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High Court of Australia Transcripts |
Office of the Registry
Melbourne No M100 of 1999
B e t w e e n -
TRENORTH LIMITED (formerly known as EUROLYNX PROPERTIES LTD)
Appellant
and
MALLESONS STEPHEN JAQUES (a firm)
Respondent
GLEESON CJ
GAUDRON J
McHUGH J
GUMMOW J
KIRBY J
HAYNE J
CALLINAN J
TRANSCRIPT OF PROCEEDINGS
AT CANBERRA ON THURSDAY, 9 MARCH 2000, AT 10.25 AM
(Continued from 8/3/00)
Copyright in the High Court of Australia
GLEESON CJ: Yes, Mr Lally.
CALLINAN J: Mr Lally, before you begin, can I just ask you a question. This Court held that the deceit was the product, as it were, of the aggregation of the minds and intentions of officers and an agent of the company, is that correct?
MR LALLY: Yes, but the word "aggregation" is, in our submission, not quite appropriate. It is actual knowledge by inference.
CALLINAN J: All right, let it be treated as actual knowledge. The sum of those states of mind, as it were, knowledge and intention, was complete by the date of settlement, is that right?
MR LALLY: Yes.
CALLINAN J: So that there is a representation which is certainly complete. Indeed, it may have been made before the date of settlement, but it exists at the date of settlement and it continues thereafter, is that correct?
MR LALLY: Yes.
CALLINAN J: A party who is guilty of deceit continues to make that representation until it is withdrawn.
MR LALLY: Yes.
CALLINAN J: Why should the Court then treat Eurolynx, Trenorth, as being under other than an obligation to withdraw that representation and thereby almost completely to mitigate any loss?
MR LALLY: This Court, to find fraud, had to be satisfied that at the time the representation constituted by the proffering of the documents that contained the misrepresentation had carrying with it the intention to deceive. I will come to that shortly.
CALLINAN J: You just accept my term for the time being, collective states of mind or aggregated states of mind.
MR LALLY: I do, yes.
CALLINAN J: Why is it that if that aggregation or collective state of mind can be the cause of the deceit, why should the deceiving company then be entitled to remain in that state of continuing the representation right beyond the date of settlement, right up until the date of the purported rescission and beyond it? I mean, in the court below the view was taken that it was reasonable for Eurolynx to defend all the proceedings. I do not understand how that can possibly be so.
MR LALLY: That was over our submission, of course, that it was totally unreasonable.
CALLINAN J: Well, I understand that. At the moment I just cannot see how it can possibly be so that that is reasonable. If you have to look at the collective state of mind and the collective state of mind involves a continuing representation from at least the date upon which the sufficient aggregation exists to constitute deceit.
MR LALLY: Well, we would put it even somewhat more narrowly, that the state of mind of Trenorth is not collectively in some vacuum but it is determined by reference to the actual knowledge of particular servants or agents and the particular ones that are so relevant in this case were Mr Ryan and to a lesser extent Mr Cini.
CALLINAN J: Well, even Mr Gilbert - I think it is Mr Gilbert who is referred to at page 582 of the report. Is that Mr Gilbert at the top of page - yes, he was the Eurolynx officer responsible for the giving of the instructions and it rather looks as if this Court, or the majority in this Court, is quoting some evidence at about point 2 where their Honours say:
He was quite familiar with the terms of the separate agreement, though he did not realise "until we came to settlement" that the rent-free period had not expired.
And that adjustment is effectively a component of the deceit.
MR LALLY: Yes, that was adjusted, the - - -
CALLINAN J: And there seems to be at least a case to argue that one officer may have had all the knowledge at any rate, or sufficient facts, not that we have to look at one officer, but if one does look at one officer, it may be that Mr Gilbert is that officer.
MR LALLY: No. We can establish, and I am going to take the Court quickly to relevant documents that show the basis upon which this Court came to the view that it did in Krakowski, by leaving totally aside the question of the knowledge and intention of Mr Gilbert, to then turn to whether or not the mind of Trenorth should be taken to have an actual knowledge and intent that had a basis other than what Mr Gilbert's state of mind was, because it was Mr Gilbert that was put forward in the witness box as the innocent person, who gave the authorisation to found the argument that the principal could not be found liable in fraud because the person who gave the instructions for the documentation to go forward had an innocent mind.
GLEESON CJ: Could I just seek to clarify one aspect of the sequence of events, just to be sure I have got it straight, Mr Lally. As I understand it, before the contract of sale was entered into on 16 September, there were negotiations between Messrs Cini and Ryan, on the one hand, and Mr Mermelstein, on the other, and in the course of those negotiations Mr Mermelstein made it clear that the Krakowskis would only buy if there was a sitting tenant paying the rent equal to 10 per cent of the purchase price.
MR LALLY: Yes.
GLEESON CJ: So before the contract of sale was entered into and before Mallesons made or participated in any misrepresentation, Cini and Ryan arranged for the tenant to occupy the premises, take a lease on the basis of an inducement arrangement, involving the payment of cash of $156,000 by Trenorth to the tenant and a rent holiday of three months.
MR LALLY: Yes.
GLEESON CJ: And, if nothing more had occurred, but the contract of sale had gone ahead and been completed, it might be thought that there would have been at least an arguable case, on those facts alone, that there was misrepresentation within section 52 or misleading and deceptive conduct within section 52 of the Trade Practices Act. It may be harder to establish a case of fraud rather than sharp practice. But, before Mallesons made or participated in any misrepresentation at all, Cini and Ryan, by entering into a side agreement with the tenant, which was concealed from the purchasers, put in place the lease arrangement at a rent of $156,000 a year.
MR LALLY: Yes, and that side agreement was negotiated by Mr Adam Ryan.
GLEESON CJ: That is right. Now, what Mallesons and Mr Gilbert did, let us assume innocently, albeit negligently, from one point of view was to furnish the Krakowskis with a concrete misrepresentation, that is to say the section 32 statement and the answers to requisitions contained a positive misrepresentation to the effect that there was no relevant side agreement.
MR LALLY: That is so.
GLEESON CJ: A misrepresentation that might, arguably, have existed even apart from what Mallesons did but that was impossible to deny once Mallesons did what they did.
MR LALLY: That is so.
GLEESON CJ: So, from one point of view the conduct of Mallesons was to arm the Krakowskis with a clear basis upon which they could argue that they were victims of fraud in circumstances where, if it had not occurred, they might have had difficulty establishing that they were victims of anything more than sharp practice.
MR LALLY: Yes, and could I take the Chief Justice to the relevant page where the relevant document that was tendered in evidence of cross-examination of Mr Mermelstein which makes good that point, that it is the document that emanated from Mallesons with the copy to Mr Adam Ryan.
If the Court would turn, please, to page 573 - the page before, 572, shows that it was, of course, the evidence in-chief of Mr Mermelstein, not the cross-examination. The portion that is highlighted in the middle of the page was the highlighted portion that he relied upon. The wording is clear at page 578:
The date of the commencement is to be 11 September 1989. Our client is prepared to provide the Lessee with a side letter indicating there will be a rent free period of three months commencing 11 September 1989.
If you turn the page, the copy was sent of that letter to Adam Ryan. It was that information that was obtained by Mr Mermelstein that resulted in the claim being made. If we turn to page 681 - - -
GLEESON CJ: But is the vice in that statement the absence of a reference to the inducement payment of $156,000 in cash?
MR LALLY: Yes. In the letter of demand, being the relevant letter which constituted the common law rescission out of court for fraud. As the Court will see in the judgment, the relevant date of 7 December 1990 is that date because of this letter which purported to bring about a rescission on the grounds of fraud and the Court, accordingly, after this matter was heard and determined, made a declaration. Mr Justice McDonald made a declaration - - -
GUMMOW J: What page is the rescission letter?
MR LALLY: At page 681.
GUMMOW J: Thank you.
MR LALLY: I draw attention to the reference at line 33 to Mr Adam Ryan.
to rescind the said contract forthwith by reason of your misrepresentations with respect to the terms of the lease of the premises to Swaeder Sales Pty Ltd.
In order to induce our clients to enter into the said contract, you represented that you had leased the premises to Swaeder for a term of 6 years and at a rental of $156,000.00 per annum; both commencing on the 11th September, 1989.
You failed to inform our clients that, in consideration for Swaeder entering into its lease of the said premises you agreed to allow it to occupy the same rent-free for a period of three months from the 11th September, 1989 and further pay to the tenant the sum of $156,000.00. We are instructed that this agreement is set out in a letter dated 12 September, 1989 from yourselves (signed by Adam Ryan to Mr. Schweda of Swaeder Sales -
That was the term of the side agreement.
GLEESON CJ: But just pausing there, that rescission was on the basis of a failure to inform which is on a basis that would have existed, even if Mallesons had made no misrepresentation at all.
MR LALLY: Yes, precisely.
GLEESON CJ: So, it was misrepresentation by silence on the part of Cini and Ryan that at least formed the basis of the letter.
MR LALLY: Yes, because it is the classic misrepresentation of the half truth constituted by the provision of a fact which on itself - on its own - on the face of what is provided is true.
GLEESON CJ: But that is not the basis of the High Court's finding, is it?
MR LALLY: No, because coupled with it was the silence as to the rest, so that that constitutes the classic misrepresentation. What is put forward is, on its face, correct, that the lease provides that, that the rental will be so much, but the sting in the tail with misrepresentation, of course, is what is not said. The side agreement that is referred to is at page 580 and the signature of Mr Adam Ryan appears at 581.
GLEESON CJ: Now, this side agreement predates both the contract of sale and the misrepresentation made by Mallesons.
MR LALLY: Yes, it does. It is 12 September.
GLEESON CJ: But where does that leave us, because the basis upon which the purchaser has rescinded, or purported to rescind, is significantly different from the basis upon which this Court found fraud.
MR LALLY: No, they made good their case that by that notice of rescission on 7 December they were electing to rescind the contract for fraud and when those facts are put together they made good fraud, in accordance with the findings of this Court.
GLEESON CJ: But the basis on which they purported to rescind did not have as one of its elements any conduct on the part of your client.
MR LALLY: That is so, but the conduct of our client was in proffering the contractual documents that contained the section 32 statement which provides the detail as to what the lease is and you would need that document to compare with the reality. You need one document that purports to state what the leasing arrangement is, and then to compare that with what, in fact, had occurred - - -
GUMMOW J: Well, it becomes more than misrepresentation by silence.
MR LALLY: Yes.
GUMMOW J: Because it is an express statement of the lack of a negative.
MR LALLY: There is often debate, is there not, as to whether it is a - - -
GUMMOW J: But the section 32 certificate.
MR LALLY: The section 32 statement in itself gave limited rights under the Sale of Land Act. You need to go further than that because you would need to use the section 32 statement as a statement of fact, rather than relying upon any rights, for the reasons that our learned friend said yesterday, that it gives a limited right of rescission prior to completion and entry into possession. It may be convenient to just complete the references that I was going to make to - - -
GUMMOW J: But what emerges for your case of advantage, perhaps, from what you have been debating with the Chief Justice just then?
MR LALLY: To come to this proposition, that when the principles that emerge from the decision of the Full Court of the Supreme Court of South Australia in Brambles, that is in our list of authorities, Brambles is a case where it was sought to defend a claim - not a claim but, rather, a charge under the health regulations or safety regulations in respect of procedures to be followed. They sought to defend it on the basis that they had an honest and reasonable belief that they duly instructed the relevant employees. The only difficulty was that the gentleman back in Adelaide who was responsible for giving the instructions had instructed the first driver, but unfortunately that driver, who was armed with the appropriate instructions as to what to do, fell ill. So a replacement driver went out to the scene. Where the appropriate action was to be taken, unfortunately, the replacement driver did not have the benefit of the safety instructions that he should. The company sought, however, to say that they had an honest and reasonable belief because the responsible officer back at headquarters had such belief and the court said, "Well, we have to look at what was the actual knowledge and the division".
If I could take the Court firstly to page 275, on the last paragraph in the judgment of the Chief Justice:
Of course, if mental states like knowledge or belief are to be attributed to a notional and metaphysical entity like a corporation, this can only be done by attributing to it the knowledge or belief actually possessed by some one or more of its officers -
and then reference to Lennard's Carrying and Tesco Supermarkets -
Very difficult questions can arise in this connection. I do not think, however, that it is necessary to enter into them now. It is enough to say that, in my view, it is a fallacy to say that any state of mind to be attributed to a corporation must always be the state of mind of one particular officer alone and that the corporation can never know or believe more than that one man knows or believes.
Then examples are given, if there is a change in successive holders. Over to 276, in the second paragraph in the middle of the page, after referring to the facts relevant to that case:
I hasten to add that although I think a corporation has in a proper case the combined knowledge or belief possessed by more than one of its officers, that does not mean that it can know or believe two contradictory things at once. It is rational belief, not schizophrenia, which is to be attributed to it. The appellant could not believe at the same time through Mr Hope that it was necessary for the rig to be winched down and that it had been winched down, and through Mr Wells that the weight could be properly distributed without any winching down.
Mr Wells was the relief driver who did not have those special instructions as to how to distribute the weight on the semitrailer so that it would conform with the law, whereas the belief that instructions had been given vested back at headquarters in Mr Hope. This point is further addressed at page 279 in the judgment of Mr Justice Bright in the middle of the page when turning to the three defences:
As to the first: It is the company's belief that is important. The belief of any employee is relevant only in so far as that belief may be imputed to the company. "Belief" is a strange word to apply to a company. Always, when beliefs or opinions or states of mind are attributed to a company it is necessary to specify some person or persons so closely and relevantly connected with the company that the state of mind of that person or those persons can be treated as being identified with the company so that their state of mind can be treated as being the state of mind of the company. This process is often necessary in cases in which companies are charged with offences such as conspiracy to defraud.
It is relevant therefore for this case, and thus the reason for my answer to Justice Callinan in the terms that I did, that the relevant state of mind of the company in this case was the state of mind of Ryan and Cini. It is not so much an aggregation of pieces of evidence of state of mind but rather determining by looking at those two witnesses and drawing an inference in respect of their conduct that is established by the documentations and the failure to call them, whereupon this Court drew the inference but then made, in accordance with that inference, an actual finding of intent and guilty knowledge.
GLEESON CJ: But if this Court's finding of fraud had been put on the same basis as the letter of rescission, factually the case could be quite clear. Mallesons' and Mr Gilbert's misrepresentation would just be irrelevant. But the basis upon which fraud was ultimately found involved a combination of circumstances including the original attempt by Ryan and Cini, as it were, by silence to mislead the purchasers and what might be described as a perfection or a completion of that attempt by the misrepresentation made by Mallesons and Mr Gilbert.
MR LALLY: This is where the state of mind is so important. Given that at the time the documentation goes forward with the necessary intent, Trenorth cannot be treated as having a state of schizophrenia.
This is the third party proceeding which, in a perfect world, would have been heard and determined immediately upon the finding of the trial judge in the way that this Court determined it should have been. So that the company, Trenorth, has intended to deceive and it has got the state of mind that it knows what the purchasers believe; it knows what is material to them; it knows the fact of the misrepresentation is going to be made and, nevertheless, intends to proceed.
It cannot be now treated as if it has a different state of mind for the purposes of the third party proceeding, ie, we would have, if advised, acted as Gilbert's state of mind would have dictated, and that is the significance of the finding of fraud in this Court, that this Court found fraud regardless of the state of mind of Gilbert and, if that is so, then the claim for the indemnity or the claim for damages that flows over must be on the same basis that the company has that intention.
HAYNE J: That may involve two questions on which I would like your help. First, do you say that your party in this litigation is precluded, is bound by, the disposition of the action between vendor and purchaser?
MR LALLY: They are the stated facts.
HAYNE J: Yes, and thus you are in a position, on your submission, as also is the vendor, where there is preclusion between the parties on the issue of fraud but, in particular, that the fraud or the deceit was a contractual representation rather than a pre-contractual representation.
MR LALLY: Yes.
HAYNE J: And thus, if I can just follow it out one step further, the rescission letter to which you took us earlier seemed to be proceeding on an assertion of pre-contractual fraud, "We entered this contract - or in order to induce our clients to enter the contract you represented." Whereas the disposition in this Court in Krakowski's litigation was a disposition on the basis of contractual misrepresentation; is that right?
MR LALLY: That is so, Justice Hayne, but they needed the facts that made up the - - -
HAYNE J: How you get to the conclusion of fraud, I understand you go back into history and all of the evidentiary bases.
MR LALLY: And that is what occurred and I accept that it is - - -
HAYNE J: But thus the loss that is in issue which it is sought to recoup, if I can use that in the most general sense, by the third party proceedings is the loss that followed on being held liable for contractual misrepresentation; is that right or am I misunderstanding the way in which the case now presents at this stage of the litigation?
MR LALLY: That is the way it is presented because the deliberate act was the act of Trenorth making provision through its solicitors of the section 32 statement accompanied by Trenorth's, but not the solicitor's, intention that the relevant misrepresentation be conveyed as a matter of contractual misrepresentation.
HAYNE J: But that is what troubles me at the moment, that if there is this state of preclusion of all of the parties with whom we are now concerned, does it follow that you are precluded from challenging in any way the basis on which this Court in the Krakowski litigation found liability, in particular, precluded from challenging what appears at 583, this division of function issue, which at least at the moment in this stage of the argument seems to me to present you with a very considerable hurdle over which you have to pass? Because if there is a division of function of the kind there described and it is in that way that the liability was sheeted home, it seems to me the causation questions now being agitated may be -I emphasise "may be" - more readily resolved in favour of the appellant than otherwise would be so, but I am taking you out of the course of your argument and I am simply expressing a concern, but deal with it as you see fit.
MR LALLY: I am happy to deal with it in this way, that the knowledge at page 583, the purpose of dealing with the division of functions amongst officers of the company is to determine whether or not, looking apart from Gilbert, there is a method to determine what was the intention and willingness of Trenorth and that appears in the second sentence:
It is erroneous to make a finding as to the company's intention or willingness to misrepresent the contractual arrangements with Swaeder without reference to the knowledge of Cini and Ryan.
The technique is to put Mr Gilbert's evidence on the side and look at what is the technique that the Court is going to use to determine what was the actual intention of Trenorth at the time the misrepresentation is made and this is the area of the guilty knowledge that is then dealt with in the next paragraph:
If Eurolynx be treated as knowing that the purchasers were buying on the faith of the rent which the property itself would yield, it must have known that the purchasers would believe that the rent reserved according to the copy of the instrument of lease produced represented the commercial rent -
and that is where we then move from the contract being used as again a factual basis, so that we are moving across from the factual basis to a misrepresentation by the provision of those contractual documents that is material because of knowledge and intention that rests in the company, quite apart from, firstly, Mr Gilbert, and secondly, Mallesons, and it is that actual knowledge and intent of Trenorth; it is not of Ryan personally, or Cini personally, but of Trenorth, and I stress the words "intention or willingness to misrepresent" and this is emphasised at about point 8 of the page:
Even if Gilbert, not knowing of the prior conversations between Mermelstein and Cini and Ryan, did not perceive that the section 32 statement would be taken to represent that the lease contained the whole agreement, an inference that Eurolynx intended or was willing that that representation be conveyed should be drawn against Eurolynx. In the absence of evidence from Cini or Ryan deposing to their knowledge of the basis on which the purchasers were buying unit 12, this Court is as able to draw inferences from the primary facts -
Now, Justice Hayne, that is then using that technique to determine that at the time what Justice Kenny determines to be then a deliberate wrongful act, is the provision of the contractual documentation which then founds this fraudulent misrepresentation that cannot be fraudulent unless there exists at that time guilty knowledge. It may be convenient to deal with that aspect that was broached by our learned friend yesterday - - -
GLEESON CJ: Just before you do that, because we do not have the evidence and I am not suggesting that we should, because we do not have the evidence in the original proceedings, could I ask you what was the evidence of inducement? Did Mr Krakowski or Mr Mermelstein or somebody else say, "the false section 32 statement" or "the false answer to requisitions were something that came to my attention and I regarded it as very important in determining to enter into the contract". What was the precise basis of the finding of an inducement?
MR LALLY: Mr Krakowski was an elderly gentleman whose English was limited but he was able to give sufficiently clear evidence that 10 per cent was a requirement of return, that he had heard that figure in Ackland Street and it was a basis upon which he wished to proceed and his nephew, Mr Mermelstein, had it as an absolute requirement.
GLEESON CJ: I understand that, but was there any evidence that the false section 32 statement or the misleading answer to requisitions ever came to the attention of either of the Krakowskis or Mr Mermelstein or had any operative effect on their minds at all?
MR LALLY: It formed part of the documentation that was relied upon - - -
GLEESON CJ: I understand that.
MR LALLY: - - - as constituting a body of facts.
GLEESON CJ: Let me put the question slightly differently, Mr Lally. I cannot help wondering when I look at the terms of the letter of rescission whether it does not represent the deception from the client's point of view.
MR LALLY: Yes.
GLEESON CJ: And you can almost see some barrister in chambers saying, "Come on, we've got to do better than that. Surely, we can find some actual written misrepresentation." They go back and look at the contractual documents and say, "Gotcha".
MR LALLY: No, because that document that I first took the Court to did not come into the possession of Mr Mermelstein until a later time.
GLEESON CJ: Was there any evidence given on behalf of the Krakowskis in the original action which demonstrated that the misrepresentations made by Mallesons and Mr Gilbert came to the attention of and had some operative effect upon the minds of the purchasers, or was their decision to enter into the contract based on what had not been said by Messrs Cini and Ryan and the misrepresentation by omission involved in that?
MR LALLY: Yes. We would have to check the transcript as to that, as to what the state of evidence was.
HAYNE J: Some importance seems to have been given in the Krakowski judgment to the terms of clause 19.4 of the contract:
A fundamental condition of this contract is -
in effect, 10 per cent return.
MR LALLY: That is the contract - - -
HAYNE J: The contract of sale.
MR LALLY: Yes.
HAYNE J: The answers to requisitions went to Mermelstein, it seems.
MR LALLY: Yes. At page 597 is the relevant special condition which is executed by Mr and Mrs Krakowski on the left and Mr Adam Ryan on the right-hand side there. That is his signature as to - - -
GLEESON CJ: But we seem to have a case where there was, at least arguably, a misrepresentation made by silence by Mr Cini and Mr Ryan and then a misrepresentation made in writing by Mallesons and Mr Gilbert and we are being invited to determine the issue of causation without the benefit of any evidence from the victims of the misrepresentation as to which one of those they took into account.
MR LALLY: But if they rescind the contract and they can make good a ground of rescission for that contract, whether they knew it existed at the time they rescind, they can make that rescission work and so it becomes less important as to what particular knowledge they had at what particular time, so long as it can be substantiated. That is the difficulty with your Honour's question, that it requires viewing at a different time sequence, so at the time they give evidence they have had, by that stage, the original letter, they have had the contracts and years pass. So, what might have been a case of misrepresentation (a), and then at a later time it might have been one of (b), is unfortunately intermingled. I was not seeking to duck the issue, but unfortunately I do not know whether that could be unscrambled at this stage, even if we went back to the transcript.
GLEESON CJ: Thank you.
MR LALLY: I was seeking to approach the problem so far as causation by the attribution of knowledge and intention in the way that I do for the purpose of showing that that act, on the finding of this Court, if it is an act of deliberate intention, it can only be one state of mind. They cannot be heard to be viewed as having, at that point of time, a different state of mind, which is how they seek to put it. That is why the question of fraud is very much a question of fact.
GAUDRON J: Does this really come down to an argument that it was not the duty of your client to protect its client from their own looseness with the truth, or their own preparedness to be loose with the truth? It would seem to me, if it does, that may also bear on the question of causation.
MR LALLY: It does. We put it higher, that it comes down to unless there had been triggered by way of instructions, or the retainer had carried with it some particular facet where there was relevant knowledge, that would trigger a duty to advise the client in respect of its fraud, you cannot make out a case that a solicitor owes a duty of care to protect a client from a fraud about which it knows nothing.
GAUDRON J: Well, it clearly did know something, in a sense.
MR LALLY: I distinguish between misrepresentation and fraud.
GAUDRON J: Yes. Can I go back to this. What you have to say is, "Yes, we had a duty of care to do something and it involved taking these steps. That included advising them as to the correct answers to requisitions, but we did not have a duty of care to protect them from the consequences of their own improprieties. Even though we failed in one duty of care, which might have adverted those consequences, we did not have a duty of care here at all and therefore we are not liable for this loss".
MR LALLY: That is so - - -
GAUDRON J: But that is really a question, I suppose, of duty of care rather than causation, in one sense.
MR LALLY: No, with respect, it is highlighted. It is dealing with the question of causation in context rather than in a vacuum and it is in paragraphs 6 and 7 of your Honour's judgment in Chappel v Hart where you express it in those terms. If I could just refer the Court to that.
GAUDRON J: Yes.
MR LALLY: If that answers your Honour's question:
Questions of causation are not answered in a legal vacuum. Rather, they are answered in the legal framework in which they arise. For present purposes, that framework is the law of negligence. And in that framework, it is important to bear in mind that that body of law operates, if it operates at all, to assign a duty to take reasonable steps to prevent a foreseeable risk of harm of the kind in issue.
It was not disputed in this Court that Dr Chappel was under a duty to inform Mrs Hart of the possible consequences in the event of the perforation of her oesophagus and subsequent infection, including the possibility of damage to her voice. The duty was called into existence because of the foreseeability of that very risk. The duty was not performed and the risk eventuated.
When we come to Medlin for other purposes I will show the Court the passages, that it is the need - and it does not matter where one starts but the focus of causation is to link the damage with the breach of the duty, but part of the process is to determine whether the risk that eventuates is within the scope. Various passages were read by our learned friends yesterday from, again, Justice Gaudron's reasons for judgment in Bennett but left out that qualification that your Honour put that it has to be the risk within that scope and it has to be that very risk that eventuates. As we put it, the relevant very risk that eventuates here for the purpose of that process is the tort of fraud and its consequences, not the Conveyancing Act.
That is where we are like two ships in the night, that we say that for causation you cannot approach this case by putting on one side that there was a case between the Krakowskis and Trenorth which resulted in Mr Justice McDonald making an order for a declaration that the contract of sale had been rescinded out of court and making an order for restitutio in integrum and then approached this by starting on the basis, "We have a solicitor who is acting in a conveyancing transaction and has a duty of care to act with proper care and skill in the work that the firm does in the transaction to save the client from economic loss", because if you start down that line we end up in the position that we have outlined in our written submissions that the danger is that if you look at it as pure economic loss, then we lose focus. This is a claim where it was a claim that only comes into being that can be put over against us in the third party proceeding because there was restitution for fraud.
The interesting discussion yesterday is all totally beside the point. It does not matter what might have happened in some other case if there had been a decision to proceed to agitate a claim under the Trade Practices Act for relief under section 52 leading to a claim for damages under section 82 which then triggered a right to agitate for discretionary relief under section 87. The fact of the matter is that that is not this case before this Court.
GAUDRON J: What you seem to have been saying would suggest there would not have been a duty there either - certainly a duty for consequences emanating under section 32 but, if you have no duty to protect your client from the consequences of their own sharp practices, then that would seem to flow over into Trade Practices Act matters as well.
MR LALLY: If the facts had been simply an innocent representation made by the solicitor's provision of documents which are incorrect and there was no more, that would - - -
GAUDRON J: That would lead to liability for them.
MR LALLY: Yes, and that would lead to a liability which in this case the Full Court of the Supreme Court of Victoria heard and determined and decided that it accepted that it had discretion to make an order for rescission under section 87 in the absence of fraud and chose not to. That has been turned against us that you cannot argue that, but it demonstrates that you can look at a problem where there is a misrepresentation that is made that is used as an opportunity to turn it into an act of fraud to show the difference. You are not looking at it as to what might have happened. An example that was put by my learned friend in discussion with your Honour Justice Gaudron yesterday was: what would happen if they had not gone ahead with the contract? Here they cannot be put in that position because of the state of mind that I have put before. They can only be viewed as having that one state of mind and that is because of the company being vested with the knowledge and intention of effectively Mr Ryan.
GLEESON CJ: A lot of lawyers devote a considerable amount of their time to protecting clients from the consequences of their sharp practices. I am not sure exactly what were the particulars of negligence here, but was one of the ways the case was put against your client that when they put out this information about the lease containing the whole of the relevant arrangements, they should have said to Mr Gilbert or to Mr Ryan, "Just have some care here. If you have been representing to these purchasers that there are no other arrangements of possible relevance, you might care to direct your mind to the inducement agreement that we prepared for you"?
MR LALLY: No, it is not pleaded nor put on that basis. It was put on the basis that they are wrong and that was the point of the comment made by the late Mr Castan in the Court of Appeal, that it had never been alleged that we had a duty to inquire into the prior negotiations and it shows how the process of reasoning of where Justice Eames started with the proposition and accepted the principles that he had to apply were no different in effect than those outlined by the Court of Appeal, but then when he comes to that very barrier that is highlighted by the Chief Justice's question to me he had no option but to answer, "Well, they must have known because fraud was on the cards and a solicitor has a duty, a positive duty, to go back and inquire into negotiations." Now, that was not how it is put. It is at page 34, the relevant - - -
HAYNE J: But that has to be read in the light of 36 as well, does it not?
MR LALLY: Yes.
HAYNE J: Particularly lines 28 and following on 36 where a particular of negligence is:
Failing to advise the Defendant with respect to the disclosure of the -
side agreement.
MR LALLY: Precisely.
HAYNE J: Which was met with a defence that that was outside the scope of the retainer, page 41, and thus there was an issue attendant, "Was it within the scope of the retainer to do it?"
MR LALLY: And that leads to then - and also the plea of causation that even if it were no relevant loss could have flowed from that - it is at page 41, 12(b), line 16:
if there was any breach of retainer or negligence.....the defendant will not and could not suffer any loss or damage as a consequence thereof;
and that founds the basis of the arguments then that are put on causation and thereafter remoteness and, again, it is the distinction between an act of fraud, not because it is fraud as such, but because the act of fraud of necessity involved ingredients where the perpetrator had to have the knowledge of all of the relevant matters and yet chose to proceed. If the company could be split in the way that our learned friends would like it to be split for the purpose of the third party proceeding, well, then it could be put on one basis that either this Court should not have found fraud then or, having determined that it was fraudulent, it can only be on the basis that there is a consistency and it is significant that this Court then ordered that the third party proceeding be determined and the remainder of the proceeding - and, of course, the third party proceeding is part of it - had to go forward on a strict basis and that is that the evidence stood where it was, no party was allowed to call any further evidence save and except that any events that had arisen after the date of the original trial that might be relevant to the exercise of discretion as to whether or not an order for restitutio in integrum ought to be made. That was the only limitation.
That is why much was made yesterday that Justice Eames had found that the solicitor knew, and that is what I want to deal with, that he is not, and nor was it open, that finding had been made about knowledge, but that is not a finding of conscious knowledge relevant to an intent for fraud, and I want to deal with that, and it may be appropriate to deal with it at this point of time, that there is no further finding other than in respect of Gilbert, which is, we have said, that is the "but for" test, but it was when the Court asked in respect of fraud yesterday that reference was made to the question of intent and overnight we have - - -
CALLINAN J: Mr Lally, just before you get to that, could I ask you another question please. Is it implicit, indeed it might even be explicit, in the reasons for judgment of his Honour Justice Eames, that it was entirely reasonable for the appellant not to withdraw the misrepresentations after settlement, right up until the date of the purported rescission, or the rescission? It must be implicit in his findings, must it not, because his Honour gave costs in respect of the proceedings that were brought by the purchaser? There is quite a discussion, is there not, in his Honour's reasons for judgment, about the question of the reasonableness or otherwise of the appellant's conduct?
MR LALLY: Yes.
CALLINAN J: And his Honour did give, or included in his damages, orders to embrace the costs that were incurred in defending the proceedings, is that so?
MR LALLY: Yes, that is so.
CALLINAN J: So his Honour obviously thought it was reasonable to defend the proceedings. Does that not necessarily involve a finding that it was reasonable for the appellant to maintain, as it were, or not withdraw the misrepresentations?
MR LALLY: No, not in respect to the findings of this Court.
GLEESON CJ: But, am I right in thinking, that Mr Justice O'Bryan, right at the very beginning, at first instance, in the original action, found that there were no misrepresentations, either innocent or fraudulent?
MR LALLY: No, the only representations were post-contractual, constituted by the answers to requisitions, but did not give any rights.
GLEESON CJ: The very fact that Mr Justice O'Bryan found that, might have some bearing on the reasonableness of the conduct of people, of the kind that Justice Callinan has just referred to.
MR LALLY: Yes, there was one authority that was relied upon by Mr O'Callaghan; I remember that if you go forward and there is a finding in favour, well that is a question of reasonableness, but in respect of whether or not a party should or should not have committed fraud, and that is why it is a different question - you cannot turn it on its head and come back to say, "Well, I was not guilty of fraud, because it was reasonable to have continued through my solicitors in defending the action", and, if I could put it that way, Justice Callinan, that is a question as between litigating parties as to how the courts have dealt with the question of costs, but it cannot be an excuse then to be relied upon that for the purposes of the third party proceedings, they should be viewed as a non-fraudulent party, because the law - - -
CALLINAN J: Well, it is a judicial fact that they committed fraud; this Court has held that there was fraud.
MR LALLY: Yes.
CALLINAN J: I am not referring to the question of reasonableness in relation to the cost. I am really referring to it to try to ascertain whether it necessarily involves in it some implicit finding that there is no obligation to withdraw misrepresentations.
MR LALLY: No, and the relevant page, and I will not go to it, I will give the Court the references: it is 1023 in Butterworth's, that was the case that was referred to, and it is dealing with the questions of costs of what is reasonable as between parties who are defending a claim against them and that claim proves to be successful, what should occur in the liability for costs as between those parties. It is relevant for that, that question of reasonableness, but it cannot - for the reason that I have said - be turned on its head to come back to say, "Well - - -
CALLINAN J: Oh no, no, I am suggesting the contrary. I am not suggesting that, I am suggesting the contrary, in fact.
MR LALLY: Yes, and for that reason I would adopt that position that it does not matter what happens in the progress of litigation. Our system works that if a case comes to this Court, that is the position that is taken to have always been the position for the purposes of how the parties' respective positions are to be dealt with.
CALLINAN J: Do any of the judges who have been involved in this case so far - of whom there are, what, eleven or something, eleven or thirteen - do any of them deal with the question of the continuing nature of the misrepresentation?
MR LALLY: No, not that I recall. But it is not until now, of course, that there has been the need to closely analyse this question of the intent, although it was - I withdraw that because we did put these sorts of submissions at first instance to Justice Eames that did not find favour which he has recorded, as you would see in his judgment, and they have not changed in substance. But it is when they brought into stark focus, how does one untangle an act where a company uses different agents and different servants for different purposes? That is why it is always somewhat of an oddity that if there is one servant or agent who may have one state of mind, and one other servant or agent who has a different state of mind, and with an action that it is said you cannot aggregate innocent and innocent to become a guilty principle, but you can aggregate guilty and innocent to find guilty, but there has to be some guilty one, and here it is the guilty knowledge, and I was concerned yesterday - - -
GAUDRON J: Well, this gets back, really I suppose to the duty. Now, maybe there is a different type of duty for the corporate client.
MR LALLY: It would depend upon, if he is a corporate client - is a solicitor to treat a corporate client as a person who is likely to commit fraud more - - -
MR GAME: Well, no, no, if you look - forget about fraud for the moment and just look to the Trade Practices Act. Nearly every corporate client is, prima facie, exposed to the operation of that Act, and to the extent that the remedies, at least, may be affected by the knowledge to be imputed to a corporate client, then maybe there is a duty in an area such as this to warn them of the possible consequences, except in this case, the company, in fact, knew and Mr Gilbert himself, in fact, knew of the existence of the side agreement. There is no doubt that he did not know about the existence of the side agreement, did he?
MR LALLY: But more so than Mr Gilbert, with respect. It was Mr Ryan who not only executes the side agreement but is the relevant director who signs the contract on behalf of the company and swears the relevant statutory declaration that goes with it. That appears at - 599 is the vendor's statement and it is at 601 where you see Mr Cini's signature as agent, but Mr Adam Ryan's signature - well - - -
GLEESON CJ: But the corollary of the proposition that Ms Samuel acted innocently is that it never occurred to her that this misstatement could have been significant to the purchasers.
MR LALLY: Precisely. That is why I wanted to deal with the question that your Honour alerted to yesterday was the difference - you cannot simply use the word "knowledge"; that there are elements of knowledge and that the proposition that was posed by the Court at page 580 brought that into focus as to whether the knowledge is there because she has drawn the documents or whether she is consciously aware of the significance.
GLEESON CJ: But was one aspect of the negligence alleged against her that she failed to advert to the potential significance of this misstatement?
MR LALLY: No, the negligence is that the statement went out that was wrong and she should have advised the clients of that fact and they were the particulars that Justice Hayne referred to.
GLEESON CJ: But does not that involve a proposition that she ought to have appreciated the significance of the information that was being omitted from the statement?
MR LALLY: It depends on what the relevant knowledge is. I do not want to duck the question, but she knew because she drew both documents but was she conscious of the significance of the representation that resulted in the fraud being established, namely that there was a representation as to the commercial rent and for that you need not simply knowledge that two documents are different but a consciousness of the significance.
It would be convenient if I could deal with those now. If I could just hand a bundle - before going to just the passage in Kerr -the relevant passage is at 580. If the Court would have open 580 of Krakowski, it is that, point 3 of the page:
A representation that the instrument of lease covered the whole of the agreement between Eurolynx and Swaeder bears only one meaning. If that representation was made consciously by Eurolynx or its solicitor, it must have been made fraudulently. There is no sense in which a representation in those terms could have been honestly made by Eurolynx or by its solicitor. But was Eurolynx or its solicitor conscious of the making of a representation in those terms?
In other words, there needs to be a consciousness, and the Court reached that conclusion at page 583 in respect of the company, with the passages that I read this morning. It was because of the consciousness, the conscious knowledge was that of Cini and Ryan, and that is how the intention was obtained. So there was then a finding of consciousness so far as the company was concerned, and then a specific finding, from page 584 to page 585:
In these circumstances no finding of fraud should be made against the solicitor -
The principles that are relevant - and the Court dealt with some of these cases when determining the issue of attribution of knowledge as between various parties that I will come to - the relevant passages out of Kerr that we would draw attention to, at page 2, the "Elements of Fraud". At the bottom of the page:
Next, there can be no fraud without an intention to deceive, though the motive is immaterial. This at least is true as regards an action of deceit which can only be supported by a fraudulent as distinguished from a negligent misrepresentation. An honest blunder in the use of language is not dishonest and unless there is a duty to be careful it is not actionable.
GUMMOW J: What year is this edition?
MR LALLY: It says 1986, I think.
GUMMOW J: It is a reprint, is it not?
HAYNE J: It is a reprint of a very old edition of Kerr, is it not? I think it is a reprint of a very old edition of Kerr.
CALLINAN J: I think the last edition was 1928. What does it say about recklessness, anything?
MR LALLY: Yes. If I deal with that, it then distinguishes what used to be called "legal fraud". If you go to page 4, point 8:
Nothing short of a fraudulent intention in the strict sense will suffice for an action of deceit, and in this strict sense it is quite natural to say that there is no such thing as legal as distinguished from moral fraud. But when fraud was referred to in the wider sense used in Chancery it is a mistake to suppose that an actual intention to cheat had always to be proved. A man may misconceive the extent of the obligation which a Court of Equity imposes upon him. His fault is that he has violated, however innocently because of his ignorance, an obligation which he must be taken to have known, and his conduct has in that sense always been called fraudulent even in such a case as a technical fraud on a power.
GUMMOW J: None of this is news. How is it helping us in this case?
MR LALLY: Leading into the guilty knowledge, and the relevant passage so far as the difference between fraud and negligence is, at the last two lines of that paragraph:
Negligence is not fraud, but negligence may be evidence of fraud if it is "so gross as to be incompatible with the idea of honesty".
So it is question of fact.
HAYNE J: All this is precluded by the earlier judgment. Why are we troubling about it, Mr Lally?
MR LALLY: Because of what was put yesterday that the solicitor, in effect, should be viewed almost as if she was guilty of fraud.
HAYNE J: No claim for deceit was made against her.
MR LALLY: Precisely.
HAYNE J: Why are we fussed about it? Why are we not fussed more about questions of causation than these questions?
MR LALLY: So long as it is clear that that is the position, that it is guilty knowledge that involves a consciousness of what is occurring. The difference, if I merely give the passages, then, in Angus v Clifford, between "making a false statement through want of care falls far short of, and is a very different thing from fraud", is at page 465 and at page 466 in the judgment of Lord Justice Lindley that:
If it is fraud, it is actionable. The passage about knowledge - knowingly making it, and making a statement without believing its truth, are based upon the supposition that the matter was really before the mind of the person making the statement, and if the evidence is that he never really intended to mislead, that he did not see the effect, or dream that the effect of what he was saying could mislead, and that that particular part of what he was saying was not present to his mind at all, that I should say is proof of carelessness rather than of fraud.
GLEESON CJ: Did you say that Ryan signed the section 32 statement?
MR LALLY: Yes.
GLEESON CJ: If Ryan signed the section 32 statement and your argument is correct, it is almost as though the finding of fraud was simply based upon an inference of fact that Ryan, having set out to mislead the purchasers by concealing from them the existence of the inducement arrangements, signed a section 32 statement which positively misrepresented that there was no inducement arrangement. Why would you be talking about aggregating anybody's state of mind? Why would you not just say Ryan, the company director, was fraudulent?
MR LALLY: That is why I made that point to Justice Callinan, that it is not really a matter of aggregating; it is a matter of determining what was the state of mind of the company.
GLEESON CJ: But there is no difficulty in attributing Mr Ryan's state of mind to the company, is there? He was a director. But that is not the basis upon which the decision went.
MR LALLY: But it is, with respect, that at 583 - - -
GLEESON CJ: The basis of what I have just put to you simply consists of a finding of fact against Ryan, who did not give evidence and against whom an inference might be easy, and an attribution of his state of mind to the company.
MR LALLY: But that is in effect what occurs at page 583, point 3, to focus upon:
the company's intention or willingness to misrepresent the contractual arrangements -
At point 4 there is then the determination of what was known. Who are the persons who are referred to? Cini and Ryan. At point 8 - - -
GAUDRON J: Really all that is being said on one view is that Gilbert's ignorance is irrelevant.
MR LALLY: Yes, but it cannot find what is the state of mind of the company without having some individual, and that was a point made by Chief Justice Bray in Brambles' Case.
GLEESON CJ: But if the ratio of this decision is simply that Ryan, from the beginning before the contract was signed, set out to deceive the Krakowskis and signed the section 32 statement knowing its significance to them and appreciating its falsity, all of that being a matter of inference, inference facilitated by the absence of Ryan from the witness box, this is a very straightforward decision.
MR LALLY: Yes, but unfortunately the Court did not have the benefit of those last pieces of evidence to view it in that way.
GUMMOW J: At 568, point 5, it is said that Ryan signed the letter of understanding.
MR LALLY: Yes, that is the letter of understanding and the evidence - - -
GUMMOW J: But at 569 it is not said though who signed the vendor's statement.
MR LALLY: Yes.
GLEESON CJ: I do not think it emerged in the later proceedings, did it?
MR LALLY: No. It is not that it emerged, it is that the evidence of Ryan's signature was given by Mr Gilbert. We have set out the passage in our submissions. If you go to549, line 6:
May I first ask you to look at the signature on that letter, who signed it for and on behalf of Eurolynx?
That is the letter, Justice Callinan, that is referred to in that portion of the judgment:
Adam Wright(?).
This is the side agreement, is it not, Mr Gilbert?---I'm sorry?
This is the side agreement, is it not?
And, over the next page at line 6:
Did you negotiate the inducement of the payment of the $156,000?---No.
Who did?---Adam Ryan.
If we go to 558, line 10:
Do you understand that he was only prepared to even contemplate, to use his words, contemplate leasing the property because of the inducement?---I wasn't involved in any negotiations with that tenant.
If we go to 586 and it is at 586 is the relevant signature there with the words "Director" at line - - -
GAUDRON J: Is there any evidence identifying it?
MR LALLY: No.
GAUDRON J: I think that was a problem in the first Eurolynx proceedings in this Court, was it not? I think it was.
MR LALLY: It is so long ago, I - - -
GAUDRON J: I am sorry I think Justice Callinan probably has something to ask of you, but I have a recollection that it was a problem at that stage.
CALLINAN J: Mr Young said there was some document with a squiggle on it that could be somebody's signature.
MR LALLY: Yes.
CALLINAN J: Is the document he - - -
MR LALLY: No, he - - -
MR YOUNG: No, it was 601, your Honour.
CALLINAN J: 601.
MR LALLY: 601 is - - -
GUMMOW J: That is the first section 32 statement.
MR LALLY: Yes, your Honour.
GUMMOW J: It is said that at line 20 is the signature of Mr Ryan, is it?
MR LALLY: No, that is Mr Cini's signature, first, but as agent but it is the signature that second appears. There is two signatures there.
GUMMOW J: I see.
HAYNE J: .....deciphering that.
GLEESON CJ: Maybe it is just initials.
MR LALLY: Could the Court look at the side agreement which is at page 580 to 581 and the squiggle appears at the bottom right-hand corner and the relevant line for signature on the next page - in the middle of the page - and that is the document that the Court found in the passage Justice Coleman referred to was signed by Ryan, and there is some further evidence.
The contractual document that is in the Court book at 669G to 669H contains the relevant form of statutory declaration. Unfortunately, the one in the Court book was not executed but the Court will note that the person provided for in the typed portion of that to execute that declaration on behalf of the company was Adam Abraham Ryan.
GLEESON CJ: I gather from what appears on page 592 of the judgment in Krakowski that the trial judge had made a finding of fact that neither Eurolynx or "its agents adverted to the possibility that" the inducement arrangements "might be relevant". Now, that finding covered Mr Ryan, I presume.
MR LALLY: Yes.
GLEESON CJ: And Mr Cini.
MR LALLY: Yes.
GLEESON CJ: Was that finding disturbed by the Court of Appeal in Victoria?
MR LALLY: No, but this Court found fraud.
GLEESON CJ: Exactly.
MR LALLY: Yes.
GLEESON CJ: Presumably then what this Court did, as a matter of inference, was to reverse that finding?
MR LALLY: Precisely, because the two are inconsistent.
GLEESON CJ: So this Court inferred that Ryan did advert "to the possibility that the `collateral agreement' might be relevant"?
MR LALLY: Yes, not only - more than that, that unless there was some particular servant or agent existed whose state of mind could be looked at for the purposes of attribution of knowledge in accordance with the principles in Brambles' Case, the Court could not have made the finding that it did and that is why I stress the reliance upon the finding of knowledge and intent.
GLEESON CJ: And where exactly do we find this Court reversing that finding in so far as it applied to Ryan?
MR LALLY: It does it by the finding at - it is the passages at 583.
GLEESON CJ: Thank you.
HAYNE J: Though that passage at about point 6 on the page is predicated on the hypothesis that Gilbert not knowing of the prior - I see, that Gilbert did not know.
MR LALLY: Yes.
HAYNE J: Yes, I see.
MR LALLY: And it is to be read in the context as to the intention and consciousness of the passage that commences at about point 4 of the previous page, 582:
Though Gilbert's explanation as to why he did not advert to the separate agreement when he was supervising the sale of unit 12 be accepted, the question is not whether Gilbert's mind adverted to the making of the representation but whether Eurolynx' mind should be held to have adverted to the making of that representation.
The mind of Eurolynx does not depend upon the acceptance of the evidence of Gilbert alone as to his appreciation of the significance of the separate agreement. Account must be taken of the evidence that Eurolynx' agent (Cini) and Eurolynx' officer (Ryan) who had first procured the agreement -
and then if you go to the last sentence at about point 8:
Their knowledge was the knowledge of Eurolynx, for they were the persons who were responsible for the initial negotiations and who had set the scene in which the representation had been made by the s 32 statement and the proffered contract of sale.
But to come back to the point made by the Chief Justice that - - -
GAUDRON J: And then do we not go to 585, which says - - -
MR LALLY: That is the intention.
GAUDRON J: Well, not so much the intention of theirs as such but Gilbert had authority to do it, whether he knew it or not.
MR LALLY: Yes.
GAUDRON J: And once you combine the authority, presumably without absence of specific instructions on it, that is all you need.
MR LALLY: Yes, and Gilbert is largely then irrelevant. It is needed to make good the cause of action in fraud, but so far as the mind, his mind is has put on the side by the Court in that process of reasoning and the cases that are there set out and Armstrong v Strain, I wanted to - I will leave it there, but the passages that I was going to refer to are - Mr Justice Devlin, at first instance, dealt with that issue that was raised by the Chief Justice yesterday, and that is that there is a distinction between knowledge because you have been told something and it is stored away, without adverting to it, whereas the guilty knowledge that is needed for fraud is a consciousness of an appreciation of the materiality and then the intent, nevertheless, to go forward, and the Court, in the passage later on, has found that, and they are doing so because they pose the question as to whether or not, given that the conveyancing documents were in the form that they were, should the company and its solicitors be found guilty of fraud, because of the consciousness and guilty intent, and the Court found that, yes, for the company, but not for the solicitor.
GLEESON CJ: Well, is it your proposition that this Court would have come to the same conclusion, but a little more easily, if they had been aware that Ryan signed the section 32 statement?
MR LALLY: Yes, precisely.
GLEESON CJ: Well, does that not bring us back to the question, accepting as we must the findings of fact about Cini and Ryan and their conduct, and adding to them the fact that we now know that Ryan signed the section 32 statement, did Mallesons have a duty of care in the circumstances to protect Eurolynx against conduct of that kind, on the part of Cini and Ryan?
MR LALLY: Well, it depends whether they advert to it.
McHUGH J: What you put to the Chief Justice is not right, is it? It is not the way that this Court determined the matter. Even if the court had known that Ryan had signed the section 32 statement, this Court would not have found fraud if that was all there was. The reasoning of the Court was this: it commenced with accepting the representation found by the Full Court, which is set out in the italicised sentence at page 576:
The representation was that the lease contained the whole of the agreement between the defendant and the tenant.
And this Court accepted that, the representation. Then at page 580, at about point 3, the Court said:
A representation that the instrument of lease covered the whole of the agreement between Eurolynx and Swaeder bears only one meaning. If that representation was made consciously by Eurolynx -
and that is the critical expression -
or its solicitor, it must have been made fraudulently. There is no sense in which a representation in those terms could have been honestly made by Eurolynx or by its solicitor. But was Eurolynx or its solicitor conscious of the making of a representation in those terms?
Then the judgment searches for evidence that Eurolynx was conscious and it does so by, at page 582, at line 7, saying:
The mind of Eurolynx does not depend upon the acceptance of the evidence of Gilbert alone.....Account must be taken of the evidence that Eurolynx' agent who had first procured the agreement of Mermelstein.....to buy unit 12 knew that the purchasers were willing to buy on the footing that the rent reserved by the lease was what the tenant had been and was willing to pay for a lease of the property offered to them. In other words, they were willing to buy at a price of ten times the amount of the rent.....Their knowledge was the knowledge of Eurolynx -
and then, at page 583, about line 8, where their Honours say:
In the absence of evidence from Cini or Ryan deposing to their knowledge of the basis on which the purchasers were buying unit 12, this Court is as able to draw inferences -
So what the Court was looking for was somebody in Eurolynx who knew the basis upon which the Krakowskis were buying and so were thereby conscious that the representation of the lease contained the whole of the agreement between the defendant and the tenant was materially false. Even if the Court had held that Gilbert had signed or Ryan had signed, it was the earlier conversation, was it not, that was relevant?
MR LALLY: It is, but I am focusing on this for the purpose of the - as between these two parties as to what causes the fraud.
GLEESON CJ: Yes, but the first sentence in the long paragraph on page 583 says we are not regarding the pre-contract negotiations "as containing the actionable misrepresentation".
MR LALLY: Yes.
McHUGH J: But they are the source of the knowledge which is attributed to Eurolynx in respect of the misrepresentation which was contained in the copy of the lease to which was attached the section 32 document.
MR LALLY: But it is that knowledge that must exist at the time the representation is being made.
McHUGH J: Yes.
MR LALLY: Yes. When you couple those two together to make the fraud and then it is in that sense - - -
McHUGH J: Well that was why I started to correct you, that if you knew no more than Ryan had signed the section 32 statement that would have led the court nowhere.
MR LALLY: No.
McHUGH J: You had to have that earlier knowledge.
MR LALLY: But I am drawing attention to the involvement of Ryan to show that this is not some knowledge that is distributed in a company where the company could not and should not have stopped. That fraud was its own separate act and that is why I am concentrating on that, that it is a known Ryan - I have called it Ryan for the purposes of the company. He knew all and he intended it to go forward.
GLEESON CJ: Would it be more accurate to say it is a finding that either Cini or Ryan or both of them was fraudulent?
MR LALLY: Yes, yes. Your Honour is quite correct.
GLEESON CJ: It does not matter which?
MR LALLY: Does not matter. Cini is the gentleman - - -
McHUGH J: But how can Cini be fraudulent? I mean, there is no evidence that he knew anything about these documents, is there, the lease or its contents or the section 32 requisitions?
MR LALLY: He signs - and if I just complete so that the other members of the Court see where he fits in - firstly at 664 there is a letter from Collings Real Estate signed by Marc Cini to Mr and Mrs Krakowski. There is reference to advise him "your solicitors" - Mr Mermelstein was not a solicitor but he was treated as if he were in correspondence at 666, two pages over, where Mr Cini is then writing to him as if he were the solicitor for his uncle:
We are pleased to inform you that your client David & Henia Krakowski, has purchased the above property.
Contracts of Sale were duly executed and exchanged -
and then if we go back to 601, that is where the section 32 statement is signed by Cini as well as agent.
McHUGH J: Which page is that?
MR LALLY: Page 601, Justice McHugh.
GLEESON CJ: If we eliminate Cini and Samuel and Gilbert things are not looking too good for Mr Ryan.
MR LALLY: No.
GLEESON CJ: And there is not much difficulty about attributing Mr Ryan's state of mind to the company, is there? So, if you make a finding of fraud against Mr Ryan and say he is the director of the company that would seem to be it.
MR LALLY: Then it is how that act, then, is viewed in accordance with the authorities as to whether that - how is it to be viewed. We put it that that, fitted within the example given in March v Stramare, that albeit that there is an occasion and an essential cause of it occurs by way of negligence, there is a transformation of the effect and that also leads into the principles where there is the setting of the scene and what then occurs, is it within the scope of the risk - in the passages that I have referred to but not read to the Court in Justice Gaudron's judgment in Bennett and referred to again in Chappel v Hart - that is the very risk that materialised - if there was a duty in respect of that very risk that materialised, then it is appropriate, even though that crime or that deliberate act has occurred, for the party to look back to the professional person to protect them.
GLEESON CJ: If a vendor of real estate which is subject to a tenancy is selling the real estate to a person who ought to be inferred to be buying it as an investment and a misrepresentation is made as to the financial arrangements between the owner and the tenant to the prospective investor or investors, is not the risk that they will have a cause of action against the vendors one within the scope of the solicitor's duty of care?
MR LALLY: No, it has to be the materialisation of the very risk that eventuates, and that is what triggered in Chappel v Hart. It is that very risk, it is not - - -
GAUDRON J: That is not the sole test of causation, of course.
MR LALLY: No, no, no, it is one of the tests. Another way of looking at it - - -
GAUDRON J: It is a consideration for saying that the cause is still operating or for saying you cannot say that the cause is not still operating. So to point to that does not necessarily take you the whole road in this case.
MR LALLY: No, no, I accept that. I accept, and it may be convenient to quickly go to some of those passages that we rely upon where - that is the difficulty with these cases on causation, that one can take a statement that if it is out of context and then applied as if it is a matter of absoluteness, it causes difficulty.
GAUDRON J: I am wondering if this case is not being too intellectualised, in a sense. It comes down to this: if the solicitor had performed her duty that arose by virtue of the terms of section 32 of the Real Property Act or Sale of Land Act - I forget what it is called - then the client would have been prevented from bringing its fraud into effect.
MR LALLY: That is the "but for" test.
GAUDRON J: Therefore, as a matter of common sense, do you say the solicitor is responsible for what happened when the fraud was discovered, or do you not? In a sense, on your argument, we are being a little bit too intellectual about it, I think.
MR LALLY: Not, with respect, because that is the starting point and the starting point is the analysis at page 517 of March v Stramare.
GAUDRON J: That is really what I was saying.
MR LALLY: Yes.
GAUDRON J: It is not really a question of breaking a chain of causation, you would put it, as seems to have been implicit in the Full Court decision, as never having been causative at all on a commonsense approach.
MR LALLY: It is put in two ways. Justice Kenny says that it is not the true cause. Alternatively, if it is to be viewed - that is the fraud - as an intervening act, then it broke the chain of causation. Under the heading of "Novus actus interveniens":
In similar fashion, the "but for" test does not provide a satisfactory answer in those cases in which a superseding cause, described as a novus actus interveniens, is said to break the chain of causation which would otherwise have resulted from an earlier wrongful act. Many examples may be given of a negligent act by A which sets the scene for a deliberate wrongful act by B who, fortuitously and on the spur of the moment, irresponsibly does something which transforms the outcome of A's conduct into something of far greater consequence, a consequence not readily foreseeable by A.
There is then reference to M'Kew's Case and at about point 9, the last sentence:
But in truth the decision proceeded from a conclusion that the plaintiff's injury was the consequence of his independent and unreasonable action.
The fact that the intervening action is deliberate or voluntary does not necessarily mean that the plaintiff's injuries are not a consequence of the defendant's negligent conduct. In some situations a defendant may come under a duty of care not to expose the plaintiff to a risk of injury arising from deliberate or voluntary conduct or even to guard against that risk.
Then after reference to Chomentowski:
To deny recovery in these situations because the intervening action is deliberate or voluntary would be to deprive the duty of any content.
It has been said that the fact that the intervening action was foreseeable does not mean that the negligent defendant is liable for damage which results from the intervening action.
There is reference to Chapman v Hearse and then Caterson. I will move to Caterson shortly, but the relevant passage from Caterson is referred to in the middle of the page. I am sorry, if I go back to the reference for Lord Reid in Dorset Yacht:
"But if the intervening action was likely to happen I do not think that it can matter whether that action was innocent or tortious or criminal. Unfortunately, tortious or criminal action by a third party is often the `very kind of thing' which is likely to happen as a result of the wrongful or careless act of the defendant."
Much the same approach was adopted by this Court in Caterson where Gibbs J (with whom Barwick CJ -
and other members of the Court -
agreed) pointed out that, if the plaintiff's action in jumping from the train was, in the ordinary course of things, the very kind of thing likely to happen as a result of the defendant's negligence and was not unreasonable, the jury was entitled to find that the plaintiff's injuries were caused -
That development of questions of reasonableness has been taken up and the passage that was referred to - where Justice McHugh had referred to in Medlin's Case that aspect, the question of reasonableness, was it appropriate. It is true that - there seems to have been some debate in the Court of Appeal in New South Wales as to whether your Honour Justice McHugh in dissent was making that statement without looking at the parties in the context as the majority did, but we do not read the passage in that way. We read his Honour's judgment as referring to the question of reasonableness in context rather than speak in principle, but it may be convenient to just refer to the two passages. If you go to Medlin, the relevant question for causal connection commences at page 6 point 3:
For the purposes of the law of negligence, the question whether the requisite causal connexion exists between a particular breach of duty and particular loss or damage is essentially one of fact to be resolved, on the probabilities, as a matter of commonsense and experience. And that remains so in a case such as the present where the question of the existence of the requisite causal connexion is complicated by the intervention of some act or decision of the plaintiff or a third party which constitutes a more immediate cause of the loss or damage.
And there is again reference at about point 8:
as having caused the relevant loss or damage.
And that is the relevant - so there is a focus upon what is the particular loss and damage and how can that be linked with the particular breach.
McHUGH J: But supposing a solicitor sends off a set of requisitions to the vendor. The vendor writes in a false answer. It comes back. The solicitor knows it is false and the solicitor then sends it off and that constitutes a misrepresentation. Now, in those circumstances, would you accept that the solicitor would be liable for negligence to the vendor and liable to indemnify the vendor?
MR LALLY: Yes, if the solicitor is sued, but that is not what occurred here.
McHUGH J: Why is it not? It was your client that sent off these documents.
MR LALLY: The client sent the documents but it did not do so in circumstances where it committed a deliberate act of fraud.
McHUGH J: But what does that have to do with it? You send out the requisitions to the client with false answers in them and the client signs it. They come back to you and you send them off and that is what constitutes the representation according to the finding. How is there any question of a novus actus interveniens?
MR LALLY: Because that is not the issue in this Court here now. The issue in this Court is whether that particular loss and damage should be visited upon Mallesons.
McHUGH J: But why did not Mallesons have a duty to stop the document being set out, in those circumstances? Surely they owed a duty to their client, in those circumstances, to prevent a client from being a party to a misrepresentation.
MR LALLY: No, the question is whether the solicitor had a duty to prevent fraud.
McHUGH J: No, it had a duty to take reasonable care for the interests of its client and I have objected on numerous occasions to this breaking up, or making concrete duties which are, in effect, merely breaches of a more general duty. A duty is a duty to take reasonable care in all the circumstances of the case and there can be many breaches of it, and why is not this a breach of that duty to take reasonable care? You have put in this question of fraud. This is a very technical fraud in any sense. You take somebody's knowledge here and you are sending out the representation here and you put them together and you say that constitutes fraud. One can understand that from the purchaser's point of view it is important that that be a law but when you are talking about causation it seems to be you are in a different area altogether.
Leaving aside Ryan signing the requisition himself, assuming that is the case, I mean, in a sense they have done nothing wrong. They happen to know something which is then attributed to the company. The sending of the documents is attributed to the company. That constitutes fraud. But, why is any individual piece of action on behalf of Eurolynx any more culpable than Mallesons who prepared this document and set it out?
MR LALLY: The fact of the matter is that the High Court did find fraud in those circumstances.
McHUGH J: I know, but now you have got to answer an argument that your negligence, which is admitted, is not causally connected with the damage that your client suffered.
MR LALLY: No, that the client suffered by reason of fraud.
McHUGH J: No, not by reason of fraud; by sending out a document which you had prepared and which then became the basis of a finding of fraud.
MR LALLY: But that is jumping, with respect, a few steps. That is jumping and it is not looking at the issue that you looked at page 21 of Medlin as to whether or not in the circumstances that Act, of itself, was reasonable.
McHUGH J: In Medlin we were talking about mitigation of damages. It is a totally different area altogether.
MR LALLY: Could I read the passage at point 6:
However, the ultimate question is whether, as a matter of common sense, the financial loss that the plaintiff has suffered was caused by the plaintiff's act in resigning his office rather than by the defendant's negligence. If the plaintiff acted unreasonably in retiring early, then the law will disregard the defendant's negligence as a cause of the plaintiff's financial loss. That negligence and its effects will be treated as background conditions of the plaintiff's loss and, as a matter of common sense, not material causes of the plaintiff's loss.
If we go back, page 11 is where the same issue is dealt with by the majority at point 8:
In these circumstances, the relevant question was not whether the plaintiff "should" have continued in his University post or whether his decision to retire was not "reasonable" but whether, in the context of what was reasonable between the plaintiff and the defendant in determining the defendant's liability in damages, the premature termination of the plaintiff's employment was the product of the plaintiff's loss of earning capacity notwithstanding that it was brought about by his own decision to accept voluntary retirement.
Those passages are viewed as passages that deal with the question of causation. The Court of Appeal in New South Wales in Kavanagh v Akhtar, that is No 6 on our learned friends - at page 597, this is an action where the woman suffered a shoulder injury as a result of negligence and she was unable to properly care for her long hair and cut it off without her husband's consent, contrary to the principles of the customs of the religion. This angered her husband and ultimately resulted in the marriage breaking down, with the woman suffering psychiatric illness as a result.
The question of causation is dealt with in the judgment of the President at page 597 and there is reference to Justice Gaudron's judgment - it is the passage I referred to in paragraph 7 of the reasons for judgment - in reference to March v Stramare, then reference to Medlin and then, over the page, the following discussion commences:
In Medlin, the one point on which the majority of the court differed from Justice McHugh was in relation to the "reasonableness" of the plaintiff's decision. The trial judge had found that Professor Medlin had not acted reasonably in deciding to retire. The High Court disagreed, but on difference bases. Justice McHugh indicated why the onus lay on the defendant to establish unreasonable conduct, not only in the context of a suggestion of failure to mitigate, but also in the context of causation. His Honour found that it was not unreasonable for the plaintiff to have retired early. However, without disputing Justice McHugh's conclusion on the facts, the majority rejected Justice McHugh's non-contextual approach to the reasonableness of Professor Medlin's conduct.
And the majority stated:
"Any question of reasonableness -
And it is that passage that I read, and if we move to about point 8 under E:
The point on which the High Court divided in Medlin also establishes that it would be wrong to address the respondent's conduct exclusively in the confines of her own marital and religious culture. To inquire merely whether she unreasonably disobeyed her husband or the dictates of her religion is not only unseemly, it is wrong. On the facts of this case it would be unreasonable for the appellant to take advantage of these restraints which the respondent put aside in her pain and discomfort. To do that in circumstances where it cannot be said that the respondent reacted unreasonably to the situation in which the appellant had placed her would be to take advantage of the appellant's own wrong. After all, that wrong had been the event that placed the respondent in a vulnerable position in which she lacked an effectively free choice.
Now, the distinction there is focusing on reasonableness and whether or not the party in the position of the company in this case was placed by its solicitors in a position where it had no free choice. The answer to that on the finding of this Court in Krakowski must be that it had no such restrictions. It did not have Mallesons standing behind them saying, "You must go ahead and proceed with this purchase". They could have and should have - - -
McHUGH J: But, surely, when that requisition came back, it was Mallesons' duty to say, "Hello, this is wrong, you can't send this out". There was no fraud until it was sent out.
MR LALLY: But the fraud requires the conscious knowledge of what is occurring.
McHUGH J: Yes, and it also requires inducement, and there would have been no inducement if Mallesons had carried out its duty.
MR LALLY: But that, with respect, is another way of putting that the accident would not have happened if it did not go down the road that way.
McHUGH J: Well, that may be, but the fact is that Mallesons were Eurolynx's solicitor and they had a duty to protect them.
MR LALLY: Did they have the duty to protect them against their own deliberate fraud where they - - -
HAYNE J: They had a duty, it was admitted, which obliged them to advise the client to disclose the true position. That was admitted - see 1001, 1002.
MR LALLY: Yes. They had a duty to advise the client to disclose the position, but this is not caused by that.
GUMMOW J: But we do not know what the client would have done if the duty had been discharged, do we?
HAYNE J: There was a finding of fact that had it been discharged, the matter would not have proceeded - 1003.
MR LALLY: That is a finding based on Gilbert's evidence as to what Justice Eames said, but that does not change the causation of the deliberate fraud.
McHUGH J: Commonsense tells you, does it not, that they would have acted on their solicitor's advice. If they had been told, "If you send this out you are guilty of fraud. You are likely to have the contract set aside and be forced to re-convey the property and pay damages." Do you think any sensible businessman is going to say to his solicitor, "Don't you worry about that?"
GAUDRON J: They may not have been able to put it as highly as Justice McHugh puts it but they certainly, knowing it was false - there is no doubt that they knew it was false - although as a fact - they certainly had a duty to advise, did they not, as to the consequences of breach of section 32 and as to the possible consequences under the Trade Practices Act or at least the likely consequences under the Trade Practices Act?
MR LALLY: But not in respect of the fraud.
GAUDRON J: That does not matter, in a sense, does it, because - - -
McHUGH J: See, when you talk about fraud, fraud is a legal construct and in this area we are not even talking about an intention to deceive. The fraud here consists of making a representation of which they were conscious, and that is the company. But, when you look at the individuals, they take a piece of knowledge here and it is added to that to make the company guilty of fraud.
MR LALLY: Yes.
McHUGH J: It strikes me as very strange to say that the causal connection is suddenly broken in these circumstances because you did not put the legal construct of fraud on it. Supposing there was no fraud but there was an innocent misrepresentation on the part of Eurolynx but the contract was set aside. In those circumstances, would you still maintain that the causal connection had been broken?
MR LALLY: But that is not this case.
McHUGH J: Well, no, no. I am just asking you as a hypothetical. You could not. Then Mallesons would have a duty.
MR LALLY: But it would not be set aside. In this case, the facts in this case that have to be dealt with for the damage that has been identified do not allow this case to be dealt with as if something else had happened.
GLEESON CJ: But part of the difficulty is the absence from the witness box of Mr Ryan, but it really is not wildly speculative, is it, to imagine somebody in his position saying, "Well, I am going to keep quiet about this side arrangement and I hope nobody asks me about it." But then the solicitors say, "Now you have been asked a question that requires you to face up to this and if you answer that question falsely you are going to be in all kinds of trouble."
MR LALLY: But the question of answering honestly and the materiality is involved in the question of fraud.
GLEESON CJ: The finding of fact that the conveyancing transaction would not have gone ahead if the accurate information had been given implies a conclusion that Mr Ryan would not have been persistent in his fraud, does it not?
MR LALLY: Well, not necessarily because the finding is that they intended and were willing that that proceed. Your cannot have - that is the difficulty with this case, that you have a client who has intended and was willing that that occurred. It was that that - if that is so, the fraud has occurred and at that point of time they cannot have two states of mind.
GLEESON CJ: But up until this misrepresentation is made you have just got a client who is, to use an expression I think used earlier this morning, being economical with the truth, but then the statement is made, a positive misrepresentation is made, involving joint conduct on the part of the solicitor and client.
MR LALLY: But not fraudulent conduct.
GAUDRON J: But does that matter in a sense?
MR LALLY: It does.
GAUDRON J: Well, I am not too sure. Perhaps it is better to approach it from the other end. What is the loss that Eurolynx suffered? How do you define that loss?
MR LALLY: The loss is loss that is consequent upon an order for rescission for fraud and restitution by reason - - -
GAUDRON J: Well, the loss was a liability to make good the consequences of its misstatement.
MR LALLY: No, of its fraud.
GAUDRON J: Well, why is that significant? I mean, I can see why that is significant if you are looking at causation itself in separate areas where the solicitor really is waiting - say, for example, the solicitor, as used to be the practice, writes to the client and says, "Can we have your instructions with respect to these matters" - which is what you used to do with respect to these things - and then you sent off the answer in accordance with those instructions. Well, that is one thing. Here, however, you are drafting the proposed answers. You are suggesting the answers that should be made. That seems to me to take it into a slightly different area.
McHUGH J: Can I add to that, it seems to me there would have been no fraud if it had not have been for your client. I mean, your client was the one that set the fraud up, so to speak, by drafting these requisitions.
MR LALLY: But it set - when you say it set the fraud up, it is by the use of the words "set the fraud up" it did not because to have the fraud you need to have that in - a guilty mind to proceed with that which existed only in the company and not with the solicitors.
HAYNE J: Can I pursue the point with you perhaps to the same effect. The loss in question here is the amount which Trenorth had to pay upon rescission of the contract of sale.
MR LALLY: Yes.
HAYNE J: It is found that the contract was made as a result of Trenorth misrepresenting the state of the lease arrangements in a way in which one or more of the servants or agents of Trenorth subjectively believed was false, which Trenorth by its servants or agents intended should be acted upon by the purchaser and upon which the purchaser did act. So far so good?
MR LALLY: Yes.
HAYNE J: The misrepresentation was in writing and it was prepared by MSJ who it was admitted was under a duty to advise its client of the need for disclosure of the true position. Again agreed?
MR LALLY: Yes.
MR LALLY: Yes.
HAYNE J: It is found as a fact that had the advice been given, the misrepresentation would not have been made, see 1002 to 3, and the contract would not have resulted - see 1003 - yes?
MR LALLY: Yes.
HAYNE J: In those circumstances, why is it not at least open to conclude, perhaps stronger than that, that the negligence of MSJ was a cause of the making of an infirm contract and one which would not have been made had the duty been performed?
MR LALLY: Because it was the occasion that was transformed into the use of a deliberate act which otherwise - - -
McHUGH J: They are words transformed into an occasion. They did nothing. Some earlier knowledge that they had predating the sending out of this document by your clients was used to sheet home to the company a liability in fraud.
MR LALLY: But it changed their conduct which was - - -
McHUGH J: What changed it was your client's act in sending out the document. It then converted what had happened to that stage, the mere knowledge, into a fraud. There would never have been any fraud if your client had not sent out the document with these false answers in, which it had prepared.
MR LALLY: But the company allowed that to proceed when it was armed with all of the ingredients it knew and it intended nevertheless that that go forward, but the solicitor did not and that is why it has to be within the damage that has to be recovered here is damage that results from a fraud, not from a misrepresentation being made.
GAUDRON J: But that seems to raise a question of foreseeability and - - -
GLEESON CJ: And the kind of damage.
GAUDRON J: Yes.
GUMMOW J: Yes, and the kind of relief.
CALLINAN J: Mr Lally, could I ask you to give some thought to what the measure of the restitution would be or how the restitution would have been calculated had, for example, the rescission been effected and completed shortly after the contract was settled, say within a month or something like that? The figures would have been quite different, would they not?
MR LALLY: Yes.
CALLINAN J: Could you give some thought to that and make a submission on that and perhaps Mr Young might too to me?
GLEESON CJ: You can think about that over the adjournment, Mr Lally. How long do you expect to require to complete your submissions?
MR LALLY: Half an hour at the most.
GLEESON CJ: We will adjourn now until 2.15.
AT 12.50 PM LUNCHEON ADJOURNMENT
UPON RESUMING AT 2.16 PM:
GLEESON CJ: Yes, Mr Lally.
MR LALLY: If the Court pleases. The ambit of the focus in the propositions that were being put to us just prior to the luncheon adjournment involve an analysis of this case as if it were a case that it is not, namely where the parties come before the Court where the solicitor had been negligent and the client had not done anything at all with the occasion or with the documents that made any alteration.
To treat it as a case where you test the causal relationship by reference to a different case altogether demonstrates, in our submission, why the application of the simple "but for" test fails. It is that qualification that is put for various reasons that if you follow a process of simple logical reasoning you find that you are in a situation where you would have, in this case, a solicitor who knows nothing that is relevant to the fraudulent aspect is, in fact, indemnifying the client for the fraud about which she knew nothing and that does not seem right as a - - -
GAUDRON J: Well why do you talk about it as fraud, as such? You keep saying that, but she has advised them, at the very least, has she not, that it is suitable to propound the section 32 form in the state it was?
MR LALLY: That is so.
GAUDRON J: And having done so, there then emerged a contract which, at the very least, might have been subject to action under the Trade Practices Act.
MR LALLY: Yes, I acknowledge that, but - - -
GAUDRON J: Well now, the damage, in one sense, was it not, was the entry into a contract, which was subject to legal consequences?
MR LALLY: That is not the question at this part of the proceedings.
GAUDRON J: I know it is not the question at this part of the proceedings, but your arguments have been proceeding on the basis that the loss was being caught out for fraud, in a sense. The loss was the entry into the contract, was it not, in those terms?
MR LALLY: No. The loss that is sought to be passed on - - -
GAUDRON J: Yes, but we have not got up to calculating the money worth of the loss.
MR LALLY: No, I am staying out of the money part. It is what Justice Callaway referred to as the increase in the loss that has been the focus of the litigation that came to this Court on the fist occasion and thereafter because the Court of Appeal, or the Full Court in those days, had specifically determined the question as to what relief ought be given.
GAUDRON J: But the loss - if you look at it in terms of the relief that ought to be given, it seems to me you are missing out on identification of the real loss. The real loss was entering into a contract to which adverse legal consequences might attach.
MR LALLY: With respect, it is the risk that eventuates and materialises was, in this case, the risk of fraud, not the entry into the contract, because if it were simply that risk it was an event which involved only the solicitor, whereas the event that is required for the materialisation of the risk involves far more. It involves not only the client but the client's - - -
GAUDRON J: Well, that might be a question of foreseeability, or it may be a question of remoteness.
MR LALLY: But it is difficult in questions of causation. That is why the "but for" test is inappropriate to stay out of any questions that also roll into questions of remoteness for that reason, and that is why concepts such as the scope of the risk and what is known and what is unjust or infusion of policy and at the bottom line, there has to be, therefore, on the facts of this case, whether there was a duty to guard against fraud as distinct a duty in respect of the conveyancing transaction - - -
GAUDRON J: Let us assume you say the duty was to advise them so that the contract that eventually was completed was not at risk of attracting legal liability other than in accordance with the terms of that contract?
MR LALLY: Yes, I see.
GAUDRON J: Yes, would you define the duty as extending that far?
MR LALLY: No, the duty was to act with reasonable care in accordance with the instructions and the knowledge that the solicitor had to effect the conveyancing transaction which included within it the need to comply with the provisions of section 32, which would have involved the handing over of a statement that was correct. The solicitor was negligent in that the information that was passed over was incorrect. Now stopping there, that is a negligent - - -
GUMMOW J: Well, stopping there, and putting aside causation for the moment, when would the cause of action in negligence be complete? Duty breach and damage, when would the cause of action be complete against your clients?
MR LALLY: To our clients?
GUMMOW J: Yes.
MR LALLY: Only when a claim - - -
GUMMOW J: Not on 19 September 1989 when the contract is entered?
MR LALLY: No. No, there would have to have been the materialisation of a claim that could be made.
GAUDRON J: Why?
GUMMOW J: Why?
MR LALLY: Because there may be no loss whatsoever.
McHUGH J: Why? You have got a contract.
MR LALLY: Yes.
McHUGH J: You have got a contract between the solicitor and client.
MR LALLY: Yes.
McHUGH J: Well, the moment there is a breach, nominal damages are claimed.
MR LALLY: Nominal damages, but for a claim to be made over - I appreciate the distinction that in breach of contract it occurs at the time of the breach and the fact that there may be an incipient right to some and if so what damages is a different question, but - - -
GUMMOW J: Are you saying it is continuing at that time like the guarantee in Wardley and you have to - - -
MR LALLY: No, but it - - -
GUMMOW J: It is not quite like the contract of guarantee.
MR LALLY: No, it is not the problem that this Court had in Wardley as to when - - -
McHUGH J: But you see there are two problems can arise in this sort of case, depending on whether you sue in contract or whether you sue in tort. If you are suing in tort, then one has to prove damage because it is the gist of the action and on one view there is no damage suffered, as you say, until they are put in a position where they are likely to have a claim against them and they have a claim against them unless you look at it in a Wardley-type situation. On the other hand, if you sue in contract, there is a breach and a cause of action is complete as soon as the breach of contract takes place and then questions arise as to whether there is a damage. This further damage is then part of the breach or - - -
MR LALLY: That is what this case brings into extreme highlight and that is why Justice Callaway defines it as that, because it is not simply an increase in quantum; it is an event that has occurred because a court has determined to give - - -
GUMMOW J: No, the event is the out-of-court rescission by the letter of 7 December 1990, is it not?
MR LALLY: The letter of rescission of 7 December 1990 upon the declaration needs the declaration of the court declaring that that at common law rescinded the contract using - and that - - -
GUMMOW J: At common law it did.
MR LALLY: At common law it did. It operated as and from that date so long as the court later declared - there is some debate in some of the authorities as to whether it is the date of - but for these purposes we consider that - - -
GUMMOW J: It did, because there was fraud.
MR LALLY: Yes. That is of December 1989 but that is because of fraud. There could not be an out - after the exchange of contracts, entry into possession. There could not be the setting aside of that contract other than by resort to that remedy which cannot occur in the absence of fraud. We say in this case that is demonstrated because the Full Court considered the matter, accepted - we are going to leave the copies of the judgments - some extracts were handed up and they were not in the appeal book - - -
CALLINAN J: Mr Lally, I am sorry to bring you back to this and to interrupt you, but before lunch Justice Hayne drew your attention to the findings at pages 1002 and 1003 of Justice Eames. His Honour there found:
On the evidence before me, and consistent with the findings of fact made in the High Court judgment, I am satisfied -
Do you remember that passage?
MR LALLY: Yes.
CALLINAN J:
satisfied that.....Gilbert would have approved their delivery to the purchasers -
of documents and made proper disclosures. His Honour did not have any evidence before him in relation to those matters at all.
MR LALLY: No. What his Honour had was the - - -
CALLINAN J: He was confined by order 5(a) of the order of this Court, that he could only receive evidence of events occurring after the first trial, after the trial. That occurred long, long after the events with which this finding is concerned.
MR LALLY: Yes, and it is dealt with - - -
CALLINAN J: And there is nothing in the High Court judgment, I would have thought, that would have supported that finding.
MR LALLY: No, there is not. I was going to take the Court to the way in which Justice Kenny dealt with that.
GAUDRON J: Was there evidence from Mr Gilbert?
MR LALLY: Yes.
GAUDRON J: On that issue?
MR LALLY: Mr Gilbert, his evidence was that he relied upon the - I will just get the passage - - -
McHUGH J: Well, there is a finding at about page 1002. Is that not your real problem in this case, that Eurolynx's agreement with Mallesons was that Mallesons would tender advice to Eurolynx through Gilbert, and Gilbert relied on you to draft the documents properly and to give him proper advice? You failed to do it, and as a result he okayed the sending out of this document which involved his company in fraud. How can you possibly say that there is no causal connection between their loss and your client's negligence?
MR LALLY: Because that finding relates to the drafting of the documents. It goes no further and it is no different than the documents as drawn by the solicitor would have come out as they were and Gilbert would have left them as that.
McHUGH J: Yes, but the finding is:
In particular, Gilbert relied upon advice proffered, by virtue of the documents drafted by the firm, as to the contents of any documents which should be provided to the purchasers - - -
MR LALLY: That is so.
CALLINAN J: And you just told Justice Gaudron that Gilbert had given some evidence at the trial and that evidence - you did not say this but I inferred that perhaps that evidence might have supported the finding.
MR LALLY: Yes, I will take you to the passages in Gilbert's evidence.
CALLINAN J: You can just give me the pages if you like, so far as I am concerned; the other members of the Court may want it. Justice Eames must have been making that finding on the papers as it were, on the transcript and everything else.
MR LALLY: Yes. It is the evidence that is before - we will locate the passage and I will not forget it - if I could come back to it.
CALLINAN J: But it would support a finding of that kind, is that correct?
Do you concede that?
MR LALLY: No, we do not accept that it is a finding that goes any further than if the solicitor had drawn the documents in a certain way, that is how they would have come out, and that is why we have put it that it is the "but for" test, because he is not saying any more than, "We left everything to the solicitors. What the solicitors did, we followed."
McHUGH J: But it is the very thing that were asked to do that they had to advise against. You keep injecting the term "fraud" into this. I would not hesitate to hold that solicitors have a duty to advise their clients not to commit frauds.
MR LALLY: Not to commit frauds about - - -
McHUGH J: Yes, and if they think their clients are involved in a fraud, they have a duty to tell them to stop it.
MR LALLY: But that raises the very issue, what are the facts that would give rise by way of knowledge to a solicitor, in a conveyancing transaction, that its client intends to be fraudulent?
McHUGH J: Well, in this particular case, there are documents being set out. You have got a solicitor, who ought to have known that the documents were a misrepresentation. Now, it is a very short step from that to think that a client may be guilty of fraud, when you are going to send out documents which are involved in misrepresentation. Why is not the solicitor under a duty, in those circumstances, to warn the client about the potential consequences of fraud, if there is guilty knowledge? Why does not the solicitor have a duty to say, "Do you know about this thing? Do you know about what they want to do?", and so on?
MR LALLY: It is because of that very necessary ingredient, the question of knowledge and as in - - -
CALLINAN J: But the answer to the requisition was false, was it not, and did not the solicitors pass the answers on? Is that right though?
MR LALLY: The answers to the requisitions were incorrect, yes.
CALLINAN J: Well, they were false?
MR LALLY: Yes, but then it is the next step, are they false so that there is the knowledge relevant for fraud, and that was the distinction I was seeking to make this morning.
CALLINAN J: Well, do they need to know that it would be fraud or that it might give rise to a risk of fraud, and even if they know that it might give rise to a risk of fraud, why should they not, as Justice McHugh suggests, become alert to that and say, "Look, I will not pass this on unless you - - -"
MR LALLY: That would mean that every mistake that is made in a document by a solicitor because it is wrong carries with it - - -
CALLINAN J: No, not every mistake.
MR LALLY: Well, then it becomes a question. That is why the law has till now been careful in maintaining the clear distinction between carelessness and fraud and I used - - -
McHUGH J: But not in terms of a solicitor's duty. That is what is critical here. I mean, your client plainly had a duty to prevent Eurolynx from committing breaches of the Trade Practices Act. Now, your answer to it is, "Well, we are not dealing with that. We're dealing with fraud."
MR LALLY: Yes.
McHUGH J: But it is a distinction without a difference. If you have a duty to prevent the client sending out false and misleading documents, it seems to me a short step to say you also have a duty to see that they do not send out fraudulent documents.
MR LALLY: But the difference with the fraud is that there would have to be some knowledge, some inquiry by the client, some giving of instructions or some fact that would trigger the need for the solicitor to undertake that task. This would create such a burden on solicitors because where does one stop with the difference in negligence.
HAYNE J: But that cuts directly across the concession that is recorded at 1002, does it not, namely your concession:
that the terms of the admission must be taken to encompass an admission that by drafting the relevant documents in a way which omitted reference to the separate agreement between the lessor and lessee, Mallesons thereby proffered advice to the Company, which advice was wrong, and was negligently given.
MR LALLY: Yes, and we do not dispute that, but the documents that were drawn were conveyancing documents that require answers, but to be used for the purpose of perpetrating a fraud is an entirely different matter and that requires the addition of the guilty knowledge. Now, the Full Court considered what would follow in this case and - - -
HAYNE J: Just before you come to that. Had nobody been fraudulent at all, but had this document gone forward carelessly from Mallesons and carelessly from Eurolynx the contract would still have been infirm, would it not? It would have been liable to be rescinded within the section 32 period.
MR LALLY: It may or may not have occurred.
HAYNE J: But it would have been liable to be set aside, there being a false statement in the 32?
MR LALLY: Yes.
HAYNE J: And even after the 32 period expired, assuming carelessness all round and no fraud, the contract may or may not have been set aside but would have been liable to suit on the part of the purchaser under section 52 plus 82 and 87 of the Trade Practices Act seeking to achieve that.
MR LALLY: Yes, but that is - - -
HAYNE J: Thus the injection of fraud, although at first sight it suggests a particular kind of infirmity in the contract, namely, one that will lead to rescission for fraud. It may need to be compared with the circumstance that would arise if everybody had been thoroughly careless but nobody had been fraudulent.
MR LALLY: Very much so.
HAYNE J: And, in the latter case, there would still have been infirmity of the contract, would there not, in the relevant sense?
MR LALLY: No, not in this case because that - - -
MR LALLY: Because the Full Court in round, was it one or four, chose or refused to make orders under 87? Is that the basis of the answer?
MR LALLY: It identified the loss as a capital loss. It identified the loss as - and it is at page 840 - essentially a capital loss on the investment to be appropriately compensable by award of damages rather than by attempted restitution.
HAYNE J: But that kind of comparison might invite the closest attention to measure of damages, perhaps to remoteness, perhaps to mitigation issues, but what does it say at all about questions of causation?
MR LALLY: Because it has proven that in this case such result that could form the basis of a claim over - that is whether we use the word it crystallises, but at the end of the day there is a claim over in the third party proceedings, it formulates that claim and that is why the presence of fraud and the involvement of the intention of the parties is so critical and why there is then need for policy decisions, because on the way that it is put against us is that one stands back and disregards the facts that have occurred as to the involvement of one party, compared with the other, and the consequences are that if that is right as a matter of causation that the "but for" test works simply as a "but for" test.
GAUDRON J: Again, that depends on how you identify the loss. Forget about the measure of damages, the loss that Eurolynx suffered, and it seems to me, at the very least, it suffered exposure to suit, did it not? Now, you might be arguing about what sort of suit but that was the damage it suffered.
MR LALLY: It is essential that we argue - - -
GAUDRON J: It incurred at the very least a liability which would fall in if a claim was made upon it.
MR LALLY: Could I put that back another way, to answer your question?
GAUDRON J: Yes.
MR LALLY: That if there had been only negligence, the solicitor would have been liable for that negligence. However, what occurred was not negligence.
McHUGH J: Yes, but your argument seems to me to lead to the inevitable conclusion that even if Mrs Samuels had been guilty of fraud, Mallesons would still not have been liable.
MR LALLY: It would be quite a different matter if Mrs - - -
McHUGH J: No, it would not be a different matter at all. It would not affect your analysis of the situation, in any event. Your argument would still be that Mallesons had no duty to protect the client against its fraud, even though one of its own employees was guilty of fraud in the legal sense, that she had the relevant knowledge.
MR LALLY: With respect, we put that submission with the basis that Mrs Samuel was not guilty of fraud, but the client was, and we can would not be putting - - -
McHUGH J: I know, but they would be independent acts of fraud. She would be fraudulent because she had sent out the documents, and she knew what was involved.
MR LALLY: But that would change the whole of the dynamics whether as between the two parties, being the solicitor and the client, the acts were reasonable, to use that term that is used. Now, it could - - -
McHUGH J: I do not see how it affects it at all, Mr Lally. Your argument is that the solicitor is owed no duty to protect the clients against their own frauds.
MR LALLY: Yes, a fraud of which it does not know, whereas in the example that you are putting back to me, it carries with it the - - -
McHUGH J: No, not all. The facts might have been exactly the same as they were, but for some reason, by some means or other, Mrs Samuels knew about the reliance the Krakowskis placed on this being the whole of the terms of the agreement.
MR LALLY: But that, with respect, is the very matter that divides the two. The guilty knowledge rested with the client that made the actions fraudulent, and in the example that you put to me, she has that knowledge so she is in the same position as the client.
McHUGH J: Yes, but her knowledge is independently of the clients. She does not acquire it from the clients.
MR LALLY: But, because of that knowledge of her clients' affairs, it would trigger the need to advise them. That was the basis in Waimond's Case of where Mr Flanagan was an employee of the solicitor. The employee had that knowledge and so there was therefore a duty because of that knowledge. In the instant put, the solicitor, having the knowledge of the fraud, would have then a duty to take action because she has in effect, in the course of her retainer, obtained information which you can term as instructions and she would have to do something. That is the reason there and that is the difference in this case, that by approaching the problem in the way that the other side has and the way in which Justice Hayne put to me before lunch exposes that difference. If I could briefly refer to some passages in Chappel v Hart, at pages 282 to 283 in paragraph 116, his Honour is referring to the "but for" test, that it is:
neither a comprehensive nor exclusive test of causation. To take but one example where its application is not conclusive, it does not readily resolve the case where two causes are at work and either of them, alone, would have been sufficient to bring about the result.....
The "but for" test is of most use as a negative test. If it is not satisfied, it is unlikely that there is the necessary causal connection. But showing that "but for" the defendant's conduct, the plaintiff would not have suffered damage does not demonstrate the required degree of connection between the defendant's act or omission and the plaintiff's damage. The application of a "but for" test does not identify what might be called the "quality" of the causal connection.
Then there is reference to the various descriptions that it is given. The focus again is on the damage and the act or omission, not by analysing what in theory might have been a position if a different cause of action existed. If we go back to 255 in the reasons for judgment of Justice Gummow, in paragraph 62, after reference to March v Stramare, about eight lines from the top:
However, the "but for" test is not a comprehensive and exclusive criterion, and the results which are yielded by its application properly may be tempered by the making of value judgments and the infusion of policy considerations. So, it may be "unjust" to hold a defendant legally responsible for an injury which, though it may be traced back to the wrongful conduct of the defendant, was the immediate result of the unreasonable action on the part of the plaintiff.
And then the reference to the Environment Agency Case and the reasons given by Lord Hoffman:
His Lordship stressed that whilst "the notion of causation should not be overcomplicated", it should not "be oversimplified". He went on to emphasise that (a) the legal issue is not what caused the result complained of, but did the defendant cause it, and (b) "common sense" answers to questions of causation will differ according to the purpose for which the question is asked and the rule by which responsibility is being attributed. In particular, "one cannot give a common sense answer to a question of causation for the purpose of attributing responsibility under some rule without knowing the purpose and scope of the rule".
Once we bring in notions of the purpose and the scope there is then introduced the position as occurred in Stansbie v Troman that is referred to there and relied upon in Hart and Honore and I will not read it. We have referred to the relevant passages in the outline. And with result on the top of the following page:
In the present appeal, not only was the damage which Mrs Hart suffered reasonably foreseeable, but the fact that the relevant conjunction of circumstances could occur should have been the subject of any adequate warning and the reason for giving it.
So that it is emphasising what it is that should have been in the mind of the solicitor and at the start of paragraph 67:
The present appeal is significantly different from the situation described. In Mrs Hart's case, the very risk of which she should have been warned materialised.
And the concluding words of that paragraph:
Those additional factors combined with the satisfaction of the "but for" test were sufficient to establish causation -
and so that it is a standing back and appreciation of those policy conditions.
If I could turn to the notice of appeal, the relevant pages are 1117 to 1118 where the relevant aspects as to causation it is put a ground that:
The Appellant would have disclosed if advised -
and (b):
there was no evidence before the Court that the Appellant, armed with a negligently prepared section 32 statement containing a false representation, made a deliberate decision not to correct the misrepresentation.
That highlights the essential difficulty in such a case where there is fraud. I hear that it might be a fraud that is not as bad as other frauds, but it is a fraud that is the whole basis of this litigation. How can you have a client who has made a deliberate decision on the finding of this Court to proceed with that, but then is to be treated - - -
McHUGH J: It is very artificial to talk about using the term "deliberate decision". It is an "imputed decision". After all, Gilbert was the person who authorised the sending out of the document. He was an innocent agent. The fraud comes in respect of two persons; it is not clear to me as to whether they were even aware of the contents of these documents that were sent out, except, perhaps, Ryan had signed the section 32 documents. But as to whether they knew what was in the contract, there does not seem to me to be any evidence of it.
MR LALLY: But that is the fraud, the consequences of which - - -
McHUGH J: I appreciate it is the fraud. But you put a label on events. It just strikes me as extraordinary that you say that your client's negligence is not causally connected with the damage suffered by the appellant when it drafted the operative representation and the section 32 statement, when it provided it to them, that it knew it was false because they had negotiated the side agreement between the appellants and Swaeders, and then it sends these documents out. I have got to say I find that a stunning proposition to say that there is no causal connection. All you seem to say is, "Well, they were guilty of fraud and somehow or other that in law breaks the causal connection". But that is putting a legal label on some acts.
MR LALLY: Legal labels make a difference in the law as to how the law treats it. There has to be, with respect, consistency between the main proceeding and this proceeding. If it were such that in the main proceeding there is a finding of fraud which enables a result that was not available to that point of time to go, then the same playing arena should exist in the third party proceeding, namely, that the company has to be viewed as deliberately intending and willing that that representation be made.
McHUGH J: That is imputed in the company, but it does not seem to me this is a case of novus actus at all, and that Justice Kenny was wrong when she said that your negligence preceded them. Your negligence was there when you sent out the documents. You completed the fraud. It was your activity and breach of your duty that made the fraud complete.
MR LALLY: We put our submissions that the - and I do not propose to go back and repeat them - deliberate act is not an act on her part or the firm's part that can be viewed without the quality of it being as carrying with it an intention to deceive by reason of the other ones involved and that it cannot be viewed in the way that your Honour puts it to me that - - -
McHUGH J: You have got no submission, I take it, that there is some rule of public policy that a plaintiff cannot recover in these circumstances.
MR LALLY: They are the matters that were specifically left over and they appear in Justice Kenny's - they are the arguments, the Burrows v Rhodes, and the remoteness, and they are the matters we have not addressed yet, because the Court of Appeal did not deal with them. There is a lot of authority that goes to that point, but I have tried to keep it on causation, but with the difficulty as to the limited amount of foreseeability, and I did not think it was appropriate to make those submissions in this part.
McHUGH J: Yes.
GAUDRON J: Can I take it, Mr Lally, that you accept that there would have been liability if the Krakowskis had succeeded under the Trade Practices Act, on any basis? If, by reason of a misleading statement, Eurolynx became liable under the Trade Practices Act, either in damages or to set aside, there is no doubt that Mallesons would have been liable?
MR LALLY: No, it depends on the reasons why there would be a setting aside; I cannot accept that proposition as broad as that is put.
GAUDRON J: But you accept damages?
MR LALLY: We would accept that the damages that flow from the negligence are caused by the negligent act, if that had occurred, and that is the significance of using the basis adopted by the Court of Appeal as a capital loss; that is how the figure of $30,000 is arrived at, as Justice Kenny refers to, and I will not refer the Court to that, but no, we cannot accept the proposition so broadly put by your Honour.
GAUDRON J: Well, what do you accept?
MR LALLY: We accept that if there were a case that had proceeded in negligence and breach of contract for our work, in respect of the requisitions on title, that we would have been liable to make good the loss so suffered, but that is not what has occurred, and that is the point that was - - -
GAUDRON J: And that is an action where Eurolynx became liable for a false and misleading statement.
MR LALLY: Yes.
GAUDRON J: Yes, even though it itself was, to some extent, responsible for it.
MR LALLY: If the cause of the misleading statement was the documentation, and I have taken that that is implicit in your Honour's question, yes.
GAUDRON J: And that is the section 32 document?
MR LALLY: Yes. It is clear the section 32 statement had to include some matters and they did not.
GAUDRON J: And, in that hypothetical situation, how would you describe the loss suffered by Eurolynx?
MR LALLY: The loss suffered by Eurolynx is the loss that is explained in the Full Court's decision.
GAUDRON J: I do not quite understand that.
MR LALLY: They are the issues that were dealt with - I am sorry if I am interrupting but it was the issue that was considered by the court.
GAUDRON J: Yes.
MR LALLY: It was determined and it was not the subject of appeal.
GAUDRON J: This is a difficulty I have had with respect to a number of economic loss cases. One tends just to look to a sum and say that is what was lost. That might be the cost of what was lost but usually there is something underlying the money sum and it seems to me that it is the something underlying the money sum that is the real loss so I am asking you do you accept that, on this hypothetical case, proceedings under section 52, there is something underlying the money sum for which your client would eventually become liable that is properly described as the loss?
MR LALLY: No. We accept that it is the damage that has to be paid over for which there is a claim over in the third party proceeding and it will be the sum of money.
GAUDRON J: We know at the end of the day it is always going to be a sum of money.
GLEESON CJ: The sum of money for damages, not the damage.
MR LALLY: The damage. It depends which proceeding we are looking at.
GLEESON CJ: The injuria.
MR LALLY: No, I mean in the main proceeding. That is the damage that has been suffered as between plaintiff and defendant. That then forms the claim as made in this case for indemnity and it is what is referred to as the claim for the indirect loss, being the loss that is suffered because of the restitutio in integrum and the direct loss by way of legal costs that are incurred.
GAUDRON J: The question is not irrelevant, but let us say - and it may expose the problem I am having - there had been no third party proceedings, and again let us say section 52 proceedings, in which Eurolynx suffered a verdict against it for damages, we will say. Thereafter Eurolynx decides to sue Mallesons separately but it takes a little bit of time to get the proceedings under way. When would the cause of action have accrued? When would you be saying it was statute barred?
MR LALLY: When it was called upon to pay those. Unless it had joined the solicitors in the third party proceeding, there would be a limitation problems case. But that is not - - -
GAUDRON J: Yes, but why would the limitation problem arise if you did not have third party proceedings?
MR LALLY: The third party proceeding is no different than the separate claim over - it is only a matter of convenience.
GAUDRON J: So you would say the cause of action would accrue only when Eurolynx suffered judgment against it under section 52?
MR LALLY: Yes.
GAUDRON J: That really, it seems to me, may be at the heart of this case.
MR LALLY: Justice Callinan, given the time, if I could give you the page references, they are 531 to 533 and 540 to 541. There is cross-examination relates to the answers to requisitions, not to the contract of sale. The cross-examination relates to whether he sought any advice from Mallesons. At page 1009 his Honour says:
on the evidence before me -
he does not identify it -
the solicitor must have known that Gilbert would follow the advice constituted by the proffering of the documents and would authorise their delivery by the solicitor to the plaintiffs.
But that, as I said before, is a finding that does not say anything other than that the solicitor acts for the client. In the normal course of events the client would follow that advice, but there is no specific evidence. He was cross-examined as to whether they went and sought advice as to the handing over of the contract, asked about the company and he said, "So far as I know, no".
CALLINAN J: Mr Lally, if you can just help me a little bit. In the jurisdiction I come from contracts are not exchanged and requisitions are delivered after the contract is executed and there is provision in the standard form of contract for requisitions. Is the Victorian practice that requisitions are delivered before contracts are executed and then the contracts are exchanged? Can you tell me what the practice is?
MR LALLY: Would your Honour just pardon me?
CALLINAN J: Mr Young may be able to tell us.
MR YOUNG: My understanding is that it is after exchange of contracts and prior to settlement that requisitions are delivered and answered.
CALLINAN J: So that the contract would normally make provision for requisitions on title?
MR YOUNG: Yes.
CALLINAN J: If there is an objection to requisitions, then perhaps one of the parties can call the contract off, that is the normal standard thing.
MR YOUNG: Yes.
McHUGH J: Yes, the trial judge says at the bottom of 1998:
Two days after the execution of the contract of sale, Mermelstein delivered to Mallesons requisitions on title.
MR YOUNG: Yes, that would be the ordinary practice.
CALLINAN J: It is just that some remarks were made at some stage which suggested they were delivered and I could not understand why requisitions were delivered before contracts were exchanged.
MR LALLY: In the reasons of the Full Court they deal with the difference between answers to requisitions on title which are, in effect, post-contractual giving limited rights unless it goes to title. That is the - - -
CALLINAN J: The contract should make provision in that regard. It usually identifies which will and which will not. There is often a dispute about what is truly a requisition on title, is there not?
MR LALLY: Yes. The other page reference as to the findings of Justice Eames was at 1017. It did not say:
Whilst on the evidence, as the High Court held, it has not been shown that the solicitor knew of the terms of the negotiations.....and thus could not herself have been held have acted fraudulently, it must have been within contemplation of a solicitor in her position that there would have been prior negotiations -
That was that - - -
GUMMOW J: Mr Lally, can you go to page 1089 of the appeal book, line 20.
MR LALLY: Yes, that is the three.
GUMMOW J: Yes.
MR LALLY: Is your Honour picking up the different terminology that is used at the end of the judgment, there is a move from referring to - - -
GUMMOW J: That is at 1100.
MR LALLY: Yes. As your Honour will note it is their term:
(i) causation; (ii) remoteness of damage; (iii) the principle of public policy - - -
Then, the other reference uses a similar but slightly different terminology - page 1100.
GUMMOW J: Line 34.
MR LALLY: Line 34, and if we follow them in it is:
foreseeability, the principle in Burrows v Rhodes or mitigation -
So - - -
GUMMOW J: Now, there is no notice of contention or cross-appeal in those matters?
MR LALLY: No, because they were not dealt with, and - - -
GUMMOW J: So, if Mr Young were successful here and he got relief in damages along the lines of what he set out at 1119, that is it?
MR LALLY: No.
MR LALLY: No.
GUMMOW J: Why?
MR LALLY: Because this appeal relates only to the matter of causation and does not go further.
GAUDRON J: Well, does that causation - - -
GUMMOW J: Come, come.
GAUDRON J: What do you mean causation? Do you mean was it causative of any loss?
MR LALLY: Yes.
GAUDRON J: And that is what is meant to be determined here. Was it causative of any loss?
MR LALLY: But I am answering the question as to whether or not - - -
GUMMOW J: Mr Young was successfully getting a grant of leave at 11.15 which was, naturally enough, an order getting leave to appeal against the judgment and the orders of the Court of Appeal.
MR LALLY: No, could I go to the transcript.
GUMMOW J: And if you did not like it - - -
MR LALLY: This was dealt with in argument. When I went into matters of foreseeability, Justice McHugh drew attention to that fact that is at - and I do not believe - there has been exchange of correspondence between the solicitors on this, but it is - - -
GUMMOW J: I am just worried about my record, not what they are communicating amongst themselves.
MR LALLY: I am sorry. This, at page 5, this seems to be getting very close to an argument about remoteness which is an outstanding issue, so that her Honour specifically limited her judgment to one of causation, despite those separate grounds were argued.
GUMMOW J: She knocked Mr Young out, that is what she is saying, is she not?
MR LALLY: Yes, but leaving over those issues of remoteness and considerations of public policy - - -
GUMMOW J: I do not understand that.
MR LALLY: Well, that is how her Honour chose to - - -
GAUDRON J: I think the parties are agreed, are they, that if the Full Court was wrong in determining that your actions were not causative of any loss, then the matter must go back for further hearing and determination of the outstanding grounds.
MR LALLY: Of the outstanding grounds, yes.
GAUDRON J: Now, are you happy with "was not causative of any loss"?
MR LALLY: Not causative of the loss here, and if it is answered, it is a cause, that leaves over, then, the determination of what loss.
GUMMOW J: No, no, no. You.....to slip. Her Honour's relays a concentrated question, she said "any loss" and you start talking about "the loss", you see?
MR LALLY: But it ends with the same result. Her Honour determined that it was not causative of the loss claimed, then left over as to whether or not it is a matter of causation, whether or not then on principles of remoteness or the application of Burrows v Rhodes there might then be a policy bar.
GAUDRON J: Well, again, I know what was done in the Full Court but I am just wondering what the proper question was for the Full Court.
GUMMOW J: Well, the Full Court allowed the appeal, dismissed the cross-appeal.
GAUDRON J: Yes.
GUMMOW J: Set aside the judgment of Justice Eames.
MR LALLY: Yes.
GAUDRON J: In doing that should it have asked was it causative of any loss or was it causative of the loss in fact sustained? What actually is the claim, the third party claim, against you?
MR LALLY: Well, it is a claim that reads as if it is an indemnity - - -
HAYNE J: It is damages or indemnity is the prayer for relief in the third party notice.
MR LALLY: Yes, yes, but at the end of the day it is a claim for damages.
GUMMOW J: Well, there is not an end of the day. That is the trouble. I am trying to work out when that might be.
HAYNE J: The next millennium I think. At the current rate, it is.
GAUDRON J: So it is a claim for damages?
MR LALLY: Yes.
GAUDRON J: That means for any damage suffered by Eurolynx?
MR LALLY: That is so.
GAUDRON J: Yes, which may or may not be - - -
MR LALLY: The - - -
GAUDRON J: Yes.
MR LALLY: Yes. If the Court pleases, those are our submissions.
GLEESON CJ: Thank you, Mr Lally. Yes, Mr Young.
MR YOUNG: May it please the Court, there are a few matters we would like to reply to and there is a few outstanding promises we made to the Court about tables and other matters for the assistance of the Court that I will come to in a moment.
GUMMOW J: And orders.
MR YOUNG: Yes. Can I deal first with the question of the Chief Justice's concerning the respective roles of the Trenorth officers and agents and Mallesons in the events that gave rise to Trenorth's liability? The essence of his Honour question was to the effect that up to a certain point the involvement was that of Cini and Ryan in arranging for the tenant and in negotiating the side agreement and at that point there was a potential for misleading conduct by way of non-disclosure or silence.
Thereafter, it was suggested that all that Mallesons had done by their conduct was to make a positive representation that would allow a case of positive misrepresentation to be made. In our respectful submission, that sequence of events as outlined leaves out of account several matters of importance. The first is that the evidence is not that Cini and Ryan alone were involved in the early stages. The evidence was that Mallesons not only drafted the lease, but negotiated it. That consists of Mallesons' letter, at court book 576 to 577, Justice Eames' findings at 998 point 7 and a finding in Krakowski itself at 568 point 3.
Secondly, in relation to the side agreement, there was a similar finding that Mallesons not only drafted it, but negotiated its terms.
GLEESON CJ: You mean Ms Samuel?
MR YOUNG: Yes. Krakowski, 568 point 5 and Justice Eames at 998, line 14. So if there was a potential for non-disclosure, it was one in which not only Cini and Ryan were involved, but also Mallesons. But the main point we make is that thereafter to focus on the positive misrepresentation introduced by Mallesons is really to have one's attention diverted back to the fraud case, which is behind us, and away from the allegations against Mallesons in the third party proceedings, which are that Mallesons breached its duty to take care for the interests of its client by failing to provide careful advice as well as by making positive misrepresentations in the contractual documents.
HAYNE J: And what damage was occasioned by that breach? The making of an infirm contract or something more?
MR YOUNG: No. We would say that when one looks for the injuria, the damage, it is the making of the entry into by Trenorth of an infirm contract that exposed it to liability.
HAYNE J: A particular kind of infirmity, namely one which could lead to rescission at common law? Does it matter?
MR YOUNG: No, your Honour. It does not matter. We would say it is the range of infirmities arising in the context of that transaction, whether under section 32 of the Sale of Land Act, the Trade Practices Act, the Fair Trading Act or tort. It is the whole range of infirmity because, at the end of the day, it is a matter for the injured party to choose its cause of action or its remedy.
Indeed, in certain circumstances it may have an election between remedies. If the market went up rather than down, presumably they would not have chosen rescission. They would have chosen damages and the injuria does not depend upon the choice of remedy made by the injured party, that is to say Trenorth's damage, its injury does not depend on those choices but Mallesons' case is that you look back into those precise events to classify or characterise the damage and, in our submission, that is incorrect as a matter of principle.
The point we make about this two-stage analysis of the events is that it does leave out of account Mallesons' duty, its admitted duty, to advise that the side agreement should be disclosed both in the section 32 statement and in the subsequent answers to requisitions on title and for your Honour Justice Callinan's benefit there is a reference in the contract of sale to the right to deliver requisitions at appeal book 588.
Once one fastens on the true issue, which is the third party proceeding, Mallesons' admitted breach of duty, it is clear that if Mallesons had performed their duty, they would have adverted any potentiality, either of misleading conduct or of misrepresentation or of any infirmity in the contract, and they would have done that on the first occasion, in the context of a proper section 32 statement and thereafter. Even if they were negligent the first time around, the answer to requisition squarely raised the issue: is there any other agreement with the tenant, it asked.
McHUGH J: What is put against you is that once you make the finding of fraud, then that colours all these facts; you just cannot look at them as bare facts as to why you did this or you did that, because in law they have a particular legal complexion and it is said, once they constitute fraud, then there is no causal connection. What have you to say about that argument?
MR YOUNG: Well, we say that the argument is misconceived. It really makes a distinction that at the end of the day is not material to a proper analysis of Mallesons' duty, its breach and its causal consequences.
HAYNE J: Why, if the particular infirmity was one that depended upon the deliberate conduct on the part of Trenorth?
MR YOUNG: Well, that is not the only infirmity that arose. Indeed, we have - - -
HAYNE J: Well is the infirmity which has given rise to judgment against Trenorth?
MR YOUNG: No, even that is not correct, your Honour. There are two judgments: there is a declaration of liability under the Trade Practices Act and there is the finding of this Court that deceit was committed and thereafter the purchaser elected one remedy rather than the other, because of the extraneous fall in market values.
But the infirmity established by court proceedings is twofold: trade practices and in deceit and there are orders of this Court that record that fact. That is why it is wrong, we would say, to run this causation argument as if we are fighting a fraud case again. We are not. The question is the causal nexus between Mallesons' failure to give advice and the injury suffered by Trenorth.
GUMMOW J: Just interrupting that for a minute.
MR YOUNG: Yes, your Honour.
GUMMOW J: Can you help me? At page 1074 - you have just mentioned causation. These are the grounds of appeal in the Court of Appeal.
MR YOUNG: Yes.
GUMMOW J: Causation seems to be ground (1), ground (2), ground (3). Am I right in thinking that what would still be in play in the Court of Appeal, not having been resolved, if the matter went back, would be ground (4) remoteness, (5) which looks like consequential from (4), (6) and (7); is that right? Is there some agreement about what would - - -
MR YOUNG: No, there is no agreement. The view we have taken is that - - -
GUMMOW J: It is hard to begin to write a judgment unless you know what your parameters are.
MR YOUNG: It is, your Honour. The way I addressed it in-chief, your Honour, was to say that we took the view that if this Court was so minded it should deal with the remoteness issue and we would consent to that course. We have certainly not agreed that it cannot be dealt with. We do, of course, recognise - - -
GUMMOW J: Well, there is no cross-appeal. There is no notice of contention.
MR YOUNG: That is so.
GUMMOW J: It is not in your interests to have a nice essay about remoteness.
MR YOUNG: No. That is why we have taken the view that we do, that if this Court is so minded it should deal with the entirety of the matter as if the Court of Appeal has refused our appeal on grounds of causation and they have dismissed the appeal and there being no notice of cross-contention that is it.
GAUDRON J: That is not what you said when you stood up yesterday.
MR YOUNG: No, that is so.
GAUDRON J: And we have heard argument from Mr Lally on the basis of what you said yesterday.
MR YOUNG: Well, subject to this, your Honour, that what I said yesterday was that matters of quantum and the other matter of public policy but not the matter of remoteness should be left aside to be dealt with on remission, but our submission was that remoteness should, if this Court was so minded, be dealt with now.
KIRBY J: I do not know why we should deprive ourselves of the possibility of a third visit.
HAYNE J: Could you give me a reference in the transcript to where you are referring to, Mr Young?
MR YOUNG: I cannot, your Honour, but we accept that remoteness can be put into one category because of its relationship with the issues that have been argued. The matters of quantum and Burrows v Rhodes are really quite separate and discrete matters and that the appropriate course in relation to both of those is remission, but it may well be that - - -
GAUDRON J: So what grounds of appeal do you say should go back because when we frame an order we - - -
GUMMOW J: You have to get down to tintacks. Counsel do not like getting down to tintacks because they like to be able to slip and slide, but that is not our business.
MR YOUNG: Subject to the matter of remoteness, orders - - -
GAUDRON J: Grounds.
MR YOUNG: That is what I was going to say: grounds (6), (7), (8) and (9) are quite discrete matters that should be remitted.
GAUDRON J: What about (10)?
MR YOUNG: I separated (10) simply because we say that this Court should deal with the costs of the appeal to this Court. Costs of other matters should be left for the Court of Appeal to deal with.
GAUDRON J: We have not heard argument on ground (10).
GLEESON CJ: You want us to remit any question of costs except the costs of this present appeal?
MR YOUNG: That is what I meant to say, your Honour, yes. That may be a convenient moment to hand up the tables and orders. Can I hand up the other documents as well. There are two documents. One is the table concerning quantum and an attachment to that, and the other is a list of orders. What the Court should have is a single-page document concerning orders sought. Paragraph 2 does not deal with either remoteness or the other cost aspects.
KIRBY J: Inherent in 1 is set aside the order of the Court of Appeal, is it?
MR YOUNG: Yes, your Honour. Can I explain the other document that I handed to the Court: there is a table on quantum and attached to that, in answer to Mr Justice Kirby's request, a list of articles that are of some assistance on causation. All of the figures in the document entitled "Issues of Quantum" are drawn from the appeal books, but simply pulling together figures from various pages and we have given the references.
Mr Justice McDonald's order we have broken into the components that Justice Eames broke it into to coincide with the argument before him.
GLEESON CJ: What is the meaning of the expression "interest earned"?
MR YOUNG: "Interest earned" means that the purchase price was held by Trenorth for a period of time before being refunded. Over that period it earned interest on the $1.56 million. That was what Mr Justice McDonald ordered by way of, effectively, compensation to the purchasers for the loss of the use of their purchase price until its return. The interests and expense is a figure relating to the borrowing costs and other expenses incurred in the transaction by the purchasers. The page references are pages where Justice Eames explains the nature of those components.
I need to mention two aspects about that to the Court. Firstly, the Court should make a note that at page 963 of the appeal book Mr Justice McDonald's order is found. At that page, in order 4, Justice McDonald breaks down the figure of $3.487 million in a slightly different way. We have adopted the breakdown that Justice Eames used of the figure because it helps to explain the process of reasoning that Justice Eames followed.
GAUDRON J: Well, I have some difficulty with that. This was restitutio in integrum?
MR YOUNG: This was restitution in consequential orders ready to undo the purchase.
GAUDRON J: Yes. That is the interest, in fact, earned by Trenorth, not the interest that could have been earned by the Krakowskis.
MR YOUNG: It is the interest, in fact, earned by Trenorth as assessed by Mr Justice McDonald.
GAUDRON J: Can we take it, for practical purposes, that the interest earned by the Krakowskis would have been the same as that, in fact, earned by Trenorth?
MR YOUNG: That may be implicit in - - -
GAUDRON J: Or no less.
MR YOUNG: I do not think I am in any position to make the concession but that would seem to be implicit in the process that Justice McDonald has followed.
GAUDRON J: What is the interest and expenses of half a million?
MR YOUNG: Mortgage interest incurred by the Krakowskis, fees owing to Mermelstein Management and, I think, other incidentals by way of expenses associated with the purchase. Unfortunately, it is not further or more precisely identified in the documents we have in the appeal books here.
GLEESON CJ: Now what follows on the page is a tabulation of the competing intentions of the parties as to what should come off the amount of $3.4-odd million?
MR YOUNG: As advanced before Justice Eames in the Court of Appeal.
GAUDRON J: Now, where do the costs of the litigation fit in?
MR YOUNG: Justice McDonald made an order in relation to costs at page 964. That is where that is set out.
GAUDRON J: So Trenorth's claim is to be increased by the sum of those costs, is it?
MR YOUNG: Yes, Justice Eames slightly varied that order concerning costs at page 1070 of the appeal book.
GAUDRON J: Nobody made any argument to this point about those costs? I mean there may be a question as to the reasonableness of Trenorth's defending the action.
MR YOUNG: Yes, and to answer your Honour's question, I believe that - at least my junior believes that there was an argument before the Court of Appeal concerning costs, so that is one of the matters that - - -
GAUDRON J: Has to go back.
MR YOUNG: - - - has to go back, yes.
GAUDRON J: So that means ground - - -
MR YOUNG: (10).
GAUDRON J: - - -ground (10) does have to go back.
MR YOUNG: Yes.
GLEESON CJ: Now, one of the major items of the difference between the deductions claimed respectively by Trenorth and Mallesons is the difference in the value of land that resulted from the fall in land values over this period.
MR YOUNG: Yes.
GLEESON CJ: Is that a causation issue or a remoteness issue?
MR YOUNG: We would say it is not a causation issue in any way.
GLEESON CJ: At all events, it is not an issue that has been determined by the Court of Appeal.
MR YOUNG: That is so.
CALLINAN J: Mr Young, could I just ask you a question. Assume that there were two effective causes of your client's loss, the negligence of the solicitors and your client's own fraud: why should they not share the losses? Would the contribution legislation in Victoria contemplate that?
MR YOUNG: There is, your Honour. There is contribution legislation that would contemplate it, but there was no claim of contributory negligence advanced by Mallesons against Trenorth.
CALLINAN J: So it was all or nothing on each side.
MR YOUNG: It was all or nothing, yes.
GLEESON CJ: Indeed, the Victorian legislation, as I recollect it, provides that you can have contribution in the case of breach of contract.
MR YOUNG: Yes, well, it provides for contribution in the case of breach that is wider than tortious breach, but I do not think it is accepted that it extends to contract, but, at all events, there was no claim advanced by Mallesons at any stage of contributory negligence.
McHUGH J: No, I mentioned that on the special leave application and I think I made a remark to the effect, well, since Astley it did not make any difference anyway.
MR YOUNG: That is so. Can I explain one other thing about the document. The Court will see that when we move from the first entry, Justice McDonald's orders at $3.487 million, to the next paragraph, we open with a slightly different figure of $3.482 million. The reason for that is simply that by the time the matter reached Justice Eames, as he records, the parties were agreed that the starting point was $3.482 million, because that was the amount of money, in fact, paid under Justice McDonald's order by agreement, and I think that is because there was a $5,000 error of some kind, but that explains that discrepancy.
Before Justice Eames the two major issues in contention were that Trenorth was claiming that the value of the land to be deducted from what it was ordered to pay was the value when it got the land back at June 1996. Mallesons were claiming it should be the original value of the land as per the purchase price for $1.56 - that was one dispute; the other dispute was Mallesons' claim that although Trenorth had paid $1.394 million of interest to the purchasers under Justice McDonald's order, they should suffer a second and further deduction for interest earned, the $1.173 million, which Trenorth argued was double-counting.
They were the two issues of quantum debated in the Court of Appeal, as we understand it, and the last paragraph really deals with that. Can I, by reference to this document, at least suggest an answer to a question from Justice Callinan. Your Honour asked, "What would be the position had the rescission been prompter?" The answer, your Honour, is that the same heads of quantum would have to be addressed but the figures would no doubt have differed in that there would have been different adjustments for interest earned or foregone on the purchase price, a different adjustment for rent and a different adjustment for the value of the land.
CALLINAN J: It might mean, depending upon what you decided was a reasonable time, there might not need to be any adjustment for rent because I think the tenant defaulted in January, is that not right?
MR YOUNG: That is so.
CALLINAN J: So that after January, until a new tenant could be found, there would not have been any rent received anyway, and there was a rent holiday for the first three months which involved no receipts by your client.
MR YOUNG: The rent holiday went until January.
CALLINAN J: January. So, it may not, depending upon what view you might take of - if you did take the view that there should have been a much earlier rescission, there might not be an adjustment for rent.
MR YOUNG: That is possible, yes, your Honour.
CALLINAN J: Possible, depending on the date.
MR YOUNG: Can I expand on what I have just said, in answer to what your Honour raised about mitigation, namely, the possibility of Trenorth having withdrawn the representation and if - - -
CALLINAN J: Could I say you are in no uncertain position about that. I do not ask that only in relation to mitigation, I also ask it in relation to causation.
MR YOUNG: Yes. What I wanted to do was remind your Honour of certain facts that were found by the High Court in Krakowski. Without going back to the case I will just summarise them. They all appear at 571 of the report but the facts are these, the tenant, as your Honour has just mentioned:
failed to pay the rent due on 1 January.....and vacated the premises in April 1990.
Secondly, and this is quite important:
Mermelstein discovered the first three months of its tenancy rent free -
grant to the tenant in February of 1990 but he took no action upon it, although that was the material representation that founded the deceit, and only that. He took no action on it until 7 December 1990, and the Court has been taken to the letter of rescission.
CALLINAN J: But that does not relieve your client of the obligation to withdraw the misrepresentation, surely.
MR YOUNG: Well, it bears upon it in this way, your Honour, that the misrepresentations discovered in February 1990, by that stage the rent free had ceased operation in any event. There really is a question of what it means to withdraw the representation.
CALLINAN J: Well, to tell them the truth.
MR YOUNG: The truth is known by February of 1990.
HAYNE J: Well, was the whole truth known by then? Certainly the existence of the rent-free period was known. Was it known that there had in addition been this so-called fit-out payment?
CALLINAN J: That did not happen until June, did it?
MR YOUNG: The fit-out payment was June. I have not noted the date here but it is at page 571 but it is about the middle of the year.
HAYNE J: So the whole truth becomes known in June?
MR YOUNG: Yes.
HAYNE J: Part of the truth becomes known in February?
MR YOUNG: That is so.
GLEESON CJ: Is it not slightly more accurate to say that it was known that there was some payment of that kind in June but it was not known what the details of it were?
MR YOUNG: Your Honour is perfectly correct. That is the finding of the High Court, that Mermelstein was aware of a lump sum payment but not its precise amount, but there is a question having regard to what was found by the High Court as to whether the payment of the fit-out allowance was a material inducement to the purchaser because that really did not have much impact upon the purchaser. That was an encouragement to a tenant to come in. It is paid by the previous owner of the property. It does not come out of the pocket of the purchaser and it does not affect the value of what he is purchasing.
CALLINAN J: No, but it might have well - - -
McHUGH J: But did not Krakowski give evidence that so far as he was concerned the vice of this side agreement was that it encouraged people to come into occupation who did not have the means to pay?
CALLINAN J: And it is highly material in that respect, is it not, because I think the purchasers said they wanted a strong tenant.
MR YOUNG: Yes. Your Honour, in all events, I do not think I can take that further other than to - - -
CALLINAN J: But what I am saying is the fact that the High Court may not have fastened on that does not mean that we now have to disregard it or regard it as other than material if we think it is.
MR YOUNG: Yes. We appreciate that, your Honour, but there does remain an issue of what it really means of substance to say that Trenorth should have withdrawn the misrepresentation post conveyance and what significance that has, we would say it has no causal significance. It is obviously highly relevant to an argument about mitigation of loss.
CALLINAN J: Why can it not have causal significance because it remains as a continuing operable, and I am talking about the sum of the misrepresentations, but a continuing operable misrepresentation.
MR YOUNG: It is not as if there is continuing reliance being placed upon them, your Honour. Your Honour says "operable". They have been made and not withdrawn but their operation was to induce the purchase and once the purchaser was committed to the purchase they were not any longer operating as an inducement is really the point we make.
CALLINAN J: Operating as an inducement not to seek rescission.
MR YOUNG: No. We would say, your Honour, that - - -
CALLINAN J: An inducement to remain as owners and not to seek any remedies to which they would be entitled.
MR YOUNG: That is why we went to the sequence of events because there was ample basis to seek rescission in February of 1990 when the falsity of their representation was revealed to Mermelstein.
CALLINAN J: In part.
MR YOUNG: In part, but in sufficient part to found rescission.
GUMMOW J: Now, Mr Young, I think I should tell you that if, contrary to what my understanding was when leave was given, a Burrows v Rhodes ground of appeal is in some way reserved, it may be impossible, really, for me to deal with this appeal. I say that having regard, for example, to the discussion of Burrows v Rhodes at the top of 1036 which is putting in another legal form a lot of Mr Lally's arguments linking causation, about the intrusion of fraud and so on.
MR YOUNG: Well, I do not know what I can say, your Honour, other than that is, in a sense, the predicament that the parties have been left in by the course taken by the Court of Appeal.
GUMMOW J: No, it is not. It is a predicament they have been left in by not getting the record in proper form here. It may be a hypothetical question: I am not sitting here to decide hypothetical questions about causation if Burrows v Rhodes is a complete answer. It is just like writing a law school essay; I am too old for that. It is not a very apt exercise of the judicial power of the Commonwealth, is more to the point.
MR YOUNG: Well, if the Court were to take that view, and it is only the absence of argument and material concerning Burrows v Rhodes, let me make it clear that for our part we would seek to have the matter relisted for further argument if the Court will hear it on all the outstanding issues. But our concern is that we should not be left caught between two places, as it were, with the Court of Appeal deciding only causation. Leaving aside the other matters, we have made it clear to our learned friends that at all times we have been prepared to argue all issues. But they have not agreed in that course.
GUMMOW J: I am directing my remarks as much to your opponent as to you, Mr Young.
MR YOUNG: I understand, your Honour, and I was not meaning to be critical of your Honour, but I am simply trying to plainly state what my client's position is.
There are a few other brief points I wanted to make by way of reply. The question of inducement was raised. We adopt what Justice McHugh said, namely, that one of the constituent elements of actionable deceit is inducement. That was not complete until the solicitors had provided the section 32 statement and the answers to requisitions and there would have been no inducement had they - - -
HAYNE J: Provided to whom?
MR YOUNG: To the purchasers.
HAYNE J: Signed by your client?
MR YOUNG: The answers to requisitions were not signed by my client.
HAYNE J: Section 32, Mr Young, signed by your client.
MR YOUNG: Section 32 was. Well, section 32 was signed on behalf of my client.
HAYNE J: Yes.
GAUDRON J: I do not understand what the requisitions have got to do with it any more?
HAYNE J: Nothing.
GAUDRON J: Other than to confirm the negligence, because - - -
HAYNE J: There is a good jury point that not only do they do it once, they kept on doing it.
MR YOUNG: No, the case against Mallesons is negligence. It is negligence in the performance of their retainer.
GAUDRON J: Yes.
MR YOUNG: Their retainer did not finish with the section 32 statement. It continued down to settlement with the answers to requisitions which they propounded. They suggested them and then they conveyed them. That cannot be divorced from their negligence.
GAUDRON J: Yes, but we were talking about the inducement before and I do not see that the requisitions have got anything to do with the inducement.
MR YOUNG: Well, they would have averted any inducement, because if the purchasers were told by truthful answers to requisitions, as they should have been, that there was a side agreement with tenant bearing upon fit-out allowance and rent holiday, that would have, as Justice Eames found, ensured that the contract did not proceed and that there would have been no loss and no fraud.
I wanted to give the Court - - -
GAUDRON J: That would have been because of the operation of section 32?
MR YOUNG: No, it would have been because - - -
GAUDRON J: Because of fraud.
MR YOUNG: No, it would have been because the true state of facts would have been revealed to the purchaser - - -
GAUDRON J: Yes, but what would have entitled the Krakowskis not to settle if the answers on requisition had been as they should have been?
MR YOUNG: They would have had that entitlement under the contract not to proceed.
GAUDRON J: That is clear, is it?
MR YOUNG: Yes, your Honour.
HAYNE J: What is the term upon which they relied, Mr Young?
MR YOUNG: It is partly table A, your Honour, and partly the term at clause 5, Court book 588.
HAYNE J: Because I had understood the Full Court in the first round to classify this, not as a requisition, but as a question, and I thought - perhaps entirely mistakenly - that answers to questions gave different rights from false answers to requisitions and that answers to questions did not entitle rescission, but it is a very long time since I have looked at any of this.
CALLINAN J: Well, I think the Full Court said that there might be a claim for breach of warranty.
MR YOUNG: At page 844 the court felt that "the plaintiffs could have obtained relief in this action by reason of the answer to requisition 8(c)", apart from statute. But let it be assumed, your Honour, that you can have an argument about whether it goes to title or not, there would have been revealed a false - - -
HAYNE J: I am sorry, just back to page 844, it is, I think, to the direct opposite effect to that which you said:
Apart from statute, therefore, we think the plaintiffs could have obtained no relief in this action by reason of the answer to requisition 8(c).
MR YOUNG: I am sorry, yes, your Honour is correct. We would say that the false answer would have revealed a misrepresentation of the section 32 statement and rights would have flown - - -
GAUDRON J: And would it then have been within the time?
MR YOUNG: Yes, your Honour, there would have been an immediate right of avoidance under section 32(5) of the Sale of Land Act, but that is why the answer to requisition is relevant to negligence. It is another step by which the solicitors, had they performed their duty, would have averted any fraud and more particularly, we would say, in terms of causation, averted any infirmity in the contract by preventing it being made as an infirm contract.
On inducement I wanted to say that there are some references in Krakowski to Mermelstein's role. At pages 569 and 570 it is revealed by those findings that he received the section 32 statement, he drafted the condition 19.4 special condition of the contract, he delivered the requisitions and he received the answers. Mermelstein gave evidence, and the Full Court quoted this, that he would not have proceeded with the purchase if told that the lease was otherwise than the whole agreement between the parties, and we will provide the full judgment of the Full Court that sets out that evidence.
GLEESON CJ: I suppose it is not necessarily extravagant to say that there might be circumstances in which a solicitor who is advising a client has a duty to advise the client that a certain type of conduct amounts to fraud.
MR YOUNG: Yes, exactly. We would embrace what Justice McHugh said to our learned friends and we advance the same submission in-chief in answer to Justice Hayne, that simply because you label it fraud, it does not mean that it is outside the role of the solicitors who have assumed a duty to safeguard the interests of their client by exercising reasonable care to advise that to go ahead with this would be fraud and you should not do it.
GLEESON CJ: Well, it is not always obvious to all business people that some forms of playing hard ball amount to fraud.
MR YOUNG: That is so. I wanted to make a response to what was said about Mr Ryan. It was argued that the High Court's findings read as our learned friend urged amounted to a finding that fraud was based solely on Ryan's knowledge. Well, in our submission, that is an attempt to go behind the findings of the High Court. That is not how the matter was found, but in any event we would say that it does not matter at all. We are not rearguing the fraud case. At the end of the day, even if Ryan signed the section 32 statement - and there is no finding anywhere that he did - it does not alter Mallesons' role because there is no evidence that Ryan adverted to the contents document but, moreover, appending his signature to that document would have been of no consequence if Mallesons had ensured that it contained no false statements.
So, in our submission, what was said about Ryan really takes us nowhere except backwards into the revisiting of the grounds for fraud, impermissibly, we would say by trying to go behind the way in which it was found by the High Court. So much is clear, we would say, from the fact that ultimately the High Court came back to Gilbert and Gilbert's role in authorising Mallesons to forward documents containing false statements. It was the principal's authorisation of the agent to forward a document containing a false statement in circumstances where the agent knew the statement was false that was attributed back to the principal. That is at page 585 in Krakowski. So, Gilbert cannot be dismissed and excluded and one only look at Ryan. In any event, the argument that was urged here that the fraud was Ryan and Ryan's alone was not contended for before Justice O'Bryan or before the Court of Appeal or, as we understand it, before the High Court.
Your Honour Justice Callinan asked about Gilbert's evidence relating to the finding by Justice Eames at page 1003. We have listed the references to the pages of the appeal book where Gilbert gives the relevant evidence in paragraph 18 of our outline. I think important passages amongst those, but they are not the only passages, are at pages 532 and 560 of the appeal book where the transcript of Gilbert's evidence is set out.
Now, there is one other matter which is that our learned friend, as we understood him, seemed to put a position that it is not open to us to contend that the fraud would have been avoided if Mallesons had performed its duty.
That was put in various ways, but it was said that because of the fraudulent intention of Trenorth found by the High Court, it cannot now be said that Trenorth and Gilbert would have stopped short of committing the fraud if advised not to do so by Mallesons. In our submission, there is no basis for that argument, either in fact or in law. Part of our learned friend's argument seemed to be that the High Court's finding that they would not make a finding of fraud against the solicitor should be turned around into a finding that at all times the solicitor was not conscious of the falsity of the representation. So a non-finding becomes a positive finding of innocent state of mind of the solicitors.
That is really a corruption of the process. Justice Eames went on to find, and amply supported by the evidence, that the solicitor knew that the documents contained a false statement. That is at Court book 1010.
GLEESON CJ: Does that include "appreciated the falsity of the statement"?
MR YOUNG: Yes, it does, it is expressly in those terms. We are not suggesting that it is relevant to inquire whether the solicitor was guilty of fraud, but the solicitor's state of knowledge is of relevance to the distinction that our learned friend seeks to draw saying that it stands in such a different position than Trenorth that somehow there is a break in the chain of causation. Indeed, in answer to a lot of questions that were put to our learned friend about the scope of the solicitor's duty, our learned friend's answer seemed to be that, "Yes, it owed a duty of care, it admitted that, but not here because fraud intervened and Mallesons did not advert to falsity".
Mallesons were fully conscious of the falsity of the statement and Gilbert authorised them to send it on and that fixed Gilbert and Eurolynx, by way of imputation, with a similar knowledge of the falsity of the statement. As we understand it, that is what the High Court said at page 585.
GLEESON CJ: The finding was that Miss Samuel was conscious of the falsity of the statement but there was no finding she was conscious of its significance.
MR YOUNG: There is no finding that she was conscious of its significance in those terms but that, we would say, is implicit in his Honour's discussion - that is, Justice Eames' discussion - at 1009 to 1010 that had the solicitor performed her duty she would have averted the fraud. The solicitor was, of course, conscious of special condition - I forget the number now, 19.4. She was conscious of the questions asked by way of requisition and the answers, and she must have appreciated, we would say, the significance of the statement that the whole agreement with the tenant was to be found in the lease, and in any event the question is whether she ought to have appreciated the significance and that was plainly within what was alleged to be her duty and her breach of duty at pages 36 and 38 of the third party pleading in the appeal book. Unless I can help the Court further, those are our submissions.
GLEESON CJ: Thank you, Mr Young. Mr Lally, in relation to the grounds that would go back if we were to allow the appeal, do you have any alternative submission to put on that?
MR LALLY: Yes, our submission is that they should include the ground of remoteness.
GAUDRON J: That is ground (5), is it?
MR LALLY: Yes.
GUMMOW J: And (4)?
MR LALLY: Yes, (4) and (5).
GLEESON CJ: Yes, thank you.
GUMMOW J: Now, why does that not render this appeal possibly hypothetical? Why do not these reservations of grounds render all this possibly hypothetical?
MR LALLY: Well, it depends on the way in which the Court treats it. It may be that - - -
GUMMOW J: Why should it have to treat it at all?
MR LALLY: Well, then it may be that the Court may require that those matters be then dealt with before it can come to a final conclusion, but the parties should not be prejudiced by the way in which the Court of Appeal chose to not give judgment on - - -
GUMMOW J: You would have put on a cross-appeal if you were unsatisfied with that and you did not.
MR LALLY: Well, we are not unsatisfied with the fact that - - -
GUMMOW J: Or a notice of - well, to get rid of the 30,000 or whatever the figure was or a notice of contention.
MR LALLY: But the notice of contention, with respect, would merely mean that it was not dealt with and we are not contending - and neither party, as it seemed, in the way it has been conducted and at the time of the special leave application, that we were not called upon to proceed with the questions of foreseeability but, rather, quite the opposite, that it was to be treated as a matter that was still in abeyance.
GLEESON CJ: Where do we find these grounds of appeal?
MR LALLY: It is at page 1072 to 1074. Now I accept that in a perfect world with knowledge of hindsight, it may have been more appropriate to have proceeded in another way. The fact is that that is the way the litigation has proceeded, with Justice Kenny taking that line, and we have acted accordingly and, at the time of the special leave, when that - - -
GLEESON CJ: Just excuse me. Why should we not direct both parties now, within 14 days, to put on written submissions addressing any arguments they want to put to the Court in relation to the matters raised by grounds (4), (5) and (7) of the grounds of appeal in the Court of Appeal? Do either counsel want to make a submission against that?
MR YOUNG: We are very content with that course, your Honour.
GLEESON CJ: Very well then.
We will direct both parties to file within 14 days written submissions containing their arguments in relation to the matters raised by grounds (4), (5) and (7) of the notice of appeal to the Court of Appeal.
Subject to that, we will reserve our decision in this matter.
AT 4.12 PM THE MATTER WAS ADJOURNED
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