Pioneer Mortgage Services Pty Ltd v Columbus Capital Pty Ltd [2016] FCA 215 | Case summary

JAGOT J: 1 The remaining issues to be resolved in this matter concern Columbus's claims for damages against Pioneer. 2 On 1 October 2015, I determined that Columbus should succeed on its cross-claim against Pioneer in proceeding NSD 1328 of 2014 and that Pioneer's claims against Columbus in proceedings NSD 526 of 2015 and NSD 1328 of 2014 should be dismissed, with the consequence that certain interlocutory injunctions against Columbus should be dissolved (see Pioneer Mortgage Services Pty Ltd v Columbus Capital Pty Ltd [2015] FCA 1067, referred to as the first judgment). 3 On 21 October 2015, I made orders including the following consequential on the first judgment: In relation to the cross-claim: 1. Judgment for the cross-claimants in relation to the cross-claim filed on 24 December 2014. 2. Declare that each of the cross-respondents have, in trade or commerce, engaged in misleading or deceptive conduct, or conduct that is likely to mislead or deceive within the meaning of s 52 of the Trade Practices Act 1974 (Cth) ("TPA") by making the representations set out in the statement of cross-claim. 3. Order that the first and second cross-respondents pay to the cross-claimants damages pursuant to s 82 of the TPA. 4. Order that the first and second cross-respondents pay to the cross-claimants damages for breach of contract. 5. Order that the first and second cross-respondents pay to the cross-claimants damages for misrepresentation. 6. Order that the cross-respondents pay to the cross-claimants damages for fraud. … In relation to the claim: 10. Order that the applicant's claim be dismissed. 11. Order that the applicant pay the respondents' damages suffered pursuant to the undertaking as to damages given as a condition of the injunction granted on 4 February 2015, damages to be assessed. 4 As explained below, although I directed the parties to agree the form of the orders to reflect my reasons for judgment, on further consideration, I am concerned that some of the orders set out above do not do so and thus should be amended, but will give the parties an opportunity to consider this issue. 5 On 26 October 2015, pursuant to reasons published on that day (see Pioneer Mortgage Services Pty Ltd v Columbus Capital Pty Ltd (No 2) [2015] FCA 1208, referred to as the second judgment), I ordered that the interlocutory injunction granted on 4 February 2015 in proceeding NSD 1328 of 2014 be dissolved. The interlocutory injunction granted on 4 February 2015 (as amended pursuant to the slip rule on 26 October 2015) was in these terms: Until further order of the Court, each of the respondents by themselves, their servants and agents, be restrained from implementing or attempting to implement an annual facility fee or similar fee in respect of any borrowers whose credit contract with the second respondent includes either clause 1 or 4 of Schedule 2, attached hereto. 6 Schedule 2 identified so-called Type A and Type B borrowers, terms explained at [183] in the first judgment which should be read as if incorporated in these reasons for judgment. 7 This injunction, which was granted upon Pioneer giving the usual undertaking as to damages, followed the grant (on 15 December 2014) and extension (on 16 December 2014) of an earlier injunction in proceeding NSD 1328 of 2014 which applied to all borrowers (Type A and Type B), also on the basis of Pioneer giving the usual undertaking as to damages. 8 In summary, the position as a result of the first and second judgments is as follows: (1) Pioneer breached cl 5.1 of the 1994 deed to which, by a deed of novation, Columbus was a party. The breaches occurred repeatedly or were continuing breaches on and from the first act of fraud of Ms Dando in 2006 until her last act of fraud in 2013. Pioneer was also vicariously liable for Ms Dando's acts of fraud. Pioneer is thus liable to Columbus for breach of contract. (2) Pioneer engaged in misleading and deceptive conduct in contravention of the Trade Practices Act 1974 (Cth) (TPA, renamed as the Competition and Consumer Act 2010 (Cth) from 1 January 2011, the relevant provision being s 52 before that date and s 18 of the Australian Consumer Law or ACL after that date) because, in respect of each act of fraud, Pioneer had represented to ANZ (from which Columbus purchased the loan portfolio) and then Columbus, falsely, that the customers the subject of Ms Dando's acts of fraud had requested and required each of the redraws, had authorised payment to the account into which the money was paid, and that Ms Dando was authorised by the customer and Pioneer to request payment from ANZ and then, as relevant, Columbus (for the Angus loan redraws). Pioneer is thus liable to Columbus for damages in accordance with s 236 of the ACL (formerly, s 82 of the TPA). By reason of the same facts, Pioneer is liable to Columbus under the common law for fraudulent misrepresentation. (3) Mr Stefanowicz is liable under the guarantee in respect of the losses of Columbus by reason of Pioneer's contractual breaches. (4) Pioneer (but not Mr Stefanowicz) is potentially liable to Columbus under the usual undertakings as to damages which Pioneer gave to the Court in proceeding NSD 1328 of 2014 in order to obtain the interlocutory injunctions. The usual undertaking as to damages is as set out in Practice Note CM 14 as follows: The "usual undertaking as to damages" if given to the Court in relation to any interlocutory order made by it or any interlocutory undertaking given to it, is an undertaking: (a) to submit to such order (if any) as the Court may consider to be just for the payment of compensation, to be assessed by the Court or as it may direct, to any person, whether or not a party, adversely affected by the operation of the interlocutory order or undertaking or any continuation (with or without variation) thereof; and (b) to pay the compensation referred to in (a) to the person there referred to. 9 My concerns about the orders made on 21 October 2015 are: (i) Mr Stefanowicz is only liable under the guarantee and, on reflection, it is not now apparent that he should be the subject of any declaration apart from such liability, (ii) given this, the terms of the orders about the payment of damages, arguably, should not extend to Mr Stefanowicz, and (iii) some of the misleading and deceptive conduct occurred before the name of the TPA was changed and some occurred after, but the damages claim falls to be assessed under the ACL. 10 I do not see why the orders cannot be amended to correct such of these matters as necessary to reflect the first judgment (as was intended) once the parties have had an opportunity to consider my concerns. 11 The dispute between the parties in respect of damages and compensation payable as a result of proceeding NSD 1328 of 2014 is disclosed in the following table: Columbus's claim Columbus's claim quantum Pioneer agreed quantum Lam and Lim unauthorised redraws $226,594.02 $226,594.02 Roberts unauthorised redraws $132,252.11 $132,252.11 Angus unauthorised redraws $43,672.02 $43,672.02 Fees paid on unauthorised redraws $8,287.44 $8,287.44 Other fees paid $3,632,178 Nil Expenses attempted Dando recovery $10,131.46 $10,131.46 Sub-total excluding Court interest $4,053,115 $420,937 Undertaking as to damages $106,533 Nil

12 The reason this table separates out the claim pursuant to the undertaking as to damages is that there is no question that it is Pioneer alone, not Mr Stefanowicz, which might be liable in this regard. 13 It will be apparent that Columbus contends that its compensable damage, if not at common law then at least under statute (the ACL), extends to the amount of all fees paid by Columbus to Pioneer, and not just fees on the loan redraws which resulted from Ms Dando's acts of fraud. Columbus's case is that but for the misrepresentations constituting misleading and deceptive conduct, which had the effect of concealing the frauds from it, it would have either required ANZ to terminate the contractual arrangements with Pioneer on 1 April 2012, being the date from which Columbus was liable to reimburse ANZ for all fees paid to Pioneer, or done so itself immediately on 28 September 2012, being the date of the completion of the sale of the loan portfolio from ANZ to Columbus. The undisputed full amount of the fees paid from 1 April 2012 is $3,698,665.39. From this, Columbus submitted, should be deducted the sum of no more than $58,200, being Mr Chepul's upper estimate of what it would have cost Columbus to manage the loan portfolio itself which, he said, Columbus would have done had the contractual arrangements with Pioneer been terminated. Mr Chepul, Columbus noted, was not cross-examined about any of his evidence in support of Columbus's damages claims, and thus his evidence should be accepted. 14 Columbus also contends that by reason of the interlocutory injunctions it was prevented from charging the proposed annual fee on borrowers for 2015 and, for commercial reasons explained by Mr Chepul, cannot seek to do so retrospectively, resulting in loss to it of the amount it would have otherwise obtained (being $106,533). 15 Pioneer contends that Columbus is not entitled to damages equalling the amount of all fees paid to Pioneer from 1 April 2012 onwards, but only to the amount of the fees paid on the loans which were the subject of the fraudulent redraws by Ms Dando. First, Pioneer contends that Columbus's claim in this regard is inconsistent with any principled approach to damages for contractual breach, fraudulent misrepresentation or for misleading and deceptive conduct. Second, it was argued that it was not necessary to cross-examine Mr Chepul for the Court to conclude that his evidence lacked cogency and was inherently speculative, and thus not a sound foundation for any conclusion that Columbus's claim in this regard should be sustained. 16 Pioneer also contends that Mr Chepul's evidence about loss caused by the interlocutory injunctions similarly lacked cogency and failed to prove any real connection between the injunctions and the alleged loss, and further failed to take into account that no annual fee could be imposed on Type A borrowers without their consent. 17 It is convenient to record that no limitations issue was raised, despite the first acts of fraud occurring in 2006. This, it may be inferred, reflects the fact that the loss which Columbus alleges it incurred was a result of the payment to ANZ of the face value of the loan portfolio (which included the fraudulent redraws), the payment of Pioneer's fees in relation to the loan portfolio, and the inability to recover from the borrowers or Ms Dando the amounts owing as a result of further fraudulent redraws after Columbus acquired the loan portfolio, all being events which occurred from April 2012 onwards. 18 In respect of the fees on loans which were not the subject of the fraudulent redraws, I accept that, if they had known about the acts of fraud and how they were committed (as explained in the first judgment), ANZ and subsequently Columbus (from 28 September 2012) would have been able to terminate the 1994 deed relying on cl 9.1 because an "Event of Default" had occurred as defined in cl 8(b) of that deed. I accept also that by operation of cl 6 of the 1994 deed and cl 3.1 of the Terms and Fees Agreement as referred to in cl 6, as well as sch 1, item 1.1 of the deed of variation, Pioneer was only entitled to payment of the fees so long as there was no "Event of Default". So much was not in dispute, given the first judgment. 19 Otherwise, I accept Pioneer's contentions. 20 Let it be assumed, for the purpose of this discussion, that I am satisfied that Mr Chepul's evidence is sufficient to establish that, if Columbus had been aware of the acts of fraud before it agreed with ANZ to be liable for the payment of all fees from 1 April 2012, Columbus would have required ANZ to terminate the contractual arrangements with Pioneer and ANZ, given that Columbus was to be responsible for the fees from then on, would have done so. Alternatively, let it be assumed that Mr Chepul's evidence is sufficient to establish that even if ANZ did not comply with Columbus's request, Columbus would have terminated the contractual arrangements with Pioneer from 28 September 2012. As a result, Columbus either would have paid no fees to Pioneer (either directly or by way of reimbursement to ANZ) or would have paid no fees after 28 September 2012. Does this mean that Columbus may claim damages at common law for breach of contract or fraudulent misrepresentation or under statute for misleading and deceptive conduct for the fees that were paid, less the cost to Columbus if it had managed the loan portfolio? 21 I consider this question must be answered "no". 22 Columbus's submissions did not distinguish between the various heads of damage other than, in answer to a question from me, observing that the claim for the fees paid in respect of the loans which were not the subject of the fraudulent redraws was probably unavailable for breach of contract, but should be available under statute for misleading and deceptive conduct. Columbus made no submissions explaining its claim for damages for fraudulent misrepresentation. 23 Given the lack of real assistance about the principles which apply to damages recoverable by reason of different causes of action, I will refer to the following statements of principle set out in Carter JW, Carter on Contract (Service 43 as at December 2015; LexisNexis) which I expect to be beyond dispute: (1) "The fundamental principle governing the award of damages, in respect of any legal wrong, is that they are compensatory" (at [41-020]. (2) "In contract the object is, usually, to place the plaintiff in the position which would have been occupied had the defendant performed the obligation breached" (at [41-030]). In particular, the damages must "reflect the failure to receive the performance promised by the defendant" (at [41-100]). (3) A "plaintiff is entitled to recover any loss or damage which is a direct and natural consequence of acting on a fraudulent misrepresentation" (at [20-450]). (4) "…in a claim for damages for fraud this is a sum representing the prejudice or disadvantage suffered in consequence of the alteration of position under the inducement of the fraudulent misrepresentations made by the defendant … this is the 'out of pocket test' of how much the plaintiff is out of pocket by reason of having acted upon the fraudulent misrepresentation. Broadly expressed, this is the difference between the financial position in which the representee would have been if the false representation had not been made, and the representee's actual position" (at [20-460]). (5) For misleading or deceptive conduct proscribed by statute, the question is what "loss or damage" was caused by the conduct complained of. In general, the approach to damages under s 82 of the Trade Practices Act [and its successor] is the same as that in tort, so that a "comparison must be made between the position in which the party that allegedly has suffered loss or damage is and the position in which that party would have been" had the contravening conduct not occurred ([at 21-110] quoting Marks v GIO Australia Holdings Ltd [1998] HCA 69; (1998) 196 CLR 494 at 512). 24 The difficulties I have with Columbus's case are these. 25 As Pioneer submitted, if it is assumed that the contractual breaches had not occurred and Pioneer had performed its obligations in accordance with cl 5.1 of the 1994 deed, then it must also be assumed not only that the frauds could not have taken place, but that there were no "Events of Default" entitling Columbus to cease paying fees and to terminate. Termination would have been available only by the giving of notice and the payment required by cl 9.4 of the 1994 deed. There is no evidence that Columbus would have exercised that right of termination. 26 It follows that if the contract had been performed as required, the position Columbus would be in is that the contractual arrangements would have continued but Columbus would not have paid ANZ for the fraudulent redraws and/or would not have been forced to write those redraws off, and would not have incurred any associated costs including payment of fees to Pioneer in respect of those redraws. On no view would Columbus have terminated the contractual arrangements at an earlier time and thus relieved itself of any obligation to pay fees due to Pioneer on the balance of the loan portfolio. Contractual damages for the making of those payments, it must follow, are unavailable. 27 Insofar as fraudulent misrepresentation is concerned, Columbus acted on the fraudulent misrepresentations by paying ANZ the face value of the loan accounts the subject of the redraws and by transferring funds to the account of Ms Dando's husband in circumstances where those amounts could not be recovered from the borrowers. However, Columbus did not continue to pay Pioneer the fees it had to pay under the contractual arrangements by reason of the fraudulent misrepresentations. It continued to pay Pioneer the fees because it was contractually bound to do so until "at its option" it determined that an Event of Default had occurred (see cl 8 of the 1994 deed and [82] of the first judgment). Until it became aware of the frauds, Columbus was not able to determine that any "Event of Default" had occurred so as to enliven its power "at its option" to call an "Event of Default" entitling it to cease paying fees and to terminate. 28 Columbus's argument is that the fraudulent misrepresentations concealed the true position from it (that there had been fraud which, if disclosed, would have enabled Columbus to terminate) so that a consequence of the misrepresentations was the continuation of the contractual arrangements. Accordingly, but for the misrepresentations, Columbus would have terminated (or arranged for ANZ to do so) and would not have paid any fees to Pioneer. 29 I am unable to accept these arguments. 30 First, the misrepresentations did not conceal the acts of fraud - they constituted the acts of fraud. If the false representations had not been made, there would have been no acts of fraud. Applying the test that damages for fraudulent misrepresentation should reflect the difference between the financial position in which Columbus would have been if the false representations had not been made and Columbus's actual position, the first element of the comparison is that if the misrepresentations had not been made there would have been no frauds and Columbus would have had no basis to stop paying the fees, nor to terminate. The second element is that the misrepresentations effecting the frauds were made, so Columbus wrongly paid ANZ too much for the loan account, wrongly paid Pioneer fees on the loan accounts the subject of the redraws, and expended money unsuccessfully trying to recoup from Ms Dando. 31 Columbus tried to avoid this by saying that after the first set of misrepresentations in 2006, each subsequent act of misrepresentation concealed the earlier frauds. This submission does not withstand scrutiny. Each fraud was committed through the making of the misrepresentations that customers had requested the executed redraws. Until Columbus was able to determine that these were false, and accordingly that there had been an "Event of Default", it was bound to continue to pay the fees. 32 Second, and testing the issue another way, it may be asked how Columbus altered its position because of the misrepresentations. The only action Columbus in fact took, which it would not otherwise have taken, was to pay ANZ too much and pay Pioneer fees in respect of the fraudulent redraws. This overpayment represents the prejudice or disadvantage that Columbus actually suffered by reason of reliance on the misrepresentations. 33 Third, and, as Pioneer submitted, if a comparison is made between the position in which Columbus is in and the position it would have been had the contravening conduct not occurred, the answer is not that Columbus would have halted the sale from ANZ, would not have entered into the deed of novation, or would have terminated the contractual arrangements with Pioneer. If the contravening conduct had not occurred, the only difference between its actual position and its posited position is that Columbus would not have paid ANZ the face value of the fraudulent loan accounts, would not have itself advanced funds on such accounts and would not have paid the fees on the defrauded accounts to Pioneer. 34 The same considerations inform the assessment of damage under the ACL. 35 I do not accept Columbus's submission that the law of restitution provides a relevant analogy for the assessment of Columbus's damage for misleading and deceptive conduct. First, Columbus was under no mistake of any kind about payments it made, other than in respect of the fraudulent loan accounts. All other payments made were on account of services in fact rendered by Pioneer to Columbus. Second, it is not immediately apparent that in respect of those payments Pioneer would not have available to it (had any restitution claim been made) a defence based on good faith. Third, while the measure of damages under the ACL is not limited to damages available in contract or the tort of deceit, no good argument of principle has been put which would enable Columbus to recover money it paid for a service that it in fact received. 36 Finally, although Mr Chepul was not cross-examined, his evidence about what he would have done had he known about the frauds cannot be reconciled with the objective evidence. For example, the first fraud occurred in 2006, well before Columbus entered negotiations with ANZ. Thus, it cannot be the case that had he known about the first unauthorised redraw Mr Chepul would have done anything. He would not have ceased paying Pioneer because, as he subsequently recognised, he had nothing to do with the loan portfolio at that time. Further, although Mr Chepul says that he would have arranged for ANZ to terminate Pioneer as manager had he known about the frauds, there is no evidence about what ANZ might have done. The fact that Columbus was liable to reimburse ANZ does not provide sufficient evidence to infer that ANZ would have acted at Columbus's request. Why ANZ, which was in the process of selling the loan portfolio, might have involved itself in the issues to which this litigation has given rise is not apparent. It thus seems equally if not more likely that the only difference would have been exclusion of the fraudulent redraws from the sale price. 37 At best, therefore, Mr Chepul's evidence is that had he known about the frauds after completion of the sale he would have stopped paying fees and dismissed Pioneer (by which I assume he means he would have terminated the contractual arrangements). Yet this is inconsistent with what occurred. When Mr Chepul became aware of the fraud, he did not immediately cease making payments to Pioneer or terminate the contractual arrangements. The fraud was exposed in July 2014. Columbus continued to pay fees to Pioneer until February 2015. The purported explanation for this, that by then Columbus and Pioneer had a commercial relationship, fails to recognise that Columbus stepped into the shoes of ANZ by the deed of novation, and that Pioneer had been managing these loans for very many years before Columbus entered the scene. Columbus was inheriting a long-standing contractual relationship. Despite the lack of cross-examination of Mr Chepul, the failure of his evidence to recognise this reality, and the inconsistency of his evidence with what in fact occurred when Columbus became aware of the frauds, undermines the cogency of his evidence. As such, there is an insufficient evidentiary foundation to accept at face value Mr Chepul's statement that he known about the frauds at an earlier time, he would have ceased paying fees to Pioneer and terminated the contractual arrangements. 38 It follows that I do not accept Columbus's claim under any of the causes of action for damages in the sum of $3,632,178 on account of fees paid to Pioneer on loan accounts (other than those accounts the subject of the acts of fraud). 39 The remaining issue is the claim pursuant to the undertaking as to damages. I do not accept Columbus has made good its claim in this regard. 40 First, Columbus was not entitled to charge Type A borrowers the additional annual fee. For Columbus to purport to make allowance for this by excluding from its claim those borrowers who complained about the charge is insufficient. It was not entitled to charge any Type A borrower the proposed $399. If any borrower had been charged, such a borrower could have demanded repayment at any time. In these circumstances, at least insofar as Type A borrowers are concerned, the interlocutory injunction did not prevent Columbus from doing anything it was lawfully entitled to do. As such, I cannot see how it can be said to be just for Pioneer to compensate Columbus for not being able to impose a charge which it was not lawfully able to impose. 41 Second, the only reason advanced for Columbus not now imposing the charge on Type B borrowers is that Mr Chepul does not consider it appropriate to charge borrowers in 2016 for an amount first notified to borrowers in November 2014 as borrowers may be "confused". It seems to me that, for Type B borrowers, this is a commercial decision made by Mr Chepul in Columbus's interests and has little to do with the interlocutory injunction. Moreover, the fact that Columbus no longer feels the need to impose such a charge (having terminated Pioneer's position as Manager under the 1994 deed) also has nothing to do with the interlocutory injunction. Accordingly, I am not satisfied that it is just to require Pioneer to pay compensation to Columbus on account of the Type B borrowers. 42 The parties should consider the issues I have raised about the earlier orders and file agreed or competing orders in each proceeding as relevant, including amendments to the orders of 21 October 2015 as appropriate, within the next seven days. These orders should also deal with interest and the costs of the damages hearing. In the event of dispute, the matter will be listed as soon as possible for resolution of all outstanding issues, including the costs of the damages hearing. I certify that the preceding forty-two (42) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot.

Pioneer Mortgage Services Pty Ltd v Columbus Capital Pty Ltd

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