Zagga Investments Pty Ltd v Walsh; Walsh v Preston Rowe Paterson Newcastle & Central Coast Pty Ltd

EX TEMPORE JUDGMENT (REVISED)

1. The plaintiff, Zagga Investments Pty Ltd, brings these proceedings against the defendant, Mr Dylan Walsh. Zagga Investments seeks to recover some $3 million from Mr Walsh under a guarantee that Mr Walsh executed in relation to advances made by Zagga Investments to New Aged Projects No 2 Pty Ltd ("NAP2"), a company associated with Mr Walsh. NAP2 is now in liquidation.
2. Mr Walsh has made a cross claim against Zagga Investments. He has also made a cross claim against the valuer, Preston Rowe Paterson Newcastle and Central Coast Pty Ltd ("PRP").
3. PRP has filed a Notice of Motion on 28 October 2024 seeking an order that Mr Walsh's cross-claim against it be dismissed or struck out.
4. By Notice of Motion filed on 5 November 2024, Zagga Investments has also sought to have Mr Walsh's cross-claim against it struck out. I am not for the moment dealing with that motion.
5. According to the Cross-claim, on 26 February 2018, NAP2 entered a contract to purchase a property at Tindale Street in Muswellbrook from an entity associated with the Catholic Church for $4.62 million.
6. NAP2 approached Zagga Investments to finance that purchase. In that context, on, 12 December 2018, Zagga Investments retained PRP to value the Muswellbrook property.
7. PRP produced a valuation on 25 January 2018.
8. The valuation stated: "The property has been valued on the basis of potential hostel use…".
9. The valuation stated that "[t]he basis of valuation" was "market value on the basis of vacant possession."
10. The valuation also stated, under the heading "Occupancy", that "the buildings were vacant at the date of inspection and the property has been valued with vacant possession."
11. The market value, "as is", was expressed to be $3.4 million.
12. On 19 March 2018, Zagga Investments agreed to lend NAP2 $2.2 million, being 65% of that valuation. NAP2 settled the purchase of the property the following year, 4 April 2019.
13. Mr Walsh appears for himself and appears to have drafted the Cross-claim against PRP. It is a lengthy document containing some 61 paragraphs over 18 pages. It is certainly drafted in a narrative form, but it is clear enough from the document what Mr Walsh is alleging.
14. First, Mr Walsh alleges that PRP owed him, as guarantor of NAP2 under its obligations to Zagga Investments, a duty of care.
15. Mr Leggatt, who appears today for PRP, submitted that it was impossible for Mr Walsh to establish, in the circumstances of this case, that PRP owed him a duty of care.
16. The cases show that a valuer who has given a valuation to a lender for lending purposes may owe a duty to a third party borrower provided that, on the facts, the elements necessary to establish a duty of care to protect against pure economic loss can be established.
17. Those elements have been discussed in many cases; for example, by McHugh J in Perre v Apand Pty Ltd, [1] where his Honour said: [2] "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. The principles concerned with 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 are, I think, relevant in determining whether a duty exists in all cases of liability for pure economic loss. In particular cases, other policies and principles may guide and even determine the outcome. But I do not think that a duty can be held to exist in any case of pure economic loss without considering the effect of the application of these general principles."
18. There are other cases where a duty of the kind Mr Walsh contends has been established. [3]
19. Whether or not Mr Walsh could establish a duty in this case is a matter that I will, for the present purpose, accept as being arguable.
20. There remain a number of fundamental problems with his Cross-claim as it is currently articulated.
21. The first relates to what I will call the complaint that Mr Walsh makes about the valuation. The complaint is, in substance, that the valuation somehow contained within it a representation that the subject property was in "vacant possession". Thus, in the Cross-claim, it is said: "[25] [T]he Villas were not vacant, and yet the Executive Summary of the report stated that the market value of $3.4m plus GST was: a. on an "as is" basis; b. with vacant possession; and c. based upon a direct comparison and capitalisation approach. [26] Despite this: a. the PRP Parties did not value the Property as requested by Zagga Markets on a market value "as is" basis and for mortgage purposes as the PRP Parties: i. ignored the fact the Property was not vacant possession, which is a failure to value the Property "as is"'; ii. ignored the fact that 3 tenants were in the Villas under village contracts at the time of the inspection and were due repayment of their ingoing contributions of (collectively) $450,000 should vacant possession be required. The PRP Parties were on notice of this as (a) the tenants were visibly in place on inspection, and (b) in any event the fact that the Villas were governed by the Retirement Villages was noted on the title of the Property; …".
22. Later in the Cross-claim, it is said that the valuation contained representations said to be misleading or deceptive for the purpose of s 18 of the Australian Consumer Law, [4] in that, relevantly: "[30] In those circumstances the First Valuation report was instructed and prepared in breach of contract vis-à-vis Zagga/Zagga Markets and in breach of duty of care owed to Zagga/Zagga Markets, MSA, and the Cross-claimant and was misleading and deceptive or likely to mislead or deceive in breach of section 18 of the Australian Consumer Law (ACL), due to, inter alia: a. the inclusion of the following misleading and deceptive and negligent representations (express and implied) (the First Valuation Representations) in the First Valuation report all of which were false or misleading: … ii. that the First Valuation was prepared on an "as is" basis; … iv. that the Property was vacant at the time of the First Valuation; v. that the Property could be obtained as vacant possession by Zagga on any default under the Zagga Loan and security agreements without any costs needed to obtain vacant possession; …". (Italicised emphasis in original.)
23. Implicit in these allegations is a contention that the valuation contains an assertion or representation that the property was, in fact, vacant. On no reading of the valuation does it convey that representation. All it says, quite clearly in my opinion, is that the basis upon which the property has been valued is that it was vacant possession. The valuation says nothing about whether or not as a matter of fact that was so.
24. The second difficulty with the Cross-claim relates to the question of reliance. Mr Walsh does not allege in the Cross-claim that NAP2 or he relied upon the valuation. Rather, it is alleged that Zagga Investments relied on the valuation and that "as the valuation report was misleading and deceptive that Zagga's losses are caused by that misleading and deceptive conduct." In view of my conclusions as to what Mr Walsh has alleged concerning the valuation, that proposition is not sustainable.
25. A further difficulty arises from what is said in the cross-claim under the heading "Settlement - no transaction case": "[53] The sale of the Property settled on 4 April 2019. The First Valuation was critical to both whether Zagga made the Zagga Loan and to whether the sale of the Property to NAP2 settled. [54] As it was, NAP2 had insufficient funds to complete the purchase from the Church Trustees. At the last minute, even with an inflated valuation of $3,400,000 (meaning with the maximum LVR the most that NAP2 could borrow was $2,210,000), there was a shortfall in capital to meet the obligation to purchase the Property. This was primarily due to the upfront and capitalised interest and fees. [55] The Cross-claimant negotiated a vendor's loan from the Church Trustees. On 1 April 2019 under a "Loan Agreement", the Church Trustees agreed to lend the NAP2 the sum of $473,584.10 (Church Loan) secured by way of an unregistered second mortgage over the Property (i.e., an equitable mortgage). [56] The Church Trustees were reluctant to offer that Church Loan, and there was no capacity to negotiate an increased Church Loan. As it was, the Church Trustees had threatened to rescind the Second Contract so they could re-take possession of the Property with the improvements the Cross-claimant had made to the Property in the interim period. [57] As such, Zagga's reliance on the First Valuation was a cause of Zagga loaning the monies that it did under the Zagga Loan, without which NAP2 would not have acquired the Property. Had the PRP Parties issued a correct valuation, NAP 2 could not have settled the purchase from the Church Trustees. [58] Zagga/Zagga Markets expressly confirmed via email to the Cross-claimant prior to settlement of the Property, that Zagga would not consider exceeding the LVR of 65%. The Cross-claimant says that the actual LVR at the time was materially higher than 65%. [59] As such, all the losses that flow from NAP2 settling the acquisition of the Property including the Zagga Losses and Walsh Parties' Losses would not have occurred but for the PRP Parties' negligence and misleading and deceptive conduct in the First Valuation." (Italicised emphasis added.)
26. The allegation there is that, in effect, but for the valuation and its alleged defects, NAP2 could not, and would not, have completed the purchase. It is impossible to see from the cross-claim how those allegations could be sustained.
27. Further, Mr Walsh has informed me today that, as a matter of fact, the original contract dated 26 February 2018 was, on 15 March 2019, rescinded and a new contract entered, being a contract that Mr Walsh tells me was ultimately settled in April 2019. None of those matters are alleged in the cross-claim.
28. The cross-claim in its current form cannot stand and must be struck out.
29. The order I make is that the Statement of Cross-Claim by Mr Walsh against Preston Rowe Paterson Newcastle and Central Coast Pty Ltd is struck out.
30. I order that Mr Walsh pay the First Cross-Defendant's costs of its motion of 28 October 2024.

Endnotes

1. (1999) 198 CLR 180; [1999] HCA 36.
2. At [104]-[105].
3. See, for example, Ta Ho Ma Pty Ltd v Allen (1999) 47 NSWLR 1; [1999] NSWCA 202, and the citations referred to in Abadee, Zipser, Sirtes and O'Keefe, Professional Liability in Australia (4th ed, 2023, Thomson Reuters) at [7.150]-[7.180].
4. Competition and Consumer Act 2010 (Cth), Sch 2 - Australian Consumer Law. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 13 November 2024