of representations and a letter. From that it has then placed the onus on

the representer to demonstrate that these matters

did not mislead the representee in circumstances

Rothschild 11 12/3/93

where the trial judge heard both sides of the

evidence and positively concluded that they did not

mislead the representee.

We submit, Your Honours, that that flows from

a misapprehension by lower courts of the impact of

Gould v Vaggelas and I put to Your Honours before

that there were other cases which demonstrate a

like misunderstanding of the consequences of that

case. The cases to which I am referring,

Your Honours, are the judgment of

Mr Jus_tice Jenkinson in National Australia Bank

Limited v Cunningham (1990) ATPR 4107. The page

reference is 51,619 and the best example of what we

submit is the misinterpretation of

Gould v Vaggelas, is at page 51,623. To the same

effect, Your Honours, is what Mr Justice Hill said

in McMahon v Pomeray Pty Limited -

MASON CJ:  We do not have that first case - the judgment of

Mr Justice Jenkinson.

MR CHARLES:  We have three copies of cases on our list of

authorities in case the Court did not have them.

The relevant case, Your Honours, is·at tab 11.

MASON CJ:	What page do we look at?
MR CHARLES:	Page 51,623.

MASON CJ: Yes.

MR CHARLES:  And the passage to which I am inviting Your

Honour's attention is in the left-hand column at

point 4, beginning "where a representation is of

such a nature".

Now, Your Honours, to the same effect is the case at tab 12, which is McMahon - - -

BRENNAN J: His Honour there is only referring to an

evidential onus, is he not?

MR CHARLES:  I accept that, Your Honour, yes. Your Honours,

to the same effect is the following case,

McMahon v Pomeray Pty Limited and may I invite the

Court's attention to the editorial comment

appearing on page 52,853 at point 2 of the page,

the second sentence.

BRENNAN J:  What you are saying is that there is sometimes a

conflation of the notions of ultimate onus and

evidential onus?

MR CHARLES:  I am indeed, Your Honour; what I am submitting

is that - - -

Rothschild 12 12/3/93

BRENNAN J: Well, that is a common enough fault that one

finds in the variety of fields, is it not?

MR CHARLES:  Your Honours, what I am respectfully submitting

is that some lower courts are unfortunately

ignoring the basic principle which was stated by

Your Honour in Gould v Vaggelas and by

Justice Wilson also in the passages to which we

have made reference in our notes of argument, that

the basic onus remains that the representee must

establish as plaintiff the reliance, and that - - -

BRENNAN J: But·that does not require a High Court judgment;

all it needs is counsel to stand up and say to the

judge, "Please distinguish between an evidential

and ultimate onus".

MR CHARLES:  Your Honour, no doubt many counsel do stand up,

but sometimes it takes a statement by this Court to

bring order back into the affairs of lower courts.

GAUDRON J: But is it clear that there was a mistake of that

kind in this case?

MR CHARLES:  We would, with great respect, submit yes. The

passages to which we have made reference,

Your Honours - and there is no substantial

reference by Mr Justice Beach; in His Honour's

reasons, for practical purposes he accepts what was

said by Mr Justice Brooking - that they demonstrate

that the court says that the - and if I might say

so, and I am completely paraphrasing - the

important representation in that letter is that

Rothschild would be making no prior claim to a

security interest, therefore you, the representee,

do not need to make any investigation of security,

because you can forget about our security and, in
those circumstances, Your Honours, nothing is seen

in the passages that Their Honours have put forward

to suggest that a representation as to the

existence of the property had any impact on the

representee at all.

Therefore, Your Honours, what one gets back to

is statements by Their Honours that the inducing

tendency of these representations - - -

GAUDRON J: Yes, but that is in a situation in which they

have already held that the representation goes to

the existence of the property. That is why it is

not clear to me you can divorce the two concepts

for your argument.

MR CHARLES:  Your Honours, in circumstances where it is not

shown, after a detailed examination of the

evidence, that a particular representation had any

consequence in terms of reliance or inducement, in

Rothschild 13 12/3/93

our submission it must follow that it has no

relevant causative consequence so far as section 52

is concerned and no impact on a cause of action.

Now, what we have here, and this is the last

question of general importance, is that if this

judgment stands, the matter will then go back to His Honour the trial judge for an examination of quantum in circumstances where if we are right in

our basic submission that these matters did not
induce the representee, but that the representee

was induced by a statement about security risk

which was true, the whole of the later hearing on

assessment of damages and apportionment is going to

be distorted by that wrong finding. So that the

matter has ongoing consequences in a very large
claim which, we would submit, is a matter of

considerable commercial importance between banks and a first application of section 52 as between

lenders.

MASON CJ:  What is significant about that, Mr Charles? I do

not follow.

MR CHARLES: Simply, Your Honours, that it is a matter, we

would submit, of great importance in banking

practice; banks lend to each other all the time,

banks act in this way, and in circumstances where

one bank acts negligently, an obvious cause of

action arises and questions of contribution,

contributory negligence and apportionment, follow.

This involves the use of section 52 in an entirely

different way, we would submit, from how it has

operated on these matters before and new

considerations may follow as to contribution and

apportionment.

Unless there is anything further the Court

wishes to put to me, those are our submissions.

MASON CJ: Yes, thank you, Mr Charles. The Court need not

trouble counsel for the respondents. The Court is

not persuaded that the proposed appeal gives rise

to any question of sufficient public importance to

warrant the grant of special leave to appeal. The

application is therefore refused.

MR GOLDBERG:  I seek an order for costs in the first-named

respondent, Your Honour.

MASON CJ:	And you also, Mr Batt?
MR BATT:	Yes.
MASON CJ:	You do not oppose that, Mr Charles?
MR CHARLES:	No, Your Honour.

Rothschild 14 12/3/93

MASON CJ:  The application is refused with costs.

AT 11.50 AM THE MATTER WAS ADJOURNED SINE DIE

Rothschild 15 12/3/93