Di Sisto v Skyworld

COUNSEL : CM Harris for plaintiffs B McManus for 4th defendant

SOLICITORS : Willis & Bowing for plaintiffs Colin Biggers & Paisley for 4th defendant

• 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4654/03 Di Sisto & Ors v Skyworld Development Pty Ltd & Ors JUDGMENT 1 His Honour: The hearing of these proceedings follows a decision by His Honour Justice Palmer given on 22 July 2005. As a result of that decision the plaintiffs filed a notice of motion on 14 November 2005 seeking orders for assessment of damages. On 12 December 2005 His Honour ordered that the proceedings be referred to an Associate Justice of the Court for assessment of damages, if any, payable to the plaintiffs by the first and fourth defendants, Skyworld and Mr Timothy Heenan. 2 Skyworld is now in liquidation and accordingly, at this stage the plaintiffs do not move for damages against them. The second and third defendants, Stamfords Constructions and Mr William Jun Feng were not served and took no part in the proceedings. The fourth defendant, Mr Heenan, is a solicitor who acted for the plaintiffs in the conveyancing transactions which gave rise to the proceedings. His Honour found that the fourth defendant had breached his duty of care and retainer but indicated that it was not inevitable that damages would flow and that they would need to be assessed. 3 I turn to the history of the conveyancing transactions and His Honour's judgment as a result of the trial. The first and second plaintiffs (Mr and Mrs Di Sisto) owned two adjoining parcels of land at Marrickville. The first was 126A and 126B Livingstone Road, Marrickville, (commonly referred to in the evidence as 126 Livingstone Road). The second was 33 Petersham Road, Marrickville. The properties shared a common rear boundary. On 20 December 2002 two contracts were entered into for the sale of the properties to Skyworld. Mr Heenan acted for the plaintiffs on the conveyances. The combined purchase price for both properties was $2.1M with $1M being allocated to the Livingstone Road Property and $1.1M to the Petersham Road property. The extended settlement date was 31 July 2003. The need for two contracts arose because two family members owned one property and three family members owned the other. There was no clause in the contracts making them interdependent. 4 Unknown to the plaintiffs, Skyworld had been negotiating for some time to purchase the adjoining property at 124 Livingstone Road from another vendor. On 24 February 2003 it entered into a contract to purchase this property. In April 2003 Skyworld asked the plaintiffs to accept a substitute purchaser Stamford Construction Pty Limited (Stamfords) in relation to the sale of the Petersham Road property. The plaintiffs agreed and on 19 May 2003 there was a deed of recision of the contract for the purchase by Skyworld of 33 Petersham Road and Stamfords entered into a contract for purchase at the same price but with an additional $55,000 as a deposit. 5 When the time to complete both contracts arrived on 31 July 2003 Stamfords and William Jun Feng could not be contacted. On 4 August 2003 the plaintiffs issued a notice to complete the contract for 33 Petersham Road to Stamfords. There was no response to this notice to complete. Skyworld also issued a notice to complete, addressed to the plaintiffs, for the purchase of 126 Livingstone Road which the plaintiffs refused to complete without the simultaneous completion of the contract for 33 Petersham Road. 6 The plaintiffs commenced proceedings on 23 September 2003. In July 2005 His Honour found that the replacement of the purchaser for the Petersham Road property was a sham transaction to enable Skyworld to avoid liability for the purchase of the property. His Honour ordered Stamfords' contract be rescinded so that the position with the original two contracts entered into on 20 December 2002 remained, namely, that Skyworld was obliged to purchase both properties. 7 Skyworld sought specific performance of the contract for the sale of 126 Livingstone Road. However, on discretionary grounds, His Honour refused relief and stood the matter over generally to abide Skyworld's performance of its obligations under both contracts. In August 2005, after His Honour's judgment, the plaintiffs issued notices to complete to Skyworld in respect of both contracts. In due course when Skyworld did not complete they terminated the contracts. 8 On 5 October 2005 126 Livingstone Road was resold for $930,000. The sale was completed on 16 November 2005. On 26 October 2005 the Petersham Road property was resold for $650,000. Completion of that sale occurred on 8 December 2005 9 On 13 April 2006 Skyworld went into liquidation. Evidence from the liquidator indicates that it has no assets or means of tracing the assets, as the directors failed to lodge any statement of affairs. In these circumstances the liquidator does not seek to take further action. 10 The plaintiffs do not seek to proceed with the claim for damages against Skyworld for the obvious reason that, at this stage, there is no chance of recovery. The plaintiffs have asked that that part of the motion be stood over for one year to allow further investigations in the matter. This leaves the claim against Mr Heenan. The claim for damages against Mr Heenan is for the sum of $780,000. It includes loss incurred on resale, advertising costs and agent's commission on resale, legal costs on resale, interest on unpaid purchase price and additional Council rates. Credit is given for an amount of rent received for the properties. 11 After reaching his conclusions about the Deed of Recision and the contract with Stamfords for the sale of 33 Petersham Road, His Honour turned to the claim for damages against Mr Heenan. He addressed the subject in paragraphs 72 to 76 of his judgment in these terms: " Damages against Mr Heenan 72. Because the two contracts for sale to Skyworld are not interdependent, Skyworld may complete the contract for the purchase of No 126 but may fail to complete the contract for the purchase of No 33. If No 33 alone is placed on the market, it may not sell for as much as the contract price stipulated in the sale to Skyworld because No 33 has no development potential except as a site amalgamated with No 126. A successful action against Skyworld for damages for breach of contract may result in a judgment which is not fully satisfied. If Mr Heenan has been negligent in his conduct of the transactions on behalf of the Plaintiffs, will he be liable for the loss which the Plaintiffs may suffer thereby? 73. The negligence alleged against Mr Heenan is that:

i) he failed to ensure that completion of the contracts for the sale of Nos 33 and 126 to Skyworld were interdependent;

ii) he failed to ensure that completion of the contract for the purchase of No 33 by Stamfords was dependent on completion of the contract for the purchase of No 126 by Skyworld;

iii) he failed to insist on contractual safeguards as to the financial ability of Stamfords to complete the purchase of No 33. 74. As the Deed of Rescission and the contract for the purchase of No 33 by Stamfords will be set aside so that the parties are restored to the positions in which they were prior to the execution of the Deed of Rescission, no loss to the Plaintiffs will flow from negligence on the part of Mr Heenan under grounds (ii) and (iii). Indeed, if Skyworld performs its obligations under the contract for the purchase of No 33, the Plaintiffs will suffer no loss at all. 75. As I have noted, Mr and Mrs Di Sisto are exposed to loss by reason of negligence on ground (i) only if Skyworld completes the contract for the purchase of No 126 but fails to complete the purchase of No 33 and a judgment against it for breach of contract is not fully satisfied. 76. It is, therefore, necessary to consider whether Mr Heenan breached his contractual or tortious duty of care to Mr and Mrs Di Sisto in failing to ensure that the completion of both contracts with Skyworld was interdependent." 12 After carefully considering the evidence, His Honour's conclusions were set out at paragraphs 89 to 91 in these terms: "89. Accordingly, I hold that in failing either to seek instructions from Mr and Mrs Di Sisto as to whether the contracts for sale of Nos 33 and 126 to Skyworld should be made interdependent or in failing to suggest that such provision should be included in the contracts, Mr Heenan failed to act in accordance with the standards of a prudent and competent solicitor so that he was in breach of his contractual and tortious duty of care to Mr and Mrs Di Sisto. 90. As I have indicated above, Mr Heenan's negligence may not occasion loss to Mr and Mrs Di Sisto: Skyworld may fully perform its obligations under the contract for the sale of No 33 as well as performing its obligations under the contract for the sale of No 126. However, if Skyworld completes only the contract for No 126 and if a judgment against it for breach of contract for the sale of No 33 cannot be recovered in full, Mr Heenan will be liable for the loss, if any, which Mr and Mrs Di Sisto suffer thereby. Had the two contracts been interdependent, Skyworld would not have been able to put Mr and Mrs Di Sisto in the position of having to re-enter the market to sell No 33 on its own rather than in conjunction with No 126. 91. In those circumstances, the parties have agreed that the assessment of the damages for which Mr Heenan may be liable to the Plaintiffs should abide performance of Skyworld's obligations under both contracts. I think that that is an appropriate course." 13 It is to be noted that His Honour's conclusions in paragraph 89 were not in the terms set out in paragraph 73 (i) of the judgment. His Honour found that the actual breach was the failure to seek instructions about making the contracts interdependent or failing to suggest that such a provision should be included in the contracts. This raises one of the issues before me, namely, whether it was likely that the purchasers would have agreed to the contracts if the plaintiffs had sought to include a term stating that the contracts were interdependent. 14 His Honour also found that Mr Heenan did not carry out all the steps which he should have on the exchange of the contract with Stamfords. At paragraph 29 he said: "However, there was no provision in the new contract with Stamfords making completion of that contract dependent upon completion of the contract with Skyworld for the purchase of No 126. Mr Heenan concedes that upon exchange of the Deed of Rescission and the new contract with Stamfords, he did not seek and obtain guarantees of the directors of Stamfords or a letter of approval of finance from Stamfords' bank, as required by Special Conditions 14 and 15 of the contract. Mr Heenan concedes that in this regard, he failed to comply with his instructions to obtain proof of Stamfords' ability to complete the contract." 15 The contract with Stamfords has been set aside and accordingly any such failure on the part of Mr Heenan is irrelevant. 16 The plaintiffs submit that His Honour decided the question of causation in his conclusion in paragraph 90, in respect to 33 Petersham Road. However, it is apparent that the trial proceeded on the basis, which His Honour accepted, that at that stage Skyworld intended that they would complete the purchase of 126 Livingstone Road, Marrickville. After all, it had brought a cross-claim seeking specific performance of that contract. What eventually occurred was that Skyworld did not purchase either property. His Honour did not consider this situation when he discussed Mr Heenan's liability. In these circumstances the question of causation needs to be examined in order to determine what damages might flow. 17 The fourth defendant's submissions pointed out the differences between claiming against Mr Heenan for his actual breach, as found by His Honour, in contrast to the claim against Skyworld, which is really a failure to complete the contract. 18 Mr Heenan raises the issue as to whether or not, if it were suggested that the contracts should be interdependent, Skyworld would have proceeded with the contract. If Skyworld would not have proceeded, it was submitted that the plaintiffs would have had two options. These options were either to proceed with the contracts without the interdependency conditions or not to proceed with the contracts. If the plaintiffs proceeded with the contracts without the interdependency conditions that was their choice and they suffered no loss. If they did not so proceed, they would have needed to go into the market and obtain another buyer or buyers. There is market evidence to suggest that if the plaintiffs had attempted the second course the market price they would have achieved would be substantially below the sale price under the contracts with Skyworld. If it was found that there was a possibility of Skyworld agreeing to interdependency of the contracts, it was submitted that such a chance was very slim and damages should be reduced accordingly. 19 The second causation issue raised was whether Skyworld would have settled the purchase for $2,100,000. Mr Heenan also raised questions regarding the rate of interest and the period for which it should be applied. Would the purchaser have accepted an interdependency clause? 20 The objective evidence indicates that exchange occurred for the plaintiffs' properties on 20 December 2002. It also demonstrates that, on 24 February 2003, Skyworld agreed to purchase 124 Livingstone Road from the other vendors. As a result of His Honour's decision and findings, Skyworld had decided to proceed with a different development and put into place the deception during April 2003. 21 The other evidence that is available, to decide whether or not the deception was planned at an earlier time, is the evidence of Mr Hu, the principal of Skyworld. His Honour was extremely critical of his evidence and would not accept it unless it was corroborated or inherently probable. I have not had the benefit of seeing Mr Hu in the witness box but part of the transcript of his cross-examination and parts of his affidavit evidence have been tendered before me. 22 Mr Hu's affidavit evidence demonstrates that there was a period of some weeks when the price was negotiated prior to exchange of contracts. Documentary evidence shows and that after exchange draft plans were prepared by his surveyor together with a development application. That application was taken to the council but not lodged. The development application was in respect of the plaintiffs' two properties. It is also apparent from diary notes that Skyworld's architect made inquiries in early January with the council about the development of the plaintiffs' two properties on behalf of Skyworld. 23 In cross-examination it appears that Mr Hu had been negotiating to purchase 124 Livingston Road before exchange on 20 December 2002. He was cross-examined as to whether he would have accepted an interdependency clause in the contract. Plainly in that cross-examination he did not concede that he would have accepted such a clause. All that he would concede in cross-examination was that, if such a request had been made, he would have considered it. The reason he gave was that he had been negotiating for the purchase of 124 Livingston Road and may have wished to purchase that property. He clearly did not say that he would not have accepted such a condition. 24 However, at the time of exchange the plaintiffs were insisting on selling both properties and the objective evidence shows that shortly after exchange Mr Hu was proceeding with the development of the plaintiffs' two properties. 25 There does not seem to be a suggestion that Skyworld could have developed 124 Livingstone Road alone. The inference which I am asked to make must be made in accordance with the civil standard of proof. 26 In Transport Industries Insurance Co Ltd v Longmuir [1977] 1 VR 125 at 141, Tadgell JA referred to the High Court's formulation of this standard in the unreported case of Bradshaw v McEwans Pty Ltd (27 April 1951) in these terms: "…The difference between the criminal standard of proof in its application to circumstantial evidence and the civil is that in the former the facts must be such as to exclude reasonable hypotheses consistent with innocence, while in the latter you need only circumstances raising a more probable inference in favour of what is alleged…." 27 Plainly, Skyworld was prepared to pay the price demanded by the plaintiffs. Skyworld obtained a clause in the contracts allowing it to make a development application and it took immediate steps to process that application. When it did so in early January, it found it had difficulty with the development it was considering. This, no doubt, focussed its attention on 124 Livingstone Road. 28 There was no exchange on 124 Livingstone Road until 24 February 2003 and nothing in the evidence suggests that there was an advanced stage of negotiation for that purchase at the end of 2002. On the available evidence it seems that at exchange and shortly thereafter Skyworld was intent on proceeding with the purchase from the plaintiffs. In all these circumstances it seems that the more probable inference is that Skyworld would have accepted a condition that the contracts be interdependent. 29 This conclusion raises the next causation issue, which is whether Skyworld would have settled on both properties (126 Livingston Road and 33 Petersham Road) at 31 July 2003. 30 It is plain that the plaintiffs bear the onus of proof that the solicitor's negligence caused them loss: see Gore v Montague Mining Pty Ltd [2000] FCA 1214 at para 34 and Ng v Chong [2005] NSWSC 270 at 51. It was submitted by Mr Heenan that the plaintiffs had not proved that Skyworld would have settled both properties on 31 July 2003. 31 Mr Heenan pointed to the fact that, late in 2005 when Skyworld had the opportunity to settle, it did not do so. The contracts were terminated and Skyworld went into liquidation in April 2006. His further submission was that Skyworld's conduct in 2003 indicated a willingness to avoid its obligations. It was also submitted that the Court should infer that the sale of the two properties would not have settled and that the plaintiffs would have been required to go back into the market to attempt to sell the properties. This then raises the question of valuation evidence because the evidence is that the value of the two properties sold as a combined development site at 31 July 2003 was $1.68M. In due course the actual sale price achieved was $1.58M together with forfeited deposits of $160,000. Therefore, on this basis there would be no loss suffered. 32 His Honour Mr Justice Palmer dealt with the findings on fraud and misrepresentation at paragraphs 42 to 64 of his judgment. His conclusions at paragraph 64 are relevant and in these terms: "For the reasons which I have given, I hold that the three misrepresentations in the 1 April letter to which I have referred above were material and were fraudulently made by Skyworld in order to induce Mr and Mrs Di Sisto to rescind the contract with Skyworld for the purchase of No 33 and to enter into a contract for sale of that property to Stamfords, a company which Skyworld knew to be without substance. To put it bluntly, the whole transaction with Stamfords was procured by calculated trickery on the part of Mr Hu and Skyworld."

33 As I have already noted, Skyworld maintained a cross-claim in which it sought to force the plaintiffs to complete the sale of 126 Livingstone Road. That is a somewhat different proposition from the proposition that they would have completed the purchase of both properties. The hypothesis which I am considering is whether they would have completed the sale of both properties because they were obliged to do so, if the contracts were made interdependent. 34 The question of whether Skyworld would have completed the purchase of both properties on 31 July 2003 raises a number of imponderables. Two at least spring to mind. They are:

(a) Whether it had the financial capacity to do so. (b) Whether it would wish to complete the purchase or, alternatively, forfeit the deposits. 35 On the first aspect there is no evidence before me of the financial capacity of Skyworld or Mr Hu at the relevant time. The fact that Skyworld went into liquidation in 2006 is too far removed in time to draw the inference that they did not have the financial capacity to complete the purchase three years earlier. The evidence, in my view, does not address this aspect either way. 36 On the second matter one could assume that if Skyworld was bound by interdependent contracts for the purchase it would not have proceeded with the purchase of 124 Livingstone Road, unless that purchase would add some profit to the development of the plaintiffs' two properties. Skyworld then had deposits at risk amounting to $165,000. The fact that Skyworld's conduct in early 2003 showed a willingness to avoid its obligations, I do not think is relevant to whether it would settle in July 2003. I would imagine that that would depend upon whether the development would have been perceived in July 2003 as sufficiently profitable to make it worthwhile proceeding at the inflated price for which they were bound to purchase the properties or whether it would be more economic to have forfeited the deposits to minimise exposure to an unprofitable development. 37 On this aspect His Honour found at paragraphs 54-57 of his judgment as follows: "54. When Skyworld succeeded in acquiring No 124 in February 2003, the retention of No 33 was clearly unnecessary and unprofitable. According to Mr Hu's own calculations, a development of ten townhouses on Nos 33 and 126 would have produced a profit of about $200,000 for a land acquisition cost of $2.1M, whereas for a land acquisition cost of $2.3M a development of nineteen townhouses could have been undertaken on Nos 124 and 126, which would have produced a profit of about $1.4M.

55. Mr Hu acknowledged in cross examination that his agreement with William that Skyworld would pay on Stamfords' behalf the additional deposit of $55,000 on exchange of the new contract for No 33 produced a loss for Skyworld of at least $110,000 on the transaction with the Plaintiffs. However, Mr Hu said that that loss was worthwhile in order to make a much greater profit on the development of Nos 124 and 126 alone.

56. This evidence is very understandable in light of the fact that by March 2003 it had become evident to Skyworld from its enquiries at the Council that No 33 could not, in any event, be used as part of the development of No 126; No 33 was simply too narrow.

57. In short, by 1 April 2003 it had become clear to Skyworld that No 33, for which it had agreed to pay $1.1M, was worthless to it as part of the development which it proposed to carry out on Nos 124 and 126. To pay an extra $55,000 to induce the Plaintiffs, by a deception, to release it from a very large loss-making contract would have made very good business sense." 38 As His Honour recounts, by March 2003 Skyworld found from its enquiries at the Council that No 33 could not, in any event, be used as part of the development. No 33 was simply too narrow. According to His Honour's judgment, Mr Hu's own calculation showed that the profit from a development of ten townhouses on 33 and 126 would have produced a profit of only $200,000. This presumably was before the difficulty with the development became apparent. 39 By 24 February 2003 Skyworld had entered into a contract to purchase 124 Livingstone Road. According to the valuation evidence in the case the real estate market was still buoyant. After 24 February 2003 it put in place town planning investigations for the joint development of only 124 and 126 Livingstone Road. The deception in respect of 33 Petersham Road was only put into place in April 2003, after contracts were entered into for the purchase of 124 Livingstone Road and before that purchase was completed on 24 May 2003. Once 124 Livingstone Road was completed the likelihood of the completion of 33 Petersham Road and 126 Livingstone Road would depend upon the profit which could be obtained from the new development. 40 The evidence of Mr Hu is that a development of 124 and 126 Livingstone Road with 19 townhouses would produce a profit of $1.4M. However, if one takes the purchase price of No 33 ( $1.1M) into account the profit would have been $300,000 plus whatever the stand-alone value of No 33 was at the time. The evidence suggests that at December 2002, the stand alone value was between $600,000 and $630,000. Thus, the total profit was likely to be in the order of $900,000. Such a profit would, no doubt, be balanced against a loss of deposits of $165,000, if a decision were made not to complete once the problems with No 33 emerged and No 124 Livingstone Road had been acquired, to allow an alternative development. Based on these facts it seems likely that the purchaser would have continued and completed both the purchase of No 126 Livingstone Road and 33 Petersham Road. 41 This means that the plaintiff is entitled to recover damages against the fourth defendant. The amounts claimed are $222,017.73 for 126 Livingstone Road and $557,988.13 for 33 Petersham Road. These amounts include interest at the contract rate of 10% pursuant to clause 7 of the contract from 31 July 2003 to the time of resale. The claim is based upon the non-receipt of the balance of purchase monies. 42 In the circumstances where the damages are based upon the premise that settlement would have occurred on 3 July 2003, the claim should not reflect the contract rate which would be applicable to a claim against Skyworld. Instead, it should be an amount to compensate the plaintiff for non-receipt of funds up until resale. The Supreme Court rate would be appropriate and given the uncertainty in respect of resale, having regard to the vendor's attitude about prices he wished to receive, I think an amount for one year would be appropriate. 43 So far as costs are concerned, the defendant should pay the plaintiff's costs. In respect of the re-opening application, this was in part as a result of an enquiry from the Court. Although the plaintiff was not completely successful on the last day of the re-opening application, I think the preferable course is that these costs should be included in the order for the defendant to pay the plaintiff's costs. 44 The parties can bring in short minutes to reflect this judgment. **********

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