JUDGMENT No. sun? 74 soscosveececes! eonencececes CATCHWORDS TRADE PRACTICES - s$.52 - whether loan company made misrepresentations that finance would be available, when it knew no finance would be available - whether senior executives were also liable as being knowingly concerned in the contraventions - whether breach of loan agreement. Trade Practices Act 1974, ss. 52, 53(aa), 58, 75B, 82 KINLACE PTY LIMITED v MORTGAGE FINANCE AUSTRALIA LTD (IN LIQUIDATION), G J STASSEN & S J GOODMAN No NG388 of 1991 COURT: LOCKHART J. DATE: 14 OCTOBER 1994 PLACE: SYDNEY 18 OCT 1994 FEDERAL COURT OF AUSTRALIA PRINCIPAL AEGISTAY IN_THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION No. NG388 of 1991 wwe www BETWEEN: KINLACE PTY LIMITED Applicant AND: MORTGAGE FINANCE AUSTRALIA LTD (IN LIQUIDATION First Respondent G J STASSEN Second Respondent S_J_GOODMAN Third Respondent MINUTE OF ORDERS THE COURT: LOCKHART J. DATE OF ORDER: 14 OCTOBER 1994 WHERE MADE; SYDNEY # THE COURT ORDERS THAT: 1. The application be dismissed. 2. The applicant pay the costs of the respondents of the proceeding including any reserved costs. NOTE: Settlement and entry of Orders is dealt with in Order 36 of the Federal Court Rules. N FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION No. NG388 of 1991 wwe ww BETWEEN: KINLACE PTY LIMITED Applicant AND: MORTGAGE _ FINANCE AUSTRALIA LTD (IN LIQUIDATION First Respondent G J STASSEN Second Respondent S_J GOODMAN Third Respondent 14 OCTOBER 1994 REASONS FOR JUDGMENT LOCKHART J. Introduction The applicant, Kinlace Pty Limited (Kinlace), claims damages against the respondents arising out of negotiations between it and the first respondent, Mortgage Finance Australia Limited (In Liquidation) (MFA), its officers and solicitors, for a loan to facilitate the purchase by Kinlace in 1988 of a property known as Kinsella's Nightclub, 383 Bourke Street, Sydney (Kinsella's) for $3m. At material times (April to August 1988) Benjamin Thoty Khuu and his brother, Tze Keung Yau, were directors and shareholders of Kinlace (there were others). MFA carried on business as a finance company and mortgage banker. The second respondent, Guillaume John Stassen, was the managing director a of MFA. The third respondent, Stephen John Goodman, was the Secretary and General Manager of MFA. There was a fourth respondent, namely, the partners of the firm of solicitors previously known as Dunhill Morgan and presently carrying on practice as Dunhill Madden Butler. I shall refer to them as Dunhill Morgan because that is the name under which the firm carried on its practice at material times. Dunhill Morgan acted for MFA in relation to the proposed lending of monies by MFA to Kinlace to facilitate the purchase of Kinsella's. Kinlace and Dunhill Morgan settled the case as between themselves on the fifth day of the hearing (Friday, 23 September 1994) which led to Dunhill Morgan being dismissed from the proceeding. Claims made by Kinlace The statement of claim initially filed by Kinlace has been amended a number of times. It is not very clear; but I extract from it the following allegations: . On 27 April 1988 it exchanged contracts with the owner of Kinsella's (Leap Nominees Pty Limited) to purchase Kinsella's for $3m. . In response to a loan application made by Kinlace, MFA, by letter dated 8 June 1988 (the letter of offer), offered to lend to Kinlace $1.8m to facilitate the purchase of Kinsella's repayable over a term of five years at an interest rate equal to a margin of 1.5% over the five years SWAP rate upon certain terms and conditions relating to security, guarantors and other matters, including a condition that MFA receive a satisfactory valuation of Kinsella's to be obtained by MFA. On 9 June 1988 the offer of finance was accepted by Kinlace in accordance with the terms of the letter of offer (this is alleged to constitute an agreement called the loan finance agreement). Each of the respondents represented to Kinlace that MFA had funds or had access to funds in an amount sufficient to enable it to lend $1.8m to Kinlace in accordance with the loan facility agreement, and that MFA was able and prepared to complete the loan finance agreement. This representation was alleged to be a continuing one up to and including 4 August 1988. The representations were false. At some time before 12 July 1988, MFA's inability to complete the loan finance agreement was or should have been known to all respondents. By 5 or 12 or 15 or 19 or 28 July 1988 Kinlace had satisfied all the terms and conditions of the loan finance agreement and was entitled to, and did, require MFA to attend at settlement and advance the loan funds. In breach of the loan finance agreement, MFA, by its solicitors Dunhill Morgan, failed and refused to attend settlement and advance the loan funds. In these circumstances MFA breached the loan finance agreement, in consequence of which Kinlace suffered loss and damage which it seeks to recover as damages for breach of contract. By reason of the matters previously mentioned MFA engaged in misleading or deceptive conduct in contravention of s. 52 of the Trade Practices Act 1974 (the TP Act). Alternatively, MFA represented that its services were of a particular standard quality, value or grade in contravention of s. 53(aa) of the TP Act. Alternatively, MFA accepted payment for its services; but at the time of such acceptance it did not intend supplying the services, or there were reasonable grounds of which it was aware or ought reasonably to have been aware for believing that it would not be able to supply the services within the period specified by MFA or within a reasonable time, thus constituting a contravention of s. 58 of the TP Act. . In reliance on the alleged contraventions of the TP Act, Kinlace suffered loss and damage. Kinlace sued Mr Stassen and Mr Goodman as aiders and abettors of the alleged contraventions by MFA and as being directly or indirectly knowingly concerned in or party to those contraventions, in breach of s. 75B of the TP Act. Kinlace also sued MFA, Mr Stassen and Mr Goodman for damages for alleged negligent misstatements, being certain of the representations previously mentioned that are alleged to constitute false representations' under the TP Act. All respondents are sued for alleged negligence arising out of their failure to take care in the making of certain of the representations, each of which is said to be false and misleading. Kinlace claims damages in the sum of $493,483. Defences MFA played no role in the final hearing of this matter. It was wound up by order of the Supreme Court of New South Wales on 4 December 1989. Leave to continue the proceeding was granted by a judge of this Court on 25 October 1991. Hence the proceeding continued against the first respondent in its absence. The second and third respondents either deny or do not admit all material allegations in the statement of claim. They deny that any act or conduct of MFA was the cause of any loss or damage suffered by Kinlace. They assert that any loss or damage alleged to have been suffered by Kinlace was caused by or contributed to by Kinlace's own negligence. They assert that any relief sought under s. 82(1) of the TP Act by way of damages is statute barred by reason of s. 82(2) as the action was commenced more than three years after the date on which any cause of action accrued. Save for certain questions of law that may arise with respect to the defence that the causes of action under the TP Act are statute barred by virtue of s. 82(2) of the TP Act, the case turns on questions of fact. Issues The issues are:- . whether the representations alleged to have been made by the respondents were in fact made; . whether the representations were false; . whether the representations are capable of being relied upon as constituting misleading or deceptive conduct for the purposes of the TP Act; . whether the representations were in fact relied upon by Kinlace; . whether key conditions attaching to the loan were satisfied by Kinlace; and whether in all the circumstances MFA was relieved of any obligation to provide the funds to Kinlace. whether any loss or damage proved to have been suffered by Kinlace was caused by or contributed to by Kinlace's own negligence; . whether the relief sought under s. 82(1) of the TP Act is statute barred by s. 82(2). Evidence The evidence was both oral and documentary. The documentary evidence included portions of affidavits sworn by witnesses on behalf of certain of the respondents who were not in fact called by the respondents and whose affidavits were not read by counsel for Mr Stassen and Mr Goodman, so counsel for Kinlace tendered, without objection, certain paragraphs of the affidavits of those witnesses in support of Kinlace's case. The witnesses who swore affidavits and gave oral evidence are as follows: Benjamin Thoty Khuu (Director of Kinlace); Dennis Ming Low (Accountant for Kinlace and Mr Khuu); Ivan Beeto (Solicitor for Kinlace); Christopher Mark Hopcroft (October 1987 - March 1989 Lending Manager and then National Operations Manager of MFA); Tze Keung Yau (Company Director of Kinlace, with business interests in Hong Kong and China; brother of Mr Khuu); Guillaume John Stassen (1986-88 Managing Director of MFA); Stephen John Goodman (1987-1989 Company Secretary and General Manager of MFA). General Observations Before examining the facts I shall make some general observations. Questions of the credibility of witnesses and their reliability are involved in the case. The relevant events with which the case is concerned occurred in 1988, six years ago. This proceeding was not commenced by Kinlace until 18 July 1991. Very little happened in the conduct of the case until 1993. It was not until 29 April 1993 that Mr Stassen was served. Why it took so long from the time of the occurrence of the relevant events for Kinlace to sue is unexplained and why Kinlace took so long to prosecute its case is also unexplained, but responsibility for most of it lies with Kinlace and certain of its solicitors (it has changed solicitors more than once). MFA was wound up on 4 December 1989 and the whereabouts of the relevant files about Kinlace (such as they are), with which the events of this case are concerned, are unknown. Also, Kinlace is a holding company. Apart from some cheque butts and other documents relating to its bank account, it neither has nor ever had many documents in its possession. Most affidavits were not filed (and presumably not prepared) until last year, five years after the occurrence of the relevant events. It is a case therefore where witnesses may not have turned their minds to the events of 1988 until years after their occurrence, and the resolution of conflicts of fact is assisted hardly at all by contemporaneous documents because there are few of them. To determine where the truth lies the Court usually has the benefit of contemporaneous documents and is not left to assess the credibility and reliability of witnesses by impressions gained from their demeanour in the witness box, together with an attempt to assess' the probabilities in the absence of documentation. The Court must do the best it can on the material before it. However, it does not create an easy task for Kinlace, which ultimately bears the onus of satisfying the Court on the balance of probabilities that its version of the relevant events is to be - 10- preferred to the versions given by the respondents. Facts Kinlace was incorporated on 18 December 1986. Its directors include Mr Khuu and his brother Mr Yau. Mr Khuu was born in Saigon of Chinese parents on 6 December 1966. His native tongue is Cantonese. After brief schooling in Saigon he came to Australia with his mother as a Vietnamese refugee in 1980. He is an Australian citizen. He obviously has considerable application, industry and _ persistence. He arrived in this country in 1980 when 14 years of age. He found work, saving his money wherever he could and studied English in his spare time. He has three brothers: Mr Yau and two other brothers who were in the textile industry as businessmen in Hong Kong. They regularly sent Mr Khuu money which he invested for them. In late December 1982, when he was 16 years of age, Mr Khuu was permitted by his brothers, in particular Mr Yau, to invest part of the family capital in a business in Dixon Street, Sydney where he commenced selling footwear and fashion garments imported from Hong Kong. The business was successful and in 1984 Mr Khuu (then aged 18) opened two more shops in Dixon Street, also selling footwear and fashion garments. By 1988 he had interests in eight shops in various parts of Sydney and an interest in one shop in Melbourne. The businesses were all conducted in leased premises. Mr Khuu was the tenant of some of them and he gave guarantees to the lessors in relation to some of the leases. Mr Khuu gave oral evidence with the assistance of an interpreter. I formed the view that his knowledge of English was quite good, both as to the spoken and written word, though he did need the assistance of an interpreter when questions involving phrases more familiar to lawyers were put to hin. When his solicitor, Mr Seeto, spoke with him they usually did so in Cantonese. My impression was that when questions were put to him about his own life and business activities he did not need an interpreter, but when cross-examined with frequent references to affidavits, evidence and matters of this kind he needed the assistance of the interpreter. In January 1988 Mr Khuu and Mr Yau _ conversed by telephone, Mr Yau in Hong Kong and Mr Khuu in Sydney. Mr Yau asked Mr Khuu to find a nightclub-restaurant business as the family in Hong Kong might wish to settle in Australia. At that stage Mr Yau owned real estate in Hong Kong: an apartment in Nathan Road which he had purchased in 1981 and certain business premises (26 Li Yuen Street) which he had purchased in 1987 for $Al.1m ($HK6.3m) and which was mortgaged to the Hong Kong Bank. In February 1988 Mr Yau mortgaged his Nathan Road apartment. In March 1988 Mr Khuu noticed Kinsella's nightclub in ~12- Bourke Street, Darlinghurst. He inspected it and was told by a real estate agent, Mr Collins, that the vendor would sell it for $3.25m. Also in March 1988, Mr Yau and Mr Khuu spoke on the telephone and Mr Khuu told him about his having seen Kinsella's. Mr Yau said that he would send a Mr Stephen Walker from Hong Kong to see Mr Khuu and look at the premises. Mr Walker is a man who apparently has some experience in the running of hotels and nightclubs. In March or April 1988 there was a telephone conversation between Mr Khuu and Mr Yau during which Mr Khuu said that Kinsella's could be bought for SA3m if they acted quickly. Reference was made to the possibility of Mr Yau selling his property 26 Li Yuen Street, Hong Kong to a prospective buyer for $HK12.5m ($A2.1m). As there would therefore have been a shortfall of $A900,000 Mr Yau said that he had some money in his business which he could use to cover the balance. There is some variance in the version of this conversation between Mr Khuu and Mr Yau, but little seems to turn on it. In April 1988 Mr Khuu and Mr Low, his accountant, had a discussion in the presence of Mr Walker who had arrived from Hong Kong. Mr Low and Mr Khuu both placed this conversation as being earlier than April, but in my opinion it is more likely than not that it was in April. Mr Khuu said that Kinlace would need to borrow $2.2m if the selling price was $3m. Mr Low said that the percentage of borrowing might be - 13- too high for the finance companies to approve and that he would talk to UOB Australia about it. Mr Khuu said that he would talk to the estate agent about dropping the price to $3m from $3.25m and come back with the exact anount of finance Kinlace required. The next day Mr Khuu telephoned Mr Low and said that the vendor would sell for $3m if exchange of contracts took place in two weeks' time. Renovations would cost $300-500,000, soa $2.2m loan should be sought. In early April 1988 Mr Khuu asked Mr Ivan Seeto, solicitor, to act on behalf of Kinlace on the purchase of Kinsella's. At about the same time Mr Low telephoned Mr Lim of UOB Australia and asked for a loan of $2.2m. Mr Lim said that the percentage to be borrowed was too high and because of the size of the loan it would require approval of the company's head office in Singapore and an independent valuation report would have to be obtained. This lastmentioned conversation was related by Mr Low to Mr Khuu. Kinlace subsequently approached other financiers with a view to raising the loan to enable Kinsella's to be purchased including BNZ, Advance Bank and the Bank of Singapore. - 14 - A draft contract of sale was sent by the solicitors for the vendors (Messrs Gordon & Johnstone) to Mr Seeto under cover of a letter dated 14 April 1988. Gordon & Johnstone set 2pm on 20 April 1988 as the date for exchange of contracts. Mr Seeto told Gordon & Johnstone that he could not arrange for the deposit of 10% to be available that day. After that date Mr Seeto was told by Gordon & Johnstone that Kinlace could pay 5% of the deposit on 27 April and the balance within seven days thereafter. On 20 April Mr Yau transferred money from Hong Kong to Kinlace's account with the State sank in Sydney to pay half the deposit, namely, $150,000. Also on 20 April Mr Low telephoned Raine & Horne and asked for an urgent verbal valuation to be done of Kinsella's within a week and the subject of a report a week later. The cost of the valuation was said to be $1 for every one thousand dollars of valuation. Soon thereafter Mr Low told Mr Khuu the cost of the valuation and Mr Khuu approved Mr Low arranging for the valuation to be made. Mr Low then informed Raine & Horne that the valuation should proceed. Shortly after 20 April Mr Khuu told Mr Low that he had been informed that the agent said that there was another buyer willing to pay $3.3m for Kinsella's. Mr Low told Mr Khuu that he would have to "chase up" UOB about the loan, but that it was very risky to exchange contracts and pay a 10% deposit without first obtaining written approval of the loan from the finance company. Mr Low also said to Mr Khuu that he should get in touch with his solicitor and let him have a close look at the contract. At or about the same time Mr Khuu told Mr Low that he had instructed Mr Seeto to exchange contracts when he could. Mr Low told Mr Khuu: "That is very risky business Benjamin". Contracts were exchanged on 27 April and the first instalment of the deposit, namely, $150,000 was paid. The date for completion was fixed at 8 June 1988 (Special Condition 31). Mr Seeto explained the special condition to Mr Khuu and the "notice to complete" clause. Mr Seeto told Mr Khuu that Gordon & Johnstone had been pressing for early exchange and that Mr Khuu should consider whether there were sufficient funds available for a loan to finance the purchase. Mr Khuu said that if he was not able to get the loan it would not matter as he would be able to get sufficient funds from his brother (Mr Yau) in Hong Kong. Mr Yau was informed of the fact that exchange of -~16- contracts had taken place, but it does not appear that he was told of the date of completion or the possibility of a notice to complete being given which could lead to the forfeiture of the deposit. In late April Mr Low told Mr Lim that the valuation was being done. Mr Lim told Mr Low that the details had been sent to the Singapore head office of UOB but that the head office might not approve the loan because the property was a nightclub and because of the high percentage of the borrowing. Mr Low related that conversation to Mr Khuu. A little later, also in April, Mr Lim told Mr Low that UOB Singapore's response was that they needed mortgage cover before the loan could be approved. This was relayed by Mr Low to Mr Khuu. Mr Low then approached Bain Clarkson, insurance brokers, to try and arrange mortgage insurance through Mr Robert Lee of that firn. In early May 1988 Mr Low had a discussion with an officer of Raine & Horne and instructed that firm to value Kinsella's, showing UOB Australia as mortgagee. Mr Low then wrote to UOB Australia enclosing schedules of assets and liabilities of both Mr Khuu and Mr Yau. The second instalment of the deposit, namely, the remaining $150,000 was paid on 4 May 1988 by Mr Yau to Mr Seeto, thus making the total financial input from Mr Yau of - 17 - $300,000. On or about 16 May 1988 there was a conversation between Mr Low and a Mr Ong of MFA. Mr Ong had commenced employment with MFA a short time before the conversation as a business development executive. Mr Ong asked Mr Low if any of his clients wanted to borrow money. Mr Low said that if he had come earlier he could have introduced him to a deal for $2nm, but that the Advance Bank had already approved the loan. On 17 May 1988 Raine & Horne, having completed its valuation of Kinsella's, sent it to UOB Australia on the assumption that it was to be the financier of the project. In late May 1988 Mr Lim told Mr Low that UOB had decided not to finance Kinlace's purchase of Kinsella's. Mr Low then got in touch with Mr Ong and said in effect that his client might be interested in being funded by MFA. Mr Ong handed over blank application forms which Mr Low partly completed. On 31 May 1988 UOB Australia confirmed that it would not finance the loan. On 2 June 1988 Mr Khuu signed the necessary application forms of MFA for finance purposes. The forms stated that the completion date of the contract was 20 June, whereas in fact it was 8 June. On 3 June Mr Yau signed the application form for MFA finance. - 18 - At or about that time, i.e. early June, there was a meeting between Mr Low, Mr Khuu, Mr Ong and Mr Brown who had commenced employment with MFA Australia a short time before. The signed application forms for finance by MFA were handed ever by Mr Khuu. Other documents were completed. Mr Hopcroft gave evidence that in May 1988 (it was either late May or early June 1988) Mr Ong came to see him about the Kinlace loan and Mr Hopcroft said to Mr Ong: "Dan that will not fit" (i.e. the loan could not be approved because the premises were being used as a nightclub and were licensed premises). On 8 June 1988 a letter of offer was sent by MFA to Kinlace signed by Mr Goodman and Mr Stassen which is an important document. It is too long to set out fully, especially as it contains "Standard Loan Conditions" as an annexure thereto but I shall set out the principal provisions: "Following an application for a proposed mortgage loan we are pleased to advise that this company has approved a mortgage advance on the following basis; LOAN AMOUNT: $1,800,000 limited to 60% of valuation or as may be agreed to by our Corporation. TERM: Five years. INTEREST RATE: A margin of 1.5% over 5 years SWAP rate. OTHER NOTES: Refer Standard Loan Conditions - 19 - annexed. We may decline to proceed further, without damages for so doing, should settlement not occur within two months of completion of a_ satisfactory valuation for the Security Property. ... OTHER CONDITIONS: 1. Satisfactory valuation of security property. Valuer to comment on trading figures, saleability, alternative uses and conversion costs. 2. Satisfactory mortgage insurance, payable by the borrower, with an acceptable insurer. ... 5. (References made to an application fee in one copy of the letter to $9,000 and in another copy to $2,000, but in my view nothing turns on this]. Due to volatility of interest rates in the money market we may be required to vary the interest rate and/or loan term prior to settlement. If this should occur you may withdraw from the transaction but shall remain liable for all costs up to that time. The annexed "Standard Loan Conditions" contain a number of paragraphs including the following: "Valuation: A satisfactory valuation is required for each property and will be ordered by this company. By signing a copy of the Annexure to this letter the borrower undertakes to pay or reimburse on demand all costs and expenses ... incurred by any party in either assessing, approving or providing this facility whether or not the loan settlement occurs. Further Information: This Company or the Lender's Solicitor reserves the right to decline to make the loan should anything transpire which in their opinion renders its completion undesirable and without being liable for damages for so doing. The borrowers are to provide other information reasonably requested on behalf of the _ Lender. Please note that this letter does not constitute a Contract for Loan. ..." Mr Low discussed the letter with Mr Khuu and told Mr Khuu to see a solicitor about it. Mr Khuu saw Mr Seeto, his solicitor, who explained the contents of 1t fully to him. Mr Seeto denied that he said to Mr Khuu that he recommended that he accept the offer, but he agrees that he did not tell Mr Khuu that he should not sign it. Mr Khuu gave evidence that Mr Seeto said to him that the offer was "OK". On 9 June 1988 Gordon & Johnstone issued their first notice to cc.plete specifying the completion date as 27 June. In June 1988 Mr Hopcroft telephoned Mr Low and said that the Raine & Horne valuation report was not in the desired format. On 9 June 1988 MFA wrote a letter to Raine & Horne asking them to comment on the trading figures, saleability, alternative uses and conversion costs with respect to Kinsella's. Mr Hopcroft gave evidence that Mr Goodman handed him the Kinlace file and said that the loan could be "done". Mr Goodman denied this. The conversation, if it occurred, would have been about mid-June. A little later, but about the same time, Mr Hopcroft stated he had a conversation with Mr Stassen which occurred after a long lunch with some clients that terminated in the evening. Mr Hopcroft said that he was very annoyed and that he told Stassen that he could not "do" the loan as Kinsella's was a licensed property and a specialized security. Mr Stassen denied this. On 20 June 1988 Raine & Horne submitted their second valuation addressed to MFA. It was 1n substance the same as the 17 May valuation. Dunhill Morgan wrote to Mr Seeto by letter of 20 June 1988 stating that "preliminary approval only" had been given to the loan and that "a valuation is to be obtained which must be satisfactory to the lender". Mr Hopcroft said that he had conversations on a number of occasions with Mr Stassen in which Mr Stassen said to him that he should go through the motions of attempting to settle the matter as MFA could always treat the valuation as unacceptable. Mr Hopcroft did not place Mr Goodman as being present at these conversations in his affidavit. When giving oral evidence in chief Mr Hopcroft said it was in the presence of Mr Goodman, but he said in cross-examination that it was in his absence. Mr Goodman's evidence about his presence or - 22 - absence from these conversations is not entirely clear, but on balance his evidence does not support the finding that he was present. Mr Stassen gave evidence in his affidavit that he did not recollect having a conversation in these terms. On 21 June 1988 Mr Seeto wrote to MFa stating that the balance of the purchase price would be funded, as to $300,000 from Kinlace, as to $600,000 from Mr Victor Seeto (no connection with or relation to Mr Ivan Seeto, the solicitor) and as to $400,000 from Kazuki Boutique. This letter was written on Mr Khuu's instructions. At some stage in June (before 24 June) Mr Khuu applied to the State Bank of New South Wales for a loan to buy Kinselia's; and on 24 June Manenti Quinlan, valuers, on behalf of the State Bank, inspected Kinsella's. On 28 June Gordon & Johnstone gave another notice to complete, the date for completion being fixed at 13 July. Mr Seeto told Mr Khuu of this notice on 28 June and sent him a letter to similar effect. Manenti Quinlan completed their valuation, and on 30 June 1988 MFA wrote to Raine & Horne asking, amongst other things, for them to state the costs of conversion of Kinsella's to "commercial retail/office usage". On 4 July 1988 Dunhill Morgan wrote to Mr Seeto enclosing documents for execution with respect to the prospective settlement. On the same day Mr Khuu signed security documents on behalf of Kinlace in favour of MFA in Mr Seeto's office. Then followed discussions between Mr Seeto and Mr Huntington of Dunhill Morgan and letters between them relating to various questions relevant to settlement including requisitions on title and a discussion of 11 July 1988 when Mr Huntington told Mr Seeto that MFA had problems about the valuation of the premises. There were various discussions after that between Mr Huntington and Mr Seeto about the possibility of extensions of time to complete. An agreement was reached in July 1988 whereby time for completion was extended upon payment of an extension fee by Kinlace to the vendor. Following a conversation between Mr Goodman and Mr Hopcroft, a letter from Raine & Horne addressed to Mr Hopcroft was received by MFA on 19 July 1988 giving an alternative value to the premises of $2.65m "having regard to possible alternative uses". Dunhill Morgan wrote to Mr Seeto on 20 July 1988 stating again that the valuation was not satisfactory. On 8 August 1988 Mr Seeto received a letter from Gordon & Johnstone terminating the contract for purchase of Kinsella's. On 4 December 1989 MFA was wound up by order of the Supreme Court of New South Wales. On 18 July 1991 this proceeding was commenced by the filing of an application and statement of claim. As mentioned above, Mr Stassen was not served until 29 April 1993. I have not referred to every conversation of which evidence was given, nor to every document in evidence because it is umnecessary to do so and would be an exercise in prolixity. I have, however, taken all the evidence into account. Credibility and Reliability of Witnesses Mr Hopcroft's evidence is in conflict with the recollection of Mr Goodman and Mr Stassen concerning certain conversations in 1988 to some of which reference has been made. It does not surprise me that Mr Stassen and Mr Goodman have a very limited recollection of the events because their evidence essentially is that there was nothing particularly untoward about this transaction which would cause it to stay fixed in their minds. To Mr Hopcroft it was an unusual transaction because he held a strong view that the loan was outside MFA's loan lending guidelines (discussed below) as it was a loan for a nightclub and that it could not answer the description of commercial premises within the meaning of MFA's guidelines. If Mr Hopcroft's evidence is to be accepted fully, it leaves unexplained why Mr Goodman and Mr Stassen would have been so determined to approve the loan to Kinlace in respect of licensed nightclub premises if they knew that it was outside the guidelines. There is no suggestion that there ~ 25 - was any personal gain for them if the loan went through. There is no reason which satisfies me from the evidence why they would have taken this course. It is possible that they were hopeful of finding one of their panel of lenders who would advance the funds; but I do not regard this as a convincing or sufficient explanation for their conduct if Mr Hopcroft's version of the conversations is correct. On the other hand, why would Mr Hopcroft invent the evidence of conversations between himself and his two superiors, notwithstanding that the relations between Mr Hopcroft and Mr Goodman were strained? There was a difference of opinion between Mr Hopcroft on the one hand and Mr Goodman and Mr Stassen on the other about the true characterization of the le.n. Mr Hopcroft believed that the loan was to be made to a licensed nightclub and he aid not think it fell within the guidelines. Mr Goodman and Mr Stassen in my view, though realizing it was a licensed nightclub, also thought that because of proximity of the building to the central business district of Sydney and other matters to which reference shall be made, they could be regarded as commercial premises, though with appropriate discounts being made on the valuation of the premises for loan purposes. It is plain from a perusal of the guidelines and in the light of the oral evidence (especially Mr Stassen), that they were only guidelines. They were not intended to place officers who administer them in a straitjacket. Kinsella's, though obviously a licensed nightclub and therefore specialized premises, could also have _ been commercial premises, It was in the grey area between the two. In my opinion, Mr Hopcroft gave his evidence with a flourish which gave the impression that he and his two senior officers were in deep and sharp conflict over this matter. I think this was an exaggeration; but I do not suggest that Mr Hopcroft deliberately exaggerated his evidence. Rather, I think he has probably convinced himself that his evidence is correct; but I treat his evidence with reservation. Overall I find it unlikely that there was such sharp discord over this proposed loan between the three men that Mr Hopcroft's evidence would have the Court believe; the difrcerence between them was a rivulet, not a wide stream. Findings In the light of these findings of fact I turn now to consider the issues. Counsel for Kinlace submitted that by issuing the letter of offer MFA represented to Kinlace that it would have access to funds on settlement as set out in the letter and that MFA would be able to provide those funds; yet the representation was false, misleading and deceptive because MFA knew that (a) the loan proposed by Kinlace did not conform with the MFA loan lending manual guidelines; and (b) that it would not be able to obtain a co-lender's agreement to advance - 27 - the funds. The letter, so it was submitted, was intended to have legal effect in that Kinlace would expect to have the funds available to it on settlement and would rely upon it as an expression of commitment by MFA. (a) Whether the proposed loan conformed with MFA's loan lending quidelines The first question I shall examine is whether' the proposed security conformed with or fitted within the MFA loan lending guidelines. The guidelines cover many pages. One section is devoted to "Specialised Securities" and it is stated in them (par. 3.1) that they are intended to assist branches in understanding why certain types of securities are not acceptable and to appreciate the particular requirements for lendthg on certain types of specialised security applications. Specialised securities are defined in par. 3.2: "as having only a limited appeal or an appeal to a specialised market or one which could not be readily used for other purposes or which is not readily saleable. This would include motels, hotels, hospitais, nursing homes, shopping centres, sporting complexes, caravan parks, shops and car yards, etc." The guidelines then go on to give guidance as to what should happen with securities of this kind. The guidelines were a document internal to MFA, its various branches and officers and they were not intended to be - 28 - used by other organizations, including co-lenders = and certainly not borrowers. Plainly a specialized business was conducted in the real estate constituting Kinsella's, namely a nightclub as licensed premises, but the security also answers the description for the purposes of the guidelines of a commercial property notwithstanding that the business which was carried on there was a specialized business. Indeed Mr Stassen and Mr Goodman approached the loan in this fashion, as did Mr Lim who described it as being commercial. The guidelines do not prohibit monies being lent against the security of commercial property notwithstanding that a specialized business may be carried on upon it. Even if it 1S correct to describe Kinsella's as a specialized security, the various matters to which the officers of MFA must have regard in deciding whether to advance against such a security which are set out in the guidelines are either satisfied or almost satisfied within the strict letter of the guidelines. But it is important to remember that within the guidelines themselves it is provided that the strict terms of them may be departed from in appropriate cases. The introduction to the guidelines states that: "Branch managers are expected to be prudent, resourceful and possess - 29 - unquestionable integrity. Primary objectives of this manual are therefore, to assist the staff of the branch to meet these demands and to streamline' and standardize our internal systems and procedures ... Although considerable time and effort has been spent to ensure that the manual covers most aspects of mortgage banking, its existence does not preclude the exercise of good judgment and prudence on the part of officers concerned at discharging their day to day responsibilities especially in handling exceptional or problem cases. The manual Should be read intelligently to facilitate the making of practical and realistic decisions when required. Nevertheless, it Should be pointed out that where there is a need to deviate from the guidelines and procedure stipulated herein, permission from the appropriate head office personnel should be sought ..." This introduction is signed by Mr Stassen as managing director of MFA. It is significant that both Mr Stassen, as the chief executive of MFA, and Mr Goodman, as the next senior officer, both signed the letter of offer (a procedure which was normal in the ordinary course of MFA's business). The guidelines in section 3 relating to specialized securities contain a particular subheading (3.12) dealing with hotels. I take those into account. There were many factors which were present in the case of this loan application which no doubt led to Mr Stassen and Mr Goodman, as well as Mr Lim, approving the loan notwithstanding the specialized character of the business carried on at Kinsella's. I will mention them briefly, namely: . the location of the building near the central business - 30 - district of Sydney and well-known areas where tourists congregate. People would thus be attracted by the nightclub; . the commercial character of the building and its convertibility into commercial premises in the strict sense; . the favourable asset position of the guarantors; . the amount of equity of Kinlace, namely, 40%; . the fact that Mr Walker was to be the nightclub operator who was very experienced in this field. He was not an employee of Kinlace but was -sngaged by a long term Management contract, which it cost Kinlace $39,000 to terminate in the events that happened (see guidelines pars. 3.9 and 3.12). These are but some of the matters upon which reliance was Placed and on which reliance was entitled to be placed when one construes the guidelines. I reject the argument that the loan proposed by Kinlace aid not conform to the MFA guidelines relating to loans and the further argument that it knew that the loan did not so conform. (b) Whether MFA knew it would not be able to obtain a co- lender's agreement Ten factors were put forward by counsel for Kinlace in support of its proposition. I shall refer to each of them. Factor 1. MFA was a mortgage bank which persons would tend to associate with stability and propriety. Even if these assumptions are correct, I regard them as irrelevant. Factor 2. MFA was a prudent financier. This too is irrelevant. Factor 3. MFA did not have funds of its own although it was conceded the -vidence on this point might be "a little bit clouded". The evidence as to MFA's own funds is not very clear; but what is plain is that the primary business of MFA was to raise funds from co-lenders whom MFA found. This too seems to be a quite irrelevant matter on this branch of Kinlace's case. Factor 4. A relationship existed between MFA and each co- lender whereby they made agreements under which MFA would submit a loan proposal from borrowers to the co-lender who would then agree to advance funds to enable MFA in its own name to lend the funds on the security of a first mortgage. Each co-lender established the principles which MFA should - 32 - apply in appraising a proposal for a loan. Reference was made in argument to the fact that both Mr Stassen and Mr Goodman agreed that the guidelines embodied those principles. What this overlooks is that a number of co-lenders had requirements which were freer or looser than those which MFA applied in its own lending guidelines: for example, the Bank of Singapore and Resi. Also the submission overlooks the fact (as mentioned earlier) that the guidelines are simply guidelines and permit departures from the literal text (see the terms of the introduction to which I referred earlier). Factor 5. The loan to be made by MFA was to be advanced on the security of a first mortgage which relates to the fact that it was a prudent financier. Again, this seems to me to be an irrelevant consideration. Factors 6 and 7. I have referred to these factors earlier as they relate to the construction of the guidelines, namely, that the purpose of the guidelines and their text were inconsistent with the loan being made in this case because of the specialized nature of the security. Factor 8. This factor is said to be the relationship between MFA and a co-lender if the guidelines did not exist or if the guidelines were not met. In other words, without the guidelines there would be no clear commercial relationship between MFA and the co-lenders. What would be the position if - 33 - the guidelines did not exist? It was submitted that the relationship between MFA and a co-lender would quickly sour because MFA would be putting up proposals to be rejected by the co-lender. I said at the time in argument that I had some difficulty understanding this point and I still retain that difficulty. Even if this point were established it does not follow that MFA would seek risky business even if the guidelines did not exist. Factor 9. The purpose and commercial standing in the lending marketplace of a letter of offer, namely, as the principal mechanism by which a commercial lender initiates a loan, is more than a mere piece of paper, it is a document of commercial significance. Again this seems to be an irrelevant consideration on the question of whether a prudent mortgage bank knew that it could not advance money at some later date. Factor 10. The tenth and final factor relied upon was that it was important for MFA to know at the time of the letter of offer and to satisfy itself that 1t could get the funds from a co-lender. I find this a curious submission because at the time a letter of offer is issued a mortgage banker such as MFA could hardly be expected to be in a position where it would definitely know that it could obtain funds from a co-lender for a particular loan. I do not see how the point can be relied upon to support the proposition that MFA knew it could not get funds from a co-lender. The point is a curious one. - 34 - A fundamental problem with the whole of this submission is that there is no rational reason why MFA would issue the letter of offer if it knew that it could never provide the funds. There is no suggestion of any impropriety on the part of Mr Stassen, Mr Goodman or Mr Hopcroft or any other officer of MFA for that matter. Certainly Mr Hopcroft alleges that Mr Goodman and Mr Stassen approved the offer when, in his view, it was contrary to the guidelines, but why would they do this unless they genuinely believed that it was a loan that was permissible for MFA to make? The evidence discloses no reason why they would have done this. They had no ulterior motive. Why engage in the task absorbing both money and resources of MFA and others if it was inevitably bound to be fruitless? No advantage would accrue to MFA or to any of its officers. Why waste the time of MFA's solicitors and the horrower's solicitors, the valuers Raine & Horne and Kinlace itself? Also, there would be some degree of injury to MFA's own commercial reputation if 1t embarked on a project of such a kind. Nothing significant was put to Mr Stassen or Mr Goodman or Mr Hopcroft when they gave evidence as to why they would cause MFA to behave in this odd way. In my opinion it 1s against the probabilities of the occasion that MPA would agree to advance funds which it knew could not be advanced. Nor 1s it supported, as I have indicated above, by the evidence. - 35 - I therefore reject the central elements of the case advanced by Kinlace in support of its arguments' of contravention of s. 52 by MFA. There is another and separate reason for rejecting Kinlace's case. The letter of offer makes it clear that it is a condition of the offer that there is a satisfactory valuation of the property to be secured. The Raine & Horne valuation of 17 May 1988 obtained under instructions from UOB Australia before any involvement of MFA, plainly did not satisfy the requirements of a satisfactory valuation for many reasons and I shall mention some of then. The valuation (contrary to Condition 1. of the letter of offer) contained no material on trading figures, saleability, alternative uses and conversion costs. It mentioned "potential rental income" without stating what that income was. Similarly it spoke of capitalization "at an appropriate rate of return" without stating what that rate was. Also, in order to meet the terms of the letter of offer it is obvious that the valuation had to answer the description of a valuation satisfactory to MFA (provided MFA acted reasonably). Indeed, it would indeed be surprising if the valuation of 17 May could be described as a satisfactory valuation even on objective considerations alone. Mr Lim wrote to Raine & Horne by letter of 9 June 1988 requesting Mr Wood of Raine & Horne to update the valuation of 17 May and to comment on trading - 36 - figures, saleability, alternative uses and conversion costs. In due course the 20 June 1988 valuation was received in response to Mr Lim's letter, but there were few changes at all to the material included in the 17 May valuation except that the name of the borrower was changed from UOB and some new material was inserted with respect to current market rental and certain market indicators that had taken place in the area. But there was nothing said about the cost of conversion, no capitalization rate was stated and the basis of the assessment of $344,000 per annum was not revealed. (Later, on 6 July 1988 Raine & Horne estimated conversion costs at $0.5m and stated that Raine & Horne was not qualified to value furnishings, furniture, fixtures, fittings and plant.) Following a conversation between Mr Hopcroft and Mr Goodman, Mr Hopcroft approached Raine & Horne and obtained a valuation of 19 July 1988. The precise basis of the valuation is not clear, though it seems most likely that it was intended to be a valuation of the property on an alternative commercial use basis, but there were unsatisfactory features with such a valuation including the figure of $2.65m assigned by the valuer. Mr Hopcroft himself accepted that up to 19 July there had been no valuation satisfying the terms of the letter of offer and, in my opinion, the 19 July valuation could not be said to be one that complied with Condition 1. of the letter of offer even if the grounds of determining whether or not it was a satisfactory valuation were to be objectively - 37 - determined, rather than the question of satisfaction to be assessed by MFA. Also Kinlace was informed on a number of occasions of the need for a proper valuation and of the problems with the existing valuations. This information was conveyed sometimes by letter and sometimes verbally including conversations between Mr Low and officers of Raine & Horne, a letter from Dunhill Morgan and conversations between Mr Huntington and Mr Seeto. It was submitted by counsel for Kinlace that the co- lenders to whom MFA put the proposal for loan did not reject it on grounds of valuation but because "it was a proposal for a nightclub or the premises did no. measure up if ywu looked on them as commercial security". In my opinion this evidence goes against the probabilities, and it is supported primarily, if not only, by evidence of Mr Hopcroft which was of a general and vague nature. The condition therefore that a satisfactory valuation must be provided was not satisfied. The case against MFA for contravention of s. 52 therefore fails. - 38 - Liability of Mr Stassen and Mr Goodman under s.75B of the Act. As MFA is itself not liable neither Mr Stassen nor Mr Goodman can be liable. All I will add is that there is considerable substance in the contention of counsel for Mr Stassen and Mr Goodman that it would need to be established that these gentlemen or either of them had actual knowledge of the material facts which constituted the convention (Yorke v Lucas (1985) 158 CLR 661; Crocodile Marketing Limited v Griffith Vintners Pty Limited (1989) 91 ALR 273; Richardson & Wrench (Holdings) Pty Limited v Ligon No 174 Pty Limited (unreported, 26 July 1994, Burchett J., at 23-29), and there is no evidence that Mr Stassen or Mr Goodman knew that the use of the property as a nightclub was outside the guidelines and that there was no possibility that any co-lender would advance money. Indeed, the eviaence points in quite the reverse direction. Both Mr Stassen and Mr Goodman believed that the transaction was in fact within the guidelines and there is evidence that Mr Stassen and Mr Goodman believed that co- lenders would advance money. Mr Stassen, for example, said that it was not true that no co-lender would approve the proposal as a nightclub because MFA had "settled numerous nightclubs and theatre restaurants". Also, I can discern no motive whatever from the evidence why either Mr Stassen or Mr Goodman would have issued the letter of offer if they were of that belief. It goes against the probabilities to say otherwise. - 39 - Reliance It is not necessary to consider the question whether Kinlace relied upon the alleged representations made to it which were said to constitute the misleading and deceptive conduct of MFA; but I shall deal with the point. The letter of offer was in my view a letter from the prospective lender (MFA) to the prospective borrower (Kinlace) to advance the monies therein mentioned on the terms and conditions set out in 1t. Plainly it was conditional on those terms and conditions being satisfied. It was more than a mere indication by MFA to Kinlace that it would consider lending the money. It was an offer accepted two days later by Kinlace which bound MFA to advance the loan to Kinlace provided the terms and conditions of the offer were satisfied. If those terms and conditions had been satisfied, which they were not, then Kinlace would have been entitled to rely upon it as an assurance that the loan would be made available. In fact, however, I am satisfied that Kinlace did not rely upon the letter of offer in this way. Mr Low and Mr Khuu were the agents of Kinlace for the purpose of securing and entering into the loan transaction with MFA. I accept the evidence of Mr Seeto that he explained the letter of offer fully to Khuu, but did not recommend it. Mr Khuu had not been successful in obtaining finance from a number of sources, namely, UOB Australia, BNZ, The Bank of Singapore and the - 40 ~ Advance Bank before the letter of offer was secured. After the letter of offer had been sent and accepted Mr Khuu set about obtaining a loan of $1.8m from the State Bank of New South Wales which did not eventuate. He said that he did this because he was "very anxious to have the whole thing settled" and "just a bit nervous" though he was "full of hope". Mr Khuu was indeed conscious at this time of the need for an independent valuation report to be obtained in order to secure finance. I am not persuaded that there was in fact any reliance, in the relevant sense, placed upon the letter of offer by Kinlace. Causation It is not necessary for this question to be considered in the light of my earlier findings. Contributory Negligence The second and third respondents submitted that the chain of causation was broken by contributory negligence of Kinlace and its officers and agents. Counsel for the respondents conceded that there was a substantial difficulty in the path of the Court constituted by a single judge in finding in their favour on this point because of the judgment of the Full Court of this Court in Munchies Management Pty Limited v Belperio - 41 - (1988) 84 ALR 700 at 712-13 in which Fisher, Gummow and Lee JJ. quoted with approval the approach taken by French J. in Pavich v Bobra Nominees Pty Limited, (unreported, 4 August 1988). Their Honours held that contributory negligence is only a complete defence to an action under s. 82 for a contravention of Division 1 of Part V of the Act where it is so dominant as to constitute a novus actus interveniens. This approach was contrary to the approach adopted by Pincus J. in S & U Constructions Pty Limited v Westworld Property Holdings Pty Limited [1988] ATPR 40-854 at 49,216-7, reasoning which was doubted by Hodgson J. in Tefbao Pty Limited v Stannic Securities Pty Limited [1994] ATPR (Digest) 46,114 at 53,533. Pincus J. applied a doctrine of apportionment. As I am bound to follow the approach adopted by the Full Court I do so, so I shall not consider this question furthe . Section 53(aa) and section 58 of the Act No separate questions arise under s. 53(aa) from those that arise under s. 52. As to s. 58 I have in substance covered that section in dealing with s. 52 so I shall say nothing further about it. Negligence Kinlace asserts that the three respondents were negligent and made negligent misstatements of fact, relying upon matters to which I have already referred and dealt with when considering s. 52 of the Act, in particular, the allegation - 42 - that MFA represented to Kinlace that MFA was able and prepared to complete the loan finance agreement and that each respondent represented to Kinlace that MFA had funds or had access to funds in an amount sufficient to enable it to lend $1.8m to Kinlace in accordance with the loan facility agreement and that MFA was able and prepared to complete the loan finance agreement. For the reasons previously given I reject these arguments. Alternative case, namely, that at some time prior to 12 July 1988 MFA's inability to complete the loan was _ and should have been known to the respondents This case must fail at the outset. MFA was not unable to complete the loan. The conditions on which the letter of offer issued were not satisfied and .t was the failure to meet the relevant conditions, especially the requirement as to suitable valuation, that led to the transaction not proceeding. For reasons which I mentioned earlier when dealing with the various witnesses I am not persuaded that the relevant conversations upon which Kinlace relies as between Mr Hopecroft and Mr Stassen or Mr Goodman in fact occurred; in particular Mr Stassen when he is alleged to have said on a number of occasions to Mr Hopcroft "Kinlace will obtain the money elsewhere if they are in danger of loosing the deposit. Go through the motions of attempting to settle as we can always treat the valuation as unacceptable." I do not accept that MFA in effect imposed upon Kinlace the obligation of - 43 - furnishing a valuation satisfactory to it as a condition precedent to the obligation to complete in order to avoid disclosing MFA's inability to complete. There is no substance in this aspect of Kinlace's case. Defence based on s. 82(2) An action under s. 82(1) may be commenced at any time within three years after the date on which the cause of action accrued (s. 82(2)). Again it is not necessary to deal with this defence. Damages It is not necessary to consider this question, so I shall not do so. I would dismiss the application with costs. I certify that this and the preceding forty-two (42) pages are a true copy of the reasons for the judgment of the Honourable Mr. Justice Lockhart. Associate: 20. hdl eA Dated: 14 October 1994 ~ 44 - Counsel for the Applicant: Mr R Gillard Qc Mr M Heath Solicitors for the Applicant: I Seeto & Co Counsel for the Second Respondent: Mr J D Heydon Qc Mr I E Davidson Solicitors for the Second Respondent: Harris & Co Counsel for the Third Respondent: Mr S White Ms L McCallum Solicitors for the Third Respondent: Horan & Co