Johnston v Smith

Supreme Court of NSW|2002-05-10|Before: O'Keefe J, Mr J

INTRODUCTION 1 This is an appeal from a decision of a Master on 20 March 2002, refusing to strike out those parts of the pleading in the matter which relate to Mortgage Partners Pty Limited (the fifth defendant.) 2 The action by Michael Peter Johnston (the plaintiff) arises out of an advance alleged to have been made by the plaintiff to the second defendant, Growthcorp (Australia) Pty Ltd (Growthcorp). According to the Statement of Claim, Growthcorp is in effect the alter ego of the third defendant Charles Platcher (Platcher). 3 The Statement of Claim reveals that the plaintiff owned a property at North Curl Curl. It was subject to a mortgage in favour of Australia and New Zealand Banking Group Limited (ANZ). The Statement of Claim further alleges that Platcher solicited funds from the plaintiff for investment with Growthcorp on promises that were fraudulent and in any event were not made good. In order to raise the funds solicited by Platcher the plaintiff had to seek a loan which was to be secured by a second mortgage over his property at North Curl Curl. In order to satisfy the requirements of a lender it was necessary for the plaintiff to be able to demonstrate that he had sufficient income to service the loan. To do this Platcher is alleged to have procured the fourth defendant, Andrew Craig Ashton (Ashton), a chartered accountant, to provide a false certificate as to the earnings of the plaintiff. According to the Statement of Claim the actions by Platcher in procuring, and of Ashton in supplying, the false statement were unknown to the plaintiff. 4 As against the fifth defendant, the Statement of Claim alleges that it was a mortgage broker whose services were sought by Platcher purportedly on behalf of the plaintiff to facilitate a loan approval for an amount of $360,000. In support of such approval Platcher, through Growthcorp, submitted to the fifth defendant an application for a loan in favour of the plaintiff for $360,000, offering as security a second mortgage over the North Curl Curl property. The Statement of Claim alleges that the application to the fifth defendant was made without the plaintiff's authority. 5 The fifth defendant arranged for Burrawong Investments Pty Ltd to agree to offer a loan for $360,000 and on 22 December, 1999 confirmed such loan approval. The document of approval was forwarded to the plaintiff care of Growthcorp and was purportedly signed by the plaintiff and returned to the fifth defendant. The plaintiff alleges that the signature on such document was not his and was a forgery. 6 The plaintiff executed the second mortgage for $360,000 in the presence of his solicitor (the first defendant), and took up the loan, the principle of which was advanced. Various sums totalling $200,040 were then dispersed from the amount of $360,000 in accordance with directions given by the first defendant. The amounts so dispersed included $7,500 paid to the fifth defendant in respect of the brokerage fee ($5,000) and the establishment fee ($2,500). They also included a payment of $85,000 to Growthcorp and of $1,383 to the Office of State Revenue. The plaintiff alleges that he did not authorise his solicitor to instruct the disbursement of funds. Thereafter a balance of the funds, namely $159,769, was credited to the plaintiff's bank account. 7 Subsequently the plaintiff alleges that at the request of Growthcorp additional amounts totalling $154,769 were withdrawn by him and paid, in the main, to Growthcorp. 8 The plaintiff further alleges that as a result of the failure by Growthcorp and Platcher to make good their promises or representations as to returns on the plaintiff's money, the plaintiff defaulted under the mortgage to Burrawong Investments Pty Limited which then exercised its rights under such mortgage. In the result the North Curl Curl property was sold and the plaintiff was left with the deficiency of $78,809.75 in respect of his debt to Burrawong Investments Pty Limited. 9 In the Statement of Claim the allegations against the fifth defendant are as follows: "7. At all material times the Fifth Defendant was engaged in business as a finance broker arranging and facilitating loans between lenders and borrowers.

On 22 December 1999 the Fifth Defendant purported to confirm a loan approval for the borrowing by the Plaintiff of the sum of $360,000 from Burrawong Investments Pty Limited.

The Plaintiff has never had any dealings with the Fifth Defendant nor has the Plaintiff authorised any person on his behalf to have any dealings with the Fifth Defendant.

The Fifth Defendant purporting to act on behalf of the Plaintiff in or about December 1999 made an application to Burrawong Investments Pty Limited to borrow the sum of $360,000.

The Plaintiff did not at any time authorise any person to instruct the Fifth Defendant to make a loan application to Burrawong Investments Pty Limited.

The Plaintiff did not at ay time authorise any person to instruct the Fifth Defendant to make a loan application to Burrawong Investments Pty Limited on behalf of the Plaintiff.

The loan application made by the Fifth Defendant to Burrawong Investments Pty Limited for the sum of $360,000 was made without the consent, direction or authority of the Plaintiff.

The Fifth defendant owed a duty of care to the Plaintiff when making the loan application to Burrawong Investments Pty Limited: (a) To act in the interests of the Plaintiff. (b) Not to act in the interests of any other person. (c) To submit accurate documentation in support of the loan application.

In breach of the said duty of care the Fifth Defendant:

(a) Did not act in the interests of the Plaintiff. (b) Acted in the interests of the Second Defendant and/or the Third Defendant. (c) Submitted documentation in support of the loan application which was inaccurate and misleading.

As a result of the breach of the said duty of care the Plaintiff has suffered loss and damage.

The Second Defendant by its agent the Third Defendant, the Third Defendant on his own behalf, the Fourth Defendant and the Fifth Defendant engaged in a conspiracy to cheat and defraud the Plaintiff out of the moneys loaned to the Plaintiff by Burrawong Investments Pty Limited.

(c) The Fifth Defendant: (i) Accepted instructions from the Third Defendant to make a loan application to Burrawong Investments Pty Limited on behalf of the Plaintiff.

(ii) Prepared an application for loan to Burrawong Investments Pty Limited without any instructions from the Plaintiff.

(iii) Supported the loan application with a wages certificate provided by the Third Defendant. (iv) Provided the loan confirmation to the Third Defendant." 10 The particulars under paragraph 36 of the Statement of Claim relate only to damages and show a total claim by the plaintiff of $829,414.10.

APPLICABLE PRINCIPLES 11 Part 13 Rule 5 provides: "(1) Where in any proceedings it appears to the Court that in relation to the proceedings generally or in relation to any claim for relief in the proceedings - (a) no reasonable cause of action is disclosed; (b) the proceedings are frivolous or vexatious; or (c) the proceedings are an abuse of the process of the Court, the Court may order that the proceedings be stayed or dismissed generally or in relation to any claim for relief in the proceedings. (2) The Court may receive evidence on the hearing of an application for an order under subrule (1)." 12 Part 15 Rule 26 makes provision as follows: "(1) Where a pleading - (a) discloses no reasonable cause of action or defence or other case appropriate to the nature of the pleading; (b) has a tendency to cause prejudice, embarrassment or delay in the proceedings, or (c) is otherwise an abuse of the process of the Court, the Court may at any stage of the proceedings, on terms, order that the whole of any part of the pleading be struck out. (2) The Court may receive evidence on the hearing of an application for an order under subrule (1)." 13 As will be seen from a comparison of the above provisions, qua a plaintiff's pleading, the indicium in Pt 13 r 5(1(a)) is similar to that specified for in Pt 15 r 26 (1(a)). Part 13 Rule 1 (c) is virtually identical to the provision in Pt 15 r 26 (1)(c) However, the relief contemplated by the two rules is quite different in character. Under Pt 13 r 5 the court is given a power to stay or dismiss the proceedings. The power under Pt 15 r 26 is more limited. It is a power to strike a pleading out. One of the bases (Pt 15 r 26(1)(b)) is related to form and the tendency resulting from such form. Because of the difference in the consequences that flow from the exercise of the different powers the courts have adopted somewhat different approaches to the exercise of such powers. 14 In Dey v Victorian Railways Commissioners (1949) 78 CLR 62 Dixon J said: "A case must be very clear indeed to justify the summary intervention of the court to prevent a plaintiff submitting his case for determination in the appointed manner by the court with or without a jury … but once it appears that there is a real question to be determined whether of fact or law and that the rights of the parties depend upon it, then it is not competent for the court to dismiss the action as frivolous and vexatious and an abuse of process." (supra at 91) 15 That the test to be applied to an application by a party who seeks summary judgment is demanding is clear from the collection of statements of the test made by Barwick CJ in General Steel Industries Inc v Commissioner for Railways (1964) 112 CLR 125. He said: "…it is sufficient for me to say that (the) cases uniformly adhere to the view that the plaintiff ought not to be denied access to the customary tribunal which deals with actions of the kind he brings, unless his lack of cause of action - if that be the ground on which the court is invited, as in this case, to exercise its power of summary dismissal - is clearly demonstrated. The test to be applied has been variously expressed ; 'so obviously untenable that it cannot possibly succeed'; 'manifestly groundless'; 'so manifestly faulty that it does not admit of argument'; 'discloses a case which the court is satisfied cannot succeed'; 'under no possibility can there be a good cause of action'; 'be manifest that to allow them' (the pleadings) 'to stand would involve useless expense'. At times the test has been put as high as saying that a case must be so plain and obvious that the court can say at once that the Statement of Claim if proved cannot succeed; or 'so manifest on the view of the pleadings, merely reading through them, that it is a case that does not admit of reasonable argument'; 'so to speak apparent at a glance'. " (supra at 129)

and " Although I can agree with Latham CJ … when he said that the defendant should be saved from the vexation of useless an futile proceeding, in my opinion great care must be exercised to ensure that under the guise of achieving expeditious finality a plaintiff is not improperly deprived of his opportunity for the trial of his case by the appointed tribunal. On the other hand I do not think that the exercise of the jurisdiction should be reserved to those cases where argument is unnecessary to evoke the futility of the plaintiff's claim. Argument, perhaps even of an extensive kind, may be necessary to demonstrate that the case of the plaintiff is so clearly untenable that it cannot possibly succeed" (supra at 130 ) 16 In Webster v Lampard (1993) 177 CLR 598 the High Court considered an appeal arising out of the entry of summary judgment. The stringency of the test to be applied before entering summary judgment was stressed by Mason CJ, Dean and Dawson JJ. They said: "The power to order summary judgment must be exercised with 'exceptional caution' and 'should never be exercised unless it is clear that there is no real question to be tried.'" (at 99) and "Nowhere is that need for exceptional caution more important than in a case where the ultimate outcome turns upon the resolution of some disputed issue or issues of fact " (at 603).

17 The basis of the difference in approach is also manifest by Agar v Hyde (2000) 201 CLR 552. Although that case was concerned with an application for orders granting leave to proceed against persons who had been served outside the jurisdiction and extending the limitation period against them, the reasoning in the decision is applicable to cases in which a party, by interlocutory step, seeks to shut a plaintiff out from pursuing his/her rights. The High Court said that: "Ordinarily a party is not to be denied the opportunity to place his or her case before the court in the ordinary way and after taking advantage of the usual interlocutory processes. The test to be applied has been expressed in various ways, but all the verbal formulae which have been used to describe a high degree of certainty about the ultimate outcome of the proceedings if it were allowed to go to trial in the ordinary way." (at 575 - 576 per Gaudron, McHugh, Gummow and Hayne JJ)

"it would be wrong to deny a plaintiff resort to the ordinary processes of the court on the basis of a prediction made at the outset of a proceeding if that prediction is to be made simply on a preponderance of probabilities." (supra at 576) 18 What is clear from the authorities is that the power to terminate an action by dismissing it summarily should be exercised only in exceptional cases, even then with great caution, and it should only be done in the clearest of cases. 19 So much for the approach to be adopted where summary judgment is concerned. 20 The approach to the striking out of the pleading or part of a pleading where leave to re-plead is to be given is less stringent than in a case in which summary judgment is to be entered. The reasons for this include that as the party whose pleading is struck out is given a right to re-plead, there is no question of the summary termination of rights. 21 The power conferred by Pt 15 r 26 is directed to the form of the pleading itself. Ordinarily it must be from the pleading, rather than from external evidence, that the indicia in Pt 15 r 26(1) are to be established. The indicium in r 26(1)(c) (otherwise an abuse of the process of the court) is in a somewhat different situation from the indicia in r 26(1)(a) (discloses no reasonable cause of action) and 26(1)(b) (has a tendency to cause embarrassment or delay). 22 The form of Pt 15, r 26(1)(b) harks back to Pt VII of the Common Law Procedure Act 1897. Section 61 of that Act gave the court power to strike out or amend the pleadings if they were "so framed as to prejudice, embarrass or delay the fair trial of the action". Whilst the modern rule takes up the concepts stated in s 61 of the Common Law Procedure Act 1897, its language imposes a less stringent test. Under the old law, it had to be shown that the framing of the pleading prejudiced, embarrassed or delayed the fair trial of the action. The new law confers the power where the pleading (as framed) "has a tendency" to cause prejudice, embarrassment or delay in the proceedings. 23 The power to strike out a pleading under Pt 15 r 26(1)(b) may be invoked if the way in which the pleading is framed is prone to, or has the inclination towards, or possible effect of, causing prejudice, embarrassment or delay in the fair trial of the action. 24 In this regard, it is appropriate to remember the basic requirement of the Rules in relation to a pleading. Part 15 rule 7 provides that: "(1) A pleading of a party shall contain, and contain only, a statement in a summary form of the material facts on which he relies, but not the evidence by which those facts are to be proved." 25 The general law has always required that allegations of fraud should be pleaded with particularity. In the context of pleading, the concept of fraud is not limited to allegations that found an action of deceit. It extends to matters of dishonesty in the nature of, or allied to, fraud (Banque Commerciale SA En Liquidation v Akhil Holdings Limited (1990) 169 CLR 279). A pleading in conspiracy is such a pleading. It should set out facts which show the making of an actual agreement between the conspirators, on one occasion or on a number of occasions, or show acts done by them pursuant to a common purpose or with a common end from which the making of the agreement is to be inferred. Alternatively, the facts pleaded may show that the conspiracy was constituted by the doing of acts with the necessary common purpose. Whatever the basis on which the conspiracy is sought to be established, the plaintiff must allege and prove common purpose between the alleged conspirators. (Williams v Hursey (1959) 103 CLR 30 at 107 per Taylor J; R v Associated Northern Collieries (1911) 14 CLR 387 at 400 per Isaacs J; Rajski v Baintin (1990) 22 NSWLR 125 at 140 per Mahoney JA). 26 This approach of the law to the pleading of matters of fraud and associated wrongs is reflected in Pt 15 r 13. The reasons for this approach include that a party against whom such serious allegations are made should be placed by the pleading in the position of knowing precisely the matters of fact on which the opposite party relies in support of the alleged fraudulent conduct.

Analysis 27 In the plaintiff's Statement of Claim there are, in my opinion, several defects which fall within the ambit of Pt 15 r 26(1)(b).

As to the Claim in Conspiracy 28 In paragraph 55 of the Statement of Claim it is alleged that the fifth defendant "engaged in a conspiracy to cheat and defraud the plaintiff out of the monies loaned (sic) … by Burrawong Investments Pty Limited". The allegation that "it engaged in a conspiracy" is the pleading of a conclusion rather than a fact to the extent that it involves the concept of engaging and involves a mixed question of fact and law to the extent that it uses the word "conspiracy". The allegation is in very broad, non specific terms, and infringes not only Pt 13 r 7, but also the general law, and in turn Pt 15 r 26(1)(b). The infringement of this rule is because the generality of the pleading is likely to give rise to an extended hearing as a result of the facts relating to the conspiracy count not having been specified. Whilst this may be cured by the particulars which are included within the pleading, the particulars supplied in paragraph 55(c) of the Statement of Claim do not do so. In addition, the assertions in paragraphs 55(c)(i), (ii), (iii) and (iv) of the Statement of Claim do not allege any nexus between the false representations by Growthcorp and Platcher on the one hand, and the loss of the plaintiff's money on the other. Further fact need to be pleaded. 29 Moreover, except for the word "conspiracy" there is no allegation of any fact as to the existence of a common purpose, either by agreement (express or implied) or by overt acts. Furthermore, insofar as preparation of an application for loan without instructions from the plaintiff is concerned, there is no allegation of absence of good faith or of knowledge that the monies were to be misused or that the fifth defendant was aware that its instructions were not those of the plaintiff. 30 In addition, the actions of the plaintiff referred to in the Statement of Claim, namely, signing the relevant mortgage in the presence of his solicitor, taking up the loan and receiving at least a residue of the amount into his bank account, (i.e. $159,769), cannot but be a ratification of the loan and hence of steps honestly taken in good faith to procure it. Insofar as the claim in conspiracy relies on it, the fact that the wages certificate forwarded to the lender was false does not establish, or go to establishing, any conspiracy unless further facts are pleaded. For example, that the fifth defendant had knowledge of its falsity or was wilfully blind to such falsity. 31 In my opinion, the pleading of conspiracy against the fifth defendant is defective and should be struck out. It may be, however, that the plaintiff is in a position to plead knowledge or other fact or facts which would relevantly link the fifth defendant with the alleged wrongdoings of Platcher and Growthcorp.

Negligence Claim 32 According to the pleading, the plaintiff did not authorise the making of the application for loan. This was done by Platcher and Growthcorp purportedly on his behalf. However, the plaintiff clearly ratified the loan transaction which was the culmination of the fifth defendant's arranging for such loan to be made. Since ratification is equivalent to original authority (Union Bank of Australia v Rudder (1911) 13 CLR 152 at 163) and such ratification is revealed by the pleading, the framing of the claim in negligence also falls within the indicium in Pt 15 r 26(1)(b). Although it is not necessary to do so, if one were to go outside the pleading itself, there is evidence that the plaintiff in fact authorised the loan transaction. There are other matters which also support such a ratification. 33 The negligence is pleaded in the broadest of terms. The duties assigned in paragraph 52(a), (b) and (c) of the Statement of Claim are expressed in a manner which, in my opinion, is so broad as to conceal the real basis, if any, of the duty. The breaches assigned are stated as broadly as the duties. To allege that the fifth defendant "did not act in the interests of the plaintiff" (paragraph 53(a)) is not, in my opinion, a compliance with Pt 15 r 7. The same reasoning applies to the breaches assigned in paragraphs 53(b) and (c) of the Statement of Claim. Again there may be matters of fact which the plaintiff is able to plead as constituting breaches of duties specific to the relationship between the plaintiff and the fifth defendant, however they have not been pleaded. As the pleading is presently framed it is likely to give rise to prejudice in the presentation of the case, and delay in its presentation. It thus infringes Pt 15 r 26(1)(b).

Interference with decision by the Master 34 The exercise by the Court of its power or function under the Rules in relation to the striking out of a pleading is discretionary. This is true both in relation to the power conferred by Pt 13 r 5 and that conferred by Pt 13 r 26. In both cases the Court "may" take the steps authorised by such rules. 35 The power of a Judge to set aside a discretionary decision by a Master and to exercise his or her own discretion in substitution for such exercise by the Master depends on well established principles. These are referred to in House v The King (1936) 55 CLR 499 per Dixon, Evatt and McTiernan JJA 40 ""The manner in which an appeal against an exercise of discretion should be determined is governed by established principles. It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon the wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not taken into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure to properly exercise the discretion which the law reposes in the court of first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred." (at 504-505) 36 Such principles have been applied to an appeal from a decision of the Master (State of New South Wales v Connor [1999] NSWCA 251, 21 July 1999, unreported). 37 In reaching her decision, the Master appears not to have differentiated between the power conferred by Pt 13 r 5 and the power conferred by Pt 15 r 26. However, the exercise of the former power is hedged by the requirement for caution and for exercise only in exceptional cases (referred to above) The latter is not so hedged. The Master, however, appears to have applied the same test to both sources of power, thus investing the effective onus cast upon the moving party to strike out under Pt 15 r 26 with the same limitations as apply in respect of summary stay or dismissal under Pt 13 r 5. That is an error, and extends to the decision in relation to the pleadings concerning both causes of action. That is sufficient basis for this court to intervene. 38 In these circumstances it is, in my opinion, appropriate for the Court to intervene, not by interfering with the refusal of the Master to dismiss the proceedings summarily, but rather with the decision to dismiss the summons insofar as it sought a striking out of the pleadings subject to a right to re-plead.

Paragraphs 7, 14, 15, 48, 49, 50, 51, 52, 53, 54, 55(c) of the Statement of Claim and such of the introductory portion of paragraph 55 as alleges "and the Fifth Defendant" struck out.

The plaintiff to have leave to re-plead in negligence and conspiracy against the fifth defendant within 28 days of the date hereof.

The plaintiff to pay the defendant's costs of the appeal and of the proceedings before the Master. **********

Last Modified: 06/04/2002 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.

CITATION : Johnston v Smith [2002] NSWSC 409 FILE NUMBER(S) : SC 20743/01 HEARING DATE(S) : 7-05-02, 10-05-02 JUDGMENT DATE : 10 May 2002

COUNSEL : P - Mr J Wilson D - Mr J E Marshall SOLICITORS : P - Moray and Agnew D5 - Chegwidden Solicitors CATCHWORDS : Practice and procedure - Pleading - Requirements for proper pleading - Summary dismissal or stay - Principles - Striking out - Difference in tests for summary dismissal and striking out - Conspiracy - Necessity to plead with particularity - Negligence - Interference with decision by the Master LEGISLATION CITED : Supreme Court Rules, Pt 13 r 5, Pt 15 r 7, r 26, r 13 Common Law Procedure Act 1897, s 61 Dey v Victorian Railways Commissioners (1949) 78 CLR 62 General Steel Industries Inc v Commissioner for Railways (1964) 112 CLR 125 Webster v Lampard (1993) 177 CLR 598 Agar v Hyde (2000) 201 CLR 552 Banque Commerciale SA En Liquidation v Akhil Holdings Limited (1990) 169 CLR 279 CASES CITED : Williams v Hursey (1959) 103 CLR 30 at 107 R v Associated Northern Collieries (1911) 14 CLR 387 at 400 Rajski v Baintin (1990) 22 NSWLR 125 at 140 Union Bank of Australia v Rudder (1911) 13 CLR 152 at 163 House v The King (1936) 55 CLR 499 State of New South Wales v Connor [1999] NSWCA 251 DECISION : 1. Appeal allowed; 2. Orders of the Master set aside; 3. Paragraphs 7, 14, 15, 48, 49, 50, 51, 52, 53, 54, 55(c) of the Statement of Claim and such of the introductory portion of paragraph 55 as alleges "and the Fifth Defendant" struck out; 4. The plaintiff to have leave to re-plead in negligence and conspiracy against the fifth defendant within 28 days of the date hereof; 5. The plaintiff to pay the costs of the appeal and of the proceedings before the Master.

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Judgment (27 paragraphs)

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Cases Cited (12)