CATCHWORDS

NEGLIGENCE - valuer - valuation provided for mortgage insurance purposes - mortgage insurer relying on valuation in providing mortgage insurance - default by mortgagor - shortfall after sale of security - mortgage insurer liable to indemnify mortgagee - if valuation arrived at with due care and skill, mortgage insurer would not have provided mortgage insurance at all - measure of damages - whether mortgage insurer's outlay minus recovery - misleading and deceptive conduct - limitation defence - time of accrual of cause of action - when loss suffered - whether at time when mortgage insurer provided cover or later when security sold or claim made - whether contributory negligence of mortgage insurer.

DAMAGES - valuer - valuation provided for mortgage insurance purposes - mortgage insurer relying on valuation in providing mortgage insurance - default by mortgagor - shortfall after sale of security - mortgage insurer liable to indemnify mortgagee - if valuation arrived at with due care and skill, mortgage insurer would not have provided mortgage insurance at all - measure of damages - whether mortgage insurer's outlay minus recovery - misleading and deceptive conduct - limitation defence - time of accrual of cause of action - when loss suffered - whether at time when mortgage insurer provided cover or later when security sold or claim made - whether contributory negligence of mortgage insurer.

TRADE PRACTICES - valuer - valuation provided for mortgage insurance purposes - mortgage insurer relying on valuation in providing mortgage insurance - default by mortgagor - shortfall after sale of security - mortgage insurer liable to indemnify mortgagee - if valuation arrived at with due care and skill, mortgage insurer would not have provided mortgage insurance at all - measure of damages - whether mortgage insurer's outlay minus recovery - misleading and deceptive conduct in contravention of Trade Practices Act 1974 - limitation defence -  time of accrual of cause of action - when loss suffered - whether at time when mortgage insurer provided cover or later when security sold or claim made - whether contributory negligence of mortgage insurer.

LIMITATION OF ACTIONS - valuer - valuation provided for mortgage insurance purposes - mortgage insurer relying on valuation in providing mortgage insurance - default by mortgagor - shortfall after sale of security - mortgage insurer liable to indemnify mortgagee - if valuation arrived at with due care and skill, mortgage insurer would not have provided mortgage insurance at all - measure of damages - whether mortgage insurer's outlay minus recovery - misleading and deceptive conduct in contravention of Trade Practices Act 1974 - limitation defence -  time of accrual of cause of action - when loss suffered - whether at time when mortgage insurer provided cover or later when security sold or claim made - whether contributory negligence of mortgage insurer.

NEGLIGENCE - Contributory Negligence - valuer - valuation provided for mortgage insurance purposes - mortgage insurer relying on valuation in providing mortgage insurance - default by mortgagor - shortfall after sale of security - mortgage insurer liable to indemnify mortgagee - if valuation arrived at with due care and skill, mortgage insurer would not have provided mortgage insurance at all - measure of damages - whether mortgage insurer's outlay minus recovery - misleading and deceptive conduct - limitation defence - time of accrual of cause of action - when loss suffered - whether at time when mortgage insurer provided cover or later when security sold or claim made - whether mortgage insurer had failed to safeguard own interests by inquiring into creditworthiness of borrower and its guarantors.

Trade Practices Act 1974, s 82

Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd  [1995] QB 375

Baxter v F W Gapp & Co [1939] 2 KB 271

Forster v Outred & Co [1982] 1 WLR 86; [1982] 2 All ER 753

South Australia Asset Management Corporation v York Montague Ltd [1996] 3 WLR 87; [1996] 3 All ER 365

Kooragang Investments Pty Ltd v Richardson & Wrench Ltd,  

unreported, Supreme Court of New South Wales, Rogers J, 4 July 1980

S W F Hoists & Industrial Equipment Pty Ltd v State Government Insurance Commission (1990) 6 ANZ Insurance Cases 76,688; (1990) ATPR 41-045

Laughton-Boyd v Moloney, unreported, Supreme Court of New South Wales, Yeldham J, 8 June 1979

Duncan & Weller Pty Ltd v Mendelson [1989] VR 386

Trade Credits Ltd v Baillieu Knight Frank (NSW) Pty Ltd (1985) 12 NSWLR 670; (1985) Aust Torts Reports 80-757

McElroy Milne v Commercial Electronics Ltd [1993] 1 NZLR 39

Lowenburg, Harris & Co v Wolley (1895) 25 SCR 51

Jobbins v Capel Court Corporation Ltd (1989) 25 FCR 226

Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514

Keen Mar Corporation Pty Ltd v Labrador Park Shopping Centre Pty Ltd (1988) ATPR 40-853

Henderson v Amadio Pty Ltd, unreported, Federal Court of Australia, Heerey J, 23 November 1995

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

Swingcastle Ltd v Alastair Gibson (a firm) [1991] 2 AC 223

Chapman v Hearse (1961) 106 CLR 112

Hughes v Lord Advocate [1963] AC 837

Mount Isa Mines Ltd v Pusey (1970) 125 CLR 383

Wroth v Tyler [1974] Ch 30

Parsons Livestock Ltd v Uttley Ingham & Co Ltd [1978] QB 791

Nader v Urban Transit Authority of New South Wales (1985) 2

NSWLR 501

MGICA (1992) LIMITED v KENNY & GOOD PTY LIMITED & ANOR (NO 3)

No NG 420 of 1994

CORAM:    Lindgren J

PLACE:    Sydney

DATE:     30 August 1996

IN THE FEDERAL COURT OF AUSTRALIA)    

NEW SOUTH WALES DISTRICT REGISTRY)         No NG 420 of 1994

GENERAL DIVISION                  )

          BETWEEN:

MGICA (1992) LIMITED (formerly MGICA LIMITED) (ACN No 000 488 362)

                           Applicant

          AND:

KENNY & GOOD PTY LIMITED

                    First Respondent

          AND:

LANCE KENNY

                   Second Respondent

CORAM:    Lindgren J

PLACE:    Sydney

DATE:     30 August 1996

                      MINUTE OF ORDERS

THE COURT ORDERS THAT:

1.   The proceeding be listed before Lindgren J Tuesday 10     September 1996 at 9.30 am for the making of orders, including orders as to costs.

2.   By 5.00 pm on Monday 9 September 1996 the parties provide     to the Associate to Lindgren J an agreed form of minute     of the orders to be made, or if agreement has not by then been reached, the forms of minutes of orders for which     they will respectively contend.

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 NG 420 of 1994

GENERAL DIVISION                  )

          BETWEEN:

MGICA (1992) LIMITED (formerly MGICA LIMITED) (ACN No 000 488 362)

                           Applicant

          AND:

KENNY & GOOD PTY LIMITED

                    First Respondent

          AND:

LANCE KENNY

                   Second Respondent

CORAM:    Lindgren J

PLACE:    Sydney

DATE:     30 August 1996

                 REASONS FOR JUDGMENT (No 3)

                      TABLE OF CONTENTS

1.   INTRODUCTION......................................... 2

 

2.   PLEADINGS............................................ 5

 

3.   CHRONOLOGICAL OUTLINE OF KEY EVENTS.................. 9

 

4.   MR KENNY'S VALUATION REPORT DATED 19 APRIL 1990..... 29

 

5.   MR KENNY............................................ 40

 

6.   THE HEARING; INTRODUCTION TO THE EVIDENCE........... 41

 

7.   REASONING........................................... 44

     7.1  BREACH OF DUTY OF CARE AND SKILL................ 45

          7.1.1     "Gross overvaluation"................. 45

          7.1.2     Mr Kenny's method and calculations.... 49

          7.1.3     Failure to take certain matters.........

                     into account........................ 78

          7.1.4     Inadequate allowances................. 91

     7.2  SECTIONS 52 AND 53A OF THE TRADE PRACTICES ACT 1974 (Cth) AND SECTIONS 42 AND 45 OF THE FAIR TRADING ACT 1987 (NSW)     91

     7.3  RELIANCE ON VALUATION........................... 95

     7.4  CAUSATION; REMOTENESS; MEASURE OF DAMAGES....... 99

          7.4.1     Quantum of MGICA's claim ............. 99

          7.4.2     The parties' initial submissions on causation, remoteness and measure of damages.... 103

          7.4.3     South Australia Asset Management Corporation v York Montague Ltd [1996] 3 WLR 87; [1996] 3 All ER 365..................................... 105

          7.4.4     Factual conclusions on causation, remoteness and measure of damages .................. 109

          7.4.5     Legal conclusions on causation, remoteness and measure of damages .......................... 112

     7.5  LIMITATION DEFENCE............................. 136

     7.6  CONTRIBUTORY NEGLIGENCE........................ 143

8.   CONCLUSION......................................... 157

1.   INTRODUCTION

By its amended application filed on 28 July 1994, the applicant ("MGICA") claims "damages under the common law and/or pursuant to Section 82 of the Trade Practices Act and Section 68 of the Fair Trading Act 1987 (NSW)".  The case concerns a valuation of a prestige waterfront residential property at 10 Campbell Street, Hunters Hill ("the Property").  The valuation was furnished by the first respondent ("K & G") which carries on business as a real estate valuer and property consultant.  The second respondent ("Mr Kenny") was the only person through whom K & G relevantly acted and it was not in issue that K & G was answerable for his conduct.  It will generally be unnecessary to distinguish between K & G and Mr
Kenny and therefore convenient to refer to "the respondents" or "Mr Kenny" without indicating a distinction.

The Property was owned by Beca Developments Pty Ltd ("Beca").  Beca was a company associated with a Mr Gary Pselletes and his wife Malama Pselletes.   At the relevant time the house and site improvements on the Property were in the course of construction.  The builder was Centurian Constructions Pty Ltd ("Centurian"), another company associated with Mr and Mrs Pselletes.

Beca borrowed money from Permanent Custodians Limited ("PCL") on the security of a mortgage over the Property.  MGICA agreed to indemnify PCL against any loss sustained by it by reason of default by Beca under the mortgage.  The indemnity is of a kind commonly referred to as "mortgage insurance".

On or about 9 March 1990, Macquarie Bank Limited ("MBL"), as agent for, inter alia, MGICA, orally instructed the respondents to carry out a valuation of the Property for mortgage purposes and requested that the valuation be extended for the benefit of MGICA.  This was followed much later by a letter of instructions dated 17 April 1990.

The critical valuation of the respondents was dated 19 April 1990 and was "as at" 18 April 1990, the date of the most recent inspection by Mr Kenny.  It assessed the value of the Property "as is" in a sum of $5.35 million and "on completion"
or "as completed" in a sum of $5.5 million.  On 11 May 1990, PCL lent Beca $3.575 million, but retained $150,000 pending completion of outstanding building work.  MGICA provided mortgage insurance to PCL.

Subsequently, by a letter dated 13 February 1991, the respondents certified that the Property had been inspected again, that previously incomplete works had been substantially completed, and that $25,000-30,000 of work remained to be completed.  In reliance on this letter , MGICA authorised the release to Beca of the sum of $150,000 previously retained.

The advance of $3,575,000 had included the first year's interest.  At the beginning of the second year of the term of the loan, Beca defaulted.  With the consents of PCL and MGICA, Beca eventually sold the Property on 6 January 1992 for $2.65 million.

MGICA claims to have incurred a liability to indemnify PCL in respect of its loss.  It says that it was liable to pay, and did pay, to PCL $1,977,513.67, including interest unpaid by Beca and PCL's expenditures.  It now claims to recover damages in this amount and interest from the respondents.

Shortly, MGICA's case is that it would not have provided mortgage insurance at all if it had not had a valuation of the Property of at least $5,500,000.  It says that Beca applied for a loan of $3,575,000 from PCL and that MGICA's policy was
not to give mortgage insurance in respect of loans exceeding 65% of the market value of the security ($3,575,000 is 65% of $5.5 million).  MGICA says that the true "as completed" value of the Property as at 18 April 1990 was substantially less than $5,500,000 and that the whole of its loss was caused by the excessiveness of the respondents' valuation.

2.   PLEADINGS

The proceedings focus on the respondents' valuation dated 19 April 1990 and letter dated 13 February 1991.  MGICA pleads contraventions of ss 52 and 53A of the Trade Practices Act 1974 ("the TP Act") and ss 42 and 45 of the Fair Trading Act 1987 (NSW) ("the FT Act").

In addition to these statutory causes of action, MGICA alleges breach of obligations of reasonable care, skill, diligence and competence arising under the general law and as implied terms of the respondents' contract of retainer. 

The contractual obligation is pleaded in two ways.  First, it is pleaded that when MBL engaged the respondents, it did so as agents for, inter alia, MGICA as a principal contracting party.  Secondly, and in the alternative, it is pleaded that the party which contracted with the respondents was MBL itself, but that it was agreed between it and the respondents that the valuation was to be for MGICA's benefit and that as a result, MGICA became entitled to sue upon the contract.  I was told that this last aspect of the pleading was an attempt to take advantage of Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 but that it would probably play no part in the case.  It did not and I will say no more of it.

The following particulars of the respondents' negligence are relied on:

   "(a)Failing to have any or sufficient regard for the existence of a right of way along the eastern boundary of the property both in so far as it affected improvements constructed on the right of way and in so far as if affected the privacy of the occupiers and the right of the occupiers to the exclusive use of that portion of the property affected by the right of way.

 

    (b)Failing to have any or sufficient regard for the fact that the property valued was said to include an enclosed salt water pool fronting the Lane Cove river when no such enclosed pool existed, nor was there any title or right to occupy any such area by way of permissive occupancy or otherwise.

 

    (c)Failing to have regard for the fact that the heated indoor pool area was without adequate or any ventilation.

 

    (d)Failing to have regard for the fact that the tiling of the pool area was, contrary to assertions in the valuation, inferior and unsuitable.

 

    (e)Failing to have proper or any regard to available 'comparable sales' and having regard to so-called 'sales' which were not truly comparable.

 

    (f)Failing to make adequate or sufficient provision for the cost of completion of the buildings and other improvements on the land.

 

    (g)Failing to have regard to the fact that the finish and fittings in the building were not 'superb' as
described in the valuation but were inferior in many respects.

 

    (h)Failing to have regard to the fact that the area described as a 'dining room' was inadequate for a house of the quality and value described in the valuation and provided the means of access to the indoor pool and spa area.

 

    (i)Failing to have regard to the fact that there was no bath room/shower/toilet facilities adjacent to the pool area so that pool users, unless they went outside the area of the residence, had to go through the small dining room area to use toilet and bathroom facilities.  The valuation incorrectly asserts that there is a toilet adjacent to the pool/spa area.

 

    (j)Failing to have regard to the fact that electronic gates and surveillance cameras said to have been installed were not in fact installed.

 

    (k)Failing to have regard or sufficient regard for the fact that the general design and style of the house was not of a standard to be expected of a residence of the value ascribed to it by the Respondents.

 

    (l)Ascribing to the buildings constructed on the land, a value greater than could reasonably be ascribed to them.  The over estimate of the value of the buildings appears to be partly attributable to an incorrect calculation of the floor area of the buildings and partly to the allocation of an excessive rate per square metre for the value of buildings.

 

    (m)Failing to have regard to the absence of air conditioning in a residence said to be of the very highest standard, especially having regard to the design and construction which would make it extremely difficult, if not impossible, to rectify the deficiency.

 

    (n)Failing to have regard for the fact that improvements such as the pontoon and jetty fronting the Lane Cove River which were included in the property valued, should not have been so included for the reason that there was no title to them and no permissive occupancy in respect of them had been granted.

 

    (o)Failing to have regard to the fact that the finish to the laundry and basement/bathroom area was inferior.

    (p)Failing to have any or sufficient regard for the fact that there is no access from the living rooms on the ground floor to the waterfront and front garden area and that the only access is through the bedrooms.

 

    (q)Authorising the release of retention moneys when significant items of work had not been completed, their non-completion was not recorded and the cost of completing other items which remained to be completed, was substantially greater than the certified provision.

 

    (r)Failing to apply proper principles of valuation in reaching a valuation for the property."

The following are the particulars of the alleged contraventions of the TP Act and the FT Act:

   "1.  Providing a valuation which substantially overstated the value of the Property by reason of the matters set out above under "Particulars of Negligence".

 

    2.  Providing the letter of 13 February 1991 which substantially underestimated the cost of completion of the works and failed to have any or sufficient regard for works which had not been completed."

The respondents' further amended defence consisted largely of denials and non-admissions.  In addition, limitation and contributory negligence "defences" were pleaded as follows (I need not deal with a "defence" of "failure to mitigate loss" which was pleaded but not pressed):

   "22In further answer to the claim by the Applicant for relief pursuant to the Trade Practices Act and the Fair Trading Act, the Respondents say that any cause of action relied upon by the Applicant in those regards is not maintainable on the basis that such cause or causes of action arose more than 3 years prior to the filing of the Statement of Claim in these proceedings.

 

    23In further answer to the whole of the Amended Statement of Claim the Respondents say that if they were negligent or in breach of contract (which are denied) the Applicant was guilty of contributory negligence.

 

       (a)Relying on information other than the valuation.

 

       (b)Failing to have any or any sufficient regard to the financial material provided by or on behalf of Beca Developments.

 

       (c)Failing to carry out any or any adequate inquiries in relation to the financial information supplied by or on behalf of Beca Developments.

 

       (d)Relying on the financial information supplied by or on behalf of Beca Developments.

 

       (e)Relying on inquiries carried out by Macquarie Bank.

 

       (f)Failing to read the valuation carefully."

3.CHRONOLOGICAL OUTLINE OF KEY EVENTS

17 October 1989.

Mr T J Davis of Jones Lang Wootton valued the Property under instructions from Beneficial Finance Corporation Limited ("Beneficial").  His valuations on various bases were made as at 17 October 1989.  On the assumption that the Property was "completed to a high standard of finish" he assigned an open market value to it of $5 million.  In its then incomplete state he assigned an open market value of $4,500,000.  On an "as completed" basis, he assigned a "forced sale value" to the Property of $4,250,000.  Mr Pselletes provided Mr Kenny with a
copy of Mr Davis's valuation report before Mr Kenny issued his own on 19 April 1990.

12 February 1990.

Under instructions from Eagle Star Trustees Ltd ("Eagle Star"), Mr Davis again inspected the Property with a view to providing an up-dated valuation of it to that company.

23 February 1990.

Mr Davis provided that up-dated valuation to Eagle Star.  He recorded that the market had "eased considerably over the last four months" and assigned an open market value of $4,200,000 "assuming completion as at" 23 February 1990, and $4,000,000 in the Property's existing unfinished state.

9 March 1990 (Friday).

Mr Frank Ganis of MBL telephoned Mr Kenny and asked him to value the Property.  Mr Ganis told him that the valuation was needed "as soon as possible"; that the Property was owned by Beca as "owner/builder"; that Mr Pselletes of Beca was on site in the course of completing extensive improvements; that he (Mr Ganis) thought that the Property would "come in at about $6 million"; and that he had arranged for Mr Kenny to inspect the Property the following day, Saturday 10 March, when he (Mr Ganis) would also be present.  The time of 10.00 am the following morning was agreed, as was a fee of $1 per $1,000 of value.  Mr Ganis said that a letter confirming the instructions would be sent.  (In fact, the letter was not sent until 17 April 1990, some 5½ weeks later, by which time Mr Kenny had completed his valuation work and arrived at the amount of the value which he had decided to assign to the Property.)

10 March 1990 (Saturday).

Mr Kenny conducted a preliminary inspection in the presence of Mr Ganis and Mr Pselletes.  Mr Pselletes identified the items of work which he said remained to be completed and gave estimates of the cost of completing them.

12 March 1990 (Monday).

Mr Pselletes forwarded to Mr Kenny a typed list of 16 outstanding items of work against which were typed in estimated costs of completing them totalling $226,500 and an allowance for an outside builder's profit of $20,000 making a grand total of $246,500.

13 March 1990 (Tuesday) and following.

Mr Kenny inspected the Property.  Neither Mr Pselletes nor Mr Ganis was present.  There were workers on site, one of whom gave him building plans.  He subsequently returned them and did not keep a copy.  He inspected the land and the improvements.  (The Property has a street frontage to Campbell Street, a water frontage to the Lane Cove River and northerly views across the River.)  The house under construction was of a "Mediterranean" style and in this respect was not in keeping with many of the traditional Federation style homes at Hunters Hill.  Mr Kenny took colour photographs of the Property and made notes of what he had seen on 10 and 13 March.

Following the inspection on 13 March, Mr Kenny perused records of sales of other residential properties at the Hunters Hill Council and made three foolscap pages of handwritten notes relating to 14 properties.  As well, he visited local real estate agents and discussed properties in the area, including features of sales which had occurred.  He "scribbled" notes of what he was told. 

He also looked at properties which he thought to be relevant to his task, made notes and from his notes assembled in handwritten form an analysis of "best sales/market info" which related to nine (on one view, ten) properties.  His evidence is that he formed the view that it was difficult to find "comparable or indicative properties" and that the large size and out-of-character style of the house posed a difficulty for the task of valuation.

19 March 1990.

MGICA issued a "Pool Mortgage Insurance Policy" No PP21 in favour of PCL as trustee of "Mortgage Pool No 1990/18" ("the Pool Policy").  The Pool Policy had effect from 19 March 1990 to 15 July 1993.  The "Insured" was defined to mean, in respect of each "Insured Mortgage" (as defined), PCL, and to include as "Trust Manager", "MGICA Securities Ltd".  The expression "Insured Mortgage" was defined to mean any mortgage which MGICA agreed from time to time to insure, except a mortgage the "loan to value ratio" (LVR) of which exceeded, relevantly, 65%.  (It was not suggested that this exclusion from the definition of "Insured Mortgage" had the effect of excluding the subject mortgage from Beca to PCL over the Property with which the case is concerned.  I assume that this was because "value" was defined in the Pool Policy to refer to the value as determined by an independent registered valuer who was a member of the Australian Institute of Valuers and who was approved at the relevant time by MGICA, and Mr Kenny satisfied that description.)

21 March 1990.

MGICA (Mr Anderson) received from MBL (Mr Ganis) a completed standard printed form of MGICA application for approval for "Pool Mortgage Insurance" under cover of a letter dated 19 March 1990.  The application was signed by Mr Ganis for MBL.  It stated that what was sought was Pool Cover No 1990/18 in respect of a loan of $3.575 million to Beca for three years and four months at an interest rate of 16.5% p.a. with loan repayments of $589,875 per annum "interest only", in respect of which MBL was the "mortgage manager/originator".  The purpose of the loan was stated to be to (a) pay out $2.1 million owed to the National Australia Bank ("NAB") on overdraft, (b) to cover the first year's interest on the loan, and (c) to reimburse development costs on a project at North Sydney in which Beca was engaged.  The security was said to be the Property which was said to have been valued in March 1990 at $5.5 million by Lance Kenny.  (This shows that by 19 or at latest 21 March, Mr Kenny had put a figure of $5.5 million on the Property and that this fact had been communicated to MBL (see later)).

An internal MGICA "Underwriting Summary" made at about this time recorded the purpose of the loan of $3,575,000 as being to "refinance bank overdraft" $2,100,000; to "prepay 1 year's interest" $600,000 (apparently, this was a slightly generous allowance but nothing turns on this since there was a loan establishment fee of $26,812.50); and to "fund new development" $875,000.  (Apparently the rate of interest was later agreed to be reduced to 15.8% payable annually in advance and at the end of twelve months it was again changed, this time to 16.75% payable monthly, but I need not concern myself further with the question of the interest rate.)

3 April 1990.

MGICA received from MBL a copy of its "Credit Approval" and attached "Proposition Summary" of 11 pages.  This showed, inter alia, that the facility of $3.75 million was to be used to re-finance Beca's overdraft ($2.0 million), to fund the first year's interest in advance ($0.6 million), to assist Beca with preliminary costs incurred in the development of a hotel at North Sydney in conjunction with the Elizabethan Theatre Trust ($.856 million), and to pay out a leasing debt of some $100,000 to Duke Pacific Finance.  (These amounts total $3.556 million.)  The "security" was stated to be the Property and joint and several guarantees by Mr and Mrs Pselletes and Centurian.  The "loan to valuation ratio" was stated as 65%.

5 April 1990.

MGICA wrote to MBL (Mr Ganis) in relation to MBL's application for "Pool Mortgage Insurance" in respect of the loan of $3,575,000 to Beca.  It advised that it had approved the application subject to the following conditions:

 

   "1.Satisfactory valuation by MSL Panel Valuer.

 

    2.Maximum LVR 65%.

 

    3.Sufficient funds to be held by MSL to enable completion of the security as nominated by valuer pending issue of S317AE certificate.

 

    4.First year's interest to be paid in advance.

 

    5.Satisfactory inspection by MGICA.

 

    6.Satisfactory signed assets and liabilities statement of Mr and Mrs Pselletes.

 

    7.Macquarie Bank Ltd to monitor the Insured loan on a monthly basis.

 

    8.Satisfactory refinance report by National Australia Bank." (emphasis supplied)

The letter also advised that MGICA's approval was subject to the mortgage's being accepted by MGICA Securities Ltd as a mortgage to be held in the MGICA Securities Ltd pool.

6 April 1990.

Mark Anderson, Assistant State Manager of MGICA, inspected the Property and shortly afterwards made a report of his inspection for MGICA's internal purposes which included the following:

       "As the inspection of the property was external only we must rely upon the forthcoming valuation and I note also that David Sharpe of MSL has inspected the property internally.

 

       From an external inspection at street level the property appears to be nearing completion and enjoys magnificent views of the upper regions of Sydney Harbour." (emphasis supplied)

10 April 1990.

Mr Kenny faxed Mr Pselletes of Beca as follows:

   "We refer to our recent valuation instructions from Macquarie Bank Limited and your request that we provide written preliminary advice in respect of our opinion of current fair market value ‘on completion of the residence under construction. [sic] 

   Accordingly, it is confirmed we are of the opinion that a fair assessment of the current market value of the subject property as at 13 March, 1990 [the date of Mr Kenny's inspection] on the basis outlined is in the sum of $5,500,000 (FIVE MILLION FIVE HUNDRED THOUSAND DOLLARS) and that our formal report and valuation will issue to Macquarie Bank Limited as soon as possible."

As noted earlier, Mr Kenny must have arrived at his figure of $5.5 million by 19 or, at the latest, 21 March.

11 April 1990.

MBL wrote to Mr Pselletes advising that "the Bank" was prepared to offer a facility in a principal sum of $3,575,000 in respect of which the mortgagor would be Beca and the mortgagee would be "Permanent Custodians Limited as nominee for Permanent Trustee Company Limited as trustee for the MGICA Mortgage Securities Trust."  The letter contained the following:

       "Reference existing Facilities with National Australia Bank Limited and reimburse [sic] expenses incurred to date on North Sydney Hotel Project." 

The security was stated to be a first mortgage over the Property and joint and several guarantees and indemnities by Gary Pselletes, Malama Pselletes and Centurian.  Under the heading "Valuation" appeared the following:

       "A sworn valuation report at the borrower's cost from a valuer under instructions from MBL to:

 

       (i)  establish the current market value of the security property.  The value of the property is to be for a minimum of $5.5 million, or the advance is to be reduced to maintain a maximum gearing of 65%.

 

       (ii)establish there are no features of the security properties which, in the opinion of MBL may be detrimental to its interests as mortgagee under the facility."  (emphasis supplied)

The letter also referred to a loan establishment fee of $26,812.50 representing 0.75% of the principal sum of $3,575,000.

17 April 1990.

MBL (Mr Ganis) faxed to Mr Kenny a formal instruction for him to value the Property "for mortgage purposes".  The letter included the following:

    "Please note that the valuation must be addressed to Macquarie Bank Limited (MBL) and be extended to include Permanent Trustee, Permanent Custodians, MGICA Limited and MGICA Securities Limited, and that the appropriate trustee clause must be included as follows:

 

       'We recommend the property as suitable security for investment of trust funds to the extent of 65% of our valuation for a term of three to five years, provided that an additional amount may be safely advanced in the event that mortgage protection insurance is effected, and this valuation can also be relied upon by any of the following mortgage insurers: MGICA Limited, Housing Loans Insurance Corporation, Australian Mortgage Insurance Corporation of AFG Insurances Limited.'

 

    In residential valuations, please provide details of properties used for comparison while confirming your value by the summation approach.

 

    In all valuations, please insert the following clauses and in commercial and industrial valuations ensure to compare capitalisation rates and confirm your value by the summation approach:

 

    1.I certify that I have:

 

       (a)internally inspected the property described in this report, or

 

       (b)inspected the plans and specifications described in this report.

 

    2.I have measured the occupational dimensions of the site which substantially agree/disagree with the Title provided.

 

    3.I have no known interest in the property, the mortgage or the prospective mortgagor.

 

    4.I acknowledge that this valuation is prepared for mortgage purposes, and do not disclaim any liability to any subrogated, transferred or assigned interests in any mortgage created as a direct consequence of this valuation.

 

    5.I have perused the relevant leases and enclose a summary of pertinent conditions including:

           -    commencing rental

           -    review clauses

           -    term

           -    option periods.

 

    6.I believe the current market valuation with vacant possession to be as follows:

 

       .   Value of Site                        $

       .   Value of site and improvements

           excluding chattels                   $

       .   Estimated rental value per week      $

       .   Recommended insurable value              $    "

    (emphasis supplied)

The letter stated under the heading "DESCRIPTION OF SECURITY" and against the entry "Anticipated Value" an amount of $5,500,000.  It concluded by requesting Mr Kenny to forward his valuation report in quadruplicate to MBL.

In evidence, Mr Kenny conceded that he may have told Mr Ganis that the amount of his valuation was $5,500,000 but said that he could not recall whether he had done so.  Another possibility is, of course, that Mr Pselletes had told Mr Ganis the amount.

18 April 1990 (day).

Mr Kenny inspected the Property, noting progress of work which had been made since his last inspection.  He did not take photographs.

18 April 1990 (evening).

Mr Pselletes faxed to Mr Kenny a typed list of 16 items of work remaining to be completed against each of which was typed an estimate of the cost to complete it.  The items dealt with the same general subject matter respectively as the 16 items in the earlier list, although they were expressed as up-dated versions.  The costs totalled $125,700.

19 April 1990.

The respondents' written valuation report issued.  It will be necessary later to discuss the report in detail.  It suffices to note at this stage that it concluded that the current fair market value on an "as is" basis as at 18 April 1990 was $5,350,000 and on an "on completion" basis as at that date was $5,500,000, comprising land $1,800,000, site improvements $300,000 and "Residence comprising some 908m² including balconies", $3,400,000.  The report set out in summary form the "cost estimate prepared by Beca Developments Pty Limited" totalling $125,700 to which Mr Kenny added "a contingency allowance (including builder's profit margin)" of $25,000 to give a "rounded off" figure of $150,000.  Accompanying the report was Mr Kenny's memo of fees for $5,500 which was
described as being "fee on basis agreed @ $1 per $1,000 of value". 

Between 19 April and 30 April.

Mr Anderson of MGICA received from MBL a copy of Mr Kenny's valuation report and read it.  On the basis of the report he noted against item 3 in MGICA's copy of its letter dated 5 April 1990 to MBL (see earlier), "$150,000" as the amount to be retained.

30 April 1990.

MGICA (Mr Anderson) wrote to MBL (Mr Ganis) advising that special conditions numbered 1, 2, 5, 6 and 8 in MBL's letter dated 5 April 1990 had been satisfied and that the remaining conditions were to be satisfied at or before settlement.

6 May 1990.

MGICA Securities Ltd, as "the trust manager of the loan", advised MBL by facsimile that the loan of $3,575,000 to Beca was acceptable for inclusion in Mortgage Pool No 1990/18 subject to certain conditions.  These included a condition that 12 months' interest be paid in advance, a condition that $150,000 be withheld pending confirmation from the valuer that the Property was completed to a satisfactory standard and "317A issued", and finally the conditions of MGICA itself as previously advised.

11 May 1990.

Settlement took place.  There were executed a Loan Agreement between PCL as lender and Beca as borrower; a Deed of Guarantee and Indemnity between Gary Pselletes, Malama Pselletes and Centurian as guarantors and PCL as lender; and a Mortgage from Beca to PCL over the Property ("the Mortgage").  All were dated 11 May 1990.

Early February 1991.

Suzie Singleton of MBL requested Mr Kenny by telephone to inspect the Property and confirm that the items which required completion had been satisfactorily completed.

5 February 1991.

The Hunters Hill Municipal Council ("the Council") issued a certificate under s 317AE of the Local Government Act 1919 (NSW), identifying the applicant for the certificate as Beca and referring to an inspection on 5 February.  Apparently Mr Pselletes supplied the certificate to MGICA.

12 February 1991.

Mr Kenny inspected the Property, having regard to the items on the up-dated list which had been faxed to him by Mr Pselletes on the evening of 18 April 1990.  He also spoke to Mr Pselletes.

13 February 1991.

(a)Mr Kenny wrote to MBL reporting on his inspection of the preceding day and recording that his purpose had been to ascertain if the Property had been completed as outlined in his report dated 19 April 1990.  Relevantly, the letter said this:

       "The residence has been completed to a standard that provides for the issue of a Building Certificate under Section 317AE of the Local Government Act.  A fax [sic] copy of a Building Certificate dated 5 February, 1991 has been forwarded to us.

 

       Our inspection indicates that there is still relatively minor work outstanding for satisfactory completion of the residence as outlined in our report and valuation, including -

 

           installation of electronic gates and surveillance cameras;

           make good ceiling/skylight over indoor pool/spa area;

           complete tiling of indoor pool/spa and surrounds;

           complete internal painting and installation of PC's as required;

           install carpet as required;

           complete cabana, jetty/pontoon and waterfront pool.

 

       Our estimate of the cost to complete all outstanding works is in the order of $25,000 - $30,000, inclusive of a contingency allowance.

 

       Furthermore, we are of the opinion that the residence has been built to a prestige standard by competent tradesman [sic].

       It is also noted that there has been considerable expenditure to provide a prestige standard of finish in areas not previously identified by us.  In particular, we would note the conversion of the entrance level storerooms to very good in-law/flat accommodation providing a lounge/dining area, bedroom, kitchen and bathroom/laundry.  Also, extensive built-in cupboards and wet bar have been provided in the games room/bar area and IXL heating/cooling units have been installed throughout."

    MGICA submits that this advice did not take into account all items of work outstanding, did not allow sufficient amounts for the cost of completing those which Mr Kenny did acknowledge, and did not allow for the fact that those which had been completed had not been completed to the standard to which Mr Kenny had referred in his valuation.  As will be seen later, in view of the conclusions which I reach in relation to the initial valuation report, I have not found it necessary to deal separately with these submissions in relation to the letter dated 13 February 1991.

(b)On the same day (13 February) MBL wrote to MGICA, noting that $150,000 was being held pending confirmation from the valuer that the Property was completed to a satisfactory standard and that a certificate under s 317AE had issued.  The letter noted that MGICA now held the certificate under s 317AE, enclosed the letter dated 13 February 1991 from Mr Kenny, and requested MGICA to "arrange to release the $150,000 deposit".

14 February 1991.

By an internal MGICA memorandum, Mr Anderson recommended to Mr Eagar of MGICA's Commercial Services Division as follows:

    "From the valuers [sic] letter, the remaining works are of a relatively minor nature, offset by other works not previously identified by the valuer.

 

    A 317AE certificate has issued, and I recommend that MGICA agrees to the release of funds."

 

The memorandum bears a handwritten note (no doubt written by Mr Eagar), also dated 14 February 1991, reading: "Agree. Release of funds is approved as recommended."

14 February 1991.

MGICA replied to MBL agreeing to the release of $150,000 to Beca.

10 April 1991.

MBL advised MGICA that the Australian Elizabethan Theatre Trust had gone into provisional liquidation, that Beca had based much of its present and future operations on its joint venture with the Trust, and that, in particular, there would be a loss of income of approximately $900,000 for the second year of the loan which was due to commence on 11 May 1991.

6 June 1991.

Beca wrote to MBL advising that the liquidation of the Australian Elizabethan Theatre Trust had called for a "drastic reorganisation" of Beca's finances.

7 June 1991.

MBL as mortgage manager gave to MGICA notice that Beca had defaulted on 7 June 1991 in paying interest of $86,038.03.

25 June 1991.

Milne Berry & Berger, solicitors for PCL, made a demand on Beca for payment.

28 June 1991 or 1 July 1991.

Notices under s 57 (2) (b) of the Real Property Act 1900 (NSW) were served on Beca, Mr and Mrs Pselletes and Centurian.

2 July 1991.

The mortgagee, PCL, through the mortgage manager, MBL, took possession of the Property.

24 July 1991.

Mr Kenny provided to MBL an "on completion" valuation of $3.0 million as at 17 July 1991, comprising land $1,300,000, site improvements $200,000, and residence comprising some 908.2m² including balconies, $1,500,000.  He was paid $2,200 for this valuation.  The size of the fall from $5,500,000 as at 18 April 1990 to $3,000,000 only fifteen months later will not have escaped attention.

23 October 1991.

Mr Kenny orally advised MBL that his valuation of $3.0 million remained static.

24 October 1991.

Mr Kenny wrote to MBL, preceding a proposed auction of the Property on 26 October 1991, suggesting that with certain disclaimers the value of the Property still remained much as he had indicated in his report of 24 July 1991.

24 October 1991.

MBL wrote to MGICA recommending a reserve price of $3.5 million for the proposed auction, based on Mr Kenny's "on completion" valuation of $3.0 million as at 17 July 1991 and his advice on 23 October that the value had remained static.

25 October 1991.

MGICA replied, concurring in a reserve of $3.5 million.

26 October 1991.

The Property was passed in at auction.

4 December 1991.

Terence Alfred Large of Egan National Valuers (NSW) Pty Ltd, under instructions from Mr Ganis of MBL, inspected the Property with a view to providing a valuation of it.

6 December 1991.

Mr Kenny wrote to MBL giving his opinion in relation to an offer to purchase the Property for $2,650,000.  He advised that under "forced sale" conditions, that amount was within the appropriate range.

10 December 1991.

Mr Large valued the Property as at 4 December 1991 (the date of his inspection) at $2.9 million (land $1,250,000; improvements $1,650,000) and as at 18 April 1990 at $3.9 million (land $1,750,000; improvements $2,150,000).

17 December 1991.

MGICA wrote to MBL concurring in MBL's intention to accept $2.65 million for the Property.

20 December 1991.

Thomas Matthew Phelan of L J Hooker (NSW) Pty Limited, under instructions from MGICA, inspected the Property.

27 December 1991.

Mr Phelan valued the Property, as at 20 December 1991 (the date of his inspection) at $2.45 million (land $1,200,000; improvements $1,250,000) and as at 18 April 1990 at $3.45 million.

6 January 1992.

With the consent of MGICA and PCL, Beca contracted to sell the Property for $2.65 million.

27 March 1992.

PCL made a claim on MGICA under the Pool Policy for $1,977,513.67 made up as follows:

                                                  $    

    Unpaid principal                   3,575,000.00

    Unpaid interest                      500,252.52

    Insurance premiums                     3,541.41

    Rates and taxes                        4,485.27

    Other statutory charges               43,560.00

    Legal fees                             6,374.30

    Selling agent's commission            54,100.00

    Advertising                           14,632.40

    Preservation of property              45,408.33

    Other                                380,159.44

    Total                              4,627,513.67

    Less gross proceeds of sale

      of security                      2,650,000.00

    Total claim                        1,977,513.67

                                       ============

22 April 1992.

MGICA paid PCL $1,500,514.41 which, with periodic payments which it had made to it previously of $476,999.26, made a total amount paid of $1,977,513.67.

29 April 1992.

Beca was ordered to be wound up.

4.  MR KENNY'S VALUATION REPORT DATED 19 APRIL 1990

Mr Kenny's valuation report began by recording that the instructions for the valuation had been received from Mr Gannis of MBL and that he (Mr Kenny) was "required to carry out a valuation assignment to establish the current fair market value of the subject property" and in particular to establish its "as is" and "on completion" values.  He recorded his understanding that the report and valuation were required "for mortgage consideration purposes by Macquarie Bank Limited, as intending mortgagee" and that "Permanent Trustee, Permanent Custodians, MGICA Limited and MGICA Securities Limited, may use and rely upon [the] report and valuation in the same manner as intended by Macquarie Bank Limited."  The report noted that the dates of inspection were 13 March and 18 April, that the date of the valuation was 18 April and that the registered proprietor (as shown in Council records) was Beca.  It gave an uncontroversial account of the location of the Property and its title references.  Then it proceeded to address "ENCUMBRANCES AND NOTATIONS ON TITLE". 

One notation which featured in the case was a right of way.  This burdened the Property and provided access to the waterfront for the benefit of an adjoining property.  According to a copy of the deposited plan 570267, the right of way was 1.525 metres wide and ran along and within the eastern side boundary of the Property down to the Lane Cove River.  Mr Kenny's valuation report said:

    "We are of the opinion that the subject property is not adversely affected by any of the above encumbrances or notations, however, a legal opinion should be obtained."

MGICA submits that the existence of the right of way detracted from the Property and that Mr Kenny was negligent in not making some discount for its existence.  In particular, MGICA makes two points.  The first is that the right of way adjoined
expansive windows which would have allowed users of the right of way to see into the indoor pool area of the house.  The second point is that at the waterfront end of the right of way, a retaining wall and "Greek oven" within the Property obstructed access to the waterfront and that this constituted a potential source of future disputation with those benefited by the right of way.

Mr Kenny's report noted that the site area of the Property was some 970.2m² comprising an "area by traverse" of 959.5m² and an "offset area" of 10.7m².  These figures appeared on DP 570267 a copy of which was annexed to the report.

The report stated that Mr Kenny had been advised that there had been some reclamation of land adjacent to the high watermark of the Lane Cove River which brought the available site area to just over 1,000m² but that he had not seen a survey report indicating that the reclaimed land was within the title of the Property.

The report stated that a "distinctive three storey ‘Mediterranean Villa’ style residence" was nearing completion on the Property.  As examples of "many distinctive features" which the house would have on completion, the report referred to the following:

 

    "vehicle access from Campbell Street is via a suspended reinforced concrete/brick paved driveway with ample parking/turning area and featuring a
central skylight over the indoor swimming pool/spa area below,

 

    a 5-6 vehicle garage with easy access,

 

    a spacious indoor swimming pool/spa area with a glass curtain wall to the Lane Cove River and a skylight from the suspended driveway above,

 

    extensive site works including retaining walls and stairways from sandstone excavated and cut on site,

 

    superb finish and fittings throughout,

 

    boatshed and jetty/pontoon, with private sandy beach and enclosed salt water swimming pool to the Lane Cove River,

 

    spacious accommodation totalling some 948 square metres (including ancillary areas)."

This statement of attractive features was attacked by MGICA.  It was suggested that the "spacious indoor swimming pool/spa area with a glass curtain wall to the Lane Cove River" was such an unusual feature as to limit the number of persons who might be interested in purchasing the Property.  MGICA submitted that the evidence showed that "superb" was not an appropriate description of the standard of finish and fittings.  In relation to the boatshed, jetty/pontoon and enclosed saltwater swimming pool, there was evidence that because of lack of tenure and authority to build, it could not be assumed that those features would be lawfully completed so as to become permanent advantages of the Property.

Mr Kenny's report went on to describe "ACCOMMODATION and INCLUSIONS to be provided on completion".  It did so in relation to the respective "levels" of the building, namely the entrance level, lower level 1, lower level 2, the basement level and the waterfront level.  For example, in relation to the waterfront level the report noted: "jetty/pontoon and enclosed saltwater swimming pool to be provided at this level".  The indoor swimming pool/spa facility was an important feature of the house.  The report included the following:

    "Other INCLUSIONS to be provided on completion will be most impressive and are (in part), briefly as -

 

    ....................................................

 

    the indoor swimming pool/spa and surrounding area will be completely tiled in pure white "carara" marble,

 

    the swimming pool/spa will be fitted with high specification equipment including solar heating and separate heaters, as well as swim jets and automatic cleaners, .........................................

 

    electronic gates and surveillance cameras will be installed, ........................................

 

    jetty/pontoon and enclosed salt water pool to be provided at waterfront level."

 

There was a considerable body of evidence directed to the question of the correct size of the house.  In this respect, Mr Kenny's report said this:

    "SIZE of the residence and ancillary areas as advised by Mr. G. Pselletes and checked by scale from the building plans provided is -

 

    Entrance Level:   Foyer             24m2

                      Garage           125m2

                      Storerooms        76m2     225m2

 

    Lower Level 1:    Living Area      195m2

                      Indoor Pool/Spa  194m2     389m2

 

    Lower Level 2:    Living Area                185m2

 

    Basement Level:   Bathroom/W.C.                8m2

 

    Waterfront Level:Boatshed                    40m2

                                                 847m2

 

    Plus, balcony areas to the Entrance Level

    Lower Level 1 and Lower Level 2              101m2

 

                                                948m2"

As will be seen later, Mr Kenny conceded that some of these areas were excessive.  MGICA submits that a careful valuer would have checked the approved building plans at the Council and conducted on-site measurements as well.  As Mr Kenny noted in the passage quoted above, he took the size of the residence and ancillary areas from Mr Pselletes and checked by scale from certain building plans supplied to him by or on behalf of Mr Pselletes, not the Council.

Under the heading "ESTIMATED COST TO COMPLETE", Mr Kenny recorded that he did not have a formal quotation of a price to complete the house and that a cost estimate prepared by Beca itself totalling $125,700 (exclusive of any allowance for builder's profit if outside supervision should be required) appeared to be fair and reasonable having regard to his discussions with Mr Pselletes.  The valuation report recorded Beca's cost estimate together with a "contingency allowance (including builder's profit margin)" as follows:

 

    "The cost estimate prepared by Beca Developments Pty. Limited is, briefly -

 

       kitchen cupboards                             $25,000

       complete tiling to all bathrooms                 $200

       complete skylight over indoor pool/spa area    $1,000

       complete internal and external painting       $22,000

       complete all P.C. items                        $3,000

       install all doors                              $5,000

       complete all landscaping                       $6,000

       complete floorcoverings including marble and

         ceramic tiles, parquetry and carpet as

         required                                    $28,000

       complete brick paving to driveway and garage   $6,000

       complete all ballustrade [sic] railings        $3,000

       complete electrical work                       $3,000

       install garage and entrance doors              $5,000

       install pool equipment                         $7,000

       fitout sauna room                              $3,500

       complete jetty/pontoon and waterfront pool     $8,000

                                                    $125,700

       Plus, a contingency allowance (including

         builders profit margin)                     $25,000

                                                    $150,700

 

                                               Say $150,000"

The report noted that $150,000 should be withheld until satisfactory completion of all outstanding works and the issue of a certificate under s 317AE of the Local Government Act 1919 (NSW).  MGICA submits that Mr Kenny was negligent in accepting Mr Pselletes' word as to the estimated cost of completion and that the allowance of $150,000 was substantially inadequate.

On page 11 of his report Mr Kenny turned to the subject of "SUPPLY, DEMAND AND MARKETABILITY".  He recorded that his inquiries of local real estate agents indicated that there were few properties within the selling price/value range anticipated for the Property, currently being offered for sale in the Hunters Hill/Woolwich area.  The report noted that his
inquiries also indicated that very few of the properties currently being offered for sale had features similar to those which would be provided on completion of work on the Property.  In relation to the state of the market, Mr Kenny's report said this:

    "Local agents with whom we spoke were at [sic] differing points of view as to the current state of the market, with the more informed sources suggesting that whilst there has been a levelling out (and in some instances considerable reductions) of values in the area, the top end of the market (waterfront properties with a northern aspect to the Lane Cove River) appears to have remained relatively unaffected (although with no significant increases) as a result of the short supply of such property and the continuing keen demand.  It is also suggested there have been fewer sales during the last 12 months because of the lack of properties available for sale rather than a lack of enquiry.  Some agents suggest that the level of enquiry may soon pick-up given the anticipated fall in interest rates and the maintenance of a Capital Gains Tax by the recently re-elected Labour government.

 

    Whilst the distinctive 'Mediteranean Villa' [sic] style of the subject residence is not typical of the more established traditional residences for which Hunters Hill and Woolwich is renown, it is compatible with residences which have been developed along the waterfront in recent years, several of which are shown in our photographic study appended.

 

    It is acknowledged that many prospective purchasers of residences in Hunters Hill and Woolwich seek the traditional style of residence, however, the subject property has many features that would considerably overcome some of the market resistance to its relatively unique, albeit distinctive, style of appearance and construction.

 

    One feature particularly favourable to the subject property is its size which considerably exceeds the permissable [sic] Floor Space Ratio of 0.5:1, thus requiring a much larger land area (if it was available) at considerably more cost to construct a similar residence."

Mr Kenny embarked on a description of his "VALUATION RATIONALE" on page 12 of his report where the following appears:

    "Whilst we consider the subject property to be slightly disadvantaged in view of its 'Mediteranean Villa' style of appearance and construction which may slightly limit sale prospects, we are of the opinion given its overall spacious accommodation and excellent presentation with distinctive design features and inclusions throughout, it would generate good interest if offered for sale with a prudent marketing campaign, particularly in view of its desirable location.

 

    Our basis of valuation is that of an analysis and comparison with recent available sales/market information in the surrounding area.  In particular, we would instance available information in respect of the following properties -

 

       18 The Point Road, Woolwich,

       24B The Point Road, Woolwich,

       6A Ellesmere Avenue, Hunters Hill,

       11 & 13 Kareelah Road, Hunters Hill,

       32 Viret Street, Hunters Hill,

       7 Stanley Road, Hunters Hill,

       5 Mayfield Avenue, Woolwich,

       45 The Point Road, Woolwich

       and

       66 The Point Road, Woolwich

 

    each of which are briefly discussed in our Sales/ Market Information Schedule appended."

The "SALES/MARKET INFORMATION SCHEDULE" annexed to the valuation report set out sales/market information relating to the nine properties mentioned.  I need note only the information recorded in relation to the first two mentioned above.  They were the properties which chiefly led Mr Kenny to arrive at his figures for the Property's house value and land value respectively:

   "Property:     18 The Point Road, Woolwich.

   Consideration:$4,550,000

   Date:          Contracts exchanged 6 June, 1989.

   Comments:      This property comprises a substantial brick and tile residence with a main floor area of some 420m2, erected upon a large waterfront block.

                  It comprises typical accommodation including six bedrooms, formal lounge room, formal dining room, family room, three security garages etc.  Excellent condition and presentation throughout.

                  It features a northern aspect with excellent water views to the Lane Cove River, an inground swimming pool, landscaped gardens, a white sandy beach with jetty and pontoon.

                  Land area larger than subject property, however, residence substantially smaller - considered to be a good comparison given lack of available evidence.

 

   Property:      24B The Point Road, Woolwich.

   Consideration:$1,950,000

   Date:          Contracts exchanged March, 1990.

   Comments:      This property comprises a relatively modern style double storey brick and tile dwelling on a 'battle-axe' waterfront block having an area of some 784m2 (plus MSB Lease).

                  It comprises typical accommodation including four bedrooms, lounge room, formal dining area and family room etc.  A small boatshed stands up to the waterfront.

                  It features a good level building block with a northern aspect and excellent water views across the Lane Cove River.

                  Despite the relatively good residence upon the land, the purchase price of $1,950,000 is essentially indicative of land value as the purchaser proposes to demolish the dwelling.  We also note that this property sold in 1988 (Transfer date 4/11/88) for the consideration of $2,500,000.

                  Considered to be a good comparison in establishing land value of the subject property."

Mr Kenny was cross examined at length as to the use which he made of this sales/market information in arriving at his "as
completed" valuation of $5,500,000.  In fact that figure comes somewhat "out of the blue" on page 13 of the report in the following passage:

   "Accordingly, our assessment of current fair market value of the freehold interest 'on completion' upon a direct comparison with the above sales/market information is in the sum of $5,500,000.

 

   It follows, that a check on our assessment of current fair market value of the freehold interest 'on completion' in the sum of $5,500,000 by the summation method may be apportioned as -

 

      Land comprising an area of some 970.2m2  $1,800,000

 

      Site improvements including extensive,

      landscaping, fencing, inground swimming

      pool/spa, on-site parking, boatshed,

      jetty/pontoon etc                          $300,000

 

      Residence comprising some 908m2

      including balconies                      $3,400,000

                                              $5,500,000

 

   Furthermore, our assessment of the current fair market value of the freehold interest 'as is', is briefly -

 

      Current Fair Market Value 'On Completion'$5,500,000

 

      Less, allowance for cost to complete       $150,000

 

      Current Fair Market Value of the freehold

      interest 'as is'                        $5,350,000"

Mr Kenny's report recommended the Property as suitable security for investment of trust funds to the extent of 65% of his valuation for a term of 3-5 years and stated that the valuation could be relied upon by, inter alia, MGICA.  His report finally stated that his valuation assumed and was subject to

   "[c]ompletion of the residence and site improvements to the statisfaction [sic] of all relevant authorities and as envisaged by the belowsigned valuer."

Following Mr Kenny's signature there appeared the following:

   "This Report and Valuation has been prepared for and under the instructions of our Client - Macquarie Bank Limited, as intending mortgagee.

 

   It is also noted that -

 

      Permanent Trustee,

      Permanent Custodians,

      MGICA Limited

      and

      MGICA Securities Limited,

 

   may use and rely upon this report and valuation in the same manner as intended by Macquarie Bank Limited.

 

   We have no known interest in the subject property, the mortgage or the prospective mortgagor.

 

   We acknowledge that this Report and Valuation has been prepared for mortgage purposes and do not disclaim any liability to any subrogated, transferred or assigned interests in any mortgage created as a direct consequence of this report and valuation."

 

 

5.MR KENNY

Mr Kenny was cross examined over six full days.  Without any signs of annoyance or impatience, he seemed to be attempting to grapple with the questions put to him.  I formed the impression that he was willing to give full and honest answers.  He made concessions against his interest.  So far as I could see, he did not attempt to tailor his evidence to suit his case.

Moreover, the notes which he made at the time of valuing the Property generally indicate that he went about his task methodically and in the manner of a person who knew what he was about.   Whatever criticisms may be made of his work, it cannot be said that he did not go about his valuation in a generally organised manner or that he did not record the general lines of his thought processes.

All of this does not, of course, dictate a result in his favour.  Indeed, as will be seen, I have reached a conclusion adverse to him on liability.  But this is not because I found him not a generally credible witness or otherwise found his evidence unsatisfactory overall.

6.THE HEARING; INTRODUCTION TO THE EVIDENCE

MGICA led evidence from Mark Anderson and Paul Johnston who were, at the relevant time, officers of MGICA, directed to establishing the retainer of the respondents; that MGICA relied on the "as completed" valuation of $5.5 million; that MGICA would not have granted any mortgage insurance if the valuation had been less than $5.5 million; and the steps taken by MGICA to realise its security, including expenditures made in preserving the Property and in preparing it for sale and selling it. 

The case proved to be a lengthy and strongly contested one, occupying 16 hearing days.  Counsel's submissions on the facts and the law were lengthy, detailed and, I should add, helpful.  Most, if not all, of the 18 particulars of negligence noted earlier were taken up with the various independent expert witnesses as well as with Mr Kenny.  I will not attempt to give a detailed account of the considerable volume of affidavit and oral evidence.

MGICA led evidence from expert valuers directed to establishing that the respondents' valuation had been arrived at negligently and was misleading and deceptive and that the true value of the Property was substantially less than the amounts placed on it by Mr Kenny.  Expert evidence was led in response.

MGICA called valuers, Messrs Large and Phelan, while the respondents called a valuer, Mr Ponton.  A fourth independent valuer, Mr Davis, was in a special position.  It will be recalled that he had initially valued the Property under instructions from Beneficial in October 1989 when he had assigned to the property an open market value as at that date of $5.0 million on an "as completed" basis and $4.5 million on an "as is" basis.  The respondents filed an affidavit by Mr Davis annexing that valuation but did not read the affidavit.  In ways which do not now matter, Mr Davis's report and his "updating" report dated 23 February 1990, according to which the comparable values had fallen to $4,200,000 and $4,000,000 respectively, were admitted as exhibits.  The respondents called Mr Davis who was cross examined on behalf of MGICA.

In summary, the relevant valuations were as follows.

Respondents   As at 18 April 1990, as completed                      "as is"   Terence Alfred Large of Egan National Valuers (NSW) Pty Ltd As at 18 April 1990, as completed and subject to issue of Certificate of Compliance under s 317AE of the Environment Planning and Assessment Act 1979 (NSW)	$5,350,000 $5,500,000         $3,900,000
Thomas Matthew Phelan of L J Hooker (NSW) Pty Ltd As at 18 April 1990, "as is" as at inspection on 20 December 1991	$3,450,000
Terence John Davis of Jones Lang Wootton As at 23 February 1990, as completed                         "as is"	$4,200,000 $4,000,000
Terry Ponton of Landsbury's (Aust) Pty Ltd As at 18 April 1990, as completed (Mr Ponton did not prepare a formal written valuation and the figure is based upon his notes (Ex A27) as explained by his oral evidence (T 1013, 1032))	$4,400,000 to $4,500,000

Messrs Large, Phelan and Ponton performed their task retrospectively and with the "benefit" of hindsight, whereas Messrs Davis and Kenny valued in February and April 1990 respectively.

MGICA's expert witnesses analysed in detail Mr Kenny's valuation report in respect of what it said and left unsaid.

The evidence led in chief by MGICA and the cross examination of Mr Kenny were directed to showing (a) that the methodology which he adopted was not as instructed by MBL and as conformed to good industry practice, namely to apply the "direct comparison" method of valuation, followed separately and by
way of confirmation or check, by the "summation method"; (b) that he made factual errors in respect of dimensions and areas and did not allow, or allow adequately, for disadvantageous aspects of the Property as compared with other properties in the Hunters Hill/Woolwich area which had been sold and to which he referred; (c) that he had failed to take into account, or to take into account adequately, shortcomings of the Property; (d) that in allowing $150,000 for the cost of completing the work outstanding as at 18 April 1990, he had made a substantially insufficient allowance; and (e) that in allowing only $25,000-30,000 for the cost of completing the work still outstanding as at 13 February 1991, he had made a substantially insufficient allowance.

7.   REASONING

The respondents emphasise in their submissions that valuation is a "very inexact science" (see too the cross examination of Mr Large at T 346.20), that the impression which a property makes on individuals is a subjective matter varying as between them, and that particular care must be taken "to sift from the evidence the inevitable contamination of hindsight" (respondents' submissions, para 4).  I have no hesitation in accepting the validity and force of these submissions. 

On the other hand, it is not in issue that the Property had a market value; that it is part of the expertise of the valuer of real estate to arrive at an opinion as to the amount of that market value; that although different valuers exercising due care and skill cannot be expected to arrive at the same figure, there is a range outside which the opinions of valuers so conducting themselves will not extend; and that, subject to allowance of the appropriate latitude, the opinion arrived at by a valuer so conducting himself or herself will be safe to be relied upon.   Mr Davies of counsel for the respondents, in his usual attractive and persuasive manner, referred to numerous instances of differences of opinion of varying degrees of significance between the experts in the present case.  In the end, however, in my opinion the evidence relating to certain central elements in MGICA's case is firm and should be accepted.

7.1  BREACH OF DUTY OF CARE AND SKILL

It was not in dispute that Mr Kenny was under a duty to MGICA to exercise the standard of care and skill ordinarily exercised by professional valuers of residential property.  MGICA submitted that Mr Kenny breached that duty in the ways referred to below.

7.1.1 "Gross overvaluation"

MGICA submits that Mr Kenny's valuation was a "gross overvaluation" and that unless explained, this itself provides some evidence of negligence or incompetence.  In this respect, MGICA refers to Baxter v F W Gapp & Co Ltd [1939] 2 All ER 752 (CA) at 758 (du Parcq LJ) and Trade Credits Ltd v Baillieu Knight Frank (NSW) Pty Ltd (1985) 12 NSWLR 670; (1985) Aust Torts Reports 80-757 (NSW/Clarke J) ("the Trade Credits case") at (1985) Aust Torts Reports 69,529.  Mr Kenny's valuation of $5.5 million is 22.2% higher than the next highest figure that any of the valuers was prepared to attribute to the Property.  That figure is Mr Ponton's $4.5 million which was, in any event, not the product of a formal valuation.  The next highest figure is Mr Davis's $4.2 million attributed to the Property as at 23 February 1990.  Mr Kenny's $5.5 million was about 31% higher than that amount.  (In the Trade Credits case, Clarke J held that a difference of 30.76% was so excessive as itself to bespeak negligence.) 

MGICA submits that the "true value" of the Property as at 18 April 1990 was about $3.5-$4 million, based upon the sale of the superior property at 18 The Point Road in June 1989 for $4.55 million and a 12.5% fall in the market from that time to April 1990. (It is common ground that there had been some fall and MGICA's adoption of 12.5% was based upon evidence of a fall of between 10% and 16%.)  On the basis of the midway point between $3.5 and $4.0 million, namely $3.75 million, Mr Kenny's valuation of $5.5 million was 47% in excess of the true value. 

Importantly, the evidence of Messrs Large, Phelan, and Davis and, in effect, Ponton, was that Mr Kenny's $5.5 million was outside the range that could be obtained by the application of proper valuation principles.  The respondents' own independent expert, Mr Ponton, said that he considered 15% to be a reasonable tolerance.  The highest value which he would attribute to the Property was about $4.5 million and Mr Kenny's figure was 22.2% higher than this, that is to say, outside Mr Ponton's range of 15%.

Mr Davis's opinion cannot be affected by the criticism, which can be levelled at the opinion of other valuers, that it was arrived at with the benefit of hindsight.  Mr Davis agreed that his figure of $4.2 million as at 23 February 1990 must be reduced somewhat to take into account the facts that the Property was not, according to the photographs which he was shown, finished to the standard which he (Davis) had anticipated and that the market fell between 23 February 1990 and 18 April 1990.  Mr Davis's evidence was that in his view "a valuer applying proper valuation principles could not arrive at a figure of $5.5 million" (T 929.27-.28).

Mr Kenny correctly emphasises that the proposition that "gross overvaluation" is some evidence of negligence is activated only if it is first found that there has been a gross overvaluation.  He submits that there is no reliable evidence of this in the present case.  He submits that whether there was a gross overvaluation depends upon acceptance of the evidence of Messrs Phelan and Large whose evidence should not be accepted as establishing a gross overvaluation because the two differ significantly from each other. 

There are differences, but this does not cause me to reject their evidence that Mr Kenny's valuation lay outside an acceptable range.  In any event, I do not think that the premise is correct.  Mr Davis valued the Property at 23 February 1990 at $4,000,000 "as is" and $4,200,000 "as completed".  Allowing for the performance of some further work between 23 February and 18 April but the further fall in the market over that period of eight weeks (Mr Davis estimated a fall of $200,000 per month) and the "non-superb" quality of the fittings and finish, it would be unduly generous to Mr Kenny to treat Mr Davis's figures as remaining the same as at 18 April.   It would conform better to Mr Davis's figures to conceive of them as establishing a range of $3,800,000 to $4,200,000 as at 18 April 1990, say $4 million.  

Messrs Phelan, Large and Davis have given evidence that a valuer performing his task in accordance with proper valuation principles could not have arrived at Mr Kenny's $5.5 million.  There is no evidence to the contrary.  Even Mr Ponton's $4.5 million plus 15% thereof gives only $5,180,000.  Accordingly, Mr Kenny's $5.5 million was $1 million above the highest figure that any other valuer would put upon the property and was $320,000 higher than 115% of that amount.  It must also be remembered that Mr Ponton's figure was not produced by him in a valuation report and was given in the course of oral evidence, albeit based on notes previously made by him.

In my opinion, even after giving full weight to the respondents' submission, which was supported by numerous concessions made by the valuers in their evidence, that value is to a substantial extent a matter of opinion, impression and personal taste and preference, and further that in considering whether a duty of care was breached one must be careful to put to one side the benefit of hindsight, it should be accepted that the true value of the Property as completed as at 18 April 1990 was about $4 million.  On this basis, Mr Kenny's figure of $5.5 million was a gross overvaluation and affords some evidence of negligence on his part.  The suggestion that the gross overvaluation bespeaks negligence is consistent with the evidence of all the experts, Messrs Phelan, Large, Davis and Ponton, that the acceptable range of values that might have been attributed to the Property fell short of $5.5 million.

7.1.2 Mr Kenny's method and calculations

MGICA submits that Mr Kenny's methodology was defective in the respects mentioned below.

(a)  The land value component of the sale for $4.55 million of 18 The Point Road, Woolwich in June 1989

Mr Kenny attributed a land value of $2.0 million to 18 The Point Road in June 1989, that is, as part of the sale price of $4,550,000 agreed upon in that month.  Although Mr Kenny did not, in his initial affidavit dated 8 December 1994, seek to explain how he arrived at the figure of $2.0 million, he did so in a later affidavit dated 14 August 1995.  That affidavit was filed and read without objection after Messrs Large and Phelan had given evidence on the matter.  The affidavit was consistent with Mr Kenny's notes, suggesting that he thought that the land at the Property was a little better than that at 18 and 24B The Point Road.  He said that he based his land value figure for 18 The Point Road and the Property on a sale of 24B The Point Road (784.1m²) in March 1990 for $1,950,000 and a sale of 5 Mayfield Avenue (677m²) in January 1990 for $1,650,000.  He allowed $200,000 for the value of the improvements at 24B The Point Road and deduced a vacant land value of $1,750,000.  In the case of 5 Mayfield Avenue he attributed no part of the price of $1,650,000 to the dwelling house.  The site area of the Property was 970m² and, so far as he could determine, that of 18 The Point Road was a little less than 1300m².  He compared the elevations, aspects and gradients of the parcels of land and concluded that the land component of 18 the Point Road was $2,000,000 and that of the Property was $1,800,000.

MGICA submits that the amount of $2.0 million which Mr Kenny attributed to the land component of 18 The Point Road was far too low and that, although given ample opportunity, Mr Kenny did not give any satisfactory explanation of how he had arrived at that amount at the time of preparing his valuation report.  His notes did not reveal how he had done so.  The explanation which he gave was, perhaps therefore necessarily, expressed in general terms.

Mr Ponton took the view (T 971.26-.30) that the land value component of the sale price of $4.55 million for 18 The Point Road in June 1989 was $3.0 million leaving only $1.55 million to be attributed to the residence and site improvements.  He thought that $150,000 was a fair value for the site improvements, leaving only $1,400,000 for the house.

Similarly, Mr Phelan said that the land value component in the June 1989 sale price of $4.55 million for 18 The Point Road was "somewhere around $2.85 million" (T 379.23), leaving only $1.7 million paid for all improvements.  He said that 18 The Point Road was "a vastly superior block of land" to 24B The Point Road (T 379.32). 

Mr Large said that the land component of the June 1989 sale price of $4.55 million of 18 The Point Road was $2.7-$3.0 million (T 249.18-.19) and "somewhere about $3 million or a bit less" (T 278.08-.10).  The mid-point of Mr Large's range, $2.85 million, leaves only $1.7 million paid for the improvements (on one view, Mr Large's range of $2.7 million to $3.0 million was as at April 1990 and his June 1989 figure was "about $3.0 million or a bit less").

Mr Kenny's figure of only $2.0 million for the land component for 18 The Point Road is clearly out of harmony with the figures of the other valuers. His explanation of how he arrived at this figure was not satisfactory.  As noted above, Mr Kenny arrived at the figure of $2.0 million for the land at 18 The Point Road by comparing it with the parcels of land at 24B The Point Road and 5 Mayfield Avenue, which he considered to be worth $1.75 million and $1.65 million respectively.  In sub-paragraph 2 (d) of his affidavit sworn 14 August 1995 Mr Kenny deposed that the blocks of land at 24B The Point Road and 5 Mayfield Avenue were superior to that at 18 The Point Road, notwithstanding the fact that 18 The Point Road was a larger block.  According to Mr Kenny, they were superior because both were further from any main road, 24B The Point Road being a battle axe block with the house built at the bottom and 5 Mayfield Avenue being in a cul-de-sac; the land at 18 The Point Road was steeper than either 24B The Point Road or 5 Mayfield Avenue; and the position of 5 Mayfield Avenue afforded impressive views of the Sydney CBD and the Harbour Bridge. Further, Mr Kenny considered that the purchaser of 24B The Point Road had paid a "premium price" for the land as a "development opportunity" (T 841-842, 844).

However, in the course of cross-examination Mr Kenny said that 18 The Point Road was "more valuable" than 24B The Point Road (T 839.32), because:

     "Firstly, it was larger, secondly, it was not a battle axe although in situations such as waterfronts that's probably not a great difference." (T 839.37)

Furthermore, the market was stronger in June 1989 when 18 The Point Road was sold than in March 1990 when 24B The Point Road was sold. 

The respondents submit that reaching a view about the relative land values of 18 and 24B The Point Road was obviously a matter of impression and judgment.  However, the evidence of all the other valuers who expressed an opinion on the matter is that the land value of 18 The Point Road was much higher than that of 24B The Point Road.  The differences between their figures of $3.0 million (Ponton), about $2.85 million (Phelan) and say $2.85 million (Large) on the one hand and Mr Kenny's figure of $2.0 million represent 50%, 43% and 43% respectively of Mr Kenny's figure.

I think that Mr Kenny's figure of $2.0 million as the land component of the June 1989 price of $4.55 million was a very substantial understatement with the result that the figure of $2.55 million for the house and site improvements was an over-statement to the same extent.  The "extent" of understatement and overstatement respectively I find to be of the order of $850,000.  That understatement of the land value is, as noted above, 43% of $2,000,000 and it is 30% of $2,850,000.  The extent of understatement by Mr Kenny is, to my mind, "gross", and bespeaks negligence unless explained.  Mr Kenny's explanation, expressed as it was in generalities, I did not find convincing.

(b)  The calculation of the rate per square metre of gross building area ("GBA").

Mr Kenny arrived at a rate of $4,244 per square metre to be applied to the Property from the notional rate per square metre of GBA of 18 The Point Road as at 18 April 1990.  He arrived at the latter from the contract price for the sale of 18 The Point Road in June 1989 by the following calculation (Exhibit A2/72):

     Sale price                                   $4,550,000

     Less

     Land value (discussed above)     $2,000,000

     Site improvements                   $50,000  $2,050.000

                                                  $2,500.000

                                                   =========

     Component of sale price for

     residence and inclusions                     $2,500,000

     Adjust downwards for change in

     market between June 1989 and April 1990

     of say 5%-10% (say 7.5%) as follows:

     Sale price (becomes, rounded down)           $4,200,000

     Less

     Land value (becomes)                  $1,850,000

     Site improvements (remains)       $   50,000  $1,900,000

     Component for residence and

     inclusions (becomes, rounded down)           $2,300,000

                                                  ==========

Assuming that the GBA of 18 The Point Road was 420m², Mr Kenny calculated that the value as at 18 April 1990 of its residence and inclusions ($2,300,000) was $5,476 per square metre of GBA.  For 10 Campbell Street, he discounted this for a comparative disadvantage of "size, appeal/marketability etc." by 20-25% (say 22.5%) down to $4,244 per square metre.

But in my view the procedure indicated above was erroneous in several respects.  It will be appreciated in the first place that the understatement of the value of the land component of 18 The Point Road by $850,000 discussed earlier equated to an overstatement of the value of the house and site improvements as a whole by the same amount, that is, of $2,550,000 rather than $1,700,000.

As well, the expert evidence shows that the amount of $50,000 for the site improvements at 18 The Point Road should have been greater (see (d) below).  In oral evidence Mr Kenny conceded that it should have been $102,500 to $105,000, an increase of $52,500 - $55,000. 

The respondents submit that Mr Kenny did all that was reasonable in the circumstances to endeavour to ascertain the correct GBA of 18 the Point Road.  The evidence of Mr Phelan shows that the correct GBA of 18 The Point Road was not 420.0m² but 496.9m² calculated from the Council's plans.  This figure comprised 430.0m² for the ground floor and first floor living areas and 66.9m² for garages.  The total of 496.9m² rounds off to 497.0m².  

Mr Kenny conceded that the area of 18 The Point Road was much greater than 420.0m².  He accepted that the area was at least 478.64m² (rounded to 479.0m²) (T 623.04-.10; 628.19-.23).

Mr Kenny conceded, as he must have done, that it was important to his method of valuation of the Property to have the correct GBA for 18 The Point Road (T 440.33).  Mr Davis, in his valuation for Beneficial dated 17 October 1989 had referred to 18 The Point Road as having, as he understood, "a gross floor
area of approximately 420m² and a two car garage on a larger block of waterfront land" (emphasis supplied).  Apparently Mr Kenny did not understand this to signify 420m² plus a two car garage; he did not check with Mr Davis or with the plans of the house at 18 The Point Road held by the Council; and he did not seek to resolve a discrepancy between the above extract from Mr Davis's valuation and a reference to "THREE SECURITY GARAGES (Internal access)" in the sales brochure which had been issued by Hunters Hill Realty Pty Ltd and Richardson & Wrench, Double Bay in connection with the sale of 18 the Point Road.  Mr Kenny had gone so far as to repeat the reference to "three security garages" in the information relating to 18 The Point Road in the "SALES/MARKET INFORMATION SCHEDULE" forming part of his valuation report.

Mr Kenny said that he checked the GBA of 18 The Point Road with local agents, Ms Zara Boland of Raine & Horne, Lane Cove, an agency which had been involved in the sale of 18 The Point Road, and Mr Brian Parkinson of Hunters Hill Realty Pty Ltd.  Mr Kenny relied on his evidence of having made those inquiries to show that he had exercised care in arriving at the GBA figure for 18 The Point Road.  However, Ms Boland and Mr Parkinson denied that they had told Mr Kenny that the area of 18 The Point Road was 420m² including two garages.  Ms Boland gave evidence that Hector Stevens who had sold her the Raine & Horne, Lane Cove business in about 1986 remained employed in the business and was the person principally associated with the sale, although she went through the house shortly after she purchased the business.  She said that she had not been inside the house since it was sold in 1986 and had no knowledge of its area and denied that she gave Mr Kenny any information about the area of the house.  Mr Parkinson gave evidence that he "took over as the licensee of Hunters Hill Realty which was then owned by George Parlby" in July 1989 by which time 18 The Point Road had already been sold.  He denied that he was ever in a position to say, or did say, to anyone that the area of 18 The Point Road was 420m² including garages.

Neither of these real estate agents denied that they had had a conversation with Mr Kenny.  However, I accept their evidence that they did not tell him what the area of the house was.  It is unlikely that they would have done so without recalling having done so, since the information ("420m² including two garages") is of a specific kind which almost certainly would have required them to look up records.  Mr Kenny may have discussed with Ms Boland and Mr Parkinson in some loose fashion the matter of the area of the house at 18 The Point Road, but his recollection that they told him anything as specific as the area of 420m² including two garages is mistaken.

The area of 18 The Point Road was so important to Mr Kenny's method of valuation that due care required him to verify its accuracy and, for that purpose, to make more inquiry than he did.  Mr Kenny gave evidence that in all his years as a valuer he had never been able to obtain the plans of a property from any council without the consent of the owner, although he had never requested access to plans held by a council.  Mr Phelan in fact had no difficulty obtaining the plans of 18 The Point Road from the Council.  Kenneth George Litting, a manager employed by the Council, gave evidence that if Mr Kenny had asked, he would have been shown the Council's copy of the approved plans for the house at 18 The Point Road.  The respondents submit that it is so unusual that the Council is prepared to provide plans to anybody upon request that Mr Kenny was justified in not attempting to obtain the plans on the basis of his experience with councils generally. However, the evidence as to the practice of councils generally was virtually non-existent and certainly inconclusive. I am impressed by the importance of the GBA of 18 The Point Road for Mr Kenny's methodology, the warning that he had from Mr Davis's valuation report that the area was 420m2 plus two garages, the fact that the plans would have been in fact made available to him by the Council for the asking, and the evidence of Ms Boland and Mr Parkinson which I accept. I think that Mr Kenny's error was due to his failure to take due care in the step of arriving at the GBA of 18 The Point Road.

Taking the two concessions of Mr Kenny (value of site improvements of $102,500 and GBA of 18 the Point Road of 479.0m²) at their respective minimums, the rate per square metre of GBA for 18 The Point Road as at 18 April 1990 becomes $4,692.07 rather than $5,476 and after allowing for the 22.5% discount for "size, appeal/ marketability etc", the rate for 10 Campbell Street as at 18 April 1995 becomes $3,636.35 rather than $4,244.  This adjustment alone would have reduced Mr Kenny's valuation from $5,500,000 down to $5,009,626.  In order to understand how this figure is arrived at, it is appropriate to remind oneself of the calculation in Mr Kenny's report:

     Land at 10 Campbell Street (970m²)            $1,800,000

     Site improvements at 10 Campbell Street       $300,000

                                                  $2,100,000

     Residence - 807m² x $4,244 =      $3,424,908

     - subtract allowance for improved

     external presentation of say        $24,908  $3,400,000

     Value on completion                          $5,500,000

                                                  ==========

Mr Kenny's two concessions yield the amount of $5,009,626 in accordance with the following calculation:

     Land value                                   $1,800,000

     Site improvements                            $  300,000

                                                  $2,100,000

     Residence - 807m² x $3,636.35 =   $2,934,534

     - Subtract allowance for improved

     external presentation of say        $24,908  $2,909,626

     Value on completion                          $5,009,626

                                                  ==========

The foregoing amount is arrived at without any allowance for the overstatement of $850,000 referred to earlier in the house component of the sale price.  Moreover, not only does it not rely on Mr Phelan's larger GBA for 18 The Point Road of 497.0m² which I find to be correct, it ignores his evidence that Mr Kenny's methodology calls for a comparison of the kinds of rooms from which a GBA for one building is arrived at and to the kinds of rooms in another building to which it is to be applied (see later).

The respondents submit that if the value of the land at 18 The Point Road was greater than the $2.0 million attributed to it by Mr Kenny, he would have attributed a greater value to the land at the Property.  They submit that therefore, the lower rate per square metre to be attributed to the residence at 18 The Point Road as a consequence of the higher land value would, when applied to the Property, have had a minimal effect on the overall value attributed to the Property by Mr Kenny. However, in other submissions, the respondents relied on the evidence of Mr Large, who said that the $1.8 million attributed to the land at the Property by Mr Kenny was within the range of figures that a prudent valuer would have reached. Mr Large valued that land at $1.75 million and Mr Phelan valued it at $2.2 million. Mr Ponton gave evidence that he thought the land at the Property was worth between $2.0 and $2.5 million. I do not accept that Mr Kenny would have been justified in attributing a value in the order of $3.0 million to the land at the Property based on the what I have found to be the true value of the land at 18 The Point Road. Accordingly, the respondents' submission is rejected.

(c)  The application of the adjusted rate per square metre of GBA for 18 The Point Road to 10 Campbell Street.

Mr Kenny used an excessive GBA for 10 Campbell Street.  He used a figure of 807m² as the multiplier for $4,244 per square metre.  The correct GBA of 10 Campbell Street was only 761m² and Mr Kenny conceded this to be correct (T 645.15).  The difference is 46m².  This is the difference between the area of 194m² which Mr Kenny included for the swimming pool/spa and the correct area of 148m².  Mr Kenny knew that the pool as built differed from that on the plan and could easily have measured what was built, yet he scaled from the plan with adjustments which he estimated.  In fact, the area figures used by Mr Kenny were precisely the same as those given to him by Mr Pselletes.  Mr Kenny said that he did not simply accept those areas but checked them by scaling from the plans.  In my view, he was in breach of his duty of care in not checking adequately the area of the swimming pool/spa room.

It is convenient now to consider the effect of this further concession. If one multiplies the rate of $3,636.35 per square metre which results from the earlier two concessions by 761m², one arrives at a figure, after subtracting the amount of $24,908 mentioned earlier, of only $2,742,354 rather than Mr Kenny's $3,400,000 for the house, and one arrives at $4,842,354 for the Property as a whole rather than Mr Kenny's $5,500,000.  Again, this procedure involves no more than utilising concessions made by Mr Kenny noted to date (increased value of site improvements at 18 The Point Road,
corrected GBA of 18 The Point Road and corrected GBA of the Property).

Mr Kenny applied the rate per square metre to all of the area which he calculated for 10 Campbell Street except the balconies.  (His figure was 908m² less 101m² for balconies = 807m².)  MGICA submits that the evidence shows that this was inappropriate.  For example, in view of the very large swimming pool/spa area in the house at 10 Campbell Street and the absence of an indoor pool at 18 The Point Road, Mr Phelan said that it was inappropriate to apply a rate per square metre arrived at from a house which has only an outdoor pool (T 402.25-.35).  More generally, Mr Phelan's evidence is that it is necessary to ensure that a rate per square metre of GBA obtained from one building is applied to the same kind of rooms in another building.  It will be recalled that Mr Kenny used a GBA of 420m² for 18 The Point Road.  Mr Phelan said that the respective areas of 18 The Point Road, as revealed by the Council's plans, were as follows:

     Ground floor living area (including

        garden store)                                 188.3m²

     First floor living area                          241.7m²

                                                     430.0m²

                                                     ======

     Ground floor patio                                33.9m²

     First floor terrace                              79.6m²

                                                      113.5m²

                                                    ========

In addition, the area of the garages at 18 The Point Road was 66.9m².  As Mr Phelan said, it seems clear that Mr Kenny's figure of 420m² must have been calculated as representing the ground floor and first floor living areas, even though it was inaccurately low by 10m².

But Mr Kenny did not apply the resultant rate per square metre only to like areas in the Property.  Mr Phelan's point was that the rate per square metre for 18 The Point Road was (correctly) arrived at by excluding verandahs and garages, yet it was applied indiscriminately to the Property, not only to areas similar to those at 18 The Point Road which had been used in the calculation, but also to the sizeable pool/spa area and storage areas.   He said that a differential and lower rate should have been applied in respect of such areas.   Mr Kenny used 807m² as the multiplier for the Property.  Reference to the areas of the various parts of the house at 10 Campbell Street set out in Mr Kenny's valuation and quoted earlier makes it clear how this figure was arrived at.  Mr Kenny correctly excluded balcony areas but incorrectly included garages, store-rooms and indoor pool/spa.  Using the area figures in Mr Kenny's valuation, Mr Phelan said that the only areas to which the GBA rate of 18 The Point Road could be straightforwardly applied without adjustment were:

     Entrance Level:     Foyer                            24m²

     Lower Level 1:      Living Area          195m²

     Lower Level 2:      Living Area          195m²

                                             404m²

This 404m² is about one half of the 807m² used by Mr Kenny.  Of course, Mr Phelan does not say that the remaining areas of the house at 10 Campbell Street such as the indoor pool/spa do not add further value to the Property.  His point is simply that it is erroneous to assume that the rate derived from the living areas at 18 The Point Road can be indiscriminately transferred to non-living areas at the Property.

Mr Phelan's evidence in this respect is persuasive and I accept it.  There was, however, no evidence of an appropriate different GBA rate to be applied to such other "inferior" areas.  I think that in not addressing this issue, and in assuming that the rate derived from 18 The Point Road was applicable to all internal areas of the house at the Property, Mr Kenny did not exercise due care and skill.  Although the evidence does not quantify the extent to which Mr Kenny's overvaluation was due to this particular error, this does not have any consequence for the result of the case.

(d)  Site improvements at 18 The Point Road and at the Property.

Mr Kenny placed a figure of $50,000 on the site improvements at 18 The Point Road.  The values placed on those improvements by other valuers were as follows:

         Mr Large (T 278.11-.12)          $80,000 - $100,000

         Mr Phelan (T 364.09.11)                    $100,000

         Mr Ponton (T 974.22)            $100,000 - $150,000

                                        (closer to $150,000)

In cross examination, Mr Kenny conceded that their true value was in the range of $102,500 to $105,000 (T 820.20).  I adopted the low point of Mr Kenny's range for illustrative purposes earlier in these Reasons.  Later in his evidence, Mr Kenny produced a reconsidered schedule providing a range of $90,000-$105,000 (Ex R4).  A fair view of the evidence, including Mr Kenny's, is that the true value of the site improvements at 18 The Point Road as at June 1989 was about (perhaps just under) 100% higher than the figure which he attributed to them.  The respondents emphasise that Mr Large and Mr Phelan agreed that the valuation of site improvements is a matter of impression. Mr Phelan gave evidence that he valued the site improvements at 18 The Point Road "[j]ust based on my experience as a valuer" (T 364.12) and that the value was "somewhat difficult to quantify" (T 364.15). The respondents say that Mr Kenny valued the site improvements as best he could with limited access to the property. However, Messrs Large, Phelan and Ponton also had only limited access to 18 The Point Road. I do not think that Mr Kenny's significantly lower figure can be attributed to differences of impression or his limited access to the property.  I think that such a low figure as $50,000 was arrived at by Mr Kenny through his failure to exercise due care and skill.  I find that the true value of the site improvements at 18 The Point Road was not less than $80,000 and was of the order of $90,000.  The value of the house component of the price of 18
The Point Road in June 1989 was therefore of the order of $1,610,000 ($4,550,000 - [$2,850,000 + $90,000]).

Mr Kenny put a figure of $300,000 on the site improvements at the Property.  Other valuers valued them as follows:

         Mr Large (T 252.05)                        $140,000

         Mr Phelan (T 389.11-.12)                   $150,000

         Mr Ponton (T 1,006.25-1,007.05)            $160,000

Mr Kenny included items for which there was no support except the owner-builder's assertion, and, moreover, engaged in a "rounding up" process.  In cross examination, Mr Kenny did not concede that his figure of $300,000 was excessive.  The figures of Messrs Large, Phelan and Ponton, all competent valuers, are within a narrow range.  I find that the value of the site improvements at the Property in April 1990 was of the order of $150,000.  Accordingly, Mr Kenny's $300,000 was about 100% excessive.  The grossness of the overvaluation is some evidence of negligence.  It is not explained satisfactorily by countervailing evidence.

(e)  Downward adjustment for fall in market

In his valuation report, Mr Kenny made statements suggesting that the market for prestige waterfront properties at Hunters Hill had not dropped.  He said that his inquiries of local real estate agents had led him to this conclusion.  In fact, as noted earlier, in his calculations in respect of the value of 18 The Point Road he allowed for a fall of 7.5% from June 1989 to April 1990. 

The local real estate agents on whom Mr Kenny said he relied were, again, Ms Boland and Mr Parkinson.  Ms Boland conceded that she may have had a conversation with Mr Kenny but denied expressing the opinion that the market for waterfront properties or that the top end of the market in Hunters Hill was strong in early 1990 or even that there was good demand for such properties at that time.  She said that such a view was inconsistent with her experience and view at the time.

For his part, Mr Parkinson did not recall a conversation with Mr Kenny but did not deny having a conversation with him.  His evidence was that he could not recall precisely the state of the market in March 1990.  He said that there had been only one or two waterfront properties sold in the 12 months preceding March 1990, but that "there was a degree of inquiry and with fewer properties on the market [he] felt the market for waterfront properties may hold up." 

When he prepared his valuation, Mr Kenny had before him a copy of Mr Davis's valuation for Beneficial dated 17 October 1989 (Mr Pselletes had supplied it to him).  It included the following:

     "It should also be noted that during market downturns, properties that that [sic] are unique,
less formal, and out of character normally suffer greater markdowns in value.

 

     1989 has seen the Sydney residential property market experience a correction following strong growth in 1987-1988.  The currently depressed market is expected to remain static into the foreseeable future, driven by the Federal Government's high interest rate policies.  Local estate agents indicate that properties at the top end of the market in Hunters Hill have suffered falls of up to 25 percent since the peak in 1988."

In cross examination, Mr Kenny acknowledged that the information to which Mr Davis referred was at odds with that which he said he got from local agents.

Mr Davis's valuation of 23 February 1990 represented a fall of the order of 16% as against his earlier valuation dated 17 October 1989.  Mr Davis said in oral evidence that in February 1990, 16% represented the extent of fall in the market which he then believed had occurred over that period (T 923.19-.23).  Mr Davis also gave evidence that in February 1990 his view was that the market was still falling.

Mr Phelan's evidence (T 331-332) was that the market peaked in November 1988, rebounded somewhat in early 1989 after the Christmas holiday break, but by June/July 1989 had "run out of steam".  He said that in the latter part of 1989 prices "started coming off the boil" and "were falling", and that by the latter part of 1990 the market was "in free-fall".   His evidence was that the fall in the market was between 10% and 20% from a peak in November 1988 to April 1990.  He said that "it was certainly evident in April 1990 that the market was on the way down" (T 331.15-.16).

Mr Ponton said that in April of 1990 he knew that the market was falling and agreed that between June 1989 and April 1990 "the fall in the market was above 10%" (T 1015.21-.22).

Mr Large said that in his opinion Mr Kenny had applied an inadequate discount for the fall in the market and that the downward adjustment which should have been allowed for 18 The Point Road from June 1989 to April 1990 was "at least 10 per cent" (T 278.16).

Mr Kenny agreed that "there were indicators everywhere around [him] that the market was [at] best unstable and probably falling [as at March/April 1990]" (T 844.14-.15).  However, the view to which he adhered was that the instability and fall were adequately accounted for in his allowance of 7.5% in respect of the period from June 1989 to April 1990.

I accept Mr Kenny's evidence that he had conversations with Ms Boland and Mr Parkinson about the state of the market.  Probably some statement distinguishing, in one form or another, "top end" and "waterfront" properties from other properties was made.  However, I do not think that a careful valuer would have been satisfied with a casual inquiry of the two agents to treat the Property as immune from all effect of the general decline which was taking place.  This is the more so, in view of the "special" and "out of character" nature of the house within the Property.

In fact, Mr Kenny did not treat "top end" and "waterfront" properties as immune from the general fall in the market.  He allowed for a 7.5% fall in respect of such properties from June 1989 to April 1990.  As Mr Davies, counsel for the respondents says again, one must be careful not to be improperly influenced by the benefit of hindsight. 

I do not think that Mr Kenny is shown to have been negligent, in the state of knowledge in March/April 1990, in allowing for a fall of only 7.5% in respect of "top end" and "waterfront" properties and, in particular, in respect of 18 The Point Road, from June 1989 to April 1990. 

(f)  Discount for size, marketability etc.

Mr Kenny applied a discount of 22.5% for "size, appeal/ marketability etc".  In para 17 of his affidavit sworn 8 December 1994, he explained that the discount arose from the "enormous size of the subject property" and the "non-traditional" nature of the house on it.  According to para 17, he had thought that the discount should be between 20% and 25% and adopted 22.5% as the midway point.

In cross examination, Mr Kenny said that if he had not been mistaken as to the true sizes of the two houses, he would have made a discount of only 16.5%, rather than 22% (T 904.04).  In cross examination Mr Large agreed with Mr Kenny's adjustment downwards by 22.5% for size and marketability (T 252.27-.29) as did Mr Phelan (T 359.28-.31; 365.11-.12).  MGICA points out that it was not put to Mr Large or Mr Phelan that a lower figure was appropriate and submits that the discount of 22.5% applied by Mr Kenny should be accepted as appropriate. 

I think that MGICA's submission in this respect should be accepted.  The "discount" being considered is one which reflects a response of prospective purchasers.  The "non-traditional" nature of the house at the Property was obvious to the eye.  So was its "enormous size".  Although it is possible that some prospective purchasers would be influenced in their offer price by awareness of dimensions and areas as distinct from visible size, the factor "size, appeal/ marketability etc" clearly, and correctly in my view, referred to subjective appreciations of the Property.

(g)  The ultimate value of the improvements at the Property

As noted earlier, Mr Kenny arrived at a figure of $3.4 million as the value of the improvements at the Property in April 1990, extrapolating from the June 1989 contract price for 18 The Point Road.  He had also analysed the property at 7 Stanley Street.  He had accepted that the accommodation there and at 18 The Point Road was roughly equal.  He further thought that apart from the swimming pool (outdoor at 18 The Point Road, indoor at the Property), the accommodation at 18 The Point Road was roughly equal to that at the Property (T 744.01-.15; 745.19-747.03; 768.10-.20).  Yet Mr Kenny put a figure of $1.35 million on the house at 7 Stanley Street (as at March 1990), $2.3 million (as at April 1990) on that at 18 The Point Road and $3.4 million (as at April 1990) on that at the Property.  MGICA submits that the size of these discrepancies should have alerted Mr Kenny to the possibility that his valuation was out of touch with reality.  I accept this submission.

Mr Ponton thought that the value of the house at 18 The Point Road was about $1.4 million as at April 1990.  That figure is of the same order as that which Mr Kenny attributed to the house at 7 Stanley Street and is consistent with Mr Kenny's view that the two were roughly equal in value.

MGICA submits that Mr Kenny should have referred to figures provided by "Rawlinson's Australian Construction Handbook" or "Cordell's Building Cost Guide" and that if he had done so he would have been warned that his calculations were amiss.  In this respect MGICA relied on Mr Phelan's evidence (para 7 of his affidavit sworn 11 November 1994, para 12 of his affidavit sworn 3 March 1995 and his oral evidence at T 367.07-22).  Mr Kenny's figure of $4,244 per square metre of GBA was more than twice the highest figure per square metre given in either of those publications for building costs.  Mr Kenny seems to have rejected the suggestion that he should have referred to these building cost figures because cost differs from value (T 790.19-791.10).  This may be accepted, but I think that by reference to all the considerations mentioned including the building costs in the two publications, the rate per square metre of GBA which Mr Kenny derived from 18 The Point Road was so high as, at least, to raise a question in the mind of a careful valuer.

(h)  The effect of the asserted errors on Mr Kenny's valuation

The cumulative effect of the errors referred to above was to inflate grossly the figure which Mr Kenny resolved upon as representing the value of the house within the Property.  MGICA submits that the following matters have been established by the evidence:

(1)  that the proper discount for market adjustment from June 1989 to April 1990 was between 10% and 16%, say 12.5%;

(2)  that the true land value of 18 The Point Road at June 1989 was about $3.0 million;

(3)  that the true value of site improvements at 18 The Point Road at June 1989 was about $100,000;

(4)  that the proper discount for size, appeal and marketability of the Property compared to 18 The Point Road was 22.5%;

(5)  that the land value of the Property was about $1.8 million - $2.2 million, say $2.0 million; and

(6)  that the site improvements within the Property were worth $150,000 rather than $300,000.

On the assumption that the true GBAs of the dwelling houses at 18 The Point Road and the Property were 497 square metres and 761m² respectively, MGICA carried out in schedules A, B and C to its written submissions certain calculations.  It is convenient to set these out as follows since they demonstrate the "flow-on" effect of changes in certain figures:

 

          "SCHEDULE ‘A’ TO APPLICANT'S SUBMISSIONS

 

     Using Mr. Kenny's methodology and figures but applying areas of 497m² (430 + 66.9) for 18 The Point Road and 761 m²for 10 Campbell Street

     Selling price $4.55 million adjusted by

     12½% for change in market - deemed value

     at March 1990 -                              $3,981,000

 

     Less land value                       $2,625,000

      Site improvements                  100,000

                                      $2,725,000   2,725,000

 

                                                  $1,256,000

 

     $1,256,000 ¸ 497 = $2527/m² G.B.A.

     Less discount for size, appeal

     marketability -

     20%-25% (22½%)=    $2527 x .775

                    =    $1958 m²/G.B.A. (3/72)

 

     Applied to 10 Campbell Street

 

     Land 970 m²                           $2,200,000

         Site improvements                    150,000

         Residence 761 m²x $1958 =                   1,490,000

                                           $3,840,000

 

     This schedule includes those components for which the Applicant contends but applies Mr. Kenny's methodology to the summation calculation.  The land value of $2.2 million for 10 Campbell Street is used without conceding that to be the correct figure."

 

 

          "SCHEDULE ‘B’ TO APPLICANT'S SUBMISSIONS

 

     Using Mr. Kenny's methodology and figures but applying areas of 497 m² (430 + 66.9) for 18 The Point Road and 761 m² for 10 Campbell Street

     Selling price $4.55 million adjusted by

     7½% for change in market - deemed value

     at March 1990 -                              $4,200,000

 

     Less land value                       $2,775,000

      Site improvements                   100,000

                                       $2,875,000   2,875,000

 

                                                  $1,325,000

 

     $1,325,000 ¸ 497 = $2666/m² G.B.A.

     Less discount for size, appeal

     marketability -

     16½%           =    $2666 x .835

                    =    $2226 m²/G.B.A. (3/72)

 

     Applied to 10 Campbell Street

 

     Land 970 m²                           $2,200,000

     Site improvements                        150,000

     Residence 761 m²x 2226 =              1,694,000

                                           $4,044,000

 

     This schedule includes those components for which the Applicant contends except:-

 

     1.  The fall in the market of 7½% applied by Mr. Kenny has been used.

     2.  The discount for size, marketability and appeal of 16½% for which Mr. Kenny contends has been used.

     3.  An allowance of $2.2 million for the land value at 10 Campbell Street (without conceding it is the correct figure)."

 

 

          "SCHEDULE ‘C’ TO APPLICANT'S SUBMISSIONS

 

     Using Mr. Kenny's methodology and figures but applying areas of 497 m² (430 + 66.9) for 18 The Point Road and 761 m² for 10 Campbell Street

     Selling price $4.55 million adjusted by

     7½% for change in market - deemed value

     at March 1990 -                              $4,200,000

 

     Less land value                       $1,850,000

      Site improvements                  100,000

                                       $1,950,000   1,950,000

 

                                                  $2,250,000

     $2,250,000 ¸ 497 = $4527/m² G.B.A.

     Less discount for size, appeal

     marketability -

     16½%           =    $4527 x .835

                    =    $3780 m²/G.B.A. (3/72)

 

     Applied to 10 Campbell Street

 

     Land 970 m²                           $1,800,000

     Site improvements                        300,000

     Residence 761 m²x 3780 =              2,877,000

                                           $4,977,000

 

     This schedule includes those components which Mr. Kenny used except:-

     1.  The conceded value of site improvements at 18 The Point Road.

     2.  The discount for size marketability and appeal of 16½% for which Mr. Kenny contends.

     3.  The true areas."

In accordance with the findings and concessions to which I have referred, I arrive at a conclusion as to the "as completed" value of the Property as at 18 April 1990 using Mr Kenny's methodology and figures but applying areas of 497m² (430 + 66.9) for 18 The Point Road and 761m² for the Property, as follows:

    Selling price $4.55m of 18 The Point

      Road adjusted downwards by 7½% for

      fall in market                               $4,208,750

    Less land value $2,850,000 adjusted

      downwards by 7.5% for fall in

      market                           $2,636,250

    Site improvements                  $90,000    $2,726,250

                                                  $1,482,500

    $1,482,500 ¸ 497 = $2,983 per m² GBA

    Less discount of 22.5% for size, appeal,

      marketability

    77.5% x $2,983 = $2,311.83

      per m² GBA

    Applied to 10 Campbell Street

    Land 970m² =                            $2,000,000

    Site improvements =                     $150,000

    Residence 761m² x $2,311.83 =           $1,759,302.63

                                           $3,909,302.63

                                           =============

Mr Kenny subtracted $24,908 for "improved external presentation".  I think it appropriate to make a subtraction on that account as a means of thoroughly implementing Mr Kenny's methodology.  This would give $3,884,394.63.  It seems appropriate to treat this figure as $3,900,000 "rounded off". This figure is not far removed from that of $4,000,000 mentioned earlier.  I find that the true value of the Property as at 18 April 1990 on an "as completed" basis was of the order of $3,900,000 to $4,000,000.

It is important to appreciate that the foregoing calculation simply adopts Mr Kenny's summation methodology.  Moreover it treats the 497m² at 18 The Point Road as if it related to rooms of the same kind as the 761m² at the Property.  Nevertheless, it is a figure at which Mr Kenny, using his methodology, should have arrived.

Many of the applicant's complaints in relation to Mr Kenny's method and calculations discussed above relate to his use of the summation method of valuation.  The respondents submit that the proper view to be taken of the evidence is that the summation method was merely a 'check method' used by Mr Kenny and that he ultimately valued the Property on the basis of comparable sales.  Even if this submission should be accepted, in my opinion it cannot be accepted that the errors made were any the less significant on that account.  In any event, Mr Kenny gave evidence that he did not use the direct comparison as his principal method of valuation. He said that with prestige properties, it was not safe to rely principally on one method of valuation, and that he did not believe that one method was less important than the other in his valuation of the Property (T 747.31-.39). Mr Kenny said: "I didn't arrive at a direct comparison completely, independently of some analysis which forms the basis of summation analysis" (T 781.10-.12).

7.1.3  Failure to take certain matters into account

MGICA submits that in breach of his duty of care, Mr Kenny failed to take into account or failed to take into account adequately, numerous matters.  Generally, it is not possible to say on the evidence that any of these alleged aspects of negligence led to a quantifiable element of overvaluation.  Rather, where valid, these matters of complaint demonstrate a failure to exercise due care and skill and explain the overvaluation as a whole.

"(a)Failing to have any or sufficient regard for the existence of a right of way along the eastern boundary of the property both in so far as it affected improvements constructed on the right of way and in so far as if affected the privacy of the occupiers and the right of the occupiers to the exclusive use of that portion of the property affected by the right of way."

Mr Phelan said that the right of way adversely affected the Property's value.  In fact, he said that it was "a very severe restriction or a thing that could have a severe limiting effect on the value of that property" (T 348.26-.27) and that attention should have been drawn to it in Mr Kenny's valuation report.  However, Mr Phelan acknowledged that it was difficult to quantify the extent to which the right of way would affect the value of the Property (T 349.13). Messrs Large and Davis took a different view to that of Mr Phelan. Mr Large was of the opinion that Mr Kenny complied with proper valuation practice by referring to the right of way in a list of encumbrances and notations on the title and by annexing documents to his valuation report which clearly indicated the right of way (T 268.7-.12). Mr Davis said that theoretically the right of way would have some effect in diminishing the value of the Property, but that measuring that diminution was "probably beyond the general principles which are applied in these types of valuation" (T 935.30).

Mr Kenny was cross examined at length about the right of way.  He agreed that removal of obstructions to the use of the right of way by those benefited could cost $10,000 (T 549.29).  Ultimately, however, he adhered to the view that although it might, as a matter of logic, be desirable that a property not be subject to a right of way, the existence of this particular right of way would not make any difference in the selling price of the Property.   In particular, he referred to the
commonness of rights of way over prestige properties fronting the Lane Cove River at Hunters Hill. 

On the evidence, I do not find that Mr Kenny was negligent in relation to the right of way.

"(b)Failing to have any or sufficient regard for the fact that the property valued was said to include an enclosed salt water pool fronting the Lane Cove river when no such enclosed pool existed, nor was there any title or right to occupy any such area by way of permissive occupancy or otherwise."

Mr Kenny did not inquire into whether the necessary approvals had been obtained.  He did know that there was no tenure granted by the Maritime Services Board.  In my view, Mr Kenny did not exercise due care in relation to the saltwater pool, pontoon and jetty.  He proceeded on the footing that these would be advantages associated with the Property adding to its value when, for all he knew, they were which structures lacked tenure and authority and were liable to be removed.

I do not think that the general statement in his valuation report "[c]ompletion of the residence and site improvements to the satisfaction of all relevant authorities and as envisaged by the belowsigned valuer" overcomes the objection.  That statement is directed to the standard and compliance of work yet to be completed, matters as to which a valuer can only make assumptions.  The statement does not overcome a failure to address the questions of tenure and authority in relation
to a site improvement which is said to have contributed to the value assigned. 

However, I am not satisfied that the evidence permits me to attribute a particular monetary amount of excess value caused by this head of negligence.  Simply to treat the value said to have been added as the relevant amount might be appropriate if it were known that the Property was not to have the benefit of the saltwater pool, pontoon and jetty.  At the time, this was not a fact but a possibility.  In fact, as the respondents point out, the necessary approval for the waterfront facilities was ultimately forthcoming.

"(c)Failing to have regard for [sic] the fact that the heated indoor pool area was without adequate or any ventilation."

No separate submission was addressed to this matter.

"(d)Failing to have regard for [sic] the fact that the tiling of the pool area was, contrary to assertions in the valuation, inferior and unsuitable."

There was photographic evidence of defects in the tiling in the pool area.  Mr Kenny agreed that the tiling shown in photographs 76-85 was "tiling of a standard which [was] less than first quality", and added that "there should have been some rectification work on some of that tiling, it is obvious" (T 647.6-.8).  Mr Davis said that although it was difficult to interpret some of the photographs, generally the standard was not that which he would have expected of a prestige residence of the kind in question.

A difficulty is that the tiling of the pool was not complete; the stage reached was that the concrete had been poured (T 463.17).  Perhaps the defects shown in the photographs would have been rectified before completion.  I think that it was wrong for Mr Kenny's report to include the glowing references to the standard of finish of workmanship without qualification to account for the incompleteness.  But the evidence does not permit me to say that any particular part of excess of valuation can be assigned to this aspect of breach of duty of care.

"(e)Failing to have proper or any regard to available 'comparable sales' and having regard to so-called 'sales' which were not truly comparable."

This particular has been addressed earlier in these Reasons.

"(f)Failing to make adequate or sufficient provision for the cost of completion of the buildings and other improvements on the land."

On 13 March 1990 Mr Pselletes gave to Mr Kenny a typed document entitled "LIST OF ITEMS STILL TO BE COMPLETED TO 10 CAMPBELL STREET, HUNTERS HILL".  The document described the state of progress in relation to 16 items.  Under the heading "VALUE OF PROGRESS CLAIM", it set out against the items amounts purporting to be the cost of the work yet to be done to complete them.  The amounts totalled $226,500 to which was added $20,000 for "builder's profit if outside supervision was required to complete", making a total of $246,500. 

On the evening of 18 April, that is to say, after Mr Kenny's final inspection that day and prior to the issue of his valuation on 19 April, Mr Pselletes faxed to Mr Kenny a typed revised list.  The 16 items were described in "up-dated" terms and the amounts representing the estimated cost to complete had been reduced as a result of the progress of work since the original list was provided.  On the revised list, the amounts totalled only $125,700.

MGICA complains that, in effect, Mr Kenny accepted, without checking, the cost estimates of Mr Pselletes, a person who had an interest in minimising the cost to complete the outstanding work.  Mr Kenny retained no records of any checking which he carried out in relation to the respective items on the list.

I do not think it necessary to discuss the evidence relating to all of the 16 items.   An illustration of the kind of issue which arose is found in item 7.  In the original list provided by Mr Pselletes to Mr Kenny on 13 March 1990, item 7 was as follows:

     "7)  ALL DOORS AND DOOR FURNITURE COMPLETE

          AND IN POSITION                    7)  $18,000.00"

In the revised list faxed by Mr Pselletes to Mr Kenny on the evening of 18 April, item 7 was as follows:

 

     "7)  ALL DOORS AND DOOR FURNITURE COMPLETE

          AND IN POSITION.  ALL DOORS NOW

          COMPLETE AND PAINTED.  LABOUR ONLY

          REQUIRED TO FIT.                    7)  $5,000.00"

The reduction from $18,000 to $5,000 is attributable to the fact that Mr Pselletes told Mr Kenny that the doors had been manufactured specially for the house and were at the door-manufacturer's premises.  Mr Kenny said that he was not able to check and did not attempt to check the correctness of this information and did not ask Mr Pselletes for the name of the manufacturer.  Mr Kenny said:

     "I accepted that what Mr Pselletes was saying, he presented to me to be giving a true assessment of the situation." (T 659.16-.18)

Another major item was number 9 which was as follows in the original list:

     "9)  ALL FLOORING EXCEPT CARPET BUT

          INCLUDING MARBLE CERAMIC TILES AND

          PARQUET IN POSITION - ALL MARBLE

          IS IMPORTED FROM TWO REGIONS MUCH

          OF THE MARBLE IS EXTREMELY RARE

          AND VALUABLE.                       9) $62,000.00"

In the revised list, item 9 was as follows:

     "9)  ALL FLOORING EXCEPT CARPET BUT INCLUDING

          MARBLE CERAMIC TILES AND PARQUET IN

          POSITION - ALL MARBLE IS IMPORTED FROM

          TWO REGIONS MUCH OF THE MARBLE IS

          EXTREMELY RARE AND VALUABLE.  MARBLE ON

          SITE ALL FLOORS PREPARED ALL WALK-IN

          WARDROBES TILED IN MARBLE VALUE TO

          COMPLETE.                              $28,000.00"

Mr Kenny made it clear in oral evidence that the original figure of $62,000 was to be augmented by the cost of carpet which was not included in that figure but that the amount of $28,000 in the revised list included $8,000 for carpet.  Accordingly, there was in reality a reduction of $42,000 in item 9 as between the two lists.  Mr Kenny's evidence was that this represented tiles which had been delivered to the site.  He said that he did see tiles in rooms in the house in readiness to be laid but did not count them or check for quantities or otherwise.  He said that he "accepted that the tiles that were there were to complete the house" and "accepted that Mr Pselletes was being honest and truthful" (T 661.19-.23).

It does seem to me that Mr Kenny too readily accepted the word of Mr Pselletes.  On the other hand, MGICA has not established, in general, that the figures were wrong.  I think that in readily accepting Mr Pselletes' advice and estimates without verifying their correctness, Mr Kenny did not exercise due care, but the evidence does not enable me to attribute a particular part of excess of valuation to this aspect of his negligence.

"(g)Failing to have regard to the fact that the finish and fittings in the building were not 'superb' as described in the valuation but were inferior in many respects."

The photographs showed that in some respects the quality of finish and fittings was not "superb" as stated in the valuation report.  However, it must be remembered that the house was not yet completed.  As Mr Kenny said, it is common for work to be made good prior to final completion or final inspection.  He said:

     "Often it is the case [that] there will be some deficiencies in workmanship and the builder will in fact bring back the responsible tradespeople to fix it." (T 648.26-.28)

The problem remains that Mr Kenny felt able to describe the quality of finish and fittings as "superb" in his report.  Mr Ponton said that the "vanity", at least, was not of a prestige standard. 

I do not find it necessary to resolve the question whether it was a breach of his duty to exercise care and skill in valuing the Property for Mr Kenny to have described the finish and fittings as "superb".

"(h)Failing to have regard to the fact that the area described as a 'dining room' was inadequate for a house of the quality and value described in the valuation and provided the means of access to the indoor pool and spa area."

There was no recognisable "dining room" in the house.  MGICA submitted that the evidence showed that in a prestige house in the price bracket in question, this should be treated as a shortcoming and, further, that it was an aspect of negligence that Mr Kenny did not refer to the lack of a dining room in his report.  I am not persuaded by the evidence to conclude that the market would or would not regard the absence of a formal dining room as a shortcoming in this particular house when weighed against the countervailing advantage of additional area for the swimming pool/spa room.  In any event, if this was an aspect of negligence, its effect is unquantifiable on the evidence.

"(i)Failing to have regard to the fact that there was no bath room/shower/toilet facilities adjacent to the pool area so that pool users, unless they went outside the area of the residence, had to go through the small dining room area to use toilet and bathroom facilities.  The valuation incorrectly asserts that there is a toilet adjacent to the pool/spa area."

The valuation report states that there was a toilet adjacent to the pool/spa area and that it had been sighted by Mr Kenny on his inspection.  In fact, there was no toilet adjacent to the pool/spa area.  In saying that there was, Mr Kenny was in breach of his duty of care.  However, the effect of the breach on the value figure arrived at is unquantifiable on the evidence.

"(j)Failing to have regard to the fact that electronic gates and surveillance cameras said to have been installed were not in fact installed."

The electronic gates and surveillance cameras referred to in the valuation report were not installed and were not referred to in either the original or the revised list of items to be completed.  Mr Kenny said that he addressed his mind to the omission of any reference in the lists to the electronic gates and surveillance cameras and allowed for the cost of their installation in the amount of $25,000 (or, perhaps more accurately, $24,300) which he added to the figure of $125,700 which, it may be recalled, he described as "a contingency allowance (including builder's profit margin)".  The amount which Mr Kenny said he included in the $25,000 for the making and installation of the electronic gates was $5,000 (T 672.25-673.09).  There were other such items which had not been listed by Mr Pselletes as outstanding, and which Mr Kenny asserted he had treated as covered in the $25,000 contingency sum.  The problem with such evidence is that it was unspecific and tended to reduce almost to nil any residue remaining for "contingency allowance (including builder's profit margin)".

I think that Mr Kenny went about this aspect of his task in a less than careful way but I am not able to attribute any particular amount of overvaluation to this aspect of negligence.

"(k)Failing to have regard or sufficient regard for the fact that the general design and style of the house was not of a standard to be expected of a residence of the value ascribed to it by the Respondents."

I do not find it necessary to pursue to the point of decision this aspect of alleged negligence.  MGICA does not suggest
that it is possible to attribute any particular amount of  overvaluation to it.

"(l)Ascribing to the buildings constructed on the land, a value greater than could reasonably be ascribed to them.  The over estimate of the value of the buildings appears to be partly attributable to an incorrect calculation of the floor area of the buildings and partly to the allocation of an excessive rate per square metre for the value of buildings."

This matter has been dealt with earlier in these Reasons for Judgment.

"(m)Failing to have regard to the absence of air conditioning in a residence said to be of the very highest standard, especially having regard to the design and construction which would make it extremely difficult, if not impossible, to rectify the deficiency."

MGICA did not address any separate submission to this particular of negligence.

"(n)Failing to have regard for the fact that improvements such as the pontoon and jetty fronting the Lane Cove River which were included in the property valued, should not have been so included for the reason that there was no title to them and no permissive occupancy in respect of them had been granted."

This particular was dealt with in the context of (b) above.

"(o)Failing to have regard to the fact that the finish to the laundry and basement/bathroom area was inferior."

MGICA did not address any separate submission to this particular of negligence.

"(p)Failing to have any or sufficient regard for the fact that there is no access from the living rooms on the ground floor to the waterfront and front garden area and that the only access is through the bedrooms."

Messrs Phelan and Large said that it was a shortcoming that there was no access from the living rooms on the ground floor to the waterfront and front garden area, except through the bedrooms.  I think that their evidence should be accepted in this respect and that Mr Kenny did not have regard or sufficient regard to this shortcoming.  However, it does not lead to a quantifiable extent of overvaluation.

"(q)Authorising the release of retention moneys when significant items of work had not been completed, their non-completion was not recorded and the cost of completing other items which remained to be completed, was substantially greater than the certified provision."

By his letter dated 13 February 1991, Mr Kenny recommended release of the whole of the retention sum of $150,000, notwithstanding that he knew that work to the extent of $25,000-$30,000 remained to be completed.  He said that he made the recommendation notwithstanding this fact for two reasons: first, the house was completed to a standard supporting the issue of a certificate under s 317AE of the Local Government Act 1919 (NSW); secondly, certain additional work not originally provided for had been done.

I did not find Mr Kenny's explanation satisfactory.  Certainly it did not reflect the questioning approach which I think was called for in relation to an owner/builder/borrower such as Beca and Mr Pselletes.  However, this aspect of negligence would not lead to the award of any additional damages having regard to the approach which I take in respect of the initial valuation.

"(r)Failing to apply proper principles of valuation in reaching a valuation for the property."

This particular has been addressed earlier in these Reasons for Judgment.

7.1.4.  Inadequate allowances

This matter has been taken up in items in the immediately preceding section.

7.2  SECTIONS 52 AND 53A OF THE TRADE PRACTICES ACT 1974 (Cth) AND SECTIONS 42 AND 45 OF THE FAIR TRADING ACT 1987 (NSW)

The respondents' valuation report dated 19 April 1990 contained statements of fact and of opinion.  The fair market value figures were matters of opinion in respect of which the respondents professed to have expertise.  MGICA claims to have relied, not upon any particular statement of fact contained in the report, but on the opinions that the fair market value of the Property "as completed" as at 18 April 1990 was $5,500,000 and "as is" as at that date was $5,350,000.

Commonly, perhaps mostly, an expression of opinion conveys no more than that the opinion is held: Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82 (FC) ("Global Sportsman") at 88.  But, depending on the circumstances, it may convey more than that: Global Sportsman at 88; James v ANZ Banking Group Ltd (1986) 64 ALR 347 (FCA/Toohey J) at 372; Bateman v Slatyer (1987) 71 ALR 553 (FCA/Burchett J) at 559; RAIA Insurance Brokers Ltd v FAI General Insurance Co Ltd (1993) 41 FCR 164 (FC) at 172-175; The Harbour Agency Pty Ltd v Agency for the Performing Arts (1989) ATPR 40-969 (FCA/Hill J) ("Harbour Agency") at 50,593.  Important considerations in this regard are whether the person expressing the opinion knows, or should know, that another person will or may act in reliance on the opinion and whether the person expressing the opinion professes to have expertise in forming and giving opinions of the kind in question: Bateman v Slatyer, supra, at 559; Elders Trustee and Executor Company Ltd v E G Reeves Pty Ltd (1987) 78 ALR 193 (FCA/Gummow J) at 242; Brown v Australian Harvestore Products Pty Ltd (1989) ATPR (Digest) 46-051 at 53,180 (FCA/von Doussa J); Harbour Agency at 50,593.  Both of these factual matters characterise the present case: Mr Kenny knew that MGICA would or might well rely upon his opinion as to the fair market value of the Property, and he professed to have expertise in forming and expressing opinions on such a matter.

Whether a statement of fact, expression of opinion or prediction is misleading and deceptive depends on whether it conveys a misrepresentation: Global Sportsman at 88; Australian Ocean Line Pty Ltd v West Australian Newspapers Ltd (1985) 58 ALR 549 (FCA/Toohey J) at 580-583. The incorrectness of an opinion does not of itself establish that the opinion was not held by the person who expressed it or that it lacked foundation: Global Sportsman at 88; Bateman v Slatyer,  supra,   at 559. Whether a statement is misleading and deceptive must be considered by reference to the statement as a whole and the context in which it is made: Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 199. In the context of commercial transactions, a statement will not necessarily be misleading where the statement is made upon bases which are disclosed and is subject to self-evident limitations: E R Squibb & Sons Pty Ltd v Tully Corporation Pty Ltd (1986) 6 IPR 489 (FCA/Gray J) at 497; and cf JD Heydon, "The Relevance of the Victim's Level of Care in Misleading and Deceptive Conduct Actions" (1995) 2 Competition and Consumer Law Journal 230. Thus "[w]here the statement is in a form or uses language which, on the face of it, supposes a level of interpretive skill, the fact that it is susceptible of mis-interpretation by an uninformed person, or a person who takes no steps to inform himself or obtain advice, does not thereby render it misleading or deceptive or likely to be misleading or deceptive": Hunt Contracting Company Pty Ltd v Roebuck Resources NL (unreported, FCA/French J, 24 April 1995) at 167-168.

I think that the supply of Mr Kenny's valuation report dated 19 April 1990 and his letter dated 13 February 1991 conveyed representations, not only that the opinions expressed in them were held, but also (a) that the opinions were based on reasonable grounds; (b) that they were the product of the exercise of due care and skill; and (c) that they were, after making due allowance for their nature as opinions as to the market value of real estate as at a particular time, safe to be relied upon and not outside the range of latitude properly to be allowed to them.

The parties have treated the question of liability for contravention of the TP Act and the FT Act as raising no issue different from the issues raised by the question of liability for breach of the general law duty of care.  The parties have also treated the question of breach of contract as raising no issue different from the issues raised by the alleged breach of the general law duty of care, the pleading of the implied contractual obligation being in the same terms as the pleading of the duty imposed by the general law.

It will be recalled that the pleaded particulars of contraventions of the TP Act and the FT Act were as follows:

     "1.  Providing a valuation which substantially overstated the value of the Property by reason of the matters set out above under 'Particulars of Negligence'.

 

      2.  Providing the letter of 13 February 1991 which substantially underestimated the cost of completion of the works and failed to have any or sufficient regard for [sic] works which had not been completed."

If para 1 of the particulars had omitted the words "by reason of the matters set out above under ‘Particulars of Negligence’", it would have been apparent that MGICA was relying on nothing more than the respondents' conduct in issuing an expression of opinion which was so far from stating the true value as to be misleading or deceptive.  The addition of the words to which I referred are embarrassing.  However, I think that a fair view of the pleading is that MGICA alleges that the opinion as to value and the opinion as to items of work to be completed and the cost of completing them were so far from the truth as to be unsafe to be relied on.  In this respect I think that MGICA's pleading refers to  representations of the kinds to which I referred earlier.

I think that the valuation of $5,500,000 was so far removed from the true value of the order of $3,900,000 to $4,000,000 as to be misleading or deceptive.

7.3  RELIANCE ON VALUATION

The respondents submit that Mr Anderson does not actually say that it was in reliance on Mr Kenny's valuation that the loan to Beca was included in the Pool Policy.  They refer to the fact that he says expressly that he relied on it in recommending that the sum of $150,000 be withheld.  The respondents submit that the evidence shows that Mr Anderson was more concerned with Beca's financial capacity than with the value of the security.  They point to evidence of reliance by MGICA through Mr Anderson on information provided by MGL, by Beca's accountant, by NAB and by a firm or company called "Project Consultants".  In a lengthy submission, the respondents contend that in the result the true cause of MGICA's loss was the carelessness of Mr Anderson rather than that of Mr Kenny.

I have no hesitation in rejecting the submission.  There was a considerable body of evidence that, notwithstanding MGICA's having had regard to other information as well and having assessed Beca's financial position and capacity to pay, MGICA was, at the very least, substantially induced by Mr Kenny's valuation to enter into the transaction.

As noted earlier, MGICA's approval of the inclusion in the Pool Policy of the mortgage from Beca was expressed in its letter dated 4 April 1990 to MBL, to be subject to the obtaining of a satisfactory valuation.  The maximum loan which MGICA would approve for inclusion in the Pool Policy was an amount equal to 65% of the value of the Property.  On the occasion of his external inspection on 6 April 1990, Mr Anderson of MGICA prepared a file note recording that it was necessary to rely upon the forthcoming valuation. 

His evidence was that upon receiving Mr Kenny's valuation he read every part of it and that,

     "The valuation was pretty important to us.  It had to be correct for us to be able to proceed with the transaction." (T 1065.28-.29)

He ticked and highlighted the valuation report as he studied it and concluded that if the valuation of $5.5 million was correct, there would be no claim on MGICA if it became necessary for the Property to be sold.  I accept Mr Anderson's evidence on these matters.

On 30 April 1990 he wrote to MBL advising that the special condition that there be a "satisfactory valuation by MSL Panel Valuer" had been satisfied.  Mr Kenny's valuation report itself recorded that it was "required for mortgage consideration purposes by Macquarie Bank Limited, as intending mortgagee" and noted that, inter alia, MGICA might use and rely upon the report and valuation in the same manner as intended by MBL.

The opinions and the implied representations in the report to which I referred earlier were, moreover, regarded objectively, of a kind calculated to influence MGICA's decision whether to grant the mortgage insurance.  Therefore a fair inference of fact arises that MGICA was induced to do so by them.  The authorities show that it is not fatal to a claim of reliance that a witness does not give express and direct evidence of reliance: Gould v Vaggelas (1985) 157 CLR 215 at 236; Elder's Trustee and Executor Co Limited v E G Reeves Pty Limited (1987) 78 ALR 193 (FCA/Gummow J) at 242; San Sebastian Pty Ltd v Minister Administering the Environmental Planning Act 1979 (1986) 162 CLR 340 at 366 (Brennan J); Dominelli Ford
(Hurstville) Pty Ltd v Karmot Auto Spares Pty Ltd (1992) 38 FCR 471 (FC) at 483; Huntsman Chemical Co of Australia Pty Ltd v International Pools Australia Ltd (1995) 36 NSWLR 242 (CA).

Mr Anderson was cross examined at some length in an attempt to show that he, and therefore MGICA, relied on the personal creditworthiness and asset backing of Beca, Mr and Mrs Pselletes and Centurian.  I accept Mr Anderson's evidence, to which he adhered, that MGICA relied on Mr Kenny's valuation, and would not have included the Mortgage in the Pool Policy if that valuation had been at least $5,500,000.

In Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514 it was said (by Mason CJ at 525) that "the common law practical or common-sense concept of causation" discussed by the high court in March v E & M H Stramare Pty Ltd (19910 171 CLR 506 applies to the notion of causatioin invoked by the word "by" in sub-s 82 (1) of the TP Act.

In my view, the evidence clearly shows that MGICA relied on the respondents' valuation as indicating that its LVR ratio policy of 65% was met; tht the Property therefore offered a sufficient "margin" or "cushion" to safeguard it against loss occasioned by default by Beca; and that the valuation was at least a substantial cause, indeed was the only relevant substantial cause (see below under "7.6 CONTRIBUTORY NEGLIGENCE"), of MGICA's having entered into the transaction.

7.4  CAUSATION; REMOTENESS; MEASURE OF DAMAGES

7.4.1 Quantum of MGICA's claim

As noted earlier, MGICA claims to recover the amounts of its payments to PCL totalling $1,977,513.67 as damages under the common law and/or pursuant to s 82 of the TP Act and s 68 of the FT Act.  It is convenient to repeat the composition of the sum of $1,977,513.67:

                                                  $    

    Unpaid principal                   3,575,000.00

    Unpaid interest                      500,252.52

    Insurance premiums                     3,541.41

    Rates and taxes                        4,485.27

    Other statutory charges               43,560.00

    Legal fees                             6,374.30

    Selling agent's commission            54,100.00

    Advertising                           14,632.40

    Preservation of property              45,408.33

    Other                                380,159.44

    Total                              4,627,513.67

    Less gross proceeds of sale

      of security                      2,650,000.00

    Total claim                        1,977,513.67

                                       ============

MGICA claims interest under s 51A of the Federal Court Act 1976 on the amounts which it paid out calculated from the respective dates on which it paid them. 

I deal separately later with the issue whether damages should be assessed in accordance with the approach reflected in the figures above, namely, the "restitutionary" approach of identifying all of MGICA's outgoings and deducting its recoveries.  I am here concerned with the more specific and limited question of MGICA's entitlement to recover the items above.

MGICA relies on cl 8(A) of the Pool Mortgage Insurance Policy which provided, relevantly, that in calculating the amount of loss suffered by the Insured ("the Insured" was defined relevantly to include PCL) in respect of which MGICA undertook to provide indemnity, there was to be included the following:

    "(i)   the unpaid principal under the Insured Mortgage;

 

    (ii)   interest unpaid to the date of the claim for loss at the effective rate or rates of interest specified in the Insured Mortgage;

 

    (iii)  the Early Repayment Amount [defined, but not presently relevant] in respect of the Insured Mortgage;

 

    (iv)   all sums properly paid by the Insured in respect of the Mortgaged Property for insurance premiums, rates, land tax (calculated on a single holding basis) and other statutory charges,

 

     (v)   reasonable and necessary legal fees and disbursements incurred by the Insured but only to the extent not covered by a Primary Policy incurred with the prior approval of MGICA in enforcing or protecting its rights under the Insured Mortgage,

 

     (vi)  other reasonable and necessary costs or expenses incurred by the Insured in repairing, maintaining and preserving the Mortgaged Property provided however that any account for costs or expenses exceeding One Thousand Dollars ($1,000) shall to the extent of such excess be included only if incurred by the Insured with the prior written consent of MGICA,

 

     (vii)such (if any) additional costs relating to the sale of the Mortgaged Property as not already deducted in arriving at the net proceeds referred to in ... [the ‘net proceeds’ are not presently relevant]..."

The only part of the total of $1,977,513.67 which was in contest was part of the sum of $45,408.33 for "Preservation of property".

Exhibit A6 comprised a schedule of fees and expenses paid by MGICA.  The amounts in exhibit A6 totalled $49,415.53.  Generally speaking, the items in exhibit A6 encompass those included in PCL's claim on MGICA for $45,408.33 for "Preservation of property" (Ex A1, p 659).  But exhibit A6 also includes some legal and advertising costs and a valuation fee of $2,200.  The valuation fee of $2,200 is included in PCL's claim in the item "Other - $380,159.44" noted earlier.  This amount alone would reduce the sum of $49,415.53 to $47,215.53, leaving a discrepancy of only $1,807.20 between that amount and the amount of $45,408.33 which MGICA claims to recover.  That discrepancy seems to be explained by the non‑inclusion in the sum of $45,408.33 of further amounts which are included in other items forming part of the total of $1,977,513.67 (e.g. "Legal fees").

While the respondents put MGICA to proof in relation to the contested part of the sum of $45,408.33 noted below, their final written submissions did not address the detail of the composition of that amount.  It would not be a sound basis on which to disallow some part of that sum, that exhibit A6 proves a larger expenditure and that it is not obvious to the last cent what are those additional items, deduction of which from $47,215.53 would give the sum of $45,408.33.

In the case of items totalling $25,505.33 within exhibit A6, the respondents concede that MGICA was obliged by cl 8 of the Pool Policy to pay them.  The remaining items are as follows:

                                                           $  

    Macquarie Centre Locksmiths                       185.00

    Kenny & Good Pty Ltd (Valuation Fees)           2,200.00

    Milne Berry & Berger (legal fees)                 454.00

    Insound Pty Limited                             3,700.00

    Cass Interiors                                    470.00

    Milne Berry & Berger (legal fees)                 111.20

    Telephone Technicians Australia                   750.00

    Bob Smith (cleaning fees)                         327.00

    J & R Grant Pools Pty Ltd (pool filtration

           & equipment)                            13,000.00

    Cass Interiors                                    303.00

    Cass Interiors (rental of lounge suite)         1,115.00

    Milne Berry & Berger (legal fees)                 438.00

    Richardson & Wrench (advertising)                 804.00

    Cass Interiors (courier fees)                      53.00

           TOTAL                                  $23,910.20

                                                  ==========

The respondents did not dispute that these expenses had been reasonably incurred or that they were reasonable in amount; rather, they asserted that they were not costs in respect of which MGICA had been liable to provide indemnity and therefore were not elements of its loss or damage for which it was entitled to recover damages.

In the first place, on their face, the expenses were covered by cl 1(g) of the Mortgage which provided that the Mortgage secured all monies which PCL paid in connection with or incidental to the exercise or attempted exercise of its rights, powers and remedies as mortgagee and its costs and expenses incurred in protecting or enhancing the Property or on account of or arising out of any default by Beca under the
Mortgage.  In the second place, it seems to me that on their face they were properly claimable by PCL from MGICA under cl 8(A)(v)-(vii) of the Pool Policy quoted above.

7.4.2 The parties' initial submissions on causation, remoteness and measure of damages

An important issue of principle which divides the parties is that of the appropriate approach to the interrelated concepts of causation, remoteness and measure of damages.

MGICA submits, at the outset, that as a matter of principle its recovery is not restricted to the difference between the amount of the loan which it insured and the amount of a hypothetical loan which it may be found it would have insured on the basis of a proper valuation.  It says, further, that it is pure speculation whether Beca would have sought, and MBL would have recommended, a loan for a lesser amount than $3,575,000, if Mr Kenny's valuation had been for a sum less than $5,500,000.  In this respect, it refers to the Trade Credits case at (1985) 12 NSWLR 672-3.

MGICA submits that a proper valuation could not have exceeded $4.5 million and that it should be accepted that it would not have insured a mortgage based on a valuation in that sum or less.  It points out that Mr Pselletes had already obtained Mr Davis's valuation in October 1989 of $5.0 million but had not borrowed against the Property, and submits that the inference
is available that Beca needed a valuation in a higher figure to obtain a loan of practical utility.

For their part, the respondents submit that the general rule is that the measure of a lender's loss arising from a negligent overvaluation of a security is the difference between the amount in fact advanced in reliance on the valuation and any lesser amount which the lender would have advanced on a valuation arrived at with appropriate skill and care.  In support, they refer to Corisand Investments Ltd v Druce & Co (1978) 248 EG 315; [1978] 2 EGLR 86; Mount Banking Corporation v Cooper [1992] 35 EG 123; [1992] 2 EGLR 142; and Duncan & Weller Pty Ltd v Mendelson [1989] VR 386.

Mr Anderson said in his second affidavit that if the valuation had come in at a figure of some $3,900,000, he would not have recommended insurance in respect of a loan of 65% of that amount, namely $2,535,000, because this would not have been enough to satisfy the purposes of the borrowing (see below).  His oral evidence in cross‑examination elaborated upon this evidence (T  1078.30‑1080.25).  The respondents submit that the probability is that if MBL, and through it PCL, had reduced the amount of the loan to take account of a lower valuation figure, this would have been acceptable to MGICA (T 1080.08).  Further, the respondents submit that Mr Anderson was satisfied with the amount of the real property holdings of Beca and that there would have been no reason why some sort of second mortgage over another property could not have been obtained to cover the supposed shortfall.  In any event, no explanation is given, the respondents submit, as to why it was insisted that the first year's interest be paid in advance.

The respondents submit that there is a sound policy reason why MGICA's damages should be limited in the way indicated, namely, that the result sought by MGICA would make a valuer an insurer against a downturn in the property market.

7.4.3 South Australia Asset Management Corporation v York Montague Ltd [1996] 3 WLR 87; [1996] 3 All ER 365

Since the case was heard, the foregoing submissions were made and most of these Reasons for Judgment were written, the members of the House of Lords delivered their speeches on 20 June 1996 in South Australia Asset Management Corporation v York Montague Ltd [1996] 3 WLR 87; [1996] 3 All ER 365 ("South Australia Asset").  The Court of Appeal had held on 20 February 1995 in six appeals reported as Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1995] QB 375 ("Banque Bruxelles"), that in a case where the lender would not have lent, or a mortgage insurer would not have insured, at all (it and the House of Lords called this, as I shall do, a "no-transaction" case) but for the valuer's negligence, the lender or mortgage insurer is entitled to recover the difference between the sum lent together with a reasonable rate of interest and other amounts outlaid in reliance on the valuation, and the net sum recovered. The Court of Appeal had contrasted with a no-transaction case, a case in which the evidence shows that if the valuer had provided a proper valuation (one resulting from the exercise of due care and skill), the lender would have lent, or the mortgage insurer would have insured, in a lesser sum on the same security (the Court of Appeal and the House of Lords called this, as I shall do, a "successful transaction" case).  In such a case, according to the Court of Appeal, the lender or mortgage insurer is entitled to recover only the difference between the actual loss and the smaller loss which would have been suffered if the lender had lent, or the mortgage insurer had  insured, in the reduced amount.

Two of those cases were appealed to the House of Lords, as was a third directly from a decision of the trial judge (South Australia Asset Management Corporation v York Montague Ltd, unreported, May J, 24 April 1995).  In all three, the appeal was against the assessment of damages in accordance with the restitutionary approach.  All three appeals succeeded in the House of Lords.

At the heart of their Lordships' reasoning is their holding that it is never sufficient to ask simply whether A owes B a duty of care and that it is always necessary to determine the scope of the duty by reference to the kind of damage from which A must take care to save B harmless.  Lord Hoffmann illustrated problems which he saw in the principle adopted by the Court of Appeal.  His Lordship took the case of a mountaineer about to undertake a difficult climb who is concerned about the fitness of his knee.  He goes to a doctor who negligently examines the knee and pronounces it fit.  If the doctor had told him the true state of his knee, he would not have gone on the expedition.  On the expedition, he suffers an injury which is a foreseeable consequence of mountaineering but has nothing to do with the knee.  According to Lord Hoffmann, the principle applied in the Court of Appeal leads to the result that the doctor is liable in respect of the injury suffered because it would not have occurred if the doctor had exercised due care.

Lord Hoffmann considered that a principle which could operate in this way offended common sense because it made the doctor responsible for consequences which, though in general terms foreseeable, did not appear to have a sufficient causal connection with the subject matter of the duty.  His Lordship, with whom the other members of the House agreed, generalised as follows:

    "Rules which make the wrongdoer liable for all the consequences of his wrongful conduct are exceptional and need to be justified by some special policy.  Normally the law limits liability to those consequences which are attributable to that which made the act wrongful.  In the case of liability in negligence for providing inaccurate information, this would mean liability for the consequences of the information being inaccurate." ([1996] 3 WLR 87 at 94E; [1996] 3 All ER 365 at 371H - emphasis supplied)

    "... a person under a duty to take reasonable care to provide information on which someone else will decide upon a course of action is, if negligent, not generally regarded as responsible for all the
consequences of that course of action.  He is responsible only for the consequences of the information being wrong.  A duty of care which imposes upon the informant responsibility for losses which would have occurred even if the information which he gave had been correct is not in my view fair and reasonable as between the parties.  It is therefore inappropriate either as an implied term of a contract or as a tortious duty arising from the relationship between them.

 

    The principle thus stated distinguishes between a duty to provide information for the purpose of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action he should take.  If the duty is to advise whether or not a course of action should be taken, the adviser must take reasonable care to consider all the potential consequences of that course of action.  If he is negligent, he will therefore be responsible for all the foreseeable loss which is a consequence of that course of action having been taken.  If his duty is only to supply information, he must take reasonable care to insure that the information is correct and if he is negligent, will be responsible for all the foreseeable consequences of the information being wrong." ([1996] 3 WLR 87 at 95D‑G; [1996] 3 All ER 365 at 372G‑373A - emphasis supplied)

His Lordship thought that the principle thus formulated was implicit in the decision of the House of Lords in Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd [1991] 2 AC 249, a case which had been distinguished by the Court of Appeal.

The parties in the present case have made written submissions as to the applicability to its circumstances of the approach taken by the House of Lords, the respondents submitting that I should, and MGICA that I should not, follow their Lordships.  I will return to the question of law involved after expressing my findings of fact relevant to it.

7.4.4 Factual conclusions on causation, remoteness and measure of damages

The "as completed" value which the respondents assigned to the Property as at 18 April 1990 was $5,500,000.  I have found that the true "as completed" value at that date was of the order of $3,900,000 to $4,000,000; that if the respondents had exercised due care and skill their "as completed" valuation would have been in an amount of that order; and that it was their failure to do so which caused the amount at which they in fact arrived to be excessive to an extent of the order of $1,500,000.

MGICA insured PLC in respect of its advance of $3,575,000 to or on account of Beca.  It did so in reliance on the valuation.  The evidence persuades me that MGICA would not have provided mortgage insurance in respect of PLC's advance of $3,575,000 if the valuation had been any less than $5,500,000.  There is no evidence that Beca would have accepted a loan of anything less than $3,575,000.  Such evidence as there is (the fact that no loan had occurred notwithstanding Mr Davis' valuation of the Property for Beneficial as at 17 October 1989 of $5,000,000) suggests that it may not have.  In any event, the suggestion that it would have is clearly "mere speculation" (cf the Trade Credits case, at 673B).  This alone shows that this is a no transaction case.

There is other evidence which leads me to the same conclusion. It will be recalled that the "Credit Approval" and "Proposition Summary" which MGICA received from MBL on 3 April 1990 showed that the facility of $3.75 m sought by Beca was to be used as follows:

To refinance Beca's overdraft with NAB	$2,000,000
To assist with preliminary costs on Elizabethan Theatre Trust Project at North Sydney	$  856,000
To pay out leasing debt to Duke Pacific	$  100,000
To pay first year's interest in advance	$  600,000 $3,556,000 ==========

MGICA subsequently recorded in its "Underwriting Summary" the purpose of the loan as follows:

    "1.    Refinance Bank Overdraft        $2,100,000

     2.    Prepay 1 year's interest        $  600,000

     3.    Fund new development            $  875,000

 

                                           $3,575,000"

                                           ==========

In affidavit evidence, Mr Anderson deposed that the latter were the purposes of the loan.  (In fact, apparently $564,000 was paid for the first year's interest and a "Loan Establishment Fee" of $26,812.50 representing 0.75% of the principal sum lent (exhibit Al p 156) was paid.)

Mr Anderson was cross examined with a view to showing that MGICA would have been prepared to insure in respect of a reduced advance by PCL if Mr Kenny's valuation had come in at a lower figure.  It will be noted that even if MGICA had been willing to do so, this would have left unresolved, not only the question whether Beca would have been interested to accept the lower advance, but also the question whether PCL would have been interested to provide it.

Moreover, if one were to eliminate the prepaid interest (I will continue to treat it as amounting to $600,000) from the summations above, one is left with totals of $2,956,000 and $2,975,000 which are 65% of $4,547,692 and of $4,676,923 respectively.  While I accept Mr Anderson's evidence that MGICA would not, on the evidence before it, have proceeded if the provision for prepayment of interest had been eliminated (T  1079.14‑.39), these figures show that even if it had been eliminated, MGICA would not have provided mortgage insurance if a valuation in an amount of less than $4,500,000, let alone of the order of only $3,900,000 to $4,000,000, had been provided.

I find that if the task of valuation had been carried out with due care and skill yielding an "as completed" figure of less than $4,500,000 and, indeed, of an amount of the order of $3,900,000 to $4,000,000, MGICA would not have insured at all.  I therefore proceed on the basis that the case is a no- transaction case.

Mr Kenny was cross‑examined at length with a view to showing that he knew or should have known that the relevant market was falling.  His evidence, to which he adhered, was that the market generally was in decline, but that on the basis of his discussions with local real estate agents (he had not previously done work on the Hunters Hill peninsular), he believed that the top end of the market for waterfront properties with a northerly aspect to Lane Cove remained unaffected by the general trend.  The relevant evidence of Mr Kenny and the other valuers was referred to earlier and I will not give a second account of it here.  I decided that it was not shown to have been negligent for Mr Kenny to have allowed for a fall in the relevant market of only 7.5% from June 1989 to April 1990.   Nonetheless, on the basis of that evidence, I find that Mr Kenny should have appreciated as at April 1990, if he did not do so, at least that the market for the Property was "fragile" or "vulnerable" and that a further fall in the market for it was "on the cards".  In the event, this particular finding will be seen to be unnecessary to the result of this case, since it is not in dispute that a fall in the market for real estate is foreseeable.

7.4.5 Legal conclusions on causation, remoteness and measure of damages

MGICA resisted, as the measure of its recoverable damages, the difference between the amount of the loan which was in fact insured and the amount of any loan shown to be one which it would have insured on the basis of a carefully arrived at valuation.  However, "the amount of any loan shown to be one which it would have insured on the basis of a carefully arrived at valuation" is, as I have just found, nil.  Accordingly, the no-transaction formula and the successful transaction formula give the same result on my findings in this case.  But this does not dispose of the issue of law raised by the House of Lords decision in South Australia Asset.

If the security had been realised immediately following the making of the advance on 11 May 1990, the Property would have been sold for the amount of its value as at 18 April 1991 of some $4,000,000 or, having regard to the falling market, slightly less.  Even after allowing for completion of the outstanding work, advertising and selling agent's commission, it seems that PCL, and so MGICA, would have suffered no loss.  Therefore, the whole of the loss in fact suffered can be viewed as having been caused by the subsequent fall in the market.

In this respect the facts were similar to those of one of the appeals decided by the House of Lords in South Australia Asset, namely United Bank of Kuwait Plc v Prudential Property Services Ltd.  In that case, there was an advance of £1.75m on the security of a property valued by the defendants at £2.5m but found to have a value of only £1.8m-£1.85m.  The property was sold some 15-16 months later for £950,000.  The trial Judge quantified the lenders' loss at £1,309,876.46 and awarded damages in that amount.  The House of Lords allowed the appeal and reduced the award to an amount equal to the difference between the amount of the valuation (£2.5m) and the correct value (£1.8m-£1.85m).  That case and the present one are "pure fall in market" cases in the sense that initially the true value of the security exceeded the amount advanced in reliance on the even higher valuation of it.

Before I turn to South Australia Asset and the issues of causation, remoteness and measure of damages which arise in the present case, I will refer, in chronological sequence, to eight other authorities.

The first is the decision of the Supreme Court of Canada in Lowenburg, Harris & Co v Wolley (1895) 25 SCR 51.  The plaintiff lent $5,500 on the security of a mortgage over a property which the defendant financial brokers negligently represented to be worth $7,000.  The property was worth only $4,700 - a difference between represented and actual values of $2,300.  It was found that a prudent investor would have lent only $2,900 on the security knowing that it was worth $4,700.  The mortgagor defaulted after paying only the first year's interest.  The plaintiff was not able to sell the property.

A jury returned a verdict for the plaintiff on liability for the defendants' negligence.  The trial judge did not, however, leave the issue of damages to the jury.  Rather, he ordered the defendants to pay the plaintiff the full amount of the advance of $7,000 with interest at 8.5% p.a. from the end of the first year and ordered that upon payment by the defendants the plaintiff should assign the mortgage to them.

On appeal to the Supreme Court of Canada, the Chief Justice, with whom Sedgewick and King JJ agreed, said this:

    "I am of opinion that this was not a correct disposition of the case.  The effect of this judgment would be to make the appellants not only responsible for such damages as were caused by the negligent performance of their duty as the respondent's agents, in over‑valuing the mortgaged property, but also for any depreciation (if any there has been) in the actual value of the property subsequent to the loan.  It is manifest that any loss in this respect should be borne by the respondent himself inasmuch as it cannot be attributed to the neglect of the appellants.  All that the appellants can possibly be liable for is the loss occasioned by the over‑valuation adopted and acted on by them.  The damages should have been assessed in the regular way, and that not having been done, the cause must be remitted to the Supreme Court British Columbia to have the error in this respect rectified."  (at 56‑57)

Taschereau and Gwynne JJ dissented on this issue and would not have disturbed the orders of the trial Judge, although Gwynne J would have substituted an interest rate of 6% for the rate of 8.5%.  (It is tempting to think that 8.5% was the contractual rate provided for in the mortgage and 6% was a rate which the evidence established the plaintiff would have obtained on his $7,000 if he had not entered into the transaction, but the report does not make this clear; cf Swingcastle Ltd v Alastair Gibson (a firm) [1991] 2 AC 223;
State Bank of New South Wales Ltd v Yee (1994) 33 NSWLR 618 (Giles J)).

The report does not record a finding as to what the plaintiff would have done if the valuation had come in at less than $7,000.  In particular, there is no finding that the he would have been prepared to lend $2,900 to the same borrower on the same security.  Nor is it said how damages are to be assessed.  However, the majority's view is, in terms, authority for the general proposition that a mortgagee's damages do not include any element attributable to a post‑transaction fall in the market value of the security.  The majority seems to approve of "the amount of the over‑valuation" as the primary measure of damages.  In Banque Bruxelles, the English Court of Appeal reviewed later Canadian cases and concluded that following the Supreme Court decision in the Lowenburg case, "it seems clear that Canadian courts will not allow a mortgage lender in a no‑transaction case to recover damages for loss attributable to a fall in the market" ([1995] QB 375 at 417E).

The second case is Baxter v F W Gapp & Co [1939] 2 KB 271 (CA).  (The case is more fully reported at [1939] 2 All ER 752.)  The amount of the valuation was £1,800 and the valuer reported that the property was a reliable trustee security for an advance of £1,200 which the plaintiff advanced on first mortgage security over the property.  Two months later, the defendants advised that the property was good security for a
further loan of £150 which the plaintiff also advanced.  The property was later sold for £850. 

At first instance Goddard LJ had awarded damages of £742:16:7 representing the total amount advanced plus the interest which the borrower had failed to pay, cost of insurance and of maintenance and repair, legal charges, costs of abortive attempts to sell, selling agent's commission and legal charges on the ultimate sale, less the proceeds of that sale.  The Court of Appeal dismissed an appeal, holding that Goddard LJ's approach to the assessment of damages had been correct.   MacKinnon LJ (with whom du Parcq and Macnaghten JJ agreed) described the correct measure as being "that which the plaintiff has lost by being led into a disastrous investment" (at 274).  His Lordship said that the damages recoverable were not limited to the difference between the amount of the valuation and the true value.

Two observations may be made about Baxter v Gapp.  First, there is no suggestion that it was regarded as a "fall in market" case.  Both Mackinnon and Macnaghten LJJ noted that the valuer had not led evidence of a fall in the market to explain the difference between the valuation amount of £1,800 and the sale price of £850.  So far as the report of the appeal reveals the true value may have been assumed by their Lordships to be no more than the price for which the property was later sold (£850).  The trial Judge, however, having noted expert evidence led by the plaintiff that the true value had been between £800 and £900, said that if he had had to put a value on the property it would have been more than that ([1938] 4 All ER 457 at 463 F,G).  His Lordship had noted that the highest figure which any valuer had placed on the property was £1,150.  In that state of the evidence, he had simply decided that the defendants' valuation of £1,800 was not "justifiable" and that no advance would have been made if the defendants had exercised due care and skill.

The second observation is that in so far as it allowed recovery of contractual interest, Baxter v Gapp was overruled by the House of Lords in Swingcastle Ltd v Alastair Gibson (a firm) [1991] 2 AC 223.

The third, fourth and fifth cases in this sequence are first instance decisions in the Supreme Court of New South Wales.  In the first of these, Laughton-Boyd v Moloney (unreported, Supreme Court of New South Wales, 8 June 1979), Yeldham J approached the assessment of damages as Ralph Gibson J had done a little earlier in Corisand Investments Ltd v Druce & Co (1978) 248 EG 315; [1978] 2 EGLR 142, namely, by limiting recovery to the difference between the amount lent and the amount which would have been lent on the basis of a carefully arrived at valuation.

The second New South Wales case is Kooragang Investments Pty Ltd v Richardson & Wrench Ltd (unreported, Supreme Court of New South Wales, Rogers J, 4 July 1980) (on appeal [1981] 2 NSWLR 1 (PC)).  Rogers J gave a verdict for the defendant valuers, but touched on the question of the correct measure of damages.  He dealt with a submission by the defendants that the plaintiff lender's recovery was limited to the difference between what was lent and what would have been lent if there had not been negligence by the valuers.  He found that the plaintiff had been prepared to lend 65% of whatever the valuation might have been.  However, he accepted a submission by Mr Clarke QC (as Clarke JA then was) that it was "pure speculation" whether the borrower would have been prepared to accept "a loan in the lesser amount thrown up by a proper valuation" (judgment transcript at 26).  His Honour thought that in the absence of affirmative evidence on this matter, the plaintiff was entitled to damages calculated "conformably with the principles enunciated by the English Court of Appeal in Baxter's Case" (ibid).

The third New South Wales case is the Trade Credits case.  Clarke J (as Clarke JA then was) followed Rogers J in the Kooragang Investments case by applying Baxter v Gapp in the absence of evidence that the borrower would have accepted a loan in any lesser amount which the lender would have been willing to lend on the basis of a carefully arrived at valuation.

The sixth case in the present sequence of eight is the Victorian Full Court decision in Duncan & Weller Pty Ltd v Mendelson [1989] VR 386.  The Full Court distinguished Baxter v Gapp on its facts as a case in which, if the plaintiff had been given a correct valuation, he would not have entered into the loan transaction at all.  In the case before the Full Court, the transaction would have proceeded in any event, but if carefully advised, the mortgagees would have withheld $92,536, rather than merely $8,000, to cover the cost of completing certain building work - a successful transaction case.  None of the three members of the Full Court questioned the correctness of the approach taken in Baxter v Gapp to the assessment of damages in a no-transaction case.  On the other hand, the occasion did not arise for them to consider the correctness of it.  Kaye J said, citing authorities, that:

    "The general rule is that the measure of a lender's loss resulting from a negligent valuation of a mortgage security is the difference between the amount advanced by the lender in reliance on the valuer's negligent valuation and the amount the lender would have advanced on a valuation made with appropriate skill and due care: ..." (at 391)

As I have said earlier, where a lender would have advance no amount if due care and skill had been exercised, a test formulated in this manner signifies that there is a recovery in accordance with the "restitutionary" measure: what was outlaid in reliance on the valuation minus what was recovered.

The seventh case is the decision of the New Zealand Court of Appeal in McElroy Milne v Commercial Electronics Ltd [1993] 1 NZLR 39.  The plaintiff developer (CEL) was embarking on a project involving the purchase of land and the construction on it of a warehouse and office building complex to meet the requirements of a tenant which was to take a lease for twelve years with the right of renewal.  The tenant's obligations under the lease were to be guaranteed by its parent company.  CEL proposed to sell the development with the benefit of the lease and guarantee as soon as possible after completion.

The defendant solicitors prepared an agreement for the lease as between CEL and the tenant which included an undertaking by the tenant to obtain its parent's guarantee.  Importantly, however, the parent company was not a party.  After completion of building work, neither the tenant nor its parent would execute the form of lease prepared.  CEL sued the solicitors for damages in negligence arising out of their failure to bind the parent company to the agreement for lease.

In the High Court of New Zealand, the defendants were held liable.  Damages were assessed on the basis that if CEL had sold the development fully leased and occupied, this would have eventuated six months after completion in a sum of $5.25 million.  The value at the date of trial was found to be $4.0 million.  It was found that if the parent had been named as a party to the agreement for lease it would probably have executed that agreement although it would have endeavoured to withdraw.  The amount of damages otherwise recoverable was discounted by 25% to allow for contingencies and judgment was entered for $1.25 million plus net interest and rates, discounted by 25%.

On appeal as to damages only, the New Zealand Court of Appeal held that CEL was to be compensated for the loss of the ability to market the development as planned - a loss which was foreseeable and not too remote.  The Court of Appeal held, in particular, that the defendants had to accept the state of the market at the date when it became possible for CEL to offer the property for sale, and that it was no answer for them to say that the market had fallen to an unanticipated extent.

Specifically in relation to the fall in the market, Cooke P said this (at 44):

    "The remaining exercise is quantification.  This is not necessarily restricted by foresight or contemplation. In principle it is prima facie an eggshell skull type of case, in that the contract breaker has to take the state of the market at the date when in fact it became possible for CEL to offer the property for sale free from dispute.  that was not before May 1989, by which stage the market had fallen still further from its declining level in 1988.  Possibly there  may be some cases where a depressed market could not be said to be sufficiently clearly and strongly or naturally related to the breach of duty to warrant imposing liability.  But in this case it is not enough in my opinion to say that the market fell to an extent never expected by the appellant.  Part of the very purpose of a guarantee is to protect against market deterioration.  The more serious the deterioration, the more important the guarantee.  Like others disadvantaged by the crash the appellant has to accept the consequences of failure to carry out its responsibilities. All factors relevant in considering remoteness appear to me to point to its liability." (at 44)

Hardie Boys and McKay JJ delivered independent judgments, relevantly to the same effect.

The eighth and last case to be noted is the decision of Heerey J of this Court in Henderson v Amadio Pty Ltd, unreported, 23 November 1995.  His Honour noted the decision of the English Court of Appeal in Banque Bruxelles.  His Honour described the case before him (one of investment rather than loan or mortgage) as a no-transaction case.  He referred to, inter alia, Banque Bruxelles and the Trade Credits case and said that a fall in the market did not break the chain of causation of loss (at judgment transcript, pp 397-400, 440).

The foregoing review brings me to the decision of the House of Lords in South Australia Asset.  That decision is not binding on me and is "useful only to the degree of the persuasiveness of [its] reasoning": Cook v Cook (1986) 162 CLR 376 at 390 (Mason, Wilson, Deane, Dawson JJ), 394 (Brennan J).  MGICA submits that I should conclude that the reasoning of the English Court of Appeal in Banque Bruxelles is more persuasive.  The Australian cases to which I referred seem to have accepted that the restitutionary approach is applicable to a no‑transaction case, including one in which part, or as in the present case the whole, of the loss suffered arises immediately from a fall in the market.  Of course, those cases preceded the House of Lords decision.  Moreover, the precise issue before me did not call for decision in those cases.  Notwithstanding these considerations, those cases give me cause to hesitate before departing from the restitutionary approach.

In March v E & M H Stramare Pty Ltd (1991) 171 CLR 506 a majority of the High Court held that the "but for" or causa sine qua non test should not be seen as the test of legal causation (McHugh J disagreed).  Mason CJ said this:

    "The cases demonstrate the lesson of experience, namely, that the test, applied as an exclusive criterion of causation, yields unacceptable results and that the results which it yields must be tempered by the making of value judgments and the infusion of policy considerations." (at 516)

Deane J said:

    "For the purposes of the law of negligence, the question of causation arises in the context of the attribution of fault or responsibility whether an identified negligent act or omission of the defendant was so connected with the plaintiff's loss or injury that, as a matter of ordinary common sense and experience, it should be regarded as a cause of it (cf Barnes v Hay [(1988) 12 NSWLR 337, at p 339]." (at 522)

Toohey J agreed generally with the reasons of Mason CJ, and in particular agreed that:

    "Where negligence is in issue, causation is essentially a question of fact, in the sense explained by the Chief Justice, into which considerations of policy and value judgments necessarily enter." (at 524)

Gaudron J agreed with Mason CJ and Deane J.

In a not dissimilar vein, in McElroy Milne v Commercial Electronics Ltd [1993] 1 NZLR 39, Cooke P said that:

    "... in the end assessment of damages is a question of fact: that there is no such thing as a rule, as to the legal measure of damages, applicable to all cases: and that the ultimate question as to compensatory damages is whether the particular damage claimed is sufficiently linked to the breach of the particular duty to merit recovery in all the circumstances."  (at 41)

As will be seen, I think that the "pure fall in market loss" sustained by MGICA in the present case is "sufficiently linked to the breach of the particular duty [by the respondents] to merit recovery in all the circumstances".

In the present case, the respondents negligently arrived at a  valuation which foreseeably caused MGICA to grant mortgage insurance in respect of the Mortgage and caused PCL, and therefore MGICA, to have the benefit of a security of less value than $5,500,000.  The respondents did not know of any lending or insuring margin policy which might operate.  They did not know whether the margin between the amount of financial accommodation to be provided and the valuation figure of $5,500,000 was large or small.  They did not know, as was the fact, that the first year's interest was to be paid in advance and that the first occasion on which monetary default might occur would be twelve months into the term of the mortgage.

On the other hand, all parties knew that the market value of the Property from time to time would fluctuate and that changes in the Property's market value over time might, according to when default and realisation occurred, cause PCL and/or MGICA to suffer loss or greater loss or to escape the suffering of loss.  The real estate market in which property, the subject of a valuation is located, may be stable or mercurial at the time of the valuation or may develop into either of those states subsequently.  Fluctuation in the market value of a security may be seen to be the direct cause of most or, as in the present case, all, of the loss suffered.  In a no‑transaction case, the negligently prepared valuation influences the mortgagee or mortgage insurer to enter into the transaction and thereby to subject its fortunes, to greater or lesser extent, to these well recognised risks of the market.  The valuer knows that the valuation which he or she prepares for a mortgagee or mortgage insurer will have this effect.

Policy considerations as to whether the loss sufferer should be entitled to recover from a negligent valuer damages in respect of the loss or that part of loss directly caused by a fall in the market, do not necessarily point in the one direction.  It may not be considered obviously fair that a commercial lender or mortgage insurer should be able to safeguard itself from a fall in the market of $1,350,000 (from, say, $4,000,000 as at 18 April 1990 to $2,650,000 as at 6 January 1992 in the present case) at the expense of a negligent valuer who has been paid a fee of only $5,500.  Would it be fair, to take a more extreme case, that a valuer who, without fee but in circumstances subjecting him or her to a duty of care, negligently overvalued a property by $500,000, should have to pay damages in a no‑transaction case to compensate for a subsequent fall in the market of say $2,000,000?

As against the considerations implicit in these questions, the position of PCL and MGICA in the present case must be considered.  The first occasion on which steps could be taken directed towards a realisation of the security was in June 1991, 13 months after the making of the advance on 11 May 1990.  Mr Kenny himself valued the property in July 1991 at $3.0m, that is to say, already $575,000 less than the amount of PCL's advance ($3,575,000).  If PCL had been able to sell instantly at that time for that amount, its loss, and therefore the amount of its entitlement against MGICA, would, of course, have been in a sum substantially more than $575,000 after unpaid interest and expenses were added on.  The period from June 1991 to the sale on 6 January 1992 saw the obtaining of valuations, preparation of the Property for sale, and an abortive auction.  A "defence" of failure to mitigate loss was not pressed.  Why, in these circumstances, does fairness not dictate that damages be recoverable in respect of the whole of the fall in the market from the time of the original transaction down to the time of default and from then to the time of sale?

The result of the House of Lords' deliberations is further indicated in the following passages from the speech of the Lord Hoffmann:

    " ... a person under a duty to take reasonable care to provide information on which someone else will decide upon a course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action.  He is responsible only for the consequences of the information being wrong." ([1996] 3 WLR 87 at 95D-E; [1996] 3 ALL ER 365 at 372 G‑H)

    "One therefore compares the loss he has actually suffered with what his position would have been if he had not entered into the transaction and asks what element of this loss is attributable to the inaccuracy of the information." ([1996] 3 WLR 87 at 97E; [1996] 3 All ER 365 at 374H)

    "A plaintiff has to prove both that he has suffered loss and that the loss fell within the scope of the duty.  The fact that he cannot recover for loss which he has not suffered does not entitle him to an award of damages for loss which he has suffered but which does not fall within the scope of the valuer's duty of care." ([1996] 3 WLR 87 at 99A; [1996] 3 All ER 365 at 376C‑D)

At base, their Lordships have redefined the valuer's duty in a manner which purports to foreclose questions of causation, remoteness and measure of damages, which have, at least conventionally, been treated as distinct from the formulation of duty.  In my opinion, the valuer's duty is a duty to exercise an appropriate level of care and skill in arriving at, and reporting, an opinion as to market value which will be, after allowing for the degree of latitude called for by the nature of the subject matter and by the process and nature of valuation, safe to be relied on by the intending mortgagee or mortgage insurer.

Unlike their Lordships, but like the English Court of Appeal, I think that the starting point must, as a matter of principle, be to identify the legal wrong done and to inquire what the loss-sufferer's position would have been if that wrong had not been done; cf Robinson v Harman (1848) 1 Exch 850 at 855; Livingstone v Rawyards Coal Co (1880) 5 App Cas 25 at 39; British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 at 688-689.  This is so in both contractual and tortious contexts, although the nature of the wrong done differs as between the two.  In the case of contract, the wrong would not have occurred if the contract had not been breached; a tortious wrong on the other hand would not have occurred if the tortious act or omission had not occurred.  To take a different starting point from these seems to me to be, with respect, radically novel.

In the present context, in the absence of special circumstances, breach of the contractual duty and tortious negligence are of the same nature.  It is an implied term of the contract by which a valuer is retained that the valuer undertakes to provide a valuation report which will be the product of the exercise of the level of skill and care referred to above.  And apart from contract, where a valuer in fact provides a valuation report in circumstances in which there is a duty of care and skill incumbent on the valuer in favour of another person, again the valuer will incur liability if the report is not the product of the exercise of the level of care and skill described above.  In both classes of case, if damages are not to be awarded in respect of a particular loss or class of loss "caused" by the contractual or tortious negligence, this result should be achieved by the application of principles which deny recovery where the particular loss or class of loss is considered "too remote", or is the result of what is regarded as a new intervening cause or as a claimant's failure to mitigate loss.

In my view, in a no-transaction case such as the present one, a mortgagee's or mortgage insurer's loss arising from a fall in the market value of the security is not too remote a consequence of a valuer's negligence to be properly compensable by an award of damages.  According to the approach taken by the House of Lords, such loss is to be compensated for but subject to a limit, namely the extent to which the valuation was wrong (see below).  Presumably, in the present case the House of Lords' approach would permit recovery of only $1.5m ($5.5m - say $4.0m) rather than the sum of $1,977,513.67 which MGICA paid to PCL.

At the outset, it is to be noted that their Lordships' approach leads to seemingly odd results as illustrated by the facts of the present case just mentioned.  Odd results are particularly indicated in cases where the extent of the wrongness of the valuation is small and large.  Firstly, assume that in the present case, the respondents' valuation, negligently arrived at, had been in a sum of $4,500,000 (admittedly, the smaller the extent of over valuation, the more difficult it is to sustain the charge of negligence).  In other words, the extent of wrongness is only $500,000 rather than $1,500,000.  By the time of default and therefore the first occasion to move towards realisation of the security (June/July 1991), the market value had fallen to $3,000,000.  Although the immediate cause of the whole of the loss would have been the fall in the market, according to their Lordships the amount of damages recoverable would be limited to $500,000 representing the difference between $4,500,000 and $4,000,000.  The additional $75,000 would represent "purely" a fall in the market which it had not been the duty of the valuer to guard against.  Once it is accepted that damages are recoverable for at least some loss caused by a fall in the market, it is not obvious why they should not be recoverable, in the absence of special circumstances such as a failure by MGICA to mitigate loss, for all loss so caused.

Secondly, and conversely, their Lordships' approach leads to the result which, with respect, I consider to be unacceptable, that there can be a greater recovery, the greater the extent of wrongness in the valuation, and so, apparently, the "more gross" the negligence.  Assume, in the present case, that the valuation had been in a sum of $6,000,000 rather than $5,500,000.  According to the approach of the House of Lords, the damages recoverable would now be, again on the basis that the true value was $4,000,000, the amount of loss suffered up to $2,000,000 - on the facts of this case, $1,977,513.67.

A convenient starting point from which to explain why, with great respect, I think that I should not follow the House of Lords is to be found in their Lordships' rejection of the "cap" theoretical support for their decision.  Lord Hoffmann explained and discarded that theory in these terms:

    "An alternative theory was that the lender should be entitled to recover the whole of his loss, subject to a 'cap' limiting his recovery to the amount of the overvaluation.  This theory will ordinarily produce the same result as the requirement that loss should be a consequence of the valuation being wrong, because the usual such consequence is that the lender makes an advance which he thinks is secured to a correspondingly greater extent.  But I would not wish to exclude the possibility that other kinds of loss may flow from the valuation being wrong and in any case, as Mr Sumption said on behalf of the defendants York Montague Ltd., it seems odd to start by choosing the wrong measure of damages (the whole loss) and then correct the error by imposing a cap.  The appearance of a cap is actually the result of the plaintiff having to satisfy two separate requirements: first, to prove that he has suffered loss, and, secondly, to establish that the loss fell within the scope of the duty he was owed." (at [1996] 3 WLR 87 at 100 F 9; [1996] All ER 365 at 377 j-378 a)

The suffering of loss or damage is a necessary element of tortious negligence.  Their Lordships accept that this element may be satisfied by loss which is immediately attributable exclusively to a fall in the market (as noted earlier, United Bank of Kuwait plc v Prudential Property Services Ltd before their Lordships was such a case).  In a pure fall of market case no cause of action accrues before the loss due to the fall is suffered.  It follows, in my respectful view, that in such a case their Lordships' decision must be understood to involve the imposition of a cap on the extent of an admittedly compensable class of loss.  But where a class of loss is not too remote, it is contrary to principle to limit recovery on the ground that the precise course of events by which the loss was suffered or the extent of the loss suffered was not foreseeable: Chapman v Hearse (1961) 106 CLR 112 esp at 120‑122; Hughes v Lord Advocate [1963] AC 837 esp 846‑847 (Lord Reid); Mount Isa Mines Ltd v Pusey (1970) 125 CLR 383 esp at 390, 392 (Barwick CJ), 402, 406 (Windeyer J), 413 (Walsh J); Wroth v Tyler [1974] Ch 30 at 61 (Megarry J); H Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] QB 791 esp at 806, 813 (Scarman LJ with whom Orr LJ agreed); Nader v Urban Transport Authority of New South Wales (1985) 2 NSWLR 501 (CA) esp at 506G (Samuels JA), 536G‑537E (McHugh JA).

In cases of "contractual negligence" and cases of tortious negligence in which not all the loss suffered was due to a fall in the market, it cannot be said that the cause of action accrues at the time when loss attributable to fall in market is sustained.  In the case of contractual negligence, the cause of action accrues when the implied contractual undertaking to exercise care and skill is breached, nominal damages being awardable in any event.  In such a case, substantial damages are recoverable for loss arising from a fall in the market alone or from such a fall coupled with loss arising from any initial deficiency of the security.  In the case of tortious negligence of the category described, the cause of action accrues when the loss attributable to either kind of immediate cause is suffered.

It should be accepted, however, that in both the contractual and tortious cases of the kinds referred to in the preceding paragraph, as in the "pure fall of market" tortious case described previously, their Lordships' decision must again involve the impermissible imposition of a cap on the extent of an admittedly compensable class of loss.  To distinguish between "pure fall of market" tortious cases from the other cases mentioned would be to introduce an unwarranted bifurcation in this area.  It will be recalled that the nature of the duty owed is identical whether it is owed as an implied term of a contract of retainer or by reason of the operation of general legal principles on non‑contractual circumstances and relationships.

A point related to that made above arises in the context of the applicable limitation period.  For the purpose of identifying the time of accrual of the loss-sufferer's cause of action, one takes, in a pure fall of market tortious case, not the time when the transaction is entered into by the mortgagee or a mortgage insurer, but a later time, whether the time of the making of a claim on a mortgagee insurer or the time when the security is realised (see below under "LIMITATION DEFENCE").  No loss is suffered when the transaction is entered into.  This is so even if at that time the true value of the Property is less than the amount advanced.  It seems contrary to principle that an action should accrue at a later point of time when there is suffered an "actual" loss exceeding the extent of wrongness of the valuation, while the amount of damages recoverable is calculable at the time when the transaction is entered into.

In my view, the fall in the market is akin to the familiar "egg‑shell skull" analogy of personal injury cases.  In both situations, the extent of loss caused by the wrongdoer may be greater, indeed much greater, than anticipated because of circumstances for which he or she is not responsible.  Nonetheless, the general nature of the loss is foreseeable in each case.  There is no good reason for distinguishing the suffering of financial loss by a mortgagee or mortgage insurer in this respect from losses of the kinds suffered by a peculiarly vulnerable plaintiff from injuries to his or her person.

Before parting with the House of Lords decision in South Australia Asset, I return to Lord Hoffmann's mountaineer analogy.  Possible causes of his injuries having nothing to do with his knee which suggests themselves are an avalanche, an injury freshly sustained in the course of climbing and a failure of climbing equipment.  In my view, injury suffered from any such cause is a class of injury too remote from the range of losses which might foreseeably be suffered if the doctor examining the mountaineer's knee did not exercise due care and skill, to be the subject of an award of damages against the doctor.  Similarly, in a no‑transaction case, financial loss suffered by a mortgagee or mortgage insurer as a result of the mortgaged property's being destroyed or damaged by fire, earthquake or vandalism, would be a class of loss too remote from the range of losses which might foreseeably be suffered if a valuer providing a valuation report did not exercise due care and skill, to be the subject of an award of damages against the valuer.

7.5LIMITATION DEFENCE

In view of the conclusion which I reached earlier that the respondents are liable to MGICA for having negligently performed the task of valuing the Property, and the conclusion which I reach below that MGICA is not guilty of contributory negligence, it is, perhaps, not necessary for me to deal with the respondent's submission that the causes of action under the TP Act and the FT Act are statute-barred.  However, as the issue was the subject of detailed submissions, it seems appropriate that I express my view on it.

Section 52 of the TP Act and s 42 of the FT Act are relevantly identical as are s 82 of the TP Act and s 68 of the FT Act.  It is convenient to discuss the respondents' limitation submission by reference to the TP Act.

Section 82 is in the following familiar terms:

    "82(1)A person who suffers loss or damage by conduct of another person that was done in contravention of a provision of Part IV or V may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention.

 

       (2)An action under sub-section (1) may be commenced at any time within 3 years after the date on which the cause of action accrued."

Mr Davies of counsel for the respondents, after reviewing the authorities, submits that MGICA suffered loss when it accepted the Mortgage under the Pool Policy.  He submits, correctly, that at that time MGICA undertook to pay any relevant loss suffered by PCL and that, ex hypothesi, it did not have at that time security worth $5.5 million.  He submits that the entry into such a transaction was a suffering of actual damage.  Since MGICA included the Mortgage in the Pool Policy subject to conditions on 5 April 1990 and unconditionally on 6 May 1990, and the present application was not filed until 6 July 1994, MGICA's "action" for the purpose of sub‑s 82(2) was, according to his submission, commenced outside the three year period referred to in that sub‑section.

MGICA submits that its loss did not arise until 6 January 1992 at the earliest, this being the date of the sale of the Property and therefore the date on which it was known that there would be a shortfall.  It submits that the better view is that the cause of action did not accrue until 27 March 1992, being the date when PCL made its claim.  Since MGICA filed its application on 6 July 1994, both of those events occurred well within the period of three years prior to that date.  All payments made by MGICA to PCL were made within that three year period.

The critical issue which divides the parties concerns the point of time at which MGICA's cause of action arose.  I will not refer to the various authorities relevant to this kind of question prior to the decision of the High Court in Wardley Australia Ltd v The State of Western Australia (1992) 175 CLR 514 ("Wardley").  In my view, that case, decided on 28 October 1992, resolves the present issue in favour of MGICA.  In Wardley, the State of Western Australia granted an indemnity to NAB against a facility granted by NAB to Rothwells Ltd.  The State sued Wardley Australia Ltd ("Wardley") in this Court, claiming damages for loss allegedly suffered by the State by reason of the fact that misleading and deceptive conduct of Wardley had led the State to grant the indemnity.  The amended statement of claim alleged that the misleading or deceptive conduct was constituted by representations made on 24 and 25 October 1987 by Wardley, the indemnity having been executed by the State on 26 October 1987.  The relevant pleading was introduced on 14 January 1991, more than three years after execution of the indemnity.

The joint judgment of Mason CJ, Dawson, Gaudron and McHugh JJ includes the following passage:

    "With economic loss, as with other forms of damage, there has to be some actual damage. Prospective loss is not enough.

 

    When a plaintiff is induced by a misrepresentation to enter into an agreement which is, or proves to be, to his or her disadvantage, the plaintiff sustains a detriment in a general sense on entry into the agreement. That is because the agreement subjects the plaintiff to obligations and liabilities which exceed the value or worth of the rights and benefits which it confers on the plaintiff. But, as will appear shortly, detriment in this general sense has not universally been equated with the legal concept of 'loss or damage'. And that is just as well. In many instances the disadvantageous character or effect of the agreement cannot be ascertained until some future date when its impact upon events as they unfold becomes known or apparent and, by then, the relevant limitation period may have expired. To compel a plaintiff to institute proceedings before the existence of his or her loss is ascertained or ascertainable would be unjust. Moreover, it would increase the possibility that the courts would be forced to estimate damages on the basis of likelihood or probability instead of assessing damages by reference to established events. In such a situation, there would be an ever-present risk of undercompensation or overcompensation, the risk of the former being the greater." (at 527)

Their Honours referred to Forster v Outred & Co [1982] 1 WLR 86; [1982] 2 All ER 753 ("Forster") and later cases in which Forster was accepted and applied, such as Jobbins v Capel Court Corporation Ltd (1989) 25 FCR 226 ("Jobbins").  In Forster the plaintiff executed a mortgage over her freehold property as security for a loan made by a company to her son.  The son subsequently became a bankrupt.  She executed the mortgage in the presence of the defendants who were acting as her solicitors.  Following demand under the mortgage, she repaid the loan.  She then sought to recover damages from the defendants for "contractual negligence" and for negligence under the general law for failing to advise her properly when she executed the mortgage.  The English Court of Appeal held that the cause of action had accrued upon execution of the mortgage because the plaintiff had suffered actual damage at that time. 

In the High Court in Wardley, Mason CJ, Dawson, Gaudron and McHugh JJ said that the result in Forster was "explicable by reference to the immediate effect of the execution of the mortgage on the plaintiff's equity of redemption" (at 529).

The Court was not, however, able to explain Jobbins so easily.  In that case, the applicant had entered into an agreement to invest in a film, allegedly in reliance on misleading and deceptive statements.  The applicant sought to recover "$60,000 being an amount paid under the agreement".  The making of both the agreement and the payment occurred more than three years prior to the filing of the application in this Court.  A Full Court of this Court held that the claim was statute-barred.  That Full Court did not specify whether it treated the cause of action as having accrued upon the making of the agreement or upon the making of the payment.  Since the making of the payment involved actual loss to the applicant, the Full Court's decision was, as their Honours in the High Court said, supportable.  But they said that they had difficulty in accepting that the applicant had suffered loss or damage "on entry into the agreement merely because the
investment was alleged to lack the represented qualities" (at 529).

Finally, their Honours agreed with the decision of von Doussa J in S W F Hoists & Industrial Equipment Pty Ltd v State Government Insurance Commission (1990) 6 ANZ Insurance Cases 76,688; [1990] ATPR 51,599, in which his Honour held that under a liability indemnity insurance policy, the actual loss suffered by the insured occurs when the insured is called upon by a third party to make payments against which the insured would be indemnified under the policy as represented by the insurer.  Until that time, and in particular until the events giving rise to the third party's claim against the insured occur (without a claim having been made), there is no more than a potential loss.

Brennan, Deane and Toohey JJ, in separate judgments, reached the same conclusion as that arrived at in the joint judgment of Mason CJ, Dawson, Gaudron and McHugh JJ.

The respondents submit that in Wardley the High Court did not overrule Jobbins or the earlier case of Keen Mar Corporation Pty Ltd v Labrador Park Shopping Centre Pty Ltd (1988) ATPR 49,185 (FCA/Pincus J) which was followed by the Full Court in Jobbins.  To my mind, however, it is unmistakable that the High Court disapproved of Jobbins.  Nor can any conclusion favourable to the authority of Keen Mar be deduced from the fact that the High Court did not refer to it.

Wardley has been applied by Full Courts of this Court in Karedis Enterprises Pty Ltd v Antoniou (1995) 59 FCR 35 and CAJ Investments Pty Ltd v Lourandos, unreported, 23 February 1996, as well as by Heerey J in Jaldiver Pty Ltd v Nelumbo Pty Ltd (1993) ATPR (Digest) 46-097.

In the present case, when MGICA included the Mortgage in the Pool Policy, it may be said to have incurred a contingent liability to indemnify PCL.  But that contingent liability might never become an actual one.  In these circumstances MGICA did not suffer actual loss by including the Mortgage in the Pool Policy.

Indeed, when MGICA entered into the transaction on 11 May 1990, the market value of the Property ($4,000,000) exceeded the amount of PCL's advance ($3,575,000).  It was only at some undefined later time by which the market value had fallen sufficiently, that MGICA would have incurred loss if the Property had been sold and a claim made on it under the policy.  Absent a sale, there would always have remained the possibility that the market might recover.

I do not find it necessary to choose between the time of sale of the Property and the time of the making of the claim on MGICA under the Policy as the time at which MGICA's cause of action accrued.  On either basis, it accrued within the three year period which expired on 6 July 1994, and so the limitation defence fails.

7.6CONTRIBUTORY NEGLIGENCE

The respondents' submissions relating to contributory negligence are made under the heading "Reliance, Causation and Contributory Negligence" in their written outline of submissions.  This is significant.  The gravamen of the submissions is that MGICA, through Mr Anderson, did not rely on Mr Kenny's valuation but relied on other matters for which Mr Kenny was in no way responsible.  The respondents' submission in this respect is encapsulated in para 6 of their written outline:

    "6.    It is submitted that all this evidence shows that the cause of the Applicant's loss was the careless way Mr Anderson went about approving the inclusion of this loan in the pool policy.  The provision of a Valuation by Mr Kenny was merely an incidental matter in the whole approval process.  If Mr Anderson had carefully checked the material he had available to him and had not been prepared to rely so heavily on both Macquarie Bank and the borrower's accountant it is clear that the loan would never have been included in the policy.  The financial position of the borrower was untenable."

Under part 7.3 "RELIANCE" above, I rejected this submission and found that MGICA had relied, at least substantially, on the valuation.

Does the issue of contributory negligence have any further potential role to play?  In particular, if contributory negligence has been established, is it possible, and if so according to what principles, that the damages otherwise recoverable by MGICA should be reduced on that account?  In principle, contributory negligence might have this result in relation to the cause of action for tortious negligence, but can it do so in relation to the causes of action under the TP Act and the FT Act, and if not, is it desirable that the facts said to prove contributory negligence be examined?

The respondents submit in para 7 of their written outline as follows:

    "At the very least, there should be a reduction in any monies recovered by the Applicant because of the contributory negligence of Mr Anderson, and thereby the Applicant, demonstrated in the preceding material. ..."

But in the absence of any supporting argument, the submission is one of disarming and breathtaking simplicity.  The question whether the Court has power to do that which the submission invites it to do in the context of the statutory causes of action is a difficult one which has been the subject of learned comment; cf J C Campbell, "Contribution, Contributory Negligence and Section 52 of the Trade Practices Act - Part II" (1993) 67 ALJ 177 at 187-190; J D Heydon, "The Relevance of the Victim's Level of Care in Misleading and Deceptive Conduct Actions" (1995) 2 Competition & Consumer Law Journal, 230.  Perhaps, fortunately, I do not find it necessary to explore the various interesting possible bases which have been suggested on which damages otherwise recoverable by an applicant might be reduced on account of the applicant's contributory negligence.  The reason is that I am not persuaded that the evidence pointed to by the respondents establishes a want of care on the MGICA's part for the safeguarding of its own interests and that even if this be wrong, any want of care which existed is not shown to have contributed to the loss suffered by it.

Three matters must be noted at the outset.  First, MGICA did not deal directly with Beca or Mr Pselletes, but was a mortgage insurer which dealt with MBL on behalf of PCL and its role of a mortgage insurer must be taken to have been known to Mr Kenny.  Secondly, the respondents did not lead any expert evidence as to the practices followed by mortgage insurers for the protection of their interests.  Thirdly, in the absence of such evidence, I ask myself whether the documentary evidence and the evidence of Mr Anderson of MGICA show that MGICA failed to take reasonable care to ensure that there would not be a loss in respect of which PCL would be entitled to indemnity under the Pool Policy.

Mr Anderson gave evidence that MGICA normally relied on information provided by the mortgage manager, MBL.  For example, he said this:

    "MGICA would look at the information and make its own determination as to whether the application was a good risk and on occasion would ask for verification of some of the information that was provided but we would normally rely upon information provided by the lender - by the mortgage manager in this case, Macquarie Bank." (T 180.38-181.03)

There was much other evidence given by Mr Anderson in cross examination to the effect that he relied on information provided by MBL.  Similarly, he gave evidence that in various respects he relied on information provided by Beca's accountants, William Stavrou & Co, and by NAB, and on a letter dated 26 March 1990 from "Project Consultants".  It is not established that as a general matter MGICA was careless in relying on such information as distinct from itself in undertaking all inquiries into the creditworthiness of Beca and its guarantors.

It is, however, conceivable that information provided to a mortgage insurer might, on its face, raise suspicions or, for other reasons, demand further inquiry.  Assume that the information showed, or that such further inquiry would have shown, matters which would have dissuaded the mortgage insurer from providing cover.  In such a case it might be appropriate to decide that the mortgage insurer had failed to take reasonable care to safeguard itself from loss and further that its failure was a cause of the loss which it came to suffer.  Assume that, as well, the mortgage insurer would not have entered into the transaction but for a negligent overvaluation.  It might be appropriate in such a case to apportion responsibility equally as between the negligent valuer and the negligent mortgage insurer; cf AGC (Advances) Ltd v Baillieu Knight Frank (SA) Pty Ltd unreported, SA/FC, 12 October 1992 (financier/mortgagee and valuer).

The respondents point to evidence which they say suggests that Beca had overstated the value of various assets and submit that Mr Anderson should have appreciated that Beca was attempting to mislead MBL and, through it, MGICA.  I will address these submissions of the respondents in turn.

(a)The respondents submit that MGICA should have been suspicious about the good faith of Beca because of circumstances surrounding its commercial/residential complex at 32-38 Montgomery Street, Kogarah on which Beca had placed a value of $8.5 million.  The figure which MGICA came to treat as representing the value of that property was $7.5 million.  MBL's "Proposition Summary" of 19 March 1990 repeated Beca's figure of $8,500,000.  Mr Anderson, however, on 23 March 1990 required verification and obtained a copy of the letter from Honer & Johnstone United Realty Pty Ltd dated 26 March 1990 expressing the opinion that with proper marketing, the property would realise between $7.5 million and $8.0 million.  Mr Anderson attributed a value of $7.5 million to the property in his Underwriting Summary of 3 April 1990.

    I do not accept the respondents' submission that a suspicion should have been raised about the bona fides of Beca by reason of its having assigned a figure of $8.5 million to this property.  Mr Anderson gave evidence that it is not uncommon for a borrower to have an optimistic view of the value of its holdings.  In the present case, Beca's figure of $8,500,000 was $500,000 above the top of the real estate agent's range and $1,000,000 above the bottom of that range.  Mr Anderson said that he relied on the evidence provided by the letter from the agent.  In fact, MGICA allowed in its figures $7,500,000 for this property, that is to say, the figure at the bottom of the range given by the agent.

    I do not think that the over statement by Beca of some 6% - 13% of the value of this property is of such a dimension as should have alerted MGICA to the existence of bad faith on the part of Beca or those associated with it. 

(b)The respondents' next submission is that MGICA should have been put on its guard by gross discrepancies between the "at cost" figures assigned by Beca to its real estate holdings and the costs of them as revealed by the prices which appeared in transfers registered under the Real Property Act 1900 (NSW).  The two sets of figures are as follows:

Property	Costs assigned by Beca	Cost as revealed by R P Transfer
13 Columbus Circuit, Coffs Harbour transferred to Beca by Transfer bearing date 1 March 1974.	$179,500	$22,000
27 Arthur Street, Coffs Harbour transferred to Beca by Transfer bearing date 21 March 1974.	$221,947	$21,500
32-38 Montgomery Street, Kogarah transferred to Beca by Transfer bearing date 23 September 1985.	$1,357,640	$500,000
283 Miller Street, North Sydney transferred to Beca by Transfer bearing date 5 November 1987.	$2,639,113	$1,650,000

    It is not in issue that the figures in the first column were ultimately supplied by Beca.  MGICA submitted that there was no evidence that a mortgage insurer exercising due care and conducting itself in accordance with common practice should "conduct its own audit of the balance sheet" and seek verification of the "at cost" figures supplied to it.

    I think that this submission should be accepted.  While the discrepancies between the two columns of cost figures are gross, it must be understood that the respondents' case is not that Mr Anderson in fact knew of the prices appearing in the various Transfers.  Its case must be that it was incumbent on a mortgage insurer exercising due care in its own interests to verify the cost figures supplied to it.  In the absence of evidence, I would not reach that conclusion, particularly in view of the fact that MGICA's concern, no doubt like that of any other mortgage insurer,
is not with historical cost so much as with current market value.

(c)The respondents submit that the financial statements of Beca for the three financial years 1987, 1988 and 1989 showed a decrease in Beca's "net worth" from ($544,481) for 1987 to ($1,616,235) for 1989.  While this is true, Mr Anderson pointed out that MGICA relied on current market values of assets rather than historical cost figures appearing in the balance sheet, and that if the assets in question were reflected at their then current market values, Beca's net worth would have been approximately $16 million, the figure to which, on the evidence, MGICA had had regard.  Mr Anderson's "Underwriting Summary" recorded, in relation to the commercial properties shown in Beca's balance sheet at historical costs, that "if these assets were reflected at current market value in the balance sheet, net worth would be approximately $16M" (exhibit A1, p140).  I do not think that the evidence demonstrates a failure by MGICA to exercise due care to safeguard its own interests in this respect.

(d)The respondents submit that Beca traded at a net loss of some $300,000 in each of the three years 1987, 1988 and 1989 and that this should have put MGICA on guard as to Beca's creditworthiness.  The respondents submit that when questioned about this, Mr Anderson gave inconsistent responses.  Mr Anderson said that he had relied on a letter dated 26 March 1990 from Beca's accountant, William Stavrou & Co, addressed "TO WHOM IT MAY CONCERN" referred to earlier.  I do not think it necessary to address the detail of that letter.  It suffices to say that it offers an explanation for the annual losses in terms of an increase in the value of Beca's holdings and Beca's ability "to acquire and develop assets in a viable manner".

(e)The respondents point to the fact that Beca's overdraft increased between December 1988 and November 1989 from ($637,764.00) to ($2,034,476.00).  The respondents criticised Mr Anderson for failing to check the deposits into Beca's bank account which totalled only $900,000 as against what the respondents said was its stated income of $2,714,619.  Mr Anderson said that he relied on Beca's accountants to provide him with information relating to Beca's income and expenditure.

    I think that the respondents' submission is not persuasive.  First, there was no expert evidence to the effect that a prudent mortgage insurer would have added up the bank deposits.  Secondly, the figure of $1,763,044 which appears in the letter dated 26 March 1990 of William Stavrou & Co "TO WHOM IT MAY CONCERN" as representing the total revenue of Beca for the year 1988-1989, deals with an historical period as distinct from the then projected year ended 30 April 1991 for which the predicted income was stated to be $2,714,619 (including $900,000 from the Independent Theatre project).

(f)The respondents point to the fact that the evidence showed that Beca had exceeded its overdraft limit at the NAB.  I think, however, that this fact, without more, is not something which should have caused MGICA to think that Beca would default under the Mortgage, and, a fortiori that MGICA would incur a liability as mortgage insurer.  A diary note records that the manager of the Brighton‑Le‑Sands branch of NAB advised:

         "Present overdraft facility has been exceeded.          Directors considered honest and reliable and            would not enter into any commitment that they           could not fulfil."

    While Mr Anderson conceded that to exceed an overdraft limit was not to fulfil a commitment (T 184.30) what was said by the branch manager of the NAB must be understood as whole.  At least, what he said is ambiguous and does not persuade me that MGICA was careless in entering into the transaction without further inquiry as to the circumstances surrounding the exceeding of the overdraft limit.

(g)The respondents criticise Mr Anderson for failing to note what they suggest to be a discrepancy about the income of
Beca and "the matter of sales".  The "sales" referred to are historical figures of $156,943, $505,270 and $1,209,231 for the years 1987, 1988 and 1989 respectively.  However, the explanation given by Mr Anderson (T 1047) is acceptable, in my view.  The projected "income" figure at exhibit A1 p 128 does not include any income from sales because, apparently, the author did not contemplate that there would necessarily be sales in the then future period for which the projection was being made.

(h)The respondents submit that "Mr Anderson did not even know if the land adjoining the Elizabethan Theatre Trust land had been bought by Beca, the borrower".  The evidence relied on (T 185.15), however, is merely to the effect that Mr Anderson could not, then and there in the witness box, recall whether Beca had purchased the land.

(i)The respondents raise the criticism that Mr Anderson failed to identify the fact that income from the property at 961 Anzac Parade, Maroubra was included in the consolidated income of $2.7 million for serviceability of the loan, while in truth that property was owned by Anthony Developments Pty Limited, not a company beneficially "owned" by Mr and Mrs Pselletes.  The reply of MGICA is twofold.  First, MGICA submits that there is no evidence that the rent from that property was not to be made available to Beca.  Secondly, MGICA submits that Mr Anderson's analysis of Beca's capacity to service the debt was based on a cash flow statement provided by its accountants which did not include rent from the Anzac Parade property.  It is true that the "project[ed] cash flow analysis Beca Developments Pty Ltd" supplied by the accountants did not include any cash flow from the property at 961 Anzac Parade, Maroubra.  I, therefore, think that Mr Anderson's latter answer, at least, is a sufficient basis on which to reject the respondents' submission.

(j)The respondents make the point that a lease commitment to "Duke Pacific Finance" was not included in Beca's finance commitments on p 135 of exhibit A1.  Although this was not put to Mr Anderson in cross examination, the answer seems to be clear: the leasing debt (some $100,000) was intended to be "retired"; see para 1.3 of the Proposition Summary at p 126 of exhibit A1.

(k)The respondents submit that Centurian, which was to provide a guarantee, was in a worse financial state than Beca.  Mr Anderson said that MGICA placed little value on Centurian's guarantee but that, since it was part of the Pselletes group of companies, he thought it prudent that it should join in as a guarantor.  I see no reason not to accept this evidence.  MGICA was being offered real property security which it thought satisfied its 65% LVR ratio and the guarantees of Mr and Mrs Pselletes.  It should not tell against it that a superfluous third guarantee, that of Centurian, may not have come from as substantial a guarantor as one might have looked for in different circumstances.

(l)The respondents criticised Mr Anderson for not having been concerned about other statements in the letter of William Stavrou & Co, Beca's accountants, which indicated that they were unfamiliar with Centurian's business activities.  However, I think that the criticism is met by the evidence of Mr Anderson at T1055.30-.32:

           "I placed very little value on the guarantee of Centurian but being part of the group of companies we felt it prudent that it should be obtained."

(m)The respondents criticise Mr Anderson for having said that he thought that the "cost of the renovations was coming out of [Beca's] own cash flow" (T 1076.22‑.27).  The respondents make the point that if that had been true, the amount of Beca's losses would have been even greater than those which the documents available to Mr Anderson showed.  MGICA's response is that the documents already showed losses for Beca for the years up to 30 June 1989, and that expenditure on the Property would have been already reflected in those figures.  It is true that this would leave unaccounted for, work done between 30 June 1989 and April/May 1990 when the proposal was before MGICA.  However, the evidence does not enable me to attribute any
particular monetary amount to the cost of such work.  The evidence on the point is so vague that it would be wrong to conclude on the basis of it that MGICA failed to take reasonable care to safeguard its own interests.

The respondents have not proved that MGICA failed to exercise reasonable care to safeguard its own interests.  What will constitute the exercise of reasonable care must depend on the risk to be guarded against.  The risk here was that PCL would suffer a loss against which MGICA had undertaken to indemnify it.  MGICA would suffer that loss only if it transpired that Beca defaulted and the Mortgage and guarantee failed to protect PCL from loss.  The greater the LVR ratio, the greater the care a mortgage insurer might be expected to exercise.  The evidence does not persuade me to conclude that with its LVR ratio of 65% apparently satisfied, MGICA's failure to suspect, to seek verification and to make further inquiry, in the various ways indicated in the respondents' submissions constituted a failure by MGICA to take reasonable care to protect itself from loss.

Even if, contrary to the foregoing conclusion, it was careless of MGICA not to suspect, to seek verification or to make further inquiry in one or more of the ways suggested by the respondents, the evidence does not persuade me that this would have led to any different result for it.  I will take, by way of example, the instance which may seem to be most favourable to the respondents' case, namely, the gross overstatement of the cost of the four properties referred to in (b) earlier.  If MGICA had become aware of the prices in the Transfers, it may have been incumbent on it to seek an explanation.  If it had, I do not know what explanation would have been given.  It was the current market value of the properties with which MGICA was concerned.  This may have signified that it was not incumbent on it to seek an explanation at all or that it was entitled to be easily satisfied by any explanation given. 

While it cannot be said to be impossible that an inquiry would have revealed that there had been an attempt by Beca to deceive and that this revelation would have induced MGICA not to grant cover, this is mere guess work.  In sum, it could not be concluded on the evidence that any negligence on MGICA's part had contributed to its loss.

8.  CONCLUSION

My conclusions can be summarised as follows:

1.  The respondents breached the duty of care and skill which they owed to MGICA and in the result provided an "as completed" valuation of $5,500,000 whereas the true value of the Property was only of the order of $3,900,000 to $4,000,000 and a valuation resulting from the exercise of due care and skill would have said so.

2.  The respondents contravened s 52 of the TP Act and s 42 of the FT Act by providing a valuation which overstated the "as completed" value of the Property to the extent of some $1,500,000 to $1,600,000.

3.  MGICA acted in reliance on the respondents' valuation by including the Mortgage in the Pool Policy and would not have provided mortgage insurance if the "as completed" valuation had been substantially less than $5,500,000 as it was.

4.  The respondents are liable to MGICA for all the loss which it suffered from having entered into the transaction, not only for that represented by the amount of the difference between the valuation supplied and the true value.

5.  The limitation defence fails.

6.  The contributory negligence defence fails.

The respondents should be ordered to pay damages to MGICA of $1,977,513.67 plus interest under s 51A of the Federal Court Act 1976 calculated in the usual way on the amounts outlaid by MGICA from the respective dates of outlay to date of order.  As well, the respondents will be ordered to pay MGICA's costs.

The parties should attempt to agree on the amount of interest.  The proceeding will be stood over to a date for the making of final orders.  The parties will be directed to bring in an agreed form of short minutes of the orders to be made on that date or, if agreement is not reached, the forms of short minutes of orders for which they will respectively contend.

                  I certify that this and the preceding 158 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lindgren.

                  Associate:

                  Dated:          30 August 1996

Heard:            7, 8, 9, 10, 11, 14, 15, 16, 21, 22 August 1995; 5, 6, 7, 8, 9 February, 8 March 1996.

Date last submission

received:         25 July 1996

Place:            Sydney

Decision:         30 August 1996

Appearances:      Mr J J Steele QC with Mr R W White of counsel instructed by Hickson Lakeman & Holcombe appeared for the applicant.

                  Mr D Davies of counsel instructed by Colin Biggers & Paisley appeared for the respondents.