FEDERAL COURT OF AUSTRALIA

Elliot & Tuthill (Mortgages) Pty Ltd v Farrell & Anderson Pty Ltd

[2002] FCA 965

PRACTICE AND PROCEDURE – application for leave to file cross-claims – proposed cross claim against applicant’s solicitors and directors – application opposed – whether cross‑claims disclose a cause of action – cross‑claims seek an order for indemnity or contribution – consideration of principles of equitable contribution

Burke v LFOT Pty Ltd [2002] 187 ALR 612, considered

Austotel Management Pty Ltd v Jamieson & Ors (1996) ATPR 41-454, referred to

Dorrough v Bank of Melbourne Ltd (1995) ATPR 46-152, referred to

I & L Securities v Landmark White [1999] NSWSC 1012, referred to

Alexander (T/as Minter Ellison) v Perpetual Trustees WA Ltd [2001] NSWCA 240, referred to

Henville v Walker [2001] 182 ALR 37, referred to

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

Cockburn v GIO Finance Ltd (No. 2) (2001)51 NSWLR 624, referred to

General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125, followed

ELLIOT & TUTHILL (MORTGAGES) PTY LIMITED v FARRELL & ANDERSON PTY LIMITED & ORS

N1474 of 2001

ELLIOT & TUTHILL (MORTGAGES) PTY LIMITED v FARRELL & ANDERSON PTY LIMITED & ANOR

N1482 of 2001

ELLIOT & TUTHILL (MORTGAGES) PTY LIMITED v FARRELL & ANDERSON PTY LIMITED & ANOR

N1483 of 2001

ELLIOT & TUTHILL (MORTGAGES) PTY LIMITED v FARRELL & ANDERSON PTY LIMITED & ANOR

N1484 of 2001

MADGWICK J

2 AUGUST 2002

SYDNEY

N1482 of 2001

N1483 of 2001

N1484 of 2001

THE COURT ORDERS THAT:

1.             The respondents be granted leave to file cross‑claims in proceedings, N1474/01, N1482/01, N1483/01 and N1484/01.

2.             Costs will be reserved

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

N1482 of 2001

N1483 of 2001

N1484 of 2001

REASONS FOR JUDGMENT

1                     The application before the Court concerns a notice of motion filed by the respondents seeking leave to issue cross‑claims against the applicant’s solicitors and directors (“the cross‑respondents”).  The applicant in the principal proceedings is suing the respondents, who are property valuers, for breaches of s 52 of the Trade Practices Act 1974 (Cth) (“TPA”), s 42 of the Fair Trading Act 1987 (NSW), breach of contract and tortious negligence for alleged overvaluations of certain parcels of land.  The applicant is a trustee for certain investors and lends their funds on the security of mortgages.  The applicant claims that the respondents overvalued certain properties, which returned a shortfall when the applicant was obliged to realise the securities for non-payment by the debtors.  The proposed cross‑claims allege that the cross‑respondents breached various duties to the applicant and as a consequence, the applicant suffered loss and damage.  The applicant opposes the respondents’ motion on the basis that it reveals no sustainable cause of action. 

2                     The issues raised are difficult and require close examination of the case law and its relationship to the particular facts of the present proceedings.  In particular, reference has been made to the recent decision of the High Court in Burke v LFOT (2002) 187 ALR 612, which both parties have sought to rely on.  In light of the need for the parties to know the outcome of my decision so as to undertake whatever practical arrangements might become necessary, I indicated that I would grant the respondents leave to file the proposed cross‑claims and reserved my reasons for decision, which I now give.

Background

3                     The principal proceedings concern four related matters, namely N1474/01, N1482/01, N1483/01 and N1484/02.  The applicant company in each of these matters was, as indicated, a trustee-moneylender, conducting a mortgage investment scheme (“the scheme”).  The applicant’s scheme involved the provision of finance, by lending up to two-thirds of the value of real property, secured by first mortgages on the relevant properties.  The applicant alleges that the amounts of the loans in respect of four properties were calculated by reference to property valuations prepared by the respondents.  The first respondent in all of the proceedings was in the business of providing property valuations.  The second respondent is a registered valuer and employee of the first respondent.  In proceeding N1474/01, there is an additional respondent, the third respondent, who is also a registered valuer and employee of the first respondent. 

4                     In September 1999 the applicant engaged the respondents for the purpose of obtaining property valuations in respect of the following properties: Units 3202 and 3203A of 148 Elizabeth Street, Sydney; 22 Esk Street, Wahroonga and 104 Sandgate Road, Wallsend, in the Newcastle area.  The applicant claims that monies were lent to investors, such loans being in each case approximately two-thirds of the value of the property, calculated by reference to the respondents’ valuation reports.  Subsequent to these arrangements, the borrowers in respect of each of these properties defaulted on the mortgage repayments and the applicant, as mortgagee in possession, sold each property at public auction.  The applicant claims that, upon such sales, it did not recover all of the monies lent.  The applicant claims that the respondents’ property valuations were inaccurate and over-estimated the true value of each of the properties.  The applicant claims that this led it to lend greater sums of money than it would have, had the respondents’ valuations shown the true value of the properties.  The claim for damages for the respondents’ alleged breaches of duties, in respect of the four properties, is approximately three million dollars.  The principal proceedings are presently listed for a twelve day hearing in early December 2002.

The proposed cross‑claims

5                     The respondents’ application for leave to file cross‑claims was filed on 20 June 2002.  The cross‑respondents named in the cross-claims are Mr Jack Jordan and Mr David Jordan, who are both the solicitors for and directors of the applicant company.  The respondents allege that the cross‑respondents were negligent in their duties, both as the applicant’s solicitors and as its directors, and that it was their negligence that caused the applicant’s loss and damage.  Essentially, the respondents say that the cross‑respondents paid insufficient regard to the alleged lack of personal credit-worthiness of the borrowers, whatever the position as to the value and, therefore, the adequacy of the intended securities.  The relief sought by the respondents is essentially an order for indemnity or contribution on the basis

that the proposed cross‑respondents are wholly or partly responsible for the applicant’s loss and damage.

6                     Counsel for the respondents submitted that the proposed cross‑claims relate to the subject matter of the proceedings and as such, leave should be granted to file the proposed cross‑claims:  see O 5 r (1) of the Federal Court Rules.  She submits that the question as to whether the respondents can claim contribution from the cross‑respondents has not been conclusively determined by the High Court.  It is submitted that Burke v LFOT did not determine that a claim for contribution could not succeed in the circumstances alleged, and that dicta in that case left the question open.  It was also pointed out that there are no Full Court decisions of this Court on point and that there are single judge decisions of this Court which support the possibility of claims for contribution by persons who have allegedly contravened the TPA against those alleged to have concurrently caused the same loss: see Austotel Management Pty Ltd v Jamieson & Ors (1996) ATPR 41-454, Dorrough v Bank of Melbourne Ltd (1995) ATPR 46-152; and also a decision of the NSW Supreme Court I & L Securities v Landmark White [1999] NSWSC 1012 (8 October 1999), Rolfe J.

7                     Counsel for the applicant submitted that leave should not be granted because the proposed cross‑claims do not reveal a viable cause of action.  Counsel’s submissions were put as follows:

·               The cross‑claims fail to reveal a cause of action which could be brought as fresh proceedings.  The breaches alleged are breaches of a duty of care owed by the cross‑respondents to the applicant company, not a duty of care owed to the respondent valuers.  The resultant harm was suffered by the applicant company and not the respondent valuers and so, any cause of action for those losses would only accrue to the applicant.  On this basis, there can be no compensation payable to the respondent valuers for the harm suffered as the alleged duty and breach of duty was owed to the applicant.  There is no authority to support the proposition that a third party who suffers economic or other loss can recover in negligence for a breach of a duty of care owed not to the third party but to another party.

·               It is not open to the respondents to base their cross‑claims on the assertion that, if the applicant were to sue the proposed cross‑respondents for a breach of a duty of care, then the damages would be the same as those that the respondents may be found liable for by reason of their allegedly misleading or deceptive conduct. 

·               The proposed cross‑claims do nothing more than assert that, had the proposed cross‑respondents acted with due care, then the misleading nature of the conduct of the respondents would have been exposed before finance was lent.  Even if this submission were proven, it would not remove the respondents’ liability imposed upon them for breaching a statutory mandate to avoid misleading and deceptive conduct.

8                     Counsel for the applicant placed reliance on the following cases in support of his argument that the courts have rejected the argument that any failure on the part of an applicant or its agent to act with due care negatived or otherwise reduced liability for damages:  Alexander (T/as Minter Ellison) v Perpetual Trustees WA Limited [2001] NSWCA 240;  Burke v LFOT;  Henville v Walker [2001] 182 ALR 37;  Henjo Investments Pty Ltd v Collins Marrickville Pty Limited (1988) 79 ALR 83. 

Burke v LFOT

9                     In Burke v LFOT, the applicant in the principal proceedings, Hanave, was the purchaser of a commercial property.  Hanave commenced proceedings against LFOT, the vendor, for misleading and deceptive conduct in respect of representations made about the property.  Mr Burke, Hanave’s solicitor, was involved in the negotiations for purchase and continued to act on the purchase of the property.  The application was dismissed at first instance, but Hanave successfully appealed to the Full Court of the Federal Court and LFOT was found to have acted contrary to s 52 of the TPA.  The false and misleading conduct by LFOT included describing one of the tenants as a “high quality tenant” although the tenant had been in significant arrears in payment of the rent on a number of occasions, and for failing to disclose that an incentive payment had been made to that tenant.  The matter was remitted to the primary judge for determination of liability, the cross‑claim against Burke and for an assessment of damages. 

10                  On remittal, the primary judge found that Burke was negligent in not advising Hanave to make inquiries into the solvency and financial standing of the tenants before exchange of contracts.  If such advice had been given, the inquiries would have disclosed the true position and the purchase would not have proceeded on the terms that it did.  The sale price exceeded the true value of the premises by $750,000.  His Honour held that Burke should contribute equally with LFOT towards the judgment award.  Burke unsuccessfully appealed to the Full Court of the Federal Court.  Burke then appealed to the High Court.  The issue before the High Court was whether the Federal Court had been correct to hold that Burke was liable to make contribution and, if so, whether it had been correct to order equal contribution from, LFOT and Burke.

11                  Burke’s appeal to the High Court was successful.  A majority of the High Court, Gaudron and Hayne, McHugh and Callinan JJ, allowed the appeal.  Kirby J dissented.

12                  In their joint judgment, Gaudron and Hayne JJ observed (at [14]), that, in general, “the principle of equitable contribution requires that those who are jointly or severally liable in respect of the same loss or damage should contribute to the compensation payable in respect of that loss or damage”.  The principle requires that there be a “common obligation” or “co-ordinate liabilities”, or that the liabilities should be “of the same nature and to the same extent”:  see [15].  This may direct attention to the parties’ culpability as well as to the issue of causation.  In this case, Gaudron and Hayne JJ regarded LFOT’s conduct, amounting to a positive inducement to purchase, as of such a different order from Burke’s conduct, characterised as an omission to advise further inquiries, that LFOT should not be entitled to contribution.  The consequence of Burke’s omission was merely that LFOT’s misleading conduct remained undetected.  Further, their Honours were of the view that Burke also had been misled by LFOT’s representations, and if that had induced him not to advise further inquiry, he would be entitled to indemnity from LFOT.  However, in their Honours’ view, it was not necessary to consider further the relevance of culpability and the causal significance of the acts and omissions or how doctrines of equitable contribution operate in connection with s 52 TPA claims.  That was so because the doctrine of equitable contribution “is founded on concepts of fairness and justice” and, if the order for contribution stood, LFOT would be unjustly enriched because they would still retain half of the excess moneys, above the true value of the premises, paid to them by Hanave for the purchase of the property:  see [22].

13                  McHugh J agreed that if the order for contribution stood, LFOT would gain $375,000 by reason of its misconduct and any “principle of the common law or equity that would lead to such a result is so surprising that it would need to be re-examined”: McHugh J at [26].  However, the principles concerning contribution did not lead to the orders, as made by the Federal Court in this case. 

14                  The right of contribution “depends upon matters of substance, not form”.  The relationships between the parties must show “a common interest and a common bur[d]en.  The nature of the relevant interest and burden is such that the discharge of the burden by one party constitutes a benefit to the other or others which, in fairness, the law cannot countenance them keeping”:  see [40]-[41].  Examining the case law, McHugh J observed that contribution will not arise “simply because the respective liabilities of parties arise out of similar relationships or related transactions” nor will it apply “if the obligations are merely owed to the same party or are ‘otherwise connected in time or circumstance’ ”:  see [43]-[44].  His Honour indicated his preference for an approach that looks at whether there was “an involvement of the parties in a common design to achieve a common end” rather than to look at merely “co-ordinate liabilities”, that is, merely a common burden:  [47]-[48].  McHugh J acknowledged that the circumstances in which such an order will be made are not closed and a difference in the causes of action on which the parties are liable will not “of itself preclude an order for contribution between them, provided the liability of each ‘is of the same nature and to the same extent’ ”:  [49].

15                  In McHugh J’s view, the liabilities of LFOT and Mr Burke were difficult to characterise as being “of the same nature and to the same extent”.  His Honour found that they were independent, not common obligations, having different legal sources and they were not of the same nature or the same extent.  “LFOT’s obligation [under the TPA] extended to not misleading Burke as well as Hanave”:  [52].  His Honour approved analyses, in particular that of Lee J who dissented in the Full Federal Court’s consideration of the matter, which held that the “level” of the obligation needed to be the same.  Implicitly, his Honour was saying, or so it seems to me, that LFOT had, by reason of its obligation to Burke too, a deeper level of obligation than that of Burke – see [59]-[66].  The only way in which their obligations could be viewed as “ shared” was that the applicant was the object of them: see [57].  In his Honour’s view, it would be unjust for LFOT to retain moneys it had received; LFOT would be unjustly enriched because it had obtained a greater purchase price than it would have obtained but for its contravening conduct.  It was just that LFOT should be obliged to return the surplus to Hanave.  It would be “against the policy of the [TPA], that a

party, having been found to have breached s 52, could bind the very person [Burke] who was misled and deceived to contribute to the loss”:  see [65]. 

16                  Callinan J was of the view, firstly, that there was “no relevant mutuality of rights and obligations inter se”.  His Honour appears (see [143]) to have been much influenced by the actual deception as well as the misleading of Burke as a director of Hanave.  His Honour also referred to the impossibility of contracting out of the TPA and contrasted this with Burke’s primarily contractual obligations to Hanave which, his Honour said, might have been contractually limited.  However, his Honour also said, at [145]:

“I would not wish to be taken to be saying that in no case in which one of the obligations is owed by statute and another or others are owed at common law or under another statute, the possibility of contribution is necessarily excluded.  Whether it is will, depend however, among other things, upon the precise nature and content of the respective obligations owed and rights created or enjoyed, and the degree of correspondence between them.  Nor does my decision, in this case, so far as contribution in law as opposed to equity is concerned, turn upon the fact that there was, in my opinion, (contrary to the holding of Heerey J) a degree of moral obloquy on the part of one or more of the respondents, and none on the part of the first appellant, although I would not rule out that those matters might be decisive considerations in some cases.  I agree, however, with what was said by Lee J in the Full Court that the fact that there was a degree of moral obloquy on the part of the respondents provides another clear indication that the respective burdens, obligations and rights owed and enjoyed by the appellants were quite different, qualitatively and quantitatively, and accordingly legally, from those owed by the respondents.  His Honour was also right, with respect, to have regard to the fact that the Act provides a remedy for the broad spectrum of people likely to be affected by breaches of the Act and does not restrict relief to the astute and the intelligent.”

17                  Kirby J would have allowed the appeal.  His Honour was in favour of a more flexible approach, observing at [90]:

“With the advent of new rights and remedies (most of them statutory), it is most undesirable to circumscribe the application of the principle of contribution.”

18                  His Honour considered, as he said at the outset of his reasons (at [69]), that:

“Despite their origin and purposes [in “doctrines of ‘equity’ in the sense of ‘reason justice and law’ ” c.f. [88]] those principles [of equitable contribution] have become needlessly encrusted with artificial rules and restrictions resulting in disputation, confusion and uncertainty.”

Conclusions as to LFOT

19                  It is possible, as the applicant argues, that the Court’s decision in Burke v LFOT did not necessarily depend upon the s 52 miscreant having been unjustly enriched.  It is also possible that, ultimately, it did.  The reasons of Gaudron and Hayne JJ appear less clearly to point in the latter direction than those of McHugh and Callinan JJ.  For Kirby J, in dissent, the “unjust enrichment” analysis was merely question-begging, but general principles would have favoured Burke being made to contribute.

20                  In the Full Federal Court the majority, Heerey and Lehane JJ were undeterred by considerations of “unjust enrichment”.  The latter was, of course, one of the authors of the text on the law of equity which McHugh J described as “great”.  The learned authors of that text appear to propound a view of the law closer to that espoused by Kirby J (see McHugh J’s discussion in Burke v LFOT at [47]-[49] and, per Kirby J at [115] and footnote 172).  As indicated above, there are other judgments of single judges of this Court which would or could support the claims for contribution now sought to be raised.  Speaking for myself, in the exercise of a right to make a reasoned and constructive criticism, even if the doctrine of precedent should consign it to irrelevance, it seems to me that the considerations of policy and substantial justice referred to by Kirby J at [106]-[118] are, with utmost respect, not adequately answered by the other judgments in the High Court. 

21                  In these circumstances and where, as here, the element of unjust enrichment is lacking, I do not believe it can be said that Burke v LFOT provides an unarguable answer to the claims sought to be raised by the cross‑claims.  If that case can be said, in the light of the differences of reasoning exposed in the various judgments, to have a ratio decidendi, it is by no means clear that it either does not involve one or both of the factors, absent in the present case, of unjust enrichment, or LFOT’s basal or threshold role in actually bringing about the existence of the underlying legal relationships between all the parties.  My conclusion is that the notion of unjust enrichment was not the only basis for the decision of Gaudron and Hayne JJ and that, in the opinion of those two judges, there were other reasons for upholding the appeal.  But these other reasons seem to have depended on the initiating role of LFOT.  The same may be said of McHugh J’s reasoning.

22                  It is, it seems to me, at least arguable that, in the present case, and despite the TPA count against the would-be cross‑claimant, the respondent valuers no more initiated the set of subsequent legal relationships than did the cross‑respondents, and that that is so even though the cross‑respondents were entitled to rely on the respondents’ valuations.  The legal relations between the parties were formalised before the valuations were given and the respondents had no interest in what the applicant or the cross‑respondents did with, or in reliance upon, their advice as valuers.  In terms of “levels” of obligations or “nature and extent” of interests and obligations, these may be distinctions that constitute differences.

23                  I should add that Henville v Walker (2001) 182 ALR 37, in which the High Court decided that there is no ground for reading into s 82 of the TPA doctrines of contributory negligence and of apportionment of damages therefore, is not necessarily inconsistent with the claims the respondent wishes to make for contribution from third parties.  Neither Cockburn v GIO Finance Ltd (No. 2) (2001)51 NSWLR 624 and Alexander (t/as Minter Ellison v Perpetual Trustees WA Ltd [2001] NSWCA 240 are binding on this Court.  In any case Cockburn appears principally to have turned on the view that the party seeking contribution, as one who suffered because a transaction was voided ab initio, had nevertheless sustained no loss c.f. 634-5.  In Minter Ellison, a trustee liable to beneficiaries sued its solicitors to recover its loss.  The solicitors sought to say that the trustee’s own defaults should result in an apportionment of the trustee’s loss to reflect their own and the trustee’s respective responsibilities.  The NSW Court of Appeal did not accept this.  It was the trustee who had retained the solicitors.  Their duty was to the trustee.  The trustee’s duties were, however, to the beneficiaries.  That was a decisive matter for Stein JA and Ipp AJA.  No such confusion arises here, at least as the matter is presently constituted.

24                  The law is clear that before a party will be shut out before the final hearing from presenting a cause of action, the intended cause of action should, in effect, be hopeless:  General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125.  In my opinion, that cannot be said here.  The law relating to contribution appears to be in the process of development or restatement.  Further, the full facts are not known as to the relevant conduct of the proposed cross‑respondents and controversial questions may be involved in the curial ascertainment of those facts.  The precise factual context may affect the real content of the proposed cross‑respondents’ duties, both as directors and as solicitors.  Where there appears to be scope for further development, elaboration or clearer restatement of the law, it seems to me inappropriate to shut the cross‑claimants out before that precise factual context is known.

25                  I therefore granted the application to file the cross‑claims.  Costs will be reserved.

Associate:

Dated:              2 August 2002