Cash Resources Australia Pty Ltd v Brett [1997] QCA 130

IN THE COURT OF APPEAL [1997] QCA 130 SUPREME COURT OF QUEENSLAND Appeal No. 2872 of 1996 Brisbane [Cash Resources Australia P/L v. Brett] BETWEEN: CASH RESOURCES AUSTRALIA PTY LTD ACN 004 792 330 (Plaintiff) Appellant AND: PETER BRETT (Defendant) Respondent Davies JA Thomas J Williams J Judgment delivered 20 May 1997 Judgment of the Court APPEAL DISMISSED WITH COSTS CATCHWORDS: NEGLIGENCE - Causation - Negligent valuation of security - Whether appellant relied on valuation after relevant time - Whether valuation ceased to be an operative cause of damage - Whether causative factor can come to an end. NEGLIGENCE - Remoteness of damage - Part of loss due to fraudulent conduct of third party - Whether conduct reasonably foreseeable. NEGLIGENCE - Contributory - Whether finding of 100% contributory negligence equates with absence of causation. Counsel: Mr D. Jackson QC, with him Mr P.P. McQuade for the appellant. Respondent appeared on his own behalf Solicitors: Flower & Hart for the appellant. Respondent appeared on his own behalf Hearing date: 28 April 1997 -- 1 of 15 -- IN THE COURT OF APPEAL SUPREME COURT OF QUEENSLAND Appeal No. 2872 of 1996 Brisbane Before Davies JA Thomas J Williams J [Cash Resources Australia P/L v. Brett] BETWEEN: CASH RESOURCES AUSTRALIA PTY LTD ACN 004 792 330 (Plaintiff) Appellant AND: PETER BRETT (Defendant) Respondent REASONS FOR JUDGMENT - THE COURT Judgment delivered 20 May 1997 Introductory The appellant, Cash Resources Australia Pty Ltd, is in the business of factoring debts. It was referred to at trial as "CRA" and that abbreviation will be used here notwithstanding possible confusion with a well-known company that has the same initials. The respondent is Peter Brett, a qualified valuer, who valued a house property for CRA in 1990. The only other major actor in this matter is Olympus Nominees Pty Ltd ("Olympus"). It owned the house property valued by Mr Brett. Olympus's main activity was the manufacture and supply of aluminium framed windows and like products to persons in the building industry. It was wound up on 1 July 1991. CRA's business involved the buying at a discount of debts. Its customers were businesses -- 2 of 15 -- 2 interested in receiving cash for current debts sooner than would be expected on trading terms, or those which require a more immediate cash flow than usual. From the client's viewpoint, its credit sales are converted into cash sales, though not for their full face value. There are two methods of purchase - notified debts and non-notified debts. The former would be by simple legal assignment whereunder the debtor would effectively become a debtor of the factor. CRA however operated by means of non-notified debts, whereby the client company would collect payments from its debtors in the usual way but would be obliged to bank the proceeds to the credit of CRA. It was a confidential arrangement between CRA and its client and the debtors were intended to have no knowledge of CRA's involvement. Such a business arrangement was entered into between CRA and Olympus pursuant to what was called an invoice financing facility. The arrangement contained incentives for the client company to recover debts early. CRA purchased debts of Olympus at 80 per cent of the face value of copy invoices. CRA paid those sums to Olympus less a further 3 per cent as its initial fee, resulting in an actual payment of 77 per cent of the face value of the invoice. If Olympus collected payment of the full debt from its debtor within the prescribed time, and banked those proceeds to CRA's account, CRA refunded the 20 per cent margin to Olympus upon monthly reconciliations. CRA's initial fee of 3 per cent would be adjusted upwards or downwards according to the collection performance of Olympus. It would increase considerably if collection was delayed. CRA had other rights, including the right to apply the 20 per cent retention to satisfy any unpaid balance of any 120 day old debt, or at CRA's discretion in satisfaction of any sum owing by Olympus to CRA. The persons relevantly conducting business on behalf of CRA were its Brisbane branch office manager, Mr Walder, and the Melbourne head office manager, Mr Roberts. The profits of CRA of course were entirely dependant upon turnover, and a strong desire to obtain clients may readily be inferred from the evidence. In August 1990 Mr Walder, who was interested in offering CRA's services to Olympus, -- 3 of 15 -- 3 retained Mr Brett to value a property owned by Olympus, namely a house property situated at Carrara. He was asked to assess the "fire-sale" value. Three types of valuation relevantly seem to have been recognised in the present case, namely a mortgagee sale, which was regarded as likely to produce the lowest value of the three, by reason of public knowledge that it was a mortgagee sale; a "fire-sale" on the footing that a quick sale would be made within 30 days of instructions to sell, which was recognised as likely to obtain less than full market value because of the abbreviated time limit, but to lack the prejudice associated with a mortgagee's sale; and market value, namely the value realisable by placing a property on the open market without tight time restrictions. Mr Brett's valuation was $975,000 subject to vacant possession, as at 5 September 1990, on the footing of a so-called fire-sale. The evidence is that the property market in Australia, including the relevant Gold Coast area, was at that time affected by a recession and that the decline of property values became even more marked after 5 September 1990. The security available to CRA on the above property was limited to a third mortgage, to follow mortgages held by National Australia Bank and National Australia Savings Bank to the extent of $750,000. It can be seen then that Mr Brett's valuation could found a belief by CRA of a secured "equity" of $225,000, although costs of realisation ($30,000) would bring the net value of its security below $200,000. The obtaining of a valuation from Mr Brett was one of eight factors which CRA considered necessary before it would be prepared to grant a factoring facility to Olympus with a facility limit of $200,000. Earlier dealings with Olympus had included a requirement by CRA that the valuation would have to come in at at least $1 million, but CRA seems to have departed from that. Another of CRA's eight requirements ("security to represent minimum of 100 per cent") would also seem to be of less than critical importance if any thought were given to realisation costs. Another requirement of CRA before it would grant the facility was that there be a bill of sale over a launch, -- 4 of 15 -- 4 representing security worth approximately $50,000. No such security was ever available, and later attempts to obtain that intended security failed miserably. Apparently Mr Walder misled Mr Roberts into thinking that it had been provided, and the deal proceeded. The evidence as a whole strongly supports the inference drawn by the learned Trial Judge that in the light of later events there was apparent an almost intractable or burning desire on the part of the appellant to continue trading with Olympus. On 28 September 1990 CRA entered into a factoring agreement with Olympus, with a $200,000 limit. Trading was apparently satisfactory until the end of the year. Had closer monitoring of Olympus's affairs occurred however, it would have been apparent that its trade and profitability was steeply declining. On 26 February 1991 CRA received a report from its accountants Coopers & Lybrand (Ex. 9) on the specific subject of "appraisal of Olympus". That report, it might be thought, should have been sufficient to induce CRA to withdraw promptly from further dealings with Olympus. The report referred to "a significant change in the level of uncollectable debtors. The company has written off over $250,000 of debtors from the '89/90 year. This has severely affected the company's recent profitability . . . The level of production has decreased dramatically in the last 12 months from approximately $350,000 to $400,000 a month to approximately $100,000 to $200,000 a month for the next six months. . . . The company suffered an additional loss of $100,000 after their accountant, who had those funds trust [sic], fled the country." It continued "Based on the financial statements as presented to my staff for the period ended 30 June 1990, this company is insolvent." Attention was drawn to Group and Prescribed Payments tax outstanding for over 90 days. There was express advice "your position does not appear to be secure in the light of the magnitude of the bank overdraft and priority creditors". It concluded, "Extreme caution should be exercised in dealing with this client, and we recommend a reduction in your exposure." To the contrary of this advice, CRA decided to increase the level of its facility to Olympus, -- 5 of 15 -- 5 and on 28 February 1991 extended the credit limit to $250,000, and thereafter continued dealing with Olympus. It is important to note that all the losses which CRA now seeks to recover against Mr Brett were incurred after this time. No debts purchased to that time were outstanding. As the learned Trial Judge noted, the debts which caused losses, according to Mr Roberts, were the debts purchased in or after March, April and May 1991 and, on Mr Walder's evidence, substantially in May 1991. It is also to be noted that, unlike a more conventional loan from a lending institution, CRA did not make any general advance. It purchased the invoices one by one. It could stop buying invoices, or reduce the number of such purchases at any time it chose. This underlies the finding by His Honour that the appellant could have got out of its arrangement "virtually at the drop of a hat". We do not understand His Honour to suggest that there could have been a peremptory withdrawal on a given date with no further accounting, as accounting would need to occur with respect to past invoices which were not yet satisfied, and some of those might turn out to be bad debts. Even so, there is abundant evidence to support His Honour's conclusion that CRA could have chosen to retreat in its dealings with Olympus at any time after 26 February 1991, and that it could probably have done so virtually unscathed. In broad outline His Honour's findings were to the following effect - (1) Mr Brett admitted in evidence that he had made two errors in preparing his valuation -(a) he had applied a 10 per cent discount factor to the real property only, and had not applied that factor to the chattels; and (b) he had treated the subject land as if it were two subdivided blocks without allowing for the necessary costs of subdivision and holding charges. In those respects His Honour found that Mr Brett has been negligent. (2) Had the valuation been properly performed, on His Honour's assessment it would have resulted in a figure somewhere between $800,000 and $880,000. If one takes the median figure, the extent of Mr Brett's "error" was about $135,000. -- 6 of 15 -- 6 (3) CRA relied in part on that valuation in deciding to grant the initial facility on 28 September 1990. In other words, CRA's receipt of Mr Brett's valuation was a cause of CRA commencing business with Olympus in September 1990. (4) CRA's actions on and after 28 February 1991 were no longer taken in reliance upon or caused by the negligent act of Mr Brett in providing the original valuation. His Honour expressly found that the losses suffered by CRA, all of which occurred after 28 February 1991, were not caused by the negligence of Mr Brett. (5) To the extent to which CRA's losses were the result of fraudulent conduct by Olympus in presenting invoices in respect of nonexistent transactions, such a loss would not in any event have been reasonably foreseeable by Mr Brett. If Mr Brett was otherwise liable for CRA's total losses from its dealings with Olympus, the damages should not include loss attributable to such conduct by Olympus. (6) In assessing damages in any event, His Honour proceeded according to the case presented by CRA, namely that it would not have entered into the initial transaction with Olympus and that its election to continue dealing after February 1991 was in reliance upon the original valuation. On that footing His Honour assessed damages essentially as claimed in Ex. 75 ($348,731.97), but deducted specific items such as legal costs wrongly charged, ending up with a figure of $282,461.47. His Honour noted however that that figure would need to be further reduced by recalculation of interest, and once the net amount was established, there would then need to be an increase in interest to update the amount to the date of judgment. (7) CRA was guilty of contributory negligence both in its actions leadings to its making the original arrangement with Olympus, and in its extraordinary decision to continue trading with Olympus after 26 February 1991. As to the former, the board of CRA failed to take reasonable steps to ascertain essential matters, Mr Roberts was materially misled in a number of respects by Mr Walder, CRA inadequately investigated the financial background and affairs of Olympus, and it did not act according to its own guidelines and requirements. His Honour assessed CRA's share of responsibility for loss due to its own negligence at 60 per cent with respect to entering into the facility in the first place. With respect to the continuation of trading after February 1991 he found that CRA was entirely responsible for its own losses. -- 7 of 15 -- 7 (8) All losses of CRA were attributable to its dealings after 28 February 1991. (9) Judgment was given for the defendant with costs of the action. By this appeal CRA has attempted to attack many of the findings of fact and inferences drawn by the learned Trial Judge. Particular attack was mounted upon the finding that CRA did not rely after 28 February 1991 upon Mr Brett's valuation. Procedural history Determination of the present appeal is a far from satisfactory exercise. This is the result of certain events and factors which should be briefly mentioned. The trial occupied eight days in all, but a substantial adjournment was necessary after the fourth day. Shortly prior to the resumed hearing, senior counsel on behalf of Mr Brett sought leave for the solicitors for the professional indemnity insurers, who had hitherto arranged for his representation, to withdraw from the case. On 9 October 1991, Mr Brett had entered into a scheme of arrangement with his creditors pursuant to Part X of the Bankruptcy Act. The insurers apparently withdrew their funding of the defence on the basis that the defendant had failed to disclose his scheme of arrangement to them at the appropriate time and that this enabled them to avoid liability. They were permitted to withdraw and Mr Brett continued as a litigant in person, conducting his case, as His Honour observed, "with obvious disadvantages". CRA, which had failed to seek leave to proceed with the action initially, was given leave nunc pro tunc to proceed. His Honour adverted inter alia to the "complicated way in which the case was presented", the limited assistance that the Court could give to a litigant in person and of his desire for a closer and more detailed examination of the evidence than was available. The very limited cross-examination of Mr Walder created difficulties for the learned Trial Judge in assessing the evidence without infringement of the rule in Browne v. Dunn. But as His Honour observed, there were bases which appeared from the documentary evidence, the evidence of the witness himself and evidence of other witnesses -- 8 of 15 -- 8 which permitted doubts and qualifications to be entertained with respect to Mr Walder's evidence. When the matter came on for appeal, leading counsel for CRA (who had not been counsel at the trial) applied for an adjournment on the ground that former counsel had "become unavailable" on the previous day, and that neither he nor junior counsel (who it may be noted had been counsel at the trial) were properly prepared. The Court, with Mr Brett's consent, granted an adjournment on the footing that the matter should be dealt with by written submissions from both parties. The matter was adjourned expressly on the basis that the appellant had 28 days in which to file its written argument and serve a copy on Mr Brett, and that Mr Brett had a further 7 days within which to file his outline. The time for delivery of the appellant's submissions expired on 4 December 1996. Six months later, the Registrar received the appellant's outline and submissions. Mr Brett has objected to this in writing as well as supplying his own two pages of "submissions" which it must be said do not address the points that have been made on behalf of the appellant, and which are of little assistance in the analysis of the relevant issues. The appellant's outline and submissions (45 pages in all) are fullsome on some issues, but quite unsatisfactory on some issues including the quantum of damage. For example, in the event that the Court was minded to allow the appeal and grant judgment for the plaintiff, those submissions would not permit this Court satisfactorily to quantify the judgment. Indeed, were an assessment required, it might be necessary to rethink the basic question whether the "no transaction method" or the "successful transaction method" was the appropriate basis for assessment of damage (Hayes v. James and Charles Dodd [1990] 2 All E.R. 815, 818-819). In this situation a study of the record and an assessment of the arguments has been an unusually difficult task. Despite the applicant's breach of the court order the Court decided to proceed to determine the appeal on the written submissions, conscious of the extreme difficulty of doing so satisfactorily. It is worthy of note that considerable assistance is to be found in the extensive references which are made to relevant passages in the transcript and exhibits in the -- 9 of 15 -- 9 comprehensive judgment of the learned Trial Judge. Issues The primary challenge (Notice of Appeal, para 2(a)) attacks His Honour's finding of fact that the appellant did not rely after 28 February 1991 upon Mr Brett's valuation. Not surprisingly, CRA at trial relied upon assertions by both Mr Roberts and Mr Walder in evidence that having received Mr Brett's valuation, the value of the security stated therein was "vital", "paramount", or "critical" to their decision to grant the finance facility. There was however a great deal of evidence which would justify His Honour in discounting these self-serving statements, or in disbelieving them. In the event, His Honour accepted that the receipt of this valuation was one of the factors upon which CRA did rely in granting the initial facility, but was of the view that other factors had entirely displaced such reliance by the time the decision was made on 28 February 1991 to continue with and increase the level of that trading. His Honour noted that a sale in the sum of $975,000 would not even at the outset have netted a sufficient sum to provide 100 per cent security for the initial limit of $200,000, if sale expenses were taken into account. Mr Brett's written submission also draws attention to the initial letter of offer from CRA to Olympus of 3 September 1990, in which the requirement was that the valuation be not less than $1 million. It is possible to infer that the requirement of 100 per cent security in addition to the security (or equitable ownership) of the debts themselves, and the actual level of the valuation were not as important factors as has been submitted. In this context, the protections which CRA possessed against loss were by no means limited to its third mortgage over the Carrara property. Its protections included the following (a) entitlement to the debts themselves; (b) recourse to Olympus to repurchase overdue unpaid debts; (c) (as CRA erroneously believed) $50,000 further security over the launch; (d) recourse to a trade indemnity policy (which in effect would protect Olympus against bad debtors); (e) the third mortgage over Olympus's real property. -- 10 of 15 -- 10 There is little point in discussing more deeply the factors inducing CRA to make the initial arrangement with Olympus, because His Honour has, with respect, correctly found that Mr Brett's valuation was a concurrent cause of its decision. The clear inference, however, is that it was not as important a factor as was suggested by CRA. The first submission on behalf of CRA on this point is that all of the eventual loss for which CRA sues was caused by its entering into the arrangement with Olympus in the first place. It seeks to draw a veil over the effect that subsequent events might have had. In our view the fact that a valuation may be a contributing cause to the commencement of a trading relationship does not necessarily mean that it remains responsible for its continuation, especially when there are opportunities which others control for its termination. Mr Brett's contributing causation could come to an end or be displaced by other motivations and causes. It was submitted that the increase in the facility limit from $200,000 to $250,000 had no effect upon the eventual outcome, because at the date when Olympus went into liquidation the balance owing to the appellant was $200,710.76. Rather tenuous inferences from incomplete accounting material are involved in that particular argument, but it is not necessary to pursue them. The importance of what CRA did on and after 28 February 1991 is not so much that it increased the facility limit as that it continued to trade at all with this client. In addition to the warning of Coopers & Lybrand there was increasing evidence available to CRA of the folly of continuing trading, had it chosen to make even basic investigations and checks. We would reject the submission that CRA's actions on and after 28 February 1991 were "irrelevant to the cause of the loss or the quantum of it" and would likewise reject the submission that "the loss was caused by entering into the facility agreement in the first place". Even if the "but for" test of causation was appropriate (which it is not - March v. E & M.H. Stramare Pty Ltd (1990- 1991) 171 CLR 506) there is no principle that a causative factor cannot come to an end or be -- 11 of 15 -- 11 supplanted by other more cogent operative factors with respect to ongoing later events. It was further submitted that "His Honour seems to have been distracted by an apparently irrelevant consideration of reliance in this case as if it was relevant to something other than causation of loss." The submission is unfounded. In a case like the present, the tortious act is the giving of an opinion, which is a form of representation upon which a client may be expected to act. The giving of such an opinion does not cause harm to the client unless the client subsequently relies on it. The question of reliance is, in such a context, directly relevant to the issue of causation. In our view His Honour correctly addressed the question of reliance in the context of considering whether causation was established. Finally it was submitted that there was no proper basis for His Honour's finding that there was no reliance on Mr Brett's opinion from and after 28 February 1991. As to this, it is enough to say that there was an abundance of evidence from which His Honour could reach such a conclusion. It is more than curious that, on a falling real estate market, and with knowledge of Olympus's insolvency, CRA chose to increase its investment rather than withdraw it. Almost six months had passed since Mr Brett's valuation had been obtained, and there was no attempt to obtain an updated valuation from Mr Brett or anyone else. There is also reason to be concerned at the nature of the business that CRA engaged in from and after 28 February 1991. It was the unvarnished promotion of insolvent trading. It was arranged so as to siphon the proceeds of the trading to itself, and it may be inferred, to the disadvantage of unsecured creditors generally. After the final collapse of Olympus on 12 June 1991, CRA promptly gave notice to all debtors whose unpaid debts it had factored, that such debts were owed directly to CRA. This it was claimed resulted in a legal assignment of those debts to CRA. It was submitted that under cll. 18 and 4.4 of the invoice finance agreement, CRA, as lawful attorney of Olympus, could exercise such a right at any stage of the relationship if it so wished. Some of those assigned debts were then paid directly to CRA without demur by debtors, and some -- 12 of 15 -- 12 less promptly after issue of legal process. At least from 28 February the conduct of CRA was so unusual that it is reasonable to think that it was motivated by undisclosed factors that cannot be identified with certainty. His Honour's inference of intractable desire to continue trading with Olympus is more satisfactory than most other available inferences, and is probably close to the mark. Between February and May the relationship between CRA and Olympus seems to have grown into something quite different from the earlier relationship. The inference was available that CRA must have ceased relying in any real sense on the earlier valuation of Mr Brett. It is possible to analyse the facts in other ways and to draw other inferences. But that was how His Honour saw the situation, and we are not prepared to say that he was wrong. It is perhaps a mistake to make common assumptions concerning reliance when the true motivations of the relevant party are so obscured. Undoubtedly other factors must have operated which have not been brought out. It is idle to speculate on matters such as the relationship between Mr Walder and Mr Sullivan or to search for further hypotheses that might explain the extraordinary conduct. At the very least CRA is shown to have defied logic in ignoring the advice of Coopers & Lybrand. One is likely to fall into error if the relationship between CRA and Olympus is assumed to have been that of the ordinary logical client/money-lender, the money-lender depending upon its trusted valuer for an appropriate level of security to protect its investment. These observations are necessary because there is a tendency at first glance in a case of this kind to assume that a financier acts upon the opinion of its valuer and that that is the end of the matter. In the present matter we conclude that His Honour, who made a comprehensive analysis of the facts in this case, was entitled to conclude that CRA did not rely after 28 February 1991 on Mr Brett's valuation. The sustaining by the Court of His Honour's finding of a lack of causation between any negligence of Mr Brett and the loss for which CRA sues is enough to defeat the entire action. It is -- 13 of 15 -- 13 therefore unnecessary to deal with numerous other arguments which were addressed. Some of these however will be briefly noted. (a) Remoteness, and assessment of damage In the present case His Honour found that loss of the kind just mentioned (through sham invoices) was of a kind not reasonably foreseeable by a person in the position of Mr Brett, with the information possessed by Mr Brett. It is not necessary to deal with the complex argument that seeks to upset this finding. It may be noted however that if that finding remains, considerable problems would attend any assessment of quantum, even if CRA were otherwise successful in maintaining its action. It is clear that a certain amount of the damage suffered by CRA was as the result of Olympus producing sham invoices. After Olympus's failure, CRA, in order to maximise its recovery, conducted extensive investigations into the activities of Olympus. It should have been in a position to establish what part of its overall loss was attributable to this type of conduct. However no such evidence was led. The onus was upon CRA to establish its loss. As indicated earlier, there would arise arguable questions whether the proper basis for assessment was the "no transaction method" or the "successful transaction method". Further, where damages are capable of proof with some precision and the party which has the onus of establishing damage fails to produce appropriate evidence, the Court will not readily make guesses in favour of that party (Syntex Australia Ltd v. Ray Teese Pty Ltd Appeal No. 100 of 1995, 6 August 1996, unreported). The consequence is that, even if CRA were entitled to judgment against Mr Brett, there would be extreme difficulty in assessing the damages. CRA's written submissions contain extensive arguments to the effect that His Honour overestimated the extent to which the loss was attributable to Olympus's fraud (His Honour expressing the view that this probably explained a substantial portion of the damages). That conclusion depends upon inferences from incomplete accounting information which CRA would have been in the best position to supply. If CRA were entitled to a judgment, it would be impossible to assess damages other than by making a low and somewhat arbitrary assessment (cf. Ted Brown Quarries Pty Ltd v. General Quarries (Gilston) Pty Ltd (1977) 16 ALR 23; JLW (Vic) Pty Ltd v. Tsiloglou [1994] 1 VR 237, 241, 245, 250). It is sufficient to note this difficulty, and unnecessary to pursue the point further. -- 14 of 15 -- 14 (b) Contributory negligence In our view there was a sufficient case of contributory negligence and His Honour was entitled to make an assessment of 60 per cent against the appellant with respect to the initial transaction. Whether His Honour could find, in effect, 100 per cent contributory negligence against CRA with respect to the loss from its dealings after 28 February is arguable as a proposition of law. Such a finding was in any event unnecessary in view of the finding of absence of causation. In the end the complaint against the finding of "100% contributory negligence" comes down to a matter of terminology. Whether it is expressed as absence of causation after 28 February, or of loss being entirely due to CRA's own fault after 28 February, CRA has no entitlement to damages for negligence from that point on. The appeal should be dismissed with costs. -- 15 of 15 --