SHALHOUB & ORS v SCHMIDT & ANOR [1999] NSWSC 309

New South Wales Supreme Court CITATION : SHALHOUB & ORS v SCHMIDT & ANOR [1999] NSWSC 309 CURRENT JURISDICTION : Common Law Division FILE NUMBER(S) : 20889/97 HEARING DATE(S) : 23/03/99 JUDGMENT DATE : 8 April 1999

Neville John Shalhoub (First plaintiff) PARTIES : Lorna Rose Shalhoub (Second plaintiff) Shalhoub Holdings Pty Limited (Third plaintiff) Richard Arthur Schmidt & Christopher Quilter (Defendants) JUDGMENT OF : Adams J at 1

COUNSEL : Mr M K Rollinson (plaintiffs) Mr N Hutley SC, Mr D Pritchard (defendants) SOLICITORS : John McEncroe & Company (plaintiffs) Corrs Chambers Westgarth (defendants) CATCHWORDS : Wickstead v Browne (1992) NSWLR 1 Rushcutters Investments Pty Limited (unreported NSWCA 17 June 1987 Commonwealth v Verwayen (1990) 170 CLR 394 Carlson v King (1947) 64 WN (NSW) 65 at 66 CASES CITED : Soulemezis v Dudley (Holdings) Pty Limited (1987) 10 NSWLR 247 Port of Melbourne Authority v Anshun Pty Limited (1981) 147 CLR 589 Ling v Commonwealth (1996) 68 FCR 180 Bryant v Commonwealth Bank (1995) 57 FCR 287 DECISION : Appeal from the Master's judgment allowed.; Causes of action contained in the statement of claim dismissed.; Respondents to pay the appellants' costs.

THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION 20889/97 ADAMS J Thursday 8 April 1999 SHALHOUB & ORS v SCHMIDT & ANOR

JUDGMENT

1 HIS HONOUR : This is an appeal from the decision of the Master dismissing the appellants' application for summary dismissal under Part 13 rule 5 of the Supreme Court Rules in proceedings commenced against them by the respondents for alleged professional negligence. The alleged negligence arose in the conduct of litigation in the Equity division of this Court which resulted in a judgment by Young J against the plaintiffs (the equity proceedings). The plaintiffs had sued on various causes of action having as their essential ingredient an alleged unauthorised appointment by the defendant financier of a receiver who entered into possession of certain of the plaintiffs' assets. The relevant instruments providing for appointment of the receiver set out a number of events of default, the occurrence of which permitted the appointment. In the equity proceedings, the financier relied on twelve alleged events of default. The Court found that ten of these had been established. As the occurrence of any one of them could have properly triggered the appointment of the receiver, it followed that judgment with costs was awarded to the financier. 2 The disappointed plaintiffs commenced an action in due course against the solicitors who had acted for them in the equity proceedings, alleging professional negligence. The substance of this action was an allegation that the solicitors had, or ought to have, been aware of a body of evidentiary material which was not adduced in the equity proceedings and which would have assisted the plaintiffs materially in establishing their case. 3 It was, in effect, conceded before the Master (and before me) that the postulated evidence was capable of bearing upon six of the ten events of default found by Young J to have occurred. It was submitted by the defendants to the Master, however, that any one of the remaining four would have sufficed to have determined the equity proceedings in their favour. Accordingly, whether or not the defendants had failed properly to present the plaintiffs' case in the respects alleged, the outcome would have been the same and there was no loss. The Master found and, for the purposes of the proceedings before me, the defendants conceded, that the omitted evidence was at least relevant to two of the remaining four events but argued that this made no significant difference. 4 The two unaffected events of default were - (i) the plaintiffs did not pay $10,718.26 (Group Tax due under the relevant legislation) to the Deputy Federal Commissioner of Taxation due on 7 December 1990; and (ii) there was a failure to cause the plaintiffs' books to be audited each year and to furnish a copy to the financiers. 5 On the part of the plaintiffs it was not disputed that these occurrences were events of default under the relevant instruments but it was submitted that if they had been able to establish waiver or circumstances constituting an estoppel they may have succeeded nevertheless in the equity proceedings. 6 In the course of his Honour's judgment, however, Young J said - Perhaps I should say here something which is pertinent to a number of submissions made by Mr Garnsey for the plaintiffs. In recent years particularly, there has been considerable stress laid by courts on looking to the intention rather than to the form and this has involved much more use of equitable principles, particularly principles involving the law of estoppel, than heretofore. Whilst it is also true that in recent years the old maxim that estoppels could be used "as a shield but not as a sword" have been cast aside, it is still true to say that it is usually easier to employ such a weapon as a shield rather than as a sword. If this were a case in which a debtor was seeking some relief against forfeiture because of some over-technical approach by a creditor and the debtor offered to do equity, then it may well be that a rather benign attitude might be taken to the debtor's situation. However, it seems to me a completely different situation where a debtor sues for substantial damages for trespass or for unlawful interference with economic relations. It is difficult to see how it can be conscionable to aid a debtor to obtain such substantial damages by disregarding the legal rights of the parties and substituting some artificial equitable obligation. Indeed, the situations where equity has permitted estoppels to be used as a sword appear to be limited to the case of what I have called in another place "equitable non-contracts". That is, in an appropriate case equity will say that even though at common law there is no contract, the parties ought to be estopped from denying the existence of a contract and equity will grant specific performances of the "non-contract". Saying this, however, is quite a different thing from saying that equity will make up any deficiencies in a cause of action in tort. Indeed, the highest equity has gone is in the Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 situation: where it would be unconscionable not do so, equity has awarded equitable damages for breach of an equitable non-contract. Accordingly, when one looks at the situation between the parties, due attention must be paid to estoppels in the contracts, such as the parties by their conduct making it clear that payment on the last day of the month would be sufficient, but must not, for sympathy for the plaintiffs or otherwise, supply ingredients in a cause of action, especially a cause of action in tort for substantial damages. Even so, there was no evidence in the equity proceedings capable of supporting, let alone establishing, a waiver or an estoppel nor was Mr Rollinson of counsel, who appeared for the plaintiffs before me, able to point to any relevant evidence in the omitted material. It was put to me, however, that it may have been that the exposure of the omitted material might have prompted a response from the financiers which might have produced hitherto unavailable material of an unknown character that might demonstrate the existence of the relevant equity. One only has to state the submission to demonstrate its lack of persuasive force. It was not submitted that discovery in the equity proceedings was or might have been inadequate, nor that interrogatories may have yielded material facts: cf Wickstead v Browne (1992) NSWLR 1, per Handley and Cripps JJA at 11. Even the possible unpredictable feature (vide Rushcutters Investments Pty Ltd v Gillmour unreported NSWCA 17 June 1987) must have some recognizable element capable of assisting the plaintiffs. In this regard, the extensive litigation, including use of pretrial procedures, in the equity proceedings, provides a substantial evidentiary context for considering the application for dismissal which is not usually available (cf Rushcutters Investments ). In the Commonwealth v Verwayen (1990) 170 CLR 394, it was pointed out by Deane J (at 444) that - Since an estoppel will not arise unless the party claiming the benefit of it has adopted the assumption as the basis of action or inaction and thereby placed himself in a position of significant disadvantage if departure from the assumption be permitted, the resolution of an issue of estoppel by conduct will involve an examination of the relevant belief, actions and position of that party. 7 Whether or not the plaintiffs relied, in fact, upon any alleged representation or assumption is a matter, of course, within the knowledge of the plaintiffs. There was no material to which Mr Rollinson could point which suggested any such reliance. 8 Accordingly, even if the difficulty posed for the plaintiffs in the passage which I have quoted above from the judgment of Young J was not as overwhelming an obstacle which his Honour's language might suggest (which was not contended before me), the submission made in this respect on behalf of the plaintiffs must fail. The same arguments seem to me to apply to the second of the events of default referred to above. 9 In dealing with the four identified events of default, the Master observed that, as to certain of them "questions of waiver or estoppel were argued" but, without giving any explanation as to how such arguments might have been resolved in favour of the plaintiffs, declined to grant the defendants' application upon the basis that "it appeared that there may be other ways [than those contained in the pleadings] of presenting their claim open to the plaintiffs" and that he was "not satisfied that the plaintiffs' claim is hopeless or bound to fail". 10 With the greatest respect, I consider that the exiguity of the Master's reasons constitutes a failure of his duty to expose "not only the evidence, and the decision arrived at, but also the reasons for arriving at the decision": Carlson v King (1947) 64 WN (NSW) 65 per Jordan CJ at 66; Soulemezis v Dudley (Holdings) Pty Limited (1987) 10 NSWLR 247. 11 Quite apart from the error, I am unable to appreciate from the Master's judgment how other possible ways of presenting their claim open to the plaintiffs might assist them to overcome the survival of the two events of default to which I have referred. Mr Rollinson was unable in his submissions to me to assay a recasting of the action that might have this effect. 12 It was submitted to me on behalf of the appellants by Mr Hutley SC that of the other two remaining events of default, at least that which comprised the existence of a material adverse change in the financial position of the borrower could not have been affected by the postulated additional evidence, although that evidence may (according to the Master) have in one or other respects been relevant. Mr Rollinson, except in the sense that the additional evidence referred to this matter, was unable to point to its possible use either to render the existence of the event doubtful or to support a case of waiver or estoppel even accepting, in defiance of his Honour's judgment in this respect, that such equities might have constituted elements of the plaintiffs' causes of action in the equity proceedings. The crucial evidence is that contained in the affidavit of a Mr Ian Ballingall sworn 6 December 1993. The most favourable view of this evidence (ignoring any technical inadmissibility) is that the adverse changes which were objectively demonstrated might not have been considered by the relevant officers of the Bank, having regard to the plaintiffs' history and the entirety of their financial affairs, as creating a substantial risk of default in payment of their debts. However, that was not the material issue. As Young J found (with respect, inevitably) there were "obviously adverse circumstances affecting the business". 13 In the result, I consider that the defendants have established that the plaintiffs' claim, insofar as it rests upon the adverse judgment on the substantive actions in the equity proceedings, is hopeless or bound to fail. However, a substantial area of dispute in the equity proceedings might have been affected by the additional evidence and findings in favour of the plaintiffs in those respects may have affected the order for costs ultimately made by his Honour. As at present drawn, the pleadings in the current proceedings do not seem to me to cover this eventuality. I do not think that it would be just in all the circumstances to dismiss the plaintiffs' statement of claim if by so doing they were precluded from litigating this matter because of the considerations arising from Port of Melbourne Authority v Anshun Pty Limited (1981) 147 CLR 589; and see Ling v Commonwealth (1996) 68 FCR 180 and Bryant v Commonwealth Bank (1995) 57 FCR 287. Accordingly, I do not propose by the order which I make to preclude the plaintiffs from amending their statement of claim appropriately to permit them to litigate the question whether, because of the alleged negligence of the defendants, a different order for costs may have resulted in the equity proceedings. Subject to this qualification, however, I allow the appeal from the Master's judgment and dismiss the causes of action contained in the statement of claim filed on 10 October 1997. The respondents must pay the appellants' costs.