Professional Nominees Pty Ltd v Finch Freeman Consultancy (Q) Pty Ltd
[2002] QDC 3
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- Professional Nominees Pty Ltd v Finch Freeman Consultancy (Q) Pty Ltd[2002] QDC 3
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Professional Nominees Pty Ltd v Finch Freeman Consultancy (Q) Pty Ltd[2002] QDC 3
Professional Nominees Pty Ltd v Finch Freeman Consultancy (Q) Pty Ltd[2002] QDC 3
DISTRICT COURT OF QUEENSLAND
CITATION: | Professional Nominees P/L v Finch Freeman Consultancy (Q) P/L & Anor [2002] QDC 003 |
PARTIES: | PROFESSIONAL NOMINEES PTY LIMITED (ACN 010 518 322) Plaintiff -v- FINCH FREEMAN CONSULTANCY (QLD) PTY LTD (ACN 069 435 776) First Defendant and JOHN COLIN RICHARDSON Second Defendant |
FILE NO/S: | D4607 of 1998 |
DIVISION: | Civil jurisdiction |
PROCEEDING: | Action for damages for negligence, misleading or deceptive conduct, ss. 52, 75B(1), 82, 87 Trade Practices Act (Cwth) 1974 |
ORIGINATING COURT: | Brisbane |
DELIVERED ON: | 23 January 2002 |
DELIVERED AT: | Brisbane |
HEARING DATE: | 3-5 December 2001 |
JUDGE: | Judge Boulton |
ORDER: | Judgment for Plaintiff against both Defendants in sum of $ plus costs to be assessed |
CATCHWORDS: | REAL PROPERTY – VALUATION OF LAND – VALUERS – whether defendant valuers owed a duty of care to the Plaintiff REAL PROPERTY – VALUATION OF LAND – METHODS OF VALUATION – whether defendant valuers failed to check information provided by borrowers’ employee as to commercial leases – failure to check relevant comparable sales REAL PROPERTY – VALUATION OF LAND – COMMERCIAL LEASES – whether plaintiff lender contributorily negligent in failing to check detail of leases referred to in valuations REAL PROPERTY – VALUATION OF LAND – FIRST MORTGAGE LENDING – whether lender contributorily negligent in failing to investigate financial status of borrower and borrowers’ agents TRADE AND COMMERCE – TRADE PRACTICES AND RELATED MATTERS – misleading or deceptive conduct – whether defendant valuers’ negligent valuations satisfied requirements of s 52 of Trade Practices Act 1974 TRADE AND COMMERCE – TRADE PRACTICES AND RELATED MATTERS misleading or deceptive conduct – whether second defendant valuer personally liable along with first defendant company DAMAGES – NEGLIGENCE AND/OR MISLEADING OR DECEPTIVE CONDUCT – FIRST MORTAGE LENDING – loss of opportunity to invest funds elsewhere |
COUNSEL: | Mr P A Freeburn for Plaintiff; Mr D G Clothier for Defendants |
SOLICITORS: | Tucker & Cowen for Plaintiff; McInnes Wilson for Defendants |
REASONS FOR JUDGMENT
- [1]The plaintiff company is currently engaged in offering financial planning services. It is an arm of an accounting practice, Snelleman Tom Consulting Accounting of which Martin Joseph Kerrigan is the managing partner. Mr Kerrigan is a certified practising accountant.
- [2]Between 1994 and 1998 the plaintiff was engaged in private mortgage lending. Again Mr Kerrigan was the principal engaged in that activity. There was at that time continuing demand for that type of lending. Firms of accountants or solicitors either had clients of their own who were anxious to invest at the rather attractive interest rates that were available in lending of that kind or in some instances were approached by other persons who were anxious to invest. The demand from interested borrowers exceeded availability.
- [3]Typically the lending was for short periods of time and on an interest only basis. The plaintiff company was interested primarily in Brisbane property. Mr Kerrigan explained that the plaintiff was not interested in lending for development as it had no expertise in handling partially completed developments in the event of default. The crucial requirement in the lending was security in the form of a first registered mortgage over the property. After some research the plaintiff settled on a loan ceiling of two-thirds of the market valuation of a property. This differed from development type lending on one hand where the value ratio might have been as low as 40% because of the particular hazards referred to above or lending from banks or financial institutions where the ratio might be as high as 90% but the surrounding conditions were much more stringent and the interest rate offered was of course much less.
- [4]The key to the exercise from the point of view of the plaintiff was the quality of the security and this had to be evidenced by a valuation from a reputable valuer. In the event of default there was a buffer of one-third of the value of the property to pay the costs of repossession of the property and resale.
- [5]From other expert evidence in the case it is clear that the two-thirds ceiling on loans against valuation was typical of this type of lending in the market place. Rates of interest at the time relevant to this matter were of the order of 11 to 12 per cent of which 1 to 1 ½ per cent might be onpaid by the lender to a third party as a management fee.
- [6]Evidence given by Mr Kerrigan concerning the loans advanced by the plaintiff over a period and by Mr Woodhead of similar type loans made by his firm GPS Spencer Woodhead would suggest that there was a remarkably low rate of default by borrowers. In the event of default the recovery rate by exercising mortgagee’s powers was high.
- [7]Mr Kerrigan and Mr Woodhead spoke of the distinction between this sort of lending and institutional lending. Persons who would qualify for bank or finance company lending at 7 to 8 per cent were unlikely to borrow at 11 to 12 per cent. Frequently there was urgency in first mortgage lending. Mr Kerrigan spoke of a particular instance where the plaintiff had “turned around” a loan application in a matter of hours. He was asked:
“Did you have regard to the ability of the borrower to service and repay the loan?-- It wasn’t the primary consideration at all. I mean, in many of the times we were supplied details of the person’s income, and in a lot of these type of private lending situations the reason they come to you is because they can’t get finance through a traditional financier such as a bank. Always, always, always in our mind the quality of the security, the underlying property, was paramount to us, so it was there but it was a minor matter. It certainly didn’t help us proceed with the deal by itself.”
- [8]The plaintiff did not advertise to the public. Requests were frequently received through two firms of solicitors who acted on behalf of the plaintiff – Ellison Moschella and GPS Spencer Woodhead. On the occasion in question the senior partner of Ellison Moschella telephoned Mr Kerrigan to relay a request for an 11% loan of $337,000 to be secured against properties that had valuations aggregating $505,000. Mr Kerrigan expressed interest and the terms and supporting documentation were faxed through to him on or about 29th August 1996. The letter is Document 4 in Exhibit 10. Mr Kerrigan read the valuations but was not familiar with the valuer Finch Freeman. He sought information through Mr Moschella. By letter dated 5th September 1996 (Document 6 in Exhibit 10) the first defendant provided to Ellison Moschella a professional services profile and a letter of assignment of the valuations of Lots 2, 4, 12/13 “Ivy Lane” to Ellison Moschella. Both letters were over the hand of the second defendant.
- [9]Significantly the professional services profile included the following paragraphs:
“Finch Freeman – Queensland
2.4 As the fastest growing State in the Commonwealth Queensland had been targeted for an office for some years. It finally came into being in 1995 through the merger of two long established local real estate businesses of Philip Westlake & Associates and Macallisters. The principals of these two businesses Mr Philip Westlake and Mr John Richardson becoming Directors of Finch Freeman Consultancy (Qld) Pty Ltd. This office also has a responsibility for the Northern Territory and New Guinea until businesses are established there.”
and
- 5.4 Queensland
John C Richardson FVLE (Val & Econ) FREI AFAMI AAIM
Registered Valuer Queensland, New South Wales & South Australia
John Richardson added another 30 years of property knowledge and experience to Finch Freeman when his company Macallisters merged to form the Queensland office. John is registered in Queensland and New South Wales and is a Registered Specialist Retail Valuer in Queensland.
During the time spent in the valuation industry John has been involved in valuing everything from detached housing through to the largest shopping centres, office buildings and international hotels.”
- [10]Paragraph 6.0 made reference to experience in six main categories, the first of which was “Mortgage Security”.
- [11]It should be noted that the lender’s terms of the loan advance (document dated 30th August 1996) addressed to Hanglade Pty Ltd the borrower, required assignment of the valuations (Document 5 in Exhibit 10). The assignment document is Document 6 in Exhibit 10 and is clearly in response to this requirement communicated through Hanglade Pty Ltd.
- [12]Hanglade Pty Ltd provided to Ellison Moschella by letter dated 27th August 1996 what is described as a brief company profile, some statements of assets and liabilities of the company and its sole director, Mr Helmut Weiss, a cashflow projection and a balance sheet for the company as at 30 June 1996 (Document 3 in Exhibit 10). These documents contained material which was not certified and quite unsubstantiated. Mr Kerrigan was questioned extensively about these documents which he considered quite worthless saying that they had “no value”. The only action it seems that Mr Kerrigan saw fit to take was to conduct a bankruptcy check on Mr Weiss who had made the offer to provide a personal guarantee, obtain a company search of Hanglade Pty Ltd and various real property, Land Tax, Local Government searches in respect of the securities.
- [13]It was put to Mr Kerrigan that the documents sent by Hanglade Pty Ltd in Document 3 of Exhibit 10 should have alerted him to likely cashflow problems on the part of the borrower and that the plaintiff should have embarked upon an assessment of the character of persons associated with Hanglade Pty Ltd and into its capacity to be able to service the loan. Mr Kerrigan rejected these situations and I accept his evidence. Having quite justifiably treated the documents as worthless it seems extraordinary to suggest that he would then embark upon a detailed analysis of the hopelessly vague material in order to elicit concrete concerns about the capacity of the company to service the loan. Mr Kerrigan really summarized his approach as follows:
“We never went out trying to loan money to people who we thought couldn’t pay back the loan. We looked predominantly at the security. In this instance we looked at the valuation rigorously and we believed that in the case that the client defaulted that there was sufficient buffer – there was a $168,000 buffer to incur marketing costs and legal costs and interest if there was a time period when the client defaulted that we could actually recover our moneys out of that buffer zone.”
- [14]Mr Kerrigan returned to this theme time and time again.’
- [15]Likewise in respect of the personal guarantee of Mr Weiss, Mr Kerrigan observed that they had not requested the guarantee. They were prepared to accept it but were not swayed by it.
- [16]Again it seems to me that Mr Kerrigan’s attitude was perfectly reasonable in the circumstances. The statement of assets and liabilities is not dated and is not signed. The amounts shown are expressly not supported by valuations. All the figures are rounded to thousands of dollars. The document obviously had no value whatsoever.
- [17]The Finch Freeman valuations of Units 2, 4, 13/13 as at 16 January 1996 and 24th June 1996 are documents 1 and 2 respectively in Exhibit 10. A summary of the end figures along with the Slater valuations and of the sale prices actually achieved in 1997 is Exhibit 8. The aggregate valuation by Mr Richardson as at 16th January 1996 was $380,000. That as at 24th June 1996 was $505,000. Mr Slater’s valuation based only on information that was available to Mr Richardson as at 24th June 1996 was $290,000. The aggregate amount realised on the 1997 sales was $270,250.
- [18]An examination of the respective valuations of 16th January 1996 and 24th June 1996 reveals that they are near identical except for the abovementioned figures and for the fact that on 24th June 1996 Units 12 and 13 were valued as one parcel. In each instance the valuation figure is expressed to be on vacant possession basis.
- [19]Under the heading “Investment Property” the sentence relating to market value subject to lease is left blank in all of the January valuations. The second sentence under that heading provides a consideration of market rental:
“Unit 2: $165.00/m2 net or $15,600 per annum or $1300 pcm plus outgoings
Unit 4: $110.00/m2 pa net or $8,808.00 per annum or $734.00 pcm plus outgoings
Unit 12: $110/m2 pa net or $6,120 per annum or $510.00 pcm plus outgoings
Unit 13: $110/m2 pa net or $8,472.00 per annum or $706.00 pcm plus outgoings”.
- [20]Much attention was focussed on two aspects of the June valuations. Again under the heading “Valuation” it is stated in each instance “Vacant possession basis”.
- [21]The “Investment Property” paragraph in each instance is as follows:
“Unit 2: The Market Value of the property is subject to the lease of the property by Mark Williams trading as Acme Computer Sales for six months then a purchase by the lessee (for $220,000). The property is leased at $19,800 pa net ($1,650 pcm) giving a rental rate of $208.42/m2 pa. net plus outgoings and showing a yield of 9%.
Unit 4: The Market Value of the property is subject to a lease to Distributors Pty Ltd for two years plus two options of two years each at a rental of $9,000 per annum net ($750 pcm) which equates to a rental rate of $112,50/m2 pa net and shows a yield of 9%.
Units 12/13 of the property subject to the long term lease detailed under Heading 12 “Comments” is assessed at $185,000. The market rental is considered to be $17,000 pa net ($127.82/m2 pa net) which shows a yield of 9.19% on the valuation figure.
Para 12 “Comments on the Property” is blank.”
- [22]It is common ground that during the period January-June 1996 there was no perceptible change in the real estate market for commercial properties or in market rentals. Mr Freeburn put to Mr Richardson in relation to increases:
“Those aren’t explicable by market movement, is it? It’s not explicable by market movement?-- No.
Or improvements in the property?-- No.
Or sales evidence?-- No.
So your contention is that those increases are entirely due to leases which you didn’t see?-- That’s correct.”
- [23]Mr Richardson, supported in this respect by Mr Bauer, suggested that the June 1996 valuations were in fact based on a capitalization of net maintainable annual returns. This would seem to be an attempt to avoid the unpleasant reality that the comparable sales referred to in both the January and June valuations were identical. I reject the contention absolutely. There is no sign anywhere that Mr Richardson turned his mind to an appropriate capitalization process. What he plainly did was to arrive at a greatly inflated market valuation and then express the annual rental figure as a percentage “yield”. That was the term used by him under cross-examination and in the abovementioned passages.
- [24]Even if the rental figures had been valid (which they were not) they would have given no justification for such an increase. The rental figure for Unit 2 of $19,800 pa net was up 27% on the market rental referred to by Mr Richardson in his January valuations. No explanation was afforded for this and no allowance was made to compensate for the above market figure. In fact his valuation rose by 42%. The rental figure for Unit 4 at $9,000 pa net was only 2.2% up on the quoted market figure in January. The valuation rose some 17.6%. The rental for Units 12/13 was up some 23% but the valuation in fact rose by 32%. These discrepancies should have been obvious to Mr Richardson who, unlike the Plaintiff, knew of the January valuations.
- [25]All of this is made worse when the leases mentioned in the valuations were not checked by Mr Richardson. He has given figures over the telephone by Mr Ashworth as per the handwritten notes in Exhibit 31. This document was produced by Mr Richardson in examination-in-chief following the following questions:
“Can you tell me the approach that you took to valuing these particular units in June of 1996?-- In each case I had been given details of leases and I valued them on a capitalisation method.
Who gave you the details of the leases?-- Mr Ashworth.
Would you have a look at this document, please. Do you recognise it?-- Yes, I do.
As what?-- It is details of the leases that he telephoned through to me.
When did you prepare the document?-- The valuations?
No, the handwritten notes?-- There’s no date on it, but it would have been close to this time”.
- [26]Exhibit 31 which concludes with the note “address to Hanglade” has the appearance of a contemporaneous note. It is extraordinary that it contains pencilled notations of the figures that appear in the June 1996 valuations - $220,000 for Unit 2 and $100,000 for Unit 4. A figure of $170,000 appears for Units 12/13. It seems highly likely that the $220,000 figure for Unit 2 derived merely from the say so of Mr Ashworth that the lessee of Unit 2 had an option to purchase for $220,000. The other notation “9% on $100,000 up from $85,000” which is the figure that appears in the subsequent valuation bears no resemblance whatsoever to a capitalization exercise.
- [27]As for Units 12/13 where the notation “Leased” appears “$18,700 pa” there was in fact no lease at all. Under cross examination Mr Richardson was asked:
“But there’s no lease at all in relation to lots 12 or 13, is there?-- I understood there was to be a lease.
There was to be a lease?-- Um hmm.
That’s what you were told by Mr Ashworth?-- Yes.
Not one in place yet, but there was going to be one?-- I don’t recall the exact words. It was an ongoing type of thing.”
- [28]There was no lease to Williams of Unit 2. The figure in the lease to Webb of Unit 4 was misunderstood to be net when it was in fact gross. Mr Richardson was asked about Unit 2 conceding that without reference to the lease he may well have valued it at the $155,000 arrived at in January. However, he was referred to Exhibits 32 and 33 where he had correspondence with another firm of solicitors, Messrs Primrose Couper and Cronin who sought clarification and asked expressly for vacant possession figures. In respect of Unit 2 he provided a figure of $210,000, for Lot 4 $90,000 and for Lots 12 and 13 $170,000. Those figures are quite incompatible with what he told the Court. They serve to demonstrate how incompetent a valuation exercise the June valuations really were.
- [29]It is of considerable significance that in all of the valuations the lending caution section was left blank.
- [30]A valuation report Exhibit 7 was produced by property valuer Michael Slater. Mr Slater criticized a number of features of the Finch Freeman June valuations:
- (i)The use of Bell’s Square sales when they were simply not comparable.
Bell’s Square was a modern complex where creative marketing techniques had been used.
- (ii)The misleading information conveyed in respect of leases and the failure of the valuer to verify the information.
This was especially so in respect of Unit 2 which Mr Slater valued at $85,000.
- (iii)The failure to use comparable sales in “Ivy Lane” the subject property and other comparable sales that were available.
- [31]Mr Slater concluded that there was no evidence to support the June 1996 valuations. I accept his evidence. There was no expert valuation evidence called by the Defence, despite a pre-trial indication that such a report would be forthcoming. The absence of an expert report at trial bodes ill for the defence on this issue.
- [32]Mr Slater was asked about the duty of a valuer relying on leases in formulating a valuation and replied:
“I think if the valuer is relying on the leases to formulate the valuation, I think it is fundamental to the process that he verifies the accuracy of – the existence and the accuracy of what is reflected on the lease document.”
- [33]Mr Melvyn John Bauer gave expert evidence on behalf of the defendants as to lending practices. Mr Bauer was not a valuer but had lengthy experience in lending particularly in financial institutions. When asked about the relative obligation of valuers and lenders to check leases he replied;
“Well, it is my understanding that valuers are aware that the obligation is on the lender to check that the lease, in fact, exists, but I would normally expect a valuer to certainly follow-up on the leases to make sure that they exist and that they were relevant.”
- [34]Mr Bauer was quite adamant that the valuations were not on a vacant possession basis but based on the lease rentals. He interprets the 9% as a capitalization rate. Mr Richardson could do no better under cross-examination than to describe it as a “yield” - i.e. a percentage of a market value that was already determined. This is the term used in the valuations. They did not purport to be net maintainable returns being well above the market figure in some instances.
- [35]I have already adverted to the fact that there is no analysis whatsoever of the factors which might be relevant to the determining of a capitalization rate. If there had been there would have been an interesting line of enquiry as to why a capitalization rate of 9% was arrived at for Units 2 and 4 but a rate of 9.19% was arrived at for Units 12 and 13.
- [36]I reject Mr Bauer’s evidence on the point of the valuation method adopted. Mr Bauer’s evidence on the obligations of lenders appear to be very much coloured by his experience in institutional lending and by his own personal practice which may have even surpassed those standards. I reject his evidence that first mortgage lenders place the same emphasis on the three C’s (Capacity, Collateral and Character) as the banks and that in all instances it was incumbent on lenders to check leases.
- [37]Mr Richard Knox Woodhead gave expert evidence on first mortgage lending on the part of the plaintiff. Mr Woodhead adopted a much more flexible approach than that taken by Mr Bauer agreeing that the approach taken by his organization was more focussed upon security than anything else but that serviceability was not something to be ignored. In respect of serviceability he said:
“What we are looking at is a property that is rented, that is producing income, and that is the key of the serviceability that we look at.”
- [38]He qualified this somewhat by saying:
“Without sounding too guarded, it really depends on the type of property, the security which is being put up. My view is that with property that is pretty standard strata-titled office accommodation, Ann Street in Brisbane, that it is the sort of property that generally rents well, it markets relatively well and it should be able to generally service itself, and a nine per cent cap rate is not too bad.”
…
A reasonably prudent lender would verify the lease income, I suggest, ask for copies of the leases?-- That’s a difficult one. I mean, we would probably look at the leases. On the other hand it is one of those grey areas with this particular matter. We are talking about small office space close to the city. They generally have a relatively high turnover of occupants. you know, we are talking around about the 90, 100 square metre. They’re not the six-by-six type commercial CBD leases over – you know, starting at about 300 square metres which take a long time to get somebody into it and, you know, you have got to put in a lot of incentives. I read the valuation and my general view in respect of the property like that is that there is so many comparatives about that you just wouldn’t expect the valuer to get that one wrong. It’s really – I think I used the expression of what we call – it’s really vanilla type valuation work.”
- [39]Mr Woodhead replied in cross-examination:
“The valuer has not put a qualification in his valuation that he hasn’t sighted the lease and my general assumption with a matter such as this is that the valuer would have done some investigation into it and I could rely upon that.
Do you think then as a reasonably prudent lender that obviates the need for you to investigate that matter?-- On a very standard property like this particular property, yes.”
- [40]It might be convenient to consider at this stage a submission made on behalf of the defendants to the effect that the assignment was made to Ellison Moschella and not to the plaintiff. Mr Richardson in giving evidence in chief appeared to give support to the view that he was ignorant of the identity of the plaintiff and under the impression that Ellison Moschella were in fact the lenders in the present instance and that consequently the defendants had no duty of care to the plaintiff. The following passage of cross-examination of Mr Richardson severely undermined such a contention:
“Then have a look at the next letter. That’s your letter of assignment. You knew that Ellison Moschella were a firm of solicitors; that’s right, isn’t it?-- Yes.
And that you wanted to be on their panel to be considered for their work and their clients’ work?-- Yes.
And you knew that they arranged loans for clients and that’s why they needed valuers?-- Yes.
And you were interested in being on their panel of valuers so that you could do that work?-- Yes.
And you knew that in relation to Hanglade there was going to be a mortgage, didn’t you?—Yes.
And the valuation was required for what’s called mortgage security purposes; that is, to value the security?-- Yes.
And that meant that a mortgagee, which was Ellison Moschella or their client, wanted to have a valuation of these properties so they could properly assess the value of the security?-- That’s correct.
And you sent this letter to Ellison Moschella because you were content for Ellison Moschella and their client to rely on the valuations?-- Yes.
And you knew that if you failed to take care in your valuations, there might be financial consequences?-- That’s correct.
And those financial consequences might, you knew, have been consequences for either Ellison Moschella or its clients?-- Yes
And you knew that people were relying on the accuracy of your valuations?-- Yes.
And they were important documents, weren’t they?-- Yes.”
- [41]The submission that the June valuations were assigned merely to Ellison Moschella and not to the lender cannot be sustained. There was clearly the required nexus between the defendants’ conduct and the misleading or deception of the plaintiff in the present instance. While the defendants may have been ignorant of the identity of the plaintiff it was plainly in their contemplation that the valuations would be relied upon by persons such as the plaintiff whose existence was sufficiently identified. The facts of the present case satisfy the tests of the existence of a duty of care articulated by Brennan CJ in Esanda Corporation Ltd v Peat Marwick Hungerfords [1995-1997] 188 CLR 241 at 252:
“But in every case, it is necessary for the plaintiff to allege and prove that the defendant knew or ought reasonably to have known that the information or advice would be communicated to the plaintiff, either individually or as a member of an identified class, that the information or advice would be so communicated for a purpose that would be very likely to lead the plaintiff to enter into a transaction of the kind that the plaintiff does enter into and that it would be very likely that the plaintiff would enter into such a transaction in reliance on the information or advice and thereby risk the incurring of economic loss if the statement should be untrue or the advice should be unsound. If any of these elements be wanting, the plaintiff fails to establish that the defendant owed the plaintiff a duty to use reasonable care in making the statement or giving the advice.”
- [42]A very similar situation existed in the Canadian case of Haig v Bamford et al. 1977 1 SCR 466 which related to a financial statement prepared by accountants for submission to an investor. In allowing the appeal on the grounds that the respondents owed the appellant a duty to use reasonable care in the preparation of the accounts the majority found at p. 467:
“The accountants prepared such statements for reward in the course of their professional duties. The statements were for benefit and guidance in a business transaction, the nature of which was known to the accountants. The accountants were aware that the company intended to supply the statements to members of a very limited class. The appellant was a member of the class. The fact that the accountants did not know his name was not of importance.”
- [43]On this issue the remainder of the Court were in agreement with the above finding.
- [44]Under cross-examination Mr Woodhead agreed with the general proposition that a lender should consult with the valuer if the lender’s investigations revealed anything significantly different from what appeared in the valuation. This would appear to be as Mr Woodhead described it “all pretty standard stuff”. The problem for the defendant in the present instance is the suggestion that there was obligation on the plaintiff to go behind the valuation to check the leases. In the absence of such an obligation the situation of needing to go back to the valuer simply did not arise.
The Failure to Enquire About Credit Worthiness
- [45]It was suggested that the plaintiff should have further investigated Hanglade Pty Ltd and Mr Weiss on the basis of the statements of assets and liabilities. I have already rejected the contention that the statement of assets and liabilities warranted enquiry. It is further submitted that they should have investigated Mr Ashworth who it would seem provided the lease information to Mr Richardson over the telephone. It is not shown that Mr Ashworth was anything other than an employee of Hanglade Pty Ltd.
- [46]There was no lending caution noted on the valuations. If there had been something to the effect that the information was based on the mere say so of an employee of Hanglade Pty Ltd - that company having an obvious interest in achieving a high valuation - then the plaintiff might well have been put on notice. It was not.
- [47]This failure of the plaintiff to enquire about the credit worthiness of Hanglade Pty Ltd and/or Mr Weiss and/or Mr Ashworth is one of two principal criticisms levelled by the defendants in the present case. Reference is made to judicial comment in other cases where, however, the factual situation was notably different.
- [48]For example reference was made to the decision of Duggan J. in the Supreme Court of South Australia in Plenty & Plenty v Pattinson & Anor (2001) SASC 42. In that case the plaintiff had invested moneys which had been advanced to third parties. They then sued the valuer and a finance broker who had recommended the purchase against a background of other transactions where the finance broker’s recommendations were based on the value of the properties and the financial circumstances of the borrowers. There was a long standing relationship between the broker and the plaintiffs where the broker commented on the credit worthiness of the borrowers. AT 81-612 Duggan J. observed:
- [49]“143. However, this is not a case in which the second defendant chose not to speak. The second defendant was asked for advice in relation to the investment and gave it. The loan was recommended and the recommendation was given against the background of a longstanding relationship whereby the second defendant gave advice to the plaintiffs which involved recommending loans and commenting on the appropriateness of the security put forward for the loan and the credit worthiness of the borrowers. Once the second defendant accepted this responsibility and was aware that the plaintiffs were relying on its recommendations, it could not avoid liability for a breach of its duty of care by asserting that it had not been asked directly about the valuation or credit worthiness.”
- [50]It is apparent that the decision was based on the special circumstances of the case. Duggan J. observed at para. 161:
“161. In many situations it would be appropriate for an adviser in the position of the defendant to rely on an independent valuer in making a recommendation to a potential lender. However, in the circumstances of the present case, it was apparent that the valuer’s report was bereft of detail and analysis. Furthermore, there was not even the most rudimentary enquiry as to the financial position of the borrowers. As in the case of the defendant Pattinson, the advice given to the plaintiffs was not qualified In any way. The financial position of the borrowers was not such as to justify the recommendation which was made to the plaintiffs.”
- [51]This situation is distinguishable on the facts from the present case. This present action is not an action by investors and more importantly, there is no advance history of having made enquiries of credit worthiness. The history was to the reverse effect.
The Failure to Check the Leases
- [52]This is the second major criticism made by the defendants against the plaintiffs. Again reliance is placed upon judicial comment in other cases and in particular the comments of Williams J. in I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd ; Supreme Court No. 494 of 1997.
- [53]In that case Williams J. dealt with a situation which is on its face very similar to that in the present case. There was an advance made by a lending company with links to the firm of solicitors utilising what were pooled funds of various investors. The loan was secured by first mortgage over the property which was valued as at 2nd March 1995 at $1.576 million. That valuation was expressly on the basis of average sales of the 19 lots in Stage 1 at two allotments per month. Not a single lot had sold by 28th July 1995 the date of the advance, a fact which must have been evident to the lender. Furthermore the lender was notified of certain building contracts with builders but of the need for a security deposit of $39,000 before the builders were prepared to start work. As Williams J. points out in his judgment:
“There was nothing in the material submitted by the broker to suggest that such security deposit had been paid by or on behalf of Camworth (the borrower).”
- [54]Amongst the material submitted to the plaintiffs was a letter from accountants dated 24th May 1994 reading in part as follows:
“I confirm that the above named company acts as trustee for the ‘Didar Mohammed Family Trust’.
To the best of my knowledge both Camworth Pty Ltd and the Didar Mohammed Family Trust are dormant and have not traded since the Trust was established on 20 December 1989”.
- [55]Furthermore the plaintiffs demanded on the 11th July 1995 as a condition of the loan a “statement of the borrower’s assets and liabilities signed by the borrowers”. Such a statement was never provided.
- [56]It should be noted that the submission by the broker to the plaintiffs for the loan was made on 3rd July 1995. There was then a lapse of 3½ weeks before the advance was made. There was no urgency.
- [57]In that case the lender was put on notice of certain significant features which patently required investigation and failed to carry out such investigations despite having ample time to do so.
- [58]A not dissimilar case to the present one is I & L Securities Pty Ltd v Lamberts (Australia) Pty Ltd (Supreme Court No. 4846 of 1997). In that case Chesterman J. dealt with private first mortgage lending involving a negligent valuation. In particular there was a failure on the part of the lender to check rental income - the point that here constitutes the principal thrust of the defendant’s case against the plaintiff. Chesterman J. observed:
“The last point relied on is that the plaintiff should have been sceptical of, or made further enquiries of, the rental income from the property which was to be the source of servicing the interest payments. It was said that the plaintiff should have been concerned that the departure of some tenants may have caused a shortfall which Mrs Duncan could not make up from her other resources.
I do not think that this argument can be accepted. The defendant’s valuation dealt, in some detail, with the tenancies which occupied the property and the rental income they produced. The rents were said to be market rates with the obvious implication that should one or more tenants leave, other tenants should be willing to pay the same amount. The valuation did not, of course, warrant that there would be no vacancies or that a tenant who quit would be replaced. Equally, however, there was nothing to suggest that there may be problems in maintaining the rental income.”
- [59]After reviewing some of the cases where contributory negligence had been found Chesterman J. went on to say:
“These cases do not, of course, lay down any principle of law. What is, I think, significant in each of them is that the lender had notice that the valuation might be unreliable or that the borrower would have difficulty in repaying the money. Each of them involved more than an assessment of credit risk which turned out to be wrong. Each lender had information, on which it was relying for the decision to make the advance, which revealed, at the least, the distinct possibility of a problem in recovering money lent.”
The AIVLE Proforma and Supporting Statement
- [60]Much was made in submissions on behalf of the defendants concerning this statement Exhibit 17 which (though relating to residential valuations) is referred to in the short form valuations as needing to be read in conjunction with them. There is no real dispute that it was the obligation of the lender not the valuer to check title. It is sought to extend this to an obligation on the part of the lender to check leases albeit short term unregistered leases. I have already rejected that contention.
- [61]The valuer in the present instance took details of leases from an employee of the borrower over the telephone, then allowed himself to be fobbed off by excuses when he requested copies of such leases and then failed to insert a warning or caution in the valuation documents.
Section 52 Trade Practices Act
- [62]It was not seriously argued on behalf of the defendant that if the advice of the first defendant was negligent it was other than misleading or deceptive conduct under s. 52 of the Trade Practices Act. This is no doubt correct. The first defendant corporation knew that the valuations were to be relied upon for first mortgage lending by a client of the solicitors even though the precise identity of that client may not have been known to the defendants. The plaintiff was clearly within the class of persons likely to be affected. The defendants were content to advance the valuations on that basis. There is no question that the plaintiff did in fact rely upon them and was led into serious error. The valuations were hopelessly inaccurate and incompetent. Mr Richardson had no reasonable grounds for his opinion. There may not have been an intent on the part of the defendants to deceive but this is irrelevant.
- [63]It is furthermore clear in the present instance that the first defendants’ conduct in breach of s. 52 caused the plaintiff’s loss.
- [64]Much of the argument mounted on behalf of the defendant centred on the role of the second defendant. Reference was made to the decision of White J. in Interchase Corporation Limited v ACN 010 087 573 Pty Ltd SCQ 520 of 1994, 8th February 2000. In that case White J observed:
“Interchase has sued Mr Waghorn in negligence in his capacity as a valuer in the employ of Hillier Parker. He signed the impugned letter and report not as an individual valuer but as a member of the Hillier Parker organisation. It was entirely fortuitous that he was principally concerned in his carrying out the valuation. Had Mr Richardson remained in employment with Hillier Parker there is little doubt that he would have been the valuer who did the job. The whole course of dealing between Interchase and Hillier Parker demonstrates that it was that company and not any particular individual within its employ that was within its contemplation.”
- [65]The present case can be distinguished. The second defendant was heavily involved at a personal level. He advanced his own position and experience as a basis for the plaintiff’s reliance on the first defendant and on the valuations which were over his own hand. It was he who signed the letter of assignment allowing them to be relied upon. He plainly comes within those persons listed in s. 75B(a)(c) of the Trade Practices Act 1974. By sending the professional services profile he could also be said to have induced the contravention by persuading the plaintiff to rely upon the valuations.
- [66]Section 75B was considered by the High Court of Australia in Yorke and Anor v Lucas [1983-1984] 158 CLR 661. As to para. (a) the majority held at pp. 667, 668:
“If par. (a) of s. 75B imports the requirements of the criminal law, it is clear in the light of Giorgianni v. The Queen that Lucas could only be brought within that paragraph if he intentionally aided, abetted, counselled or procured a contravention by the Lucas company of s. 52 of the Trade Practices Act. Upon the findings of the trial judge, however, Lucas lacked the knowledge necessary to form the required intent. A contravention of s. 52 involves conduct which is misleading or deceptive or likely to mislead or deceive and the conduct relied upon in this case consisted of the making of false representations. Whilst Lucas was aware of the representations – indeed they were made by him – he had no knowledge of their falsity and could not for that reason be said to have intentionally participated in the contravention.”
- [67]As to para. (c) the majority observed at p. 67:
“In our view, the proper construction of pr. (c) requires a party to a contravention to be an intentional participant, the necessary intent being based upon knowledge of the essential elements of the contravention.”
- [68]The second defendant was aware at all times of the January valuations and of the market rentals there referred to. He was aware that there was no movement in the market between January and June or change of circumstances which would have justified a variation. He was given figures over the telephone by the employee of a prospective borrower which were significantly inflated. He failed to check these and failed to sound a caution in the valuations which were then advanced. The contravention in the present case did not involve a deliberate falsity but failure to exercise due skill and care. He can only be said to have participated intentionally knowing full well the essential elements of the contravention.
- [69]A right to damages arises under ss. 82 and 87 of the Act. There is no need for me in the present case to consider questions of contribution.
- [70]The question of contributory negligence as a defence to the claim for damages under s. 52 of the Trade Practices Act 1974 (Cth) is presently settled in Queensland by the decision of the Queensland Court of Appeal in Appeal No. 10277 of 1999 handed down on 22nd September 2000, I & L Securities v HTW Valuers [2000] QCA 383.
- [71]I was informed that the High Court of Australia has heard an appeal against that decision and that by analogy with the reasoning of the majority in Henville v Walker [2001] HCA 52 handed down on 6th September 2001 concerning s. 82(1) of the Trade Practices Act 1974 (Cth) I should refuse contribution under the Trade Practices head insofar as s. 87 is concerned. This would be an adventurous course made even more so by the fact that the Court of Appeal sat a bench of five in I & L Securities and produced a unanimous judgment. The short answer is that on the facts of the present case the issue does not arise but if it did I would be plainly obliged to follow the Court of Appeal.
Quantum
- [72]The quantum of the damages claimed is set out in the Schedule to the Further Amended Statement of Claim filed by leave. Copy of that document is Exhibit 1. It claims an amount of $202,266.60 which is inclusive of interest up to 30th November 2001. It falls into two parts. There is the capital loss incurred when the advance of $337,000 was recouped only to the extent of $270,250. The figure referred to in paragraph 11 of the Further Amended Statement of Claim. There are the interest amounts at 11 per cent from the date of default on 12th March 1997 calculated at 11 per cent per annum on a monthly basis and these are said to reflect the loss of opportunity to invest the investors’ funds under similar arrangements on the first mortgage lending market where such rates were relatively standard and where there existed an abundance of borrowers seeking funds on such a basis.
- [73]The quantum of the claim is only really challenged on five bases. Three of these are quite specific whereas the other two relate more to a discounting exercise to be applied when considering damages for lost opportunity.
Prepaid Interest
- [74]The first of the specific complaints relates to the prepayment of interest in the amount of $18,535 which was made from the original advance. This was for the original six months period of the loan from the 12th September 1996. In effect Mr Clothier argues that the advance was not $337,000 but $337,000 less $18,535.
- [75]There would be merit in this submission if the calculation of the plaintiff’s loss commenced from 12th September 1996. In fact it commences from 12th March 1997 when default occurred. By that date the $18,535 of prepaid interest had extinguished the interest debt. The capital debt at that time remained at $337,000.
- [76]I am satisfied that there is no merit in this point.
Peter Hurrey
- [77]The sale of Units 12 and 13 on 16th July 1997 was a private sale consented to by the mortgagee. The purchasers’ solicitor demanded his fee totalling $1,620 out of the proceeds of sale threatening non-completion if he were denied. The plaintiff made a commercial decision to accept this demand motivated by anxiety to recover some of the losses suffered by the investors. The defendants submit that this loss should not be borne by them and I accept that submission.
Richard Ellis – Commission
- [78]Units 2 and 4 were marketed for the mortgagee by Richard Ellis, Brisbane. The evidence as to marketing strategies and commissions given by James Francis Watson was not challenged in any significant respect other than the rate of commission charged. Mr Watson agreed that 2.5 per cent of the gross sale proceeds was the correct figure in contrast with the 3 per cent actually retained. The documents in Folder 3 of Exhibit 11 disclose this. The agent was paid $1,807.51 for Unit 4 and $2,250 for Unit 2, a total of $4,057.50. The correct amount was $1,506.25 and $1,875 respectively, a total of $3,381.25. The difference of $676.25 charged should not be borne by the defendants.
- [79]Lot 4 was sold on 12th December 1997 and Lot 2 on 15th December 1997. The deduction of $676.25 should occur from the former date.
The Claim for Loss of Opportunity
- [80]The evidence in the case revealed that first mortgage lending was popular with small investors who, very understandably, wished to achieve better rates of interest than were available through lending to institutions. It was open to such investors to obtain a return of 10 per cent to 10 ½ per cent. On top of this was the 1 per cent to 1 ½ per cent management fee. The evidence of Mr Kerrigan and Mr Woodhead suggested that the risk of default on such loans was small and that even in the event of default the rate of recovery of the investors’ funds was high. Nevertheless, for the purpose of this exercise, it must be conceded that there was a small element of risk to the lender and through the lender to the various investors.
- [81]It is also common ground that not all investors of the $337,000 might have retained their investment from 12th September 1996 to the present day. Reference has been made to the short term nature of such investments. It is recognised that some investors would wish to remove part or all of their investment to meet individual demands.
- [82]There is furthermore the decline in interest rates referred to by Mr Kerrigan and Mr Woodhead that has occurred over the period from 1996 to the present. Again, it seems to be common ground, that the rates of interest charged on first mortgage lending would seem to have declined from the 11 to 12 per cent range to something of the order of 10 per cent over that period.
- [83]For these and other imponderables, it seems appropriate to impose a cut off period of approximately two years from the date of default, i.e. 31st March 1999 while leaving the 11 per cent interest rate in place. The figure on the abovementioned Schedule as at that date is $152,336.13 but this will have to be adjusted to remove the two small items of Mr Hurrey’s fee and the excess commission figure along with their interest components. I will give liberty to apply to both parties so that the appropriate calculation can be made.
Want of Prosecution
- [84]The defendants contend that interest on the plaintiff’s damages under the Common Law Practice Act should be reduced following their failure to prosecute the action expeditiously.
- [85]A chronology of steps taken in the action is set out in Exhibit 28. It emerges that the plaint was issued on 30th October 1998. No real complaint is made about the conduct of the action until June of 1999 when the defendants’ solicitors requested security for costs in the sum of $32,000. It seems that the defendants’ solicitors continued to press the matter and that despite advice that the plaintiff was arranging a bank guarantee with the Commonwealth Bank proceeded to make an application for striking out or security for costs in mid August 2000. On 23rd August 2000 there was a consent order made that the plaintiff provide security for costs and on 31st October 2000 the plaintiff paid the $32,000 in cash into court as security for costs. It is this 15 month period that the defendants complain of.
- [86]Mr Kerrigan said that the plaintiff had difficulty in obtaining a guarantee from the bank being unable to offer property by way of security for such a guarantee. Ultimately it was forced to advance cash. Mr Kerrigan points out that when the plaintiff delivered the bank guarantee to the Registrar of the court on 18th January 2001 the defendants failed to execute a consent order permitting the payment out of court of the sum held in cash and had to be compelled to do so by court order.
- [87]Mr Kerrigan also spoke of difficulties with the plaintiff’s then solicitors and of a change in solicitors as a result during the abovementioned period.
- [88]I do not accept that it is appropriate to deprive the plaintiff of interest on its damages as a result of the abovementioned delay which was to a significant extent outside of the plaintiff’s control. The plaintiff has been held out of its funds for something upwards of three years by defendants who have been shown to be weak on the merits. I refuse to make any reduction in Common Law Practice Act interest. I order that the defendants pay to the plaintiffs the sum of $152,336.13 (to be amended in accordance with the above directions) and interest on that sum at 10 per cent from the 1st April 1999 to today’s date. I order that the defendants pay the plaintiff’s costs of and incidental to the action to be assessed.