Supreme Court of WA|2004-05-14|Before: Mr P, Hasluck J

Custom Credit Corporation Ltd v Dallas Development Corporation Pty Ltd & Ors [2004] WASC 92 (14 May 2004)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : CUSTOM CREDIT CORPORATION LTD -v- DALLAS DEVELOPMENT CORPORATION PTY LTD & ORS [2004] WASC 92

HEARD : 18-21, 24-27 FEBRUARY 2003, 4-5, 10-12, 15-19, 24-26 MARCH 2004

Trade Practices Act 1974 (Cth)- Mortgage debts - Plea of misleading and deceptive conduct raised in counterclaim - Whether mortgage debts should be set aside - Verbal misrepresentations allegedly made by financier concerning the provision of development funds - Whether borrower misled by silence - Alternative causes of action in contract and tort - Whether any or any sufficient causative connection between the conduct complained of and the alleged loss - Paucity of documentary and circumstantial evidence - Findings that verbal misrepresentations not made as alleged - Counterclaim dismissed - Judgment for plaintiff in respect of the mortgage debts - Turns on own facts

Akron Securities Ltd v Iliffe (1997) 41 NSWLR 353

Beach Petroleum NL v Johnson [1993] FCA 283; (1993) 43 FCR 1

Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64

Custom Credit Corporation Ltd v Ravi Nominees Pty Ltd (1992) WAR 42

Daniels (formerly practising as Deloitte Haskins & Sells) v Anderson (AWA case) (1995) 37 NSWLR 438

Hungerfords v Walker [1989] HCA 8; (1989) 171 CLR 125

I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2002] HCA 41; (2002) 210 CLR 109

Kimberley NZI Finance Ltd v Torero Pty Ltd (1989) ATPR ASC 55-943; (1989) ATPR 46054 FCA 27 July 1989

Verdell Pty Ltd v F&G Nominees Pty Ltd [2002] WASC 58(S)

Wardley Australia Ltd v State of Western Australia [1992] HCA 55; (1992) 175 CLR 514

1 The plaintiff, Custom Credit Corporation Ltd, seeks to recover debts said to be due under four mortgages executed by the first defendant, Dallas Development Corporation Pty Ltd, between 26 June 1989 and 1 May 1990. The second defendants have ceased to play any active part in the proceedings with the result that the claim is being defended by Dallas alone.

2 The principal witness for Dallas was the second defendant, Barry Daniel O'Rourke. He became a director of Dallas soon after the formation of the company but ceased to be so in 1986. Thereafter, he acted as the de facto manager of the company and in that capacity was involved in the events giving rise to the litigation.

3 It appears from the statement of claim that the debts said to be due to Custom Credit under the four mortgages in question amount in aggregate to $2,750,002.70 plus accrued interest. Dallas denies that it is indebted to Custom Credit in the amounts claimed. In essence, it contends that even if it is found to be liable to Custom Credit in the amounts claimed, or as to any other amounts, it is entitled to relief against such liability pursuant to the Dallas counterclaim.

4 I pause to say that with the passage of time the mortgage debts described in the pleadings have increased. The actual amounts now said to be due under each secured loan have been re-calculated by allowing interest at the high rates of interest applicable on a monthly cumulative basis as envisaged by the schedules to the mortgages, and then deducting any moneys received or obtained by way of mortgagee sales. Ms Lianne Noonan, a senior manager assisting the liquidator of Custom Credit, gave evidence that the total owed by Dallas to 30 April 2004 is $40,608,849.28.

5 It appears from the pleadings that Dallas admits the entry into the mortgage arrangements, the receipt of funds, and the making of demands for repayment under each mortgage, but the issue of default has not been admitted in each case.

6 Both parties recognise that the matter principally in controversy concerns certain misrepresentations which are alleged by Dallas to have been made by or on behalf of Custom Credit in mid-1989, and which are said to have brought about the loans to Dallas. It is said that Dallas was misled into acquiring property known in the proceedings as the Irwin property in exchange for land owned by Dallas known as the West Coast Highway land, to the ultimate detriment of Dallas (the "swap transaction"). Thus, as a consequence of pre-trial orders and directions, arrangements were made for the Dallas case to be presented first at trial.

7 The trial commenced in 2003 but had to be adjourned, part heard, because the eight days allowed for the hearing proved to be not sufficient. While the matter stood adjourned, Dallas applied to amend its counterclaim. That application, and a related application by Custom Credit to strike out the Dallas pleading and enter judgment, became the subject of a ruling by me as the trial Judge which is reflected in Custom Credit Corporation Ltd v Dallas Development Corporation Pty Ltd & Ors [2003] WASC 98. The reasons for decision given on that occasion should be read in conjunction with this judgment.

8 The Dallas application to amend was vigorously opposed. I will not repeat what I said on the prior occasion. However, in summary, I was persuaded that the proposed amendment did not change the Dallas counterclaim in any essential respect. I concluded that the four representations underlying the Dallas counterclaim, which were said to have been made in mid-1989, and the related causes of action relied upon by Dallas, remained the same. I was of the view that the amendments were directed to straightening out a rather confused position concerning the timing of certain events. I held that Dallas should be permitted to ensure that its pleadings conformed to the evidence given at the trial, bearing in mind that Custom Credit would have ample time to respond to the changed plea during the period of the adjournment. When the trial resumed arrangements were made for Mr O'Rourke to be recalled as a witness so that counsel for Custom Credit would have an opportunity to cross-examine him with respect to the amendments.

9 The trial resumed on 4 March 2004. The pleadings, including the amendments made on both sides as a consequence of the events I have just described, are now contained in a spiral bound volume comprising 73 pages described as "Further Re-Amended Papers for the Judge". I will treat this document as the operative point of reference and henceforth describe its various parts simply as the "statement of claim" or "statement of defence" or the "pleadings" as the case may be. I note in passing that the pleadings as they stood at the commencement of the trial were received into evidence at the resumption of the trial as Exhibit D57 and consist of a volume comprising 83 pages described as "Re-Amended Papers for the Judge". For ease of reference, I will call the latter volume the "original pleadings" or, as to various parts of the volume, the "original claim" or the "original defence and counterclaim" as the case may be.

10 Custom Credit contends that the amendments sought by Dallas should be brought to account in assessing the credibility of Mr O'Rourke and other witnesses for Dallas, notwithstanding my allowance of the amendments. I will return to this aspect of the matters in issue later.

11 It will be apparent from the narrative to this point that at the initial hearing of the trial in 2003 evidence was received from Mr O'Rourke and other witnesses for Dallas directed to the Dallas allegation that on or about 19 June 1989 it was induced to enter the swap transaction and related financing arrangements as a consequence of misrepresentations made by or on behalf of Custom Credit.

12 Put shortly, the Dallas case is that it wished to obtain finance from Custom Credit in order to proceed with certain land development projects that had the potential to produce substantial profits. The misrepresentations which are said to have induced Dallas to enter the swap transaction were allegedly made in the course of conversations between Mr O'Rourke and Mr Phil Lewis, a senior officer of Custom Credit. Dallas pleads also that at the relevant time Mr Lewis failed to disclose that he had an interest in the swap transaction resulting from his prior association with the vendor of the Irwin property.

13 Dallas contends that the swap transaction and related events, including an alleged failure by Custom Credit to provide certain funds, prevented Dallas from proceeding with its development projects and meeting its commitments under the mortgages. The Dallas counterclaim therefore reflects a claim for damages based upon loss of opportunity and loss of profits.

14 It follows from this overview that it will be useful to begin by looking at the background to the dispute and at the events leading up to the swap transaction in mid-1989. The sequence of the relevant events is important. The financial considerations bearing upon the respective positions of the parties are important too. There was a good deal of evidence to the effect that after the share crash in 1987 the demand for property was strong, property developers such as Dallas were active in the marketplace, notwithstanding high interest rates, and finance companies such as Custom Credit were vigorously in pursuit of new business. It seems to have been an era in which all those with an interest in land development were willing to take risks.

15 Two of the valuers called by Dallas, namely, Mr Keith Collins and Mr Richard Marr, gave evidence to this effect. The valuer called by Custom Credit, Mr Kennedy, said this at page 7 of his report concerning the West Coast Highway land (P56 @ 9/3134):

"Property values increased dramatically in the late 1980's and developers were key players in this market phase. Funding was relatively easy to obtain and purchasers were ever present. With all players of the property development process participating readily, (developers, financiers, purchasers) the market built up this momentum. Early signs of a market correction began to emerge in mid 1989 as some of the financiers began to show concern at their exposure. The extent of the over development and risk profile did not become obvious to the wider market place until probably very early 1990. The concern was not limited to the office market and it was not long before the market momentum began to correct itself. Residential unit developments were another segment of the market to feel the effects of this change. Once the end users (purchasers/tenants) of property withdrew, the effect of high carrying costs quickly took their toll and financiers began to react."

16 Having regard to the mood of the era, I must keep steadily in mind that the misrepresentations complained of are not said to have been set out expressly in written form. They are said to have been made verbally at various meetings. Accordingly, it becomes necessary to give careful consideration to the credibility of the principal witnesses and to the circumstances giving rise to the swap transaction. This will assist me in determining whether the verbal statements complained of were made by Mr Lewis as alleged, and, if so, whether they in fact caused the losses referred to in the Dallas counterclaim.

17 Dallas was formed in 1985. It was established to facilitate construction, development and joint ventures. It was the parent company to Dynasty Constructions Pty Ltd and was involved in various developments within the metropolitan area of Perth. I noted in earlier discussion that at all material times Mr O'Rourke appears to have acted as the de facto manager of the company. Directors of Dallas included Mr O'Rourke's son-in-law, Gordon Carruthers, and his daughter, Suzanne Carruthers.

18 It is apparent from a Trust Deed dated 7 July 1986 that Dallas undertook to act as the trustee of a trust described as the "Dallas Constructions Unit Trust". It follows that the various properties acquired by Dallas were acquired in its capacity as a trustee company and were held for and on behalf of the Trust.

19 The financial statements of Dallas were prepared under the supervision of Mr Con van Mannen who at that time was a partner in the firm Ernst & Young, Chartered Accountants. He said in evidence that the first financial statement for the company was the statement for the year ending 30 June 1987 (Exhibit D68 @ 8/2776). Dallas received no income during that year and did not hold any significant assets. The financial statement for the year ending 30 June 1988 (Exhibit D69 @ 8/2794-2803) show total assets of $467,081. The total current liabilities amounted to $464,048.

20 The financial statements for the year ended 30 June 1989 (Exhibit D29 @ 8/2814-2823) depict a significant increase in the activities of the company. The income of the company is said to be $155,449 derived principally from development profit and profit on sale of land. The loss before income tax is described as $237,355. The total current assets are described as $4,298,192. The total current liabilities are given as $4,685,885.

21 Note 4 to the accounts, being an inventory of properties held by Dallas as at 30 June 1989, shows that during the financial year 1989 the company added to its land holding known as St Michaels various other land holdings. I will turn to the details of these acquisitions in a moment. However, I note in passing that in the course of his evidence at the resumed trial the accountant Mr van Mannen said that the figures presented in Note 4 were derived from information obtained from Dallas and represented the amount of money spent by Dallas on the various land projects up to 30 June 1989.

22 In the course of cross-examination, counsel for Custom Credit put to Mr van Mannen that on one view of the matter it might be suggested that Dallas was insolvent as at 30 June 1989 in that its current liabilities of $4,685,885 exceeded its total current assets of $4,298,192 by $234,598. Mr van Mannen said that this was not necessarily so as arrangements could have been made to cover the outgoings of the company. He did not have sufficient information before him to address such an issue. However, he agreed that the financial statement revealed a ten-fold increase from total current liabilities of $464,048 in 1988 to $4,685,885 in 1989. This was accompanied by a significant increase in the assets of the company.

23 Mr van Mannen was referred also to the financial statements of Dallas for six months to 31 December 1989 (Exhibit D30 @ 8/2826). He said that these accounts must have been brought into existence pursuant to the express instructions of the client. Note 1 to the accounts declared that there had been a change in accounting policies in respect of valuation of completed developments and land held for developments. At the end of June 1989 the developments and land were stated in the accounts at cost. At the end of December 1989 the developments and land were stated in the accounts at sworn valuation. The increase in value of the developments and land had been brought to account as income.

24 I pause to note that the operating profit at 31 December is said to be $2,945,711. However, it is apparent that the figure for expenses of $669,573 exceeds the total income of the company from sources other than the large figure attributed to "increased value of developments" pursuant to the changed accounting policies.

25 The total current assets are said to be $9,264,505 which is largely comprised of the figure $8,971,316 attributed to "Inventories". The total current liabilities are said to be $6,601,168 giving rise to a figure for net assets of $2,711,113.

26 Note 4 to the financial statements concerning "Inventories" reads as follows:

27 Mr van Mannen also adduced in evidence financial statements for the year ended 30 June 1990 (Exhibit D31 @ 8/2849). The change in accounting policies noted in the preceding financial statements continued to apply. The total expenses of $1,541,335 included an item of $1,318,009 in respect of interest (which can usefully be contrasted with the sum of $258,623 in respect of interest in the preceding year). The list of secured loans forming part of the current liabilities included Esanda $2,236,645, Custom Credit $2,615,841 and Beneficial Finance $2,176,406.

28 These accounts leave an impression that, subject to the effect of any capitalisation of interest clauses within the documentation evidencing borrowings, Dallas had to complete its various development projects promptly and take advantage of a steady demand for the marketable properties thus produced, in order to meet its commitments.

29 It will now be useful to look at the acquisition of the properties mentioned in the "Inventories" item and the way in which certain values came to be attributed to them. Information of this kind will assist an understanding of the financial arrangements that Dallas made with Custom Credit in mid-1989 and of the events giving rise to the controversial swap transaction.

30 In September 1987 Dallas purchased land known as the St Michaels land for $360,000. Approval was given by the local authority to construct 34 quality units in four stages (D10 @ 1/355). The site situated at 220 Fairway Circle, overlooked the Joondalup Country Club and was intended to be a prestigious estate for quality dwellings. It seems that on or about 18 March 1988 Esanda approved a loan of $400,000 to complete the purchase.

31 It seems that with financing from Esanda, Dallas proceeded with development work during 1988 and in early 1989. According to the accountant, Mr van Mannen, the figure of $2,326,894 attributed to the land in the Dallas accounts for the year ended 30 June 1989 was arrived at by calculating the amount expended on the land prior to the end of that financial year.

32 It appears from a Dallas letter to Custom Credit dated 18 May 1989 (D10 @ 1/355) that at that time the final stage was "now 70% complete". Dallas wished to re-finance the remaining unsold units in Stages 1 and 2 which were said to comprise units in Stage 1 (2 type B units) and Stage 2 (4 type B units and 6 type C units). On the Dallas case, the approval of this proposal by Custom Credit set the scene for the swap transaction.

33 I note in passing that the St Michaels project became the subject of a valuation by Mr Richard Marr and Mr K J Collins of Hillier Parker dated 19 June 1989 at about the time of the swap transaction (D22 @ 2/711).

34 By an offer and acceptance dated 15 June 1988 Dallas contracted to purchase the property known as the St Andrews land, being Lot 530 Fairway Circle, Connolly, for the sum of $400,000 (D11 @ 10/54). The registered proprietor of the subject land was the Joondalup Development Corporation. Dallas had in mind to establish 22 (later 29) residential units upon the land but finalisation of the purchase remained in abeyance while the vendor Corporation completed road works and other facilities in the area. The contract in question was subject to special conditions whereby development of the land was to be effected in accordance with restrictive covenants. The settlement date was given as 1 March 1989.

35 The Dallas entry into the swap transaction in mid-1989 was prompted to some extent by a need to obtain funds to complete the purchase of the St Andrews land. The land was transferred into the name of Dallas by Transfer E154844 on 21 July 1989 that is, about one month after the swap transaction. The transfer was accompanied by Mortgage E154845 (P9 @ 2/749) in favour of Custom Credit to secure an advance of $1,440,000 being the advance that permitted Dallas to complete the swap transaction. This advance was secured also by a Custom Credit mortgage affecting the Irwin property.

36 I note in passing that it was a matter in controversy at the trial as to whether the misrepresentations complained of included an assertion by Mr Lewis on behalf of Custom Credit that, if Dallas entered into the swap transaction, funds would be provided to Dallas not only to complete the purchase of the St Andrews land but also to proceed with development work. This gave rise to an evidentiary issue as to whether Dallas was in a position to proceed with such work as soon as the swap transaction was carried into effect.

37 I will return to this issue in due course. In essence, Dallas contended that a 22 unit scheme designed by its architect, Ian Howard of Woodhead Australia, was ready to go to tender in or about May 1989. Further, a feasibility study concerning the St Andrews land was supplied to Mr Lewis of Custom Credit by Dallas shortly before the misrepresentations complained of were made. Dallas alleged that Custom Credit failed to provide the funds promised for development work at the St Andrews site.

38 The Shenton Shopping Centre land (Lot 851 Shenton Avenue) was acquired by Dallas from the Joondalup Corporation at a price of $300,000 pursuant to an offer and acceptance form dated 2 September 1988 (P93 @ 1/163). The form was not signed by or on behalf of the Joondalup Corporation but it was common ground that its acceptance of the Dallas offer was effected by a letter dated 12 October 1988 with the result that a binding contract was brought into existence (P94 @ 1/215). Settlement was made subject to certain approvals being obtained.

39 There is a valuation from Mr K J Collins of Hillier Parker concerning this land dated 27 October 1989 (P37 @ 4/1056). It is described at that date as vacant land upon which it is proposed to build a local shopping centre. The land value was said to be $815,000 and the estimate of value on completion of the shopping centre was said to be $2,250,000. These figures were cited in a letter from Beneficial Finance to Dallas dated 24 November 1989 whereby the finance company approved an advance to pay out the existing finance owing to Esanda and the ANZ Bank and for construction of 8 rental units with provision for capitalisation of interest (P60 @ 4/1120).

40 I note in passing that at about this time, by an offer and acceptance form dated 30 November 1989, Mr Collins and Mr Marr of Hillier Parker offered to purchase the land for $2,200,000 with settlement to be within 14 days of a strata plan being in order for dealing, that is, after the development was completed (P54 not in the agreed bundle). The proposed transaction did not proceed further.

41 By an offer and acceptance dated 14 January 1989 Dallas contracted to purchase from St Ives Development Pty Ltd Lots 2, 254 and 255 West Coast Highway, Scarborough for the sum of $950,000 (D13 @ 1/230). The contract provided for plans and specifications (with approval from all relevant authorities) for the construction of 36 units upon the land to be supplied by the vendor on acceptance of the offer at no cost to the purchaser.

42 The land was transferred into the name of Dallas pursuant to a transfer of land dated 3 April 1989 (P95 @ 1/323). A mortgage to Perpetual Finance Corporation Ltd to secure $1,000,000 was registered on 4 April 1989.

43 Mr O'Rourke said in evidence that Dallas acquired the land with a view to establishing residential units upon the land but Dallas was open to offers. Indeed, as appears from an exclusive authority to sell dated 16 March 1989 signed by Mr O'Rourke (P24 @ 1/245) it appears that Satterley Real Estate was instructed to place the property on the market for sale at a price of $1,500,000, that is, prior to the land being transferred into the name of Dallas.

44 A short time later an offer to purchase the site at a price of $1,100,000 was received from a prospective purchaser named Adam Zencich (D15 @ 1/331). Mr O'Rourke amended the proposed price to $1,300,000 and arranged for the common seal of Dallas to be affixed to the form denoting the willingness of Dallas to accept an offer at that figure. However, in the event, it seems that this counter offer was not acceptable to the prospective purchaser and nothing came of the negotiations. As at mid-1989 the land was unimproved and remains unimproved to the present day.

45 I note in passing that the West Coast Highway land is described in the Note 4 Inventories item in the 30 June 1989 Dallas accounts as "Horizons at Scarborough". A value of $1,003,207 is attributed to the land being the purchase price of $950,000 paid by Dallas and some incidental expenses.

46 Five months after contracting to purchase the West Coast Highway land Dallas exchanged the land for the Irwin property pursuant to the swap transaction in the circumstances I will come to shortly. For the moment, it is sufficient to note that settlement pursuant to the swap transaction had not been effected prior to 30 June 1989 and for that reason, presumably, the West Coast Highway land was included in the Note 4 Inventories item as an asset of Dallas as at 30 June 1989. As we shall see, settlement pursuant to the swap transaction was in fact effected on 31 August 1989, with the result that thereafter the West Coast Highway land does not appear in the Dallas financial statements.

47 On 19 May 1989 Dallas submitted an offer to the agents representing Joondalup Development Corporation to acquire two hectares of land approved for use by the Corporation as a retirement village/nursing home complex. The purchase price specified in the offer was $750,000 payable by a deposit of $37,500 with the balance to be paid on settlement. The offer was accepted by the Corporation on 2 June 1989 upon the basis that the vendor would undertake to subdivide the land and create the proposed lot as soon as possible with settlement to be effected seven days after availability of title. The consequence of this was that the value attributed to this land in the Note 4 Inventories item in the 30 June 1989 accounts was $37,500 representing the value of the deposit.

48 There were two other properties mentioned in the Note 4 Inventories item in the 30 June 1989 Dallas accounts, namely, Irwin Chambers valued at $10,000 and Wittenoom Place valued at $188,706. The Irwin property was the property acquired by Dallas in exchange for the West Coast Highway land. I will come to the details in that regard shortly. The Wittenoom Place land can be put to one side for the time being as it does not have an immediate relevance to the representations complained of by Dallas in its defence and counterclaim or to the swap transaction.

49 It emerges, then, from the narrative to this point that as at mid-1989 Dallas had acquired or contracted to acquire a number of properties in a comparatively short period of time and needed to proceed with development of the same in order to meet its commitments. It owed $1,000,000 to Perpetual Finance in respect of the West Coast Highway land. It was looking for finance to proceed further with the development of the St Michaels land. In addition, it required finance to complete the purchase of the St Andrews land and to proceed with the development of that land. The existing loans were subject to high rates of interest. The only way in which Dallas could fund development work was via "construction loans" whereby advances were made as work progressed and the value of the land serving as security increased.

50 It was against this background, on the Dallas case, that Mr O'Rourke commenced to deal with Custom Credit. Accordingly, it will be useful to look briefly at the situation of that company as at mid-1989.

51 Custom Credit was incorporated in the State of New South Wales and as at mid-1989 was carrying on business in Western Australia as a financier. At the trial Custom Credit led evidence from James Bonwick, who was employed by the company as National Manager Property Finance between 1987 and 1992. I am satisfied, and so find, that his evidence comprised a reliable account of the way in which Custom Credit conducted its business at that time.

52 Normal procedure for the approval of finance applications at Custom Credit would begin with potential borrowers making an application for finance. The application would then be the subject of a written assessment document produced by a lending officer and a property finance manager and, if viewed favourably, recommended to the State Manager for approval.

53 Up to September 1988, Custom Credit State Managers had authority under lending guidelines to approve loans, at their discretion, up to a limit of $1,000,000 to any client group. From September 1988 the limit was increased to $3,000,000. If a loan application exceeded the limit placed on State Managers, the procedure was for the State Manager to recommend the application and forward it to the Head Office of Custom Credit in Sydney for approval.

54 Applications for finance were prepared by the local lending officer and a property finance manager for submission to the State Manager. They were if necessary, forwarded to Sydney Head Office, depending on the amount of the application. At Head Office, either Mr Bonwick or someone in authority would consider the application and either approve or reject it or seek more information. In most cases Mr Bonwick would accept and rely on all the facts as presented on the document.

55 The policy manual of Custom Credit contained, at the time, words providing that if an employee of Custom Credit held a personal interest or was personally involved with an application for a loan from Custom Credit, this should be fully disclosed. It was the responsibility of the local State Manager to communicate this policy to the personnel within the local office.

56 As at 1988 and 1989, Property Finance Managers of Custom Credit had no authority on their own to grant or approve loans, or to commit Custom Credit to any lending transaction. They were responsible for dealing with customers and for putting together loan applications that would then go through internal lending procedures leading in the end, either to approval or rejection of a proposed loan.

57 According to Mr Bonwick, Custom Credit did not prescribe the type of property applicants for finance needed to own or acquire in order to obtain finance. Custom Credit was a finance company which was in the business of lending funds. It was not a property valuation company. It was not qualified to offer property valuation advice to its clients. It employed specialist outside consultants to perform those tasks. Hillier Parker was on Custom Credit's panel of valuers in Perth at the time. When an applicant applied for finance, internal policy was for Custom Credit to nominate or engage one of the panel members, based on criteria such as availability and experience for the particular property to perform the task.

58 The State Manager of Custom Credit in Western Australia as at mid-1989 was Mr Graham Exton. He left in June 1989 and was replaced by Mr Jim Richards. One of the latter's colleagues was Mr Phillip Lewis who held the position of Senior Property Finance Manager, having been with the company since 1981. At a crucial moment in June 1989, while Mr Richards was on leave, Mr Lewis served as Acting State Manager.

59 I pause to say that Mr Lewis had a brother-in-law in the property business in Perth at this time, namely, Mr Brian Conway. It was a keenly contested issue as to whether Lewis, by reason of his association with Conway, and another businessman, Philip Simcock, and additionally, by reason of his association with two companies - Westminster Properties Pty Ltd and Telbe Pty Ltd - had a financial interest in the Irwin property at the time of the swap transaction. I will address this issue in due course. For the moment, it will be sufficient to say that, on his own account at trial, Lewis did not mention any of these associations to O'Rourke.

60 Another Custom Credit officer at the relevant time was Simon Adams. He was employed by Custom Credit as a Lending Officer after graduating from Edith Cowan University. As at mid-1989 he was 23 years of age and been in the position of Lending Officer for about 12 months. He dealt with Dallas in this capacity initially but in mid-1989 he was promoted to Property Finance Manager. He signed certain documents concerning the St Andrews/Irwin loan to Dallas in the latter capacity.

61 It appears to be common ground that by mid-1989 Mr O'Rourke and Mr Lewis were known to each other to some extent. Mr Lewis said that he first met Mr O'Rourke in 1987 at a lunch to welcome Mr Exton to Perth. It is a matter of controversy as to the nature and frequency of their meetings and communications but I am prepared to accept that there was a relationship of sorts between them. This probably had a bearing on Mr O'Rourke's decision to approach Custom Credit with a view to obtaining finance.

62 I note in passing that at the trial Mr Lewis steadfastly denied that he was close to Mr O'Rourke. He said that to the best of his recollection Mr Adams handled the Dallas loan requirements. However, it was common ground at the trial that on 13 June 1989 Mr O'Rourke, Mr Exton and Mr Lewis were together at the Joondalup Golf Course. On that day Channel 9 put to air a story about Mr O'Rourke taking possession of a new kind of golf buggy. The relevant footage includes a glimpse of the three men having a look at the new buggy at the Joondalup Golf Course on what appears to be a social occasion. They are dressed in casual attire.

63 Mr O'Rourke was the principal witness for Dallas at the trial of the action. He submitted a witness statement (D35) and supplementary witness statement (D36) to the Court, and gave verbal evidence concerning the events described in his statement. He was cross-examined at considerable length.

64 Mr Lewis submitted a witness statement to the Court (P89), and gave verbal evidence. He was cross-examined at length. Custom Credit led evidence also from Mr Simon Adams who spoke of his role as a Property Lending Officer, and of his later association with Dallas as a Property Finance Manager. He submitted a witness statement (P70).

65 For the time being, I will put to one side the differences between the principal witnesses concerning the matters in contention and endeavour to set out the sequence of events bearing upon the present dispute having regard to the contemporaneous documents and the pleadings. This will be of assistance in understanding and narrowing the issues reflected in the pleadings. I will turn to the evidence of the principal witnesses concerning the misrepresentations complained of in due course.

66 By letter dated 18 May 1989 Dallas applied to the Business Development Manager of Custom Credit for a loan of $1,560,000 to assist with the refinancing of Stages 1 and 2 of the St Michaels development. In addition, the loan would be used to provide a working capital advance and to make provision for interest during the selling period. The letter was signed by Mr O'Rourke's son-in-law, Mr Carruthers, who was a director of Dallas (D10 @ 1/355).

67 The D10 letter says that in September 1987 Dallas contracted to purchase the St Michael' site. As I noted in earlier discussion, the letter went on to say that approval was given by the local authority to construct 34 quality home units in four stages. The final stage was now 70 per cent complete. The letter said further that the project had been financed to date by Esanda but Dallas now wished to refinance 12 unsold units in Stages 1 and 2.

68 The request was for $1,560,000 of which $1,000,000 would be to refinance existing borrowings, $404,000 was to be advanced progressively as and when required, and $156,000 was to be advanced progressively for interest. The amount of $156,000 contained within the advance was to support the loan during the selling period. As to repayment of principal, it was said the loan would be repaid from the sale proceeds of the individual strata title units.

69 The next significant document is a letter from Custom Credit to Dallas dated 6 June 1989 confirming that Custom Credit was willing to approve a loan of $1,460,000 in respect of the St Michaels land (D47 @ 1/380). The adjustment downwards from the figure of $1,560,000 applied for to the figure of $1,460,000 granted suggests that the application became the subject of discussion.

70 Custom Credit approved the loan of $1,460,000 for a term of 6 months to be secured over 12 strata title units forming part of the St Michaels land. $1,000,000 was to be advanced at settlement with $300,000 to follow progressively on pre-sale of four units. The balance of the loan was to be applied to an interest capitalisation facility.

71 The application for finance prepared internally by Custom Credit was approved on 16 June 1989 (D71 @ 2/430). It is significant that the typewritten figure of $1,560,000 has been altered by hand to become the sum of $1,460,000, being the figure the subject of the approval letter dated 6 June 1989. There are other features of the St Michael's D71 loan application which invite comment.

72 The application is said to be for a "progressive bridging" loan. The loan is to be secured against the St Michaels land with the land value to be confirmed by a panel valuer. The rate of interest is 20.50 per cent with a penalty rate of 22.50 per cent. The author of the document refers to the applicant (Dallas) having approached Custom Credit to refinance Stage 2 of the St Michaels project so that Dallas can use the funds from the current financier, Esanda, for other development projects. The form notes that Mr O'Rourke has had more than 15 years experience in the property development market. Dallas has plans "to build a suburban shopping centre and retirement village located opposite the current Joondalup Shire Offices and a luxury residential complex on the perimeter of the Joondalup Golf Course".

73 It appears from the form that the St Michaels D71 loan application was signed, and thus recommended for approval, by the Lending Officer, Simon Adams, on 15 June 1989, and by the Senior Property Finance Manager, Philip Lewis on 16 June 1989. It was signed, and thus approved, by the State Manager of Custom Credit, Graham Exton, on 16 June 1989.

74 In effect, the St Michaels' loan approval represented a partial refinancing of the project previously financed by Esanda. The loan by Custom Credit was carried into effect in due course by Mortgage E142583 which purports to have been signed on 26 June 1989. This was known in the pleadings as "the third mortgage" (P5 @ 2/510).

75 It seems that at about this time, in June 1989, Dallas formed a view that it would be useful to acquire a commercial property in the Central Business District of Perth. It was a matter of acute controversy between the parties at the trial as to how this notion came into being. The representations allegedly made by Mr Lewis are relevant to this issue. Again, for the time being, I will begin by looking simply at the relevant documents and the sequence of events.

76 It is a matter of undisputed fact that by an offer and acceptance dated 19 June 1989 Dallas contracted to purchase the strata title to floor three of an office block known as Irwin Chambers in the CBD of Perth. The price paid for the Irwin property was $1,475,000. The relevant offer and acceptance (D20 @ 2/503) was prepared by a real estate agent, Malcolm Dempsey, who at that time was employed by Satterley Real Estate. I note in passing that the offer and acceptance prepared by Mr Dempsey refers to all carpets and lightings "as inspected 19 June 1989". This note in Mr Dempsey's hand is cogent evidence that the inspection and the signing of the contract took place on 19 June 1989.

77 On the same day, the vendor of the Irwin property, Westminster Holdings Pty Ltd, contracted to purchase the West Coast Highway land from Dallas for the same price, namely, $1,475,000 (D21 @ 2/505).

78 In effect, the two vendor companies, Westminster and Dallas, had agreed to swap their respective pieces of land. The offer in each case was described as a cash offer and settlement was to be effected two months later. For ease of reference, I have described the making of these two contracts on 19 June 1989 as the "swap transaction".

79 It follows from earlier discussion that Dallas was obliged to obtain funding from Custom Credit in order to complete the swap transaction, for, as I have noted, the West Coast Highway land was subject to a mortgage to Perpetual Finance. Further, Dallas was looking for finance at this stage in order to complete its purchase of the St Andrews land. On the Dallas case at trial, Dallas was also looking for funds to proceed with development work at the St Andrews site.

80 On this occasion (unlike the Dallas application for the St Michaels loan per the D10 letter dated 18 May 1989) there is no initial letter from Dallas setting out its wish to obtain finance in order to complete the swap transaction, or for any related purpose. This suggests that the Dallas requirements were the subject of discussions between Mr O'Rourke and one or more officers of Custom Credit. The most likely candidates in that regard were the Lending Officer, Mr Adams, or his superior, Mr Lewis, or both.

81 It is an undisputed fact that on 20 July 1989 an application for finance by Dallas as reflected on the assessment form prepared in-house by Custom Credit was approved by Mr Lewis in his capacity as the Acting State Manager. It allowed for a loan to Dallas of $1,540,000 (P83 @ 2/739).

82 I pause to observe that the St Andrews/Irwin P83 loan application was undoubtedly prepared in-house by officers of Custom Credit, but it was a matter of acute controversy as to who played the leading role in that regard. It was a matter of controversy also as to what discussions (if any) preceded the preparation of the loan application, who was involved in such discussions, and as to when and where they took place. The Dallas case at trial was that the relevant discussions occurred before Dallas entered the swap transaction and that, in every respect, Mr Lewis was the principal spokesman on the Custom Credit side. I will come back to these issues later.

83 In the meantime, it will be useful to look at certain features of the St Andrews/Irwin P83 loan application which have a bearing upon the swap transaction.

84 The loan is described as a "progressive bridging loan". Reference is made to an existing indebtedness of $1,460,000 (being the earlier St Michaels' loan). One notices immediately that the two loans amount to $3,000,000 in all, with the result that the $3,000,000 limit applicable to the Perth branch of Custom Credit was not exceeded. The application refers to a Hillier Parker valuation dated 27 June 1989 in respect of the St Andrews land and to a valuation from the same firm dated 12 July 1989 in respect of the Irwin property.

85 The purpose of the funding is said to be to assist Dallas with the purchase of a group housing site and a strata titled office space at the 3rd floor of Irwin Chambers. Elsewhere, under the heading "Preamble", being a section in which the background to the application is described, the author of the document says that: "an application for development funds will be forwarded in due course".

86 It is said that the Irwin property "will be held as a long term investment". A project feasibility for the St Andrews land is included, in which the realisable value of the land is said to be $1,500,000, with other comments suggesting that this is in respect of a 22 unit project. It is said that the Custom Credit debt will be financed at the end of the term by institutional finance or "by sale of the completed unit project".

87 The form was signed, and thus recommended for approval, by Simon Adams (as Property Finance Manager) on 20 July 1989; and signed, and thus approved by Philip Lewis (as Acting State Manager) on the same date.

88 The St Andrews/Irwin loan was secured by Mortgage E154845 as to the St Andrews land (P9 @ 2/749). At par 5 of the statement of claim, the mortgage concerning the St Andrews land was called "the first mortgage", notwithstanding that the subject loan was applied for after the St Michaels loan. The St Andrews/Irwin loan was secured also by Mortgage E182823 ("the second mortgage") as to the Irwin property (P10 @ 3/765). Both mortgages purport to have been signed on 20 July 1989, that is, the day on which the loan was approved.

89 The formal letter of approval to Dallas concerning the St Andrews/Irwin loan is dated 26 July 1989 (D3 @ 3/782). The Custom Credit letter is said to have been signed on behalf of Dallas at the offices of Custom Credit. The letter suggests that the loan funds of $1,440,000 will be used to pay the amount required for Dallas to complete the purchase of the St Andrews land ($530,000) and to discharge the amount owed by Dallas to Perpetual Finance in respect of the West Coast Highway land so that Dallas can complete the swap transaction ($760,000). The balance will be applied as a security deposit to cover interest ($150,000). There is no mention of funds for development of the St Andrews land.

90 The nature of the discussions between Mr O'Rourke for Dallas and Mr Lewis for Custom Credit concerning the swap transaction and related matters is at the heart of the controversy between the parties. It will be of assistance in assessing what was said and done to look at the values attributed to the principal pieces of land in mid-1989.

91 The St Michaels D71 loan application by Dallas, which was approved by Mr Exton on 16 June 1989, attributed a value of $1,950,000 to the subject land. This was to be confirmed by Custom Credit's panel valuer.

92 It seems that the Custom Credit Finance Manager engaged Hillier Parker to provide a formal valuation. The Hillier Parker St Michaels' valuation (D22 @ 2/453) is dated 19 June 1989 and was signed by Mr Richard Marr, the senior valuer at Hillier Parker, and his colleague, Mr Keith Collins, of that firm. It appears from the valuation that it relates to twelve strata lots, being Lots 17 - 19.

93 This valuation was clearly brought into existence in response to the Dallas application for refinancing in respect of the St Michaels land. The valuers purport to assign a value to the land upon completion of the 12 units in question, but without specifying the comparable sales evidence. They assign values to the units ranging from $143,000 to $168,000 which produces a total value of $1,878,250 (being slightly less than the value attributed to the land in the application form).

94 I remind myself that the St Andrews/Irwin P83 loan application approved by Mr Lewis on 20 July 1989 refers expressly to Hillier Parker valuations in respect of each piece of land. On this occasion, each of the valuations is said to have been prepared under instructions from Dallas.

95 The Hillier Parker valuation of the St Andrews land is dated 27 June 1989 and was therefore finalised 8 days after the signing of the contracts comprising the swap transaction on 19 June 1989. The valuation was signed by Mr Collins of that firm (P7 @ 2/528). He referred to a lack of comparable sales but fixed the value of the St Andrews land at $1,500,000. I pause briefly to remind myself that Dallas had contracted to purchase the land twelve months earlier for $400,000 and settlement of the transaction, as at 27 June 1989, had not yet been effected. No development work had taken place on the land.

96 The Hillier Parker valuation of the Irwin property is dated 12 July 1989 and was signed by Mr Loughnan of that firm (D19 @ 2/652). He referred to the potential of the property as a site for serviced offices. He assessed the value of the property at $1,530,000.

97 The effect of the swap transaction was to attribute a value of $1,475,000 to each of the Irwin property and the West Coast Highway land. It will be recalled that the West Coast Highway land had been purchased by Dallas about five months earlier for $950,000. Accordingly, it might be said that if the Irwin property being obtained by Dallas in exchange for the West Coast Highway land was worth the figure of $1,530,000 assigned to it by Hillier Parker, or even was worth the contracted price of $1,475,000 attributed to it for the purpose of the swap transaction, then Dallas had obtained a significant windfall.

98 However, I am conscious that care must be exercised in weighing up the pros and cons of the swap transaction. The three Hillier Parker valuations, and the value attributed to the West Coast Highway land by the swap transaction, leave an impression that the parties were inclined to talk about land values in general terms, and to be guided by estimates rather than valuations based on comparable sales evidence.

99 I have noted that by letter dated 26 July 1989 Custom Credit confirmed approval in principle of a loan to Dallas of $1,440,000 on the security of the St Andrews land and the Irwin property for a period of twelve months (D3 @ 3/782). The letter indicates that of the amount in question $530,000 was to be applied to completing the purchase of the St Andrews land and $760,000 was to be used in paying out Perpetual Finance. The latter payment meant that Dallas would be able to discharge the mortgage on the West Coast Highway land and complete the swap transaction. Dallas would finish up as the registered proprietor of both the St Andrews land and the Irwin property.

100 I have noted that the overall advance of $1,440,000 was secured by Mortgage E154845 dated and stamped 20 July 1989 affecting the St Andrews land (P9 @ 2/749). This is described in the pleadings as the first mortgage. The advance was secured also by Mortgage E182823 dated 20 July 1989 (the second mortgage) affecting the Irwin property (P10 @ 3/765).

101 These mortgages were duly registered. The relevant payments were made by Custom Credit via the St Andrews/Irwin account 15644025345. The account created earlier in time in respect of the third mortgage was described in the books of Custom Credit as the St Michaels account 156445025244.

102 The funding arrangements with Custom Credit enabled Dallas to complete the purchase of the St Andrews land from the Joondalup Development Corporation. Settlement was effected on 21 July 1989. Dallas became the registered proprietor of the subject land.

103 Settlement pursuant to the two offer and acceptances dated 19 June 1989 comprising the swap transaction was effected on 31 August 1989. Thereafter, Dallas became the registered proprietor of the office premises comprising the Irwin property.

104 I pause briefly at this point to touch on a matter that gave rise to a good deal of controversy at the trial, namely, a further payment made by Custom Credit to Dallas in the sum of $500,000.

105 The misrepresentations complained of are said by Dallas to have included an undertaking that Custom Credit would provide funds for the development of the St Andrews land. I observed in earlier discussion that the purpose of the St Andrews/Irwin P83 loan application was described on the form as being to assist Dallas with the purchase of the St Andrews land and the Irwin property, although, elsewhere in the form, it was said that "an application for development funds would be forwarded in due course".

106 Mr O'Rourke gave evidence to the effect (at par 68 of his witness statement) that he understood the St Andrews/Irwin P83 loan application extended to development funds for St Andrews. When he attended at Custom Credit with his daughter, Suzanne Carruthers, to sign the D3 approval letter evidencing the loan arrangements dated 26 July 1989 (D3 @ 3/782), he was disconcerted to find that provision had been made for $1,440,000 only being $530,000 to complete the purchase of the St Andrews land, $760,000 to pay out Perpetual Finance with respect to the West Coast Highway land, and $150,000 to secure the payment of interest. The letter made no mention of development funds for St Andrews.

107 Mr O'Rourke said in evidence that he spoke to Mr Lewis about this at the time and was told that it was just an error and would be fixed up. Mr O'Rourke said that on the basis of this assurance the loan documents were signed and he guaranteed the arrangements on behalf of Dallas.

108 I pause here to say that in the agreed bundle at trial there was another letter from Custom Credit bearing upon these events which was dated 27 July 1989, that is, the day after the D3 approval letter (D75 @ 3/791). Both letters were signed by Simon Adams in his new role as Property Finance Manager.

109 Unlike the 26 July D3 approval letter, the 27 July letter bears a date stamp which suggests that it was received by Dallas on 2 August 1989. The 27 July letter opens with a reference to St Michaels, St Andrews and Irwin Chambers and commences by saying:

"Please find enclosed approval letters for the advances provided on the above projects which we require you to sign and return one copy."

110 The letter goes on to say that funds distributed to date from the St Michaels account (account number 156445025244) amounted to $1,300,000; from the St Andrews/Irwin account (account number 156445025345) $530,000 plus an amount of $1,114.70 for legal costs. These figures corresponded to figures mentioned in the 6 July D47 approval letter concerning the St Michaels loan and the 26 July D3 approval letter concerning the St Andrews/Irwin loan. However, inadvertently, the names attributed to the respective accounts were incorrectly transposed in the 27 July letter. Dallas was invited to contact Adams if it had any queries.

111 The 27 July P 75 letter was a source of controversy at the hearing. It was open to the interpretation that Dallas received the two letters of loan approval by post and signed the same at about the same time, at its own office, notwithstanding that the St Michaels loan was approved on 16 June and the St Andrews/Irwin loan on 20 July. Such an interpretation would bring into question Mr O'Rourke's evidence that he protested the absence of development funds for St Andrews while signing the 26 July D3 approval letter at Custom Credit's office. On the other hand, the 27 July P75 letter leaves an impression that Custom Credit was accustomed to advancing funds without having attended to all of the relevant documentation beforehand.

112 I will return to evidentiary issues of this kind later, save to note that for the time being Dallas did not make any written protest about the alleged absence of development funds for St Andrews, or raise any other queries in writing about the payments made.

113 It seems that about two months later, at a time when Mr O'Rourke was in Melbourne, arrangements were made for Suzanne Carruthers to collect a cheque for $500,000 from Custom Credit in favour of Dallas. It appears from the "Customers Contract Statement" maintained by Custom Credit with respect to Dallas that a payment of $582,000 from the lending institution Citibank had been credited to the Dallas St Michaels' account 16544502544 on 28 September 1989. On the following day a payment of $500,000 to Dallas was debited to the same account.

114 The Dallas case at trial was that this payment, albeit inadvertently debited to the St Michaels' account, was made in order to fulfil the undertaking given by Mr Lewis to provide development funds for St Andrews. Dallas said that the payment should be regarded as evidence corroborating the Dallas case that an undertaking to provide development funds was given.

115 Custom Credit sought to rebut these assertions by pointing to a Custom Credit memo dated 29 September 1989 prepared by Mr Adams and signed by him and the State Manager, Mr Richards (P78 @ 3/1020). The memo reads as follows (omitting the introductory parts and signatures):

"DALLAS DEVELOPMENT CORPORATION PTY LTD

Our client has arranged for the refinancing of six of his home units at the St. Michael's development in Joondalup through Citibank for a consideration of $714,000 and has requested that $500,000 of these funds be released to him for the following purposes:

2. Working capital to be used primarily with costs associated with the planning stages for his proposed retail centre and retirement village

3. A further $100,000 for an interest capitalisation facility to support these borrowings

Should we agree to this request, we would have the following security position:

1. Registered First Mortgage over a floor of Irwin Chambers valued by Hillier Parker at $1,530,000.

2. Registered First Mortgage over land adjoining Joondalup Golf Course known as St. Andrew's valued by Hillier Parker at $1,500,000.

3. Registered First Mortgage over four units at the St. Michael's development in Joondalup valued at $600,000.

Based on this safer ratio and the fact that we are holding sufficient interest capitalisation to cover the next 5 months, it is recommended that we agree to his request."

116 The authenticity of the 29 September P78 memo was challenged in cross-examination. The cross-examiner spoke of it as a "concocted" document. I note in passing that a copy of the document does not appear to have been provided to Dallas at the time or signed by the company. It was simply an in-house memorandum signed by Custom Credit officers.

117 A protest of sorts was made by Dallas concerning the payment of $500,000 in a letter dated 10 November 1989 from Ms Carruthers to Mr Adams (D5 @ 4/1107). However, it is immediately noticeable from the terms of the letter that no complaint is made expressly about an alleged failure to provide development funds for the St Andrews land. The letter reads as follows (omitting the inessential parts):

"We refer to our recent conversation and wish to confirm the following arrangement.

According to the statements provided we note that on 28th September 1989, the balance remaining on four units at St Michaels was $406,964.11. Since then $500,000 was taken out and we appreciate at that time it was more convenient this way as one of our guarantors was in the Eastern States. However, as per our conversation, we wish these monies of $500,000 to be taken over to the St Andrews and Irwin Chambers loan with a second mortgage on Irwin Chambers.

This will then free St Michaels of the excess and enable us to clear the loan upon sale of those remaining four units.

Please confirm that this arrangement is mutually acceptable and we thank you for your assistance."

118 It seems that some attempt was made by Custom Credit to respond to this request. By letter dated 11 December 1989 Mr Adams forwarded documentation to Dallas for a second mortgage over each of the St Andrews land and the Irwin property (D27 @ 4/1137). He said that "this mortgage is to be put in place to cover the return of $500,000 made from your facility for the St Michaels development." He said also that in addition to the sum of $150,000 provided by Custom Credit at the commencement of the St Andrews/Irwin loan facility as a security deposit to cover interest, a further payment of $50,000 to secure interest was now required.

119 In the event, Dallas did not execute the further documents and the issue concerning the sum of $500,000 appears to have been left in abeyance. Early in 1990 Dallas was said to be in default with respect to the St Michaels loan.

120 It will now be convenient to turn to events that took place after the making of the $500,000 payment to Dallas.

121 Dallas alleges that in the months following the swap transaction it was unable to lease the Irwin property in the manner envisaged by the Hiller Parker valuations. Towards the end of 1989, while steps were still being taken by Mr O'Rourke to proceed with the various Dallas projects, Custom Credit terminated the services of Mr Lewis. It was common ground at the trial that Mr Lewis was thought to have misconducted himself during the course of his employment. He was in fact subsequently charged with thirteen criminal offences arising out of his employment by Custom Credit with respect to the period 3 November 1988 to 19 May 1989. He was later found guilty of eight out of the thirteen counts.

122 In the months following the departure of Mr Lewis, Mr O'Rourke and the directors of Dallas were in contact with other senior officers at Custom Credit including Mr Simon Adams, Mr Hubbard and Mr Bonwick.

123 Dallas eventually applied to Custom Credit for a loan of $2,950,000 to proceed with the development of the St Andrews land.

124 On 1 May 1990 Mr Bonwick arranged for a further mortgage to be executed by Dallas to cover all outstanding interest payments, which amounted to the sum of $115,000. This mortgage (P38 @ 6/2123) affected the St Andrews land, the Irwin property and various units within the St Michaels project. Mortgage E388742 is described in the pleadings as the "fourth mortgage".

125 Shortly after the execution of the fourth mortgage Custom Credit proceeded to lodge three caveats against the titles of the properties owned by Dallas and Mr O'Rourke on the grounds that it was an equitable chargee. These caveats were lodged on 25 June 1990. Some months later, notices of demand dated 31 October 1990 were served upon Dallas for payment of the whole of the moneys secured by the third and fourth mortgages (P40 @ 6/2104 and P41 @ 6/2158).

126 At the same time, on 31 October 1990, Custom Credit lodged Caveat E478108 (P42 not in the agreed bundle) against the titles to various Dallas properties. Custom Credit claimed an estate or interest in the properties in question as equitable chargee pursuant to cl 14(c) of the registered Mortgage E142583, that is, the third mortgage.

127 A notice of demand dated 25 January 1991 was then served upon Dallas for payment of the whole of the money secured by the first and second mortgages.

128 In due course, Custom Credit took steps to exercise its powers of sale pursuant to the various mortgages. In 1991 it commenced legal proceedings against Dallas and the second defendants as parties to the relevant transactions. I note in passing that the exhibits adduced by Custom Credit at trial included a Notice to Admit Facts dated 11 February 2004 (P43 not in the agreed bundle). That Notice was relied upon to establish that demands were directed to Dallas and Notices of Default issued for the amounts specified as alleged.

129 These events led to Dallas setting up a claim for damages against Custom Credit by way of a counterclaim.

130 In essence, Dallas asserts that any liability that might arise to Dallas should be set off against moneys due by Custom Credit to Dallas pursuant to the counterclaim. Dallas contends that it was induced to enter into the swap transaction and related financial arrangements made in mid-1989 as a consequence of misrepresentations made by Mr Lewis. It is said that Custom Credit's misconduct was compounded by the lodgement of caveats against land held by Dallas, with the result that Dallas was deprived of any capacity to meet its obligations or to realise the profits that might otherwise have been available to it.

131 Against this background it will now be convenient to look at the case put by Dallas in its statement of defence and counterclaim.

The Dallas statement of defence and counterclaim

132 The Dallas statement of defence and counterclaim commences with a series of admissions which confirm the making of various advances as alleged by Custom Credit and reception of the funds in question. Dallas submits in par 5 that it did not make any interest payments for the months of June, July, August, September and October 1990 or pay the principal sum to Custom Credit on 20 July 1990. Dallas says further that, by its set-off and counterclaim, it is entitled to relief from any liability pursuant to the first mortgage and the second mortgage. It denies that it was in breach of the first and second mortgages and denies being liable to Custom Credit. It denies being indebted to Custom Credit in the sum claimed or any amount.

133 Dallas pleads at par 26 of its counterclaim that it had contracted to purchase the St Andrews land for the purpose of developing 29 residential units. It goes on to say that it was the registered proprietor of the West Coast Highway land which it was planning to develop. In or about early June 1989 O'Rourke approached Lewis on behalf of Custom Credit for finance to purchase and develop the St Andrews land and to finance the cost of developing the West Coast Highway land. Lewis is described in the pleading at par 25 as Custom Credit's Business Development Manager having actual or apparent authority to negotiate with and make representations to prospective borrowers from Custom Credit concerning their borrowing proposals.

134 Dallas pleads in par 29 that in or about early June 1989 O'Rourke met with Lewis and Mr Graham Exton, the State Manager of Custom Credit, on the site of the St Andrews land at which time the financing of the purchase and development of the site and the development of the West Coast Highway land was discussed. This is called "the Joondalup meeting".

135 It is said in par 30 that Lewis asked O'Rourke to obtain a valuation of the St Andrews land and requested feasibilities for the development of the two sites ("the feasibility"). It is said that O'Rourke presented "the feasibility" to Lewis and Exton at the Joondalup meeting with a view to Custom Credit lending moneys to Dallas for the purchase and development of the St Andrews land and the development of the West Coast Highway land. O'Rourke also sent a feasibility of the development of the West Coast Highway land to Lewis by fax on 8 June 1989.

136 I digress briefly to say that on the Dallas case at trial the feasibility concerning the West Coast Highway land, which was allegedly presented to Lewis and Exton at the Joondalup meeting, was an undated document portraying a total project cost of $4,546,000 and an expected net return of $854,000 (D12 @ 10/107). The feasibility for that site, which was then allegedly faxed to Lewis on 8 June 1989, was an undated document portraying a total project cost of $4,754,000 with an expected net return of $1,006,000 (D17 @ 10/112). Construction costs in each case were said to be $2,870,000.

137 However, there was considerable controversy at the trial as to whether any feasibility study had been created in respect of the St Andrews land as at mid-1989, and thus as to what document, if any, was the feasibility being referred to in par 30 of the Dallas counterclaim. Custom Credit had requested further and better particulars of the counterclaim directed to that issue.

138 The Dallas amended answers to the request for particulars, filed July 2003 (at page 34 of the pleadings) contained an assertion that the feasibility with respect to the St Andrews land was prepared by O'Rourke in consultation with Pindan Constructions Pty Ltd, Palmerston Building Co Pty Ltd and Woodhead Australia (WA) Pty Ltd and is undated. Further on, at par A9, it is said that a feasibility was prepared for each of the St Andrews land and the West Coast Highway land. Dallas prepared the feasibilities in-house under the direction of O'Rourke and they were done in conjunction with the building manager on information supplied by the architects - Woodhead Australia.

139 I note in passing that these particulars suggested that the document which Dallas sought to rely upon as the feasibility presented at the Joondalup meeting for St Andrews was an undated document portraying the total project costs as $4,513,000 comprised principally of land at valuation $1,500,000 and building costs of $2,784,000. However, there was a good deal of controversy as to when exactly this document was created. I will return to this issue later. The only other document adduced in evidence at the trial which could be described as a feasibility for the St Andrews land referred to financial statements made up to 31 March 1990 and was clearly not brought into existence until after mid-1989 (D34 @ 8/2992).

140 Dallas pleads in par 31 that shortly after the Joondalup meeting Lewis informed O'Rourke by telephone that he was aware of a purchaser who would acquire the West Coast Highway land on the basis that it would be exchanged for a commercial property in the Perth CBD. If that happened, Custom Credit would then advance moneys to Dallas on a higher ratio against the security of a commercial property than it would on a development property for the purpose of purchasing the Perth CBD property and financing the purchase and development of the St Andrews land. O'Rourke informed Lewis that neither he nor Dallas had any previous experience with commercial properties and said further that if Dallas entered into the exchange it would be handled by his agent, Mal Dempsey, of Satterley Real Estate Agents.

141 The pleading goes on to say in par 32 that shortly thereafter "in about mid-June 1989" O'Rourke met Lewis on the Burswood Golf Course where Lewis enquired whether O'Rourke had considered the proposed exchange of properties ("the Burswood meeting").

142 Dallas pleads in par 33 that "shortly after the Burswood meeting" O'Rourke, together with Ms Carruthers, met with Lewis and Simon Adams in the offices of Custom Credit when Lewis orally represented to O'Rourke that upon Dallas selling the West Coast Highway land in exchange for the Perth CBD property, Custom Credit would lend to Dallas 85 per cent, or thereabouts, of a valuation by Hillier Parker of the Perth CBD property to finance the purchase of that property and the purchase and development of the St Andrews land. This is called "the first representation".

143 It is then alleged in par 34 that "in the course of one or other of the meetings and conversations" referred to earlier (that is, those mentioned in pars 30 - 33) Lewis further represented to O'Rourke that the Perth CBD property constituted an excellent investment, a net rental of $122,400 per annum could be expected, cash received from rentals would provide an excellent cash flow which would contribute to the payment of interest on the proposed financing, and there would be no difficulty in obtaining the tenant for the Perth CBD property ("the second representation").

144 I pause to say that the plea in this form did not expressly identify the property described as "the Perth CBD property". However, the case at trial was fought essentially on the assumption that Dallas was advancing an allegation that by this stage, in the course of one or other of the meetings and conversations, it had been made known to O'Rourke that the property in question was the Irwin property. In other words, the pleadings were construed as though par 34(1)(a) referred to a representation by Lewis to O'Rourke that the Perth CBD property being talked about was the Irwin property and constituted an excellent investment. However, for the time being, I will continue to echo the language utilised in the pleading in which the subject property was described simply as "the Perth CBD property".

145 Lewis is said in par 34(2) to have represented also that Dallas had to be the owner of the Perth CBD property before Custom Credit would lend any moneys for the purchase and development of the St Andrews land, Custom Credit would not advance money for the purchase and development of the St Andrews land unless Dallas purchased the Perth CBD property, Dallas had to exchange the West Coast Highway land for the Perth CBD property if Custom Credit was to advance money, and informed O'Rourke that he should obtain valuations from Hillier Parker of the St Andrews land and the Perth CBD property for the purpose of the proposed exchange ("the third representation").

146 Dallas pleads in pars 35 and 36 that these representations were made by Lewis to induce Dallas to enter into the exchange ("the swap transaction") and to borrow money from Custom Credit. Acting upon and induced by the representations, O'Rourke engaged Hillier Parker to undertake the required valuations. Hillier Parker valued the St Andrews land at $1,500,000 by valuation dated 27 June 1989, valued the Irwin property at $1,530,000 by valuation dated 12 July 1989, and provided the valuations to Custom Credit on or about the dates just mentioned.

147 O'Rourke, accompanied by Carol O'Rourke, Mal Dempsey and Ms Carruthers, is said to have inspected the Irwin property on 19 June 1989 in conjunction with Keith Collins of Hillier Parker with a view to effecting the exchange, obtaining finance from Custom Credit as proposed by Lewis in the first, second and third representations, and financing the purchase and development of the St Andrews land. On 19 June 1989, Dallas entered into agreements effecting the exchange and proceeded to complete the purchase of the St Andrews land and to plan and undertake the development of the same. This is the transaction I have called "the swap transaction".

148 Dallas pleads in par 37 that Custom Credit approved finance for the purchase of the St Andrews land and Irwin property, such finance being secured by the first mortgage (Mortgage E154845 dated 20 July 1989) and the second mortgage (Mortgage E182823 dated 20 July 1989). The exchange was completed by the registration of a transfer of the St Andrews land to Dallas on 21 July 1989 and the registration of transfers to complete the swap transaction on 1 September 1989.

149 Dallas pleads in par 42 that by making the first, second and third representations Custom Credit, by Lewis, conveyed the overall impression to O'Rourke that if Dallas exchanged the West Coast Highway land for the Irwin property Dallas would be making a good investment and would have no difficulty in quickly tenanting the Irwin property. Further, Dallas would be able to meet its financial commitments in respect of the related borrowing, would be regarded by Custom Credit as more creditworthy, would be in a sounder financial position to borrow from Custom Credit for the purposes of purchasing and developing the St Andrews land, and would be able to borrow sufficient money from Custom Credit for that purpose.

150 However, in fact the purchase of the Irwin property was a bad investment because tenants could not be obtained quickly, no cash flow was received from the property to contribute to interest payments due to Custom Credit, holding and developing the West Coast Highway land was a better investment, Custom Credit did not intend to and did not finance the cost of development of the St Andrews land. Also, Dallas lost its creditworthiness as a borrower from Custom Credit, was not able to borrow sufficient money to meet the cost of developing the St Andrews land and was not able to meet its financial commitments resulting from the swap transaction.

151 The counterclaim contains an assertion that in reliance upon the misrepresentations complained of, and the impression pleaded in par 42, Dallas borrowed the funds secured by the mortgages, entered into and completed the swap transaction, completed the purchase of the St Andrews land and undertook the development of that site.

152 Dallas pleads in par 47 that by reason of the matters relied upon by Dallas and by operation of s 51A of the Trade Practices Act 1974 and s 9 of the Fair Trading Act 1987 (WA) Lewis engaged in misleading and deceptive conduct or conduct likely to mislead or deceive. It is said in par 48 that by operation of further provisions of the statutes Custom Credit is deemed to have engaged in the misleading and deceptive conduct of Lewis.

153 Put shortly, then, the Dallas counterclaim sets up initially a plea of misleading and deceptive conduct based upon verbal misrepresentations allegedly made by Lewis prior to the signing of the two offer and acceptances dated 19 June 1989 which gave rise to the swap transaction and related borrowings ("the misleading conduct claim").

154 I pause to say that the misrepresentations complained of, which are said to have induced Dallas to enter the swap transaction, include the fourth representation. For the sake of an orderly exposition, I will deal with the fourth representation separately. However, I take this opportunity to affirm that henceforth any references to the misleading conduct claim should be construed upon the basis that I have taken account of and given proper weight to the facts and matters giving rise to the fourth representation.

155 In effect, as to this first head of claim, Dallas pleads in par 54 that by reason of the misleading and deceptive conduct of Custom Credit, Dallas and O'Rourke suffered loss and damage, particulars of which were provided in the pleadings and at trial. It is apparent from par (c) of the prayer for relief that Dallas seeks to obtain certain orders, which the Court is said to have power to make under s 87 of the Trade Practices Act, relieving the defendants from liability under the mortgages sued upon.

156 Dallas contends (at par 38 of its closing submissions) that its statement of defence and counterclaim, if successful, will provide either a complete defence to the Custom Credit claim, or a partial defence by way of set-off to the extent of the damages awarded to Dallas. Additional causes of action based upon breach of contractual promise and negligent mis-statement are also pleaded but each is said to be comprehended within the misleading conduct claim. According to the defence submissions (at par 40) if Dallas succeeds as to its principal claim by an award of damages and the grant of relief under s 82 and s 87 of the Trade Practices Act the further claims will fall away.

157 The stance adopted by the defendants is expressed in this way in the Dallas closing submissions:

"41. CCC seeks some $40 million for unpaid balances of monies advanced and accrued interest claimed to be owing under the mortgages. Dallas and O'Rourke do not admit the validity of the alleged defaults under the mortgages. In essence Dallas and O'Rourke say that if the alleged misleading and deceptive conduct is found against CCC it should follow that the Court should both award damages to Dallas and relieve Dallas and O'Rourke from liability to the CCC for any sum pursuant to the provisions of s.82 and the powers of the Court under s.87 of the TPA and the equivalent provisions of the Fair Trading Act (WA). Both remedies are available to the Defendants, s.87(1). Relief from liability is available under s.87(2), particular in this case under s.87(2)(ba).

42. Marks v GIO Australia Holdings [1998] HCA 69; (1998) 196 CLR 494 establishes that the Court has ample power under s.82 and s.87 to grant that relief; per the Court as a whole, Gaudron J; McHugh, Hayne and Callinan JJ; Gummow J and Kirby J, (Kirby only dissenting on whether the appellants were entitled to some relief under s.87); see commentary in Miller's Annotated Trade Practices Act 23rd ed. 1.82.60 at 686,687.

43. The Court held in Marks that 'once causation was established, neither the amount recoverable under s 82(1) nor the orders that might be made under s 87 were limited by analogy with breach of contract, tort or equitable remedies' (headnote)."

158 The fourth representation involves an allegation that Lewis failed to disclose an interest he is alleged to have had in the Irwin property and the making of the swap transaction. The facts and matters bearing upon this representation are rather complicated and it will therefore be convenient to deal with them at some length separately. Accordingly, I will deal first with the two further causes of action reflected in the counterclaim, namely, breach of contract and negligent mis-statements.

Related claims for breach of agreement and negligent mis-statement

159 Dallas advances a plea in the alternative at par 38 to the effect that on or about the occasion referred to in par 33 (a meeting at the offices of Custom Credit shortly after the Burswood meeting) a concluded agreement was made whereby, in consideration of Dallas entering into the swap transaction, Custom Credit agreed to lend Dallas 85 per cent of the Hillier Parker valuation of the Irwin property and other moneys required to purchase the Irwin property and complete the purchase and development of the St Andrews land as proposed in the feasibility. This is called the "financing agreement".

160 Dallas goes on to allege in par 39 that in breach of the financing agreement Custom Credit advanced only $760,000 on the security of the Irwin property and did not advance moneys under the securities required for the development of the St Andrews land.

161 There is a further plea in par 40 and par 41 to the effect that at the time of execution of the securities, Lewis promised O'Rourke that Custom Credit would advance finance for the cost of developing the St Andrews land with the result that Dallas gave the securities to the plaintiff and completed the swap transaction and the purchase of the St Andrews land. This further agreement is said to have been breached in that Custom Credit failed to advance finance for the cost of developing the St Andrews land as proposed in the feasibility.

162 These pleas concerning breach of the alleged par 38 financing agreement and the subsequent par 40 development funds for St Andrews agreement underline the need for a finding as to whether a feasibility document for St Andrews was provided to Custom Credit at the Joondalup meeting as alleged by Dallas. In each case the agreement concerns development "as proposed in the feasibility". If no feasibility document for St Andrews was provided the agreements contended for will fall away.

163 Dallas pleads in par 54 that by reason of Custom Credits breaches of agreement Dallas and O'Rourke suffered the loss and damage described in that paragraph which I referred to earlier. I will call this the "breach of agreement claim".

164 Dallas pleads in par 50, as a further plea in the alternative, that the first, second and third representations and the statements referred to in par 40, constituted mis-statements made by Custom Credit negligently in that they were made when Custom Credit possessed special skill or knowledge concerning the said representations and statements, or was otherwise in a special relationship with the defendants and with the intention of inducing Dallas to borrow money from the plaintiff.

165 It is said that in making the statements Custom Credit failed to use reasonable care to ensure the accuracy of the representations whereby Dallas was induced to enter into and complete the swap transaction and borrow moneys from Custom Credit.

166 This plea is supported by particulars to the effect that Lewis made the representations in circumstances in which he or Custom Credit never believed or never should on any sound commercial basis have believed that the statements were in fact true and accurate. It is said he made no or no sufficient enquiries to establish that the statements were reliable and well informed and knew of no or no sufficient facts which justified the making of the statements.

167 Dallas pleads in par 52 that at all material times Custom Credit knew or ought to have known that Dallas and Mr O'Rourke were engaged in the business of project property development and obtained and had obtained finance for such activities from Custom Credit and other financiers.

168 Again, the loss and damage said to flow from the alleged negligence is that pleaded in par 54 of the counterclaim. I will call this "the negligent mis-statement claim".

Custom Credit Corporation Ltd v Dallas Development Corporation Pty Ltd & Ors [2004] WASC 92

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (771 paragraphs)

Custom Credit Corporation Ltd v Dallas Development Corporation Pty Ltd & Ors [2004] WASC 92 (14 May 2004)

The Dallas statement of defence and counterclaim

Related claims for breach of agreement and negligent mis-statement

Evidence concerning the fourth representation

The O'Rourke evidence after the swap transaction

The Suzanne Carruthers' evidence/post July events

Further observations about the relief sought

The first category of loss - specific properties

The second category of loss - loss of value in Dallas

Details concerning the second category of loss

Cross-examination concerning section 8 of the Spence Report

General observations concerning the Dallas second category of loss claim

Parties

Legislation Cited (2)

Cases Cited (27)