Wardley Australia Ltd & Anor v State of Western Australia

[1991] HCATrans 256

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Perth No P20 of 1991

B e t w e e n -

WARDLEY AUSTRALIA LTD and
WARDLEY AUSTRALIA SECURITIES

LTD

Applicants

and

STATE OF WESTERN AUSTRALIA

Respondent

Application for special leave

to appeal

BRENNAN J

DEANE J

TOOHEY J

Wardley 1 5/9/91

TRANSCRIPT OF PROCEEDINGS

AT ADELAIDE ON THURSDAY, 5 SEPTEMBER 1991, AT 9.49 AM

Copyright in the High Court of Australia

MR C.J.L. PULLIN, QC:  May it please the Court, with

MR J.A. CHANEY, I appear for the applicants.

(instructed by Northmore Hale Davy & Leake)

MR E.M. HEENAN, QC:  May it please Your Honours, with my

learned friend, MR J.P. YOUNG, I appear for the

respondent. (instructed by the Crown Solicitor for

South Australia)

BRENNAN J:	Mr Pullin.
MR PULLIN:	Thank you, Your Honours.  Your Honours, there

are two issues involved in this application and

which were important in the Full Court. The first

one is when did the cause of action accrue and,

secondly, if it accrued when the indemnity was

signed by the State Government then could the court

avoid the effect of the decision in Weldon v Neal

and permit an amendment pursuant to Order 13 rule 2

of the Federal Court Rules?

Now, I take it that Your Honours are familiar

with the facts in the case and, on that assumption,

I just mention four points concerned the facts

before dealing with the merits of the application.

The first is that the bank, the National Bank,

agreed to grant financial accommodation to

Rothwells in the sum of $150 million on condition

that the State Government gave an indemnity. The

second point is that the State signed the indemnity

in favour of the bank on 26 October 1987

undertaking to indemnify the bank against any net

loss which might arise if Rothwells did not pay.

There was a condition that the bank had to exercise all of its rights to its fullest extent before pursuing the State Government under the indemnity,

and that included pursuing it to liquidation and

final distribution.

The third point is that after making certain

payments totalling $22.5 million said to be under

the indemnity, the State Government, two days

before the expiry of three years after

26 October 1987 - the State sued, based on

misrepresentation said to have been made by
Wardleys on Saturday, 24 October 1987. The fourth

point is that the Federal Court appeal was about an attempt made early this year to amend to bring in a

cause of action concerning other representations

said to hpve been made by Wardleys on Sunday,

25 October 1987, that is, a complaint about a

misrepresentation made some three years and three

months before the amendment was made.

It was clear enough that when the indemnity

was signed by the State that it was a contingent

liability and the exact extent of that liability

Wardley 2 5/9/91

was not known in precise terms at that time. We

say, however, that it would have been a matter of

assessment, and that is the kind of problem that

the law is confronted with in other areas.

Now, the ratio of the court appears at

application book page 123, and at the bottom of the

page - in fact, I will just read the one sentence

which contains the decision, plus refer to a little

above that sentence. At the bottom of the page

opposite line 45, the court said:

In our view, the mere assumption of an

executory and contingent legal obligation, the
future performance of which is likely to be
more onerous than would have been the case had

the representations in reliance upon which the

obligation was assumed been true rather than

false, is not the suffering of loss or damage

the amount of which is forthwith recoverable

by action under s. 82.

Now, the only other portion of the judgment I

would like to refer to is just above that at

line 26 where the court said:

Potential or likely damage is not actual

damage which has already been suffered.

And then the court gives the example of what they

call colloquially the situation where someone

purchases an asset which is, to use the court's

words , "a lemon" .

Now, if common law principles apply and, of

course, in relation to this area, section 52
cases - and I should say, claims for damages under

section 82, of course, the High Court has said, at

least in relation to measure of damages, that the

measure of damage in tort usually applies, that is

in the Gates' decision, Gates v City Mutual - if

common law principles apply in this case, we would

say that the decision contradicts a decision of the

Court of Appeal in Forster v Outred, and that was approved in another Full Court of the Federal Court

in the Jobbins' decision, Jobbins v Capel Court.

That being so, we would say that the Full Court in Jobbins and the Full Court in this decision are in

conflict.

Now, if I could just briefly mention the facts

in Forster and see why we would say they indicate

that the court should have come to a different

decision in this case. In Forster v Outred, the

plaintiff executed a mortgage as security for a

loan taken out by her son. It was held that she

suffered actual damage when she executed the

Wardley 3 5/9/91

mortgage, notwithstanding that, in fact, the son might pay up all the moneys owing under the loan

and that therefore the mother might never have had

to pay anything under the mortgage. But it was

held that notwithstanding that the quantification of the loss would depend upon events between that date and the date when damages were assessed,

nevertheless, damage was suffered.

Now, the State seeks to distinguish the

Jobbins' decision here on the same basis, really, that the Full Court did, that is, that that was a

case dealing with the so-called "lemon" situation,

purchasing an asset. But we say the principles

cannot be different between the situation where one

is buying an asset as opposed to the situation

where one is acquiring an obligation, if one likes,

or undertaking an obligation.

I can illustrate that in this case by saying

what if it had been the situation where a plaintiff

had purchased some shares in a company and assume

that when I, as plaintiff, examine the company to

see what I should pay for the shares, I see amongst
the accounts a contingent liability and that

contingent liability was this very indemnity. So

that in assessing the value of the shares, I then

ask, "Well, what is the likelihood that I might

have to pay under this indemnity?", and a

representation is made exactly as pleaded here,

that is, Rothwells is thought to have substantial

net assets. It has only a cash-flow problem. I

would then, as plaintiff, think, "Well, it's very

unlikely that I will be called upon or the company will be called upon to pay up under that indemnity

agreement and therefore when I purchase the shares

in the company for a certain sum of money" - it

turns out later the representation was false -

"it's purely a valuation exercise in determining

what the value of shares where."

Now, if that is right, in that situation the

Full Court here would have said that time runs as from the date of the acquisition of the asset, then

why should it not be the case here that time runs from the time when the indemnity was signed? So,

that is really the argument that would be run on

appeal.

The courts have recognized and identified some

uneasiness in connection with limitation points

concerning economic loss, that is, when is the

damage suffered in economic loss cases, and there

has been some unease mentioned by Justice Gaudron

in Hawkins v Clayton, only in passing, and

Mr Justice Sheppard has also, in the Federal Court,

mentioned some unease with Forster v Outred.

Wardley 4 5/9/91

Now, there are only two other points on this

subject. The State says in its outline that the

closest analogy is to be found in cases dealing

with rights of indemnity under joint tortfeasor

legislation but we say that is a fallacious

argument. That is of no assistance or relevance at

all because that it purely a matter of statutory

interpretation in determining when it is that the

right of indemnity accrues.

Now, the decision raises many puzzles

following upon Their Honours' decision, one of

which is that it says that the cause of action

accrued at least by the time a demand was made by

the Bank for payment. Now, that is contrary to the

terms of the indemnity and, if, in fact, the

corollary to the ratio which, you will remember,

was in negative terms, it just said that lost was not suffered when the indemnity was signed, well,

when does it accrue? Why should it accrue when a

demand was made if, in fact, there is a contingency

which had not been satisfied? Because Rothwells

has not yet paid, or the liquidator has not yet
paid any final distribution even now and yet here
is the State Government suing saying it can

recover. So, that is a puzzling aspect which

follows upon the decision.

Now, we would submit that there is likely to

be great confusion reigning if these two decisions,

that is, Jobbins and the decision in this case are

allowed to stand because of the difficulties in

trying to determine in what circumstances they will

apply. So, they are the reasons why we say that

special leave should be granted on the first point.

Could I now turn to the second point, the

Weldon v Neal point? Order 13 rule 2 of the

Federal Court Rules is reproduced at page 132 of

the application book and that is an order which

merely gives the court the power to order

amendments at any stage of proceedings. It is not

the sort of provision which has been brought into

play in most States and in England which allowed

the court to amend and to bring in a cause of

action which was statute barred at the time of the

application if the cause of action that is being

brought in arises out of the same circumstances,

same factual material as does the cause of action

which is. already on foot and within time.

Weldon v Neal, in those circumstances, with an

order like the one in the Federal Court Rules and
without the special type of rule that I referred to

says - and it is said 104 years ago in the Court of

Appeal. - that it was a settled rule of practice

even then that a party cannot amend and bring in a

Wardley 5/9/91

new cause of action if that cause of action is

statute barred at the time of the application.

Now, the Federal Court sought to reason its

way around this by saying that because the court

deals with matters, and it is not restricted to

dealing with what I might call federal causes of

action, it has a very broad jurisdiction in

relation to the particular factual circumstances.

Now, really, what has happened in those decisions

is to say that the Federal Court is getting very

close to a superior court of record, like the

common law courts, with unlimited jurisdiction.

The only qualification, really, was, before the

cross-vesting legislation, that it was necessary to

find a federal cause of action and then the whole
of the causes of action, common law or otherwise

that might follow, could be dealt with.

So, really, all that was happening was saying

that the Federal Court was almost a court of
unlimited jurisdiction providing you could get this

qualifying factor. Now, if that is so, then really

there is not much difference between the

Federal Court and the common laws courts - superior courts of record with unlimited jurisdiction. And they have held that Weldon v Neal applies with a

rule of the kind that one sees in Order 13 rule 2.

The fact that, as I understand, most of the

jurisdictions of Australia have seen fit to make a

special rule, it being necessary to do that to

overcome the rule in Weldon v Neal, suggests that

the Full Court should have reached that same

decision in this case. Really, all the Federal

been made in other States but rather than suggest

Court has said is there is probably power in the

that they have simply said, in effect, "We will not

follow Weldon v Neal. "

Now, they did not actually say that but that

is, in reality, what they have done and we would

submit that that is a wrong decision against

overwhelming authority and I might say it is

contrary to the High Court in Renowden v McMullin

which is a case which was referred to in my learned

friend's outline where the High Court quite clearly

concluded that Weldon v Neal did apply, that

apparently being in circumstances in Victoria where

there was no special rule. Now, I have not

researched that point but it is clear that no one

referred to the special rule that one finds in the

various States and Victoria in that case. So, I

can assume that at that stage it did not exist.

But it certainly held that Weldon v Neal applied.

Wardley 6 5/9/91

So, we would submit that that decision is wrong and

should be reviewed by this Court.

So, they are the grounds for making this

application, may it please the Court.

BRENNAN J:  Thank you, Mr Pullin. Mr Heenan.

MR HEENAN:  May it please Your Honours. This is a very

early stage in this litigation. The decision which

has come up to the Full Court of the Federal Court

arises out of an application for leave to amend

which was disallowed and the effect of the decision

of the Full Federal Court is simply to allow an

amendment to be granted. There will be further
amendments in due course which the present

respondent, applicant in the Federal Court, would
seek to make in reliance on this decision. So, the

question as to the date of the accrual of the cause

of action will endure. But I emphasize that it is
an early stage in the action and defences have not

even been filed.

Your Honours, might I refer very briefly to

the terms of the indemnity. The full terms of the indemnity are set out in the reasons of His Honour

Mr Justice French at pages 47 to 49 of the application book. Might I just add very briefly to

my learned friend's recitation of the facts: as

Your Honours will recall, the circumstances were

that immediately upon the world share market crash,

Rothwells Merchant Bank found itself in

difficulties. There was a crisis weekend in Perth

on 24 and 25 October 1987 at which a variety of

financial advisers and business leaders assembled

and a series of representations were made to the

State Government to join in a rescue.	Among those
representations, so it is alleged, were

representations made by the present applicant,

Wardleys, who, it is alleged, was leading this

approach for financial relief on the Saturday, the
Saturday, the 24th.	The negotiations continued and

on the Sunday in the afternoon of the Sunday, the

25th, there was a meeting of the State Cabinet

Budget Sub-committee and a series of

representations and submissions were made to the

budget committee on that Sunday afternoon.

That culminated in a decision on the Sunday

evening for the State to grant a guarantee or

indemnity - we say it is an indemnity although

nothing turns on it - for a proposed facility of

$150 million to be granted to Rothwells by the

National Australia Bank. That indemnity was signed

by the premier for the State on the 26th which was

a Monday holiday, and then the merchant bank,

Wardley 7 5/9/91

Rothwells, drew down against the facility the

following day, the Tuesday, the 27th.

Now, when this application for damages was

commenced under section 82 of the Trade Practices

Act it alleged all the matters which I have

mentioned save certain representations alleged to

have been made by Wardleys, the present applicants,

on the Sunday. These are called, in the pleadings,
"the Sunday Wardleys' representations" or "the

Sunday soundness representations". But allegations were made against Wardleys for representations made on the Saturday.

In the course of a variety of interlocutory

procedures an application was made in January 1991

to amend to add allegations against Wardleys

arising out of the Sunday representations.

DEANE J:  So far as you can see, would the evidence of the

Sunday representations be admissible in relation to the Saturday representations?

MR HEENAN: Well, it is rather difficult to say at this

early stage because defences have not enjoined.

DEANE J:  I mean, if they were confirmatory of them, for

example.

MR HEENAN:  But we would certainly be wishing to put that

proposition, Your Honour.

DEANE J: So, in other words, your approach is that it is

not critical to admissibility of evidence to know

whether the amendment has been properly allowed at

this stage?

MR HEENAN:  No, Your Honour, but the learned judge at first

instance concluded, and the Full Court adopted the

position, that, in effect, a new cause of action,

whatever that may mean, was being added by virtue

of the amendment in that it referred to "actionable

conduct", misleading or deceptive conduct which

previously had not been identified and the case has

been treated on that footing at first instance and

in the Full Federal Court.

BRENNAN J: That is more or less by common ground, is it?

MR HEENAN:  Yes, Your Honour, although in the light of the

is seized of rather than identifying a cause of action in the traditional common law sense, that concession or acknowledgement seems to

analysis which has been undertaken by the Full the court

have been blurred somewhat or, at least, its

importance diminished because the Full Federal

Wardley 5/9/91

Court has approached the case on the footing that

the jurisdiction which is attracted to the
Federal Court by virtue of section 86 of the Trade
Practices Act is in respect of matters and that

this is the constitutional warrant for the grant of

jurisdiction to any Federal Court by virtue of the

Judiciary Act and the matter is reposed in the court by section 86.

It is only when one goes to section 82 that

one comes across the phrase "cause of action", and

that appears in the limitation subsection, 82(2).

So, the effect of the decision of the Full Federal

Court· is to diminish the significance of a new

actionable course of conduct being identified by

the Sunday representations.

BRENNAN J:	But at the end of the day, if Mr Pullin's view on the present application were to prove
successful, the issue that would fall for determination as between the State and Wardleys would be whether or not the State entered into the
indemnity or whether the State would have entered
into the indemnity but for the Wardleys' Sunday
representations.
MR HEENAN:	Your Honour, we would continue to run the case

on the basis of representations that were made by

Wardleys on the Saturday.

BRENNAN J:	Of course.
MR HEENAN:	Yes.

BRENNAN J: But the issue that may arise is whether or

not - - -

MR HEENAN:  - - - we can rely on the Sunday representation.

Yes, it would, Your Honour. It would. That would be the factual issue.

Now, Your Honour, the subsequent events, as is

well known, was that the State was exposed to a

contingent liability under this indemnity; that on

17 October 1988 Rothwells repaid the $150 million

to the National Australia Bank and on

3 November 1988 Rothwells went into provisional

liquidation and the liquidators were alleging that

the repayment of the $150 million within the six

month pe~iod was a voidable preference against the

Bank and had foreshadowed a claim against the Bank

to disgorge that money.

The Bank, in turn, had foreshadowed a claim

against the State under the guarantee that if they

were forced to disclose and if they could not

recover the money against Wardleys, they would

Wardley 9 5/9/91

resort to the State under the indemnity.

Negotiations followed and there was a compromise

resulting in the State, in effect, paying

$22.5 million in settlement of its claim.

Now, we have put to the Court a brief outline

of submissions.	I am not sure if Your Honours have
that.	I have additional copies should they
be - - -	·

DEANE J:	I have it.
MR HEENAN:	Your Honours, we respectfully submit that the

two critical points of decision of the Federal

Court were, first - and this appears to be the

ratio of the case as identified by my learned

friend - that the damage which must exist before a

cause of action accrues under section 82(1) is

actual or inevitable damage, not merely contingent

or potential damage which, depending upon the

outcome of subsequent events, may never

materialize. And the second or subsidiary

conclusion, which was obiter, was that the court

has power at any time, consistently with the rule

in Weldon v Neal, to allow amendments to a claim

where the allegations in those amendments arise out of the same matrix of facts constituting the matter

in respect of which federal jurisdiction has arisen

under section 86(1) by the commencement of the
particular proceedings within the time limit

provided by section 86(2).

Our submissions are that either of those

conclusions will allow the State to follow the
course which the Federal Court has allowed and that

the grant of special leave would be futile unless

it can be shown that there is a good arguable case

that both are wrong.	We say that the first
conclusion - - -

DEANE J:  Mr Heenan, did the Full Federal Court go on to

exercise the discretion on the basis that you were

correct on the first point?

MR HEENAN:  The formal order I understand, Your Honour, was

that the application for the amendment, which

His Honour Justice French had disallowed, was

granted and it was granted on the footing of the

first point. There were expressions in the

judgment indicating that a foreshadowed application

for a more general amendment could then later be

entertained.

DEANE J:  Entertained? That really takes a lot of the force

away from your	"it's one or other" in that one can
speculate that	if it is not one, it might have been
the other, but	the decision rests on the first

Wardley 10 5/9/91

point and the first point is obviously one of

general importance. Does it not really only come

down to this, that in view of the importance of the

first point, is this an appropriate case for this

Court to get involved in it at the leave to amend stage?

MR HEENAN:  As to those matters, Your Honour, there seems to

be little real doubt that it is a question of

importance.

DEANE J:  And also a difficult one.

MR HEENAN:  Yes. In relation to the question of whether it

need be involved, although there will be many

subsequent interlocutory applications in this case

and further applications for an amendment, the

essential point will probably remain, almost

certainly.

TOOHEY J: That takes some of the sting out of the

proposition that it is too early for this Court to

intervene.

MR HEENAN:  Yes, it does, Your Honour. So we are left with

the position that the decision on the first point

is plainly right or is not attended with sufficient

doubt to allow the grant of special leave.

DEANE J: That is a rather brave submission, if you are

putting it.

MR HEENAN:  Your Honours, the position that we put in

relation to that is that this is a case of

contingent liability and the so-called division of opinion in the Federal Court between this decision

and Jobbins and between the English decisions that

follow the course of authority on Forster v Outred

is more apparent than real because we say that my

learned friends are not able to point to any case

where there is a contingent liability where it has

been held that the damage is suffered before the

contingency occurs and that in Forster v Outred and

in Jobbins what had happened was that the damage,

in each case being of the gist of the action, had
occurred on the entry into, in the first place, by

the sympathetic mother, the mortgage guaranteeing

her sons liability because it was an encumbrance on

her real estate, it effected an immediate

diminution in the value, and she was liable.

There are, in the reasons for decision in this

case, a number of criticisms of Forster v Outred

and we would not wish to be taken as acknowledging

that its reasoning is correct. There are

expressions of opinion by single judges in the

Federal Court, Mr Justice Sheppard in the Hagman v

Wardley 11 5/9/91

Westpac case dealing with foreign currency loans

expressing a reservation about the reasoning in inadequate insurance policies expressing reservations against that reasoning.

But at least in relation to Australian

authority we say that there is no case which holds

that the entry into a contingent liability causes
damage to accrue before the event which triggers

the contingency has happened.

BRENNAN J: There may be two different problems, may there

not? It depends which way the plaintiff chooses to

put it. If the question is, "Is there a complete

cause of action consisting as to one of its

elements of damage, is it a damage within
section 82 to incur a contingent liability?" The

other way in which an applicant or plaintiff may

choose to put it is, "We sue for this particular

damage, namely the amount of money paid out at some

stage, and we look at the statutory cause of action

which includes that damage and that alone." Now, it seems to me that in the present case one would

be hard put to find a situation in a proceeding

which is better calculated to raise the precise

meaning of section 82 and to call upon a party to

identify precisely its cause of action than the

present one.

MR HEENAN: This case is a spectrum of opportunities for all

kinds of unresolved questions. Your Honour, I

would not wish to appear to resile from that on any

point. But might I just put this series of
possibilities to Your Honours for consideration.

Let us assume that the position contended for by my

learned friends for the applicant has some initial

attraction and that the reasoning in Forster v

Outred pervades in an essential way the reasoning

by the Full Court in Jobbins. Then the

significance of that is that as soon as the State

there has been a draw down by the debtor from	is exposed under this indemnity in the sense that
Westpac on the facility, it has suffered damage. Even if there was no shadow of doubt about the
solvency of Rothwells, so long as this contingent
liability is there, there is damage sufficient to
bring an action under section 82.

Supposing an action is brought in

circumstances where there has been no default by

Rothwells and it is proved that the indemnity was

entered into as a result of misleading and
deceptive conduct and that the contingent liability

is a damage in the sense postulated by the question

which Your Honour Justice Brennan put to me a few

seconds ago, there is then the assessment of that

Wardley 12 5/9/91

damage which may prove a difficult task but it has

never deterred courts before, and that results in a

judgment in favour of the State against Rothwells

which then has to pay the money. But there has

still never been a default and I ask the Court to

assume there is never one and that the debt is

repaid, the facility of the $150 million is repaid

and there is no liquidation. When the debt is

repaid, does that mean that the damage has been

recouped or replenished? It must mean something to

that effect, consistently with the reasoning under

examination, and if it means that, how is the loss

recouped? How does the repayment of the debt by

Rothwells to the Bank extinguish the damage which,

on this hypothesis, the State is able to recover?

Now, if it does not, if it leaves the State in the position of a windfall recipient of an award of damages, what is the State to do with those

damages? Is it accountable to Rothwells for them

because in the end the State was not called upon?

If it is accountable, as one would expect by some

process of reasoning, why is it accountable? And

the only reason one can consider is because in the

event, no damage has been suffered. So we say,

perhaps over simply, that that simply demonstrates

our prime contention, that damage is not suffered

by an indemnifier until he has to make the payment

and that to focus on the entry into a contingent

liability to indemnify is no damage until called

upon. Now, that series of examples, in our

respectful submission, highlights what we say is

the plain correctness of the decision below.

Now, Your Honours, there are a number of other

matters which I have come prepared to deal with, dealing with the secondary point, but in the way

that the argument has developed, I am not sure that

you would wish me to voice those.

BRENNAN J: If it seems to be a case in which special leave

should be granted to deal with the first point,

that rather concludes the matter, does it not?

MR HEENAN:  If Your Honours were of that view. May it

please the Court.

BRENNAN J: Special leave will be granted in this case. It

will be a general grant of leave. It will not be

restricted to either of the points that have been

argued.

AT 10.27 AM THE MATTER WAS ADJOURNED SINE DIE

Wardley 13 5/9/91