Vero Insurance Limited v Down Under Home Loans Pty Ltd

[2008] NSWSC 1198

CITATION:	Vero Insurance Limited v Down Under Home Loans Pty Ltd [2008] NSWSC 1198
HEARING DATE(S):	20 October 2008
JUDGMENT OF:	Hammerschlag J
EX TEMPORE JUDGMENT DATE:	20 October 2008
DECISION:	Judgment for the plaintiff in the amount of $302,300
CATCHWORDS:	CONTRACT - AGENCY - Agent issues deposit guarantees to third parties on behalf of its principal beyond the authority expressly conferred upon it to do so - Principal nevertheless bound to honour guarantees and sues on indemnity given by agent in agency agreement - Principal also claims delivery up of unused deposit guarantee forms - but fails to establish that defendant still has them or where they otherwise are - no issue of principle
PARTIES:	Vero Insurance Limited (formerly Royal & Sun Alliance Insurance Australia Limited Down Under Home Loans Pty Ltd (formerly known as Azar & Lambert Financial Services Pty Limited
FILE NUMBER(S):	SC 50090/2007
COUNSEL:	A.C. Casselden (Plaintiff)
SOLICITORS:	Gadens (Plaintiff) Defendant by its director S. Azar

- 1 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

HAMMERSCHLAG J

20 OCTOBER 2008

50090/2007 VERO INSURANCE LIMITED (FORMERLY ROYAL & SUN ALLIANCE INSURANCE AUSTRALIA LIMITED) -V- DOWN UNDER HOME LOANS PTY LTD (FORMERLY KNOWN AS AZAR & LAMBERT FINANCIAL SERVICES PTY LIMITED

EX TEMPORE JUDGMENT

1 HIS HONOUR: The plaintiff (previously called Royal & Sun Alliance) is an insurer. The defendant was a mortgage broker.

2 By a written agreement made on 7 December 2001 described as a “Deposit Power Guarantee Agency Agreement” (“the agreement”) the plaintiff appointed the defendant to act as its agent for the purpose of issuing guarantees described as “Azar & Lambert Deposit Power Guarantees”, which are instruments intended to secure payment of the deposit by a purchaser of real property to the vendor in respect of the sale of real property. The guarantees were issued in lieu of cash and under their terms could be called on when the sale of land contract was terminated for the purchaser’s breach and the deposit was to be forfeited to the vendor.

3 Clause 5 of the agreement provides:

“5.1 Subject to Clause 5.2 the Agent is authorised to accept applications (“Applications”) on behalf of the Principal from persons wishing to apply for the product known as the Azar & Lambert Deposit Power Guarantee, a specimen of which is annexed to this Agreement and marked as ‘Annexure A’.
5.2 The Agent is only authorised to accept applications and issue guarantees for and on behalf of the Principal if: …(c) the Agent fully complies with the issuing guidelines and procedures (“Issuing Guidelines”) (including “Guarantee Fee Payable”) as annexed to this Agreement and marked as Annexure C”)

4 Clause 6 of the agreement provides:

“Without prior written approval of the Principal, the Agent has no authority to accept an Application or to issue a guarantee for and on behalf of the Principal where the Agent has not complied with the terms of this Agreement.

5 Clause 11.1 of the agreement provides:

“The agent acknowledges that the Principal is the sole proprietor of the name, concept and product “Deposit Power”, “Deposit Power Bond”, “Deposit Power Guaranteed” and “Deposit Power Guarantee” and all related application forms, guarantees, materials and documents and may promote, market, publish and/or issue any product bearing any of those names or similar names and related literature and material in its own right or through other agents.”

6 Clause 16 of the agreement provides:

“The Agent shall indemnify and keep indemnified the Principal against all losses, damages, claims, expenses and demands whatsoever which the Principal shall now or hereafter sustain, incur or be called upon to satisfy by reason of the default, failure, omission or neglect in any manner whatsoever of the Agent, or any employee, or agent of the Agent, or sub-agent to comply with or observe any provision of this Agreement (including any schedule or annexure hereto) or by reason of any other act or omission of the Agent or its employees, or agents, or sub-agents.”

7 Whilst there is no Annexure C attached to the copy of the agreement signed by the defendant which was admitted into evidence it accepted that Annexure C was in the following form:

“AZAR & LAMBERT FINANCIAL SERVICES

DEPOSIT POWER GUARANTEE:

Azar & Lambert Financial Services Deposit Power Guarantee can be instantly issued where an unconditional loan approved lender is held to assist with the purchase AND:

1. Settlement will occur within a period of 26 weeks

2. You have sighted a copy of the signed and dated contract of sale, for any existing property which will fund the purchase.

3. The applicant/s is/are individual/s. (eg. A Pty Ltd company must be referred for approval)

4. The maximum Guarantee amount is up to 10% of the purchase price and does not exceed $50,000

5. The declaration in the application form is fully answered, signed by all purchasers named in the contract and contains no negative or incomplete response

6. Any loan conditions (other than valuation) have been satisfied (sic).

*Note - Where a loan approval is outside these guidelines
- or for situations outside these guidelines and fax it to Royal & SunAlliance on 1800 678 914.

For help freecall 1800 678 979 – Freefax 1800 678 914




The applicant may be asked to provide further information. You can expect an answer within 24 hours.

Note: Guarantees cannot be issued for purchases involving saving plans, rent-to-buy, private finance, or off the plan purchases with a settlement period of greater than 26 weeks.”

8 I shall refer to the last paragraph of the guidelines as “the Note”.

9 The plaintiff brings (and in submissions addressed only) two categories of claim against the defendant.

10 Firstly, it claims under the indemnity in cl 16 on the basis that the defendant issued six guarantees in favour of vendors of real property beyond the authority which the agreement conferred upon it but which it was bound to honour.

11 Secondly, relying upon cl 11, it seeks delivery up of guarantee forms (either executed or not executed) which it says it delivered to the defendant and of which the defendant retains possession, but which have not been returned. It claims that there are 83 such instruments.

12 I shall deal with each of the two categories of claims in turn.

The breach of authority and indemnity claim

13 It is not in issue that the defendant, purporting to act under the authority of the agreement issued six guarantees as follows in respect of which the plaintiff received claims and paid the following amounts, totalling $302,300:

Guarantee Number	Date of Payment	Amount Paid by Plaintiff
XP555287AL	5 April 2007	$51,000
XP555276al	5 April 2007	$55,500
XP555281AL	5 April 2007	$52,500
XP555280AL	5 April 2007	$53,000
XP555275AL	14 December 2006	$50,500
XP555352AL	5 June 2007	$39,800
Total	$302,300

14 Each of the first five guarantees (to which I shall refer as “the five guarantees) was issued in respect of a separate sale of a lot in an unregistered plan proposed to be registered in respect of a property development at Crown Street, Wollongong. Each of those five sale contracts (to which I shall refer to as the “five contracts”) bears the date 1 August 2008.

15 The sixth guarantee was issued in respect of the sale of a lot in an unregistered plan proposed to be registered in respect of a property development at Swanston Street, Melbourne (“the Melbourne guarantee”). It reflected the date of the sale contract as 29 April 2003.

16 The purchaser under the five contracts as well as under the sixth (which I shall refer to as the “Melbourne contract”) defaulted. The vendor in each case terminated and the deposit was forfeited.

17 All the guarantees were called on and the plaintiff met the calls as I have described above.

18 The plaintiff claims that the defendant issued the guarantees in breach of the provisions of, and outside the authority conferred on it by, the agreement in the following respects:

a the guidelines require that settlement will occur within a period of 26 weeks and that guarantees cannot be issued for “off the plan” purchases with a settlement of greater than 26 weeks, whereas each of the guarantees was issued in respect of an ‘off the plan” purchase with a settlement period of greater than 26 weeks;

b

the guidelines provide that the maximum guarantee amount is up to ten percent of the purchase price and will not exceed $50,000, whereas the five guarantees exceeded that limit.

19 The plaintiff claims under the indemnity amounts equivalent to those it paid under the guarantees.

20 A contention in respect of the Melbourne guarantee, that the defendant failed to ensure that the guarantee application form was made available to or submitted to the plaintiff and failed to ensure that the guarantee fee was submitted to the plaintiff, was abandoned in submissions.

21 Each of the five contracts contained a provision for a ten percent deposit which, in each case, exceeded $50,000.

22 Each contract also provided in cl 30.6 as follows:

”completion date” is, if at the date of this contract the strata plan has not been registered, the later of fourteen (14) calendar days after the date the vendor serves notice of registration of the strata plan upon the purchaser or the purchaser’s solicitors or 28 days after the date of this contract. If the strata plan has been registered, 35 days after the date of this contract.”

23 Each also contained a provision (cl 33) in the following terms:

“33.1 The vendor must use all reasonable endeavours to have:
33.1.1 the consolidation plan; and
33.1.2 the strata plan
registered with 34 months from the date hereof.
33.2 If those plans have not been registered by that date either party can rescind.”

24 It is clear that in procuring the issue of the five guarantees on behalf of the plaintiff the defendant exceeded the maximum guarantee amount specified in par 4 of the guidelines as well as the Note in breach of cls 5.2(c) and 6 of the agreement, there having been no prior written approval of the defendant for it to do so.

25 The Melbourne contract provided that settlement date was to be the date the Residue is payable. “Residue” was defined in cl 1.1 to mean the price due pursuant to this contract less any deposit. The contract provided that the Residue was payable the later of 14 days after written notice of registration of a proposed plan of subdivision or 14 days after written notice of the issue of an occupancy certificate was given to the purchaser.

26 The deposit payable in respect of which the defendant issued the guarantee for the Melbourne contract was $39,800.

27 Clause 9.3 of the Melbourne contract provided that if the plan was not registered within 42 months of the date of sale the vendor or purchaser may by written notice rescind.

28 The evidence established that all of the sale contracts were in respect of an off the plan purchase.

29 In my view on the proper construction of par 1 of the guidelines and the Note the authority of the defendant was restricted to issuing guarantees on behalf of the plaintiff where the contracts did not provide that settlement was to occur within 26 weeks (that is irrespective of whether, as a matter of fact, it did or did not).

30 The period for settlement (or completion) in the five contracts was specified by reference to registration of the necessary strata plan with an outside limit that either party could rescind if registration had not occurred within 34 months of the date of the contract.

31 Although completion could occur within 26 weeks it could perfectly legitimately (without any party being in breach) occur significantly later than that.

32 The Melbourne contract is in a similar position except that it allowed 42 months for the registration of the plan.

33 One may safely assume that it was not contemplated that an occupancy permit would issue before registration of the plan and it did not. The evidence shows that the plan was registered on 28 June 2006 and the vendor’s solicitors informed the purchaser that they would notify the purchaser once an occupancy permit was issued.

34 It follows that the defendant’s conduct in committing the plaintiff to each of the contracts was in breach of cls 5.2(c) and 6 of the agreement.

35 Before me the defendant was represented by Mr Azar, its director. He made put three things in defence of the plaintiff’s claim:

a with respect to the $50,000 guarantee limit in the guidelines that the defendant should not be held bound by that limit because on 23 March 2004 he received a letter from the plaintiff which, amongst others, stated;

“A second development is the launch of our On-line Application System, now available to approved Agents. The On-line Application system means less paperwork, and faster response times and is, we feel, a huge advantage for your business. Should you be interested in a demonstration please contact your Business Development Executive or myself directly.
Thirdly, Deposit power is streamlining our fee structure. The fee for the standard Deposit Power Guarantee, valid for 6 months, will remain at 1.2% of the deposit amount, but will be extended to include deposits to the value of $200,000. Previously this fee structure was capped at deposit amounts of $100,000.
The fee for the Long Terms Deposit Power Guarantee, for settlement terms between 6 – 12 months, will move to 3% of the deposit amount, for deposit amounts of up to $100,000. This fee review, from 2.4% to 3%, reflects the different risks associated with longer settlements.
Changes to the fee structure will come into effect April 1, 2004.”

b with respect to the five guarantees, the 26 week settlement period in the guidelines and the reference to off the plan sales, the position in which the defendant found itself was as a consequence of the conduct of two persons, Messrs Sam and Shadi Hraiti, who had introduced the purchasers under the five contracts to the defendant (who the defendant was assisting to obtain mortgage finance) and they had caused the defendant to believe that settlement would occur within 26 weeks together with the fact that the defendant did not know that the purchasers were for off the plan with a settlement period of greater than 26 weeks, apparently as a consequence of things held out by the Messrs Hraiti;

c with respect to the guarantees in general there were a number of anomalies with respect to signatures on and the figures reflected in some of the guarantees and other guarantees issued by the defendant on behalf of the plaintiff which raised the suspicion of fraud in some manner which Mr Azar did not clearly articulate. He recounted that he had been paid a visit by Mr Barker, a manager of the plaintiff and an investigator to whose attention he drew these matters but they did not take them further;

36 None of the matters put by Mr Azar constitutes a defence to the plaintiff’s claim:

a the letter upon which Mr Azar relies comes months after the guarantees in question were issued. Moreover the letter did not purport to vary the terms of the agreement but provided for a different fee structure in the event that guarantees for more than $50,000 were issued which was always possible even under the terms of the agreement with the plaintiff’s prior written consent. Moreover, even with respect to the change to fee structure, the letter makes it clear that the changes would only come into effect on 1 April 2004;

b the defendant’s dealings with the Messrs Hraiti cannot affect its liability in contract to the plaintiff. The defendant may have had a cross-claim or cross-claims against those people. According to Mr Azar, it never had the resources to bring it;

c the evidence establishes each of the elements of the plaintiff’s claim. The guarantees were issued in respect of sale transactions the genuineness of which is not in question, the plaintiff was undoubtedly bound by those guarantees even if the defendant exceeded its actual authority in committing the plaintiff to them because the plaintiff has undoubtedly clothed the defendant with ostensible authority vis a vis the beneficiaries under those guarantees to issue them. The defendant did not put anything which, in my view, undermined in way the efficacy of the guarantees or any of the underlying transactions which give rise to the plaintiff’s claim.

37 The plaintiff is accordingly entitled to a verdict for the amount which it was (but would otherwise not have been) required to pay under the guarantees as a consequence of the defendant having committed it to them in breach of the agreement and in excess of the authority which the plaintiff conferred upon it.

38 There will accordingly be a verdict for the plaintiff in the amount of $302,300.

The delivery up claim

39 I now turn to the delivery up claim.

40 For the purposes of the performance of its obligations under the agreement the plaintiff provided the defendant with individually numbered guarantee issuing pads. Although the summons did not seek, in express terms, any such order, the proceedings were conducted on the basis that the plaintiff moved for an order for delivery up of numbered guarantee forms to which I shall refer below.

41 On 19 September 2003 the plaintiff conducted an audit of the defendant’s premises at suite 1, 4 Kildare Road, Blacktown.

42 A reconciliation was carried out of the guarantee forms issued at the commencement of the agreement with the defendant’s records.

43 As a consequence the plaintiff said it ascertained that 83 guarantee forms were unaccounted for.

44 Relying on cl 11 of the agreement the plaintiff asserts that it is the sole proprietor of the forms and guarantees. It asserts that the defendant is in possession of its property and claims an order for delivery up in the nature of a mandatory injunction.

45 In par 51 of his affidavit sworn 28 August 2008 Mr Azar deposed to the following:

“The defendant claims the defendant advised the plaintiff’s solicitor, Jenny Alford of Gadens to request the 26 guarantees from Micah legal Services. Micah Legal Services are in possession of the guarantees.”

46 Mr Azar’s oral evidence was that he handed over whatever guarantee forms the defendant had (which were, according to him, 23 blank forms and 3 forms with a line and the word “cancelled” through them) to a solicitor, Brenda Tay (apparently also Brenda Campbell) of Micah Legal Services who previously acted for the defendant in these proceedings. His evidence was that if she no longer has them, then he cannot say where they are.

47 Although the plaintiff cross-examined Mr Azar, the plaintiff made no attempt to call any witness to contradict what he said, nor did the plaintiff rely upon any subpoena (or non-response to any subpoena) to Micah Legal Services or any other person.

48 The evidence upon which it relied in response to Mr Azar was restricted to:

a the fact that its solicitors had sent a letter to Micah Legal Services on 18 August 2008 enquiring whether they held a number of guarantees specified by number and if so, when they would be able to collect them; and

b par 14 of an affidavit of Mr Barker sworn on 2 October 2008 which is in the following terms:

“I have been informed by the plaintiff’s solicitors that Brenda Campbell of Micah Legal Services has responded verbally that Micah Legal Services is not in possession of the original guarantees numbered 555360 to 555379, 555386 to 555389 or 555380 to 555381.”

49 Notwithstanding the patent difficulties with that evidence, including that the affidavit material is second-hand hearsay or double hearsay and that the source of the information is from an unidentified person within the plaintiff’s solicitors, the plaintiff invited me to make a finding that Micah Legal Services does not have the documents concerned. Mr Azar did not object to it presumably because as a non-lawyer he did not recognise its shortcomings.

50 I do not consider that the defendant has shown any basis why the evidence of Mr Azar should not be accepted, and I accept it.

51 I accept that the defendant has established on the balance of probabilities that it delivered what it had to its then solicitors. The plaintiff, however, has failed to establish either that those solicitors no longer have it or where it otherwise presently is.

52 The state in which the plaintiff has left the evidence does not enable me to make a finding either way.

53 Moreover Mr Azar has undertaken that he will furnish to the plaintiff an authority for it to obtain directly from Micah Legal Services (in so far as any such authority is needed) for the delivery up directly to the plaintiff of any of the forms which Micah Legal Services may hold.

54 In my view, the plaintiff has not only not made out a necessary element of its cause of action for delivery up, but there would be no utility in making such an order. Accordingly, I decline to make the order sought and the delivery up claim fails..

55 So far as costs are concerned the plaintiff succeeded in its discrete claim for payment of the monies but failed in its delivery up claim. It also did not persist in claims under the Trade Practices Act and did not persist in two claims for the payment of guarantee fees. It also abandoned one claim in respect of the Melbourne guarantee.

56 In the circumstances I do not consider that the plaintiff is entitled to all of its costs. The plaintiff is entitled, in my view, to 75 percent of its costs.

57 There will be judgment for the plaintiff in the amount of $302,300.

58 I note the undertaking of the defendant given to me by Mr Azar will be to provide the plaintiff with an authority for the plaintiff to obtain directly from Micah Legal Services any guarantee documents executed or unexecuted which Micah Legal Services may hold.

59 The proceedings are stood over to Friday 24 October 2008 to enable Short Minutes to be brought in to take account of interest. The exhibits may be returned.

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