Mr Kenny was cross‑examined at length with a view to showing that he knew or should have known that the relevant market was falling. His evidence, to which he adhered, was that the market generally was in decline, but that on the basis of his discussions with local real estate agents (he had not previously done work on the Hunters Hill peninsular), he believed that the top end of the market for waterfront properties with a northerly aspect to Lane Cove remained unaffected by the general trend. The relevant evidence of Mr Kenny and the other valuers was referred to earlier and I will not give a second account of it here. I decided that it was not shown to have been negligent for Mr Kenny to have allowed for a fall in the relevant market of only 7.5% from June 1989 to April 1990. Nonetheless, on the basis of that evidence, I find that Mr Kenny should have appreciated as at April 1990, if he did not do so, at least that the market for the Property was "fragile" or "vulnerable" and that a further fall in the market for it was "on the cards". In the event, this particular finding will be seen to be unnecessary to the result of this case, since it is not in dispute that a fall in the market for real estate is foreseeable.
7.4.5 Legal conclusions on causation, remoteness and measure of damages
MGICA resisted, as the measure of its recoverable damages, the difference between the amount of the loan which was in fact insured and the amount of any loan shown to be one which it would have insured on the basis of a carefully arrived at valuation. However, "the amount of any loan shown to be one which it would have insured on the basis of a carefully arrived at valuation" is, as I have just found, nil. Accordingly, the no-transaction formula and the successful transaction formula give the same result on my findings in this case. But this does not dispose of the issue of law raised by the House of Lords decision in South Australia Asset.
If the security had been realised immediately following the making of the advance on 11 May 1990, the Property would have been sold for the amount of its value as at 18 April 1991 of some $4,000,000 or, having regard to the falling market, slightly less. Even after allowing for completion of the outstanding work, advertising and selling agent's commission, it seems that PCL, and so MGICA, would have suffered no loss. Therefore, the whole of the loss in fact suffered can be viewed as having been caused by the subsequent fall in the market.
In this respect the facts were similar to those of one of the appeals decided by the House of Lords in South Australia Asset, namely United Bank of Kuwait Plc v Prudential Property Services Ltd. In that case, there was an advance of Ł1.75m on the security of a property valued by the defendants at Ł2.5m but found to have a value of only Ł1.8m-Ł1.85m. The property was sold some 15-16 months later for Ł950,000. The trial Judge quantified the lenders' loss at Ł1,309,876.46 and awarded damages in that amount. The House of Lords allowed the appeal and reduced the award to an amount equal to the difference between the amount of the valuation (Ł2.5m) and the correct value (Ł1.8m-Ł1.85m). That case and the present one are "pure fall in market" cases in the sense that initially the true value of the security exceeded the amount advanced in reliance on the even higher valuation of it.
Before I turn to South Australia Asset and the issues of causation, remoteness and measure of damages which arise in the present case, I will refer, in chronological sequence, to eight other authorities.
The first is the decision of the Supreme Court of Canada in Lowenburg, Harris & Co v Wolley (1895) 25 SCR 51. The plaintiff lent $5,500 on the security of a mortgage over a property which the defendant financial brokers negligently represented to be worth $7,000. The property was worth only $4,700 - a difference between represented and actual values of $2,300. It was found that a prudent investor would have lent only $2,900 on the security knowing that it was worth $4,700. The mortgagor defaulted after paying only the first year's interest. The plaintiff was not able to sell the property.
A jury returned a verdict for the plaintiff on liability for the defendants' negligence. The trial judge did not, however, leave the issue of damages to the jury. Rather, he ordered the defendants to pay the plaintiff the full amount of the advance of $7,000 with interest at 8.5% p.a. from the end of the first year and ordered that upon payment by the defendants the plaintiff should assign the mortgage to them.
On appeal to the Supreme Court of Canada, the Chief Justice, with whom Sedgewick and King JJ agreed, said this:
"I am of opinion that this was not a correct disposition of the case. The effect of this judgment would be to make the appellants not only responsible for such damages as were caused by the negligent performance of their duty as the respondent's agents, in over‑valuing the mortgaged property, but also for any depreciation (if any there has been) in the actual value of the property subsequent to the loan. It is manifest that any loss in this respect should be borne by the respondent himself inasmuch as it cannot be attributed to the neglect of the appellants. All that the appellants can possibly be liable for is the loss occasioned by the over‑valuation adopted and acted on by them. The damages should have been assessed in the regular way, and that not having been done, the cause must be remitted to the Supreme Court British Columbia to have the error in this respect rectified." (at 56‑57)
Taschereau and Gwynne JJ dissented on this issue and would not have disturbed the orders of the trial Judge, although Gwynne J would have substituted an interest rate of 6% for the rate of 8.5%. (It is tempting to think that 8.5% was the contractual rate provided for in the mortgage and 6% was a rate which the evidence established the plaintiff would have obtained on his $7,000 if he had not entered into the transaction, but the report does not make this clear; cf Swingcastle Ltd v Alastair Gibson (a firm) [1991] 2 AC 223;
State Bank of New South Wales Ltd v Yee (1994) 33 NSWLR 618 (Giles J)).
The report does not record a finding as to what the plaintiff would have done if the valuation had come in at less than $7,000. In particular, there is no finding that the he would have been prepared to lend $2,900 to the same borrower on the same security. Nor is it said how damages are to be assessed. However, the majority's view is, in terms, authority for the general proposition that a mortgagee's damages do not include any element attributable to a post‑transaction fall in the market value of the security. The majority seems to approve of "the amount of the over‑valuation" as the primary measure of damages. In Banque Bruxelles, the English Court of Appeal reviewed later Canadian cases and concluded that following the Supreme Court decision in the Lowenburg case, "it seems clear that Canadian courts will not allow a mortgage lender in a no‑transaction case to recover damages for loss attributable to a fall in the market" ([1995] QB 375 at 417E).
The second case is Baxter v F W Gapp & Co [1939] 2 KB 271 (CA). (The case is more fully reported at [1939] 2 All ER 752.) The amount of the valuation was Ł1,800 and the valuer reported that the property was a reliable trustee security for an advance of Ł1,200 which the plaintiff advanced on first mortgage security over the property. Two months later, the defendants advised that the property was good security for a
further loan of Ł150 which the plaintiff also advanced. The property was later sold for Ł850.
At first instance Goddard LJ had awarded damages of Ł742:16:7 representing the total amount advanced plus the interest which the borrower had failed to pay, cost of insurance and of maintenance and repair, legal charges, costs of abortive attempts to sell, selling agent's commission and legal charges on the ultimate sale, less the proceeds of that sale. The Court of Appeal dismissed an appeal, holding that Goddard LJ's approach to the assessment of damages had been correct. MacKinnon LJ (with whom du Parcq and Macnaghten JJ agreed) described the correct measure as being "that which the plaintiff has lost by being led into a disastrous investment" (at 274). His Lordship said that the damages recoverable were not limited to the difference between the amount of the valuation and the true value.
Two observations may be made about Baxter v Gapp. First, there is no suggestion that it was regarded as a "fall in market" case. Both Mackinnon and Macnaghten LJJ noted that the valuer had not led evidence of a fall in the market to explain the difference between the valuation amount of Ł1,800 and the sale price of Ł850. So far as the report of the appeal reveals the true value may have been assumed by their Lordships to be no more than the price for which the property was later sold (Ł850). The trial Judge, however, having noted expert evidence led by the plaintiff that the true value had been between Ł800 and Ł900, said that if he had had to put a value on the property it would have been more than that ([1938] 4 All ER 457 at 463 F,G). His Lordship had noted that the highest figure which any valuer had placed on the property was Ł1,150. In that state of the evidence, he had simply decided that the defendants' valuation of Ł1,800 was not "justifiable" and that no advance would have been made if the defendants had exercised due care and skill.
The second observation is that in so far as it allowed recovery of contractual interest, Baxter v Gapp was overruled by the House of Lords in Swingcastle Ltd v Alastair Gibson (a firm) [1991] 2 AC 223.
The third, fourth and fifth cases in this sequence are first instance decisions in the Supreme Court of New South Wales. In the first of these, Laughton-Boyd v Moloney (unreported, Supreme Court of New South Wales, 8 June 1979), Yeldham J approached the assessment of damages as Ralph Gibson J had done a little earlier in Corisand Investments Ltd v Druce & Co (1978) 248 EG 315; [1978] 2 EGLR 142, namely, by limiting recovery to the difference between the amount lent and the amount which would have been lent on the basis of a carefully arrived at valuation.
The second New South Wales case is Kooragang Investments Pty Ltd v Richardson & Wrench Ltd (unreported, Supreme Court of New South Wales, Rogers J, 4 July 1980) (on appeal [1981] 2 NSWLR 1 (PC)). Rogers J gave a verdict for the defendant valuers, but touched on the question of the correct measure of damages. He dealt with a submission by the defendants that the plaintiff lender's recovery was limited to the difference between what was lent and what would have been lent if there had not been negligence by the valuers. He found that the plaintiff had been prepared to lend 65% of whatever the valuation might have been. However, he accepted a submission by Mr Clarke QC (as Clarke JA then was) that it was "pure speculation" whether the borrower would have been prepared to accept "a loan in the lesser amount thrown up by a proper valuation" (judgment transcript at 26). His Honour thought that in the absence of affirmative evidence on this matter, the plaintiff was entitled to damages calculated "conformably with the principles enunciated by the English Court of Appeal in Baxter's Case" (ibid).
The third New South Wales case is the Trade Credits case. Clarke J (as Clarke JA then was) followed Rogers J in the Kooragang Investments case by applying Baxter v Gapp in the absence of evidence that the borrower would have accepted a loan in any lesser amount which the lender would have been willing to lend on the basis of a carefully arrived at valuation.
The sixth case in the present sequence of eight is the Victorian Full Court decision in Duncan & Weller Pty Ltd v Mendelson [1989] VR 386. The Full Court distinguished Baxter v Gapp on its facts as a case in which, if the plaintiff had been given a correct valuation, he would not have entered into the loan transaction at all. In the case before the Full Court, the transaction would have proceeded in any event, but if carefully advised, the mortgagees would have withheld $92,536, rather than merely $8,000, to cover the cost of completing certain building work - a successful transaction case. None of the three members of the Full Court questioned the correctness of the approach taken in Baxter v Gapp to the assessment of damages in a no-transaction case. On the other hand, the occasion did not arise for them to consider the correctness of it. Kaye J said, citing authorities, that:
"The general rule is that the measure of a lender's loss resulting from a negligent valuation of a mortgage security is the difference between the amount advanced by the lender in reliance on the valuer's negligent valuation and the amount the lender would have advanced on a valuation made with appropriate skill and due care: ..." (at 391)
As I have said earlier, where a lender would have advance no amount if due care and skill had been exercised, a test formulated in this manner signifies that there is a recovery in accordance with the "restitutionary" measure: what was outlaid in reliance on the valuation minus what was recovered.
The seventh case is the decision of the New Zealand Court of Appeal in McElroy Milne v Commercial Electronics Ltd [1993] 1 NZLR 39. The plaintiff developer (CEL) was embarking on a project involving the purchase of land and the construction on it of a warehouse and office building complex to meet the requirements of a tenant which was to take a lease for twelve years with the right of renewal. The tenant's obligations under the lease were to be guaranteed by its parent company. CEL proposed to sell the development with the benefit of the lease and guarantee as soon as possible after completion.
The defendant solicitors prepared an agreement for the lease as between CEL and the tenant which included an undertaking by the tenant to obtain its parent's guarantee. Importantly, however, the parent company was not a party. After completion of building work, neither the tenant nor its parent would execute the form of lease prepared. CEL sued the solicitors for damages in negligence arising out of their failure to bind the parent company to the agreement for lease.
In the High Court of New Zealand, the defendants were held liable. Damages were assessed on the basis that if CEL had sold the development fully leased and occupied, this would have eventuated six months after completion in a sum of $5.25 million. The value at the date of trial was found to be $4.0 million. It was found that if the parent had been named as a party to the agreement for lease it would probably have executed that agreement although it would have endeavoured to withdraw. The amount of damages otherwise recoverable was discounted by 25% to allow for contingencies and judgment was entered for $1.25 million plus net interest and rates, discounted by 25%.
On appeal as to damages only, the New Zealand Court of Appeal held that CEL was to be compensated for the loss of the ability to market the development as planned - a loss which was foreseeable and not too remote. The Court of Appeal held, in particular, that the defendants had to accept the state of the market at the date when it became possible for CEL to offer the property for sale, and that it was no answer for them to say that the market had fallen to an unanticipated extent.
Specifically in relation to the fall in the market, Cooke P said this (at 44):
"The remaining exercise is quantification. This is not necessarily restricted by foresight or contemplation. In principle it is prima facie an eggshell skull type of case, in that the contract breaker has to take the state of the market at the date when in fact it became possible for CEL to offer the property for sale free from dispute. that was not before May 1989, by which stage the market had fallen still further from its declining level in 1988. Possibly there may be some cases where a depressed market could not be said to be sufficiently clearly and strongly or naturally related to the breach of duty to warrant imposing liability. But in this case it is not enough in my opinion to say that the market fell to an extent never expected by the appellant. Part of the very purpose of a guarantee is to protect against market deterioration. The more serious the deterioration, the more important the guarantee. Like others disadvantaged by the crash the appellant has to accept the consequences of failure to carry out its responsibilities. All factors relevant in considering remoteness appear to me to point to its liability." (at 44)
Hardie Boys and McKay JJ delivered independent judgments, relevantly to the same effect.
The eighth and last case to be noted is the decision of Heerey J of this Court in Henderson v Amadio Pty Ltd, unreported, 23 November 1995. His Honour noted the decision of the English Court of Appeal in Banque Bruxelles. His Honour described the case before him (one of investment rather than loan or mortgage) as a no-transaction case. He referred to, inter alia, Banque Bruxelles and the Trade Credits case and said that a fall in the market did not break the chain of causation of loss (at judgment transcript, pp 397-400, 440).
The foregoing review brings me to the decision of the House of Lords in South Australia Asset. That decision is not binding on me and is "useful only to the degree of the persuasiveness of [its] reasoning": Cook v Cook (1986) 162 CLR 376 at 390 (Mason, Wilson, Deane, Dawson JJ), 394 (Brennan J). MGICA submits that I should conclude that the reasoning of the English Court of Appeal in Banque Bruxelles is more persuasive. The Australian cases to which I referred seem to have accepted that the restitutionary approach is applicable to a no‑transaction case, including one in which part, or as in the present case the whole, of the loss suffered arises immediately from a fall in the market. Of course, those cases preceded the House of Lords decision. Moreover, the precise issue before me did not call for decision in those cases. Notwithstanding these considerations, those cases give me cause to hesitate before departing from the restitutionary approach.
In March v E & M H Stramare Pty Ltd (1991) 171 CLR 506 a majority of the High Court held that the "but for" or causa sine qua non test should not be seen as the test of legal causation (McHugh J disagreed). Mason CJ said this:
"The cases demonstrate the lesson of experience, namely, that the test, applied as an exclusive criterion of causation, yields unacceptable results and that the results which it yields must be tempered by the making of value judgments and the infusion of policy considerations." (at 516)
Deane J said:
"For the purposes of the law of negligence, the question of causation arises in the context of the attribution of fault or responsibility whether an identified negligent act or omission of the defendant was so connected with the plaintiff's loss or injury that, as a matter of ordinary common sense and experience, it should be regarded as a cause of it (cf Barnes v Hay [(1988) 12 NSWLR 337, at p 339]." (at 522)
Toohey J agreed generally with the reasons of Mason CJ, and in particular agreed that:
"Where negligence is in issue, causation is essentially a question of fact, in the sense explained by the Chief Justice, into which considerations of policy and value judgments necessarily enter." (at 524)
Gaudron J agreed with Mason CJ and Deane J.