Wardman v Hatfield [2003] NSWCA 283 | Case summary

(q) On 26 March 2003, the claimants filed a Notice of Motion (without filing a defence) seeking dismissal of the proceedings on the basis that they were statute barred. That application was heard by Acting District Court Judge Boyd-Boland who dismissed the Notice of Motion with costs on 30 April 2003. 4 In the proceedings, the opponent claims damages which have been particularised to include various amounts which he has been required to pay to his legal advisers in relation to the landlord proceedings, totalling approximately $45,000. This sum is approximately $15,000 more than the $29,777.91 claimed as the share of the opponent's costs of the landlord proceedings and his costs of the cross claim (which Dr Bark was ordered to pay to him pursuant to the indemnity provision in the deed). 5 The claimants argued before the primary judge that the proceedings were statute barred because the opponent's cause of action arose either at the date upon which he entered into the deed (4 December 1986) or when he received the letters of demand (15 February 1989 and/or 12 April 1991) or, at the very latest, when the landlord proceedings were instituted in 1991. The opponent, on the other hand, submitted that his cause of action against the claimants was not complete until it was finally determined that he would be required to make payment under the guarantee. This, he argued, did not occur until judgment was delivered in the landlord proceedings on 19 November 1999. 6 The primary judge, in accordance with the test enunciated in General Steel Industries Inc v Commissioner for Railways (1964) 112 CLR 125, recognised that the summary dismissal of the proceedings at an interlocutory stage could only be justified if the proceedings were "useless and futile", "clearly untenable", "manifestly groundless" or "obviously untenable". His Honour was also mindful of the admonition in the joint judgment of Mason CJ, Dawson, Gaudron and McHugh JJ in Wardley Australia Limited v Western Australia (1992) 174 CLR 514 at 533 (the joint judgment), where their Honours said: "We should, however, state in the plainest of terms that we regard it as undesirable that limitation questions of the kind under consideration should be decided in interlocutory proceedings in advance of the hearing of the action, except in the clearest of cases. Generally speaking, in such proceedings, insufficient is known of the damage sustained by the plaintiff and of the circumstances in which it was sustained to justify a confident answer to the question." 7 Notwithstanding the foregoing, the primary judge considered that it was clear, up until the time of the District Court judgment in November 1999, that the opponent's liability under the guarantee to reimburse Cawood for arrears of rental and outgoings due under the lease was merely contingent or potential, and that it did not crystallise until judgment had been entered against him. His Honour advanced two reasons for this conclusion. The first was that at the time the deed was entered into, it was possible that the guarantee might not be called upon - this was so because Perwood might have complied with its obligations to pay rent and outgoings. The second was that in the landlord proceedings instituted to recover those arrears, which were yet to be determined at the time, both Perwood and the guarantors (including the opponent) were seeking to defend those proceedings upon the basis that the guarantee did not extend beyond the expiry of the initial term of the lease on 31 July 1988, at which time the rental payable under the lease was not in arrears. 8 Essential to the primary judge's reasoning is the following passage from the joint judgment in Wardley (at 527): "….the answer to the question when a cause of action for negligence causing economic loss accrues may require consideration of the precise interest infringed by the negligent act or omission. The kind of economic loss which is sustained and the time when it is first sustained depend upon the nature of the interest infringed and perhaps the nature of the interference to which it is subjected. With economic loss, as with other forms of damage, there has to be some actual damage. Prospective loss is not enough." 9 The primary judge rejected the claimants' argument that the opponent had first sustained the loss when he became aware that he remained liable as guarantor of Perwood's performance of the lease, being either of the dates on which a demand was made upon him by Cawood's solicitors in that regard. His Honour's reasoning was as follows: "…The Court in Wardley made it clear the disadvantageous character or effect of an agreement entered into on the faith of a misrepresentation might not be ascertained until a future date. At none of the times used by the defendants as the basis for their argument was the obligation or potential obligation of Hatfield crystallised. The defendants offered no argument to suggest that at any of the times they indicated they were capable of quantifying Hatfield's claims. To my mind, at those dates, that could not be done. That is even more evident when one considers the terms of the Judgment of this Court which came to result in Hatfield making the payments recorded earlier to Cawood. In those proceedings a substantial defence was argued, involving construction of the lease and in particular the terms of it in so far as they related to guarantees. A substantial cross-claim was mounted against Cawood in that action, at one stage put as high as $3 million although ultimately it came to result in a significantly smaller award to the present Plaintiff." 10 The claimants advanced two arguments before this Court. The first was that, although it might be accepted for the purposes of the argument that from the date the deed was executed the opponent's liability under the guarantee in the lease was only contingent, the liability nonetheless became actual once Perwood defaulted under the lease by failing to make rental payments as covenanted. Reference was made to the definition of "default" in clause 13.04 of the lease, which provided as follows: "In any of the following circumstances namely 13.04.01 RENT IN ARREARS - if the rent hereby reserved or any part thereof shall be unpaid and in arrears for the space of fourteen (14) days after the same shall have become due whether any formal or other demand therefor shall have been made or not; the Tenant shall be deemed to have made default." 11 It was therefore submitted that once Perwood defaulted in accordance with the above clause, the guarantee in clause 17.01 was activated automatically without the necessity for any demand to be made by Cawood upon the guarantors. The opponent's liability under clause 17.01 to pay all monies therefore arose on Perwood's failure to make those payments. Accordingly, as and from the date of Perwood's undisputed default, time under the statute commenced to run. 12 The claimant's second and alternative argument was that the opponent's claim was essentially one of loss of chance, that chance being the opportunity, had he been properly advised by the claimants, to minimise or obviate his potential liability as a guarantor under the lease. Reliance was placed upon the distinction between the loss of a chance on the one hand and the chance of a loss on the other, identified by Hodgson JA (with whom Handley JA and Young CJ in Eq agreed) in Segal v Flemming (2002) NSWCA 262. Regarding this point his Honour said: "25. In the former case, where a chance is lost, it will never be known how things would have turned out if the chance had not been lost, so that the only possible compensation a plaintiff can obtain is compensation for the value of the chance itself. Accordingly, it is reasonable to require a plaintiff to commence proceedings within the limitation period once the chance has been lost, and reasonable to award damages on that basis against a defendant. 26. On the other hand, where a person incurs a chance, even a substantial chance, of suffering a loss, in due course it may become clear that no loss is ultimately suffered; and so long as there is some appreciate chance that no loss will be suffered, it is unreasonable to require a plaintiff to commence proceedings and unreasonable to award damages against a defendant. However, once there is actual loss, even if there is also the chance of further loss, a plaintiff must commence proceedings within the appropriate limitation period, and can obtain damages reflecting actual loss suffered plus damages reflecting the chance of any further loss." 13 It was thus submitted that in the present case, the gravamen of the opponent's complaint against the claimant is that he suffered the loss of a chance rather than the chance of a loss, with the consequence that time commenced to run as and from the date of execution of the deed. 14 The opponent submitted, however, that even if he had suffered the loss of a chance upon the execution of the deed, he had also suffered the chance of a loss, and that the two are not mutually exclusive. On this basis, he submitted that there were three conditions precedent to the establishment of his liability to meet Cawood's demands under the guarantee. The first was Cawood suing under the guarantee. The second was Cawood suffering a claimable loss. The third was Perwood and/or Dr Bark being unable to pay the amount of Cawood's claim. It was submitted that these conditions were not satisfied until judgment was obtained by Cawood in the District Court in November 1999. 15 Reliance was placed by the opponent on the decision of the Full Court of the Supreme Court of Victoria in Van Win Pty Limited v Eleventh Mironton Pty Limited (1986) VR 484. In that case, the proprietor of a building sued the local council for negligence due to the issue of a building permit authorising the erection of a particular building. The council issued a third party notice against the engineer to whom it had referred the plans, alleging a failure to exercise the requisite skill and diligence in certifying to the council that the proposed building would be structurally adequate. It was held that the third party notice did not disclose a cause of action against the engineer because, until the council was found to be liable to the building proprietor, it had not suffered any damage as a result of the engineer's negligence. Kaye J (with whom Gray and Phillips JJ agreed) said (at 489-490): "As already observed, professional advice given negligently resulting in damage to property will found an action in tort for damages. The damage pleaded and particularised by the City of Kew is financial loss, which it will incur by its liability to satisfy any judgment for damages recovered against it by Van Win and the costs of defending the counterclaim. Thus the damage alleged being in futuro , the pleading does not disclose any material injury suffered or harm occasioned to the City of Kew's interests. At its highest, the claim made the City of Kew is for inchoate damage which might subsequently by suffered by it. Consequently, damage being the gist of an action in tort to recover damages, the City of Kew's cause of action against (the engineers) has not yet arisen." 16 This decision was referred to by O'Loughlin J in the Federal Court of Australia in St George Bank Limited v MJK Pty Limited (1999) FCA 1752. That case involved proceedings by the bank against a valuer, whereby the bank claimed that it had suffered losses when its borrower defaulted and its real estate security was found to be inadequate. It claimed that it had relied on the report and advice of the valuer in making the loans to the borrower and further alleged that the report and advice were misleading and deceptive and therefore in breach of s 52 of the Trade Practices Act and s 56 of the Fair Trading Act 1987 (SA). The valuer sought leave to file a cross claim against the borrower's accountant, alleging that the preparation of the valuer's report had been materially influenced by incorrect information obtained from financial statements prepared by the accountant with respect to the borrower. It claimed that the accountant owed it a duty of care to prepare the accounts properly, which duty had been breached. It pleaded that if the valuer were to be found liable to the bank for the loss and damage sustained by it, that loss had in fact been caused by the accountant's negligence and its breach of the Trade Practices Act and the Fair Trading Act. 17 The bank resisted the granting of leave upon the basis that the proposed cross claim of the valuer against the accountants did not disclose any damage suffered by the valuers. This submission was based upon the decision in Van Win, where, after citing the passage referred to in [15] above, O'Loughlin J concluded in the following terms: "31. This line in reasoning in Van Win's case also leads to the conclusion that the respondents in these present proceedings do not yet have a cause of action for misleading or deceptive conduct - they have not suffered loss or damage for the purposes of s 82 of the TBA until there is an actual or certain liability : Wardley v State of Western Australia (1992) 175 CLR 154 at 525. I am satisfied that the respondent's intended claims against the accountant under the TPA and the FTA and the intended claim in negligence cannot be maintained at this stage." (emphasis supplied) 18 The passage from Wardley upon which O'Loughlin J relied was to the effect that the State of Western Australia would only suffer a loss as a consequence of Wardley's misleading conduct (which caused it to grant an indemnity to the National Australia Bank against a facility granted by the bank to Rothwells Limited) when and if Rothwells' defaulted under the facility, thus transforming a contingent liability under the indemnity into an actual liability. 19 The following passage from the joint judgment in Wardley (at 527) was also relied on by the opponent: "When a plaintiff is induced by a misrepresentation to enter into an agreement which is, or proves to be, to his or her disadvantage, the plaintiff sustains a detriment in a general sense on entry into the agreement. That is because the agreement subjects the plaintiff to obligations and liabilities which exceed the value or worth of the rights and benefits which it confers upon the plaintiff. But, as will appear shortly, detriment in this general sense has not universally been equated with the legal concept of "loss or damage". And that is just as well. In many instances the disadvantageous character or effect of the agreement cannot be ascertained until some future date when its impact upon events as they unfold becomes known or apparent and, by then, the relevant limitation period may have expired. To compel a plaintiff to institute proceedings before the existence of his or her loss is ascertained or ascertainable would be unjust. Moreover, it would increase the possibility that the courts would be forced to estimate damages on the basis of likelihood or events. In such a situation, there would be an ever-present risk of under-compensation or overcompensation, the risk of the former being the greater." 20 The opponent submitted that the present case was analogous to those of Van Win and St George Bank. With respect, I cannot agree. Proceeding from the basis that the present is a chance of a loss case, it can be accepted that any economic loss suffered by the opponent as a consequence of the claimant's alleged negligence was only a potential or contingent loss until such time as his liability under the guarantee became an actual liability. Thus, that liability remained contingent until such time as there was a default on the part of Cawood. That default occurred when it fell into arrears with respect to the payment of rent and outgoings to the extent identified in the letters of demand of 15 February 1989 and/or 12 April 1991. On those dates, at the very latest, the opponent became actually liable under the guarantee. 21 Subject to any conditions precedent to a creditor's right to enforce a guarantee, such as the requirement to give notice, the general rule is that the creditor's right to enforce the guarantee arises upon the principal debtor defaulting in the performance of the obligation guaranteed: see O'Donovan and Phillips, "The Modern Contract of Guarantee" 3rd ed pp 457-458; 487 and 495. In other words, the guarantor's liability arises at the same time as the creditor's cause of action against the debtor accrues, this being so even if the creditor's loss is not quantified: National House-Building Council v Fraser (1983) 1All ER 1090 at 1092. 22 In my opinion, the liability of the opponent as guarantor arose upon Cawood's default in the due payment of rent in accordance with the covenants contained in the lease. Any contingent or potential liability became, as and from that default, an actual liability. There was no provision in the lease, particularly in clause 17 thereof, which required any condition precedent to be satisfied before that liability arose: cf Keene v Devine (1986) WAR 217 at 223; Rickday v Lewis (1905) 22 TLR 130. The liability of the guarantors was joint and several, and consequently the opponent's liability was in no way dependant upon any claim being made upon his co-guarantor or, for that matter, Cawood instituting proceedings to enforce the guarantee. 23 In my opinion, therefore, once the opponents' liability under the guarantee crystallised into an actual liability, he suffered loss which completed his cause of action against the claimants. Although it was submitted by the opponent that any monetary loss sustained by him could not be ascertained until judgment had been obtained in the landlord proceedings, that argument confuses the difference between sustaining an actual and measurable loss on the one hand and the quantification of that loss on the other. That distinction was referred to by Kaye J in Van Win in the following terms (at 489): "…..that confusion is likely to enter into consideration of this type if the distinction between damage occasioned from a tortious act and damages resulting or flowing from such damage, injury or harm is not kept clear. Damage is injury or harm resulting from a wrongful act while damages are compensation and money awarded for the resultant injury or harm." 24 A similar point was made by Cohen J in Vining v Marsden & Ors, 25 November 1996 (unreported) where, after citing from the joint judgment in Wardley, his Honour said: "Thus the distinction to be drawn is on the one hand where there is a potential loss which may be suffered dependent upon a contingency, and on the other hand where a loss is suffered immediately even though the assessment of the damages might itself require a consideration of contingencies. In the case of the former situation time will not commence to run until the happening of the contingency, which is the first time when it can be said that damage has been suffered. In the latter case time runs as soon as some form of damage is suffered, even though the ascertainment of the amount of that damage might require the taking into account of unknown but possible situations." 25 In the present case, the primary judge (in the passage from his judgment which I have set out in [9] above) has, with respect, confused the distinction to which Cohen J referred. Although his Honour recognised that it was necessary for the opponent's obligation under the guarantee to "crystallise", he appears to have interpreted the time of crystallisation as the point at which it was possible to accurately quantify the opponent's claim, which was only when Cawood obtained judgment against the opponent on the guarantee in the landlord proceedings. 26 Further, his Honour's reference in the same passage to the defence mounted by the opponent in the landlord proceedings is, with respect, erroneous in two regards. Firstly, the opponent's argument that the guarantee did not extend beyond the expiry date of the original term of the lease was irrelevant as the defence failed. Secondly, Perwood's cross-claim against Cawood went purely to the ultimate quantification of Cawood's loss under the lease. The actualisation of the opponent's liability under the guarantee as a consequence of the undisputed default of Cawood in the payment of rent and outgoings was, in my opinion, in no way dependent upon that liability being confirmed in the landlord proceedings: nor could it be avoided by the opponent raising a defence which was ultimately unsuccessful. 27 The apparent conflation by the primary judge of the concepts underpinning the opponent's liability under the guarantee and the quantification of that liability is further demonstrated by the following passage from his Honour's judgment: "I find it would not be possible to satisfy the requirement that the Court be capable of calculating loss by reference to existing facts at any of the times from which the present Defendants claim the time should run. At best a speculative estimate was capable of being undertaken. The precise notice and extent of Hatfield's loss remained uncertain until it crystallised with the judgment of this Court." 28 With respect, the nature of the opponent's loss became certain when it "crystallised" upon Perwood's default under the lease. At that time, his liability under the guarantee, to adopt the expression of O'Loughlin J in St George Bank, became "actual or certain". The only remaining uncertainty in that respect was the extent of that liability. 29 Accordingly, in my opinion the liability of the opponent under the guarantee became an actual liability no later than 1991 and it was from that time that the limitation period commenced to run. It follows that the institution by the opponent of proceedings against the claimants in November 2002, some 11 years after his cause of action against them was complete, were statute barred. 30 The alternative argument of the claimants based on the loss of a chance raises some interesting questions, and, in my opinion, there is substance in the opponent's argument that the two categories (being loss of a chance and chance of a loss) are not mutually exclusive. However, having found for the claimants on the basis that the case is one of a chance of a loss, it is unnecessary to express any final conclusion on this matter. 31 In my opinion, the primary judge should have acceded to the claimants' application that the proceedings were statute barred. As such a finding brings the proceedings to an end, it is appropriate that leave to appeal from the primary judge's dismissal of the claimants' Notice of Motion filed on 26 March 2003 should be granted. I would therefore propose the following orders:

Wardman v Hatfield

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Judgment (27 paragraphs)

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Legislation Cited (1)

Cases Cited (3)

Cited By (5)