Plaintiff v Defendant

[2009] VSC 614

PRACTICE & PROCEDURE - Application for leave to amend defence and third party claim - Proposed amendments opposed on ground of res judicata - Original proceeding concerned fraudulent mortgage - Registrar of Titles was not a party to original proceeding - Whether Registrar of Titles is precluded from seeking a declaration concerning a subject matter already determined between the parties to the original proceeding - Proposed amendments also opposed on ground of failure to disclose a cause of action - Allegation of fraud based on "reckless indifference" - Whether bad in law - Whether sufficiently particularized - Allegation of "legal responsibility" for the purposes of s 109(3)(a) of the Transfer of Land Act 1958 - Allegation that duty of care existed by virtue of Plaintiff's vulnerability as registered proprietor of the land - Whether bad in law.

1 The Defendant ("the Registrar") has applied for leave to amend his defence and third party claim. The other parties to the proceeding have opposed the grant of leave on grounds that include the contention that proposed amendments involve the litigation of matters already decided on by Pagone J in Solak v Bank of Western Australia Proceeding No 2007 of 2008[1] ("the original proceeding") and that the principal of res judicata applies to prevent the Registrar from agitating the claims. For the reasons that follow, I have concluded that the Registrar is obliged to accept the decision and orders of Pagone J, although the Registrar was not a party to that proceeding and that the Registrar cannot, in this proceeding, re-litigate the matters that Pagone J determined as between the Plaintiff (in each proceeding) ("Mr Solak") and the Bank of Western Australia (the Thirdnamed Third Party in this proceeding and the Defendant in the original proceeding) ("Bank West"). Accordingly I will not allow the proposed amendments directed to the re-litigation of those matters. I have also formed the view that another of the proposed amendments should not be allowed because the pleading is defective. The other proposed amendments will be allowed.

2 Before turning to the proposed amendments, it is appropriate to set out in some detail the issues that were litigated in the original proceeding before Pagone J.

3 In 2006, a person purporting to be Mr Solak fraudulently obtained loan funds from Bank West by forging Mr Solak's signature on a loan agreement and a mortgage document that Bank West registered on the title to Mr Solak's property. In 2008, Mr Solak instituted the original proceeding seeking declarations against Bank West to the effect that, by reason of the fraud, the loan agreement and mortgage were void and of no effect, that no amount of money was secured by the mortgage and seeking an order for the discharge of the mortgage.

4 Bank West did not challenge Mr Solak's claim that his signature had been forged. Rather, the bank alleged that the doctrine of indefeasibility effected by the provisions of the Transfer of Land Act 1958 (Vic) ("the TLA") entitled it to maintain the registration and to enforce the covenant to pay the monies secured by the mortgage.[2]

5 The proceeding was determined by Pagone J on 17 March 2009. Pagone J refused to grant the declarations and orders sought. The reasons for decision record Mr Solak's acceptance in that proceeding that registration of a forged instrument would confer indefeasibility of title, including the covenant to pay moneys secured, provided that the covenant to pay was registered on title, whether expressly or by incorporation in the registered mortgage, but not if the covenant to pay was otherwise found in a separate document which, upon its proper construction, secured nothing.[3] It was argued for Mr Solak that nothing was owing upon the covenant to pay in the registered mortgage because it did not incorporate the forged obligation to pay in the separate loan agreement.[4] It was argued that the loan agreement was a contract entered into between Bank West and the person purporting to be Mr Solak, but not Mr Solak, whilst the memorandum of common provisions in the mortgage imposed upon the real Mr Solak, through registration of the mortgage, only those obligations actually assumed by him.[5] Pagone J did not accept this to be the correct construction of the documents, holding that the mortgage was effective as security, incorporating the memorandum of common provisions and the loan agreement through that memorandum.[6]

6 On 26 March 2009, Pagone J made an order dismissing Mr Solak's claim. Pagone J also dismissed, in consequence, claims and cross-claims for contribution and indemnity between Bank West and others having a role in processing and facilitating the loan documents, including Kheirs Financial Services Pty Ltd ("Kheirs Financial Services") and Gamel Kheir ("Mr Kheir") (the Fourth Parties in the original proceeding and the First and Secondnamed Third Parties in this proceeding).

7 Bank West had joined Aussie Home Loans Ltd ("Aussie") and AHL Investments Pty Ltd as Third Parties and made a claim for indemnification arising from an alleged breach of an agreement under which Bank West had appointed Aussie to perform various services for the Bank, including the introduction of potential clients to the Bank. Bank West's claim against Aussie was, essentially, that the loan application submitted to Bank West on behalf of the person purporting to be Mr Solak included the completed Bank West's standard identification form identifying the borrower, without the original identification documents having been cited, contrary to cl 4.1 of the origination agreement.[7] Aussie, in turn, had made a fourth party claim against Mr Kheir and Kheirs Financial Services based on Mr Kheir's processing of the loan pursuant to an agreement between his company, Kheirs Financial Services, and Aussie.[8] Pagone J made findings and conclusions on apportionment of liability "in case it becomes relevant hereafter".[9] For that purpose his Honour considered the evidence before him of the events leading to the creation of the loan upon forged documents. The judgment records that evidence:

[25] How it was possible for the forger to have access to some of the documents of the real Mr Solak was explained by the latter in his evidence. His uncontradicted evidence was that he left Australia on 2 February 2006 to return on 30 June of that year. He returned with an intention to sell the property and discovered that the duplicate certificate of title was missing from the place he had left it in his home. The property had an upstairs room which he used as an office in which he kept various documents including the duplicate certificate of title and copies of licences, passports and other documents relating to his business affairs. No-one was living in the house whilst he was away and on his return he discovered that a kitchen window had been broken and that the security recording machine connected to security cameras around the property was missing. These matters were reported to the police who, it seems, are still investigating the matter. Mr Solak gave evidence of his belief that the police think that the perpetrator of the theft and forgery may be a person known to Mr Solak who, however, is not in Australia and was last spoken to by Mr Solak when, to his belief, the other person was in Ireland. Apart from that suggestion, however, Mr Solak's uncontested evidence was that he did not know who illegally entered his residence, or who had successfully impersonated him and fraudulently obtained a loan upon a forged mortgage.

[26] The person purporting to be Mr Solak, therefore, had access to the duplicate certificate of title and to some copies of documents of the real Mr Solak which he was able to use to provide identification of himself as Mr Solak. In particular he provided a copy of Mr Solak's actual Australian passport and driver's licence. He also provided copies of tax returns, financial statements and company tax returns with personal details including the real Mr Solak's name, address, date of birth and statement of assets and liabilities.[10]

8 Importantly, for present purposes, the Registrar was not made a party to the original proceeding.

9 The reasons for dismissing the claims are published in Solak v Bank of Western Australia.[11]

B. Solak v the Registrar of Titles Proceeding No 6728 of 2009: the current proceeding

10 Mr Solak then commenced this action against the Registrar. Mr Solak has alleged, as against the Registrar, the "truth and [] fact"[12] of the forgery of the loan agreement and mortgage and made the allegation, premised on the decision and orders of Pagone J in the original proceeding, that he is bound "at law" to repay the loan to Bank West and that "at law" the registered mortgage over his property secures the repayment of the loan.[13] Mr Solak seeks indemnification from the Registrar for the amount that he must pay Bank West to discharge the loan and for the costs of prosecuting the original proceeding. Mr Solak's cause of action against the Registrar is based on s 110(1)(b) and s 110(1)(c) of the TLA,[14] which provide a right of indemnity to a person who sustains loss or damage by reason of any amendment of the register[15] and/or any error, omission or misdescription in the register.[16]

11 The Registrar disputes that he is liable to indemnify Mr Solak. In his amended defence filed 21 August 2009, the Registrar has put into contest (by a bare denial only) Mr Solak's claim that the documentation was forged and that the loan monies were fraudulently obtained from Bank West by a person or persons unknown to Mr Solak.[17] The Registrar has also denied Mr Solak's claim that Mr Solak is bound at law to repay the loan monies to the bank and that the mortgage on the title of Mr Solak's property secures the repayment of that loan. The Registrar has alleged, expressed in summary form:

(a) that he is not bound by the judgment and orders of Pagone J in the original proceeding as he was not a party to that proceeding;[18]

(b) that the mortgage is unenforceable by reason of the Consumer Credit (Victoria) Code, which required any mortgage taken by the bank to be signed by Mr Solak;[19]

(c) that the instrument of mortgage is void and does not secure the payment of any moneys to Bank West;[20]

(d) that at the time Bank West took benefit of the mortgage, the bank had notice, alternatively had brought home to it, that Mr Solak had not executed the mortgage;[21]

(e) that Mr Solak has not suffered loss or damage to be indemnified by s 110 of the TLA;[22] and

(f) that Mr Solak could have made this claim against the Registrar in the original proceeding, but did not do so and that the claim has now merged in the decision and orders of Pagone J and Mr Solak is estopped from doing so in the current proceeding.[23]

12 The Registrar also commenced third party proceedings against Kheirs Financial Services, Mr Kheir and Bank West. The Registrar relies on s 109(3) of the TLA and claims that if the Registrar is liable to indemnify Mr Solak for any loss and damage arising out of the registration of the mortgage, then the Registrar may recover that amount from the third parties, being the persons "actually responsible", within the meaning of that expression in s 109(3) of the TLA, for the loss and damage suffered by Mr Solak "by reason of" the factual matters that are pleaded in paragraph 7. The Registrar seeks declaratory relief to that effect.

13 Correspondence has passed between the solicitors for Mr Kheir and Kheirs Financial Services and the solicitors for the Registrar about alleged deficiencies in the facts and matters pleaded by the Registrar, including the "failure" on the part of the Registrar to plead a category of legal responsibility on which the pleading of "actual responsibility" as against Mr Kheir and Kheirs Financial Services is based. The solicitors for the Registrar take issue with the proposition that "actual responsibility" within the meaning of s 109(3) of the TLA requires some cause of action independent of s 109 and s 110 of the TLA and have maintained claim based on the factual matters as pleaded in paragraph 7.

14 On 21 August 2009 I gave leave to the Registrar to file an amended defence in terms consistent with his solicitors' response, so that there was no doubt about the way in which the Registrar put his claim that the Third Parties were the persons "actually responsible".

15 I turn now to the proposed amendments (apart from those amendments that are not in issue).

16 First, the Registrar seeks to further amend the defence to include in paragraph 11 the allegation that the loan agreement, as well as the mortgage, is void and that the registered mortgage on its proper construction does not secure the payment of any monies to the bank.[24]

17 Secondly, the Registrar proposes a new pleading in paragraph 12 of the defence as follows:

1. Further to paragraph 11, the Register will say that at the time the Bank executed the mortgage, the Bank acted fraudulently in that it acted with reckless indifference as to whether the plaintiff was or was not the actual signatory to the mortgage with the consequence that the registered mortgage is invalid.

PARTICULARS

At all material times the Bank by its employee Dean Gillespie in Melbourne dealt with Gamel Kheir of Kheir Financial Services Pty Ltd in Sydney. At the time the mortgage was executed the Bank knew that:

(a) the plaintiff resided in Melbourne;

(b) Kheir had supplied to him by fax a 42 page home loan application purportedly signed by the plaintiff;

(c) the 100 point signatory identification form contained in the home loan application referred to identification documents being a passport and a driver's licence but did not indicate whether either or both of those documents were sighted by Kheir;

(d) provision in the 100 point signatory identification form for Kheir to indicate whether or not verification had been achieved as a result of the check was left blank and no signature of the "checking officer" was affixed as required;

(e) the Bank did not receive copies of the relevant identifying documents despite the fact that a part of the form was completed which was to be completed only if copies of the documents were to be forwarded to the Bank;

(f) both parts of the form were completed, one to be completed if copies of the documents were to be forwarded to the Bank, the other to be completed if copies of the documents were not to be forwarded to the Bank;

(g) as a consequence of the matters referred to in paragraphs (c) - (f) above, the 100 point signatory identification form was defective on its face, was incomplete and could not be relied upon as a verification of the plaintiff as the signatory thereto;

(h) Kheir's dealing with the plaintiff was "remote" in the sense that it was not "face to face" and yet, when afforded the opportunity to do so, Gillespie did not indicate to Kheir or otherwise question how identification of the customer would be made;

(i) the Bank then left it to the signatory to the mortgage to arrange for a person to witness his signature and return a completed identification certificate to the Bank.

(ii) To the third party statement of claim

18 The Registrar proposes a new paragraph 5A as follows:

5A. If it is established at the trial of the proceeding that:

(a) the plaintiff did not execute the mortgage of his interest in the land in favour of Bank West; and

(b) persons unknown to the plaintiff obtained without the plaintiff's knowledge and consent a loan of $560,000 secured by a mortgage over the land; and

(c) such persons forged the signature on the mortgage and any antecedent agreement and loan application form

(none of which is admitted) then the Registrar will say that:

(d) the plaintiff is not liable to pay any money to Bank West under the mortgage because, on its proper construction, the registered mortgage does not secure the payment to Bank West of monies payable under the antecedent Home Loan Agreement dated 16 March 2006 purportedly entered into between the plaintiff and Bank West;

PARTICULARS

The Registrar refers to the matters in dispute in proceeding number 2007 of 2008 in this Court before Pagone J. and to his Honour's judgment dated 17 March 2009.

(e) even if (which is denied) the registered mortgage does purport to secure the payment to Bank West of monies payable under the antecedent Home Loan Agreement, the registered mortgage is void as a consequence of the fact that it was procured by fraud on the part of Bank West in that it acted with reckless indifference as to whether the plaintiff was or was not the actual signatory to the mortgage.

PARTICULARS

The Registrar refers to and repeats paragraph 12 of the Further Amended Defence herein and the particulars subjoined thereto.

(f) even if (which is denied) the registered mortgage does purport to secure the payment to Bank West of monies payable under the antecedent Home Loan Agreement and even if (which is denied) the registered mortgage is not void as a consequence of any fraud on the part of Bank West, the mortgage is unenforceable by Bank West against the plaintiff as a consequence of the operation of the Consumer Credit (Victoria) Code.

PARTICULARS

The Registrar refers to sections 11 and 38 of the Code.

19 Secondly, the Registrar "covering [himself]"[25] in case it is necessary to plead an independent cause of action to support the s 109(3)(a) claim, proposes an additional or alternative basis of supporting the claim as against Kheirs Financial Services and Mr Kheir that they were persons "actually responsible" for Mr Solak's loss and damage as follows:

1. By reason of the foregoing, Kheirs Financial and Kheir:

...

(b) further or alternatively, acted in breach of a duty of care which, as parties with knowledge of the Plaintiff's vulnerable position as registered proprietor of land under the Transfer of Land Act 1958, they owed the Plaintiff to take reasonable care to verify the true identity of the applicant/customer as the registered proprietor of the land;

20 Thirdly, the Registrar for the same reason proposes an additional or alternative claim as against Bank West in support of the claim that Bank West was the person "actually responsible" for Mr Solak's loss and damage as follows:

9B. Bank West acted:

(a) in breach of a duty of care which, as a party with knowledge of the Plaintiff's vulnerable position as registered proprietor of land under the Transfer of Land Act 1958, it owed the Plaintiff to take reasonable care to verify the true identify of the applicant/customer as the registered proprietor of the land;

(b) further or alternatively, with gross carelessness in failing to ensure that the applicant/customer was one and the same person as the registered proprietor of the land.

21 Fourthly, the Registrar seeks a claim for relief as against Bank West in the following terms:

1. A declaration against the thirdnamed third party that:

(a) the mortgage does not secure the obligation purportedly created under the Home Loan Agreement;

(b) alternatively, registration of the mortgage is void as against the plaintiff;

(c) alternatively, as a consequence of the operation of the Consumer Credit (Victoria) Code, the mortgage is unenforceable by Bank West against the plaintiff.

22 The opposition to these amendments can be summarised as follows:

(a) The rights and liabilities of Mr Solak and Bank West with respect to the mortgage have been determined in the judgment of Pagone J in the original proceeding and are res judicata;

(b) The Registrar has no standing to raise the matters referred to in proposed paragraph 5A of the third party claim because they are matters arising between Mr Solak and Bank West and the Registrar has no standing to seek the declaratory relief as against Bank West;

(c) The pleading of the claim of fraud does not disclose a cause of action;

(d) The pleading of the breach of duty of care does not disclose the necessary elements to propound a "legal responsibility".

23 The Registrar asserts his right to challenge Mr Solak's liability to pay money to Bank West under the mortgage, notwithstanding the judgment of Pagone J in the original proceeding, upon the footing that he was not a party to the original proceeding and is thus not bound by the findings, explicit or implicit, in that proceeding and may raise them in the present proceeding pursuant to r 11.01(c) of the Supreme Court (General Civil Procedure) Rules 2005. It was further submitted that Pagone J was, in any event, not called upon to decide, and did not decide, the question of the enforceability of the mortgage under the Consumer Credit (Victoria) Code.

24 For Bank West it was argued that the rights and liabilities of Mr Solak and Bank West with respect to the mortgage have been determined by the judgment of Pagone J. That is to say, that the registered mortgage is effective to impose liability on Mr Solak to pay, and to secure the repayment of, the monies due under the loan.

25 The submissions on behalf of Bank West were supported by the other Third Parties.

26 In my opinion, the Registrar cannot agitate in these proceedings the issues raised in the third party claim in proposed paragraph 5A nor seek the declaratory relief contained in paragraph A(a) and (b). I hold this view not for the reason that the Registrar is bound by the decision and orders of Pagone J as res judicata but, rather, for the reason that Mr Solak and Bank West have had those issues conclusively and finally determined as between them and they are bound by the orders and decision of Pagone J. In my view, the Registrar must accept the decision and orders.

The law is clear that principles of res judicata will preclude re-litigation of an issue between the same parties. The principle is founded on the consideration that the decision of a court, unless set aside or quashed, must be accepted as incontrovertibly correct.[26] The principle gives expression to the need in the public interest that a judicial determination be final, binding and conclusive.[27] In Spalla v St George Motor Finance Limited[28] French J observed that the doctrines of res judicata and issue estoppel establish the most precisely defined circumstances in which re-litigation will be identified and barred.[29] Where a cause of action has been the subject of final adjudication, the order of the court is conclusive in relation to the rights inter se of the parties to the proceedings in which the order was made. As between those parties, their rights have been decided. [30]

27 It does not follow that a person, although not a party to that litigation but whose rights may be affected by that litigation, is able to re-litigate the rights of the parties, inter se, which have been determined. As the learned authors of The Doctrine of Res Judicata[31] stated:

This is not the result of estoppel: it is a consequence of being compelled to accept facts.[32]

In Executor Trustee and Agency Company of South Australia Ltd v Deputy Federal Commissioner of Taxes (South Australia),[33] the High Court held that the Commissioner of Taxation was bound to assess on the basis of the rights of beneficiaries in a trust estate as determined in separate proceedings to which the Commissioner of Taxation was not a party, as the nature of those rights had been determined. As Latham CJ reasoned:

The order of the Supreme Court is certainly conclusive in relation to the rights inter se of the parties to the proceedings in which it was made. It could have been challenged upon appeal, but so long as it stands, the rights of the annuitants to receive income from the trustee are the rights declared in the order - no more and no less. There is no means whatever whereby either the trustee or the annuitants can, as a matter of right, vary those rights. There is no suggestion that the order was obtained collusively or fraudulently. If the commissioner could get the order set aside, the case would then be different. But there is no basis for setting the order aside. There is no doubt as to the jurisdiction of the Supreme Court to make the order, and an argument that the order is wrong, though it would be the very basis of an appeal, would be irrelevant in any other proceeding.

The question which arises in this appeal depends entirely upon the rights of the annuitants against the trustee. Those rights have been defined by a court of competent jurisdiction in a manner which excludes the definition of them now preferred by the annuitants - or any other definition inconsistent with the order of the court. The commissioner is entitled to take, and must take, interests in land as he finds them - apart from evasive arrangements which are in effect rendered void as against the commissioner (Land Tax Assessment Act 1910-1934, sec. 63). A particular decision of a court as to the interest of a person in land, or as to his right to receive moneys by way of income, may be wrong. But the commissioner cannot impose land tax upon interests in land which, if a contrary decision had been given, the taxpayer ought to have, but in fact does not have; nor can he impose income tax upon income which the taxpayer does not derive but which, upon the hypothesis of a contrary decision, he would have derived.

This view of the effect of the order does not treat it as an order in rem. The order really has the same kind of effect as the will it interprets. The will plus the order (that is, the will as interpreted by the order) is the foundation and only support of the rights in relation to which alone the commissioner can properly assess taxation. Perhaps the will "ought" to have been different. Perhaps the order "ought" to have been different. The first proposition is irrelevant and, for material purposes, is meaningless. I describe the second proposition in the same way.

The case would not be the same when the question was one of ownership of property which did not consist solely of rights enforceable against a person such as a trustee. A and B may litigate about the ownership of a horse. The court may order B to return the horse to A on the ground that A and not B is the owner of the horse. But C may, independently of any dealings with A, challenge A's ownership, and he would not be affected in any way by the decision in the case of A versus B. In such a case C would not be bound by the previous decision because he was neither a party to it nor privy to any party in interest. The Commissioner of Taxation who takes moneys from a taxpayer as a contribution to the revenue cannot be described as a privy in estate to the taxpayer where rights have been determined in a proceeding to which the commissioner was not a party. But when, in duly constituted proceedings before a competent court, the rights of a cestui que trust against a trustee and the corresponding duty of the trustee towards the cestui que trust have been defined, there is no means whereby those rights can be otherwise defined, because each party is conclusively bound by the order of the court. If the right in question is a right of the cestui que trust to receive money, such as income, from the trustee, the order necessarily and in the nature of the case finally determines, so far as it goes, the nature and extent of the right of the cestui que trust. When the revenue authorities come to impose a tax in relation to such rights, they must, in my opinion, take them as they in fact actually exist between the parties. Thus, although the commissioner cannot be said to be "bound" by the order of the Supreme Court as res judicata or in any other way, he has no option but to assess the trustee or the cestui que trust upon the basis of their duties and rights as declared by the order.[34]

The other judges similarly reasoned that the rights had been defined and thus were determinative on others who must accept that the rights were correctly declared.

28 In the present case, the Registrar seeks declaratory relief in relation to the same parties concerning the same subject matter which has been decided on already and which is binding on, and conclusively determined as binding on, those parties. In my opinion, the Registrar cannot in this litigation, agitate the very matter determined in the original proceeding in respect of the rights, inter se, between Mr Solak and Bank West in relation to the construction of the mortgage and the effectiveness of the mortgage as security for the obligation to Bank West created under the Home Loan contract.

29 Accordingly, leave is not granted to the Registrar to seek the declaration contained in A(a) of the prayer for relief or to make the proposed amendments that are intended to support that prayer for relief.

30 The same consideration does not apply to the claim based on the unenforceability of the mortgage by reason of the Consumer Credit (Victoria) Code. In my view, that issue may be raised by the Registrar as that question was not decided in the original proceeding. In my view, it is a permissible use of the third party process for that question to be raised by the Registrar by way of the third party proceeding.

31 Next it was argued that the fraud allegations in proposed paragraph 5A of the third party claim and in proposed paragraph 12 of the amended defence should not be permitted because the pleadings do not disclose a cause of action. For Mr Solak, it was contended that "reckless indifference" as to whether Mr Solak was, or was not, the actual signatory of the mortgage would not amount to fraud. For Bank West it was contended that the particulars are incapable of supporting the fraud allegation. Further it was contended that it is apparent from an examination of the forty-two page home loan application, which is referred to in the particulars to the proposed paragraph 12 of the defence and which was put into evidence by the Registrar to support this application, that the "fraud" case made against Bank West is baseless.

32 For the Registrar, reliance was placed upon passages from a Court of Appeal decision in Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd,[35] and in particular the passage in the judgment of Tadgell JA in which His Honour stated that "[a] negligently-made false representation, if made with reckless indifference to its truth or falsity, may very well be fraudulent".[36] In that case, the bank had taken a mortgage of real estate from a trustee company to secure a guarantee by the mortgagor of a Third Party's indebtedness. The Third Party debtor procured the guarantee and mortgage by forgery. The mortgagee registered the mortgage under the TLA. The mortgagor brought proceedings to set aside the guarantee and the mortgage on grounds which included that the mortgagee had been "fraudulent" in that when the instrument of mortgage was lodged for registration in the Land Titles Office, the mortgagee was aware, alternatively was aware of facts that demonstrated, that the execution of the document had not been authorised by the mortgagor. At first instance, the trial judge declined to find fraud on the part of the mortgagee for the essential reason that the trial judge was not satisfied by the evidence that the mortgagee had acted "dishonestly", although His Honour had regarded the mortgagee as having been "reckless and careless and even guilty of wilful blindness".[37] Tadgell JA upheld the finding that there had been no fraud, but did so on a different basis. His Honour stated as follows:

It is not altogether clear whether, in so expressing himself, his Honour simply declined to equate recklessness, carelessness and wilful blindness (or any of them) with dishonesty, or whether he regarded the degree or extent of these elements that in his opinion the evidence disclosed to be insufficient to prove, individually or together, the requisite dishonesty. The [bank's] case was that, at most, its solicitors were careless, and that mere carelessness cannot amount to fraud. As a general or sweeping statement this may be true enough, but it is too general and too sweeping to be of much utility. A negligently-made false representation, if made with reckless indifference to its truth or falsity, may very well be fraudulent. Similarly, to abstain deliberately from reasonable enquiry for fear of what the enquiry will reveal, to choose to shut one's eyes to the obvious - to assume a state of "wilful blindness" - or otherwise to generate a state of contrived ignorance, may of course be dishonest. It has been well said that wilful blindness - deliberately turning a blind eye to obvious or obviously ascertainable facts - is akin to fraud ... If, therefore, wilful blindness of the [bank] was a substantial reason for its ignorance, at the time of registration of the mortgage, that the [mortgagee] had not authorised the mortgage, it is difficult to see why a conclusion should not have been drawn that the registration was referable to fraud. There is, however, a serious question whether the evidence was capable of supporting a conclusion of wilful blindness on the part of the [bank] or those for whom it was responsible. Lodgment of the mortgage for registration by the [bank] with actual knowledge by its servants or agents of the forgery, or lodgment for registration in ignorance of the forgery that was attributable only to wilful blindness or wilful and reckless failure to enquire, in the sense I have mentioned, would be fraud or akin to it.[38]

In other words, it may not be necessary to prove actual dishonesty in order to establish fraud where the conduct is such that it denotes a deliberate or wilful failure to make enquiries "for fear of learning of the truth".[39]

33 The Court of Appeal in Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd[40] distinguished between deliberate and wilful failure to enquire, that is, a "reckless indifference to consideration of a relevant matter",[41] and a negligent failure to enquire. The concept of fraud imports "a flavour of dishonesty rather than mere negligence".[42] I do not think that there is much to be gained from debate about whether there is a distinction or difference between the concept of "reckless indifference" and that of "wilful blindness", which counsel for Mr Solak sought to make out. As Lord Lindley in Assets Co Ltd v Mere Roihi[43] observed, conduct may amount to fraud if there is some dishonesty rather than carelessness or negligence in the conduct. Such dishonesty may be because of "reckless indifference" but either collocation of the concept distinguishes a mere failure to enquire.[44]

34 The Court's function on the pleading summons is to consider whether the claim is bad in law. In my view, it cannot be said that a claim of fraud based on "reckless indifference" is bad in law. If the claim is one that is capable of being raised in law, whether it ought to succeed is a question for the judge at trial.[45] Accordingly, I express no opinion on whether it is apparent from an examination of the forty-two page loan application that the fraud case alleged against Bank West is "baseless" as submitted for Bank West. There may well be debate as to whether the Registrar's case based on the loan agreement could succeed, but the Court should not refuse the amendment on the ground that the claim may appear not to have much chance of success.

35 I accept, however, that the particulars do not support the pleading. That is to say, the particulars do not support the allegation of "reckless indifference". Particulars of the fraud, whether actual or based on "reckless indifference", must be contained in the pleading.[46] The particulars here do not, in my view, support the element of "reckless indifference" as the element of dishonesty, as distinct from mere carelessness or negligence, is missing in the particulars.

36 Accordingly, I will not permit the proposed amendments on the fraud claim and the prayer for relief in paragraph 5A(b)should also not be allowed.

F. Legal Responsibility for the purposes of s 109(3)(a) of the TLA

37 The question is whether the proposed allegations in paragraph 8(b) and 9B of the third party claim disclose any cause of action that the third parties, or any of them, owed a duty of care, recognised by the law, to Mr Solak to verify the true identity of the applicant/customer as the registered proprietor of the land.

39 In my view, it is at least arguable that a duty of care may arise if a person is known by another person to be vulnerable to harm and the carelessness of that other person induces someone to do, or to refrain from doing, something which exposes that vulnerability and thus is a cause of harm. In Perre v Apand Pty Ltd[47] McHugh J said:

In many cases, there will be no sound reason for imposing a duty on the defendant to protect the plaintiff from economic loss where it was reasonably open to the plaintiff to take steps to protect itself. The vulnerability of the plaintiff to harm from the defendant's conduct is therefore ordinarily a prerequisite to imposing a duty. If the plaintiff has taken, or could have taken steps to protect itself from the defendant's conduct and was not induced by the defendant's conduct from taking such steps, there is no reason why the law should step in and impose a duty on the defendant to protect the plaintiff from the risk of pure economic loss.[48]

What is likely to be decisive, and always of relevance, in determining whether a duty of care is owed is the answer to the question, "How vulnerable was the plaintiff to incurring loss by reason of the defendant's conduct?" So also is the actual knowledge of the defendant concerning that risk and its magnitude. If no question of indeterminate liability is present and the defendant, having no legitimate interest to pursue, is aware that his or her conduct will cause economic loss to persons who are not easily able to protect themselves against that loss, it seems to accord with current community standards in most, if not all, cases to require the defendant to have the interests of those persons in mind before he or she embarks on that conduct.[49]

Thus the pleading must contain the requisite elements constituting the duty of care of vulnerability, the Defendant's knowledge of the Plaintiff's vulnerability and want of due care by the Defendant.

40 Secondly, categories of vulnerability are not foreclosed; a duty to prevent economic loss will depend upon application of the general principles of reasonable foreseeability of loss, indeterminacy of liability, autonomy of the individual, vulnerability to risk and the Defendant's knowledge of the risk and its magnitude.[50] In my opinion, there is a tenable proposition that Mr Solak's legal rights as registered proprietor of the land may constitute a "vulnerability" to incurring loss by reason of the Third Parties' conduct.[51] I reject the submission for Mr Kheir and Kheirs Financial Services that the matters pleaded as the material facts supporting the "legal responsibility" do not support a contention that Mr Solak was vulnerable in the sense required to erect a duty of care.

41 Thirdly, the elements of want of due care, vulnerability and knowledge of Mr Solak's vulnerability are all pleaded here.

42 For Bank West it was submitted that "the idea that a duty of care could exist in the present circumstances is a startling one: the Bank was intending to enter into a contractual relationship where the rights and liabilities of the parties would be regulated by contract rather than by the law of tort and where a well understood statutory registration process exists." For Mr Kheir and Kheirs Financial Services it was submitted that the matters pleaded asserted obligations by Kheirs Financial Services through a contract with a person other than Mr Solak and "in any event, cannot be relied on to found a duty of care to avoid pure economic loss or set the standard of care required by such a duty, even between parties to the same contract". I do not accept these submissions. As the High Court in Bryan v Maloney[52] stated, the fact that the law recognises the existence of concurrent duties in contract and tort does not mean that the existence of a contractual relationship is irrelevant to the existence of a relationship of proximity or the content of a duty of care. Although the duty of care must be independent of the contractual relationship, the existence of that contractual relationship may provide the occasion for, and constitute a factor favouring, the recognition of a relevant duty of care.[53]

43 The Court's task is not to decide the case as pleaded but to consider whether the pleading is one that is capable of being sustained in law. I am not persuaded that the claim is so untenable that I should refuse to allow the pleading. In the circumstances, this proposed pleading will be allowed.

44 Orders will be made to give effect to these reasons. I will stand the matter over to enable the parties to put submissions on the appropriate form of the orders.

[1] The judgment is published at [2009] VSC 82 (Unreported, Pagone J, 17 March 2009).

[11] [2009] VSC 82 (Unreported, Pagone J, 17 March 2009).

[12] Statement of claim filed 21 May 2009 [3].

[13] Statement of claim filed 21 May 2009 [7], [8], [9].

(1) Subject to this Act any person sustaining loss or damage (whether by deprivation of land or otherwise) by reason of -

(c) any error omission or misdescription in the Register or the registration of any other person as proprietor;

[17] Amended defence filed 21 August 2009 [6], [7].

[24] See proposed paragraph 11 of the further amended defence:

If at the trial of the proceeding herein the plaintiff establishes that he did not execute the mortgage of his interest in the land in favour of the Bank and the antecedent Home Loan Agreement then the Registrar will say that:

(a) by reason of the Consumer Credit Code the mortgage is unenforceable in court or out of court;

(b) each of the instrument of mortgage and antecedent Home Loan Agreement was void and, on its proper construction, the registered mortgage does not secure the payment of any monies to the Bank.

[26] Rogers v The Queen (1994) 181 CLR 251, 273 (Deane and Gaudron JJ).

[27] Ibid, 273 (Deane and Gaudron JJ); Spencer Bower, Turner and Handley, The Doctrine of Res Judicata (3rd ed, 1996) 9-11.

[28] [2004] FCA 1699 (Unreported, French J, 20 December 2004).

[30] Gray v Dalgety and Co Ltd [1916] HCA 35; (1916) 21 CLR 509, 543 (Isaacs J); O'Toole v Charles David Pty Ltd (1990) 171 CLR 232, 245 (Mason CJ), 257-8 (Brennan J).

[31] Spencer Bower, Turner and Handley, The Doctrine of Res Judicata (3rd ed, 1996) 9-11.

[33] [1939] HCA 35; (1939) 62 CLR 545.

[35] [1998] 3 VR 133.

[38] Ibid 143-4 (emphasis added). See also 145, lines 34-41.

[39] Assets Co Ltd v Mere Roihi [1905] AC 176, 210 (Lord Lindley); Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133, 159 (Ashley AJA).

[40] [1998] 3 VR 133.

[41] Ibid 159 (Ashley AJA); 143 (Tadgell JA).

[43] [1905] AC 176.

[44] [1998] 3 VR 133, 146 (Tadgell JA).

[45] The Commonwealth v Verwayen (1990) 170 CLR 394, 456 (Dawson J).

[46] Rule 13.10(3)(a) of the Supreme Court (General Civil Procedure) Rules 2005.

[47] [1999] HCA 36; (1999) 198 CLR 180.

[51] Cf Reynolds v Katoomba RSL All Services Club Ltd [2001] NSWCA 234; (2001) 53 NSWLR 43.

[52] Bryan v Maloney (1994) 182 CLR 609, 621 (Mason CJ, Deane and Gaudron JJ).

[53] Ibid 621 (Mason CJ, Deane and Gaudron JJ).