MBAKWE v SARKIS [2009] NSWCA 330 | Case summary

15 October 2009 Samuel MBAKWE v Sam George SARKIS Judgment 1 ALLSOP P: I agree with Handley AJA. 2 IPP JA: I agree with Handley AJA. 3 HANDLEY AJA: This is an appeal by the defendant from the judgment of Rolfe DCJ in a negligent misrepresentation case. The Judge held that the defendant had been the plaintiff's financial adviser, that as such he owed the plaintiff a duty of care, and that he had breached that duty in advising the plaintiff to make unsecured loans to companies controlled by a Mr Robert Orehek. 4 The Judge made comprehensive findings of primary fact which have not been challenged. Two specific findings in the nature of inferences drawn from the primary facts were challenged, the finding about the scope of the defendant's retainer as the plaintiff's financial adviser, and that he charged the plaintiff for his work in connection with the Orehek loans. The other grounds of appeal challenged the Judge's ultimate findings of duty, breach and reasonable reliance or causation. 5 The plaintiff's evidence, with one limited exception, was accepted by the Judge in preference to that given by the defendant. The plaintiff had a successful business as a technician servicing X-Ray film processing machines and associated equipment but lacked financial expertise, and wanted to obtain the services of someone who could help him in this area. 6 In the latter part of 1999 a mutual friend introduced the defendant as a suitable person for this purpose and the defendant agreed to help. At a follow up meeting the defendant said that he would charge $300 a month "to look after your business and keep an eye on things" and the plaintiff agreed to this arrangement. 7 The relationship developed in the following years. The defendant visited the plaintiff's office once or twice a week to review mail and other documents left in his in-tray which he would later discuss with the plaintiff. In the second half of 2000 the defendant suggested to the plaintiff that he purchase an investment property at Surry Hills. The plaintiff agreed, and after inspecting three properties in the area the plaintiff agreed to purchase one. The defendant made the arrangements for the purchase, the finance, and the letting of the property. Other real estate investments were investigated the following year but the transactions did not proceed. 8 In 2001 the defendant assisted the plaintiff to incorporate his business and set up a superannuation fund of which he became a trustee. The defendant was invited to attend a meeting of the company in August 2002. The plaintiff introduced him as his business adviser at business meetings with his accountant, with Agfa the X-Ray film supplier, and with others. During the first half of 2001 the plaintiff involved the defendant in discussions with a Mr Williams and others about a loan of $16,000 he had made to help them with a coffee shop at Springwood. The plaintiff arranged for the defendant to visit the shop and advise Mr Williams and his partners on how to improve their business. 9 Early in 2002 the defendant gave the plaintiff a brochure promoting Mr Orehek and his companies which were involved in property development. The defendant told the plaintiff that a loan to Mr Orehek would be safe and secure, the borrower would have no problem in paying back the loan and the deal was "a great opportunity". He said that Mr Orehek had been in this business for over 10 years and the plaintiff would get a 30% return after twelve months. 10 In March the plaintiff and the defendant visited Mr Orehek at his office at North Sydney where he made representations to the plaintiff to the same effect. Later that month the plaintiff lent Mr Orehek and his companies $150,000 on the terms of a Deed of Loan. 11 He made a further loan of $45,000 to Mr Orehek and his companies, at the suggestion of the defendant, in August. The defendant raised the topic by telling the plaintiff that he had the opportunity to lend more money to Orehek and receive 10% for three months and it was a great opportunity. The plaintiff borrowed the funds from his parents. His last loan of $50,000 was made in September, again at the suggestion of the defendant who said: "There's another chance to lend money to Orehek, like before, are you interested?" The moneys invested were totally lost and within a relatively short time the companies went into administration or liquidation, and subsequently Mr Orehek became bankrupt, and went to goal. 12 The challenge to the Judge's finding that the defendant owed a duty of care in giving the plaintiff financial advice was based on a submission that these unsecured loans were outside the scope of the defendant's retainer, that he had not charged for his work in relation to these loans, and that the advice, which he had volunteered, was given as a friend on a social or casual basis where legal relationships were not in contemplation. 13 These submissions are rejected. The relationship created by the defendant's informal retainer, in the events that happened, was not limited to the plaintiff's own business. If at the outset it was limited as suggested it did not remain limited. The parties' subsequent conduct either widened the retainer, or exposed the width that had originally been intended. 14 Counsel for the appellant relied on the fact that the defendant had volunteered information about the Orehek companies. This however was not unusual. The defendant did not simply wait to respond to the plaintiff's requests for advice or assistance. He took the initiative when he brought to the plaintiff's attention the possibility of buying an investment property. The defendant's advice about the Orehek investments took place within the framework of the relationship created by the defendant's retainer as the plaintiff's financial adviser. This was a relationship in which the defendant was free to offer advice without waiting to be asked. 15 Although the fact that the advice was volunteered is relevant there is no blanket immunity and a duty of care may be recognised in appropriate cases. The relevant principles were summarised in Spencer Bower, Turner and Handley "Actionable Misrepresentation" 4th ed pp 266-7: "Commonly the relationship will be initiated by the party seeking information or advice, but it may arise in the context of a wider transaction, … or be initiated by one party voluntarily providing information to another. An antecedent request for information and advice 'is by no means essential' and although it has been suggested that 'instances of liability for misstatement volunteered will be rare', it may be doubted whether this is correct." 16 Given the defendant's position as the plaintiff's financial adviser and their continuing relationship the fact that the advice about the Orehek transactions was volunteered provides no basis for rejecting a duty of care. 17 The defendant rendered three accounts to the plaintiff for his services. The first dated 7 November 2000 for $3,000 was described as being "for financial services" (Blue 75). The second dated 11 April 2002 was for $9,240 for services as "1. Joint Venture. 2. Annual Monitoring Fee" (Blue 69). The third dated 13 July 2002 was for $9,075 for services described as "Property, Monitoring, C. Williams, Joint Venture, Agfa - expenses" (Blue 72). 18 The Judge did not accept (Red 24) the plaintiff's evidence that the charge of $6,000 for the "Joint Venture" in the second invoice was for arranging the first loan to Orehek. He did not think that the parties had a specific discussion about a charge for the Orehek arrangement, but was satisfied (Red 24) that the defendant included in the amounts charged for work on the proposed joint venture with Mr Cummings the time he spent on the first Orehek matter. 19 This finding cannot be disturbed, but in any event the recognition of a duty of care did not depend on a finding that the recipient paid for it. 20 The submission that the defendant gave advice about these loans as a friend, and not as a financial adviser, and gave it on social or casual occasions, is without substance. It was given by a financial adviser to his client within the general scope of their relationship, and related to sums totalling $245,000. The plaintiff obtained $100,000 from his superannuation fund, $100,000 from his business and borrowed $45,000 from his parents. Clearly this was serious business advice. The defendant was given the cheques in each case. 21 The Judge's findings that the plaintiff was advised to lend to the Orehek group (appeal ground 4), and that the defendant gave him information or advice in relation to the second and third loans (appeal grounds 5, 6) were also challenged. However those grounds were not pressed in oral argument. In any event the evidentiary findings were based on acceptance of the evidence of the plaintiff in preference to that of the defendant. Counsel for the appellant did not attempt to establish that those findings were amenable to appellate review within any of the exceptions to the Abalos principle. 22 The challenges in grounds 8 and 9 were directed to the Judge's findings that the plaintiff relied on the defendant's statements about the Orehek group and that his reliance was reasonable. The first challenge was based on the face to face interview between the plaintiff and Mr Orehek which the defendant arranged, and which he insisted the plaintiff should attend. During this meeting Mr Orehek made representations to the general affect of those made earlier by the defendant. 23 It was submitted that the plaintiff did not rely on the defendant's representations but only on those made by Mr Orehek. It may readily be accepted that the plaintiff relied on the latter, but this does not exclude reliance on the earlier representations by the defendant. The plaintiff was not cross-examined to suggest that he relied solely and exclusively on Mr Orehek and such a finding would be against all the probabilities. The evidence did not reveal any occasion on which the plaintiff rejected the defendant's advice. 24 The established legal principles are summarised in Spencer Bower Turner and Handley "Actionable Misrepresentation" 4th ed pp 72-3: "It is enough that the representation was an inducing cause, it need not be the only inducing cause. … It is enough if revelation of the material facts might have given [the plaintiff] pause. If the misrepresentation was an inducing cause of the alteration of position, it is no answer that other causes contributed to producing the result. As Stephenson LJ said: JEB Fasteners Ltd v Marks Bloom & Co [1983] 1 All ER 583 CA, 589: 'as long as a representation plays a real and substantial part, though not by itself a decisive part, in inducing a plaintiff to act, it is a cause of his loss and he relied on it, no matter how strong or how many are the other matters which played their part in inducing him to act'".

See also Gould v Vaggelas [1985] HCA 85, 157 CLR 215, 219, 236. 25 The remaining grounds of appeal (2, 3, 7) challenged the Judge's ultimate findings of duty and breach, and the adequacy of his reasons for the former. The classic statement in Australia of the circumstances which will give rise to a duty of care in the giving of information and advice is that of Barwick CJ in Mutual Life and Citizens Assurance Co Ltd v Evatt [1968] HCA 74, 122 CLR 556, 571: "… the circumstances must be such as to have caused the speaker or be calculated to cause a reasonable person in the position of the speaker to realise that he is being trusted by the recipient of the information or advice to give information which the recipient believes the speaker to possess or to which the recipient believes the speaker to have access or to give advice, about a matter upon or in respect of which the recipient believes the speaker to possess a capacity or opportunity for judgment, in either case the subject matter of the information or advice being of a serious or business nature. It seems to me that it is this element of trust which the one has of the other which is at the heart of the relevant relationship. I should think that in general this element will arise out of an unequal position of the parties which the recipient reasonably believes to exist. The recipient will believe that the speaker has superior information, either in hand or at hand with respect to the subject matter or that the speaker has greater capacity or opportunity for judgment than the recipient … the speaker must realise or the circumstances be such that he ought to have realised that the recipient intends to act upon the information or advice … in connection with some matter of business or serious consequence … Further it seems to me that the circumstances must be such that it is reasonable … for the recipient to seek, or to accept, and to rely upon the utterance of the speaker." 26 Although the majority decision of the High Court was reversed by the Privy Council: [1971] AC 793 the statement of principle by Barwick CJ has since been accepted by the High Court as authoritative: Shaddock & Associates Pty Ltd v Parramatta City Council [No. 1] [1981] HCA 59, 150 CLR 225, 251, 255-6: San Sebastian Pty Ltd v The Minister [1986] HCA 68, 162 CLR 340, 355-6, 371-2; Esanda Finance Corporation Ltd v Peat Marwick Hungerfords [1997] HCA 8, 188 CLR 240, 249-50, 255, 261; Tepko Pty Ltd v Water Board [2001] HCA 19, 206 CLR 1, 16-7, 23. 27 On the Judge's findings this was a classic case for the recognition of a duty of care in utterance within the principles stated by Barwick CJ in Evatt's case. The Judge's reasons adequately and correctly set out the applicable principles and their application to his findings. 28 The challenge to the finding of breach of duty is also without substance. On the primary findings the defendant gave the plaintiff unconditional assurances about the safety and merits of these investments. Sadly the truth was otherwise and the principal trading company in the Orehek group, Norton Investments Pty Ltd, incurred losses of $564,183.00 during 2001 and its balance sheet at 30 June that year showed an excess of liabilities over assets of $1,006,766. 29 If the defendant made no enquiry his recommendation of the investments without appropriate qualification and disclosure was a breach of duty. If he did make enquiries they were clearly inadequate. The most cursory examination of the 2001 accounts would have revealed that an unsecured loan to the group was an extremely risky investment. 30 The final point made by Ms Obrart, counsel for the appellant, was that the representations found by the Judge which led to the second and third investments were of a limited nature, and the findings of reliance and inducement in respect of those investments could not be supported. The plaintiff's evidence of the conversation before the second transaction was that the defendant told him that "there was another opportunity to lend money to Orehek", and when the plaintiff said that he would have to borrow from his parents the defendant said this was a good idea. (Red 20) 31 The relevant conversation before the third investment was that the defendant told the plaintiff that "there was another chance to lend money to Orehek like before" (Red 20). The Judge accepted the plaintiff's evidence about these conversations (Red 25). 32 The brevity of these conversations does not preclude findings of reliance and inducement. In each case the defendant's remarks incorporated and republished the representations and assurances he had made and given before the first transaction. This was the effect of his reference in the second conversation to "another opportunity", and in the third to "another chance … like before". 33 The law also recognizes that representations may continue without being expressly repeated, unless modified or withdrawn, so long as they remain relevant to the dealings between the parties: Spencer Bower Turner and Handley "Actionable Misrepresentation" 4th ed pp 39-40. There is no ground for disturbing the findings of reliance and inducement. 34 The appeal fails on all grounds and should be dismissed with costs.

MBAKWE v SARKIS

At a glance

Court

Decision date

Before

Source

Judgment (18 paragraphs)

Parties

Cases Cited (7)

Cited By (1)