Perpetual Trustees Victoria Ltd v Malouf

Perpetual Trustees Victoria Ltd (Plaintiff) Anis Malouf (1st Defendant) PARTIES : Albert Anis Malouf (2nd Defendant) Alice Malouf (3rd Defendant) LawCover Insurance Pty Ltd (Respondent to motion)

COUNSEL : Mr C. Jurd (Sol) (1st & 3rd Defendants) Mr G Curtin (Respondent to motion)

SOLICITORS : Sid Hawach & Co (1st & 3rd Defendants) Mullane & Lindsay Solicitors (Respondent to motion)

• 16 - IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

13045/06 PERPETUAL TRUSTEES VICTORIA LIMITED V MALOUF & ORS

JUDGMENT 1 HER HONOUR: This application concerns the operation of s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 and illustrates the force of the view that it is an unsatisfactory provision and should be reconsidered: see The Owners - Strata Plan 50530 v Walter Construction Group Limited (In Liquidation) & Ors [2007] NSWCA 124 at [7] per Giles JA; see also New South Wales Aboriginal Land Council v Ace Global Markets Limited [2005] NSWSC 39 at [88] to [90] per Wood CJ at CL. 2 In the underlying proceedings, the plaintiff ("Perpetual") seeks possession of a property originally owned by the first and third defendants, Mr and Mrs Malouf. The second defendant, Albert Malouf, is their son. The property in question is apparently Mr and Mrs Malouf's home (according to Albert's pleadings). 3 Mr and Mrs Malouf say that in May 2004, thinking they were providing short term assistance to Albert, they were driven to the offices of a solicitor, Mr Goldberg, where they signed certain documents, the contents and effect of which were not explained to them. 4 They later learned that Mrs Malouf was no longer an owner of the property, that Albert Malouf had become a tenant in common and that a mortgage of $700,000 had been placed over the property. The documents executed by Mr and Mrs Malouf included:

(a) a transfer of Mrs Malouf's interest in the property to Albert Malouf which resulted in Mr Malouf and Albert Malouf holding the property as tenants in common in equal shares;

(b) a loan agreement between Perpetual as lender and Mr Malouf and Albert Malouf as borrowers for a loan facility drawn down to an amount of $700,000;

(c) a mortgage over the property securing the loan (which is the mortgage sought to be enforced in these proceedings). 5 The advance of $700,000 was paid to Albert Malouf out of Mr Goldberg's trust account in June 2004. Albert used the funds to invest in the short term lending market. According to his pleadings, he agreed on 3 June 2004 to advance the sum of $700,000 to two men, George and Habib Farah who, it appears, had interests in a group of companies that owned various restaurants. The loan was for a term of three months at an interest rate of 5% and, in default, 10%. Interest was paid to Albert in advance. 6 George and Habib Farah defaulted in repayment of the $700,000 to Albert, which was required on 3 September 2004, and it transpired that Albert did not hold the security of registered second mortgages over various properties, as he alleges he had been given to believe by Mr Goldberg. 7 Without the funds that were required to be repaid by George and Habib Farah on 3 September 2004, Albert and Mr Malouf have fallen into default under the mortgage granted to Perpetual to secure the original advance to them. 8 Mr and Mrs Malouf have cross-claimed against Mr Goldberg for negligence and breach of the Fair Trading Act 1987. They claim that neither of them is fully literate in the English language and that Mr Goldberg did not explain the nature and effect of the documents they signed and did not ask them or otherwise enquire whether they understood the documents. They say they were not advised to obtain independent legal advice and that the advice given by Mr Goldberg was of a very limited nature. 9 Curiously, the cross-claim does not seek damages from Mr Goldberg but only "indemnity or contribution" in respect of any verdict recovered by Perpetual against Mr Malouf. That may be an oversight on the part of the pleader.

10 Mr Goldberg has ceased to practice as a solicitor. On 15 July 2004 the Law Society cancelled his practising certificate and appointed a manager to his practice by resolution of the Council of the Law Society under s114B of the Legal Profession Act 1987. The cross claim brought against him by Mr and Mrs Malouf in these proceedings was served pursuant to an order for substituted service, after a number of unsuccessful attempts by process-servers to locate him. He is not participating in the proceedings. There is no evidence as to whether he is personally aware of the claim. He has provided no notice of it to his insurer. 11 In those circumstances, Mr and Mrs Malouf seek leave pursuant to s 6(4) of the Law Reform (Miscellaneous Provisions) Act 1946 ("the Act") to issue a cross-claim to join the insurer ("LawCover") as a cross-defendant in the proceedings. 12 LawCover opposes the application on the grounds that the event giving rise to the claim against Mr Goldberg occurred prior to the inception of the relevant contract of insurance, which is a "claims made" policy. Mr Curtin, who appeared for LawCover, also submitted that the applicant must satisfy the Court that Mr Goldberg is not a good common law defendant: Ace Global Markets at [56]. However, that submission was not developed with any enthusiasm. Having regard to the circumstances summarised in paragraph 10 above, I would not have refused leave on that ground alone.

13 An application for leave under s 6(4) was also filed by Albert Malouf. However, there was no appearance for him at the hearing and accordingly I dismissed his application.

The nature of a "charge" under s 6(1) 14 Section 6 of the Act relevantly provides: Amount of liability to be charge on insurance moneys payable against that liability (1) "If any person (hereinafter in this Part referred to as the insured) has, whether before or after the commencement of this Act, entered into a contract of insurance by which the person is indemnified against liability to pay any damages or compensation, the amount of the person's liability shall on the happening of the event giving rise to the claim for damages or compensation, and notwithstanding that the amount of such liability may not then have been determined, be a charge on all insurance moneys that are or may become payable in respect of that liability. …. (4) Every such charge as aforesaid shall be enforceable by way of an action against the insurer in the same way and in the same court as if the action were an action to recover damages or compensation from the insured; and in respect of any such action and of the judgment given therein the parties shall, to the extent of the charge, have the same rights and liabilities, and the court shall have the same powers, as if the action were against the insured: Provided that, except where the provisions of subsection (2) apply, no such action shall be commenced in any court except with the leave of that court. Leave shall not be granted in any case where the court is satisfied that the insurer is entitled under the terms of the contract of insurance to disclaim liability, and that any proceedings, including arbitration proceedings, necessary to establish that the insurer is so entitled to disclaim, have been taken." 15 The section seeks to secure the performance of any obligation of the insurer to pay insurance moneys to the insured, and any obligation of the insured to pay damages to the claimant. It does so by creating a new right with an associated remedy to enforce it: Bailey v New South Wales Medical Defence Union Limited (1995) 184 CLR 399 at 446 to 447 per McHugh and Gummow JJ, Brennan, Deane and Dawson JJ agreeing at 415.8. Section 6(1) creates a statutory right which arises on the happening of the "event" giving rise to the claim against the insured. The relevant event is whatever completes the claimant's cause of action against the insured: The Owners - Strata Plan 50530 v Walter Construction Group at [24]. 16 The remedy to enforce performance of the obligation secured by such a charge is the direct right of action against an insurer given by section 6(4), subject to the requirement for leave. Section 6(4) does not direct the Court to deny leave only in a case where it is satisfied both of the entitlement to disclaim liability and that necessary steps have been taken to establish entitlement to do so. Leave must be refused in those cases but may also be refused, as a matter of discretion, even if the prohibition does not apply: Bailey at 448.5; Tzaidas v Child [2004] NSWCA 252 at [17] per Giles JA; The Owners - Strata Plan 50530 v Walter Construction & Ors [2006] NSWSC 552 at [19] per McDougall J. 17 Leaving aside any question of discretion, it is important to bear in mind that the remedy cannot exist in the absence of the right - there is no occasion for granting leave in the absence of a charge. Accordingly, a threshold question in any application for leave under s 6(4) is whether a charge under s 6(1) has arisen, or may have arisen.

18 The evidence relied on by LawCover stated that, commencing 1 July 2006, LawCover insured solicitors who had ceased practice for claims made against them during the period of insurance. The relevant policy is described as run-off cover and includes a clause under which LawCover agrees to indemnify the solicitor against civil liability for a claim that arises from the legal practice of the firm and is "first made" against the solicitor during the period of insurance. The policy is accordingly one of the kind commonly known as a "claims made" policy. 19 In the case of such policies, the procedure under s 6 is not available when the event giving rise to the liability of the insured occurs before entry into the relevant contract of insurance, because no charge can arise over insurance moneys that might be payable under a contract that does not yet exist. Until the decision of the Court of Appeal in Strata Plan 50530, that proposition was the subject of competing authority. As noted by Giles JA at [1], full expositions of the competing approaches are found in Schipp v Cameron [1999] NSWSC 997 (Einstein J) and FAI General Insurance Co Limited v McSweeny (1997) 154 ALR 229 (Lindgren J). The Court of Appeal concluded that despite the force of the reasons for the approach taken by Lindgren J (which held that the charge which the section creates exists on and from the happening of the event giving rise to the claim), the terms of s 6 constrain the adoption of that approach: per Giles JA at [2]; per Hodgson JA at [29]; Tobias JA agreeing at [38]. 20 Accordingly, it is neither necessary nor appropriate for me to consider the competing views. Authority binding on me establishes that, on its proper construction, s 6(1) does not give rise to a charge where the event that completes the relevant cause of action against the insured occurs before the inception of the contract of insurance during the term of which the claim is made on the insured. 21 The two critical factual issues to be determined are when a claim was first made against Mr Goldberg (which will identify the relevant contract of insurance) and when the event giving rise to the claim against him happened.

When was a claim made on Mr Goldberg? 22 Mr Curtin submitted that the relevant contract of insurance was a policy which ran from 1 July 2006 to 30 June 2007. He indicated that LawCover accepts, for the purposes of the present application, that a claim was made on Mr Goldberg during the term of that policy, noting that it is irrelevant when within that twelve-month period the claim was made. 23 As noted above, there was no evidence to establish that Mr Goldberg has in fact ever been made personally aware of the claim against him. The cross-claim joining him in these proceedings was served on 23 March 2007, within the period 1 July 2006 to 30 June 2007, but that was pursuant to an order for substituted service. In light of the fact that Mr Goldberg has not been served personally, it might be argued, inconsistently with LawCover's concession, that no claim has yet been made against Mr Goldberg within the meaning of the run-off cover policy, but for present purposes that does not matter. The critical question is whether the claim could be said to have been "first made" against him any earlier than 1 July 2006. 24 Mr Jurd, who appeared for Mr and Mrs Malouf, relied on an affidavit of Mr Sid Hawach, their solicitor, which annexed the correspondence by which they sought to notify Mr Goldberg of their claim against him. The first was a letter dated 20 February 2006. That letter was addressed to "Andrew Brown c/o Charles A Goldberg & Co" at Level 9, 99 Elizabeth Street in Sydney, where Mr Goldberg had his offices. As already noted, by February 2006 Mr Goldberg had ceased to practice as a solicitor. Andrew Brown was the manager appointed by the Law Society to manage Mr Goldberg's practice but the evidence established that, by February 2006, he was no longer acting in that capacity. He completed his management of the practice in April 2005. 25 The evidence did not expressly address the issue whether Mr Goldberg still occupied the premises at 99 Elizabeth Street in February 2006 but the letter was returned to Mr Hawach marked "return to sender: left address / unknown". In my view, it follows from the fact of its return that there was no claim made against Mr Goldberg by the sending of that letter. 26 As submitted by Mr Curtin, that is the only possible claim made against Mr Goldberg which exists prior to 1 July 2006. There was later correspondence between Mr Hawach and Mr Brown by which Mr Hawach sought to keep Mr Brown informed of the progress of the proceedings. However all of that correspondence took place within the period of insurance. I am satisfied that there was no claim made against Mr Goldberg before 1 July 2006 and that the earliest contract of insurance in respect of which a charge could arise under s 6(1) is accordingly the contract identified by Mr Curtin. 27 Mr Hawach's affidavit also annexed correspondence between his office and LawCover. The purpose of annexing that correspondence was unclear. The first was a letter dated 14 February 2006 informing LawCover of the claim against Mr Goldberg and seeking confirmation that LawCover insured Mr Goldberg's firm "at or about 10 May 2004". LawCover appears to have ignored that letter and a further letter chasing up a response. 28 By letter dated 28 November 2006, Mr Hawach sent LawCover a copy of the cross-claim claim against Mr Goldberg and, rather optimistically, asked whether LawCover would accept service. LawCover responded by letter dated 8 December 2006 indicating that it had no record of receipt of any notification from Mr Goldberg in relation to Mr and Mrs Malouf's claim, nor any instruction from him to accept service of any process. The letter stated that it was not open to LawCover to deal with claimants in the absence of a notification by the insured solicitor (I note that the relevant annexures to Mr Hawach's affidavit are wrongly described. CJ 13 is described as the letter dated 28 November 2006 from Mr Hawach to LawCover but is in fact a letter to Mr Goldberg. The letter dated 28 November 2006 from Mr Hawach to LawCover is in fact CJ 20). 29 On 3 May 2007 Mr Hawach sent LawCover the affidavit of service establishing that the cross-claim had been served on Mr Goldberg (pursuant to the order for substituted service). The letter asked whether LawCover now acted in the matter. LawCover replied by letter dated 28 May 2007 that it had no instructions from Mr Goldberg. The letter reiterated that, in order for LawCover to become involved in the claim, Mr Goldberg "or an appropriate legal representative on his behalf" needed to notify LawCover of the claim. On 27 June 2007 LawCover wrote to advise that it had been notified of the claim by Andrew Brown, the manager of Mr Goldberg's practice. However, the letter discloses that, by that time, LawCover had still not been informed of the claim by Mr Goldberg himself. It is not clear, and it does not matter for present purposes, whether LawCover is proceeding on the basis that the notification by Mr Brown constitutes notification of the claim on behalf of Mr Goldberg of the kind contemplated in the letter dated 28 May 2007. 30 Mr Jurd's principal submission in support of the application was that, in light of the letter of 27 June 2007, it was quite reasonable for Mr and Mrs Malouf to operate on the basis that there had been a notification by the manager to LawCover and that LawCover would "be involved". That submission confused LawCover's obligation to indemnify Mr Goldberg with the Malouf's entitlement to enforce the performance of that obligation by the mechanism provided in s 6. The relevant issue for present purposes is not whether Mr Goldberg (or Mr Brown on his behalf) has notified LawCover of the claim but when Mr and Mrs Malouf first made the claim against Mr Goldberg. The correspondence between Mr Hawach and LawCover does not provide an answer to that question. As indicated above, I am satisfied that the claim was not first made against Mr Goldberg by Mr and Mrs Malouf prior to 1 July 2006.

When did the event giving rise to the claim against Mr Goldberg happen? 31 The second issue is when the event giving rise to the claim by Mr and Mrs Malouf against Mr Goldberg happened. As already noted, the relevant event is that which completes the cause of action. That issue was not addressed at all in the evidence or submissions of Mr and Mrs Malouf. In light of the decision of the Court of Appeal in Strata Plan 50530, that is arguably a matter in respect of which they bore the onus of proof, that is, they should have adduced evidence in support of the application for leave to establish that the event giving rise to the claim happened during the term of the policy in force when the claim was first made against Mr Goldberg. LawCover, perhaps out of an abundance of caution, embarked on the task of proving the converse but it is doubtful whether it needed to do so. In any event, evidence on that issue having been adduced by LawCover, it is appropriate to consider its effect. 32 Mr Curtin relied on the decision of Ace Global Markets where Wood CJ at CL at [107], after a careful consideration of the relevant authorities, approached the issue by determining when it was "reasonably ascertainable" that the party claiming against the insured person would suffer a loss on the transaction. His Honour indicated that he was following the approach of the majority in Wardley Australia Limited v Western Australia (1992) 175 CLR 514 at 532-533, as well as that favoured by Gaudron J in Kenny and Good v MGICA (1999) 199 CLR 413 at [13]-[17]. The passage from Wardley referred to by his Honour identified the principle that, where a negligent misrepresentation causes the claimant to enter into a contract that exposes him to a contingent loss or liability, his damage is sustained when the contingency is fulfilled and the loss becomes actual. 33 Mr Curtin relied on an affidavit of Anthony Cavanagh, the solicitor for LawCover, and a bundle of documents exhibited to that affidavit. Those documents focussed primarily on the financial position of George and Habib Farah and the value of the security provided by them to secure their obligations under a loan from Perpetual for $3,800,000. Presumably, the reason for focussing on that evidence was that, whatever security Albert obtained for his loan to the Farahs (which is pleaded in his cross-claim but which was not the subject of any evidence), it ranked behind the security granted to Perpetual. It was an implicit assumption of Mr Curtin's submissions that Mr Malouf's loss crystallised at the point when it became clear that Perpetual would not be repaid in full. The argument assumed, reasonably in my view, that Albert Malouf and Mr Malouf could be in no better position than Perpetual. 34 The documents established that Perpetual made a written loan offer to George and Habib Farah for $3,800,000 to be secured by first registered mortgages over identified properties together with joint and several guarantees to be granted by five companies. 35 According to Mr Cavanagh's affidavit, by 30 June 2006:

a) Habib Farah had been declared bankrupt (6 February 2006); b) George Farah had been declared bankrupt (March 2006);

and, as to the guarantor companies: c) Clivedon Enterprises Pty Ltd had had receivers appointed (21 January 2005), an administrator appointed (2 March 2006) and had passed a special resolution for the winding up of the company (27 March 2006); d) Cadmus Restaurant Pty Ltd had had an administrator appointed (25 May 2003) and had passed a special resolution for the winding up of the company (10 March 2006); e) Criterion Restaurant Pty Ltd had had an administrator appointed (23 May 2003) and had passed a special resolution for the winding up of the company (14 August 2003); and f) Citi Marina Café Pty Ltd had had an administrator appointed (2 March 2006) and had passed a special resolution for the winding up of the company (27 March 2006)." 36 The exhibit to Mr Cavanagh's affidavit included a copy of a letter dated 29 January 2008 from Mr Jones of Jones Partners, the administrator of Cliveden Enterprises Pty Ltd and the trustee in bankruptcy of Habib and George Farah. His letter discloses that liabilities substantially exceeded assets in March 2006 for those two men and that company. There was correspondence from B P Cotter to similar effect in respect of the liabilities of Cadmus Restaurant Pty Ltd. 37 The exhibit also included a running balance of the Perpetual loan account for George and Habib Farah for the period 23 September 2005 to 23 October 2006 which revealed that, as at 30 June 2006, three of the five security properties had been sold under power of sale and the proceeds of sale applied to reduction of the loan; that the balance owing was $2,313,108.85; that interest was accruing at a rate of 14.7% per annum and that no repayments had been made by the Farahs since at least 23 September 2005. 38 The remaining two security properties were sold after 1 July 2006 (on 26 July 2006 and 6 October 2006) leaving a debit balance in the loan account following the second sale of $541,404.67. 39 Mr Curtin submitted that, in light of the evidence of Mr Cavanagh, it was reasonably ascertainable by 30 June 2006 that there would be a shortfall in the value of the security for the loan from Perpetual. There is considerable force in that submission. It might be argued that, until the last two sales, there remained the prospect of a surplus in the security granted to Perpetual but even so, the prospect of there being any value in those securities for the parties that ranked behind Perpetual looked hopeless. I am satisfied that, as submitted by Mr Curtin, by 30 June 2006 it was reasonably ascertainable that there would be no surplus and, accordingly, that any loss to Mr and Mrs Malouf due to the conduct of Mr Goldberg had been sustained by that time. 40 As I have indicated, Mr Curtin's submission assumed that Mr Malouf's loss crystallised no later than the point when it became clear that Perpetual would not be repaid in full. However, it may have crystallised before that time. In case I am wrong in approaching the matter on the basis contended for by Mr Curtin, it is appropriate to give separate consideration to that issue. 41 In my view, if Mr and Mrs Malouf suffered loss due to the conduct of Mr Goldberg, that occurred even before it became reasonably ascertainable that the realisation of the security for the loan from Perpetual to George and Habib Farah would not satisfy their liability under that loan. 42 In the case of Mrs Malouf, the transaction did not expose her to a contingent loss or liability. There was no contingency. She suffered a loss when she signed the transfer divesting herself of her interest in the property, which was on 20 May 2004. 43 The position in the case of Mr Malouf is perhaps less clear. The correct analysis in my view is that his loss was not contingent - on 20 May 2004 he incurred a liability to Perpetual for $700,000 which was not contingent upon whether Albert was repaid by George and Habib Farah. On that basis, Mr Malouf's cause of action against Mr Goldberg also accrued on 20 May 2004. 44 Alternatively, it might be argued that Mr Malouf did not incur a loss so long as he had a prospect of being repaid by Albert, or Albert had a prospect of being repaid by George and Habib Farah. There was no evidence before me as to the terms on which Mr Malouf permitted Albert to advance the funds to George and Habib Farah, or whether he even knew what Albert was proposing to do with the funds. If the proper analysis is that Mr Malouf's loss was contingent upon Albert's, the evidence does not establish affirmatively when Albert's loss became actual. It may have been when the Farahs defaulted in repayment to Albert on 3 September 2004. Albert's cross-claim suggests that the only security available to him to enforce their liability was unregistered mortgages that ranked behind several other unregistered interests. It may have been reasonably ascertainable well before 30 June 2006 that those securities were worthless but there was no evidence on that issue. 45 There is no evidence to suggest that Albert had any other means to repay the $700,000. It is admitted in the pleadings that Albert and Mr Malouf defaulted in repayments to Perpetual in December 2005, January 2006 and February 2006 and that they did not rectify the defaults when served with a notice under s 57(2)(b) on 8 March 2006. 46 Although I am unable to identify the particular event that crystallised any loss suffered by Mr Malouf as a result of the conduct of Mr Goldberg complained of by him, in my view the overwhelming likelihood is that any such loss was suffered before 30 June 2006. Whether leave should be granted and the issue deferred

47 McDougall J in deciding Strata Plan 50530 at first instance considered the appropriateness of determining an application for leave under s 6(4) in the course of an interlocutory hearing. His Honour expressed the view at [29] that the relevant principle, although it was expressed in the context of an application for an interlocutory injunction, is that expressed by McClelland J in Kolback Securities Limited v Epoch Mining N/L (1987) 8 NSWLR 533 at 535, where his Honour said, among other things, that where the fate of the entitlement to ultimate relief is uncertain the Court is required to consider the cause of the uncertainty. Where the uncertainty depends on contested questions of fact, it cannot be resolved at an interlocutory hearing. Where it depends on a contested question of law, it may or may not be appropriate for the Court to decide that question notwithstanding that the hearing is interlocutory. 48 In the case before McDougall J, counsel for the applicant submitted that there was an arguable case as to entitlement and that the Court should grant leave, and leave it to the trial judge after a contested hearing to decide the question. 49 No submission of that kind was made in the present case. McDougall J considered Kolback in the context that the legal question of the application of s 6 to a "claims made" policy was then unresolved. The Court of Appeal having upheld his Honour's decision, that is no longer the case. Nonetheless, if the resolution of the present application had depended on any contested question of fact, assuming the correctness of the approach outlined by McDougall J in Strata Plan 50530 at [29], it may not have been appropriate for me to resolve the question at an interlocutory hearing. However, Mr Jurd did not contest any of the propositions of fact relied on by LawCover in support of the application and did not suggest that he needed any further opportunity to do so. 50 More importantly, as noted above, he adduced no evidence to establish that the loss occurred no earlier than the inception of the period of the relevant contract of insurance, an issue on which, in my view, Mr and Mrs Malouf bore the onus of proof. 51 Regrettably, I have come to the view that it would not be a judicial exercise of my discretion to grant leave against the speculative prospect that different evidence might be presented at a later stage. 52 The application is dismissed. **********

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