Roworth v Mamet[2010] QSC 283

SUPREME COURT OF QUEENSLAND

Introduction

[1] In July 2005 the plaintiff, Mr Roworth, met the first defendant, Mr Mamet. Mr Mamet held shares in the second defendant, Wealth Acceleration Group Pty Ltd.  WAG was a company that promoted itself as the developer of a financial program that would help its clients build wealth, regain financial control and create tax efficiencies. Mr Mamet promoted himself as a qualified financial adviser, real estate agent, auctioneer and property developer with over 25 years experience.

[2] At that stage, the plaintiffs were a young couple with a small child. They were asset rich but cash poor. They owned their house which was unencumbered and worth about $1,000,000. They had no debts but Mr Roworth’s gross salary was only about $39,000 per annum and Mrs Roworth had recently been retrenched from a job with a firm of architects. Her gross annual salary there was about $42,500 until her retrenchment.  Both plaintiffs later consulted the defendants and sought advice from them about investments they might make. 

[3] Their complaint against the defendants is that they advised them to negatively gear themselves to achieve tax benefits by buying three properties costing more than $1 million where the expenses incurred by them exceeded the income they received as rent from the properties to an extent that was unsustainable compared to the level of their income from other sources.  They say that, eventually, they had to sell the properties and have claimed damages for negligence arising out of the transactions they entered into. 

Background facts

[4] The plaintiffs bought a residence in Queensland in about 2001, having moved from Sydney. They used the money from the sale of their house in Sydney to buy their house in Queensland. Mr Roworth worked as a sales representative for Kraft Foods. He did not possess any formal employment or educational qualifications but had been in work all his adult life although he did not receive a high income. Through a fellow employee, Mr Mamet’s sister-in-law, he learned of WAG and Mr Mamet.  When he met Mr Mamet, he told him he was earning $39,000 per annum and that his wife was not working, having been retrenched about two months before.

[5] Mrs Roworth was qualified as an architect in Brazil, where she was born, but that qualification was not recognised in Australia.  She had been employed with a firm of architects as an architectural drafter and was being paid $42,500 per annum in that job until she was retrenched in early May 2005. She looked for other work after that without much luck apart from attracting a few drafting jobs which she performed from her home.

July 2005 meeting

[6] At the meeting between Mr Roworth and Mr Mamet in July 2005 at WAG’s office at Springwood Mr Roworth was given some documents describing Mr Mamet as a qualified financial adviser, real estate agent and property developer with over 25 years experience. WAG was said to have a proven financial program to help achieve “four very important goals”. They were to:

“1.Own a Debt Free Home

2. Build Wealth

3. Regain Financial Control

4.Create Tax Efficiencies”

[7] The advice included exhortations to “escape the debt trap” of the “never ending home mortgage” by acquiring income-producing assets. WAG offered “to analyse your personal or business needs and prepare financial strategies to solve the needs and reach your financial objectives.”

[8] Mr Roworth said that, during the meeting in July, he told Mr Mamet about his and Mrs Roworth’s financial circumstances including what his salary was and hers had been and about the value of their house being $1,000,000. He told him, as I have already said, that Mrs Roworth had recently been retrenched.  Mr Mamet told him that they could afford to buy three or possibly four properties by negatively gearing them and using their tax dollars to pay for investment properties, and using the equity in their house to buy the properties.[1]

August 2005 meeting

[9] A second meeting was arranged for August 2005 which Mrs Roworth also attended. The critical factual issue in the case is whether, at that meeting, she said anything to Mr Mamet to indicate that she earned approximately $70,000 per annum. Both she and her husband said that she told Mr Mamet she was then unemployed but doing a couple of odd jobs from home. Mr Roworth’s evidence was that Mrs Roworth told Mr Mamet that, if she could earn $40,000 working from home it would work out really well for her because she had a young child.[2]

[10] Mr Mamet gave evidence that during that interview he filled out a client questionnaire which included a line describing Mrs Roworth’s annual gross income as $40,000.[3] She had not signed the document and pointed out that, at that stage, she was unemployed and not earning much. Her income tax return for that financial year, 2005-2006, showed income of $3,122.[4] Of more interest from the point of view of the resolution of the factual issue concerning what she told Mr Mamet about her income was another copy of the client questionnaire showing a notation, apparently referring to Mrs Roworth saying that she had been retrenched three months before, with the entry for her income of “40,000” crossed out and additional information about her income from the Government for child assistance inserted, apparently in a different hand from Mr Mamet’s writing.[5]

[11] The other handwriting was not identified for the defendants nor was any explanation given for the defendants for the failure to call the relevant witness. In this context it was also significant that Mr Mamet’s oral evidence was that Mrs Roworth had told him that she believed that she could earn in excess of $100,000 “working from home as an architect” and that she could earn at least $70,000 in that role.[6]  This may be contrasted with para 7(f) and para 7(h) of the amended defence which asserted that Mrs Roworth informed Mr Mamet that she was an architect working part time and that the plaintiffs informed him that her annual estimated income for 2004-2005 was $40,000 and that her income was likely to increase to $70,000 per annum.  Her oral evidence was that she had informed Mr Mamet that she was unemployed, was doing some old jobs and thinking of working from home and that if she “could make $40,000 a year it would be fantastic, having our young child. I was unemployed. I wasn’t earning $40,000.”[7]

[12] That evidence was persuasive. There was no obvious reason for her to lie about her earning capacity when investigating the extent to which she and her husband could finance investments. It was not as if they were then in financial difficulties and trying to find a way out of them. Nor was it suggested to them that the acquisition of the properties was part of a “get rich quick” scheme on a rising residential market. Theirs was consciously a medium to long term plan but one where it fairly soon became obvious to them that their incomes were nowhere near large enough to service the liabilities created by the transactions they entered into.

[13] On the other hand, that was something that should have been obvious to Mr Mamet, given his experience and self-professed skill as a financial adviser. That was the effect of the evidence of Mr Lytras, a forensic accountant who gave evidence for the plaintiffs. In his report he expressed the view that:[8]

“at no time, before or after the alleged advice and the subject investment transactions, were the Plaintiffs capable of sustainably financing the investments undertaken.”

[14] The only effective contradiction of that point of view from the expert called for the defendants, Mr Green, depended upon acceptance of the assumption that Mrs Roworth had told Mr Mamet that she could increase her income to $70,000.[9] Nor was it suggested to Mr Green in his instructions that Mrs Roworth had indicated that she had the potential to earn more than $70,000 per annum.

[15] The absence of any reference to the figure of $70,000 in either copy of the defendants’ client questionnaire, ex 31 and ex 32, the unexplained deletion of the reference to Mrs Roworth having a gross annual income of $40,000, the lack of any obvious reason for her to falsify her income and the existence of a reason for Mr Mamet to assert she had inflated her income to justify what was otherwise remarkably unwise advice by him leads me to the conclusion that I should accept her evidence. In referring to the unexplained deletion and the additional notations in ex 32, Mr Bland for the plaintiffs relied, as he was entitled to do, on the decision in Jones v Dunkel.[10]

Purchase of the properties

[16] At that meeting and at a subsequent meeting in September 2005, after they had been given a letter dated 9 September 2005[11] describing their “wealth and finance strategies”, Mr Mamet told them about a number of properties as possible purchases and about the costs of buying and owning them. One, a townhouse in Cairns, was described as a positively geared property that would virtually pay for itself. Mr Roworth said that he was also told about two properties at MacGregor and Goodna that would cost them between $4,000 and $6,000 per annum, in Mr Roworth’s estimation about $100 per week after tax. Mrs Roworth’s evidence was similar.[12]  Mr Mamet also told them that he could set up a “buffer” of about $150,000 in the monies they would borrow “that would pay the difference in the properties so our lifestyle wouldn’t need to change”.[13] Mr and Mrs Roworth understood the buffer to be like a line of credit.

[17] The plaintiffs inspected the properties at MacGregor and Goodna and were also given some documents called property investment analyses of those two proposed purchases and perhaps also in respect of a property in Cairns. There was some doubt about the identity of the property in Cairns referred to in the document compared with the property they eventually bought.  For present purposes it does not seem to me to be important to the case to resolve that issue.  Those analyses showed projections of net, after tax, costs to them of between $88 and $106 per week for the MacGregor property, between $85 and $112 per week for the Goodna property and between $9 and $26 per week for the Cairns property. The total of those three sets of outgoings was, therefore, between $182 and $244 per week.

[18] The defendants produced other such documents in evidence that Mr Mamet believed had been provided to the plaintiffs but the plaintiffs’ evidence was that these were the only three given to them. I am inclined to believe them. It is odd, however, that the Roworths, having received these analyses, appear to have believed that the net expense to them would have been about $100 per week for all three properties. Mr Roworth attributed that belief to Mr Mamet saying that the property investment analyses presented a “worst case” scenario. He was also encouraged by the existence of the $150,000 buffer which he thought would enable them to cope with the anticipated expenses over what he believed would be a minimum period of 10 years.[14]

[19] I should say, in this context, that Mr and Mrs Roworth did not appear to be financially sophisticated. Nor did they appear to have any significant experience in dealing with investments. Mr Roworth’s father had been a successful businessman and the evidence suggested that he had helped them with the acquisition of their house in Sydney but they did not seek his advice about the purchase of these properties.

[20] They decided to go ahead with the purchases of the three properties before Christmas 2005 after making financial arrangements through a Mr Fernandez who worked with but not for WAG. He gave them no relevant advice about the merits of the transactions.  They built a house on one of the properties at Goodna and a townhouse on the property in Cairns. The MacGregor property already had a house on it.  The total cost of purchasing the properties, which occurred between March and September 2006, including the building costs and the costs of taking out loans was $1,008,937.29.

[21] The amount they borrowed over the period of about three years during which they owned the properties totalled $1,256,426.00, which included $247,489.17 for interest and bank charges.  The rental income for the period totalled $119,514.45.  On Mr Lytras’s calculations, during the two years before they purchased the first investment property, their free cash income available to service payments was $356.00 and $8,422.00 respectively.[15]  The annual amount they would have needed in the three years after the first investment was made to fund the costs associated with owning the properties averaged approximately $62,873.00.  The figures speak for themselves.  

Sale of the properties

[22] It was not until the first few months into 2008 that they realised that they could not sustain the investment. That realisation came to them after they received bank statements relating, in particular to the buffer account.  By the end of June 2008 the buffer account had a debit balance of $495,153.52.[16] That was an increase of more than $130,000 during the previous 18 months. They had not been aware of the rate of increase because they had not been receiving the relevant bank statements regularly.

[23] That explains their relatively sanguine attitude when interviewed by an employee of WAG, Ms Alexander, on 26 March 2008 in a review of their position.[17]  She spoke to them about what they needed to do to obtain the statements.  It was a month or so after then that Mr Roworth began to express concern to Ms Alexander and left his job, partly it seems to investigate whether he and his wife were making the best returns they could from renting the properties.  He had previously expressed concerns to her about his employment but they did not seem to be relevant to his ability to keep his financial affairs under control.  His salary was nowhere near enough to sustain the debts he and his wife had incurred by then. 

[24] When they revealed their concerns to Mr Mamet he suggested they take out a second mortgage to pay the loan and wait for the properties’ values to rise before selling them. They declined the proposal, believing that they could not risk another mortgage and sold the properties for $905,500.00, not taking into account the holding costs and expenses of sale.  The uncontradicted evidence was that their net loss after they sold the properties totalled $291,754.60. 

Reliance

[25] The plaintiffs’ evidence was that they relied on Mr Mamet’s advice in making the purchases, something which makes sense given their discussions and the impression he left them with that he was someone knowledgeable in the area of this type of investment.[18] The property investment analyses contained a note, however, saying:

“Disclaimer: Note that the computer projections listed above simply illustrate the outcome calculated from the input values and the assumptions contained in the model. Hence the figures can be varied as required and are in no way intended to be a guarantee of future performance. Although the information is provided in good faith, it is also given on the basis that no person using the information, in whole or in part, shall have any claim against Wealth Acceleration Group – Springwood, its servants, employees or consultants.”

[26] Paragraph 9(c) of the amended defence recited the disclaimer but contained no other allegation as to its legal effect. Mr Hanlon, in his written and oral submissions, sought to argue that it operated as an exemption clause but it is not clear against what form of liability it seeks to protect the defendants, whether in contract or the tort of negligence or, perhaps, pursuant to the Trade Practices Act 1974 (Cth). Mr Bland also submitted that it was limited to the information imparted by the analyses themselves and not to any other conduct engaged in by the defendants, a submission which is correct in my view and which would mean, in this case, that the defendants’ other advice to enter into these investments would not be affected by these disclaimers.

[27] Further, in the absence of an express reference to exemption of the defendants’ potential liability for negligence and the existence of the potential for liability, for example, for misleading and deceptive conduct under s 52 of the Trade Practices Act 1974 or for damages for breach of contract if the defendants had been engaged contractually to provide investment advice to the plaintiffs, the disclaimer should not be treated as exempting the defendants from liability to the plaintiffs in negligence.[19]  Nor does it preclude the conclusion that they relied on the advice they received from the defendants.  Clearly they did. 

Duty of Care

[28] The existence of a duty of care in respect of the giving of advice in circumstances such as these is now well established.[20] The brochures to which I have referred held out the defendants as reliable experts in financial planning matters and the evidence establishes the case that the plaintiffs relied upon their advice in making the investments.  This is a classical example of the type of relationship that gives rise to such a duty. 

Breach of duty

[29] Once it is established, as I have found, that Mrs Roworth did not represent her potential income to be $70,000 or more but told Mr Mamet that she had been retrenched and was hoping to do part time work from home, statements reflected in the notations and amendments shown in ex 32, it is an inevitable conclusion that the defendants breached their duty to the plaintiffs based on the evidence of Mr Lytras to which I have referred. Mr Mamet also conceded in cross-examination that, if he had been told that the plaintiffs’ combined income was about $42,000 per annum, he would have advised them not to proceed with the transactions.[21]

[30] It was also uncontentious that the rental income that they were receiving from their investment properties was as good as could reasonably be expected. There was some cross-examination directed to establishing that the Roworths had used the buffer for purposes not associated with the preservation of their investments.  They bought two cars and a computer aided drafting program but at least some of those expenses were reimbursed by them.  It was also fairly arguable on their behalf that their use of the money in the buffer account was caused by their reduced incomes resulting from the significant expenses associate with these investments. In my view it is clear that the advice given to them was careless and led them into the financial difficulties that they had begun to suffer.

Quantum of damages

[31] The plaintiffs sought the normal measure of damages, recovery of the amount of money necessary to restore them to the position they were in before the advice given to them, subject to the loss being foreseeable.[22]  Mr Bland submitted that there had been a deemed admission of the amount claimed of $291,754.60 representing the difference between the total expenditure made by the plaintiffs in respect of the investment properties and the total receipts and other benefits derived by them from those properties. Those figures were not challenged in the evidence in any event and the updating evidence in respect of the interest accruing established that the amount of the plaintiffs’ damages was $315,030.45 until 24 May 2010.[23] 

[32] It was said in the written submissions that interest was accruing thereafter at $100.58 per day on the basis that the last amount of interest accrued was $2,414.00 which should have been divided by 24 for a daily rate.  Prima facie ex 8 suggests to me that the figure of $2,414.00 should be divided by 28, the number of days since the previous accrual of interest to the account, to arrive at an approximate daily rate for interest thereafter of $86.21.  There have now been 73 days since the start of the trial on 24 May 2010 with the result that the amount claimable for the plaintiffs’ damages at the date of delivery of the judgment should be $321,323.78, subject to any further submissions the parties may wish to make on this subject.

Mitigation of damages

[33] I have already referred to the evidence that the plaintiffs realised that their buffer would reduce to zero in the near future shortly after they analysed their financial position in about April 2008 and therefore decided to sell the properties.  That evidence is reflected in the bank account statements in ex 7 which show that the balance in the buffer account averaged $495,153.52 by June 2008. The limit of that facility was $565,000 and, as was submitted on behalf of the plaintiffs, the use of that account to buy two cars and a computer program did no more than accelerate the potential exhaustion of the facility by a few weeks or months.  Some of those expenses had also been reimbursed to the buffer account.

[34] There was also evidence that the defendants made an offer to the effect that they could find then unidentified people to purchase the properties with 20 percent of the price to be financed by the plaintiffs on the security of a second mortgage. It does not seem to me that the plaintiffs were unreasonable in rejecting such an offer and Mr Mamet’s evidence was that the terms of the proposal did not reach any degree of finality and were subject to the approval of his colleagues. The defendants have not established, the onus lying on them, that the plaintiffs have failed to mitigate their damages properly.

Order

[35] In the circumstances therefore, there will be judgment for the plaintiffs for $321,323.78.

[36] After the delivery of my reasons for judgment on 5 August 2010, the parties provided written submissions as to costs, the focus of which was the making of an offer by the plaintiffs pursuant to r 360 of the Uniform Civil Procedure Rules 1999 to settle the case on payment by the defendants to them of the sum of $300,000.00 with their costs on the standard basis.  That offer was made on 23 April 2010, about a month before the commencement of the trial on 24 May 2010.  The rule provides, in part, that if the offer is not accepted and the plaintiff obtains a judgment no less favourable than the offer to settle that the court must order the defendant to pay the plaintiff’s costs calculated on the indemnity basis unless the defendant shows another order for costs is appropriate in the circumstances. 

[37] The defendants argued that another order for costs was appropriate by referring to a dictum of Chesterman J in Duffy v Hepron Pty Ltd[24] where his Honour said:

“A plaintiff who wishes to take advantage of the generosity of UCPR 360 should make an offer as promptly as is reasonable in the circumstances. There is, I think, an element of unfairness in visiting on a defendant the entire costs of an action on the indemnity basis where an offer is made on the eve of trial and the offer subsequently turns out to have been a good one. In my opinion depending, of course, on the circumstances of each case, justice would be better served by ordering indemnity costs only from the date of the offer.”

[38] They went on to argue that here the offer was made on the eve of trial, comparable to the situation dealt with by his Honour where the offer was served a month before the trial.  They also argued that the judgment amount included amounts for items used personally by the plaintiffs that they will continue to enjoy.  The written submissions did not descend to any detail about that proposition which does not conform with my understanding of the evidence.  Their third submission was that the judgment only marginally exceeded the offer, but Mr Bland submitted, in my view correctly, that all that is needed to enliven the discretion is that the plaintiff obtains a judgment “no less favourable than the offer” so that the margin by which the judgment exceeds the offer is immaterial.  Finally they submitted that the offer did not distinguish between the defendants “despite there being differing causes of action”.  As Mr Bland pointed out there was only one cause of action pleaded, that in negligence.  Nor was there any argument that one defendant was liable in a different amount from the other. 

[39] Let me return then to the submission that the offer was made not long before the trial.  Mr Bland submitted that that in Duffy v Hepron Pty Ltd, Chesterman J in fact ordered the applicant to pay all of the counter-claiming respondent’s costs on the indemnity basis. His Honour did that because “the whole prosecution of the applicant’s proceeding propounded the false assertion that he was dissatisfied with the building report”.[25]  He submitted that a similar criticism can be made of the defendants’ conduct of this proceeding in that the whole conduct of their defence propounded the false assertion that the plaintiffs had lied to them about Mrs Roworth’s earning capacity.  There is some substance in that submission which leads me to conclude that this is an appropriate case to exercise the discretion as to costs in the manner provided by the rule. 

[40] Accordingly I order that order that the defendants pay the plaintiffs’ costs of and incidental to the proceeding, including reserved costs, to be assessed on the indemnity basis.