Plaintiff v Defendant Third Party

Supreme Court of Victoria|2009-11-10|Before: J. FORREST J

PRACTICE & PROCEDURE - Addition of party at conclusion of evidence - Consequential amendment to pleadings -- Novation of agreement - Asserted transfer of obligations to third party by deed of novation - No cause of action disclosed.

1 On the afternoon of the third day of the trial, Mr S. Marantelli, counsel for the defendant, Mr Manfred Schmidt, sought to amend the counterclaim, currently against Perpetual Trustee Australia Limited ("Perpetual"), to join the third party to the proceeding, Violet Home Loans Pty Ltd ("VHL"), as a defendant to the counterclaim.

2 Perpetual's claim relates to a loan to Mr Schmidt in 2004 secured by a mortgage in its favour. Mr Schmidt's counterclaim asserts that Perpetual's mortgage facilitator, Violet Home Loans Australia Pty Ltd ("VHLA") acted unconscionably and/or negligently in procuring the loan.

3 The hearing was stood over until 6 October 2009 to enable Mr Marantelli, to prepare an amended defence and counterclaim. This was done. The draft amended defence and counterclaim ("the draft") set out the claim against VHL in addition to several other amendments relevant to the claim against Perpetual.

4 On 6 October 2009, Mr J. Wilson SC announced his appearance with Mr Bravender-Coyle for VHL. Mr Wilson opposed the amendments to the pleadings on two grounds. First, that it was too late in the proceeding to do so and, secondly, it was futile to join VHL as a defendant to the counterclaim, as it was inevitable that the amended pleading would fail.

5 An added complication emerged in the course of discussion. Mr Wilson indicated that if VHL were joined as a defendant to the counterclaim, he would seek to allege contributory negligence by Mr Schmidt. This prompted Mr Moore, who appeared on behalf of Perpetual, to apply to amend his defence to plead contributory negligence, which had not been previously pleaded against Mr Schmidt.

6 Ultimately, I have concluded that VHL should not be joined as a defendant to the counterclaim, as I do not accept that a claim can be made out against it. Further, I allow the other amendments sought on behalf of Mr Schmidt and permit Perpetual to amend its defence to allege contributory negligence.

7 It is only necessary for the purpose of this application to recite a small portion of the factual material canvassed in the course of the trial.

8 On 15 August 2003, Perpetual, Macquarie Securitisation Limited ("MSL") and VHLA entered into a mortgage origination agreement ("MOA")[1] with Perpetual as the trustee and custodian of the Puma fund. The day to day operation of the fund is administered by MSL and is known as the Puma Program. From time to time, Perpetual and MSL enter into MOAs with mortgage facilitators such as VHLA.

9 At the time the MOA was entered into, VHLA was managed by its two directors, Mr John Mingos and Mr John Hendricks, from its business premises located on William Street, Melbourne. It had similar MOAs with other financiers. VHLA did not conduct retail operations itself; rather, it entered into agreements with "accredited" finance brokers, relying on the finance brokers to attract the client's business. The brokers provided loan applications and accompanying documentation to VHLA whom, after perusal and analysis, would refer the documentation on to the particular funds provider - in this case, to MSL, the program manager. MSL would then determine whether the loan was approved or rejected. Perpetual played no part in these dealings but, presumably, disbursed the funds at MSL's request.

10 The evidence so far in this proceeding indicates that a broker, Medallion Finance Concepts Pty Ltd ("Medallion"), procured Mr Schmidt's business through a further intermediary, a Mr Maddocks, after having a number of face to face meetings with Mr Schmidt. The purpose of the loan was to finance a development Mr Maddocks had induced Mr Schmidt to invest in. The development ultimately proved worthless; Mr Schmidt was defrauded and Mr Maddocks went to gaol.

11 Between March and May 2004, Mr Schmidt's loan application was processed by Medallion, VHLA and MSL, the loan advanced, and a mortgage given by Mr Schmidt in favour of Perpetual.

12 In late September 2004, Mr Hendricks ceased to be a director of VHLA. Subsequently, VHLA was the subject of a creditor's winding up petition and was placed into liquidation. VHL took over the operation of the business conducted by VHLA, "the Violet business", in particular the procuring of funds under the Puma program.

13 On 20 July 2007, a novation deed ("the deed") was entered into between VHLA, VHL, MSL and Perpetual.[2] The practical consequences of the deed were that not only did VHL take over the Violet business but, more importantly, it was given the right to receive VHLA's trailing commissions for business written prior to its liquidation. Putting to one side various corporate structures, the evidence was clear that Mr John Mingos was the controller of both VHLA and VHL after late 2004.

14 The gist of Mr Schmidt's claim against VHL as set out in the draft, is that it is the "successor in law" to VHLA and is therefore liable for the acts and omissions of VHLA. It is asserted that VHLA breached the duty of care it owed to Mr Schmidt, either by its own conduct or by the actions of its agent. Mr Schmidt also alleges that VHLA engaged in unconscionable conduct in breach of s 51AB of the Trade Practices Act ("TPA"); and/or s 8 of the Fair Trading Act ("FTA") or misleading and deceptive conduct in breach of s 52 of the TPA and/or s 9 of the FTA. The draft seeks an indemnity from VHL for any liability over and above the sum of $85,269.[3]

15 When cross-examined by counsel for Mr Schmidt, Mr Mingos gave the following answers:[4]

"Yes, how long has V2 - Violet 2 been in operation?---Around about the date of - or shortly before the date of the novation agreement.

Now, is V2 not writing any loan business at all?---No.

Why is that?---The bottom fell out of the market - out of the MBFI market.

All right. But V2 gets paid the commissions that were written by V1?

---Yeah, that was the purpose of the - of the novation agreement.

All right?---The real purpose, if I can just explain. The real purpose of the novation agreement at that time is because, as I said previously, I had a partner, a co-director at that time and my accountants sought fit to say, 'Well, look, you know, you start afresh and, you know, V1 gets disbanded and you continue to operate under V2." You couldn't just do that. You had to get the approval of your various funders being MSL, ABL, Interstar and so on.

When you say V1 disbanded - you're a lawyer?---Correct.

How long have you been in practice for, may I ask?---Since 1982.

All right. So, when you say V1 disbanded - - -?---It's gone into liquidation.

And at the time V1 was wound-up, the share - you were a director?---Of V1.

Were you the sole director?---No, there was two of us. When it was wound-up?

All right. And the sole shareholder was what?---Frank Landel Pty Ltd.

And you're still the shareholder?---Correct, correct.

And - - -?---Sorry, did you say am I still the shareholder?

Yes?---The company is the shareholder as I understand it, Frank Landel - - -

Yes. You're still the shareholder of Frank Landel?---I'm a director and a shareholder of Frank Landel - - -

Yes so, this is the position. V1 goes into liquidation on a creditor's winding-up and you're a creditor. At the time you're the sole director and the shareholder - and the owner of the shareholder Frank Landel?---Yes.

V2 is then instituted and you're the sole director of V2 and you're the sole owner of the company that owns V2?---Yeah.

And V2 gets all the trail commissions from the old loans?---M'mm, m'mm.

- - - because it's now wound-up?---It is wound-up, yes."

16 The MOA required VHLA to originate $10 million of residential mortgages per month. VHLA was permitted access to the fund and received both direct and trailing commissions provided it met the MOA obligations regarding the manner in which VHLA, as the mortgage manager, dealt with loan applications and loans. In particular, VHLA was required to observe "parameters" set by Macquarie and adjusted from time to time: clause 13. VHLA also provided an indemnity to both MSL and Perpetual, expressed in the following terms:

VHLA indemnifies and agrees to keep indemnified each of the MSL and Perpetual in respect of all claims, losses (whether consequential or otherwise), damages, demands and expenses which VHLA or Perpetual may suffer or incur as a result of:

(a) any breach, non-performance or non-observance by VHLA (or its employees or agents) of any of its obligations under this Agreement including (without limitation) any breach, non-performance or non-observance of its obligations under the Parameters and any costs or expenses incurred by Perpetual or MSL in exercising its rights under clause 11.4;

(b) any representation or warranty made by VHLA under this Agreement being incorrect when made or when deemed to be repeated;

(c) the contents of an Application or the documents or information accompanying the Application being incorrect or misleading;

(d) by reason of or arising out of VHLA (or its employees or agents) being held in any court or otherwise to be an agent, sub-agent, attorney, partner or employee of MSL or Perpetual, as the case may be;

(e) any claim brought against MSL by a third party for defects in the quality or production of the VHLA's products and services in connection with the Mortgage Manager's access to the System under clause 23; and

(f) any act or omission of VHLA or its employees or agents other than in the proper performance of VHLA's obligations under this Agreement." (Adaptations of identities inserted).

17 The parameters described in clauses 10.1 and 13 are contained in a loose leaf publication which is updated from time to time.[6] The relevant parts relied upon by Mr Schmidt, are as follows:

"(a) VHLA had to be satisfied that an applicant for finance had demonstrated a continuity of stable income (para. 2.1.5);

(b) in the case of a self-employed person, VHLA had to sight copies of at least the previous two years' income taxation returns alternative, in the case of a low doc loan, a statement of income and expenditure, in either case as verification of the applicant's income (para 2.1.15);

(c) in the case of a re-finance, VHLA had to check the previous 6 months statements of the existing loan to determine the regularity of payments (2.1.16);

(d) VHLA had to personally interview and identify each borrower (para 3.1)." (Adaptations of identities inserted).

18 The deed is dated 20 July 2007. In the recitals, the background is described as follows:

"C) Violet Australia (VHLA)wishes to cease being a mortgage manager for the PUMA Program.

D) Violet Australia and Violet (VHL) wish all relevant management and mortgage management to be undertaken by Violet (VHL).

E) Macquarie and Perpetual are prepared to consent to this change of mortgage manager subject to the terms of this Deed."

19 The parts of the deed central to this application are:

"3.2 This termination is without prejudice to Violet Australia's liability to Macquarie or Perpetual for any breach of the MOA prior to the Termination Date.

4.1 Macquarie and Perpetual consent to the novation by Violet Australia to Violet of all of the rights and obligations attaching to the MOA, including any loans introduced by Violet Australia immediately prior to the date of this Deed and the new loans that will be the subject of the MOA from and after the Termination Date (the Loans)." (Emphasis added).

20 Until recently, applications in this State during a trial to amend pleadings or to add parties to a claim have been dealt with by applying the principles set out in State of Queensland & Anor v JL Holdings Pty Limited[7] and Howarth v Adey.[8] However, in August of this year, the High Court in Aon Risk Services Australia Ltd v Australian National University[9] (Aon) expressly overruled several statements of principle contained in State of Queensland & Anor v JL Holdings. In essence, the Court held as follows:

(a) Courts must now consider the wider public interest and the efficient use of limited Court resources when deciding whether to grant applications to amend pleadings.

(b) Parties are not entitled to raise any arguable case at any stage of proceedings, subject only to payment of costs.

(c) Amendments that produce delay impact on the entire Court system and affect parties desirous of utilising that particular Court system.

"An application for leave to amend a pleading should not be approached on the basis that a party is entitled to raise an arguable claim, subject to payment of costs by way of compensation. There is no such entitlement. All matters relevant to the exercise of the power to permit amendment should be weighed. The fact of substantial delay and wasted costs, the concerns of case management, will assume importance on an application for leave to amend. Statements in JL Holdings which suggest only a limited application for case management do not rest upon a principle which has been carefully worked out in a significant succession of cases.

A party has the right to bring proceedings. Parties have choices as to what claims are to be made and how they are to be framed. But limits will be placed upon their ability to effect changes to their pleadings, particularly if litigation is advanced. That is why, in seeking the just resolution of the dispute, reference is made to the parties having a sufficient opportunity to identify the issues they seek to agitate.

In the past it has been left largely to the parties to prepare for trial and to seek the court's assistance as required. Those times are long gone. The allocation of power, between litigants and the courts arises from tradition and from principle and policy. It is recognised by the courts that the resolution of disputes serves the public as a whole, not merely the parties to the proceedings."

22 Mr Wilson relied upon the Aon principles as underpinning his submission that the amendment was far too late. I do not accept that submission. The roles of VHL, VHLA and their relationship with Mr Schmidt and the various other intermediaries, have been well explored in the course of the trial. VHL is the subject of the third party proceedings brought by Perpetual; the allegations made by Perpetual against VHL (notwithstanding the pleading of different causes of action) are effectively identical and the issues raised by those allegations have been canvassed throughout the trial. It was not suggested that VHL would need to call any additional evidence or that it would have conducted its case in any different way to that in which it has been run. There is, accordingly, no prejudice to VHL in the conduct of the case if the amendment is granted.

23 Mr Marantelli explained the late nature of the application by reference to the answers given in cross-examination by Mr Mingos regarding the purpose of the incorporation of VHL and its role vis-à-vis its predecessor. He said that after Mr Mingos gave evidence it became clear that VHL was simply a replacement corporate vehicle for VHLA and Mr Mingos' operation of the Violet business. I accept that explanation.

24 If the amendment is granted, the orderly progress of the trial will be impeded, but only to a limited extent. VHL proposes to allege contributory negligence against Mr Schmidt if leave to amend is granted. Mr Schmidt did not contend that it would not be able to do so. There has been no cross-examination of Mr Schmidt in relation to his own conduct in entering into the loan agreement. VHL would be entitled to cross-examine Mr Schmidt on issues relevant to this allegation. Moreover, as I have said, once this issue was raised, Mr Moore, who appears for Perpetual, indicated that he would seek to amend Perpetual's defence to make an allegation of contributory negligence and would also seek leave to cross-examine Mr Schmidt once the allegation had been particularised.

25 It was not said by Perpetual or VHL that it would need to adduce any evidence other than being permitted to cross-examine Mr Schmidt. Such cross-examination would be of relatively limited compass and would only occupy a small portion of additional Court time.

26 Admittedly, this is an occasion in which there is a significant change in both the pleadings and the nature of the claim that VHL has to meet. However, it will not significantly interrupt the business of the Court or cause unnecessary delay. Nothing said in Aon derogates from the principle that the objective of doing justice between the parties remains a primary consideration in determining an application such as this. [11] Given that the proposed amendment would result in a further one to two hours of hearing time, I think that the interests of justice dictate that Mr Schmidt not be precluded from amending his claim on this basis.

27 I did not understand Mr Marantelli to oppose Perpetual amending its claim to plead contributory negligence, notwithstanding the lateness of such an application. In any event, I propose to allow the amendment for the reasons I have set out provided the only additional evidence sought to be adduced by Perpetual is that of the cross-examination of Mr Schmidt confined to this issue.

28 A Court will not grant leave to a party to amend a pleading if the amendment is futile or bound to fail.

29 This point can be stated succinctly: do the terms of the deed mean that any liability or obligation of VHLA to Mr Schmidt was transferred to VHL so as to make VHL liable to Mr Schmidt for any act or omission on the part of VHLA.

30 Mr Schmidt's position against VHLA in relation to any claim relating to the procurement of the loan is relatively clear. Prior to VHLA being subject to the winding up order, Mr Schmidt was able to sue the company in negligence or under the TPA/FTA. Once VHLA was the subject of a winding up order, it was necessary for Mr Schmidt to obtain the leave of the Court to pursue the claim: s 471 Corporations Act. As any potential claim would be for unliquidated damages, in the event of a judgment being obtained, it was a question for the liquidator to determine whether to admit the claim and, if admitted, then determine its fate as part of the company's liabilities.

31 The consequences for a company after a winding up are dictated by the provisions of the Corporations Act: once a liquidator has filed a return following a winding up pursuant to s 509(6), ASIC is obliged to deregister the company under s 601AC(2). The effect of deregistration is that "a company ceases to exist": s 601AD(1).

32 All of the above is, I think, well understood. I now turn to the question of the effect, if any, of the deed upon any liability of VHLA to its clients and whether those obligations were, by the deed, transferred to VHL.

33 It can be accepted that Mr Mingos was the controller of both VHLA and VHL; but each are separate legal entities and must be treated as such for the purpose of this analysis.

34 It is helpful at this point to identify the nature of the rights and obligations or liabilities of the relevant parties. At the time that the deed of novation was entered into, Mr Schmidt had not issued his proceedings. However, he had a personal right, in the form of a cause or causes of action, both under the general law in tort and pursuant to statute (TPA or FTA) against VHLA in relation to its conduct in the procurement of his loan. There was, at the time the deed was entered into, no statutory impediment to the exercise of these rights by Mr Schmidt. Such rights are not proprietary. They are bare rights of action.[12] VHLA had corresponding obligations to Mr Schmidt.

35 The essence of a novation of an agreement is the entering into of a new contract in the substitution of an existing contract, the consideration being the discharge of the existing contract. As Windeyer J said in Olsson v Dyson:[13]

"Novation is the making of a new contract between a creditor and his debtor in consideration of the extinguishment of the obligations of the old contract: if the new contract is to be fully effective to give enforceable rights or obligations to a third person he, the third person, must be a party to the novated contract. The assignment of a debt, on the other hand, is not a transaction between the creditor and the debtor. It is a transaction between the creditor and the assignee to which the assent of the debtor is not needed."

36 More recently in Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd,[14] Finkelstein J said of the concept of novation:

"The second basis upon which Pacific Brands puts its case is that it entered into a licence agreement with Underworks in substitution for the sub-licence from Sara Lee and that it is this agreement which Underworks breached and which Pacific Brands lawfully terminated. This arrangement is often referred to as a novation. Novation is a method employed to circumvent the non-assignability of choses in action at law yet achieve the same result: O Marshall, The Assignment of Choses in Action (1950) at 69. Novation involves making a new contract in place of the old. The consideration for the new contract (for consideration is required) is usually the discharge of the old contract: Scarf v Jardine (1882) 7 App Cas 345 , 351. Thus, for there to be a novation it will be necessary to find the existence of an agreement between Underworks and Sara Lee to discharge the sub-licence and another agreement between Underworks and Pacific Brands to enter into a new licence substantially on the same terms as the sub-licence that has been discharged. Unless all three parties are involved in reaching the requisite agreements there can be no novation: Southway Group Ltd v Esther Wolf and Morris Wolff (1991) 57 BLR 33 , 51."

37 Novation, in effect, achieves the transfer of contractual obligations from one party to another. Bingham LJ in Southway Group Limited v Wolff said:[15]

"If A wishes to assign the burden of contract to C, he must obtain the consent of B upon which the contract is novated by the substitution of C for A as a contracting party."

In this situation, C has the same rights and obligations as does A, but only insofar as this reorganisation is agreed to by B. The obligations that are transferred by the novation to C are only those obligations which were previously owed by A to B, and no more. In most cases involving novation, provided B consents, B can then enforce the original obligations of A against C and A is removed from the picture by the discharge or rescission of the old contract. In this case, VHLA's liability to Perpetual and MSL, for any breach of the MOA, was preserved, by clause 3.2 of the Deed. However, that does not detract from the proposition that any obligation owed by VHLA which was the subject of the deed was confined to Perpetual and MSL.

38 To put it another way, the "obligations attaching to the MOA" referred to in the deed are limited to those obligations owed by VHLA to Perpetual and MSL, which were transferred to VHL with Perpetual and MSL's consent. It did not and could not extend to obligations to strangers to the MOA or the deed, such as Mr Schmidt and other clients of VHLA who may have had enforceable legal rights against VHLA.

39 The law does not permit the assignment of a liability in tort. Whilst there may be authority for the proposition that a cause of action in tort can be assigned,[16] there is no authority, that I can locate, for the proposition that a liability in tort or under statute can be assigned by agreement to another. A liability in tort is just that - a mere liability incapable of assignment.

40 In law a novation operates differently to an assignment. However, if the law prevents the assignment to another of a liability or an obligation to a stranger, it is inconceivable, I suggest, that the law would permit a novation to achieve the same effect, namely the stranger having no say in the effective assignment of his right against one party to another.

41 As counsel for VHL pointed out, there are particularly limited circumstances in which an obligation or liability can be assigned to another party. Usually, it will be by the effect of statute in which it is clear, on the face of the legislation, that the obligations which are transferred to another party are those owed to strangers.[17] Similarly, where succession-in-law is provided for, such obligations are transferred by the terms of the statute.[18]

42 In this case, it is understandable why Mr Schmidt would seek to assert that VHLA's obligation is one now owed by VHL; VHLA is in liquidation and has no prospect of paying any claim he may have made upon it, whereas VHL would seem to have some assets. What if the situation was reversed? How could VHLA, a company with funds, enter into a deed of novation with VHL, MSL and Perpetual and transfer its obligation to Mr Schmidt to VHL - which, in this scenario, would not have the funds to pay any award of damages. Mr Schmidt would argue, I think correctly, that the deed of novation was ineffectual insofar as his rights were concerned and could not inhibit his causes of action in tort or pursuant to Statute against VHLA.

43 Contrary to the argument of counsel for Mr Schmidt, I do not think that the provision of clause 3.2 of the deed assists the argument. Whatever the construction of the deed, it could not effect a practical transfer of VHLA's obligation to Mr Schmidt to VHL. The clause is odd in that it is contrary to the usual purpose of a novation, namely being to provide the original contracting party (VHLA) with a clean break of its obligations to Perpetual and MSL. Here, as I have already observed, the clause preserved those obligations. This was nevertheless a term of the deed which the parties agreed to.

44 On the question of the construction of the deed, it is perhaps appropriate to mention that even if it was accepted that the obligations to a stranger could be transferred from one party to another by novation, it is arguable that the terms of the deed did not go that far. In particular, it may be said that "an obligation attaching" to the MOA did not cover an obligation incurred by the conduct of VHLA in relation to one of its clients. I do not, however, need to resolve this point.

45 The amendments which seek to join VHL to the counterclaim will not be permitted. The balance of the amendments of the counterclaim which clarify, consistent with the evidence adduced, the claim against Perpetual will be allowed. Perpetual's application to amend its defence to plead contributory negligence will be allowed provided the amended defence is filed within seven days.

[3] This is the amount paid out to Westpac in respect of Mr Schmidt's existing loan, replaced by the Perpetual loan.

[4] T228. V2 is a reference to the third party VHL.

[12] See Beatty & Anor v Brashs Pty Ltd [1998] 2 VR 201, 205.

[16] The High Court in Poulton v The Commonwealth (1953) 89 CLR 540, 602 (Williams, Webb and Kitto J) said:

"... if it were true that the Commonwealth were guilty of conversion of the Donlons' wood, it would be the Donlons alone who could elect to waive the tort and take the proceeds of sale. This would be so, both because there was not in fact any purported assignment to the plaintiff of the right of action for the tort, and because, according to well-established principle, the right was incapable of assignment either at law or in equity: Dawson v Great Northern & City Railway Co (1905) 1 KB 260, at pp 270-271; Defries v Milne (1913) 1 Ch 98."

More recently, the authority of Poulton has been questioned. The decision of the House of Lords in Trendtex Trading Corporation v Credit Suisse [1982] AC 679 and that of the High Court in Campbell's Cash & Carry Pty Ltd v Fostiff Pty Ltd [2006] HCA 41; (2006) 229 CLR 386 [73], has provoked considerable debate as to whether the strict principle set out in Poulton still prevails. Even if one accepted, consistent with Trendtex and contrary to the clear statement of principle in Poulton, that a cause of action in tort or pursuant to statute (such as the TPA or FTA) can be assigned, the assignee still needs to demonstrate a genuine substantial interest or a genuine commercial interest in maintaining the cause of action and that the interest existed prior to the assignment. See Boston Commercial Services Pty Ltd v GE Capital Finance Australia Pty Ltd [2006] FCA 1352; [2006] 236 ALR 720. But compare TS & B Retail Systems Pty Ltd v 3 Fold Resources [2007] FCA 151; (2007) 158 FCR 444. See also the collection of cases and discussion in "Assignability of Causes of Action - A Divergence Between the Federal and State Jurisdictions", Matthew Brady, Hearsay, the Electronic Journal of the Bar Association of Queensland.

[17] See for instance Melbourne University (VCAH) Act 1992, s 4. See also Crimmins v Stevedoring Committee [1999] HCA 59; (1999) 200 CLR 1, [8], [12]-[16], [134]-[136].

At a glance

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Judgment (107 paragraphs)

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Cases Cited (7)