CATCHWORDS

TRADE PRACTICES - misleading and deceptive conduct - quantity surveyor's estimate of construction costs - qualified estimate that did not reflect estimator's true belief as to likely costs - whether qualifications to opinion sufficient to prevent inaccurate estimate being misleading.

TRADE PRACTICES - misleading and deceptive conduct - reliance - whether defaults on part of applicant's employees sufficient to prevent respondents' estimate from being operative inducement to applicant to act to its detriment.

TRADE PRACTICES - causation - novus actus interveniens - whether defaults on part of applicant sufficient to break chain of causation between respondents' conduct and loss suffered.

NEGLIGENCE - quantity surveyor's estimate of construction costs - duty to give honest opinion - whether duty breached when inaccurate, but qualified, estimate given.

NEGLIGENCE - causation - multiple defaults all operating to produce loss - novus actus interveniens.

AGENCY - constructive notice - exception where third party knows that the agent will not pass information on to the principal.

Federal Court of Australia Act 1976 (Cth) - s 51A

Trade Practices Act 1974 (Cth) - ss 52, 82

Cases Considered

ANZ Banking Group Limited v Turnbull & Partners Limited (1991) 33 FCR 265

Argy v Blunts & Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112

Bennett v Minister of Community Welfare (1992) 176 CLR 408

Caltex Oil (Australia) Pty Ltd v The Dredge "Willemstad" (1976) 136 CLR 529

Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83

Re La Rosa; Ex parte Norgard v Rodpat Nominees Pty Ltd (1991) 31 FCR 83

March v E & M H Stramare Pty Limited (1991) 171 CLR 506

Obacelo Pty Ltd v Taveraft Pty Ltd (1986) 10 FCR 518

State Bank of New South Wales v Yee (1994) 33 NSWLR 618

Thorpe Nominees Pty Ltd v Henderson & Lahey [1988] 2 Qd R 216

Beneficial Finance Corporation Limited

v A B W  Nominees Pty Ltd & Anor

QG 182 of 1992

Drummond J

Brisbane

16 May 1996

IN THE FEDERAL COURT OF AUSTRALIA)    No. QG 182 of 1992

QUEENSLAND DISTRICT REGISTRY      )

GENERAL DIVISION                  )

          BETWEEN:  BENEFICIAL FINANCE CORPORATION LIMITED

                   ACN 007 597 202

                                      Applicant

          AND:      A B W  NOMINEES PTY LTD

                   ACN 010 151 925

                                      First Respondent

          AND:      RODNEY K JOHNSON

                                      Second Respondent

                      MINUTES OF ORDERS

JUDGE MAKING ORDER:          Drummond J

DATE OF ORDER:               16 May 1996

WHERE MADE:                  Brisbane

THE COURT ORDERS THAT:

1.        Judgment be entered for the applicant against each respondent for $4,592,369 and interest of $2,568,053, ie, $7,160,422.

NOTE:     Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA)    No. QG 182 of 1992

QUEENSLAND DISTRICT REGISTRY      )

GENERAL DIVISION                  )

          BETWEEN:  BENEFICIAL FINANCE CORPORATION LIMITED

                   ACN 007 597 202

                                      Applicant

          AND:      A B W  NOMINEES PTY LTD

                   ACN 010 151 925

                                      First Respondent

          AND:      RODNEY K JOHNSON

                                      Second Respondent

Coram:    Drummond J

Date:     16 May 1996

Place:    Brisbane

                    REASONS FOR JUDGMENT

          The applicant financier, ("BFC"), claims damages under s 82 the Trade Practices Act 1974 (Cth) and for negligence from the first respondent, a corporation which carried on business as quantity surveyors under the name "Butler Wright & Partners" ("BWP"), and the second respondent, a quantity surveyor employed by the first respondent at the relevant time, who provided the services to BFC in respect of which this action arises, on behalf of BWP.

          BFC agreed to lend a builder, JC Scott Development Pty Ltd, $10,780,000.  $7M of this facility was earmarked to fund the construction by the builder of a home unit development; $1.75M was to pay out a mortgage to another financier over the land on which the builder intended to build the units; $1.45M constituted an "interest reserve", ie, it was an amount equal to one year's interest payable by the builder in respect of the facility, which was added to the principal amount; payments of interest due by the builder were transferred each month from this reserve to BFC's general funds.  The balance of the facility was provided to meet certain costs incurred by the builder in connection with the marketing of the project and to pay BFC's loan establishment fee.  The $7M construction costs figure was the estimate of the builder's principal, Mr J Scott; it was forwarded to BFC under cover of his letter of 5 June 1989.

          The facility was provided subject to some pre-settlement conditions, ie, conditions which had to be satisfied before the first draw-down, and to a number of post-settlement conditions that had to be satisfied after that.  One pre-settlement condition provided:

          "Construction costs are to be verified by panel quantity surveyor (Butler, Wright and Partners) and such estimate is not to exceed $7 000 000.  If such estimate is less than $7 000 000 the construction advance is to be reduced accordingly."

          The post-settlement conditions included the following:

          "a)  The percentage of $7 000 000 to be advanced at any time is not to exceed the percentage of work completed at that time as certified by
panel quantity surveyor (Butler, Wright and Partners) on a cost to complete basis.

          b)   Council approved construction plans to be sighted and vetted by valuers and quantity surveyors prior to first construction draw."

          On 21 November 1989, BFC varied certain of the original offer conditions and permitted the builder to draw-down the whole of the facility other than the $7M construction finance component (and the component representing capitalised interest), even though neither the pre-settlement condition nor post-settlement condition b) that I have set out above had been satisfied.  On 2 February 1990 the builder was permitted to make the first draw-down from the construction finance component.  Thereafter, the builder, from time to time, drew further sums against this component of the facility.  During 1990, BFC also increased the amount of the loan facility and made the additional moneys available to the builder.

          It appears that the builder did not follow normal procedures in carrying out work on the project:  it commenced work in November 1989, although it was not until July or August 1990 that it obtained building approval from the Council.  Proper construction drawings, as opposed to building approval drawings, were not prepared until after BFC appointed the receiver in early 1991 and the builder appears to have ignored requirements of the various approvals in that the structure was built to a height greater than that permitted.  It also appears that the builder fairly early ran into financial difficulties in funding work:  relatively early, it
began to delay payments to sub-contractors, even though the builder received progress payments from BFC which included payment for work the sub-contractors had completed.  By 12 July 1990, BWP was insisting that the builder lodge a statutory declaration with them that all moneys due to employees and sub-contractors had been paid up to the date covered by each progress claim, before BWP would process the claim.  Ultimately, on 2 April 1991, BFC appointed a receiver and manager in respect of the builder, took the remaining work out of its hands and let the contract to another builder, who completed the project.

          After realising its primary security by selling the units in the completed project and various collateral securities, BFC incurred an overall loss on the project of $4,592,369.  It is this sum which it seeks to recover from BWP and Johnson.  The respondents did not challenge this quantification of BFC's claim.

          BWP had been appointed to BFC's panel of quantity surveyors only in the latter half of 1989.  It was a couple of months later, in mid-October 1989, that Mr Newbold (the BFC account manager with immediate responsibility for processing the builder's loan application and then for administering the loan facility) contacted BWP and spoke with the second respondent, Mr Johnson, to let him know that BFC was about to become involved in the project.  Scott, the builder's principal, had been speaking with Newbold about obtaining finance for the project from May 1989.  On 5 June 1989, Scott gave Newbold detailed information concerning the project and securities offered; this information included details of how Scott's estimate of $7M to fund construction was made up.  BFC did not require a formal application from Scott, but, by 16 October 1989, a detailed credit proposal was prepared, with Newbold's involvement, in BFC's Brisbane office for submission to BFC's Adelaide head office.  The proposal sought approval to provide the builder with the facility for $10.78M that I have referred to.  Approval was given by BFC's Adelaide head office on conditions which included those I have set out above.  BFC's letter of offer of 23 October was accepted by the builder on 26 October.

          In late October 1989, Newbold contacted Johnson and gave him some more details of the project; he advised Johnson that BFC would want BWP to provide an estimate of the construction costs, but was not to do anything for the time being, other than to contact Scott to get from him an idea of what the project involved.  Newbold also told Johnson that, if finance was approved, BWP would be required to check the builder's progress claims.  On 30 October 1989, Johnson visited the site and got from Scott a copy of his $7M estimate of construction costs, the development approval drawings and some preliminary structural drawings.  Shortly after, Newbold met Johnson at BWP's offices.  He asked Johnson to carry out a check on Scott's estimate of $7M and he accepted Johnson's statement that, on the limited information available, all that BWP could produce would be a broad estimate of those costs by way of a check on the builder's estimate.  Johnson raised the question of BWP's fees.  Newbold indicated that BFC expected only a limited effort on the part of BWP.  A few days later, Johnson told Newbold that BWP's fees for the preliminary estimate would be $3,000 and $1,000 per draw-down for verifying progress claims.  These fees appear quite modest; there is, however, no evidence which would justify a finding that they were so low that BFC should be considered as having required token efforts only by BWP.  Although the builder was to be responsible for meeting BWP's fees, BWP invoiced BFC and was paid by BFC.  Scott, whom neither side called as a witness, regarded the inter-position of BWP between himself and BFC as an unnecessary burden.  Throughout the project, he was generally antagonistic towards Johnson and unco-operative with him.  Scott had tried to persuade Newbold not to use a quantity surveyor, but this was a requirement of BFC's head office that Newbold could not waive.

          BFC never reduced the terms of BWP's retainer to writing, although much later, when the project was in difficulty, Newbold prepared a letter which he backdated to 16 October 1989 and placed on BFC's files that suggested he had then retained BWP on the terms set out in the letter.  Newbold admitted he did this to deflect criticism of him by his superiors.  It appears for a time to have worked.  It was not until well after the receiver had been appointed that Johnson learned of this letter and disabused Mr Lamond and Mr Ahrens of BFC of their belief, based on it, that BWP had acted under a written retainer.

          I accept that BWP was retained by Newbold, on behalf of BFC, initially to provide an estimate of the costs of construction for the purpose of enabling BFC to determine whether the pre-settlement condition I have set out above was satisfied, ie, to decide whether to make the facility available to the builder and later, to check the builder's progress claims.  The Queensland State Manager delegated to Mr Ahrens, BFC's Queensland Credit Manager at the time, responsibility for checking that the conditions of the facility had been met before loan funds were released to the builder.  Ahrens confirmed that Newbold had authority from BFC to engage BWP to carry out these tasks, although he said that Newbold did not have any authority to give BWP instructions that conflicted with the conditions set by BFC's head office on which the facility was granted and which required BWP's involvement.  Ahrens did not have any such authority either.

          Newbold was extremely keen for the project to proceed and, at the initial stage, he was very keen for finance to be approved.  Approval depended upon BWP confirming that construction costs would not exceed $7M, so that Newbold could instigate action that the Brisbane office of BFC was required to take to confirm (by "signing off" the relevant pre-settlement condition of the head office approval) that that condition had been satisfied.  It is also clear that Newbold was extremely keen throughout the time of his involvement with the project, up to the end of 1990, to accommodate Scott at every turn.  What is not clear from the evidence is Newbold's reason for being so supportive of Scott throughout the whole of his involvement in the project.  The explanation Newbold gave for his enthusiasm for the project was that he considered it to be a profitable one for BFC and that he was impressed by Scott's reputation in the building industry.  I have difficulty accepting either his evidence in this regard or that what he said, in any event, explains his enduring support for Scott.

          The two main witnesses called were Johnson and Newbold.  I accept Johnson as a witness who has, in general, given reliable evidence.  I am not prepared to accept what Newbold says where his evidence conflicts with that of Johnson.  It is convenient to summarise the main considerations that have led me to this assessment of credibility:  further reasons appear in the course of my judgment.  I accept Johnson's evidence that at various times Newbold put pressure on him to reduce the various estimates he made to bring them within the $7.5M limit ultimately set by BFC's head office, if the loan moneys were to be released to the builder.  How Johnson came to give his estimate of $7.5M in his heavily qualified letter of 20 November 1989, needs explanation.  Johnson gives a much more credible account than Newbold of the genesis of this letter, which is so much at variance with his own earlier and recent estimates of $9M and $8.35M, but which satisfied Newbold's need for support for the recommendation the latter made to BFC's head office on 16 November 1989 to allow Scott early access to a substantial part of the facility.  Newbold's evidence was to the effect that he had no involvement at all in the production of the $7.5M estimate on 20 November 1989 by Johnson:  he says he expected it came about because of discussions between Johnson and Scott, to which he was not privy.  But although Newbold was at pains to emphasise his lack of expertise in evaluating construction costs, the efforts he went to in his memorandum of 16 November 1989 in suggesting why the true estimate was likely to be $7.5M rather than the $8.35M put forward on 9 November 1989 by Johnson indicate a degree of determination on Newbold's part to extract from Johnson a letter confirming that costs would not exceed $7.5M.

          The events precipitated by Scott's seeking the first construction draw-down of $300,000 in January 1990, which culminated in Johnson's production of his estimate of $7.36M, a figure below the critical $7.5M figure referred to in the varied approval conditions, also need explanation:  Johnson gives a credible one for this sequence of events, whereas Newbold's account is unacceptable.  Newbold denied the important events of 31 January 1990 in his affidavit, but then accepted much of Johnson's account about that matter in cross-examination.  Next, Newbold claims that Johnson's confirmation of construction costs of $7.36M, in his letter of 26 March 1990, caused him to ask Johnson whether Scott could complete the project for $7M, to which he claims Johnson replied in the affirmative:  it is highly improbable that this exchange, which is of assistance to Newbold, ever took place.  Johnson never believed that Scott could complete the project for $7M:  his lowest ever estimate was a qualified one of $7.36M, which he only produced in response to unremitting pressure by Newbold.

          Johnson's initial estimate of construction costs made at Newbold's request in early November 1989 was approximately $9M.  When Johnson told Newbold this, the latter expressed disbelief, suggested Johnson's figures were too conservative and that he should discuss the matter with Scott.  Newbold was insistent that Johnson not put anything in writing to BFC until he had done this.  Johnson met Scott on site on 8 November.  After some complaint about BWP's involvement, Scott gave Johnson, in outline, details of how he intended to run the project by calling in favours from, and by setting up special deals with suppliers and sub-contractors; he mentioned other matters which, far from tending to confirm his own estimate of $7M for construction costs, revealed an awareness by Scott that the $7M figure would be exceeded.  For example, Scott said that Johnson should not make any allowance for professional fees and insurances because he had already either paid them or had entered into special arrangements to meet those costs, without the need to rely on the BFC moneys.

          After this meeting, Johnson revised his calculations of November 1989.  In accordance with Newbold's direction, he did not advise BFC of this in writing until he first telephoned Newbold to tell him that he could reduce his preliminary assessment from $9M to $8.35M on the assumption that Scott could build the project at cheaper than market rates.  He warned Newbold that many of Scott's figures could not be verified and that it was vital that a detailed assessment of the costs be carried out as soon as more detailed drawings were available.  Newbold repeated what he had previously told Johnson to the effect that Scott would have to have the building approval (and the associated drawings) and that BWP would then have to check Scott's estimate, before BFC would allow Scott to draw any money against the facility.  By this time, BFC had, of course, approved Scott's application, subject to the conditions I have referred to, although Johnson was not then aware of that.  On 9 November 1989, Johnson sent a letter to BFC containing his $8.35M estimate, which he said was based on his discussions with Scott.

          On 16 November, Scott asked Newbold if he could draw-down the whole of the non-construction component of the funds the next day.  Newbold took immediate action to meet this request, even though the only estimate of construction costs he had from BWP was for $8.35M, a figure well in excess of that which BFC head office at that stage required its Brisbane office to confirm before Scott could have access to any of the loan funds.  That same day, 16 November, Newbold prepared a memorandum to his State Manager.  Its purpose was to seek a variation to the pre-settlement conditions on which the facility had originally been approved to give the builder immediate access to the $2.3M it then sought.  In this memorandum, Newbold wrote:

          "Considerable time has been devoted to discussions with the borrower/builder J C  Scott and quantity surveyors and we are confident that once approved plans are available final costings will bring the quantity surveyors estimate within $500 000 of the borrowers actual quotes.

          The quantity surveyor is not prepared to accept quotes until final drawings are to hand and final quantities can be calculated."

          Newbold's confident opinion on likely construction costs is to be contrasted with what he said in evidence:  he says he emphasised to Johnson that he lacked expertise in assessing building estimates and was reliant on BWP in that regard; for this reason, he said he, in effect, stood largely aside and left it to Scott and Johnson to resolve the question of the correct figure for construction costs.  But in his memorandum of 16 November, Newbold used the rates information he had obtained from Johnson earlier that day to demonstrate to BFC head office why Scott's estimate of $7M was not too far wrong because Scott was likely to be able to obtain substantially cheaper rates from suppliers and sub-contractors than those which Johnson had used in arriving at his $8.35M estimate.  Newbold recommended relaxation of a number of the original pre-settlement conditions and that the pre-settlement condition relating to the quantity surveyor's confirmation of construction costs of $7M be altered so that it be a condition to be satisfied before Scott could draw any of the construction finance that the quantity surveyor confirm that construction costs based on approved working drawings would not exceed $7.5M.

          On 20 November 1989 Newbold received the letter from Johnson suggesting that construction costs for the project were approximately $7.5M.  However, this opinion is so heavily qualified that it could not reasonably be regarded as providing any support for Newbold's confident opinion in his memorandum of 16 November 1989 that an estimate carried out on the basis of the approved plans yet to be lodged would come in at under $7.5M.  Although $7.5M was the figure suggested by Newbold in his internal memorandum recommending a variation of the terms of the facility to permit the builder to draw on the $2.3M immediately, Newbold throws no light on how this letter referring to a $7.5M construction cost came to be generated by Johnson.  Nor does Ahrens, Newbold's superior, who, on 20 November 1989, sent off his request to head office, supporting Newbold; Ahrens attached the BWP letter of 20 November to his own memorandum, saying:

          "The panel quantity surveyor has now reviewed in some detail the quantities and costings for the project and has given us advice that the project can be constructed for $7.5M."

          That overstated what BWP had done and what they said in the letter.  In his evidence, Ahrens sought to suggest that back in November 1989 he had a quite different view of this BWP letter from the uncritical one which he then expressed in this memorandum.  I reject his evidence and consider that his memorandum of 20 November 1989 to head office accurately reflects Ahrens' casual attitude to how he went about performing his duties at the time.

          Johnson explained how he came to write this letter of 20 November 1989.  He said that shortly before he sent the letter off to Newbold, the latter telephoned him to say that he had to have a letter stating that the project could be built for $7.5M and that he did not care how Johnson qualified it.  Johnson protested that he could not do that until he had more information, but Newbold insisted on having the letter.  Newbold did not mention that it was required by Brisbane office to persuade head office to approve the draw-down of $2.3M to Scott.  Johnson acquiesced in Newbold's demands (after having the letter settled by his principal, Mr Butler). But, as I have said, the letter was so heavily qualified as to make it worthless as an estimate that construction costs were likely to be $7.5M upon which anyone could place any reliance.  Johnson said that, despite the opening words indicating that the estimate had resulted from a review of sub-contract and supply quotations provided by Scott, he prepared it in response to Newbold's demand without making any further attempt to re-estimate the likely construction costs.  He sought to justify his willingness to provide this letter to Newbold by his having qualified the letter, after discussions with Mr Butler, and by relying on Newbold's prior comments that nothing would be advanced by BFC to Scott until a detailed breakdown of construction costs had been prepared by Scott and verified by BWP after access to the detailed construction drawings.

          Neither Johnson's untrue statement in this letter nor the estimate it contained misled BFC's senior management.  But although BFC's head office regarded Johnson's letter of 20 November 1989 as worthless as an indication that construction costs would not exceed $7.5M, it nevertheless approved the early draw-down sought by Scott.  It is noteworthy that BFC's head office was prepared to do this, when the only independent indication of likely construction costs that it then had was Johnson's estimate of $8.35M, ie, an estimate well in excess of the $7M which head office had originally fixed as the figure which was not to be exceeded, if the loan was to be made, and well in excess of the $7.5M that Newbold suggested was the likely figure, in his memorandum of 16 November.  It can be inferred that BFC's head office must have considered the transaction with the builder to be an attractive one to BFC, despite the warning it then had that construction costs were likely to exceed the builder's estimate, on which the loan had been initially approved, by about 20%.

          BFC head office's approval of this early draw-down is contained in a handwritten facsimile dated 22 November 1989.  It was subject to a number of additional conditions, that included the following:

          "(ii)     Construction funding not to be drawn until Council approval obtained and drawings made available to QS

          (iii)     Loan to be in default if:

                   a)   QS costings exceed $7.5M

                   b)   Costing discrepancy is not resolved within 2 months of initial draw-down ...

          (iv)      If costings come in at greater than $7.5M, the profitability exercise [ie, to the builder] is to be recalculated and is to be to the satisfaction of GM, NBD, with a clear demonstration of how the borrower will fund the variation."

          Although the terms in which BFC's head office expressed both the original and the varied loan conditions are not free of obscurity, I think condition (iii) of the varied approval should be read as replacing the original pre-settlement condition requiring quantity survey verification that construction costs would not exceed $7M.  BFC's head office fixed the varied loan conditions in the context of approving access by the builder to $2.3M of the loan facility, before BFC had received an acceptable quantity surveyor's verification of construction costs.  Once the decision was made by head office to approve release of the $2.3M, there was no purpose to be served by the original pre-settlement condition, even if it could be read as varied to substitute
$7.5M for $7M.  Varied condition (iii) operated to put the builder, who was to receive immediate access to $2.3M, in default if the quantity surveyor's estimate, when ultimately received, exceeded $7.5M and also in default if the cost discrepancy between this $7.5M figure and the BWP estimate of $8.35M referred to in Newbold's loan variation application of 16 November 1989 was not resolved by 22 January 1990.  Newbold's understanding was that the discrepancy referred to in varied condition (iii)(b) was the discrepancy mentioned in his memorandum of 16 November 1989 between Scott's estimate of $7M and the BWP estimate of $8.35M contained in its letter of 9 November 1989.  I think, however, BFC head office was probably referring to the difference between Newbold's $7.5M suggested figure and the $8.35M estimate it had from Johnson:  varied conditions (iii) and (iv) show that BFC's head office accepted Newbold's opinion that actual construction costs were likely to rise from the $7M originally taken as the figure, to the $7.5M figure Newbold suggested. (Notwithstanding this, however, only $7M was ever to be advanced in respect of construction costs.)

          Varied condition (iv) is important in so far as it envisaged that, notwithstanding that the loan had gone into default for either reason, BFC might still be prepared to consider increasing the loan amount, without of course binding itself to do so.  Varied condition (ii) prohibited the release of any part of the construction component of the facility until Council approval had been obtained and the approved drawings made available to the quantity surveyor.  The reason for this condition was probably that BFC wanted to have the quantity surveyor's estimate of likely construction costs on the basis of what the Council had approved to be built, as opposed to what the builder planned to build, before any of the construction component of the facility would be released to the builder.  The terms of this condition also suggest that BFC head office was aware that building approval had not been obtained as at 22 November 1989.

          BFC head office's willingness to allow the transaction to proceed and to vary the loan conditions, despite the likely large increase in construction costs to which it was then alerted, is probably explained by the fact that it accepted what Newbold had to say in his memorandum to head office of 16 November.  In that memorandum, Newbold pointed to the high level of firm pre-sales of the units and explained why he considered that the builder had the capacity to meet construction costs, even if they were as high as the $8.35M estimated by BWP, and why, even if BFC were to fund $1.35M of cost over-runs on top of the builder's $7.M estimate, the transaction would still be profitable for BFC.  But BFC head office still established a system, by the varied conditions which it then set and which was to be implemented by BFC's Brisbane office, that would put the loan in default and require the whole transaction to be reconsidered by head office before any further loan moneys were released to the builder, if either the quantity surveyor's estimate of construction costs, to be made on the basis of the drawings in respect of which Council building approval was obtained, exceeded the $7.5M figure suggested by Newbold or if the discrepancy between the $7.5M and Johnson's estimate of $8.35M was not resolved by 22 January 1990.

          Following BFC head office approval, action was taken in BFC's Brisbane office to release $2,322,870 to the builder.

          After sending off his letter of 20 November 1989 containing his heavily qualified estimate of $7.5M, Johnson had little involvement with the project until mid January 1990.  Newbold then advised Johnson by telephone that the loan had been approved subject to a detailed check by BWP confirming that Scott's construction costs would be less than $7.5M, something that had to be done before any payments would be made to the builder.  Johnson also says Newbold told him that it was a further condition of the loan that the building approval would have to issue before any funds would be advanced to the builder.  I accept that this was the first mention by Newbold to Johnson that the loan had been approved.  What Newbold told Johnson in this regard was misleading:  approval had in fact been given shortly prior to despatch of the original letter of offer of 22 October 1989 and approval to vary the facility to permit the $2.3M draw-down on 21 November had also been given.  Johnson was unaware of all this.  Johnson was also unaware of the system for controlling the release to the builder of the construction component of the facility that BFC's head office set up by the varied loan conditions it had imposed.  The true position, known to Newbold but not to Johnson, was that BFC was not prepared to allow the release of any part of the $7M construction component of the facility unless BWP, by 22 January 1990, provided BFC's Brisbane office with an estimate of construction costs that was less than $7.5M, and which was made after the Council building approval drawings were available to BWP.  But there is no reason to doubt that Johnson believed what Newbold then told him, viz, that unless he provided Newbold with an estimate of construction costs less than $7.5M and unless building approval was also obtained, BFC would not release any loan moneys to the builder.  BFC's Brisbane office never got that estimate by the stipulated date.  Brisbane office should therefore have referred the matter to BFC's head office promptly after 22 January 1990 for its decision on whether to allow the transaction to proceed or to withdraw from it and require repayment of the $2.3M advanced in November 1989.  Neither Newbold nor Ahrens in Brisbane did what they were duty bound to do to refer the matter to head office.

          At Newbold's request, Johnson met Scott on site on 22 January 1990 when Scott gave him his letter claiming the first draw-down of $300,000 on the construction finance component of the facility, together with Scott's estimate of construction costs of $6,898,110.  Johnson was also given further drawings.  After perusing the material, Johnson orally advised Newbold that there was insufficient information to enable him to verify either Scott's construction cost estimate or the progress claim.  He followed that up with his letter of 24 January 1990 detailing the information he needed before he could attend to either task.  Newbold expressed dissatisfaction with the letter and told Johnson to sort the problem out with Scott and get the necessary documentation from him.  Johnson saw Scott on site immediately after that and showed him a copy of his letter of 24 January to BFC.  Scott was highly critical of Johnson and telephoned Newbold in Johnson's presence to explain that the project was being "fast tracked" and that "you don't stop to produce working documentation"; he said the project would have to be shut down, contrary to everyone's best interests, if he had to satisfy BWP's demands.  Newbold then instructed Johnson to make his estimate of construction costs on whatever documentation he could get from Scott, because the project could not be shut down "now that momentum was building up on site".  Johnson capitulated to the pressure exerted on him by Scott and Newbold and told Newbold he would do the best he could.  Johnson said that his state of mind at the time was that Newbold was determined for the project to proceed regardless of what Johnson thought or had to say about it.  In oral evidence, Newbold confirmed a good deal of what Johnson had to say about the events of that site meeting on 24 January in which Newbold was involved.  Johnson then went through his letter of 24 January and Scott's progress claim and estimate of 22 January with Scott, who told him that most of the documentation he wanted was just not available, although Scott did give some additional drawings to Johnson.

          Johnson, over the next few days, prepared a revised estimate of construction costs which was completed on 31 January 1990.  This was in the form of a computer printout dated 31 January 1990.  It amounted to $8,761,378.  It is apparent from a comparison of the estimate in the printout of 31 January 1990 with the preliminary work produced by Johnson earlier that same day that Johnson did carry out a large amount of original estimation work and that he also checked the information he then had from Scott concerning quotations which Scott said he had from sub-contractors and suppliers.  Johnson did not simply accept Scott's estimates and quotations:  where he accepted Scott's figures as reasonable, he relied on them, but where he thought they were unreliable, he used his own cost assessments.  For example, he rejected the $440,000 quotation of the window supplier that Scott had given him and adopted his own assessment of $606,320.

          Johnson described his estimate of $8.76M as his first detailed estimate of construction costs, although it was not a final estimate.  It was so much in excess of $7.5M that he did not bother to refine it.  He telephoned the results to Newbold, who expressed surprise, and set up a meeting later that day attended by Johnson, Newbold and Scott.  Scott criticised Johnson's estimate, primarily on the basis that he had quotations for various elements of the work from sub-contractors and suppliers that were much lower than the amounts estimated by Johnson for those same elements.  Newbold supported Scott by joining him in querying Johnson's figures; Newbold did not call on Scott to justify his own estimates.  Newbold told Johnson to delete his allowance of $250,000 for design contingencies in his estimate because BFC would be making its own allowance for contingencies.  Scott left the meeting with the printout, saying he would give Johnson copies of the quotes he was relying on to back up his lower figures.  Newbold remained with Johnson; he explained how any cost overruns beyond $7.5M could readily be met by Scott from his own resources, that he had confirmed that Scott had already paid the insurance and professional fees incurred in respect of the project.  (It later emerged, when Scott sought additional funds in July 1990, that Scott had not paid these professional fees.)  He said that BFC was fully protected and could not lose on the deal.  Johnson insisted that he "still did not believe that the job could be built for $7.5M".  He expressed concern to Newbold at being pressured into producing an estimate for less than what he believed the project could be built for and said that if it goes bad "we will all end up in Court".  Newbold's response was to suggest that he rely on the quotations which Scott was to produce and qualify his estimate accordingly; in that way, Newbold suggested, BWP would be protected from any exposure if the figures supplied by Scott were exceeded.  This suggests that Newbold was less concerned to protect BFC's interests than to ensure that Scott obtained the funds he wanted.  In his affidavits, Newbold, in some detail, denied ever seeing the printout or hearing of the $8,761,378 estimate produced by Johnson on 31 January and denied attending any meeting of the kind described by Johnson.  In cross-examination, however, he agreed with much of Johnson's account of these events, denying only what Johnson said that was most damaging to himself.

          Although not specifically cross-examined about the matter, I think it emerges clearly enough from Johnson's evidence that, by the end of January at the latest, he was aware that Newbold was probably acting contrary to BFC's interests:  I have referred to Johnson's insistence to Newbold that the project could not be built for $7.5M; to Newbold's instruction that Johnson should not commit the estimates he prepared for BFC to writing until he had first spoken with Newbold; to Newbold's siding with Scott against Johnson on the issue of whether costs would exceed $7.5M; to what Johnson said his state of mind was during the meeting of 24 January 1990 and to Newbold's comment on 31 January 1990 about how BWP could protect itself from later complaint by BFC, if BWP were to provide the estimate of less than $7.5M that Newbold wanted, by expressly relying on Scott's quotations.

          The day after the 31 January meeting, Scott returned the computer printout to Johnson with some handwritten notations on it, together with a bundle of quotations from sub-contractors and suppliers.  Johnson says that "based upon Newbold's express instruction to use Scott's figures", he amended various items in his estimate of 31 January 1990 and ended up with an estimate of $7.36M.

          I do not consider that Johnson had any genuine belief that the job could be done for anything like $7.36M, even if the various items such as insurances, cranes and contingencies, which he said in his letter of 2 February were not included in the $7.36M estimate, are ignored.  His evidence concerning how he reduced the earlier estimate of $8.76M to arrive at the $7.36M estimate demonstrates that, on this occasion, he adopted various of Scott's figures quite uncritically.  In arriving at his assessment of $606,320 as the cost of the window component of the project in his estimate of 31 January 1990, his preliminary workings show that Johnson had, at that stage, rejected the quotation given to him by Scott of $440,000 for this element of the work as too optimistic and had preferred his assessment of $606,320 based on his own measurements.  However, in deriving his estimate of $7.36M on 2 February 1990, he abandoned his previous thinking and adopted the same quotation provided by Scott which he had shortly before discarded.  If he had adhered only to his own view of the likely cost of the window component, his 2 February 1990 cost estimate would have exceeded the critical $7.5M figure.  He admitted reducing other components of his 31 January estimate on Scott's unverified say-so.  He said:

          "Now, on your evidence, what you did after you got that estimate was to change it by incorporating quotes with which you were not happy.  Is that a fair comment?---There were quotes that I had a problem with on it, yes.

          All right.  Now, you did not send a letter to beneficial setting out your misgivings in that regard?---No, the letter of 2 February does say that we relied on those quotes."

          Further, in his letter of 2 February, Johnson said that his estimate of $7.36M was based on certain drawings which BWP had received on 22 January 1990; yet in his letter of 24 January 1990, he said that one of the reasons why he could not then carry out any detailed check of Scott's estimate of $7M was that that same drawing information was insufficient and that to do that, he would need extensive additional drawings, which he specified.  Johnson also said he deleted the whole of his $250,000 allowance for contingencies in his 31 January estimate, which he considered appropriate in view of the unsatisfactory nature of the cost information available to him, from the 2 February estimate on the basis of Newbold's comment to leave it out because BFC "would be making their own allowances for contingencies".  This allowance was, by itself, sufficient to ensure that the ultimate figure Johnson arrived at, $7.36M, would exceed what he knew to be the critical maximum figure of $7.5M, if he included it in that estimate.  For him to delete it from his estimate on the basis of Newbold's statement that BFC would make its own allowance for this component of the construction cost estimate which BFC wanted BWP to provide as expert quantity surveyors, indicates how plain it must have been to Johnson that Newbold was not interested in protecting BFC's position by obtaining
anything like an accurate estimate, independent of Scott's, of likely actual construction costs.

          Johnson's estimate of 2 February 1990 cannot be regarded as anything other than a falsely deflated figure which he put forward as his own estimate in response to the pressure exerted on him by Newbold, which he was not prepared to resist.

          Johnson's letter of 2 February 1990 is, in my opinion, seriously misleading because it purports to be an estimate, subject to some qualifications, of construction costs of $7.36M, when Johnson did not believe that the actual construction costs were likely to be as little as that but would, in all probability, substantially exceed the critical $7.5M figure, ie, the figure which Newbold had earlier told him was the one which could not be exceeded, if the builder was to get access to any of the loan moneys.  Johnson was retained by Newbold to provide BFC with his opinion as to whether construction costs would exceed $7.5M, a figure which Johnson believed was a figure of critical importance to BFC, as was in truth the position.  It is, in my opinion, beyond question that Johnson was retained to give his honest opinion to BFC.  This letter, which Johnson provided to accommodate Newbold's demands, involved an abdication of his duty to do that.  Johnson throughout believed that construction costs would substantially exceed $7.5M.  It was both misleading to BFC and a breach of Johnson's duty of care to BFC to provide the estimate of $7.36M in those circumstances, no matter how he qualified that inaccurate estimate.  In my opinion, he was duty bound to advise BFC, in explicit terms, of his firmly held belief that costs would exceed the critical figure of $7.5M.  He would not have acted wrongfully, ie, in breach of s 52, or negligently if, as well as expressing that particular opinion, he also stated that, if certain assumptions were made, costs might be as low as $7.36M.  But he could not, in my view, perform his duty of care to BFC or act without misleading BFC unless he also advised BFC that his own belief was that the cost would substantially exceed what he knew to be the critical figure of $7.5M.

          It is not, in my view, open to a professional adviser to give to his client, in response to a request by the client, an opinion on a matter of concern to the client that he does not believe to be reliable, without flagging that belief in a clear way.  Carefully worded qualifications to such an opinion will rarely be sufficient to prevent the qualified opinion being misleading.  The reason why such an opinion is misleading is simply that it is not the adviser's honest opinion.  In order to characterise such an opinion as misleading, it is not necessary to assess the degree to which the qualifications might be sufficient to alert an astute reader or a casual reader to the need for care before acting on the qualified opinion, or to alert a reader of greater or lesser perceptiveness to the need for further inquiry as to the reliability of the opinion, before acting on it.

          However, if it were necessary to have regard to such matters in determining whether Johnson's estimate of 2 February 1990 was misleading, even though it was not an opinion he then held, I consider that the qualifications Johnson put on the estimate of $7.36M were not sufficient to prevent that estimate, read with the qualifications, from being misleading to BFC or to prevent Johnson being in breach of his duty of care to BFC to give it accurate advice, given that, to Johnson's knowledge, his opinion was required by BFC as an indication of whether construction costs were likely to exceed $7.5M, a figure of central significance to BFC.  The letter of 2 February 1990 contains insufficient warning as to its unreliability:  there is no hint in it that, when he gave the admittedly qualified opinion, Johnson did not then believe that the project could be built for less than $7.5M, a figure he knew to be of critical importance to BFC:  his own opinion was that it would probably cost well in excess of $8M and close to $9M.  Johnson expressly noted in his letter that his estimate did not exclude the cost of five items set out on the last page:  but he failed to mention that he considered an appropriate allowance for one of those items, contingencies, was $250,000, ie, a figure which meant his qualified estimate exceeded $7.5M, or that appropriate allowances for combinations of the other items would also take the estimate over $7.5M.  His letter was misleading because of his failure to flag this by setting out what he regarded as a proper allowance to be made for each of these excluded items.  His failure to include this information in the letter was, I think, deliberate.  He probably considered that, if he were to include this information, the letter might not be a statement that costs would be less than $7.5M that would satisfy Newbold.  I think it likely that he seized on Newbold's advice to qualify the $7.5M estimate, in the hope that that would relieve BWP of responsibility for what he knew was a wholly inaccurate estimate.

          While Johnson stated that his estimate was based on certain of Scott's quotations, his letter was also misleading because he did not reveal that he believed certain of those quotations were far too low and that proper assessments for these elements of the job would take the estimate over $7.5M.  While he stated that it was also based on certain drawings, a reader would only detect that Johnson may have been of the opinion, a week before, that it was those same drawings that were insufficient to enable him to make a reliable estimate of construction costs if the reader not only turned back to Johnson's letter of 24 January, to which Johnson referred at the start of his letter of 2 February, but realised that Johnson was referring in both letters to the same set of drawings.  The letter was misleading for that reason too.

          No one in BFC's head office saw Johnson's letter of 2 February 1990 prior to the builder getting access to the construction component of the facility.  The system BFC's head office established did not require that.  It relied on its Brisbane staff, in particular on Newbold and Ahrens to whom the Queensland State Manager delegated the task, to ensure BFC's interest was protected.  Newbold was prepared to treat Johnson's letter of 2 February 1990 as sufficient evidence that loan condition (iii) imposed by BFC head office by its facsimile of 22 November 1989 was satisfied.  So was Ahrens.  Neither had any justification for adopting those views.  It was another condition of the loan imposed by BFC head office on 22 November 1989 that no draw-down of the construction funding component was to be permitted until Council approval had been obtained and the approved drawings made available to BWP.  This condition was never satisfied.  But that did not stop Newbold, according to his own evidence and despite his feeling "a little uncomfortable" at the absence of these drawings, from recommending to Ahrens that the builder be allowed to draw-down from the construction component.  Newbold says he drew to Ahrens' attention, when he sought approval for the first draw-down in February 1990, the fact that this condition remained unsatisfied and obtained Ahrens' approval to release the first $300,000 of construction funding, despite this.  If Newbold did this and if Ahrens gave approval, it was an extraordinary action on Ahrens' part:  he had no authority to depart from or vary the loan conditions set by head office or to release loan funds when such conditions remained unsatisfied.  Ahrens did not mention this matter in evidence-in-chief.  Cross-examination touched on it only briefly, in the context of the BWP letter of 26 March 1990 (from which it is clear that the condition was then still unsatisfied).  Whether Newbold did draw this matter to Ahrens' notice, as he claimed, or whether he decided not to mention to him the absence of building approval, Ahrens' conduct, in either case, reveals a lack of proper attention to his duties; if told that the condition had not been satisfied, he should have prevented the release of further funds to the builder until head office approval was sought and obtained.  If not told, he should have picked up the non-satisfaction of the condition from enquiries he should have made before permitting the release of the $300,000 to the builder.  Either way, Ahrens, I think, displayed the same sort of neglect he had earlier shown when he passed on to head office Newbold's variation recommendation of 16 November 1989:  his own covering memorandum discloses a failure on his part to bother to read the BWP letter of 9 November 1989 with any degree of care.

          Neither Newbold nor Ahrens had any authority to ignore the loan conditions set by BFC's head office.  They had no justification for ignoring that the loan was in default from 22 January 1990 or for ignoring the absence of building approval.  They were, I think, bound to inform BFC's head office of these matters and had no authority to release any further funds to the builder until they had first sought and obtained approval from head office to disburse loan moneys, notwithstanding the default and the non-satisfaction of the loan conditions.

          It is, in my opinion, clear from the pressure Newbold exerted on Johnson to produce an estimate of less than $7.5M, that, if Newbold had not been able to extract the letter of 2 February 1990 from Johnson, he would not have considered himself sufficiently protected and would not have been prepared to take the action he did to set in train the release of the construction funding component of the loan facility to the builder.  I therefore consider it highly likely that, if Johnson had not given Newbold this misleading and inaccurate letter of 2 February 1990, BFC would never have released any part of the construction component of the facility to the builder and BFC would have suffered no loss.  It is possible that, if BFC called up the $2.3M advance in early 1990, it may still have suffered a loss:  the securities given by the builder may have been insufficient to enable BFC to recoup that initial advance at that time.  If BFC had suffered such a loss, that would not, of course, have been recoverable from BWP, because BFC did not rely on anything that BWP had done when it decided to vary the initial loan conditions and to make that initial advance available to the builder.  But it was not suggested that the loss of $4,592,369. claimed by BFC should be reduced because BFC would inevitably, and without default on BWP's part, have incurred part of that loss, once it advanced the $2.3M, even if it had withdrawn from the transaction in early February 1990.  It is mere speculation whether the damages now claimed should be reduced because of that possibility.

          While it would have been proper for Johnson, in the face of Newbold's pressure, to refuse to give any estimate, it is more likely that, if Johnson had acted as he should have, he would not have declined to provide an estimate to BFC of the kind that Newbold wanted, but which he believed to be inaccurate, but would instead have given BFC his honest opinion.  The next question therefore is whether, in the absence of evidence to that effect from someone in authority in BFC's head office, I should infer that, if Johnson, in early February 1990 had given to BFC his genuinely held opinion that construction costs would be of the order of $8.76M, BFC's head office would have decided not to proceed further with the transaction and would then have stopped the flow of loan moneys to the builder.  If BFC had done that, it would probably have avoided the losses that flowed from releasing construction funds to the builder in early 1990 and thereafter.  It was this action which enabled the builder to take the project to the stage reached in late 1990 where BFC would then have incurred greater losses by stopping funding than it in fact suffered, by funding the project to completion.

          I do not think it can be assumed that BFC head office would necessarily have withdrawn from the transaction in early 1990 if it had then received Johnson's true opinion.  I have referred to BFC's willingness in late November 1989 to vary the original loan conditions and release $2.3M to the builder, although it was then given Johnson's estimate of $8.35M; this was well in excess of the builder's estimate of $7M, on the basis of which it originally approved the loan.  BFC must have then appreciated that the builder's estimate of $7M was likely to be a substantial underestimate.  I have also referred to the indication contained in varied condition (iv) that, even if the BWP estimate exceeded $7.5M, BFC head office might still be prepared to proceed with the transaction.  The picture Newbold painted in his November 1989 application to vary the original loan conditions to permit release to the builder of $2.3M was that, should BWP's preliminary estimate of $8.35M, compared with the builder's estimate of $7M, prove correct, the builder had the cash flow to carry an initial $1.35M hold back by BFC; he referred to Scott having already expended a total of $750,000 from his own resources on the project and to having arranged a $750,000 overdraft facility with his bank.  Newbold went on to demonstrate that, even if BFC were to provide the additional $1.35M by which BWP estimated the builder's estimate of $7M for construction costs would be exceeded, project profitability would still remain acceptable.  What Newbold had to say in this memorandum about the builder having already expended, by November 1989, $750,000 of its own funds on the project was incorrect.  The reaction of BFC's head office to Newbold's application was to approve release of $2.3M to the builder.  Moreover, in early August 1990, BFC approved an increase in the loan facility of $390,000 to reimburse the builder for fees paid to consultants and other additional costs in respect of the project and in October 1990, BFC head office approved a further increase of $650,000 to meet cost-overruns and additional costs of fitting out the units.

          BFC's case as pleaded was that a proper estimate was much more than $8.76M, viz, approximately $12M.  If that was a proper estimate of construction costs as at 2 February 1990, it would be easy to infer that, if BFC head office had then been told that, it would have lost all interest in the project and would have immediately required repayment of the moneys already advanced.  The allegation that $12M was the proper estimate, as at early February 1990, was made in reliance upon the report of the quantity surveyor, Mr Leck, retained by BFC for the purposes of the action.  BWP tendered reports of Mr Mitchell and Mr Mason, which criticised the reliability of Leck's opinion.  However, despite this, the question of what was a proper estimate of construction costs as at 2 February 1990, when Johnson produced his misleading estimate of $7.36M, was never properly litigated at the hearing because the respondent did not seek to defend the $7.36M estimate as an accurate or reliable assessment of anticipated construction costs as at 2 February 1990.  Counsel for BFC, in closing submissions, accurately observed that it was for that reason that the detailed reports of the quantity surveyors, Leck, Mitchell and Mason, became peripheral.

          However, Ahrens said that if he had realised in February 1990 that BWP's true estimate of construction costs was as high as $8.76M (something he was not told by Newbold), he would have recommended to BFC head office that BFC not proceed further with the arrangement with the builder because that would result in a return to the builder as developer of a less than satisfactory margin for profit and risk.  The correctness of this statement by Ahrens appears to be confirmed by the calculations made as to the builder's profit in the original credit proposal of 16 October 1989 which was submitted to BFC head office.  The builder's profit return on gross value would fall from 21.9% to 9.8% if construction costs rose from $7M to $8.76M, a low rate of return in the then prevailing high interest regime.  I accept what Ahrens said to the effect that he relied on the letter of 2 February 1990 in satisfying himself that the condition fixed by BFC head office concerning the maximum permissible construction cost had been satisfied.  In cross-examination, he acknowledged he read this letter too hastily at the time, in that he had probably confined himself then to checking that it referred to an estimate of less than $7.5M, without bothering to read beyond that, to the exclusions.  He accepted he should have realised the reference to these exclusions indicated a figure in excess of $7.5M, as the true construction cost.  But Ahrens said he relied on the estimate of $7.36M in the letter at the time as evidence that the relevant condition was satisfied.  His reliance, while displaying a lack of care for BFC's interests in so far as he read the letter only cursorily, does not, in my opinion, amount to such a degree of neglect as to justify the conclusion that that estimate was not a real inducement to BFC, by Ahrens, in fact relying on it to release construction funds to the builder.  Cf. Argy v Blunts & Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112 at 137-138.  The failure by Johnson to clearly disclose either his true opinion or his concerns at the reliability of his estimate of $7.36M support this conclusion by going to explain Ahrens' reading of the letter.

          Ahrens went on to say that if he had read Johnson's letter properly and realised that it was a qualified estimate only, he would have enquired further.  He said that, if, as a result of such enquiries, he had turned back to Johnson's earlier letter of 24 January or had ascertained what Johnson had told Newbold on 31 January, ie, that he still did not believe the job could be built for $7.5M and that the only way he could reduce his estimate to less than that figure was for him to accept Scott's figures, Ahrens would not have signed off the relevant post-settlement condition and Scott would have remained in default, as he had been from 22 January 1990.  I accept Ahrens' evidence that, if he had realised that Johnson's true opinion of the cost estimate was that it was in excess of $7.5M, Ahrens would have recommended to BFC head office that it not proceed with the transaction further; he said that if he had realised that Johnson believed construction costs could be as high as about $8.7M, he most certainly would have made that recommendation.  I accept this as sufficient evidence to show that it is more probable than not that, if Johnson had exposed his true belief, rather than masking it in his letter of 2 February 1990, action would have been taken within BFC at a level higher than Newbold which would have led to BFC withdrawing from the transaction before
advancing any of the $7M construction funding component of the job (and thus avoiding the losses it ultimately suffered).

          Even though Newbold had the letter of 2 February 1990, which he was prepared to treat as satisfying one of the varied loan conditions, he still could not give Scott access to the $300,000 he sought on 22 January by way of the first progress claim without further assistance from Johnson.  Although, under the varied loan conditions, a BWP certification that total construction costs would not exceed $7.5M was one pre-condition to the builder having access to the $7M construction component of the facility, the builder was to access this component by way of periodic progress claims.  Before it could receive a progress payment, the original post-settlement condition of the loan required a certificate from BWP that showed that the percentage of $7M to be advanced in payment of any particular progress claim did not exceed the percentage of work completed at that time as assessed by BWP on the cost to complete basis.

          Neither in BFC's letter of offer, in which this condition was set out, nor in the documents generated internally within BFC in relation to the grant of the facility was it spelt out what BFC required the quantity surveyor to do to certify the builder's progress claims "on a cost to complete basis".  BFC's expert quantity surveyor witness, Leck (who has limited experience working for finance companies) understood a financial institution's requirement for advice with respect to a developer's progress claims on a "cost to complete basis" to involve advice which would enable it to ensure that at all times it retained sufficient of the loan moneys promised to the developer to complete the project itself if the developer collapsed.  Ahrens expressed conflicting views as to his understanding of the advice required from a quantity surveyor as to the cost to complete when processing the builder's progress claims, although he claimed that the concept was well understood between financiers and quantity surveyors for "a long long time".  Initially, he agreed with what Leck had to say, but later he said:

          "My understanding was that the financiers had always requested of quantity surveyors to tell them how much is required by the builder in the normal course, to complete the building."

          Johnson gave conflicting evidence.  In his oral evidence, he said that around 1989/90 the term was only starting to be used by financial institutions, that different financial institutions had different definitions of the term and that, before carrying out such an exercise, it was necessary to find out from the particular institution exactly what was expected in that regard; he accepted that Newbold's instruction was a "theoretically satisfactory" way of valuing progress claims on a cost to complete basis.  In his affidavit, however, Johnson said that the expression "cost to complete" in the context of valuing progress claims in the manner proposed by Newbold had a "traditional and accepted
meaning" and what Newbold proposed was "highly irregular", ie, quite contrary to that.

          Mitchell, the respondents' expert quantity surveying witness who has wide experience in working with the finance industry, said, of the concept "cost to complete", that even now it has no fixed meaning in the finance industry.  He said that what a quantity surveyor is required to do to value a builder's progress claim on a cost to complete basis in providing services to the builder's financier is governed by what information the financier wants, in the particular case.  He mentioned having recently provided services to a bank in connection with a construction loan which, on instructions from the bank, involved him valuing the builder's progress claims on a cost to complete basis which used as its datum of total construction costs the amount of the loan provided to the builder.  This is the same task Newbold instructed Johnson to perform in checking the builder's progress claims.  Mitchell acknowledged this exercise gave the bank little guidance on the likely actual costs to complete the project at any given time.  He suggested that the reason why the bank nevertheless instructed that this approach be adopted was to ensure it would be competitive in the highly competitive financing industry:  if a quantity surveyor were to provide accurate information on actual costs to complete at given stages of a project, his fees, which are generally passed on to the borrower, would be substantial.

          I accept what Mitchell says.  The expression "cost to complete" as a concept employed by financiers in evaluating progress claims by developer-borrowers had, in 1989, no settled meaning.  It was an expression which required explication before a quantity surveyor could certify the builder's progress claim on a basis that could be properly understood.  It seems obvious that there must initially be a datum fixing the total cost to complete the project, by reference to which the cost to complete the project at various stages of its progress can be assessed by the quantity surveyor evaluating the developer's progress claims.  It seems equally obvious that a number of different measures can serve as that datum:  it may be provided by the builder's own initial estimate of total cost of construction, or it may be provided by an estimate carried out by the quantity surveyor at the outset, independently of the builder.  As I have said, Mitchell suggested that there was also nothing irrational in using the amount of construction finance to be provided by the financier to the developer as this datum, irrespective of the likely actual cost, provided that was what the financier called for.  Depending upon the information the financier requires in the particular case, it may also be necessary for the certifying quantity surveyor to update the initial datum to reflect known or probable increases in the total cost to construct the project that emerge during the life of the job.

          BFC provided no express guidance to its own officers in Brisbane as to what it expected the quantity surveyor they retained to act for BFC would do, although a close reading of the letter of offer and the approved conditions of the facility set out in it suggests that BFC may have expected that the builder's progress claims would be assessed by reference to the estimate of total construction costs that the quantity surveyor was to provide at the outset.  Notwithstanding this, BFC made no attempt to suggest that Newbold's authority to retain BWP and give instructions to it was subject to any particular limitations and Ahrens gave evidence, which I accept, that a BFC account manager, such as Newbold, had a general authority to engage quantity surveyors required to be engaged to assist BFC in administering construction loans and also had full authority to give instructions to those quantity surveyors as to what was required of them in performing those services for BFC.

          In my opinion, the evidence indicates a failure on the part of those in BFC's head office responsible for approving loans of the kind here in question to turn their mind to just what information they wanted BFC to be given by the quantity surveyors engaged to monitor projects that BFC was prepared to fund.  Consideration of that would also have involved consideration of the fees BFC was prepared to pay for such quantity surveying services.

          After Johnson sent his letter of 2 February 1990 to Newbold certifying that construction costs would be $7.36M, he telephoned Newbold to discuss Scott's first progress claim for a draw-down of $300,000.  Johnson pointed out to Newbold that, on the basis of his estimate of $7.36M, Scott was not entitled to anything in respect of his progress claim of $300,000:  he told Newbold that if Scott's entitlement was calculated "on a traditional cost to complete basis", ie, Johnson's estimate of $7.36M less Scott's current estimate of $6.9M, Scott would have to complete the first $460,000 of work before he would be entitled to access to any of the construction component of the facility.  In expressing this opinion, Johnson ignored the fact that it was even plainer than he explained to Newbold that Scott was not entitled to any progress payment:  his own estimate of construction costs was not $7.36M, but something in excess of that, even if regard is had only to the cost components which he had expressly excluded from that qualified estimate.  Newbold's response was that Scott had to have some cash flow and could not be expected to use up all of his $750,000 overdraft facility with his bank at the beginning of the job; Newbold instructed Johnson to recommend payment to Scott of $300,000 and to base his certification of that entitlement on Scott's figure of $6.9M as the cost to complete, rather than Johnson's own estimate of $7.36M.  Johnson pointed out that that was ridiculous and Newbold, after some discussion, then instructed Johnson to base his calculations with respect to progress claims "on a `cost to complete' basis using the $7 million loan facility as the construction cost and that [BWP] should use Scott's own summary of building costs as the basis for assessing the cost to complete".  By Scott's own summary of building costs, Newbold told Johnson he meant Scott's estimate of the cost to complete the work set out in his progress claim of 22 January 1990.  This estimate was based on Scott's total estimate of construction costs of $6,898,110 included in that progress claim.  It was a little less than his original estimate of $7M forwarded to BFC under cover of Scott's letter of 5 June 1989.  As Johnson observed, the approach Newbold instructed him to follow meant that he had to assume a theoretical construction budget of $7M and attempt to calculate progress draw-downs on the basis of that theoretical budget.  He said this was "highly irregular" and, although his progress valuations refer to a cost to complete, this was certainly not the same as "the traditional and accepted meaning of that term".  However, he accepted Newbold's instruction and issued a second letter of 2 February 1990 to BFC enclosing his progress valuation no. 1 for work completed as at 31 January 1990.  His letter went on to state:

          "Based on the Construction Budget of $7,000,000.00, the Value of Work to Complete the project is $6,700,000.00.

          Should you have any queries regarding this Valuation, please do not hesitate to contact this office."

          The payment recommendation accompanying this letter, on BWP's letterhead and signed by Johnson, contained the following:

          "It is considered that Mr. Jim Scott, the Builder for the project has now executed work of such value that in terms of the agreement for the construction of the said works and in accordance with the Contract, payment is recommended in accordance with the following :

          Value of Work Complete .............    $300,000.00

          Adjustment for Variations ..........    $      0.00

                                                                         ___________

                                VALUE COMPLETED  $300,000.00

          Less previous CERTIFICATE               $      0.00

                                                 ___________

            RECOMMENDED AMOUNT FOR PAYMENT NO. 1  $300,000.00

                                                 ___________"

          That is the totality of the material Johnson forwarded to BFC.

          Newbold confirmed that it was he who instructed Johnson to base the progress claim valuations on the $7M amount of the loan facility.  His explanation for this approach was that, if construction costs overran the $7M amount of the facility, that was of no concern to him because once the building had been completed, any such overruns could be financed by Scott from receipts from the sale of the completed units or by Scott's creditors by Scott keeping them out of payment for extended periods.  But having got Johnson's accommodating certificate, Newbold was able to draw up the paperwork necessary to procure the release to Scott of the $300,000 he sought from BFC.  In the progress payment authority which Newbold prepared in order to ensure the release of the $300,000 to Scott, he noted "QS final costing attached $7,360,000".  This, as Newbold well knew, was not a
final costing at all, given the limited drawing information on which Johnson had based it and the other matters he had discussed with Johnson.  Newbold later delivered to Johnson copies of the drawings submitted at the end of March to the Council on behalf of Scott in an endeavour to obtain Council building approval.  On Newbold's instructions, Johnson did not make any new estimate, but only checked the drawings to ensure that there would be no need to revise his estimate of 2 February.  This Johnson confirmed by his letter of 26 March 1990.

          On 26 March 1990, Scott submitted his second progress claim.  Scott quantified this by estimating the percentage that had been completed up to the date of the claim of each element into which he had broken down the work; he then valued the work carried out by reference to the value he had placed on the relevant element in the build-up of his total construction cost of $6,898,110.  The procedure followed by Johnson is apparent from Johnson's letter of 28 March 1990, and accompanying certificates relating to this progress claim.  In issuing his second progress certificate, Johnson followed what Scott had done in quantifying his claim, but made his own estimate of the completed percentage of each element of the work into which Scott had broken down the job.  He added to his estimate of the cost to complete the difference between Scott's still current total cost to complete estimate of $6,898,110 and the $7M construction allowance, to arrive at what he called the "total cost to complete".  It was necessary to add this difference to his estimate of the cost to complete, based in turn on Scott's estimate, because he was, in accordance with Newbold's instruction, proceeding on the basis that the total construction cost should be assumed to be $7M.  He then certified the value of the work complete as the difference between that total figure and the $7M figure by deducting the $300,000 of progress payment no. 1.  In this way, Johnson arrived at the amount of the second progress payment, which he certified, of $527,720.

          The third progress claim submitted by Scott on 30 April 1990 adopted a revised estimate of total building costs of $7M, ie, a figure that conformed with the construction component of the BFC facility.  Johnson evaluated this claim on essentially the same basis he had previously followed.

          In my opinion, the BWP progress "certifications" were neither misleading nor negligently given.  In so far as the applicant's case is based upon the respondents' conduct in issuing progress certificates from time to time, it is misconceived.  The applicant's case here is that, by certifying the progress claims submitted by the builder between 2 February and December 1990, BWP, from time to time, reaffirmed the advice it gave in the letter of 2 February 1990 that its estimate of total construction costs of the project was $7.36M.  However, there is nothing in the work BWP did in certifying progress claims that purports to touch on its having estimated, in its letter of 2 February, that total construction costs would be $7.36M.  An entirely different exercise was involved, as is apparent from the face of the progress claim verification documents.  BFC also alleges that the verification work BWP performed in relation to the builder's progress claims was also misleading because its assessments made from time to time of the costs to complete construction of the project were substantially lower than a proper assessment of that cost.  Again, the complaint is misconceived.  Acting on instructions from Newbold, who was authorised to give them, Johnson did not attempt to assess the actual cost to complete the project when he was processing each of the builder's progress claims; rather did he carry out an artificial exercise based upon what BFC could only have understood, from the certificate, was a notional estimate of total construction costs of $7M.  In issuing each of the progress certificates, Johnson acted strictly in accordance with Newbold's instructions.  His certificates could not therefore possibly have misled the only member of BFC's staff who was intended by BFC to sight them.  Nor were they negligently given:  they were given in accordance with the instructions of the only officer of BFC who was to see them and Mitchell's evidence shows that the basis upon which Johnson was instructed to prepare them was a sensible one, something Johnson acknowledged in cross-examination.

          Moreover, even if these progress certificates had to be sighted by someone superior to Newbold before a decision to release progress payments to the builder could be made, I do not think that the certificates should be regarded as misleading.  They unequivocally identify that the value of work to be completed on the project is based not on any estimate of actual cost to complete, but rather on "the construction budget of $7M", ie, the precise amount of the loan facility earmarked for funding construction.  Ahrens then knew that Johnson had just provided an estimate of construction costs in excess of $7M and BFC head office, back in November 1989, must have been anticipating construction costs of the order of $7.5M.  The progress certificate accompanying each letter advising of the current value of the work to complete the project shows precisely how it is arrived at and, in particular, that it is based on the $7M amount earmarked for construction funding, not on the significantly higher $7.36M estimate of 2 February 1990 most recently given to BFC by BWP.  Even if Johnson ought to have realised that Newbold's superiors might sight and rely on the certificates, there was no requirement for him to explain the limited value they had.  The certifications were not misleading and BWP was not in breach of any duty of care it, through Johnson, owed BFC in issuing them in the form they were in.  Nor is there any evidence showing that BFC was misled by the certificates.  It has no ground for complaint against BWP or Johnson in this regard.  Counsel for BFC, while not abandoning reliance on the issue of what were said to be misleading progress certifications, acknowledged, correctly, in my opinion, that BFC's case really depended upon showing that the letter of 2 February was misleading or negligently given and that what Johnson did by way of progress certifications could not assist BFC.

          Newbold set in train action that resulted in the release of construction funding to the builder, once he had Johnson's letter of 2 February.  Newbold knew he was not authorised to do this because the loan condition requiring submission to the quantity surveyor of Council-approved drawings before any construction funding was released had not been satisfied.  He may well also have realised that the loan was in default.  On any view, Newbold well knew that he could not properly take the action he did to ensure the release of funding to the builder, without referring the matter to head office for approval.  Ahrens was, for the reasons I have given, negligent and in breach of his duties to his employer by signing off the relevant conditions when they had not been satisfied and thus ensuring the funds would be released to the builder.

          Unless the neglect of Ahrens in failing to ensure that none of the construction component of the loan facility was released to the builder or unless the activities of Newbold, in breach of his duty of fidelity to his employer, broke the chain of causation between the losses to BFC that resulted from BFC releasing, by progress payments and additional funds, moneys to the builder, it would follow that, because the letter of 2 February, on which BFC relied to release those funds to the builder, was misleading and negligently given, BFC can recover the whole of its losses from the respondents.  Contributory negligence is not pleaded, apparently because of the authorities indicating that it is not available as a partial answer to a claim based on a breach of s 52 the Trade Practices Act 1974 (Cth):  see Re La Rosa; Ex parte Norgard v Rodpat Nominees Pty Ltd (1991) 31 FCR 83 and ANZ Banking Group Limited v Turnbull & Partners Limited (1991) 33 FCR 265.

          There are two bases upon which I think Johnson and, through him, BWP are liable for the full amount claimed by BFC.  Firstly, in March v E & M H Stramare Pty Limited (1991) 171 CLR 506, it was said at 518-519:

          "As a matter of both logic and commonsense, it makes no sense to regard the negligence of the plaintiff or a third party as a superseding cause or novus actus interveniens when the defendant's wrongful conduct has generated the very risk of injury resulting from the negligence of the plaintiff or a third party and that injury occurs in the ordinary course of things.  In such a situation, the defendant's negligence satisfies the `but for' test and is properly to be regarded as a cause of the consequence because there is no reason in commonsense, logic or policy for refusing to so regard it."

          But for Johnson's conduct in providing Newbold with his misleading estimate of 2 February 1990, it is clear, for the reasons given, that Newbold would not have been prepared to instigate action to release further moneys to the builder and that BFC would not have advanced any of the construction component of the facility and so would not have suffered the loss in question.  Moreover, Johnson understood, from what Newbold told him, that two things had to take place before any loan moneys would be advanced to the builder:  firstly, his provision to Newbold of an estimate less than $7.5M and, secondly, the issue of Council building approval.  Johnson knew from his dealings with Newbold that Newbold was likely to be in a position to influence whether loan moneys were released to the builder and he also knew that Newbold was very keen for those moneys to be paid over.  Johnson also knew that Newbold was not interested in protecting BFC, given his determination to extract from Johnson an estimate less than $7.5M, although he well knew Johnson's true belief that construction costs were very likely to substantially exceed that figure.  Johnson ought to have also realised, when he gave Newbold his letter of 2 February and his certificate for the builder's first progress claim, that building approval had not then been obtained:  the drawings he had fell short of what was required for that purpose and he had heard Scott tell Newbold, on 24 January 1990, that it would take a further three months to produce working documentation.  Johnson certainly knew from what Newbold told him that building approval had not been obtained when he issued his second progress certification in late March 1990.  Because of his belief that construction costs were likely to substantially exceed the $7M estimate of the builder and the $7.5M figure beyond which he was told BFC would not advance moneys, it was, I think, readily foreseeable by Johnson that the release of loan moneys to the builder might involve the release of funds to a project that was likely to fail.  It can fairly be said, in my opinion, that, by giving Newbold, against this set of known circumstances, the misleading estimate, Johnson thereby generated the very risk that BFC would release loan moneys to the builder in circumstances in which loss to BFC might ensue.  Cf. State Bank of New South Wales v Yee (1994) 33 NSWLR 618 at 625.

          Secondly, BFC fixed, as a condition of the advance, the need for the quantity surveyor's advice that construction costs would not exceed $7.5M.  It is clear, from the trouble Newbold took to get from Johnson an estimate less than $7.5M, that Newbold would not have been prepared to arrange for the release of funding additional to the $2.3M to the builder without Johnson's letter of 2 February, notwithstanding Newbold's desire, so obvious to Johnson, to assist the builder.  Johnson's default in providing Newbold with this inaccurate estimate was therefore causally related to the loss BFC suffered, given that, if Johnson had provided his honest estimate, BFC would not have proceeded further with the transaction.  But even though Johnson armed Newbold with an inaccurate estimate, without which BFC would not have suffered loss, BFC would still not have suffered the losses in question unless Newbold broke his duty of fidelity to BFC and unless Ahrens also neglected his duty of care to BFC.  All three defaults were necessary before BFC could suffer the loss it did.  No question therefore arises as to whether the neglect of Ahrens or the misconduct of Newbold constitutes a novus actus interveniens.  Each of the three defaults played a necessary part in causing the damage to BFC for which it sues.  Cf. Caltex Oil (Australia) Pty Ltd v The Dredge "Willemstad" (1976) 136 CLR 529 at 583; Thorpe Nominees Pty Ltd v Henderson & Lahey [1988] 2 Qd R 216 at 220.  Since Johnson's default was a cause of BFC's losses, it does not matter that it would not by itself have been sufficient to ensure BFC suffered those losses.  They can all be recovered from BWP and Johnson.  See Bennett v Minister of Community Welfare (1992) 176 CLR 408 at 429.

          The respondents argued that Johnson's letter of 2 February 1990 cannot be regarded as having misled BFC because Newbold knew the true position, viz, that it was a serious underestimate of what Johnson believed to be the true construction costs, and because Newbold had authority from BFC to deal with Johnson.  The respondents rely upon the rule that, in certain circumstances, a principal has constructive notice of what is known to his agent that is stated in Bowstead on Agency, 15th Ed, article 102, and other authorities.  As appears from article 102, the general principle relied upon by the respondent is subject to a number of qualifications.  One is set out at p 414:

          "... it is clear also that where the third party had actual knowledge that the agent would not pass information on (eg because he is a party to the fraud [on the principal] together with the agent), the principal will not be treated as having notice.  It may be that [this] is the only case where the agent's fraud will prevent a notification being effective, the reasoning being that there is no actual authority and that the third party is not in such a case relying on apparent authority.  `He cannot take advantage of a known breach of faith' ..."

          Johnson knew that Newbold would not pass on to BFC information as to Johnson's true belief:  he well knew that that would have defeated all of Newbold's efforts to extract from him, over his protests, an estimate of less than $7.5M, despite Johnson's continuing and firm belief that the true cost was well in excess of the critical $7.5M figure.  I therefore think that Johnson's conduct, in arming Newbold with what he considered was a serious underestimate, was misleading to BFC and known to Johnson to be misleading to BFC, despite the authority Newbold had to deal with Johnson on behalf of BFC and despite Newbold's knowledge of Johnson's true position.

          Moreover, so far as BFC's case based on a breach by Johnson and BWP of s 52 the Trade Practices Act 1974 (Cth) is concerned, the action in damages created by s 82 of the Act lies wherever as a matter of fact a principal can show that it suffered loss by relying on the misleading conduct of the respondent.  Obacelo Pty Ltd v Taveraft Pty Ltd (1986) 10 FCR 518 at 532 and Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83 at 97 are authorities for the proposition that there is no room for qualifying this statutory right by importing a principle of agency law which operates to deem the principal to have notice of relevant facts even though he is ignorant of those facts.

          The applicant is entitled to judgment against each respondent for $4,592,369.  As I understand the evidence, no part of this sum includes interest accruing under the loan facility since August 1991.  The applicant claims interest under s 51A the Federal Court of Australia Act 1976 (Cth) on this sum from August 1991 to judgment at the rate of 12%.  It was not suggested that there is any ground upon which the applicant should be denied such interest.  The applicant is therefore entitled to interest on the amount of the judgment, as claimed.

I certify that this and the preceding

56 pages are a true copy of the

reasons for judgment herein of the

Honourable Justice Drummond.

Associate:

Date:         16 May 1996

Counsel for the applicant:            P L O'Shea

Solicitors for the applicant:         Clarke & Kann

Counsel for the respondents:          R J Douglas

Solicitors for the respondents:       McCullough Robertson

Dates of Hearing:                     19, 20, 21, 22, 23, 26 February 1996