Key Nominees Pty Limited v Ace Insurance Limited

Under the terms of the order that this question be decided separately, if the question is decided in the affirmative, there is to be judgment for the defendant. If the question is decided in the negative, the balance of the proceedings are to go to trial, subject to all other matters of defence and/or reply available to the parties.

The factual background I was asked to assume to determine the separate question was as follows. On or about 18 May 2004 Clydoc delivered to the plaintiff's agent a written valuation of the property, valuing it at $1.35m. A competent valuer would have valued it at no more than $1.05m. Acting in reliance on the valuation the plaintiff advanced $910,000.00 to the borrower secured by registered first mortgage over the property. The plaintiff's lending practice was not to lend more than 70% of market value of the security and but for the valuation would have lent no more than $700,000. The borrower defaulted under the terms of the mortgage and was subsequently made bankrupt. The property was sold at public auction pursuant to the mortgagee's power of sale on 30 September 2005, and after payment of costs and expenses the net proceeds were $777,204.48, insufficient to meet the principal amount of the loan and accruals of interest.

The hearing proceeded on the understanding that the cause of action accrued when the plaintiff first suffered any loss. The question for determination was when that occurred.

The defendant says that the loss first occurred late in 2004 when a combination of events, starting with the bounced cheque in October 2004 and ending with a third default on 29 December 2004, made it reasonably ascertainable that there would be a loss, because there had been significant and assessable falls in values in areas of Sydney, including the Northern Beaches area, since mid 2004.

The plaintiff says the loss did not occur until September 2005, only when the mortgagee sale 'crystallised' the value of the security, and it was actually known that it was inadequate to cover the loan and accruals of interest, and therefore productive of a loss.

The applicable legal principles 8. It was common ground between the parties that the starting point for any analysis of the legal principles applicable to the question to be decided in Australia is the decision of the High court in Wardley Australia Ltd v The State of Western Australia (1992) 175 CLR 514, in which it was established that a breach of duty causing a person to enter into a disadvantageous transaction that comprises a mere risk of economic loss does not give rise to a cause of action at the time of the transaction, and a cause of action will only accrue at a later time if actual loss materialises or eventuates: see Professional Liability in Australia, 2nd edition, Walmsley, Abadee and Zipser at 1.2300 on page 188. Thus, prospective loss is insufficient and a cause of action only accrues when there is some actual loss: Wardley at 527. Where a contract exposes a plaintiff to a contingent loss or liability, no actual damage is sustained until the contingency is fulfilled and the loss becomes actual. Until that happens the loss is prospective and may never be incurred: Wardleyat 532.

Thus, it was not disputed in the present case that no loss was suffered at the time of the plaintiff entering into the mortgage and advancing the loan, in reliance upon the overvaluation, and it was agreed that any loss remained contingent until actual loss eventuated. Nor was it disputed that the prospective loss became actual loss was ultimately incurred. The dispute here revolved around the question of when actual loss first eventuated, that is, when the contingent loss became actual, the contingency having been fulfilled.

The majority in Wardley reached the conclusion (at 532-3) that the time when a plaintiff first suffers actual loss in respect of contingent loss accords with the comment of Gaudron J in Hawkins v Clayton (1988) 164 CLR 539 at 601:

"[I]f the interest infringed is an interest in recouping moneys advanced it may be appropriate to fix the time of accrual of the cause of action when recoupment becomes impossible rather than at the time when the antecedent right to recoup should have come into existence, for the actual loss is sustained only when recoupment becomes impossible."

A contingent loss, therefore, becomes actual and actionable when recoupment becomes impossible. The disadvantageous character or effect of the agreement cannot be ascertained until its impact on events as they unfold or becomes known or apparent. Otherwise the court would be forced to estimate damages on the basis of likelihood or probability instead of by reference to established events. "In such a situation, there would be an ever-present risk of undercompensation or overcompensation": Wardley at 527. The majority went on to say (at 533):

"The conclusion which we have reached is reinforced by the general considerations to which we referred earlier (at 527). It is unjust and unreasonable to expect the plaintiff to commence proceedings before the contingency is fulfilled. If an action is commenced before that date, it will fail if the events so transpire that it becomes clear that no loss is, or will be, incurred. Moreover, the plaintiff will run the risk that damages will be estimated on a contingency basis, in which event the compensation awarded may not fully compensate the plaintiff for the loss ultimately suffered."

It was the following passage by Brennan J in Wardley (at 537) that later cases have adopted as articulating the relevant test as to when prospective loss becomes actual loss:

"The quantification of the diminution in value of an asset or of a liability incurred or the value of any benefit acquired may not be ascertainable at the time when the burden of the transaction is borne. In that event, the suffering of any loss cannot be said to occur before it is reasonably ascertainable (not before it is ascertained) that the burdens which the plaintiff has borne are greater than the value of the benefits that the plaintiff has acquired or will acquire. In other words, no loss is suffered until it is reasonably ascertainable that, by bearing the burdens, the plaintiff is 'worse off than if he had not entered into the transaction'."

In Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) CLR 414, Gaudron J referred to this passage and said (at 425):

"…the time that loss occurs (and hence the time when the tort is complete) is when recoupment is rendered impossible. In the case of a mortgage transaction, that will occur when it is reasonably ascertainable that sale will result in a loss. At the earliest it will be when default occurs and, at the latest, when the property is sold."

In NSW Aboriginal Land Council v Ace Global Markets Ltd [2005] NSWSC 39, Wood CJ at CL adopted what he described as the Wardley approach, as well as that favoured by Gaudron J in Kenny & Good Pty Ltd v MGICA (1992) Ltd. He then said (at [108]):

"Objectively, as at that date, it was both clear and objectively ascertainable that there would be a significant shortfall."

Counsel for the plaintiff in the present case submitted that these statements by Gaudron J and Wood CJ at CL incorrectly interpret Wardley and that the correct principle is that actual loss cannot occur until it crystallises and is made certain by an actual sale, when total recoupment becomes impossible. The loss remained contingent until that time.

The plaintiff, therefore, submitted that the contingency was the sale, because only upon sale can there be any certainty of a shortfall.

The defendant's counsel submitted that the contingency was the borrower's defaults, because it was these that gave rise to the right to exercise the power of sale, and thus the loss.

I disagree with both propositions. In my view the correct principle is that stated by Gaudron J in Kenny & Good Pty Ltd v MGICA (1992) Ltd and what she is there doing is explaining the Wardley principle and its application, so as to determine when, in the case of a mortgage transaction, the contingent loss becomes actual, because recoupment is rendered impossible. That occurs when it has become reasonably ascertainable, by objective evidence, that sale will result in a loss. Default is not the contingency, because even where default has occurred, unless it is reasonably ascertainable that sale will result in a loss, the loss remains prospective. That a sale would result in a shortfall is a question of fact. It is not required, as a matter of law, for an actual sale to occur, as was made clear in NSW Aboriginal Land Council v Ace Global Markets Ltd. So long as there is evidence that a sale would produce a shortfall, the contingency is fulfilled and the prospective loss becomes actual. It may be, for example, that a sale will assist in the quantification of the ultimate loss, but it is not the sale that is the contingency that gives rise to actual loss.

Application of the principle 19. The application of the principle, thus explained, to the present case, requires an examination of the point of time at which the evidence discloses it was reasonably ascertainable that a sale of the mortgaged property would produce a shortfall.

20. The only evidence as to the value of the property as at the time of the borrower's defaults in late 2004 is that it may have been something less than $1.05m. It is insufficient for me to conclude that it was reasonably ascertainable that a sale at that time would have resulted in a shortfall. Unlike the factual situation that presented itself in NSW Aboriginal Land Council v Ace Global Markets Ltd, here it was not 'clear and objectively ascertainable' that there would be a shortfall. The only evidence that there would be a shortfall arose as a result of the sale itself.

21. For these reasons I find that the prospective loss, brought about as a result of the undervaluation of the mortgaged property, did not become actual until after 25 March 2005, and it remained contingent until the auction on 30 September 2005.

22. It follows that the answer to the separate question for determination is "No", the plaintiff's cause of action against Clydoc Pty Limited for negligence in relation to a valuation dated 18th May 2004 in respect of a property at 108 Cabarita Road Avalon, which is the subject of the draft statement of claim annexed and marked "A" to the summons in these proceedings, did not accrue prior to 25 March 2005.

Disposition 23. I therefore order that the balance of the proceedings are to go to trial, subject to all other matters of defence and/or reply available to the parties

24. I further order the defendant to pay the plaintiff's costs of the separate question, on the ordinary basis.

25. The parties should bring in short minutes by way of a timetable for the further conduct of the proceedings, including the filing of a Defence, the serving of any affidavit evidence, and a date for a Directions Hearing in the Commercial List with a view to the allocation of a hearing date.

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.