Plaintiff v First Defendant

1 In this proceeding, the plaintiff sues the defendants for damages, including exemplary damages, on a number of grounds. All of the grounds relate to alleged false, misleading or negligent advice given by the defendants to the plaintiff in connection with certain investments made by the plaintiff on the recommendation of the defendants.

2 The defendants have applied to the Court for leave to join additional parties to the proceeding, in order that the defendants may take advantage of the proportionate liability regime established by Part IVAA of the Wrongs Act 1958 (Vic) ("the Act").

3 Section 24AL(1) of the Act provides:

24AL Joining non-party concurrent wrongdoer in the action

(1) Subject to subsection (2), the court may give leave for any one or more persons who are concurrent wrongdoers in relation to an apportionable claim to be joined as defendants in a proceeding in relation to that claim.

4 Section 24AL(1) requires two things to be shown before the Court may give leave to join additional parties. First, that the proceeding is, in whole or part, "in relation to an apportionable claim". For the purpose of this application, the plaintiff accepts that the proceeding relates to an apportionable claim. Second, that the proposed additional party is a "concurrent wrongdoer".

5 Section 24AH defines a "concurrent wrongdoer" in the following terms:

(1) A concurrent wrongdoer, in relation to a claim, is a person who is one of 2 or more persons whose acts or omissions caused, independently of each other or jointly, the loss or damage that is the subject of the claim.

(2) For the purposes of this Part it does not matter that a concurrent wrongdoer is insolvent, is being wound up, has ceased to exist or has died.

6 The parties agree that, in order for the defendants to obtain leave to add a party for the purposes of contending that the added party is a concurrent wrongdoer, they must put forward a pleading which raises an arguable case that the party is a concurrent wrongdoer. It is common ground that, in order to enliven the Court's jurisdiction to allow joinder of an alleged concurrent wrongdoer, the defendants need only plead a case which is "not hopeless". [1]

7 A substantial portion of the claims made by the plaintiff against the defendants relate to investments by the plaintiff, on the recommendation of the defendants, in promissory notes issued by two companies, Ann Street Mezzanine Pty Ltd ("ASM") and York Street Mezzanine Pty Ltd ("YSM"). Each of those companies is within the "Westpoint" group of companies, which has collapsed. The plaintiff has lost each of her investments in those companies.

8 In an earlier interlocutory application in the proceeding, I granted leave to the defendants to join certain additional parties as concurrent wrongdoers.[2] At that time, I refused an application by the defendants for leave to join the directors of ASM and YSM. I did so because the case sought to be pleaded against them was, in my opinion, unarguable.[3]

9 By this application, the defendants again sought leave to join the directors of ASM and YSM. They relied upon a reformulated form of proposed pleadings. The plaintiff accepted that the reformulated pleadings raised an arguable case against the directors, and I accordingly gave leave to the defendants to join them as parties to the proceeding. The plaintiff opposed this course on the grounds that the earlier application to join the directors had been refused, albeit in respect of a different form of pleading, and because there had been delay in making the further application for joinder. For the reasons stated in argument, I rejected these grounds of opposition and granted leave to join the directors.

10 The defendants have also applied to join Property Investment Research Pty Ltd ("PIR"). The defendants wish to allege that PIR is a concurrent wrongdoer. Further, they wish to allege that PIR is liable to them for negligent misstatement and for engaging in misleading or deceptive conduct in contravention of the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1999 (Vic).

11 I heard the application for leave to join PIR on 12 March 2008. On that day, I refused leave to the defendants to join PIR and gave brief ex tempore reasons for doing so. In the course of revising those ex tempore reasons, I had cause to doubt the correctness of my decision. Accordingly, as the orders which I pronounced refusing leave to join PIR had not been authenticated, I informed the parties that the orders which I pronounced would be withdrawn whilst I reconsidered my decision. The power of the Court to reconsider a decision when the order or judgment pronounced as a result of the decision has not been authenticated is not in doubt.[4] It is unfortunate for the parties that this situation has arisen, but the justice of the case must be the paramount consideration. Where a judge thinks that he or she is or may be in error in a decision reached or the reasons given for reaching it, either in whole or in part, it is appropriate that the judge reconsider the decision or reasons whilst that opportunity remains prior to authentication of the resulting judgment or order. Of course, the power to reconsider should be exercised sparingly. However, in circumstances where the orders which I pronounced would have had the effect of shutting out the defendants from raising the pleaded claims against PIR in this proceeding, and from relying upon the status of PIR as a concurrent wrongdoer to reduce the amount of any liability they may have to the plaintiff, it is appropriate that this power be exercised.

12 Having reconsidered the matter, I am now of the view that the proposed pleadings by the defendants against PIR do not raise a case which is so hopeless that it does not admit of argument. Issues such as whether a duty of care is owed, the class of persons to whom a duty of care is owed and whether an arguably misleading statement was the cause of loss to persons relying upon it are all questions to be resolved on the basis of the evidence presented at trial. On an application such as this, the defendants need only establish that the proposed pleadings contain factual allegations which, if established at trial, could arguably found one or more of the causes of action alleged. If the Court is satisfied that such an arguable case has been put forward, joinder should be allowed.

13 The plaintiff alleges that she was misled by false, misleading or negligent advice given to her by the defendants in connection with the purchase by her of promissory notes issued by YSM. The purpose of the promissory note offering was to raise "mezzanine" funding for an apartment development by Scots Church Development Limited in the central business district of Sydney. In short, the plaintiff alleges that the defendants were negligent, or engaged in false or misleading conduct, by advising her to invest in YSM promissory notes in circumstances where they had not, amongst other things, given proper consideration to the suitability of an investment in YSM promissory notes by the plaintiff. The plaintiff alleges that the defendants had no reasonable basis for making their recommendation to her that she invest in YSM promissory notes.

14 The first claim which the defendants wish to raise against PIR is an allegation that PIR owed a duty of care to the plaintiff, further or alternatively to them, in connection with the preparation and distribution by PIR of a report containing an evaluation by PIR of a promissory note offering by YSM (the "PIR report").

15 The PIR report was in evidence on the hearing of an application. It is dated February 2001. It expressly relates to an information memorandum issued by YSM which had been assessed by PIR in January 2001 ("the first information memorandum"). The first information memorandum was not in evidence. However, from reading the PIR report it is apparent that it related to a proposal that Scots Church Development would develop 170 apartments plus ancillary parking and commercial space above the refurbished heritage building of the Scots Presbyterian Church located in the Sydney central business district. The builder was to be Westpoint Corporation Pty Ltd. Funding for the purchase and development of the site was to be a total of $77m financed by equity of $15m, a first mortgage from a bank of $47m and a second ranking mezzanine facility comprised of $15m in promissory notes issued by YSM.

16 The promissory notes which were issued to the plaintiff were not issued pursuant to the first information memorandum. They were issued pursuant to an information memorandum prepared by YSM at some time after 29 August 2003 ("the second information memorandum"). The plaintiff invested on 1 April 2004. The second information memorandum was in evidence.

17 The structure of the promissory note offering to which the first information memorandum and the PIR report relates is described in the PIR report in the following terms:

York Street Mezzanine Pty Ltd will raise $15 million mezzanine finance in the form of Promissory Notes. Each Promissory Note will have a minimum face value of $50,000. This $15 million will be loaned to Scots Church Development Limited, a company established for the specific purpose of being the primary vehicle for this project.

This mezzanine finance plus a first mortgage bank facility of $47 million will be the only loans sought as part of total project funding of $77 million. Bank funding will be primarily used to finance construction and will commence once $23.5 million in pre-sales have been achieved.

18 It is apparent that the PIR report was prepared for the purpose of, amongst other things, assisting investment advisers such as the defendants to perform their statutory role of properly researching the financial products which they recommend. The PIR report states in this regard:

Under Corporations Law, Property Investment Research Pty Ltd ('PIR") ACN 006 425 083 is a licensed 'Investment Adviser' and holder of License No. 12151, dated 3/12/94. Established in 1989, PIR is Australia's leading 'independent' research group on property related investments. PIR is the major supplier of independent research to Investment Managers and Financial Advisers. Under the law, all Financial Advisers are required to properly research the financial products they recommend. PIR's independent research plays a vital compliance role for ASIC licensed Investment Advisers and Securities Dealers in that it (i) assists in ensuring investment recommendation are appropriate for the client (ii) provides adequate knowledge of investment promoters, their track record, the investment market and the risks involved (iii) ensures, where specialised in-house research is not available, reliable research is obtained that is impartial and accurate.

19 The PIR report contains an express disclaimer, in the following terms:

Property Investment Research Pty Ltd (PIR) has received fees from Westpoint Corporation Pty Ltd for the preparation of this independent report, however, it was not prepared for inclusion in, or in connection with any prospectus and should not be relied upon to provide all the necessary information for investment decisions. PIR has no vested interest in the success or otherwise of the Investment Offer.

Although great care has been taken to ensure the accuracy of this report, Property Investment Research Pty Ltd gives no warranties in relation to the statements and information contained herein and disclaims all liability arising from any persons acting on the information and statements in this report. PIR does not provide personal securities recommendations. All investors are strongly advised to consult professional financial advisers whose role is to provide appropriate investment advice, taking into account investors' individual investment objectives, financial situations and particular needs. For more comprehensive information relating to investment offers PIR research reports should be studied carefully.

20 Further, the PIR report makes it clear that PIR has not conducted a full due diligence. In this regard, the report states:

Property Investment Research Pty Ltd (PIR) advises that in the compilation of this report, we have not conducted a full due diligence on this offer. Investors would be well advised to consult the Information Memorandum, and conduct their own inquiries, or receive professional advice. This report was not prepared to form part of any offer.

PIR has relied upon information contained in the Information Memorandum.

PIR has inspected the property and met representatives of Westpoint Management Ltd. PIR has received a copy of the Information Memorandum offer to prospective investors in the mezzanine finance. We have received a copy of a Valuation of the Scots Church Development, 2 York Street, Sydney undertaken by Colliers Jardine Consultancy and Valuation Pty Limited, and dated 31 December 2000. We have also received copies of the Architectural Plans submitted by Tonkin Zulaikha Greer/Jackson Teece Chesterman Willis/Chhada Siembieda for the Scots Church Design Excellence Competition August 2000 and of a Structural Due Diligence Report prepared for Westpoint by Van de Meer Bonser Consulting Engineers dated December 1999. PIR has received copies of the Guarantee and Indemnity of Westpoint Corporation Pty Ltd to York Street Mezzanine Pty Ltd, and the Loan Agreement and Fixed and Floating Charge between York Street Mezzanine Pty Ltd and Scots Church Development Ltd as well as the Mortgage and Deed of Extension of Guarantee.

21 There are two respects in which the defendants wish to allege that the PIR report contains false, misleading or deceptive statements which were relied upon by them in deciding to recommend to the plaintiff that she invest in YSM promissory notes and, further or alternatively, were relied upon by the plaintiff herself in deciding to accept that recommendation.

22 First, the defendants rely upon statements made by PIR that certain provisions of the Corporations Law (as then in force), which provide information and protection to investors in "securities" as defined in the Corporations Law, did not apply to the promissory note offering made by the first information memorandum. In this regard, the PIR report states:

Promissory Notes with a face value of $50,000 or more are defined in the Bills of Exchange Act 1909 (Cth) and, as such, are not 'securities' as defined in the Corporations Law. Consequently, the offer to investors is made through an Information Memorandum rather than prospectus.

Promissory Notes are not covered under Corporations Law and so neither prospectus, Custodian, nor Responsible Entity are required as they would be if this offer came under the jurisdiction of the Managed Investments Act (MIA) in the Corporations Law.

24 Second, the defendants wish to rely upon statements in the PIR report concerning the risk that the total project cost of $77m would not be substantially exceeded. In this regard, the PIR report states:

Once the development approvals are secured and sufficient pre-sales have been achieved, Scots Church Development Ltd is to enter into a fixed price lump sum building contract with Westpoint Constructions Pty Ltd. Construction is scheduled to commence in August 2001 for completion in December 2002.

With any development project, but particularly one involving refurbishment of a heritage building, there are risks of cost overruns. The proposed fixed price contract ensures that the risk of cost overruns are minimised, although there is the possibility of cost escalations prior to the developer entering into the contract.

25 The defendants wish to allege against PIR that these representations, which I will call "the Corporations Law representations" and the "development cost representations" were false, misleading or deceptive and were a cause of their recommendation to the plaintiff that she invest in YSM promissory notes, and of the plaintiff's decision to accept that recommendation and to invest. As I have said, the defendants wish to put a case against PIR on two grounds - in negligence for breach of a duty of care and for misleading or deceptive conduct under statute.

26 The making of the Corporations Law representations and the development cost representations are pleaded in the following form:

1. The PIR YSM Report contained inter alia the following representations:

(a) that the YSM Promissory Notes were exempt from the disclosure and other requirements set out in the Corporations Law (or its successor the Corporations Act) (hereafter collectively the Corporations Law);

(b) further to (a), that because YSM Promissory Notes were exempt from the disclosure and other requirements set out in the Corporations Law, neither a prospectus, custodian or responsible entity was required which would have been the case had the offering constituted a managed investment scheme (as defined) under the Corporations Law and, as such, were not subject to the prospectus requirements mandated under that legislation;

(c) that the cost of the proposed development was unlikely to significantly exceed $77 million;

(d) that there was a limited risk of the costs of the development exceeding $77 million because the development was to be constructed pursuant to a fixed price contract;

(e) that insofar as the representations referred to in sub-paragraphs (a)-(d) hereof constituted matters of opinion, the opinions were based upon reasonable grounds.

27 The defendants' pleading of a duty of care is in the following terms:

1. In about February 2001, PIR published and distributed to various people (including the Respondents), a report headed 'York Street Mezzanine Pty Ltd' (the PIR YSM Report), which contained an evaluation of a promissory note (YSM Promissory Notes) offering to be made by YSM.

The PIR YSM Report is in writing. A copy is in the possession of the solicitors for the Respondents and may be inspected.

1. In distributing the PIR YSM Report, PIR knew or ought to have known

(a) persons contemplating acquiring YSM Promissory Notes would rely upon the information contained in the PIR YSM Report for the purposes of determining whether to make that investment;

The knowledge is to be inferred from the matters alleged in paragraph 114C(c) (d) and (e) and from the subject matter of the said report which, amongst other things, gave return and risk ratings for the investment of A+ and A respectively.

(b) persons falling with the class referred to in sub-paragraph (a) hereof would or could suffer economic loss in the event that information contained in the PIR YSM Report was inaccurate, incomplete or otherwise misleading;

(c) the class had a comparatively limited knowledge of the matters the subject of the PIR YSM Report as compared with PIR and as such persons in the class were in a position of vulnerability vis a vis PIR in relation to the subject matter of the PIR YSM Report;

The position of vulnerability arose because of the comparatively limited knowledge of the subject matter on the part of the class as compared with PIR and from the responsibility which PIR assumed towards the class as a result of its receipt of remuneration from Westpoint, and the consequences of preparation and distribution of the report.

(d) persons within the class were relying upon PIR to exercise due care and skill in the formulation of opinions set out in the PIR YSM Report.

1. In the circumstances pleaded in paragraph 265 hereof, PIR owed a duty to a class of persons which included the Applicant to take reasonable care in the making of representations contained in the PIR YSM Report (the PIR Duty of Care).

28 The difficulty with the duty of care which is pleaded is that it ignores the existence of the second information memorandum issued by YSM. The pleading refers only to the PIR report as containing an evaluation of "a promissory note ... offering". That can only be a reference to the offering contained in the first information memorandum. The defendants recommended to the plaintiff that she invest in property in promissory notes offered pursuant to the second information memorandum, and a copy of it was given to the plaintiff. As noted in my earlier reasons,[5] the plaintiff says that she did not read it and placed no reliance upon it in deciding to accept the defendants' recommendation to invest. However, for present purposes, that does not matter. There is no issue that the plaintiff's investment was pursuant to the second information memorandum.

29 The second information memorandum describes an altered development proposal for the development of the Scots Church site to that which is described in the first information memorandum. There is no suggestion that there was a second PIR report relating to the second information memorandum.

30 There are some material differences between the development schemes contemplated by the two information memoranda. The first information memorandum was issued before construction had commenced and stated that completion was scheduled for December 2002. The second information memorandum was issued at a time when construction of the apartments on the Scots Church site was "well underway with construction now scheduled to finish early in 2005". The development described in the first information memorandum was to comprise 170 apartments at a total cost of $77m. The development described in the second information memorandum was to comprise 148 apartments at a total cost of $100m. The amount of the mezzanine funding which was being sought had increased from $15m in the first information memorandum to $36m in the second information memorandum.

31 On the other hand, it is apparent from reading the whole of the second information memorandum that it relates, in relevant respects, to a relevantly identical structure to that contained in the first information memorandum which is the subject of the PIR report. In particular, the second information memorandum contains its own representation that the promissory note offering was exempt from compliance with relevant aspects of the Corporations legislation. By this time, of course, the Corporations Law had been replaced by the Corporations Act 2001 (Cth). In this regard, the later information memorandum states:

Each Promissory Note must have a minimum face value of $50,000 and is issued in accordance with the Bills of Exchange Act 1909 (Commonwealth). Promissory Notes are not securities as defined by the Corporations Act (Section 9 "Debentures") and therefore are not covered by the Corporations Act.

This is the same structure which was the subject of the Corporations Law representations contained in the PIR report.

32 It was submitted on behalf of PIR that the proposed allegations of a duty of care owed by PIR to the plaintiff, or to the defendants, raised a hopeless case that was bound to fail. It was submitted that the second information memorandum, pursuant to which the plaintiff invested, related to a different development scheme: less apartments, more cost, more mezzanine funding and a different completion date. On this basis, it was submitted that the class of investors and financial advisers to whom a duty might have been owed by PIR should be limited to those investing in, or advising in respect of, promissory notes issued pursuant to the first information memorandum.

33 The PIR report related to the first information memorandum and the transactions contemplated by it. It was made for no other purpose. In these circumstances, the following statement by Lord Jauncey of Tullichettle in Caparo Industries Plc v Dickman is relevant:

Possibility of reliance on a statement for an unspecified purpose will not impose a duty of care on the maker to the addressee. More is required ... regard must be had to the transaction or transactions for the purpose of which the statement was made. It is loss arising from such transaction or transactions rather than 'any loss' to which the duty of care extends.[6]

34 In addition, the "DISCLAIMER" and "DUE DILIGENCE" sections of the PIR report appear to negative the existence of a duty of care by PIR to the plaintiff as an investor. On the other hand, the "RESEARCH CREDENTIALS" section of the PIR report arguably deprives these sections of any effect in negativing any duty of care by PIR to the defendants, as financial advisers, which might otherwise be established.

35 It was these matters which led me to conclude in my ex tempore reasons given at the conclusion of argument that the duty of care put forward in the defendants' proposed pleadings raised a hopeless case. However, on reflection, I am not satisfied at this stage that the postulated duty of care raises a case which is so hopeless that leave ought to be refused to commence it.

36 It was submitted on behalf of the defendants that the class of persons to whom a duty of care was arguably owed by PIR would extend to those who invest in promissory notes "on the faith of statements made in the PIR report which had application to the scheme which is the subject of the investment". In this regard, it was submitted that both the Corporations Law representations and the development cost representations have application in relation to the scheme in which the plaintiff invested, because the structure of the later information memorandum was relevantly identical to the general subject matter and structure of the scheme which is the subject of the first information memorandum considered in the PIR report. It was submitted that the developer, the property to be developed, the use of a fixed price building contract and the offering of promissory notes with a face value of more than $50 000 in order to avoid the application of the relevant Corporations legislation were common elements to the schemes contemplated by the two information memoranda.

37 It was submitted that although the Corporations Law had been replaced by the Corporations Act, the relevant provisions concerning the definition of "securities" in s 92 of the Corporations Law and s 92 of the Corporations Act were in relevantly identical terms. Counsel for PIR did not dispute this. Accordingly, it was submitted that the Corporations Law representations were capable of having application to an investment in promissory notes pursuant to the second information memorandum, as this element of the structure had not altered.

38 Further, as the development was to be constructed by Westpoint pursuant to a fixed price contract with Scots Church Development, the development cost representations were also capable of having application to investments pursuant to the second information memorandum, as this element of the scheme had not altered. Indeed, by the time of the second information memorandum, the fixed price contract had already been entered into and construction was well under way.

39 As I have said, my task is not to determine whether the proposed causes of action alleged against PIR are likely to succeed. I must only determine whether the proposed causes of action are arguable, in the sense that they might succeed once all of the evidence has been led at trial. In all the circumstances, it is in my view arguable that, in preparing the PIR report, PIR owed a duty of care to financial advisers who, in recommending that their clients invest in promissory notes pursuant to the second information memorandum, act on the faith of statements in the PIR report which have application to both the first information memorandum and the second information memorandum. Further, in my view it is arguable that a duty of care was owed to investors such as the plaintiff. Although an express disclaimer may negative the existence of a duty of care, this is a matter of interpreting the disclaimer in the full content of the surrounding circumstances.[7]

40 It is arguable that the representations were inaccurate, incomplete or otherwise misleading. No argument was put to the contrary. It is also arguable that the representations were made negligently or without reasonable grounds. Again, no argument was put to the contrary.

41 Of course, the statutory causes of action based upon misleading or deceptive conduct do not depend upon the existence of a duty of care. It is enough if it is established that the misleading or deceptive conduct is the cause of loss or damage.

42 The proposed pleadings against PIR seek to establish causation by alleging reliance upon the representations. The proposed pleadings of reliance are in the following form:

1. In reliance upon the representations on 1 April 2004 the Plaintiff invested $75,000 and acquired a promissory note issued by YSM (the YSM Promissory Note).

Save that the Defendants say that they prepared a financial plan, for the Plaintiff which involved a recommendation that the Plaintiff invest $75,000 in Westpoint and that the plan included a copy of the PIR YSM Report, the Respondents are not presently able to provide further particulars save that it can be inferred that the Plaintiff read the report and was influenced by it in determining to make the investment.

1. Further or in the alternative in reliance upon the representations, the Defendants recommended that the Plaintiff acquire the YSM Promissory Note.
2. Further, in the event that the Defendants had not made the recommendation to the Plaintiff that it acquire YSM Promissory Note, the Plaintiff would not have done so.

43 In my view, all questions of reliance and causation are issues for determination after all the evidence has been adduced at trial. It cannot be said that they are unarguable. However, having regard to the way in which the causation arguments were presented in oral submissions, further particulars of the alleged reliance by the defendants should be given. I will so order.

44 For the above reasons, I will give leave to the defendants to join PIR as a party to the proceeding. I will hear the parties as to the form of orders and as to costs.

[1] See, eg, Boral Resources (Vic) Pty Ltd v Robak Engineering and Construction Pty Ltd [1999] VSCA 66; [1999] 2 VR 507, [13].

[2] Atkins v Interprac and Crole [2007] VSC 445.

[4] See, eg, Texas Co (A'asia) Ltd v Federal Commissioner of Taxation (1940) 63 CLR at 382, 457; R v Billington [1980] VicRp 58; [1980] VR 625, 628.

[5] [2007] VSC 445, [20].

[6] [1990] UKHL 2; [1990] 2 AC 605, 661 (emphasis added); referred to with apparent approval by Brennan CJ in Esanda Finance Corporation Ltd v Peat Marwick Hungerfords [1997] HCA 8; (1997) 188 CLR 241, 252.

[7] Mutual Life and Citizens' Assurance Co Ltd v Evatt [1968] HCA 74; (1968) 122 CLR 556, 570.