CATCHWORDS
NEGLIGENCE - duty of care - failure of solicitor to disclose to client information material to decision of client to lend funds on second mortgage for six months - whether solicitor entitled to rely upon valuation of security - valuation admittedly negligently made - apportionment of liability between solicitors and valuer.
VALUATION - residual land valuation - appropriateness of valuation based on hypothetical development of land - principles of valuation discussed.
Trade Practices Act 1974 (Cth): s52
Fair Trading Act 1987 (NSW): s42
Law Reform (Miscellaneous Provisions) Act 1946 (NSW): s5
Abrahams v Federal Commissioner of Taxation (1944) 70 CLR 23; applied.
Spencer v The Commonwealth (1906) 5 CLR 418; applied.
Russell v Federal Commissioner of Taxation (1981) 81 ATC 4391; referred to.
Turner v Minister of Public Instruction (1956) 95 CLR 245; applied.
JAMES BEATTIE PARK & ORS v ALLIED MORTGAGE CORPORATION LIMITED & ORS
Nos NG980 of 1992 and NG663 of 1993
CORAM: HILL J
PLACE: SYDNEY
DATED: 5 JULY 1995
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTRY )
) No NG663 of 1993
GENERAL DIVISION )
Matter No NG 980 of 1992
BETWEEN: JAMES BEATTIE PARK
First Applicant
ELAINE PARK
Second Applicant
SUE ELLEN REGAN
Third Applicant
RUBY VIOLET GLADYS POULTON
Fourth Applicant
AND: ALLIED MORTGAGE CORPORATION LIMITED
First Respondent
MORTGAGE FINANCE AUSTRALIA (SECURITIES) LIMITED
Second Respondent
WAHRING HOLDINGS PTY LIMITED
Third Respondent
DAVID ANTHONY UNDERHILL
Fourth Respondent
STEPHEN JOHN GOODMAN
Fifth Respondent
ALEXANDER RM MACINTOSH
Sixth Respondent
SALLMANNS (NSW) PTY LIMITED
Seventh Respondent
STEPHEN HOWES
Eighth Respondent
AND: SALLMANNS (NSW) PTY LIMITED
Cross-Claimants
AND: TIMOTHY WILLIAM DALEY
GERALDINE ANNE DALEY
RICHARD MARTYN WOOLNER
IAN JAMES ROSS
MICHAEL JOHN MILGATE
Cross-Respondents
Matter No NG663 of 1993
BETWEEN: JAMES BEATTIE PARK
First Applicant
ELAINE PARK
Second Applicant
SUE ELLEN REGAN
Third Applicant
RUBY VIOLET GLADYS POULTON
Fourth Applicant
2.
AND: TIMOTHY WILLIAM DALEY
GERALDINE ANNE DALEY
RICHARD MARTYN WOOLNER
IAN JAMES ROSS
MICHAEL JOHN MILGATE
First Respondents/
Cross-Claimants
DAVID LESLIE ABRAHAMS
Second Respondent
IAN MACPHERSON DAY
Third Respondent
ANDREW CRAIG ASHTON
Fourth Respondent
AND: SALLMANNS (NSW) PTY LIMITED
First Cross-Respondent to First Cross-Claim
JOHN STEVEN HOWES
Second Cross-Respondent to First Cross-Claim
CORAM: HILL J
PLACE: SYDNEY
DATED: 5 JULY 1995
MINUTES OF ORDER
THE COURT ORDERS THAT:
In proceedings NG663 of 1993:
(1) The application by the cross-claimants for leave to amend the cross-claim be dismissed with costs.
(2) Cross-claim dismissed.
(3) No further order as to costs.
In proceedings NG980 of 1992
(3) Judgment for the cross-claimants against the cross-respondents in the sum of $164,000 plus interest from 5 May 1995 to date.
(4) Cross-respondents to pay 40% of the costs of the cross-claimants such costs to be limited to the costs of the hearing commencing on 5 May 1995.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTRY )
) No NG663 of 1993
GENERAL DIVISION )
Matter No NG 980 of 1992
BETWEEN: JAMES BEATTIE PARK
First Applicant
ELAINE PARK
Second Applicant
SUE ELLEN REGAN
Third Applicant
RUBY VIOLET GLADYS POULTON
Fourth Applicant
AND: ALLIED MORTGAGE CORPORATION LIMITED
First Respondent
MORTGAGE FINANCE AUSTRALIA (SECURITIES) LIMITED
Second Respondent
WAHRING HOLDINGS PTY LIMITED
Third Respondent
DAVID ANTHONY UNDERHILL
Fourth Respondent
STEPHEN JOHN GOODMAN
Fifth Respondent
ALEXANDER RM MACINTOSH
Sixth Respondent
SALLMANNS (NSW) PTY LIMITED
Seventh Respondent
STEPHEN HOWES
Eighth Respondent
AND: SALLMANNS (NSW) PTY LIMITED
Cross-Claimants
AND: TIMOTHY WILLIAM DALEY
GERALDINE ANNE DALEY
RICHARD MARTYN WOOLNER
IAN JAMES ROSS
MICHAEL JOHN MILGATE
Cross-Respondents
Matter No NG663 of 1993
BETWEEN: JAMES BEATTIE PARK
First Applicant
ELAINE PARK
Second Applicant
SUE ELLEN REGAN
Third Applicant
RUBY VIOLET GLADYS POULTON
Fourth Applicant
AND: TIMOTHY WILLIAM DALEY
GERALDINE ANNE DALEY
RICHARD MARTYN WOOLNER
IAN JAMES ROSS
MICHAEL JOHN MILGATE
First Respondents/
Cross-Claimants
DAVID LESLIE ABRAHAMS
Second Respondent
IAN MACPHERSON DAY
Third Respondent
ANDREW CRAIG ASHTON
Fourth Respondent
AND: SALLMANNS (NSW) PTY LIMITED
First Cross-Respondent to First Cross-Claim
JOHN STEVEN HOWES
Second Cross-Respondent to First Cross-Claim
CORAM: HILL J
PLACE: SYDNEY
DATED: 5 JULY 1995
REASONS FOR JUDGMENT
Before
the Court are two proceedings which arise out of loans made by four clients of
the firm of Messrs Colin Daley Quinn, Solicitors, to Beechboro Investments Pty
Limited ("Beechboro") on
the security of a second mortgage over a property called "The Renaissance Centre" at Katoomba, New South Wales. The total amount advanced was $420,000 and the
advance was for a term of six months.
Ultimately Beechboro defaulted in repayment and the subsequent mortgagee
sale of the property for $1.4 million did not realise sufficient funds to repay
any amount to the second mortgagees who are the applicants in each of the
proceedings before the Court.
The first of the two proceedings
was heard in part by Davies J who gave judgment dismissing the claims
brought by the third and fourth applicants against the first to fifth
respondents. The claim against the sixth
respondent, Mr Macintosh, had earlier been discontinued. The remaining respondents to those
proceedings were Sallmanns (NSW) Pty Limited and Mr Howes, an employee of
that firm. For convenience I use the
expression "the valuers" to
refer to both. The substantive case
against these respondents was that in valuing The Renaissance Centre at
$3.5 million they had been negligent or alternatively engaged in
misleading and deceptive conduct and that the applicants in relying upon that
valuation had suffered loss.
Davies J set aside the claim against the valuers and Mr Howes
for separate determination.
Subsequently the valuers filed a cross-claim in these proceedings against the partners of Colin Daley Quinn, hereafter referred to as "the solicitors". By their cross-claim the valuers alleged negligence on the part of the solicitors resulting in damage to the applicants in consequence of which the solicitors were alleged to be joint tortfeasors and thus the valuers claimed indemnity or contribution pursuant to s5 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW).
The second proceedings, numbered NG663 of 1993, were proceedings brought by the same applicants (Mrs Poulton had not originally been an applicant in this proceeding but became a party during the course of the hearing) against the solicitors alleging, inter alia, negligence. Also respondents to these proceedings were Messrs Abrahams, Day and Ashton, who were the guarantors of the loan made by the applicants to Beechboro. The action against these respondents was ultimately discontinued by consent.
In these proceedings the solicitors cross-claimed against the valuers alleging negligence on the part of the valuers or alternatively breaches of s52 of the Trade Practices Act 1974 or s42 of the Fair Trading Act 1987 (NSW), by reason of the preparation and provision of the valuation. The cross-claim alleges the solicitors had suffered loss or damage being:
"... such sums as they may be liable to pay to the Applicants, whether as damages, interest, costs or whatsoever, together with their own costs in defending this action."
By
order of Davies J, the two proceedings were heard together with evidence
in the one being taken as evidence in the other. This included the evidence that had been
taken before Davies J. However, in
final address the parties agreed that I need have no concern with the oral
evidence transcribed in the proceedings before Davies J, except in respect
of three
passages to which my attention was specifically drawn by counsel for the
solicitors.
After the matter had proceeded for some time, settlement was achieved in the claim by the applicants against the valuers and the solicitors. In the result, by consent, I ordered in proceedings NG980 of 1992 that there be judgment against the valuers in the sum of $410,000 inclusive of interest with no order as to costs. As part of the settlement, the applicants discontinued the proceedings against the solicitors, being NG663 of 1993.
In the
result that left, in matter NG980 of 1992, the question of whether the valuers
were entitled to contribution from the solicitors in respect of some part of
the amount which the valuers had paid to the applicants. In matter NG663 of 1993 there was left a
claim by the solicitors against the valuers for an indemnity against any amount
which the solicitors were bound to pay to the applicants. Since, as a result of the settlement there
could be no such amount, logically that should have meant that the cross-claim
in proceedings NG663 of 1993 should have been either discontinued or
dismissed. However, as will be noted
later, at the conclusion of submissions the solicitors sought to amend their
cross-claim in proceedings NG663 of 1993 so as to include a claim for indemnity
against the valuers for any amount which
the solicitors were otherwise liable to pay to the valuers in respect of
proceedings NG980 of 1992.
The Facts
The firm of Colin Daley Quinn originated as a partnership between Mr Daley Senior and Mr Quinn, a partnership of some twenty-five to thirty years standing. The firm had been formed as a result of amalgamation of a number of other firms at that time. Among the services it provided clients was the placement of money in mortgage investments. Approximately thirty clients at relevant times participated.
Where the amount to be advanced could not be advanced by one particular client, a lending proposal was submitted to a number of lenders who were identified as having funds available for investments and the funds of those desiring to participate were pooled and advanced to the borrower. In such a case the security for the borrowing, which was generally a first mortgage, was taken in the name of the various clients who had provided the money.
A partner of the firm was nominally, at least, in charge of this part of the firm's practice. At the relevant time with which the present proceedings are concerned, this was Mr Woolner. However, Mr Woolner appears to have played no part in the present transaction. Responsible presumably to Mr Woolner was a Ms Hanslow, who had worked with the firm for some seventeen years. She was not qualified but was employed as a conveyancing clerk. She had direct contact with clients who desired to invest money in mortgages. No doubt, as the present case indicates, where a particular client had dealings with a partner in the firm, communications with that client might, as well, be through that partner in addition to such communications as might take place with Ms Hanslow.
Mr Timothy Daley ("Mr Daley") first learned of the possibility of an advance being made to Beechboro in the sum of $440,000 in August 1990 from Mr Stephen Goodman of Allied Mortgage Corporate Limited ("Allied Mortgage") with whom he was negotiating in respect of another transaction. Mr Goodman said that he (meaning thereby Allied Mortgage) was lending $1.25 million on first mortgage of the property which was valued at $3.5 million and that the interest was high. He indicated that Allied Mortgage would "take out" the clients at the end of six months.
Around the same time, perhaps earlier, Mr Goodman had also spoken to Ms Hanslow. In that conversation Mr Goodman disclosed that the finance was being sought for clients of his who had purchased the property from a mortgagee in possession for $1,650.000. He mentioned that the purchaser had obtained the copyright of a development application for the site and had a valuation from the valuers for approximately $3 million. He said that his company, Allied Mortgage, was lending by way of first mortgage $1.2 million and that Beechboro required approximately $400,000 on second mortgage. He said that some $300,000 to $400,000 had already been spent by Beechboro in obtaining building and development approvals. After referring to the fact that the Beechboro company structure consisted of solicitors and accountants, he said that his company would "take out" the second mortgage within a period of five to six months of the initial advance.
On 23 August 1990, Mr Daley received from Wahring Holdings Pty Limited, a finance broker, information concerning the proposed loan in the form of four documents: a synopsis of the loan application, asset and liability statements of the proposed guarantors, a copy of a valuation made by the valuers and dated 22 August 1990 and a copy of a letter of offer from Allied Mortgage. The proposal was that the loan be $440,000 with interest ($40,000) being paid in advance to be deducted at the time the loan was made. The letter said:
"Your loan will be discharged, or partially discharged, through further advances by AMC Ltd in accordance with their Letter of Offer. It is anticipated that your loan will be fully discharged within six months."
The synopsis made it clear that there was no income from the property as vacant possession had been obtained to allow for refurbishments and improvements and that this accounted for the necessity to provide for interest on the second mortgage. It disclosed also that the contemplation was that the overall principal (this related, it would seem, to the first mortgage to Allied Mortgage) would be repaid through either sale of the property for redevelopment (an estimated selling price of $6 million was referred to) or by refinancing. It contained, as well, commercial information concerning the group of companies of which Beechboro was part.
The valuation report disclosed that it had been made under instructions from Beechboro for the purpose of assessing the "current open market value" on behalf of an intending mortgagee. It described the property. It said that on the land valued stood a part two, part three and part four storey brick building of Italianate Victorian style originally opened as a school and subsequently used as a convent before being refurbished in 1986 and 1987. The development consent referred to in the valuation contemplated a development of the site as a 100 room two storey motel, a two storey restaurant/coffee shop, a four theatre cinema centre, theme shopping facilities at ground floor level, a resort office space on the first floor level, a single storey fast food restaurant and on site parking and associated landscaping works.
The valuation, while mentioning some sales in Katoomba said to be of assistance in valuing the property, proceeded on the basis of what is described as a "residual land value analysis". The residual land value analysis assumed partial demolition of the existing structure, construction of roadways, car parking, fast food outlet, restaurant, cinema complex and internal refurbishment, as well as sale of a motel site. There were no detailed calculations included with the valuation, although reference was made to their being attached. The report contained, however, a summary of the assumptions made in the valuation.
The basis upon which the valuation proceeded was thus that the land would be developed in accordance with the development application at a cost which the valuers calculated, together with holding charges. There was then determined the ultimate value of the development from which were subtracted the costs including holding costs to determine the land value after redevelopment. A developer's profit of twenty five percent on cost was then applied to the figure to discount the land value back to present day value. The result was said to be a value of $3.5 million. The report indicated that the valuation was for use only by the party to whom it was addressed and that no responsibility would be accepted for any third party.
The letter of offer was an approval from Allied Mortgage to Beechboro of an advance of $1,690,000, being an initial draw down of $1,250,000 to assist Beechboro with the purchase and a further advance of $440,000 at the latest six months from the date of the initial draw down. The offer was subject to certain conditions and particularly provided:
"This approval is not absolute and unconditional and you should note,
(a) MFA(S)L reserves the right to vary any or all of the terms and conditions applicable to the loan at any time prior to completion, in repsone [sic] to any change to market conditions or other circumstances. ...
(c) Any variation of the terms and conditions, or any cancellation of this approval, shall not create any liability of MFA(S)L's part for any loss or damage which might in consequence thereof be suffered by you or any other party."
Endorsed on that letter was an acceptance on behalf of Beechboro.
Over the next few days Mr Daley considered the documents he had received and discussed them with Ms Hanslow. He instructed her to approach clients whom she thought might be interested in second mortgage finance and to keep Mr Daley informed of the response. By 7 September Ms Hanslow was able to advise Wahring Holdings Pty Limited that the application for finance for $420,000 had been approved, subject to certain conditions. These included a condition that the valuation report be updated and "assigned to us". An administration charge was to be payable by the borrower to the firm of one percent. Additionally there was the following condition:
"An agreement being entered into confirming that Allied Mortgage Corporation Limited will discharge or partially discharge, through further advances within the term of the loan, and in the event of the mortgage not being taken within the term of the loan confirmation that the second mortgagees will be given priority in the event of any resale or new mortgage being entered into."
As Mr Daley said in his evidence, the last condition was an attempt to lock in Allied Mortgage. It was a way of tightening up the letter of comfort which had been given concerning "take out".
Correspondence passing between Colin Daley Quinn and the solicitors for Beechboro make it clear that Mr Daley pressed for a strengthening of the take out agreement but that this was not agreed to. A letter was, however, received from the valuers to the effect that the valuation could be relied upon by the applicants "for mortgage purposes".
Mr Daley had also queried the fact that the valuation was almost twice the purchase price that was being paid for the land by Beechboro, that purchase being, as already noted, from a mortgagee exercising power of sale. To that query the valuers responded that they were aware of the purchase transaction but understood that the development application which formed an integral part of the initial valuation was held by Beechboro or an associated company and was not the property of the mortgagor at the time of the sale. The letter concluded that the circumstances of the purchase and the contract price did not affect the valuation.
It is necessary now to turn to the specific circumstances which led each of the applicants to lend their money to Beechboro.
Mrs Regan
Mrs Regan took no personal part in the decision that she should invest $220,000 in the Beechboro second mortgage. She had appointed Mr Lance Regan, her brother, and her father attorneys under power and it was her brother who acted as her attorney in respect of the particular transaction. Prior to it, Mr Regan had on her behalf invested other sums of money in mortgages arranged by the solicitors. Mr Daley had acted on some of these occasions.
Mr Lance Regan ("Mr Regan") is dyslexic and had, prior to the events in question, suffered an injury which he said left him brain damaged. Mr Daley, in his evidence, regarded the assertion of brain damage as an exaggeration. Whether Mr Regan is or is not brain damaged, there was little doubt from my observation of him in the witness box that while he did exercise some independent judgment about the wisdom of a particular loan transaction, his ability to understand was certainly impaired. He said, in his evidence, that in his business dealings he relied heavily upon professional advice. He left school before he was fifteen years old and clearly had difficulty in both reading and writing.
In September 1990 the solicitors held in their trust account on behalf of Mrs Regan, $220,000 available for investment. Mr Daley approached Mr Regan with the loan proposal the subject of the present proceedings. Mr Daley detailed the proposal advising that the security was worth $3,500,000 and that the first and second mortgages after the advance had been made would amount to only forty-eight percent of the value of the land. He said:
"The first mortgagee will pay you out in about six months. We have directors of the borrower, being a solicitor and an accountant, to give personal guarantees. The loan to value ratio is good."
Mr Regan asked how much it would be necessary to sell the property for to recover the money advanced and was told that approximately $2 million would be necessary. He asked Mr Daley whether he should proceed with the advance and Mr Daley replied in the affirmative on the basis of what he had said. He indicated that he could try to get a deed of priority from the first mortgagee, a concept which clearly Mr Regan would not have understood. Mr Regan says, and I accept his evidence, that he only indicated his acceptance to proceed with the transaction because it was recommended by Mr Daley. Mr Daley showed him the valuation but it was not at that stage read by Mr Regan nor did Mr Daley explain it.
Mr Regan was attracted to the proposition because of a preference that he had that the money be lent for a period of six months but with a maximum of eight months if necessary. This was because he was proposing to use $200,000 of the money to purchase a restaurant/night club in Kogarah which was in the course of being refurbished. It was estimated that that refurbishment would take from six to eight months from September 1990. Mr Regan had discussed this proposed purchase with Mr Daley before September 1990.
Mr Regan had a further conversation with Mr Daley by telephone in which Mr Regan confirmed his agreement to proceed with the transaction. Subsequently Mr Regan attended at the solicitors' office to sign papers. He signed a mortgage lending authority in the form later described in relation to the Parks.
I find specifically that Mr Daley at no time advised Mr Regan that the first mortgagee was under no legal obligation to pay out or to take out the second mortgagees at the expiration of six months; that Mr Daley indeed led Mr Regan to believe that there was such a legal obligation; that Mr Daley at no time advised Mr Regan that the mortgagee sale, pursuant to which Beechboro purchased the property, was for a purchase price almost half the amount shown in the valuation; and that the second mortgage which was to be given was in part to secure the purchase price payable by Beechboro under that transaction.
Mr and Mrs Park
The contact between Mr and Mrs Park ("the Parks") and the solicitors was solely through Ms Hanslow. She, having been instructed by Mr Daley to ascertain whether clients were interested in the proposed advance to Beechboro, wrote to the Parks seeking an indication of their interest in the proposal. There was standing in the solicitors' trust account, on behalf of the Parks, the sum of $120,000. Ms Hanslow was aware that the Parks had other funds available so that, if need be, they could lend $150,000. The letter enclosed a copy of the valuation report of 22 August 1990 and the development consent, together with the letter from Allied Mortgage dated 23 August 1990 and attachments. The attachments included the letter of offer from Allied Mortgage to take out the second mortgagees. It concluded by inviting the Parks to sign a mortgage lending authority which was also enclosed.
The mortgage lending authority was in the form which the solicitors normally used if a client proposed to invest a sum upon mortgage. It gave details of the proposal and security and under the heading "Special conditions or instructions relating to the security" said:
"1. The first mortgagee is entitled to make an initial drawdown of One Million Two Hundred and Fifty Thousand Dollars ($1,250,000) with further advance of Four Hundred and Forty Thousand Dollars ($440,000) which is to be paid in full satisfaction of the second Mortgage."
There was reference also to a deed of priority to be obtained. The document authorised the solicitors to apply the moneys in trust to complete the transaction.
Mrs Park at the time was at least seventy three years of age and retired. Her husband, who was a year older, was in bad health. They had been clients of the solicitors for some twenty years and used interest on moneys lent to meet living expenses. At the time Mrs Park was still working. Prior to sending the documentation to the Parks, Ms Hanslow had discussed the proposed transaction with Mrs Park by telephone. Mrs Park reminded Ms Hanslow that there had been problems with the previous investment she had made. Ms Hanslow said that the proposed transaction looked very good. There is a dispute as to whether Ms Hanslow at that time indicated that the transaction was a second mortgage transaction, but nothing turns upon that.
Subsequently Ms Hanslow asked the Parks to find an additional $30,000 over and above the $120,000 then in the solicitors' trust account.
On receipt of the solicitors' letter the Parks signed the mortgage lending authority.
Ms Hanslow agrees that she told Mrs Park that the first mortgagee had agreed to take out the second mortgagees at the end of six months and that this reduced the risk of the transaction. In so saying Ms Hanslow understood that the first mortgagee was bound so to do and communicated that understanding. This was a fact which led Ms Hanslow to think that the proposal was a good investment. When asked whether she would have recommended the transaction if the first mortgagee had not been bound so to do, she said that she probably would have recommended the transaction to proceed but would have told Mrs Park that the first mortgagee was not bound, that being, as she agreed, a "very important consideration". Specifically she agreed that she would not have recommended the transaction if the only real way of recovering the money at the expiration of the six months term was through a mortgagee sale.
Ms Hanslow had no real recollection of her conversations with Mrs Park. She said that she would have told Mrs Park that the money was to be used to settle Beechboro's purchase of the property for $1.5 million. She said she had been concerned about this but had formed the opinion that the figure was low in relation to the valuation because Beechboro had purchased the property in a mortgagee sale. She professed, notwithstanding this evidence, to understand that a mortgagee had an obligation to achieve a fair and reasonable price for the property.
While I have no doubt that Ms Hanslow was honest in giving her evidence and in saying that she always discussed in full with all clients each transaction, I would accept the evidence of Mrs Park that in this case Ms Hanslow did not tell Mrs Park that Beechboro had purchased the property around the time the valuation had been made for almost one half of the figure shown in the valuation. At no time did Ms Hanslow ever advise the Parks that the first mortgagee had refused to commit itself to take out the second mortgagees without reservation. I would find also, contrary to an attempt by Ms Hanslow to reconstruct the conversation that she did not discuss with the Parks the risks associated with the transaction by virtue of the moneys advanced being secured by second mortgage.
Mrs Poulton
Mrs Poulton was at the time of the transactions approximately seventy-four years of age and was a veteran pensioner. She was in poor health and the parties agreed to the tender of a statement made by her to save her having to attend. In the result she was not, by agreement, subjected to cross-examination.
Her evidence is not dissimilar to that of Mrs Park. Her introduction to the transaction was a letter from the solicitors in substantially identical terms to that which was received by Mrs Park and with the same enclosures. At the time the solicitors were holding moneys on behalf of Mrs Poulton in their trust account. Mrs Poulton had, from time to time, invested in mortgages through the solicitors.
Mrs Poulton no longer had copies of the documentation as these had been given to the solicitors in connection with the earlier court proceedings. She understood that she was being asked to invest in a second mortgage repayable within six months. She noted the valuation for $3.25 million but was still troubled. In consequence she rang Ms Hanslow, with whom she had previously dealt, and expressed her concern about the transaction being a second mortgage. According to Mrs Poulton's evidence, Ms Hanslow replied:
"But Ruby, the valuation for the property is there in case anything happens. The interest rate is very good for six months. I wish I had some money. I would invest myself."
Mrs Poulton then indicated that that was good enough for her and signified her assent to proceed with the transaction. She signed the paperwork and returned it to Ms Hanslow. She says that to the best of her recollection she read everything that was sent to her.
Ms Hanslow's evidence was that her conversation with Mrs Poulton took the same course as that with Mrs Park. Specifically, she mentioned to Mrs Poulton that, "We will be paid out six months from the date of the advance of funds."
I would make the same specific findings in respect of the conversation with Mrs Poulton as I made with respect to Ms Hanslow's conversation with Mrs Park.
The claim against the solicitors
As pleaded in the cross-claim filed by the valuers against the solicitors, the breaches of duty of care said to constitute negligence were particularised as follows:
"a) Failing to read or read carefully the valuation by the cross claimants.
b) Relying on the cross claimants' valuation when the cross [sic] knew or ought to have known that it included property other than the security property.
c) Failing to obtain an independent valuation of the security property which was in form and content suitable to the needs of the applicants as intending mortgagees proposing to advance moneys for a period of 6 months only secured by second mortgage.
d) Failing to have regard to the purchase price of the property when deciding to advance funds to Beechboro.
e) Failing to have regard to the amount of money loaned by Mortgage Finance Australia (Securities) Limited ("MFASL").
f) Lending an amount of money which, when added to the money advanced by MFASL, exceeded 100% of the purchase price of the security property.
g) Failing to exercise any or any sufficient independent judgment as to the wisdom of the proposed transaction and the ability of Beechboro to repay the loan at the expiration of the term;
h) Failing to provide any or any sufficient information or explanation to the applicants concerning the price paid for the security property by Beechboro, the amount of money advanced to Beechboro by MFASL secured by first mortgage, the financial circumstances of Beechboro and the basis of and methodology adopted in the Sallmanns' valuation;
i) The cross claimants also repeat (for the purposes of this cross claim only) all allegations of negligence and particulars relating thereto made by the applicants against the cross respondent in proceedings number G663 of 1993."
At the close of oral evidence, counsel for the valuers, in response to a question from the bench, sought to amend these particulars so as to rely upon the failure of the solicitors:
"(j)to provide to the applicants any sufficient or accurate information or explanation concerning the arrangements (if any) to be entered into between the applicants and MFSAL for the repayment of the applicants' debt or the nature and enforceability of such arrangements."
Counsel for the solicitors objected to leave being granted to amend the particulars having regard to the lateness of the time at which the application was made.
No real prejudice to the solicitors appears to me to arise as a result of this amendment. The case throughout was conducted on the basis that there had been a failure on the part of the solicitors to advise their clients that there was no legal obligation upon the first mortgagee to take out the debt owing to the second mortgagee at the expiration of six months. It was not suggested that additional evidence would need to be called by the solicitors to deal with the matter and no application for an adjournment to permit such evidence to be sought was made.
I would accordingly allow the amendment, notwithstanding the late stage at which it was proposed.
The expert evidence - the claim against the solicitors
Expert evidence was called on behalf of both the solicitors and the valuers. Mr Moses, a partner in the firm of solicitors, Murphy and Moloney, with extensive experience in conveyancing and conveyancing related matters (including having been Challis Lecturer in Conveyancing at the Law School of the University of Sydney between 1969 and 1975) gave evidence for the valuers. Much of Mr Moses' written report was concerned with the valuation which Mr Daley said he had relied upon. Mr Moses points out that it is significant that a solicitor enquire both in relation to the value of the property and its saleability. He expressed the view that the valuation in the present case was unusual in his experience and would not be acceptable to a solicitor recommending the possibility of advancing funds on the security of the property.
Mr Moses' criticism of the valuation seems to proceed upon the basis that the valuation depended on the premise that the hypothetical development discussed in the valuation report would in fact proceed. With respect to Mr Moses, he appears to have misunderstood the basis upon which the valuation was in fact made, a matter to which I will return. However, Mr Moses makes in his report the general and unexceptional comment that the ability to make repayments of principal and interest under the mortgage would be a matter of concern because no lender would advance funds in an expectation that it would be necessary to exercise a power of sale in order to recover the sum lent.
In oral evidence Mr Moses expressed the opinion, which I readily accept, that it was a practice followed by solicitors advising clients proposing to lend money, to make the lender aware of any relevant fact which the solicitor knew in relation to the property the subject of the advance. I would express it as a duty. He said, and I do not think there is any real dispute about this, that it would be normal practice for a solicitor advising in respect of a transaction such as the present to advise the client that the funds to be advanced were to be used to complete an uncompleted contract of sale; that the purchase price under such a contract of sale was considerably less than the valuation which had been obtained from a valuer; that the total borrowings to be undertaken by the mortgagor exceeded the purchase price which the mortgagor was paying for the property; and whether there was a legal obligation of the first mortgagee to take out the second mortgagee at the expiration of the loan. He said also that if it became clear subsequently that what was expected to be a legal obligation to take out the second mortgage would not be legally binding it would be normal practice for a solicitor immediately he or she became aware that there was no such legal obligation to inform his or her client.
Most of the cross-examination of Mr Moses concerned the criticisms he made of Mr Daley's reliance upon the valuation in the present case. Except for his evidence concerning the present valuation which, in my view, was misconceived, I accept Mr Moses' evidence. It differed in truth little from that of Mr Bluth whose evidence I also accept.
Mr Bluth, a partner in the firm of Abbott Tout, Solicitors, and previously an employed solicitor and partner in the firm of Gray and Perkins, gave evidence for the solicitors. He had been in practice for some seventeen years and although in more recent times his clients appear to have been institutional lenders rather than individual lenders, he had acted for individual lenders investing money on mortgage at least while with Gray and Perkins.
In his expert report Mr Bluth expressed the view, which is readily enough accepted as a general proposition, that a prudent solicitor acting for a lender should obtain the opinion of an appropriately qualified valuer and that the solicitor was entitled to rely upon that valuation. He accepted, however, that this could not be an invariable rule. He said that it was not in accordance with the usual practice of solicitors to seek to go behind a valuation. He disagreed with Mr Moses as to whether the valuation in the present case would have been acceptable, expressing the view that it was. In cross-examination Mr Bluth agreed with Mr Moses' formulation of the normal practice of a solicitor as being to communicate to the client matters known to the solicitor relevant to the particular transaction. He said in the course of his practice he had come across, from time to time, residual land valuations but agreed that such valuations were fairly infrequent. The occasion for such valuations arose normally where the security was subdivisional land, land to be made the subject of a strata plan or to be commercially developed.
He agreed that it would be normal practice for a solicitor to disclose to a client a discrepancy between the purchase price of the property and the valuation obtained because such a discrepancy would tend to reflect upon the valuation. He said also that he would advise a client of the amount of money being provided by the first mortgagee so that the client could determine the proportion of total moneys being borrowed; and in relation to a borrowing to complete a purchase, the relationship of the borrowing to the purchase price.
Mr Bluth said it was not unusual for a borrower to borrow more than the purchase price. He accepted, as I have already indicated, that there would be some circumstances where a prudent solicitor would go behind the valuation. He also accepted that if the client had advised the solicitor that at the expiration of the term of the borrowing he was looking to apply the moneys lent to another purpose, a prudent solicitor would explain to the client that there was no guarantee that the money would be returned to him at the expiration of the loan but that it could take some considerable months before the money was recovered.
The expert evidence on valuation
Expert valuation evidence was given by Mr Bransdon on the part of the solicitors. In one sense since negligence has been admitted by the valuers, the evidence is of little significance. However, it may be shortly summarised as follows.
Mr Bransdon, who gave evidence for the valuers, had been asked to value the property as at 22 August 1990 for the purposes of the proceeding. He assessed the value of the property at $1,750,000, arriving at that figure by what he referred to as his preferred method of valuation, that is to say by estimating the rental values for the respective components of The Renaissance Centre building and adding to the capitalised value of this income the estimated value of residual vacant land. Mr Bransdon rejected a valuation based upon a prospective development, such as that made by the valuers, having regard to what Mr Bransdon understood to be the actual costings for that development as estimated in March 1990. There was no evidence as to whether these costings were known to the valuers at the time the valuation was initially made and the costings used were based upon Rawlinson's Australian Construction Handbook and similar publications. In his valuation he compared the figure he had arrived at to comparable sales evidence. He accepted that the nature of the particular property, the development upon it, and its location made the property a difficult one to value in August 1990.
Mr Bransdon's evidence makes clear the obvious proposition that the best evidence of the value of land would ordinarily be the price which that land actually sold for in an open market transaction. He said that he was unable to ascertain whether the price paid by Beechboro of $1.5 million was an arm's length price. He had, however, made some enquiries but had not been able to ascertain whether the property had been exposed to the market place and was thus cautious of accepting that figure as the value. He agreed that it would be usual practice to refer to that sale in a valuation of the property and his valuation in fact did so.
The duty of care of the solicitor
Section 5 of The Law Reform (Miscellaneous Provisions) Act 1946 (NSW) confers upon a person liable in fact a right to claim contribution from another tortfeasor:
"... who is, or would if sued have been, liable in respect of the same damage, whether as a joint tort-feasor or otherwise...".
On the facts of the present case, the claim for contribution depends therefore on the question whether the solicitors would have been held liable to the applicants in negligence if the applicants had pursued the claim against the solicitors and the damage recoverable by the applicants (if a suit against the solicitors had proceeded) was the same damage as that suffered at the hands of the valuers.
It could scarcely be in dispute that a solicitor retained to advise owes a duty of care to his or her clients. That would be so whether the advice was in the nature of legal advice or investment advice at least where such advice was part of the solicitor's retainer. It is convenient to consider the claim in negligence by reference to the various alleged breaches of duty of care particularised.
Ultimately no argument was put on pars(a) and (b) of the particulars. As to particular (c), the charge that the solicitors had failed to obtain an independent valuation of a suitable kind in the circumstances, proceeds on the assumption that the present valuation was not. In support of this submission the valuers rely upon the evidence of Mr Moses and, to a lesser extent, the evidence of Mr Bransdon. However, while a residual land value valuation may not be common, it does not follow that such a valuation is thereby unsuitable.
The general test for valuation, developed initially in the area of compensation for resumption, may be expressed as being:
"...the price which a willing but not anxious vendor could reasonably expect to obtain and a hypothetical willing but not anxious purchaser could reasonably expect to have to pay ... if the vendor and purchaser had got together and agreed on a price in friendly negotiation.":
Abrahams v Federal Commissioner of Taxation (1944) 70 CLR 23 at 29 and cf Spencer v The Commonwealth (1906) 5 CLR 418. It is obvious that the best evidence of value would be the price obtained in a contemporaneous sale of the same property between parties at arm's length to each other. Where a contemporaneous sale of the same property has not taken place, weight is usually given to contemporaneous sales of comparable properties. The extent to which the properties are comparable will often be a matter of judgment and dispute. Where there is a contemporaneous sale of the actual property or contemporaneous sales of a comparable property, it will be important that those sales be between parties at arm's length reached in an arm's length bargain: Russell v Federal Commissioner of Taxation (1981) 81 ATC 4391.
In the present case the sale to Beechboro was a mortgagee sale. Having regard to the duties which the law imposes upon a mortgagee exercising a power of sale, howsoever those duties are formulated (see, eg, the competing views discussed in Bourke v Beneficial Finance Corporation Limited (unreported, 30 January 1991)) it might be expected that a mortgagee exercising power of sale would have taken reasonable steps before the sale to ascertain the value of the property. Nevertheless, in a rare case at least, the price paid in a mortgagee sale may not represent the real value of the property because the sale has not proceeded on an arm's length basis or some other breach of the mortgagee's duties has occurred. It is not possible in the present case to express a view as to whether the sale to Beechboro was an arm's length sale or whether in that case there was a breach of the mortgagee's duties.
As Spencer's case itself makes clear the valuation must proceed by reference to the best use of the property. For this purpose the valuer will take into account not only the present use to which the land is applied, but any more beneficial use to which it may reasonably be applied. This is the process which a purchaser negotiating to purchase the property would undertake. Thus it is not inappropriate in valuing property to take into account a potential development of the property, for among the range of hypothetical purchasers can be assumed to be a person who would undertake such a development as would maximise the usage of the land.
An obvious example can be seen in broadacres suitable for subdivision. The process involved in valuing subdivisional land is discussed by the Full Court of the High Court in Turner v Minister of Public Instruction (1956) 95 CLR 245. The same method can be adopted for any land ripe for development. In the case of subdivisional land, there is involved the determination of the gross proceeds of the subdivided land (based upon a hypothetical subdivision), deducting therefrom the costs of subdivision, holding charges and expenses of sale. There is then taken into account by way of discount a risk factor and a figure representing the profit a developer would seek.
It can not be doubted that a valuation which proceeds on such a basis is an open market valuation. It makes no assumptions as to the actual use by the owner of the land but proceeds on the basis that a hypothetical purchaser desiring to purchase the land for its best use would determine the amount that purchaser is to pay on a commercial basis. It is for this reason that I would not accept the criticisms made by Mr Moses as to the method of valuation used in the present case.
On the evidence, and this is accepted by the valuers in accepting liability in negligence, the valuation was wrong. This may well have been because the costs of development were understated or because the ultimate value of the development before discounting was overstated, having regard to the likely property market when the development was completed. Some evidence before me suggests that the property market was in clear decline by the time the valuation was made.
Expert valuers will normally check their valuation by using alternative methods. This was the course adopted by Mr Bransdon in making the valuation for the purpose of the present proceedings. It was not a course adopted by the respondent valuers in the present valuation. This being said I would not, however, conclude that the valuation was in its nature unsuitable for security purposes. I do not think it matters for this purpose whether the moneys to be advanced are to be advanced for a period of six months or longer, or are secured by first or second mortgage.
Paragraphs (d), (e) and (f) can be dealt with shortly. Obviously each of the matters in these paragraphs is a matter of concern to a person lending money in a case such as the present. The solicitor was clearly obliged to advise his client as to the purchase price of the property to be given as security; the total amount to be advanced on first and second mortgage to enable the purchase to be completed; and the fact that the moneys to be advanced exceeded 100 percent of the purchase price of the property. It is not a defence to a solicitor to say that he was entitled to keep these matters to himself and to rely only upon the valuation obtained. As the evidence in the present case makes clear, it could never be an absolute defence to a solicitor that he relied upon a valuation obtained when other circumstances known to the solicitor cast doubt upon that valuation.
The particulars as expressed rather appear to contemplate that the solicitor made the decision that the funds should be advanced. This may well be the case in respect of Mr Regan who clearly relied heavily upon Mr Daley. But where the client exercises some independent judgment, as all the clients did to a greater or lesser degree in the present case, it is the obligation of the solicitor to disclose to the client those facts which would affect the risk in entering into the transaction, so that the clients are able to make an informed judgment.
Paragraph (g) of the particulars is more problematical. Unless specifically retained so to do a solicitor would not ordinarily be under an obligation to advise on matters of investment. In a particular case the solicitor may nevertheless have a duty to advise a client where the circumstances are such that the client will rely upon the advice of the solicitor. Such a case may be where the client is unable to exercise independent judgment as a result of some mental incapacity, or where by implication the client having made known the investment purpose in mind can reasonably be expected to rely upon the advice of the solicitor as to the suitability of the investment for that purpose. Both of these circumstances clearly existed with respect to Mr Regan.
It must be said that a solicitor could hardly recommend a second mortgage loan, of the kind involved in the present case, to a client with a need to use the funds advanced shortly after the loan was to expire. Particularly where an investment of moneys for a short term is involved, the value of the security, while remaining of fundamental importance, may be less important than the ability of the borrower to repay. It may be thought that if more commercial investors had had regard to ability to service and repay loans rather than the value of securities, there would have been less problems arising out of the so-called entrepreneurial 80s.
The present was a case where Beechboro had no asset other than the property to be used as security. To repay the loan it required either to sell the property or refinance. The circumstances showed that it intended to refinance rather than sell at the end of the loan term. It was precisely for that reason that it was of the greatest significance to ensure that Beechboro had the ability to refinance.
However, I would find that only Mr Regan relied upon the solicitors' judgment as to the wisdom of the loan. In his case the loan was clearly not appropriate and he would be entitled, on this basis, to succeed against the solicitors. However, I do not think it can be said that the other applicants retained the solicitors or indeed relied upon their judgment as to the wisdom of the transaction and for this reason par(g) would seem inapplicable to them.
Paragraphs (h) and the new particulars added provide the real basis for concluding that the present case involved a breach by the solicitors of their duty to their clients. As the expert evidence shows, a solicitor has a duty to provide to clients information known to the solicitor relevant to the transaction upon which the solicitor is acting for the client. Clearly it was relevant to enable the clients to exercise an independent decision, that they be made aware of the price paid for the property by Beechboro; the amount of money advanced to Beechboro secured by first mortgage; the financial circumstances of Beechboro and whether there was a legal obligation on the part of the first mortgagee to take out the applicants at the expiration of the loan. The solicitors, while aware of all these matters, refrained from communicating them to the client. It is unnecessary to consider further whether there was an obligation upon the solicitors to explain the basis of and methodology adopted in the valuation.
The solicitors, as well as denying breach of duty, sought to defend the present proceedings on the basis that if there were a breach of duty that breach was not the cause of the loss suffered. First, it was submitted, that information regarding the amount of the first mortgage was contained in the mortgage lending authority (not, it may be noted, that this transaction related to Beechboro's purchase of the property) and that a close reading of the documents forwarded by the solicitors to Mrs Park, Mrs Regan and Mrs Poulton would have enabled them to determine for themselves that the first mortgagee was under no binding legal obligation to take out the second mortgagees.
None of the clients in the present case was legally qualified. Indeed each was elderly and would not have appreciated the significance of the documentation. Indeed it has to be noted that Ms Hanslow herself failed to appreciate that there was no legal obligation on the part of the first mortgagee to take out the clients at the expiration of the loan. She it was who told the clients of the existence of this obligation and indeed when she did so believed it to be the case. Where a solicitor gives oral advice on the legal relationships between parties it ill behoves the solicitor whose advice is in error to say that the client upon reading the documentation should have formed the view that the situation was other than that which the solicitor advised.
Counsel for the solicitors submitted that there was no direct evidence that had the relevant facts been made known to the clients and perhaps the impact which those facts had upon the transaction, they would have declined to participate in the investment. Each of the matters was pertinent to the risk attaching to the investment. Even Mr Daley conceded that faced with giving advice on the desirability of two investments, one with a legal obligation on the part of the first mortgagee to take out the second mortgagee and the other without such legal obligation, he would advise a client to participate in the former, rather than the latter. So much is but common sense.
In the circumstances of the present case, and having observed in the witness box each of the applicants other than Mrs Poulton, I would infer that none would have proceeded with the transaction if disclosure of all relevant facts had been made to them. Each (and I think the same must follow for Mrs Poulton) was a person concerned with the security of the funds to be invested. Once the cumulative effect of these matters is taken into account the risk of the investment strongly increased.
In my view, in the circumstances of the present case, the solicitors are not excused from liability by reason that the valuation was misleading or by reason that the valuers owed some duty of care to the solicitors. I might say that I expressly refrain from deciding whether the valuers did owe some duty of care to the solicitors, that is to say, whether the necessary degree of proximity arose between the two.
The question of the apportionment of relative degree of liability is difficult. In my view both were liable, although I am inclined to the view that the liability of the valuers contributed more to the loss of the clients than did the liability of the solicitors. In these circumstances I would find, doing as best I can to apportion the liability, that the valuers are liable to the extent of sixty percent of the loss suffered and the solicitors forty percent.
The application of the solicitors to amend their cross-claim against the valuers.
After submissions had concluded application was made by the solicitors to amend the cross-claim against the valuers by seeking damages against the valuers, not only as the claim was framed against any liability of the solicitors to pay damages to the clients, but any liability of the solicitors to pay damages to the valuers. The short proposition is that the valuers by providing the valuation were guilty of conduct which was misleading and deceptive under the provisions of the Fair Trading Act or, in the case of a trading corporation, the Trade Practices Act, with the consequence that if the solicitors were liable for contribution under the provisions of s5 of The Law Reform (Miscellaneous Provisions) Act 1946 (NSW) they should be entitled to recover the amount of that liability from the valuers under either s43 of the Fair Trading Act or s52 of the Trade Practices Act.
The amendment raises a quite novel argument which leads to a consideration of the relationship between s5 of The Law Reform (Miscellaneous Provisions) Act and provisions such as s52 of the Trade Practices Act and indeed could raise an issue of inconsistency under s109 of the Constitution. The solicitors expressly declined reliance upon s109.
In written submissions made subsequent to the hearing, counsel for the solicitors argued that the issue arose rather as a defence to the valuers' cross-claim than a matter for the cross-claim of the solicitors against the valuers, although maintaining the application to amend the cross-claim.
No doubt one reason why the matter was put that way was that although the valuers' cross-claim was filed late, it was foreshadowed on the first day of hearing and filed on the second, and no defence to the cross-claim was lodged.
While it is true that most of the facts would probably be before the Court, I do not think that it is appropriate to permit the matter to be raised at this late stage. The whole case was fought on the basis of negligence on the part of either the solicitors or the valuers and apportionment of that negligence. Having regard to the admission of liability of the valuers in negligence, the question of whether the valuers were guilty of misleading and deceptive conduct was not one which emerged during the course of the hearing. To allow the matter now to be raised could prejudice the valuers and accordingly I would decline the amendment.
Costs
In matter NG663 of 1993 the question of costs seems relatively uncomplicated. The main claim by the applicants against the solicitors has been discontinued with no order as to costs. That left outstanding the question of a cross-claim by the solicitors against the valuers for an indemnity against any amount which the solicitors were bound to pay to the applicants.
As I have already indicated, there could be no such amount as a result of the compromise reached between the applicants and the valuers. The real issues between the parties arise in the result in matter NG980 of 1992. The most commercial course is thus to deal with costs in the latter matter and to make no order as to the costs in matter NG663 of 1993.
On the second day of hearing the valuers made an open offer to the solicitors that contribution of 50% be made by each party. That offer was stated to remain open during the course of the trial. It was not accepted. That offer is relevant to the question of costs.
The solicitors did not formally become parties to the 1992 proceedings until 5 May 1995. However, at the commencement of the hearing counsel for the valuers foreshadowed the cross-claim against the solicitors and the case proceeded as if such a cross-claim had been filed.
The solicitors throughout denied any responsibility for contribution or otherwise. In that denial they have failed. In the result I have found them liable to contribute to the extent of 40%. They were not liable to the full extent of 50% the subject of the open offer and were not obliged to accept it. Nor should their failure so to do be reflected in the outcome.
Rather, I am of the view that the solicitors should pay to the valuers 40% of the valuers' costs of the cross-claim from the commencement of the hearing.
The orders accordingly will be as follows:
Matter No NG663 of 1993:
(1) Application by cross-claimants for leave to amend cross-claim dismissed with costs.
(2) Cross-claim dismissed.
(3) Otherwise no order as to costs.
Matter No NG980 of 1992:
(1) Judgment for cross-claimants against cross-respondents in the sum of $164,000 plus interest from 5 May 1995 to date.
(2) Cross-respondents to pay 40% of the costs of the cross-claimants such costs to be limited to the costs of the hearing commencing on 5 May 1995.
I certify that this and the
preceding forty-two (42) pages
are a true copy of the Reasons
for Judgment herein of his Honour
Justice Hill.
Associate:
Date: 5 July 1995
Counsel and Solicitors DL Warren instructed by
for Applicants: M Conley
Counsel and Solicitors L Foster SC with JR Nicholas
for 7th & 8th Respondents instructed by Berne Murray Tout
in NG980/92 (1st & 2nd
Cross-respondents in
NG663/93):
Counsel and Solicitors S Donaldson instructed by
for Cross-respondents Colin Biggers & Paisley
in NG980/92 (1st Respondents
in NG663/93):
Dates of Hearing: 4, 5, 8, 9 & 16 May 1995
Date Judgment Delivered: 5 July 1995
