Utopia Financial Services Pty Ltd v Financial Ombudsman Service Ltd
[2012] WASC 279
•7 AUGUST 2012
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: UTOPIA FINANCIAL SERVICES PTY LTD -v- FINANCIAL OMBUDSMAN SERVICE LTD [2012] WASC 279
CORAM: LE MIERE J
HEARD: 22 FEBRUARY 2012
DELIVERED : 7 AUGUST 2012
FILE NO/S: CIV 2883 of 2011
BETWEEN: UTOPIA FINANCIAL SERVICES PTY LTD
Plaintiff
AND
FINANCIAL OMBUDSMAN SERVICE LTD
First DefendantJOHN REES
KOHRA REES
Second Defendants
Catchwords:
Financial services - Corporations - External dispute resolution process - Determination - Terms of reference - Assessment of loss suffered - Specific performance - Turns on own facts
Legislation:
Corporations Act 2001 (Cth), s 911A, s 912A, s 945A
Supreme Court Act 1935 (WA), s 32
Trade Practices Act 1974 (Cth), s 52
Result:
Claim dismissed
Order of specific performance
Category: B
Representation:
Counsel:
Plaintiff: Mr M L Bennett
First Defendant : Mr M Wise
Second Defendants : No appearance
Solicitors:
Plaintiff: Bennett & Co
First Defendant : Francis Abourizk Lightowlers
Second Defendants : Irdi Legal
Case(s) referred to in judgment(s):
Baxter v Gapp [1939] 2 KB 271
Beswick v Beswick [1968] AC 58
Coulls v Bagot's Executor & Trustee Co Ltd (1967) 119 CLR 460
Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26; (2008) 19 VR 358
Frank Davies Pty Ltd v Container Haulage Group Pty Ltd (No 1) (1989) 98 FLR 289
Hadley v Baxendale (1854) 9 Exch 341
Hawkins v Clayton (1988) 164 CLR 539
HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [2004] HCA 54; (2004) 217 CLR 640
Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413
Lowenburg, Harris & Co v Wolley (1895) 25 SCR 51
Rolls‑Royce New Zealand Ltd v Carter Holt Harvey Ltd [2005] 1 NZL 324
Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514
LE MIERE J: The plaintiff, Utopia Financial Services Pty Ltd, carries on a financial services business. On 1 November 2006 Mr and Mrs Rees met with an authorised representative of Utopia and completed a client data form, including a risk profile questionnaire. On 2 February 2007 Utopia prepared a statement of advice for Mr and Mrs Rees. The statement of advice recommended that Mr and Mrs Rees:
(1)set up a family trust (the Family Trust);
(2)borrow $100,000 against the equity in their principal residence to enable Mr Rees to invest in unlisted diversified property trusts (the Property Trust Investment) jointly with the Family Trust;
(3)borrow $100,000 by a capital protected loan to invest in shares in the four major Australian banks for a five‑year term (the Capital Protected Investment); and
(4)establish an additional loan to fund the first year's interest for the Capital Protected Investment.
On 9 February 2007 Mr and Mrs Rees signed an authority to proceed permitting Utopia to act in accordance with the recommendations in the statement of advice. Subsequently, the loans and the investments were established. Mr Rees' taxable income was reduced by the deductions relating to the loan and investment recommendations. Mr and Mrs Rees were able to claim and qualify for the Family Tax Benefit which they subsequently received.
The Dispute
On 29 April 2010 Mr and Mrs Rees complained to Utopia that the dividends on their investments and their tax benefits had not been sufficient to cover the interest payments on their loans and the capital value of their investments had diminished. They sought compensation from Utopia for alleged losses resulting from acting in accordance with the recommendations. On 6 May 2010 Utopia informed Mr and Mrs Rees that their allegations were incorrect and Utopia would not pay any compensation.
On 25 May 2010 Mr and Mrs Rees lodged a dispute form with the first defendant; Financial Ombudsman Service Ltd (FOS). In a letter attached to the dispute form, Mr and Mrs Rees stated their complaints and sought financial compensation. To explain that dispute resolution process, it is necessary to set out some relevant aspects of the regime imposed by the Corporations Act 2001 (Cth) on providers of financial services.
The Corporations Act s 911A requires that a company be licensed to carry on a financial services business. One of the obligations of a licensee is to be a member of an approved external dispute resolution scheme: Corporations Act s 912A(1)(g), s 912A(2)(b). FOS, which is a company limited by guarantee, is an approved external dispute resolution scheme. Clause 14.5 of FOS's Constitution provides that the provisions of the Constitution and of the applicable terms of reference in respect of a dispute shall form a binding contract between each member and FOS. The dispute resolution scheme conducted by FOS has been established as an independent forum to resolve disputes (Disputes) between Applicants, that is a person who has lodged a Dispute with FOS, and Financial Services Providers, that is a provider of a financial service that is a member of FOS. It is common ground that the applicable terms of reference are the terms of reference established on 1 January 2010 as amended on 1 July 2010 (Terms of Reference).
Utopia holds an Australian financial services licence and is a member of FOS. It is common ground that the provisions of the FOS Constitution and the Terms of Reference form a binding contract between Utopia and FOS.
In accordance with the Terms of Reference the Dispute lodged by Mr and Mrs Rees with FOS was resolved by a FOS Panel. The Panel found that Utopia had breached its obligations to Mr and Mrs Rees because it did not have a reasonable basis for the advice provided to them in breach of s 945A of the Corporations Act and it failed to adequately disclose to them the risks associated with the recommended strategy. The Panel held that but for the inappropriate advice and inadequate risk disclosure Mr and Mrs Rees would not have invested as they did and the breach by Utopia of its obligations to Mr and Mrs Rees caused them loss. The Panel found that Mr and Mrs Rees' loss, excluding the current value of the Property Trust Investment, was $139,015. The Panel found that Utopia should contribute $3,000 towards Mr and Mrs Rees' professional costs. In relation to the Property Trust Investment the Panel observed that the investment was frozen and Mr and Mrs Rees were unable to withdraw from the investment. The Panel found that the uncertainty of the future of the Property Trust Investment could be resolved by not deducting any amount for its current notional value from Mr and Mrs Rees compensation but requiring that the investment be assigned to Utopia if it so desired. The Panel determined that Mr and Mrs Rees' complaint was upheld and decided that:
(a)Utopia pay to Mr and Mrs Rees $142,015 (being $139,015 and $3,000 for professional costs); and
(b)Mr and Mrs Rees assign to Utopia all their rights and interests in respect of the Property Trust Investment within 14 days of receiving a written request and cheque for any transfer or assignment fee from Utopia. Such written request may only be sent by Utopia within 14 days of payment by Utopia of the amount detailed in (a) (the Determination).
In this action Utopia claims a declaration that FOS acted outside its Terms of Reference when making the Determination. Utopia does not seek judicial review of the Determination. Utopia's case is that in resolving the Dispute by the Determination FOS, by the Panel, acted contrary to the provisions of the Terms of Reference and is thereby in breach of the contract between FOS and Utopia. Utopia does not challenge the Panel's findings that Utopia breached its obligations to Mr and Mrs Rees. Utopia says that in deciding that Utopia pay $142,015 to Mr and Mrs Rees and that Mr and Mrs Rees assign to Utopia their rights and interests in the Property Trust Investment if requested, the Panel acted beyond the power conferred on it by, and contrary to, [9] of the Terms of Reference, which provides the remedies which FOS may decide upon to resolve the Dispute. Utopia says that under [9] of the Terms of Reference, FOS may decide that the Financial Services Provider pay a sum of money to the Applicant but only to compensate the Applicant for direct financial loss or damage. Utopia says that the Panel decided that Utopia pay $139,015 to Mr and Mrs Rees and Mr and Mrs Rees to transfer their interest in the Property Trust Investment, if requested, instead of assessing the direct financial loss or damage suffered by Mr and Mrs Rees.
FOS denies that it breached the contract with Utopia. It says that the Determination was made in accordance with the Terms of Reference. FOS counterclaims for an order for specific performance requiring Utopia to pay to Mr and Mrs Rees the sum of $142,015. FOS says that the terms of its contract with Utopia require Utopia to comply with the Determination and Utopia's failure to pay to Mr and Mrs Rees the amount directed by FOS is a breach of that contract.
Mr and Mrs Rees took no part in the action and gave notice that they abided by the result.
The Determination
A central issue is the proper construction of [8] and [9] of the Terms of Reference. However, before considering those provisions it is convenient to outline the Panel's findings about the loss and damage suffered by Mr and Mrs Rees. As I have said, Mr and Mrs Rees invested $100,000 in each of the Capital Protected Investment and the Property Trust Investment, a total of $200,000. At [10] the Panel said that at the time of lodging their complaint with FOS, the value of the Capital Protected Investment had fallen to $76,813 and the Property Trust Investment was frozen, had ceased paying distributions and was valued at $13,388. The income from the investments and the tax benefits was insufficient to meet the interest payments on the loans. The Panel said that as a result Mr and Mrs Rees were unable to withdraw from the Property Trust Investment or continue to afford interest payments on the loans taken out to make the investments.
Mr and Mrs Rees acted in accordance with the recommendations made by Utopia. The first recommendation was to take a loan of $100,000 secured against their home and to use the $100,000 to, jointly with the Family Trust, invest in a diversified portfolio of direct property trusts. In accordance with this recommendation Mr and Mrs Rees invested $100,000 to purchase units in the Orchard Diversified Property Fund (the Property Trust Investment). The second recommended investment was to borrow $100,000 under a Westpac Protected Equity Loan (the PEL) and invest that sum in shares in the four major Australian banks in equal proportions. The PEL is an interest only protected loan to fund 100% of the purchase price of the shares. The borrower, Mr and Mrs Rees, pay interest on the loan and any applicable fees. The lender, Westpac, protects the amount of the loan capital from any reduction in the value of the portfolio. This means that at the end of the loan term, if any of the investments have fallen below their initial purchase price, they are simply handed back to the lender as full repayment for that portion of the loan, which was used to originally acquire those investments. On the other hand, the borrower gains from all of the investments that have appreciated.
In its Determination, the Panel found that, but for the inappropriate advice and inadequate risk disclosure, Mr and Mrs Rees would not have invested as they did. At the time of lodging the complaint with FOS, the capital value of their investments had fallen, the Property Trust was frozen and the interest they had paid on the loans exceeded the income they had received from the investments, tax refunds and family tax benefits by approximately $30,000. Therefore, the Panel found, the breach of Utopia's obligations had caused a loss to Mr and Mrs Rees. The Panel then went on to assess the amount of the loss. The Panel observed that the Property Trust Investment was frozen and this investment might:
(a)be worthless, in which case, it would be unfair to deduct an amount from the [Rees'] compensation for its current (theoretical) value; or
(b)have residual value, in which case if no amount was deducted from the amount awarded to [the Rees], they would benefit twice.
The Panel said that the uncertainty of the future of the Property Trust Investment can be resolved by not deducting any amount for its current notional value from the Rees' compensation but requiring that the investment be assigned to Utopia if it so desired. The Panel further found that Utopia should contribute $3,000 towards the Rees' professional costs, being accountant's fees. Utopia does not challenge that part of the decision.
The Panel set out the calculation of the Rees' loss provided by their accountant on 22 June 2011 excluding the current value of the Property Trust Investment and accounting fees, as follows:
Total Amount Invested $200,000 Less current value of Capital Protected investment/break fees $91,697 Plus Loan Interest on Capital Protected investment $54,397 Plus loan interest on Property Trust investment loan $29,589 Less income from Capital Protected investment -$17,283 Less Income received from Property Trust investment -$9,113 Less Income Tax refunds -$19,309 Less Family Tax benefit -$7,569 Total Loss $139,015
The Panel observed that Utopia claimed that the current value of the Capital Protected Investment was $100,000. That is because if the investment is held until maturity it is capital protected. The Panel rejected Utopia's contention. The Panel found that, as the investments were not appropriate for the Rees, the estimated value of those inappropriate investments at maturity was not material to the calculation of loss. The Panel was of the view that it was more appropriate to use the current value of the Capital Protected Investment in calculating the Rees' compensation. The Panel accepted the calculation of the Rees' loss made by their accountant.
The current value of the Capital Protected Investment was calculated from a quote given by Westpac on 6 June 2011 of the amount that would be payable by Mr Rees if he realised the Capital Protected Investment on that date. The value of the bank shares had fallen but because the PEL was capital protected the net loss to Mr Rees would be $8,303.25, which is the amount of break costs payable on early termination of the loan. The sum of $91,697 is calculated by deducting the break costs of $8,303 from the investment of $100,000.
The other contentious value referred to by the Panel is the value of the Property Trust Investment. In their letter of 20 May 2010, which was annexed to their dispute notice, Mr and Mrs Rees stated that the current value of the property shares was $13,388. I do not know the basis of that assertion. The materials before the Panel included a document dated 6 June 2011 and described as 'investor account statement for the period 24 May 2007 to 6 June 2011' on a letterhead of Orchard Funds Management. The statement contains an entry to the effect that the value of the units held by John Rees, the Rees Family Trust in the Orchard Diversified Property Fund was $11,007.19. That is the property fund in which the Property Trust Investment was made.
Terms of Reference
The dispute resolution process is set out section C of the Terms of Reference. Paragraph 7.1 provides that to resolve a dispute, FOS may use one or more of the methods specified, which includes deciding the dispute in accordance with the process set out in [8]. Paragraph 8 deals with 'deciding disputes'. Paragraph 8.1 provides that FOS is not bound by any legal rule of evidence. Paragraph 8.2 provides:
8.2Dispute resolution criteria
Subject to paragraph 8.1, when deciding a Dispute and whether a remedy should be provided in accordance with paragraph 9, FOS will do what in its opinion is fair in all the circumstances, having regard to each of the following:
a)legal principles;
b)applicable industry codes or guidance as to practice;
c)good industry practice; and
d)previous relevant decisions of FOS or a Predecessor Scheme (although FOS will not be found by these).
Paragraph 8.7 sets out the requirements for a determination. They include that each determination:
must specify any remedy, determined in accordance with paragraph 9, that FOS considers fair and appropriate.
Paragraph 9 is entitled 'Remedies' and includes:
9.1Types of remedies
Subject to paragraphs 9.2 to 9.8, FOS may decide that the Financial Services Provider undertake a course of action to resolve the Dispute including;
a) the payment of a sum of money
...
9.2Compensation for direct financial loss or damage
Subject to paragraph 9.7, FOS may decide that the Financial Services Provider compensate the Applicant for direct financial loss or damage.
9.3Other compensation
a)Subject to paragraph 9.3 c) and paragraph 9.7, FOS may decide that the Financial Services Provider compensate the Applicant for consequential financial loss or damage up to a maximum amount of $3,000 per claim made in the Dispute.
b)Subject to paragraph 9.3 c) and paragraph 9.7, FOS may decide that the Financial Services Provider compensate the Applicant for non‑financial loss but only where:
(i)an unusual degree or extent of physical inconvenience, time taken to resolve the situation or interference with the Applicant's expectation of enjoyment or peace of mind has occurred; or
(ii)in the case of a Dispute pertaining to an individual's privacy rights - injury has occurred to the Applicant's feelings or humiliation has been suffered by the Applicant.
The maxim amount of compensation for non‑financial loss will be $3,000 per claim made in the Dispute.
Section F contains interpretation of defined terms. The defined terms include:
'Consequential financial loss' means indirect financial loss or damage; and
'Determination' means a decision by FOS about a Dispute in accordance with paragraph 8 (which may include a decision as to remedy under paragraph 9).
Interpretation of Terms of Reference
Paragraph 9.3(b) provides that FOS may decide that the Financial Services Provider compensate the Applicant for non‑financial loss in the limited circumstances there specified. Direct financial loss or damage is not defined in the Terms of Reference. 'Consequential financial loss' is defined in the Terms of Reference to mean indirect financial loss or damage.
The New Zealand Court of Appeal in Rolls‑Royce New Zealand Ltd v Carter Holt Harvey Ltd [2005] 1 NZL 324 held that, in the absence of any contrary indication in the contract, the dividing line between 'direct losses' and 'indirect and consequential losses' will be drawn along the boundary between the first and second limbs of Hadley v Baxendale (1854) 9 Exch 341. It was held:
Under this analysis direct losses will be those losses which directly and naturally in the ordinary course of things flow from a breach of contract. Losses falling under the second limb are those caused by special or exceptional circumstances and are only recoverable by a plaintiff if the defendant had knowledge of those circumstances [142].
Australian courts have adopted a similar approach: Frank Davies Pty Ltd v Container Haulage Group Pty Ltd (No 1) (1989) 98 FLR 289. In Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26; (2008) 19 VR 358 Nettle JA, with whom Ashley and Dodds‑Streeton JJA agreed, held that it was artificial to distinguish between 'direct' and 'consequential' loss on the basis of the first and second limbs of Hadley v Baxendale and said that the real distinction was between 'normal loss (rather than "direct loss")' and 'consequential loss', where normal loss refers to that loss which every plaintiff in a like situation will suffer and 'consequential loss' is any loss beyond the normal measure, such as profits forgone or expenditure incurred by reason of the breach. The approach of Nettle JA was based on the approach in McGregor On Damages (15th ed) where the learned author distinguishes between 'direct' (normal) and 'consequential' loss in the terms referred to. McGregor refers to the two most significant types of damages for torts as normal damages and consequential damages. Normal damages refer to damages that attempt to compensate the plaintiff for perhaps the most direct consequences of the tort. The court will choose what will best put the plaintiff in the position as if the tort had not been committed, that is, reinstatement, replacement or diminution in value.
Insofar as the loss or damage claimed by the Rees includes the difference between the interest they paid on the loans and the income they received from the investments together with tax benefits that loss or damage is direct financial loss or damage. The statement of advice given to the Rees by Utopia stated that the combination of investments recommended provides a cash positive tax loss investment in property and shares. That is, whilst the investment is cash flow positive, for tax purposes it is negative. The difference between the interest paid by the Rees and the income and tax benefits received from them are losses, which directly and naturally in the ordinary course of things flow from the breach of obligation by Utopia. Utopia did not argue to the contrary.
Insofar as the loss or damage claimed by the Rees includes the diminution in the value of their investments that is a claim for direct financial loss or damage. However, Utopia submits that the Panel did not asses the loss or damage suffered by the Rees and indeed the Rees had not suffered any loss or damage at the time of the Determination. Utopia submitted that the assessment by FOS of the assumed current value of the Capital Protected Investment purported to calculate loss and damage that had not in fact been incurred because the Rees retained the Capital Protected Investment and the interest would have been payable in any event. In the same way, Utopia submitted in relation to the Property Trust Investment that the Panel awarded compensation under the guise of loss or damage for what was really a notional or assumed loss. Utopia says that in doing so the Panel acted beyond the Terms of Reference, which confined the Panel to awarding compensation for direct financial loss or damage, that is, direct financial loss or damage that has been suffered.
Nature of Utopia's case
Clause 14.5 of FOS's Constitution provides that the provisions of the Terms of Reference in respect of a Dispute shall form a binding contract between Utopia and FOS. The effect of that clause is that FOS must deal with a Dispute between Applicants and Financial Service Providers in accordance with the Terms of Reference.
A Determination creates new rights and obligations. It does not amount to the performance of a judicial function, that is the ascertainment and enforcement of existing legal rights. The power to create new rights and obligations arises from the contract between FOS and a member. The extent of, and limitations upon, that power must be found in the Terms of Reference which constitute the relevant terms of the contract.
Paragraph 7.1 of the Terms of Reference provides that to resolve a Dispute FOS may use one of the specified methods. The relevant method is to decide the Dispute in accordance with the processes set out in [8]. That method is called a Determination. The remedies which FOS may decide to resolve the Dispute are specified in [9]. Paragraph 8.2 provides that when deciding a Dispute and whether a remedy should be provided in accordance with [9], FOS will do what in its opinion is fair in all the circumstances, having regard to the specified matters. Paragraph 8.2 prescribes what matters FOS should have regard to in deciding whether a remedy should be provided; it does not provide that FOS may provide any remedy which in its opinion is fair in all the circumstances having regard to the specified matters. That is apparent from the text of [8.2]. It is further demonstrated by 8.7(a)(ii)(B)(iv) which provides that FOS must specify any remedy, determined in accordance with [9], that FOS considers fair and appropriate.
Paragraph 8.7 provides that a Determination must specify any remedy, determined in accordance with [9], that FOS considers fair and appropriate. Paragraph 9.1, as qualified by [9.2] ‑ [9.8], sets out the remedies which FOS may decide.
Utopia's case is that FOS breached the contract between it and Utopia by deciding upon a remedy that was not provided for in [9]. Utopia says that [9] does not empower FOS to decide the remedy which FOS decided in this case. This is not an appeal or an action for judicial review. Utopia's case is not that FOS erred in fact or law in making its decision. Utopia's case is that the remedy decided by FOS is outside the remedies which [9] empowers FOS to decide.
FOS may decide that the Financial Services Provider pay the Applicant a sum of money but the sum of money must consist of compensation for direct financial loss or damage pursuant to [9.2], compensation for consequential financial loss or damage up to a maximum of $3,000 pursuant to [9.3(a)], or compensation for a non‑financial loss pursuant to [9.3(b)]. FOS says that the sum of money it decided Utopia should pay the Rees is compensation for direct financial loss or damage.
The question is whether the remedy which FOS decided is compensation for direct financial loss or damage. Utopia says that compensation for direct financial loss or damage means compensation for actual loss or damage suffered and does not include prospective loss or damage and at the time of the Determination the Rees had not suffered any actual loss or damage. Utopia says that any loss or damage suffered by the Rees was only prospective loss or damage because until they realised the investments it could not be ascertained what loss they had suffered or whether they had suffered any loss.
Terms of reference - paragraph 9
Under [9.1] FOS may decide that the Financial Services Provider undertake a course of action to resolve the Dispute including the actions set out in [9.1] (a) to (h). The power to decide that the Financial Services Provider pay a sum of money is subject to the limitations in [9.2] and [9.3], which in effect limit the compensation that FOS may decide that the Financial Services Provider pay to the Applicant to compensation for direct financial loss or damage, consequential financial loss or damage up to a maximum of $3,000 and compensation for non‑financial loss in the circumstances specified. A decision that the Financial Services Provider pay to the Applicant a sum of money will only be appropriate if it is for the purpose of compensating the Applicant for direct financial loss or damage or, to a limit of $3,000, for consequential financial loss or, in the special circumstances specified, for non‑financial loss.
FOS's discretion in deciding a remedy is very wide. Paragraph 9.1 should not be narrowly construed to empower FOS to make decisions that could only be made at common law or in equity. Such an approach is inconsistent with the purpose of [9.1], which is to provide FOS with wide and flexible powers in order to do justice between the parties. The words 'FOS may decide that the Financial Services Provider undertake a course of action to resolve the Dispute including: (a) the payment of a sum of money' enables FOS to decide that the Financial Services Provider pay the Applicant a sum of money upon condition that the Applicant transfer or assign to the Financial Services Provider their interest in some chose in action or other property.
In Lowenburg, Harris & Co v Wolley (1895) 25 SCR 51 the defendant finance brokers who advised the plaintiff to invest money in a first mortgage were found to be negligent in accepting a valuation of the land submitted to them by the mortgagor and were held liable to the plaintiff for the loss. The trial judge ordered the defendant to repay to the plaintiff the full amount of his advance and directed that upon payment of this sum the plaintiff should assign the mortgage to the defendant. The majority of the Supreme Court of Canada allowed an appeal on the basis that the effect of the judgment would be to make the defendant not only responsible for such damages as were caused by the negligence of the valuers in overvaluing the mortgaged property but also for any depreciation in the actual value of the property subsequent to the loan. However, the Chief Justice, with whom two other members of the court agreed, found no error in the form of the judgment. The two minority Judges found no ground for interfering with the judgment of the lower court. Gwynne J said that the true measure of the plaintiff's damages was the amount which he was wrongfully induced by the defendant to advance on condition that the plaintiff transfer all his interest in the mortgage to the defendant. Gwynne J said:
Whatever may be the real value of the security can only with certainty be ascertained upon a sale of the premises to realise the amount purported to be secured by the mortgage. I can see no justice whatever in compelling the plaintiff to adopt any such proceedings, or in putting him to the delay and expense incident upon any proceeding for determining the real value of premises comprised in a mortgage, or interest which he repudiates as having been imposed upon him by the false representations of the defendants (61).
In Baxter v Gapp [1939] 2 KB 271 MacKinnon LJ referred to the judgment of the trial judge in Lowenburg, Harris & Co v Wolley and said that that would be a process which would arrive at the same result as awarding the plaintiff damages in an amount equal to the difference between the amount lent and the actual value of the mortgage.
I find that the decision by FOS that Utopia pay a sum of money to the Rees and the Rees, if requested by Utopia to do so, transfer their interest in the Property Trust Investment to Utopia is a decision which FOS is empowered to make by [9.1] of the Terms of Reference.
Actual loss or damage
Utopia submits that the power of FOS to decide that the Financial Services Provider compensate the Applicant for direct financial loss or damage is not enlivened unless and until FOS is satisfied that the Applicant has suffered loss or damage by reason of the Financial Services Provider's breach of obligation. Utopia says that it is not sufficient that the Applicants are likely to suffer loss or damage.
Courts have considered when a person suffers economic loss or damage in the context of determining the point at which the limitation period begins to run in cases involving economic loss. The time at which a plaintiff first suffers loss or damage is essentially a question of fact and will differ from one case to the next. In Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514 Mason CJ, Dawson, Gaudron and McHugh JJ observed that economic loss may take a variety of forms and, as Gaudron J had noted in Hawkins v Clayton (1988) 164 CLR 539, 600 ‑ 601, the answer to the question when a cause of action for negligence causing economic loss accrues may require consideration of the precise interest infringed by the negligent act or omission. When economic loss is sustained depends upon the nature of the interest infringed and the nature of the interference to which it is subjected: Wardley (527). A plaintiff may suffer economic loss or damage in a number of ways. In Wardley the plaintiff suffered loss by the incurring of a liability. The High Court held that the indemnity generated an executory and contingent liability upon the part of the State and it suffered no loss until that contingency was fulfilled. The plaintiff had entered into a contract which exposed it to a contingent loss or liability but suffered no actual loss until the contingency was fulfilled. Brennan J said that 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: (536). Brennan J added (at 537):
The quantification of the diminution in value of an asset or of a liability incurred or the value of any benefit acquired may not be ascertainable at the time when the burden of the transaction is borne. In that event, the suffering of any loss cannot be said to occur before it is reasonably ascertainable (not before it is ascertained) that the burdens which the plaintiff has borne are greater than the value of the benefits that the plaintiff has acquired or will acquire. In other words, no loss is suffered until it is reasonably ascertainable that, by bearing the burdens, the plaintiff is 'worse off than if he had not entered into the transaction'.
One principle that emerges from Wardley is that where loss is not capable of being ascertained until some time in the future, loss or damage is suffered when the loss is capable of being ascertained. However, loss occurs when it is reasonably ascertainable not when it is ascertained.
FOS submitted that the Rees' case before FOS was a 'no transaction' case and relied upon Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413. In that case the respondent insured a mortgage in reliance upon a valuation provided to a company associated with the lender. The valuer knew, and provided its report, on the basis that the lender and the insurer would rely upon it. The valuation was for $5.5 million. The true value at the time of valuation was about $4 million. The borrower defaulted. The lender went into possession and eventually resold for $2.6 million. The insurer paid the full amount of the lender's loss and claimed that amount in contract, tort and pursuant to the Trade Practices Act 1974 (Cth) s 52 from the valuer. The trial judge found that the insurer would not have insured the mortgage had it known of the true value of the property. Determining the case in tort, and by reference to the Trade Practices Act s 52, the trial judge allowed the full amount of the insurer's loss. The valuer argued that the limit of the entitlement should have been the difference between the amount of the valuation and the true value of the property at the time of valuation - thus excluding the effect of a decline in property values which was reflected in the sale price of $2.6 million eventually achieved. The decision of the trial judge was affirmed by the Full Federal Court, which decision was in turn affirmed by the High Court.
Gaudron J decided the matter on the basis that it was a case of economic loss said to have resulted from entry into a transaction in reliance upon negligent advice. In relation to when loss occurs, her Honour said:
Where economic loss is said to have resulted from a transaction entered into in reliance upon negligent advice or information, the approach of this Court has not been confined to looking at the immediate situation brought about by entry into the transaction. That is because, as was pointed out in Wardley Australia Ltd v Western Australia, '[w]ith economic loss, as with other forms of damage, there has to be some actual damage' and not simply '[p]rospective loss'. And where a transaction involves benefits and burdens, 'no loss is suffered until it is reasonably ascertainable that, by bearing the burdens, the plaintiff is "worse off than if he had not entered into the transaction"'.
It was pointed out in Wardley that '[t]he kind of economic loss which is sustained and the time when it is first sustained depend upon the nature of the interest infringed and, perhaps, the nature of the interference to which it is subjected'. Wardley was concerned with an action for damages for breach of s 52 of the Act. However, there is no reason in principle why the position should be any different in tort.
The interest that a mortgage lender seeks to protect by obtaining a valuation of the proposed security is not simply an interest in having a margin of security over and above the mortgage debt. Rather, it is that, in the event of default, it should be able to recoup, by sale of the property, the amount owing under the mortgage. And that is also the interest of a mortgage insurer. It is the risk that recoupment might not be possible that calls the valuer's duty of care into existence. And it is the interest in recoupment that is infringed by breach of that duty. Moreover, the time that loss occurs (and hence the time when the tort is complete) is when recoupment is rendered impossible. In the case of a mortgage transaction, that will occur when it is reasonably ascertainable that sale will result in a loss. At the earliest it will be when default occurs and, at the latest, when the property is sold [14] ‑ [16]. (footnotes omitted)
Gummow J agreed with Gaudron J that the cause of action commenced at the earliest when the mortgagor defaulted:
The interest of MGICA was that, in the event of default, the mortgagee would have the capacity to recover the amount secured by realising its security and without calling upon the insurance. To the extent that MGICA recouped to the mortgagee the moneys secured by the mortgage, it would have an interest in the security by way of subrogation.
...
... the cause of action of MGICA in negligence accrued when the damage to its interest (as indicated above) was sustained. This was, at the earliest, when the mortgagor defaulted, and certainly when the property was sold.
Mason CJ, Dawson, Gaudron and McHugh JJ in Wardley Australia Ltd v Western Australia considered the economic loss arising from conduct which contravened s 52 of the Trade Practices Act. Their Honours said:
'The kind of economic loss which is sustained and the time when it is first sustained depend upon the nature of the interest infringed and, perhaps, the nature of the interference to which it is subjected.'
They went on to distinguish the detriment suffered by a person when first entering into an agreement relying on the negligent misrepresentation and the legal concept of 'loss or damage' which may manifest at a later time. These propositions apply with equal force to the tort of negligence and to this case [82] ‑ [86]. (footnotes omitted)
In HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [2004] HCA 54; (2004) 217 CLR 640 the respondent entered into a contract to purchase a shopping arcade in reliance upon advice from a valuer that the construction of a new shopping centre nearby was not likely to affect existing retail tenancy levels adversely. After the opening of the new shopping centre the arcade suffered a collapse in gross rental income with a concomitant fall in value. The respondent tried to sell the arcade without success. The High Court held that the correct measure of damages was obtained by deducting the true value of the arcade at the date of purchase from the purchase price and in determining the true value at the date of purchase regard might be had to subsequent events. The High Court also considered an alternative argument by the respondent that compensation should be measured by the difference between the purchase price and what was left in the hands of the respondent. The High Court was of the view that this approach 'did not lack merit'. This type of approach was considered appropriate where a property could not be sold and may be appropriate under TPA s 82 either as a guide to the compensation or as a method of checking the appropriateness of an award on another basis where the respondent may be locked into the property. A similar approach may be appropriate where investments cannot be realised.
Interest of Rees infringed
In determining whether the Rees had suffered loss or damage at the time of the Determination consideration should be given to the interest infringed by the wrongful act or omission of Utopia.
The Rees borrowed $200,000. The first loan of $100,000 was secured against their home and was used to invest in a diversified property portfolio (Property Trust Investment). The second loan of $100,000 was the PEL, the funds from which were invested in shares in the four major Australian banks. The Rees entered those transactions on the advice and recommendation of Utopia. The Panel found that borrowing to invest (gearing) is generally a high risk approach to investing. By recommending that the Rees invest $100,000 in shares in the four major Australian banks and $100,000 into a single diversified property trust, Utopia exposed the applicants to considerably increased risk. Utopia represented to the Rees that the borrowing and investment strategy would be cash flow neutral. A gearing strategy where the investor, as with the Rees, is totally reliant on income generated from the investments to pay the strategy's interest expense is a high risk. Utopia placed the Rees, who had negligible savings and an annual income deficit, in a position where they were totally reliant on distributions from the recommended investments being maintained in line with their historical levels. Any number of events less severe than the global financial crisis could have occurred, which would have placed pressure on income levels, resulting in the Rees being unable to continue making their loan repayments. The Panel found that Utopia did not have a reasonable basis for the advice it provided to the Rees and thereby breached its obligation under Corporations Act s 945A. Section 945A requires a financial services provider to only provide advice to a client if it makes proper enquiries in relation to the client's circumstances, has given proper regard to those circumstances and the advice is appropriate to the client, having regard to that consideration and investigation. The Panel further found that Utopia failed to adequately disclose to the Rees the risks associated with the recommended strategy.
By entering into the transactions recommended by Utopia, the Rees exposed themselves to the risk that the capital value of the investments would fall whilst they remained liable to repay the loans taken out to purchase the investments. By taking out the loans the Rees exposed themselves to the risk that the interest on the loans would exceed the income from the investments and tax benefits and they would have to meet the deficit from their other income, thereby threatening their lifestyle and financial security. The Panel found that Utopia's breach of obligation to the Rees exposed the Rees to those risks. The interest of the Rees that was infringed by the breach of obligation by Utopia is their interest in maintaining the capital value of their investments and that the net result of the investments and borrowing be cash flow neutral. The Rees suffered loss and damage caused by Utopia's breaches of obligation when the existence of their loss was ascertainable not when it was ascertained. By the time of the Determination the Property Trust Investment was frozen, it had ceased paying contributions and was valued at $13,388 or possibly $11,007.19. The risk which Utopia had exposed the Rees to by their breach of obligation had come to fruition. At that time they had suffered actual economic loss. Utopia infringed the Rees' interest in growing or maintaining the capital value of their investments and not incurring a negative cash flow as a result of implementing Utopia's recommendations. At the time of the Determination the capital value of the Rees' investments had diminished and they had incurred losses by paying interest payments, which exceeded the income from the investments, tax refunds and tax benefits. They had suffered direct financial loss or damage.
Utopia argued that the Rees had suffered no economic loss in relation to the investment in the Australian bank shares and incurring liability under the PEL. The Rees were obliged to pay periodic interest payments for the term of the loan which did not expire until 18 May 2012. At the date of the Determination the interest payments made by the Rees had exceeded the income from the investments by approximately $37,000. The exposure of the Rees to the risk of the income from the investments being insufficient to meet the loan repayments was the very risk which Utopia had exposed the Rees to by the breach of their obligations to the Rees. By the time of the Determination the Rees had suffered economic loss from the investment in the bank shares and the corresponding PEL in that they had suffered and were continuing to suffer a loss, being the difference between the loan repayments they were obliged to make and the income they had and were receiving.
FOS did not act outside terms of reference
These findings are sufficient to dispose of this action. At the date of the Determination the Rees had suffered actual economic loss and damage. It is not necessary to enquire whether or not the Panel correctly quantified that loss or damage. The contract between FOS and Utopia required FOS to deal with the dispute between Utopia and the Rees in accordance with the Terms of Reference. The Terms of Reference require FOS to decide upon a remedy, if any, in accordance with [9]. FOS decided that Utopia pay to the Rees compensation for direct financial loss or damage. FOS did not decide that Utopia pay to the Rees a sum of money for something other than direct financial loss. In deciding the amount of compensation FOS is required to do what in its opinion is fair in all the circumstances, having regard to legal principles, applicable industry codes or guidance as to practice, good industry practice and previous relevant decisions of FOS or a predecessor scheme: Terms of Reference [8.2]. The Panel decided that in its opinion it was fair in all the circumstances that Utopia pay compensation to the Rees in relation to the economic loss suffered by them with respect to the Property Trust Investment by repaying to the Rees the amount of the liability they had incurred under the home loan and for the Rees to transfer the Property Trust Investment to Utopia at its request. The Panel further decided that Utopia should pay to the Rees the financial loss they had suffered by reason of the loan repayments having exceeded the income from the investments together with tax benefits.
Family Tax Benefits
Utopia pleaded that in purporting to make an award of compensation in favour of the Rees for direct loss or damage FOS acted in a manner that was ultra vires the constitution, alternatively breached the terms of the contract by failing to consider the issue of direct loss in the context of the entire financial advice, thereby failing to take into account the benefits both received and receivable in the future by the Rees from the current and future family tax restructure, which should have been set off against any specific loss otherwise found to have been incurred by the Rees.
FOS submits that it is not open to Utopia to raise that point in this action. FOS says that Utopia put forward its submissions to FOS relating to proper quantification of the claim. In none of those submissions did Utopia submit that a deduction should be made for future family tax benefits to be received. FOS says that where it gave Utopia the opportunity to make whatever submissions it chose, it is inappropriate, upon a review of the decision, to permit Utopia to run points not raised before FOS. To permit Utopia to do so would make FOS's decision making process unworkable.
I find that FOS did not breach the contract by failing to make a deduction for future family tax benefits to be received by the Rees. A Determination does not involve the performance of a judicial function. FOS does not ascertain or enforce existing legal rights; it creates new rights and obligations. Its contractual duty when deciding a Dispute, and whether a remedy should be provided in accordance with [9] of the terms of reference, is to do what in its opinion is fair in all the circumstances having regard to legal principles, applicable industry codes or guidance as to practice, good industry practice and previous relevant decisions of FOS: [8.2]. FOS must give the parties a reasonable opportunity to make submissions and provide information about the matters in dispute before making the Determination. Having regard to the Terms of Reference relating to the deciding of Disputes and the purpose of FOS and the principles that underpin FOS's operations and processes set out in [1] of the Terms of Reference, the contract between Utopia and FOS does not in general require FOS in deciding what remedy is in its opinion fair in all the circumstances to have regard to a consideration not raised by the Financial Services Provider. There is nothing in the circumstances of the matter before FOS that required it to have regard to the value of future family tax benefits when that matter was not raised by Utopia. FOS committed no breach of contract by failing to have regard to that matter.
Counterclaim
FOS seeks an order for specific performance of Utopia's obligation to pay to the Rees the sum of $142,015 in accordance with the Determination. It is common ground that upon Utopia becoming a member of FOS, Utopia became bound by the contract established by the FOS Constitution. Utopia pleads, and FOS admits, that Utopia was obliged by the contract to resolve disputes and complaints in accordance with the provisions of the Constitution and the Terms of Reference. Terms of Reference [8.7(b)] provides that a Determination is a final decision and is binding upon the Financial Services Provider if the Applicant accepts the Determination within 30 days of receiving the Determination. Paragraph 8.8 provides that in order to accept a Determination the Applicant must provide the Financial Services Provider with a binding release from liability in respect of matters resolved by the Determination. The Rees accepted the Determination and provided Utopia with the requisite release.
The remedy of specific performance is equitable and therefore discretionary. The remedy of specific performance is appropriate where damages is not an adequate remedy. There is no rule of law that specific performance will not be granted for an agreement for a money payment: Beswick v Beswick [1968] AC 58, 81 (Lord Hodson). In this case, the obligation of Utopia under the contract is to act in accordance with the Determination by paying money to the Rees who are not parties to the contract between Utopia and FOS. That does not prevent an order for specific performance. A contract for the benefit of a third party is enforceable at the behest of a party to the contract even though that party has not suffered personal loss as a result of the failure to perform the contract. A court may grant specific performance of a promise for the benefit of a third party: Coulls v Bagot's Executor & Trustee Co Ltd (1967) 119 CLR 460, 478 ‑ 479 (Barwick CJ), 502 ‑ 504 (Windeyer J). Even if the court could award more than nominal damages to FOS for Utopia's breach of contract, an award of damages would not be adequate.
Utopia submitted that the court should not order specific performance because there is a lack of mutuality in the obligations. It is an equitable principle that specific performance may be denied for want of mutuality. The principle is that a contract, to be specifically enforced, must as a general rule be mutual, that is to say, such that it might at the time it was entered into, have been enforced by either of the parties against the other of them. There is no lack of mutuality in the contract between Utopia and FOS. The contract can be enforced by Utopia against FOS. It is not to the point to enquire whether or not Utopia can enforce any agreement or obligations against the Rees. It is FOS not the Rees who seek to enforce the contract.
Utopia further resists an order for specific performance on the ground that the contract provides another means for enforcement. Paragraph 13.7 of the Terms of Reference provide that where a Financial Services Provider fails to meet its obligations under the Terms of Reference, FOS may take any action it considers appropriate, including expelling the Financial Services Provider from membership of FOS in accordance with the FOS Constitution. Paragraph 13.7 does not provide that expelling the Financial Services Provider from membership is FOS's exclusive remedy where the Financial Services Provider fails to meet its obligations under the Terms of Reference.
Taking action to expel the Financial Services Provider from membership of FOS is not strictly a remedy for breach of contract. It is an action that FOS may take if the Financial Services Provider fails to meet its obligations under the Terms of Reference. That failure will usually also constitute a breach of contract but the expulsion of the member is not an alternative common law or equitable remedy for breach of contract.
In deciding whether or not to exercise its discretion to order specific performance the court should take into account that FOS might expel Utopia from membership for failing to meet its obligations under the Terms of Reference. However, the capacity of FOS to expel Utopia from membership is not a sufficient justification for refusing an order for specific performance. Expelling Utopia from membership does not achieve the performance of Utopia's obligations, nor provide an adequate alternative remedy. This is an appropriate case for an order for specific performance.
Interest
FOS seeks an order for specific performance requiring Utopia to pay to the Rees the sum of $142,015 together with interest pursuant to statute from the date that the Determination was payable by Utopia. FOS did not elaborate upon the claim for interest. Supreme Court Act 1935 (WA) s 32 provides that in any proceedings for the recovery of money, the court may order that there shall be included, in the sum for which judgment is given, interest at such rate as it thinks fit on the whole or any part of the money for the whole or any part of the period between the date when the cause of action arose and the date when the judgment takes effect. The counterclaim is not a proceeding for the recovery of any money. It is a claim for specific performance of Utopia's obligations under the contract between Utopia and FOS. Paragraph 9.5 of the Terms of Reference provides that FOS may decide that the Financial Services Provider pay interest on a payment to be made by the Financial Services Provider to the Applicant. However, FOS did not decide that Utopia pay interest on the payment to the Rees. There is no basis for the court to order Utopia to pay interest.
Conclusion
Utopia's claim must be dismissed. There should be an order for specific performance requiring Utopia to pay to the Rees the sum of $142,015.
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