Was there a duty of care?
More substantial questions raised on behalf of ABCOS relate to the consequences of this finding. Counsel argue the trial Judge erred in holding ABCOS liable in negligence to the Investors on the ground there was no relevant duty of care. They point out that the ABCOS valuation was prepared for the benefit of the financier, MANL, and there is no evidence that any of the Investors saw, or even knew of, the ABCOS document before the settlement on 30 June. ABCOS was not asked to advise any of the Investors and it never assumed any legal responsibility towards them. They say:
"... the ABCOS Valuation was sought for the purpose of MANL as a finance company. MANL had its own lending policy criteria. No suggestion was made to ABCOS that it was also for or might be relied on by the Investors or their agent, Mr McDonald. What may or may not have been important to MANL in a valuation may have been irrelevant to the Investors. For instance, if MANL had been given a valuation for less than what the Investors had seen in Mr Bester's valuation and MANL proceeded having consciously decided to take a risk, would ABCOS have been liable to the Investors? Surely not; it was for MANL to make a decision to finance or not on whatever basis it chose and on whatever, if any, weight it placed on the ABCOS Valuation ...
This was a commercial transaction. The Investors could not claim that MANL owed them a duty of care in deciding whether or not to finance them. ABCOS was not asked to advise the Investors. ABCOS assumed no legal responsibility to the Investors and they never indicated to ABCOS that they were relying on it in any way."
The syndicate members were represented at settlement by McDonald. McDonald gave evidence that he did not see the ABCOS valuation prior to settlement, but he knew of its existence. His recollection was that a copy of the valuation was faxed to his office at Maitland on 27 June, but he was then already in Sydney. In cross examination McDonald agreed that MANL looked carefully at the income and assets of each syndicate member, but he did not agree the valuation was irrelevant to MANL's decision to proceed. He gave this evidence:
"You knew if something went wrong with the finances for the venture, for example, if it did not generate enough income that MANL would be interested in assuring to itself that the syndicate members could meet in full the obligations that they had to MANL, that is right is it not?---Yes, that's right.
You really did not turn your mind at settlement to any question about what the ABCOS valuation came to because you were very busy doing other things, is that right?---No, that's not right. I had to turn my mind to the ABCOS valuation for the simple reason that I realised that if the ABCOS valuation did not come to the value that was being paid for the horses, then the financier wouldn't pay - wouldn't go ahead.
Nobody told you that, did they?---I got a bit of commonsense about it.
Well, you did not know what was in the valuation, did you?---I didn't know the details of it, no.
Well, you did not know what was in it at all, did you?---No, Mr Rares it wasn't me buying the horses, it was up to the financier. I assumed that the valuation was satisfactory to them, otherwise it wouldn't have happened.
And you did not know what criteria MANL were applying to determine whether the valuation was satisfactory to them or not, did you; you did not know what the criteria were, did you?---Well, that's up to MANL.
But the answer to my question is, you did not know what criteria MANL were using to determine whether the valuation was satisfactory to them, did you?---No, I didn't."
Counsel for the Investors responded to this submission by pointing to some evidence given by Pulford during the course of cross examination:
"You knew that there were a number of investors who were actual or potential participants in this venture?---I didn't know of a number but I presumed there were investors. I didn't know of any numbers or had no, you know, knowledge of it.
But you assumed there were quite a few of them?---Yes, I suppose I did, yes.
...
You appreciated that if investors such as the ones that you knew of in connection with this venture became involved in a syndicate which had purchased horses at prices greater than their actual value then those investors could suffer loss?---Yes.
And that loss could be a significant loss?---Yes, I suppose depending on, you know, how much too much they paid for them.
You realised that the prices set out in the so-called invoices were the ones that were proposed to be paid by the syndicate in respect to the purchase of the horses?---Yes.
You realised that the purchasers were going to be, or consideration was being given to them being financed by a finance company?---Yes.
You understood that the finance company would not go ahead unless it had a valuation of 1.565 million or more?---Yes."
The ABCOS valuation was addressed to "First Trinity Park Stud Breeding Venture". It was sent to a number of people, including McDonald and King, the promoters of the venture. Counsel for the Investors argue that, in these circumstances, "it was or ought to have been known to Pulford that the Investors would be prejudicially affected if he did not carry out the ABCOS valuation diligently and with care".
The trial Judge dealt briefly with the question of duty of care. He said:
"Both Mr Bester and ABCOS owed the applicants a duty to take reasonable care in the preparation of their valuations. Both were aware that a formal valuation was required. Neither can have been unaware that his valuation would be relied on. Both must have been aware that, if he was negligent in overvaluing the horses, the purchasers and financier might suffer loss.
In San Sebastian Pty Ltd v The Minister (1986) 162 CLR 340, Gibbs CJ, Mason, Wilson and Deane said at 355:-
'When the economic loss results from negligent misstatement, the element of reliance plays a prominent part in the ascertainment of proximity between the plaintiff and the defendant, and therefore in the ascertainment of a duty of care.'
However, there need not be a direct dealing between the person who is negligent and the person affected by the negligence: Bryan v Maloney(1995) 182 CLR 609. In the present case, the obtaining of a valuation was crucial to the obtaining of finance and to the establishment of the venture. After the ABCOS valuation issued, the various agreements were executed and settlement took place."
We do not think Bryan v Maloney resolves this issue. That was a case of physical damage to the plaintiff's house; not a case of pure economic loss. A more relevant High Court decision is one given after oral argument in this case: Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 142 ALR 750. In that case a financier of a company sued the company's auditors for losses sustained by reason of its reliance on accounts that were the subject of an allegedly negligent audit. It was not claimed the auditors were aware of the financier's proposed reliance on the accounts. The Supreme Court of South Australia struck out the relevant part of the Statement of Claim on the basis that it disclosed no cause of action. In unanimously affirming that decision, the members of the High Court summarised the Australian cases dealing with the so-called "Hedley Byrne principle": see Hedley Byrne & Co Ltd & Heller v Partners Ltd [1964] AC 465. We need not refer to those cases. It is sufficient to note what was said by the Justices in relation to the necessary nexus between the maker of a negligent representation and a particular claimant. Brennan CJ said at 757:
"The uniform course of authority shows that mere foreseeability of the possibility that a statement made or advice given by A to B might be communicated to a class of which C is a member and that C might enter into some transaction as the result thereof and suffer financial loss in that transaction is not sufficient to impose on A a duty of care owed to C in the making of the statement or the giving of the advice. In some situations, a plaintiff who has suffered pure economic loss by entering into a transaction in reliance on a statement made or advice given by a defendant may be entitled to recover without proving that the plaintiff sought the information and advice. But, in every case, it is necessary for the plaintiff to allege and prove that the defendant knew or ought reasonably to have known that the information or advice would be communicated to the plaintiff, either individually or as a member of an identified class, that the information or advice would be so communicated for a purpose that would be very likely to lead the plaintiff to enter into a transaction of the kind that the plaintiff does enter into and that it would be very likely that the plaintiff would enter into such a transaction in reliance on the information or advice and thereby risk the incurring of economic loss if the statement should be untrue or the advice should be unsound. If any of these elements be wanting, the plaintiff fails to establish that the defendant owed the plaintiff a duty to use reasonable care in making the statement or giving the advice." [Emphasis added.]
Toohey and Gaudron JJ said at 764:
"It is not pleaded that Esanda approached Peat Marwick for information or advice; it is not pleaded that Peat Marwick knew that Esanda was proposing to enter into the transactions in question or, indeed, any transaction with Excel or its associated companies; it is not pleaded that Peat Marwick knew that Excel's 1989 accounts or their report on the accounts would be communicated to Esanda or any other finance provider with respect to the obtaining of finance or for any other purpose. Had one or more of those matters been pleaded, Esanda might have brought itself within the duty of care recognised by Barwick CJ in Mutual Life & Citizens' Assurance Co Ltd v Evatt (1968) 122 CLR 556 at 572-573 or that recognised by the House of Lords in Hedley Byrne & Co Ltd v Heller & Partners Ltd."
At 765 their Honours commented:
"... it is neither pleaded that Peat Marwick expressly or impliedly invited Esanda or finance providers generally to act on the basis that the accounts were accurate nor that they had an interest in Esanda so acting. Had one or more of these matters been pleaded, Esanda would have found support in this court's decision in San Sebastian Pty Ltd v Minister Administering the Environmental Planning and Assessment Act 1979 (1986) 162 CLR 340."
McHugh J said at 776:
"Thus, the position in Australia to date with respect to liability for pure economic loss caused by negligent misstatement is that, absent a statement to a particular person in response to a particular request for information or advice or an assumption of responsibility to the plaintiff for that statement, it will be difficult to establish the requisite duty of care unless there is an intention to induce the recipient of the information or advice, or a class to which the recipient belongs, to act or refrain from acting on it. Mere knowledge by a defendant that the information or advice will be communicated to the plaintiff is not enough ... Nevertheless, the decisions have all emphasised that a lack of an intention to induce the plaintiff to act or refrain from acting is not necessarily fatal to a plaintiff's claim because other factors may be present that obviate the need for such an intention."
It is necessary to apply this guidance to the present case. In relation to the statement of Brennan CJ, it is clear that ABCOS, through Pulford, knew the valuation would be communicated to the prospective syndicate members; indeed it was addressed to the syndicate, not to MANL. Copies were sent to King, McDonald and Done, all of whom were acting on behalf of the syndicate members rather than MANL. Pulford did not know the identity of the proposed members of the syndicate and he may not have considered whether the valuation would be seen by each of them. But he intended to place it before them, individually or as a group. Pulford knew, or ought reasonably to have known, that the valuation would be likely to cause the syndicate members to proceed with the venture. This was not only because they might draw comfort from the values ascribed to the horses by him, but because the valuation would be likely to ensure provision of the finance that was critical to the venture proceeding. In other words, Pulford knew the valuation was likely to be a crucial element in the decision whether or not the venture was to proceed; in the words of Brennan CJ, it "would be very likely to lead the plaintiff to enter into a transaction of the kind that the plaintiff does enter into". But it cannot be said Pulford knew, or ought to have known, it would be likely that the syndicate members would enter into the transaction in reliance on the valuation. Pulford knew the financier would rely on the valuation in entering into the transaction; but he also knew the prospective members were already minded to proceed, on the basis of the prices agreed between King and McDonald. The Investors did not rely on the valuation, in the sense of being persuaded by it to proceed with their investment. But the valuation caused them to proceed with their investment, because MANL relied on it in deciding to provide the finance necessary for the venture to proceed.
We have hesitated over this aspect of the case but we think it falls within the notion of proximity described by Brennan CJ. As judges have often pointed out, it is erroneous to read a judgment as if it were a statute. In applying an authority, the task is to identify and apply the relevant principle, rather than to determine whether the facts of the instant case fall within the precise language of the earlier case. Courts have imposed a limitation on the extent of the duty of care in respect of a representation because of concern about the effect of an unlimited duty of care on commercial and professional activity: see per McHugh J in Esanda at 781-787. The classic expression of this concern was by Cardozo CJ in Ultramares Corporation v Touche (1931) 174 NE 441 at 444: a duty of care imposed only by reference to the criterion of foreseeability would expose the maker of the representation "to a liability in an indeterminate amount for an indeterminate time to an indeterminate class". An approach that upheld the existence of a duty of care to B where A relied on the representation to enter a particular transaction with B, the representor knowing of B's existence and the general nature of the proposed transaction, would fall well short of exposing representors to the risk described by Cardozo CJ; the class would be determinate, or at least determinable, and the amount and duration of the risk would be limited by the nature of the known transaction. The extent of liability in such a case would be no greater than if the representation had caused B, rather than A, to go ahead with the transaction; a situation clearly covered by the Hedley Byrne principle as developed in Australia by the cases discussed in Esanda.
Upon the formulation adopted by Toohey and Gaudron JJ in Esanda, there seems to be no difficulty in the Investors bringing their ABCOS claim within the Hedley Byrne principle. It will be recalled their Honours mentioned some of the matters not pleaded by Esanda and commented that, had one or more of them been pleaded, Esanda might have brought itself within the Hedley Byrne principle. Those matters included "that Peat Marwick knew that Esanda was proposing to enter into the transactions in question or, indeed, any transaction with Excel or its associated companies". In the present case Pulford knew syndicate members were proposing to enter into transactions with a financier, involving the creation of a horse-breeding venture using the horses the subject of his valuation; and the valuation was likely to be critical in determining whether that venture proceeded. Toohey and Gaudron JJ also said "it is not pleaded that Peat Marwick knew that [the relevant representation] would be communicated to Esanda or any other finance provider with respect to the obtaining of finance or for any other purpose". In the present case, Pulford knew his valuation would be - or, at least, might be - communicated to the prospective syndicate members. In fact, because of the shortness of time, it seems not to have been communicated to them individually before settlement. However, before the settlement that committed the syndicate members to the transaction, their representative, McDonald, knew a satisfactory valuation had been received from ABCOS. For his purposes a "satisfactory valuation" was one that valued the horses at a figure not less than $1,565,000. Documents in evidence show MANL required this as a condition of settlement. The requirement was spelled out in a number of documents; it is sufficient to refer to MANL's Credit Approval of 20 June 1989. The first of nine "pre-settlement conditions" was "Valuation of bloodstock to be addressed to MANL - Valued at $1,565,000. Acquisition cost $1,436,000".
The proposition that "proximity" in the pure economic loss context may exist otherwise than by reference to reliance on spoken or written words was recognised by the High Court in Hill v Van Erp (1997) 142 ALR 687, a case decided on the same day as Esanda. The Court held a solicitor retained to draw up and attend to execution of a will was in a relationship of proximity to an intended beneficiary under the will and therefore owed to that person a duty to exercise reasonable care and skill in executing the retainer. (The disposition in the will was ineffective because the testatrix's signing was attested by the spouse of the intended beneficiary.) The notion of proximity, in the same context, was recently discussed by a Full Court of this Court in Perre v Apand Pty Ltd, unreported, 21 November 1997.
Counsel for ABCOS say that, despite MANL's pre-settlement condition, it was not established at the trial that MANL in fact relied on the ABCOS valuation in deciding to proceed with the transaction. We will come to that issue later. Subject to that, it seems to us the relationship between ABCOS and the Investors was such as to impose upon ABCOS a duty of care towards the Investors in relation to the valuation.
However, counsel for ABCOS raised a further point in connection with the existence of a duty of care. It was not discussed in Davies J's principal Reasons for Judgment of 10 November 1995, but was dealt with in these terms in his Honour's supplementary Reasons of 23 February 1996:
"Counsel for ABCOS submitted that ABCOS had no duty of care to Mr Bailey, Mr Wall and Mr Mesh, as each had received a secret commission from Mr King, or to Mr Fraser, who had lent $60,000 to Mr McDonald and had been repaid $75,000, or to Mr Jones, whose first year's interest payment of $11,400 had been 'waived' by Mr McDonald. Counsel submitted that, if ABCOS had known of these benefits, ABCOS would not have given the valuation it did, Mr Pulford having believed that the values of the horses had been arrived at in a proper arm's length transaction.
...
In my view, commissions or benefits were not a factor which had any relevance to Mr Pulford's valuation or for that matter to the fixing of the value of the bloodstock as between Mr McDonald and Mr King. It seems to me to have been a matter of no concern to ABCOS that one or more of the investors entered into the syndicate on terms slightly different from the others. Mr Pulford made no enquiry about and received no information about the matter. Mr Pulford was requested to make 'an independent valuation for the finance company.' His task was to exercise due care and skill in the making of his valuation. This he failed to do.
Mr Pulford's undertaking of the task gave rise to a duty of care to those who would be likely to be adversely affected if he were negligent. Messrs Bailey, Wall, Mesh, Fraser and Jones were among the persons who were likely to be and were adversely affected by Mr Pulford's negligence."
Counsel for ABCOS point out neither ABCOS nor Pulford knew of the secret commissions and payments. They ask why a valuer would be expected to inquire regarding secret payments. They refer to Pulford's evidence that, if he had known the sales reflected in the briefing documents were not arm's length market transactions, he would either not have made valuations based on the invoices or would have spoken to his supervisor; and also to evidence that, if he had known of the payments, and the sale by Bester to King of "Plaisir D'Amour", he would not have undertaken the valuation. Counsel submitted:
"The omission to disclose to ABCOS a material fact (namely the secret payments) changed the relationship which existed between each of those persons and ABCOS, on the one hand, as against the other Investors and ABCOS, on the other hand. Each recipient of a secret payment not only had a cause to go into the venture which the other Investors did not have, but they also had information which any honest, let alone reasonable, person in their position would have regarded as material to the value of both the bloodstock and the investment.
The 'special' relationship of proximity was thus missing between all the Investors, or the recipients of the secret payments, and ABCOS. Indeed, it would be an affront to justice to allow these persons who took secret kick-backs or payments to sue a valuer who made an honest mistake. The same comments apply to their claims under s.52, which are equally unmeritorious. Alternatively, those Investors should be found to have been contributorily negligent."
The words "honest mistake" are hardly adequate to describe Pulford's handling of this valuation. But we agree it was not incumbent on Pulford to make inquiries about payments or discounts to syndicate members. He was not concerned with the arrangement between prospective members of the syndicate and its promoters; his job was to value the horses. For that purpose, it was necessary to ascertain whether the prices agreed between King and McDonald, of which he had details in the briefing documents, were negotiated at arm's length, and, if so, whether they could properly be taken as indicative of market value. If he was so satisfied, that was the end of the matter, so far as he was concerned. As we have observed, Pulford made no effort to carry out these tasks. Rather, at Bester's behest he simply rubber-stamped the total figure agreed between King and McDonald. We agree with the trial Judge that there is no substance in this submission.