Brian Leslie Wood & Anor v Neville Wesley Wood & Ors [1997] FCA 957 (17 September 1997)

FEDERAL COURT OF AUSTRALIA

LIMITATION OF ACTIONS - whether applicants' cause of action statute barred by reason of s 82 of Trade Practices Act 1974 (Cth) - allegation that applicants induced to enter guarantee and indemnity agreement as a result of deceptive and misleading conduct by the respondents - whether cause of action accrued when applicants entered into agreement - whether loss is incurred immediately upon entry into agreement - consideration of nature of applicants' liability under agreement.

Trade Practices Act 1974 (Cth), ss 52, 82

Forster v Outred & Co [1982] 1 WLR 86, not followed

Jobbins v Capel Court Corporation Ltd [1989] FCA 538; (1989) 25 FCR 226, not followed

Wardley Australia Ltd v State of Western Australia (1991) 30 FCR 245, applied

Magman International Pty Ltd v Westpac Banking Corp [1991] FCA 41; (1991) 100 ALR 575, cited

Magman International Pty Ltd Westpac Banking Corporation [1991] FCA 636; (1991) 32 FCR 1, applied

Wardley Australia Ltd v State of Western Australia [1992] HCA 55; (1992) 175 CLR 514, applied

BRIAN LESLIE WOOD AND DENISE ANN WOOD - v -

NEVILLE WESLEY WOOD, MARK NEVILLE WOOD AND CAROL JOYCE WOOD

NG 906 OF 1996

TAMBERLIN J

SYDNEY

17 SEPTEMBER 1997

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 906 of 1996

BETWEEN:	BRIAN LESLIE WOOD First Applicant DENISE ANN WOOD Second Applicant
AND:	NEVILLE WESLEY WOOD First Respondent MARK NEVILLE WOOD Second Respondent CAROL JOYCE WOOD Third Respondent
JUDGE:	TAMBERLIN J
DATE OF ORDER:	17 SEPTEMBER 1997
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1. The Notice of Motion be dismissed.

2. The respondents pay the applicants' costs of the Notice of Motion.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 906 of 1996

BETWEEN:	BRIAN LESLIE WOOD First Applicant DENISE ANN WOOD Second Applicant
AND:	NEVILLE WESLEY WOOD First Respondent MARK NEVILLE WOOD Second Respondent CAROL JOYCE WOOD Third Respondent

JUDGE:	TAMBERLIN J
DATE:	17 SEPTEMBER 1997
PLACE:	SYDNEY

REASONS FOR JUDGMENT

The question is whether the applicants' cause of action, based on misleading or deceptive conduct, is statute barred by reason of s 82(2) of the Trade Practices Act 1974 (Cth) ("the Act"), where the applicants' loss arises under a guarantee.

Section 82 provides:

"82(1) A person who suffers loss or damage by conduct of another person that was done in contravention of a provision of Part IV or V may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention.

(2) An action under subsection (1) may be commenced at any time within 3 years after the date on which the cause of action accrued." (Emphasis added)

More specifically, the question is when can it can be said in the present circumstances that the applicants' cause of action under the Act "accrued"?

The applicants allege that they were induced to enter into a Guarantee and Indemnity agreement ("the Guarantee") with the National Australia Bank ("the Bank") as a result of misleading or deceptive conduct by the respondents in breach of s 52 of the Act.

Agreed facts

For the purposes of the present Motion the parties have agreed on the following Statement of Facts:

"1. Tidefair Pty Limited ("Tidefair") engaged in conduct that was misleading or deceptive or was likely to mislead or deceive in contravention of s 52 of the Trade Practices Act, 1974 (the "Conduct").

2. The First and Second Respondents were persons involved in the Conduct engaged in by Tidefair in contravention of s 52 of the Trade Practices Act, 1974, within the meaning of s 82(1) of the Trade Practices Act, 1974.

3. In reliance on the Conduct, at various dates prior to 12 November, 1993:-

(a) the Applicants executed the Guarantee and Indemnity, a copy of which is annexed and marked "B" (the "Guarantee"), pursuant to which they guaranteed that Tidefair would pay to National Australia Bank Limited (the "Bank") the amounts which it owed to the Bank at any time; and

(b) the Applicants granted to the Bank the registered First Mortgage over real property of which they were the registered proprietors located at 8 Yeomans Street, Mt Warren, Queensland, (the "Land"), a copy of which is annexed and marked "C" (the "Mortgage").

4. After the execution of the Guarantee and the Mortgage, but prior to 12 November, 1993, Tidefair owed amounts to the Bank (the "Amounts").

5. At various dates after 14 November, 1993:-

(a) the Bank demanded that the Applicants pay the Amounts to the Bank pursuant to the Guarantee;

(b) the Bank exercised its rights to take possession of and sell the Land under the Mortgage to obtain payment by the Applicants of the Amounts pursuant to the Guarantee; and

(c) the Applicants paid the Amounts to the Bank from out of the proceeds of the sale of the Land under the Mortgage.

6. The Applicants filed the Application commencing this proceeding on 13 November, 1996."

The relevant provisions of the Guarantee are as follows:

"6.1 You guarantee that the customer will pay us all the amounts which the customer owes us at any time. You agree to pay us any amounts which the customer owes us up to the basic liability as at the time we demand that you pay them to us.

6.2 The amounts which the customer owes us at any time are:

(a) all amounts which at the time we have advanced or paid, or have become liable to advance or pay, for any reason:

(i) to or on behalf of the customer; or

(ii) at the express or implied request of the customer; or

(iii) because of any act or omission of the customer; or

(iv) because of any act or omission of ours at the express or implied request of the customer; and

(b) all amounts for which at that time the customer is or may become actually or contingently liable to use for any reason, including all amounts for which the customer is or may become liable to us in respect of any orders, drafts, cheques, promissory notes, bills of exchange, letters of credit, guarantees, bonds, and other instruments or engagements (whether negotiable or not and whether matured or not) which:

(i) have been drawn, issued, accepted, endorsed, discounted or paid by us; or

(ii) are held by us as a result of any transaction entered into by us for, or on behalf of, or at the express or implied request of, the customer; and

(c) ......

7.1 You must pay us on demand all the costs, expenses and liabilities we incur:

(a) in connection with this guarantee and indemnity or any other security or document related to it given to us by you or the customer; or

(b) in the actual or attempted exercise or enforcement by us of a power or a remedy under this guarantee and indemnity or any of those other securities or documents.

These include administration costs and our legal fees and expenses on a solicitor and client basis.

...

10.1 You agree to indemnify us up to the maximum liability against any loss we may suffer because for any reason:

(a) the customer does not pay us any amounts which the customer owes us; or

(b) we are prevented from including or recovering an amount as part of the amounts which the customer owes us by the intervention of a legal rule; or

(c) ...." (Emphasis added)

The authorities

In recent years the principles concerning the date on which a cause of action for misrepresentation accrues has received attention in this Court, the High Court and in England.

A convenient starting point is the decision of the Court of Appeal in Forster v Outred & Co [1982] 1 WLR 86. That was an action in negligence against solicitors for failing to properly advise the plaintiff on or before 8 February 1973, when she entered into a mortgage in the presence of the solicitors. The relevant proceedings were instituted on 25 March 1980. It was alleged that the plaintiff suffered loss and damage by incurring a liability under the mortgage as a result of the issue by the mortgagee of a Notice of Demand on 21 January 1975. After that date the plaintiff paid out the loan. The limitation period was six years. The question was whether the proceedings commenced in March 1980 were statute barred.

The Court of Appeal held that the 1980 proceedings were statute barred. Stephenson LJ said at 98:

"... on the facts of this case, the plaintiff has suffered actual damage through the negligence of her solicitors by entering into mortgage deed, the effect of which has been to encumber her interest in her freehold estate with this legal charge and subject her to a liability which may, according to matters completely outside her control, mature into financial loss - as indeed it did. It seems to me that the plaintiff did suffer actual damage in those ways; and subject to that liability and with that encumbrance on the mortgage property was then entitled to claim damages ..."

Dunne LJ at 100, in an important passage, said:

"In this case, as soon as she executed the mortgage the plaintiff not only became liable under its express terms but also - and more importantly - the value of the equity of redemption of her property was reduced. Before she executed the mortgage deed she owned the property free from encumbrances; thereafter she became the owner of a property subject to a mortgage. That, in my view, was a quantifiable loss and as from that date her cause of action against her solicitor was complete, because at that date she had suffered damage." (Emphasis added)

It is apparent from the above statements that their Lordships regarded the execution of the mortgage as giving rise to an immediate loss arising from devaluation of the mortgaged premises because of the additional liability incurred and charged on those premises.

The decision in Forster was considered and applied in the Full Federal Court decision of Jobbins v Capel Court Corporation Ltd [1989] FCA 538; (1989) 25 FCR 226. That action raised claims for damages under s 82(1) of the Act for breach of s 52 and also in contract and deceit. It was filed on 14 September 1989. The respondents claimed that the action was statute barred and contended that the cause of action had accrued by 9 April 1986 which was the date when the applicant made an investment pursuant to an agreement entered into two weeks earlier as a result of the misleading conduct. On the other hand, the applicant claimed that the damage occurred in October 1986 when the first instalment of the guaranteed amount was not paid. The Full Court held that the proceeding was statute barred because the applicant suffered damage immediately upon entry into the agreement and the making of the investment two weeks thereafter. Both of these occurred outside the three week period. The Court at 228-229 applied the principles set out in the above statement by Dunne LJ. At 231 the Court said:

"... the applicant suffered damage immediately upon his entry into the agreement and the making of the payment thereunder, both of which occurred outside the three year period. According to the pleading, the investment lacked the represented qualities; as a consequence it was from the outset less valuable than it should have been." (Emphasis added)

The next relevant recent decision of this Court involving consideration of the date on which a cause of action accrues under s 82 was the Full Federal Court decision in State of Western Australia v Wardley Australia Ltd (1991) 30 FCR 245. In that case the Court allowed an appeal from a decision of Sheppard J who had applied the principles in Forster, albeit with strong misgivings as to part of the reasoning of Dunne LJ quoted above.

In Wardley the action by the State of Western Australia was commenced on 24 October 1990 within three years after execution of an indemnity. It was based on alleged misrepresentations made on 24 and 25 October 1987 by various respondents. An amendment was sought raising for the first time allegations against Wardley based on certain further representations said to have been made on 25 October 1987. There was, in that case, no collateral mortgage given by the State. The Full Court held that mere assumption of an executory and contingent legal obligation, the future performance of which was likely to be more onerous than would have been the case had the representations in reliance upon which the obligation was assumed been true, is not a loss the amount of which was forthwith recoverable by action under s 82. This was because the cause of action would not have accrued, and might never accrue, while the suffering of loss or damage remained a likelihood rather than a reality. The cause of action brought by Western Australia on the pleading crystallised, at the earliest, when the Bank requested the State to indemnify it in respect of the demand made upon the Bank by the provisional liquidators of Rothwells.

The Full Court in Wardley declined to follow the decision in Jobbins. They agreed with the observations of Sheppard J in Magman International Pty Ltd v Westpac Banking Corporation [1991] FCA 41; (1991) 100 ALR 575 at 581. In that case his Honour having decided that he was bound by Jobbins, expressed important reservations in relation to the reasoning in Forster's case in the following terms:

"During the argument there was some discussion whether Forster's case ought to be followed in Australia. I confess to having some misgivings about its underlying reasoning. If one analyses its facts, it may be said that the plaintiff acted to her detriment by reducing the value of her interest in the property when she entered into the mortgage. But in truth and reality she had not then lost anything. Only when the son defaulted and became bankrupt was the plaintiff bound to repay his indebtedness to the company. If he had repaid it, she would never have been called upon to pay anything and the value of her interest in the property would have remained undiminished. If this view were correct, her loss arose, not at the time of the entry into the mortgage, but at the time of the son's default." (Emphasis added)

The Full Court judgment in Wardley said (at 265) of the above comments:

"We respectfully agree with those remarks. The point of immediate significance is that we would not regard Forster's case as an appropriate guide for the construction of s 82(2) of the Act, whatever outcome may await its use in Australia in support of submissions that certain actions in negligence are statute-barred."

The next development was the decision of the Full Federal Court in Magman International Pty Ltd v Westpac Banking Corporation [1991] FCA 636; (1991) 32 FCR 1 taken on appeal from Sheppard J. The Bench comprised five members of this Court. The principal decision was delivered by Beaumont J with whom Black CJ, Gummow, von Doussa and Hill JJ agreed. Magman concerned proceedings instituted for recovery of damages for allegedly misleading and deceptive conduct under the Act, together with breaches of duty of care by Westpac in negotiating and effecting foreign currency loans. The Full Court referred to the reservations expressed by Sheppard J concerning the underlying reasoning in Forster's case. The judgment then went on to consider the decision in Jobbins and Forster. The Court decided that to the extent that claims were made under s 82(1), the appeal should be allowed. The Court distinguished Jobbins.

Wardley was taken on appeal to the High Court which affirmed and endorsed the approach taken in the Full Court decision. The High Court decision is reported as Wardley Australia Ltd v State of Western Australia [1992] HCA 55; (1992) 175 CLR 514. The principal judgment was given by Mason CJ, Dawson, Gaudron and McHugh JJ. Their Honours (at 529) considered that the decision in Forster was explicable by reference to the immediate effect of the execution of the mortgage on the value of the plaintiff's equity of redemption and specifically referred to the observations of Dunne LJ in that case. Their Honours said at 530-531:

"Another element in some of the English decisions, as in Jobbins, is the conclusion that, because the subject matter of the agreement lacked the qualities which it had been represented as having, that subject matter was therefore less valuable than it would have been if the representations had been true. That conclusion is acceptable in cases in which the contract measure of damages is appropriate but it is not acceptable here where the contract measure of damages does not apply. The application of that measure of damages may, in some situations, enable a court to conclude more readily that the plaintiff first suffers loss or damage on entry into an agreement." (Emphasis added)

At 532, their Honours said:

"If, contrary to the view which we have expressed, the English decisions properly understood support the proposition that where, as a result of the defendant's negligent misrepresentation, the plaintiff enters into a contract which exposes him or her to a contingent loss or liability, the plaintiff first suffers loss or damage on entry into the contract, we do not agree with them. In our opinion, in such a case, the plaintiff sustains no actual damage until the contingency is fulfilled and the loss becomes actual; until that happens the loss is prospective and may never be incurred." (Emphasis added)

The Court went on to express its agreement with the approach adopted by the Full Court in both Wardley and Magman.

At 545 Deane J said:

"Finally, it appears to me to be unlikely that the Parliament would have intended, as a matter of policy, that a cause of action should arise under s 82 in a case where all that was involved was the incurring of an isolated contingent liability involving a mere risk (or greater risk) of actual liability to make a payment at some future time."

Toohey J, at 557, shared the misgivings expressed by Sheppard J, as to the statements of Dunne LJ in Forster, because "in truth and reality", the plaintiff in Forster lost nothing when she executed the mortgagee. At 557 he said:

"Certainly she put herself at risk but it was only on her son's default that she could be called upon to pay anything. Forster is, I think, distinguishable from the present case. If it is not, it should not be followed. In any event the issue here is not one of discoverability of loss or damage; the issue is when loss or damage relevantly occurred."

His Honour went on to observe that insofar as Jobbins relied on Forster it to was open to question.

Consideration of the above authorities leads me to the conclusion that neither Forster nor Jobbins should be treated as controlling in this case. Indeed, those decisions are clearly distinguishable or do not represent a correct statement of the law. The relevant determinative principles are those set out in the High Court decision in Wardley. Forster, of course, did not turn on the breach of legislation comparable to the Trade Practices Act. Moreover, I share the doubts expressed by Sheppard J in Magman and by the Full Court in Wardley as to the soundness of the proposition set out by Dunne LJ in Forster to the effect that there is an immediate loss upon execution of the mortgage arising because there is an immediate diminution in value of the equity of redemption upon its execution. In relation to proceedings founded on s 82 of the Act I do not consider that this represents an accurate statement of the principles which apply in this case.

In view of the above developments in this country, particularly in cases concerning s 82 of the Act, I do not consider that the approach taken by the Court of Appeal in Forster should be applied to the present case. More specifically, the statement of Dunne LJ as to immediate loss upon signing a mortgage should not be applied in the present circumstances. As Sheppard J pointed out, "in truth and reality" there is no liability and therefore no devaluation of the property mortgaged until default. Default does not arise upon execution of the mortgage. A contingent "liability" is a liability to arise in the future upon the occurrence or non-occurrence of a certain event or circumstance. It is not a present obligation. The statement by Dunne LJ as to immediate devaluation upon execution of the mortgage does not accord with commercial reality. In my view, it ought not be applied in relation to liability under s 82.

The present case

The respondents submit that the Guarantee did not have a requirement, as a condition precedent to the obligations of the applicants as guarantors that there should be a demand. The Guarantee is cast in the form that the applicants "guarantee that the customer will pay .... all the amounts which the customer owes .... at any time." Although the Guarantee is not expressed to be conditional, the applicants submit that there is no obligation unless or until the customer refuses to pay. It is a guarantee that Tidefair will perform its promise to pay moneys.

After the execution of the Guarantee and Mortgage, but prior to 12 November 1993, Tidefair owed amounts to the Bank. It is therefore said that prior to 12 November 1993 the applicants had a liability to the Bank under cl 6.1 which did not depend on a demand being made by the Bank. In fact the demand was issued after 14 November 1993. The liability under the Guarantee arose, it is said, notwithstanding that the amount may not have been exactly quantified by 14 November 1993. It is further submitted that entry into the Mortgage inevitably reduced the value to the applicants of the property mortgaged and it was said that this aspect of Forster had not been over-ruled by Wardley.

It is important when considering these submissions to bear in mind the structure of cl 6.1. The first clause is expressed as a guarantee that the customer will pay the Bank all amounts which the customer owes the Bank at any time. The requirement is not simply that the applicants will pay all amounts which the customer owes at any time, but that they guarantee that the customer will pay the amounts. The "term" guarantee, of course, has a well accepted meaning and is distinct from an indemnity: Jowitt v Callaghan (1938) 38 SR (NSW) 512 at 516-517 per Jordan CJ. The choice of the term guarantee is therefore some indication that the parties intended an indirect secondary or collateral liability to arise upon default and not a direct primary liability without any requirement of default by the customer. On this approach it is not until the customer fails to pay money owing that an obligation arises. In other words, it is a promise on the part of the applicants that if the customer does not pay the amounts owing, then the guarantors will make a payment. It is at the stage when default by the customer occurs, at the earliest, that the liability arises.

This conclusion gains support from the second sentence in cl 6.1 which makes it evident that the amount of the payment to be made by the guarantor is ascertained at the time when demand is made on the guarantor. The circumstance that the quantum is defined as at the time of demand supports the conclusion that liability does not accrue until demand is made. It is only at that time that both the obligation and the quantum are crystallised and are no longer merely contingent possibilities. This mechanism, whereby the quantum is ascertained at the time of demand, is a strong indication that liability was not intended to arise until a demand was made on the guarantor. The secondary character of the obligation is evident from the fact that the obligation of the guarantor in the first sentence is that the guarantor will pay all the amounts which the customer owes. If the customer fails to perform then the time of demand for payment is the earliest time at which the obligation of the guarantors in fact arises.

Accordingly, for the above reasons, it is my view that liability under the Guarantee and Indemnity did not arise in the present case until the making of a demand by the Bank on the guarantors. On the agreed facts the Notice of Motion should be dismissed. The respondents should pay the applicants' costs of the Notice of Motion.

I certify that this and the preceding ten (10) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Tamberlin

Associate:

Dated: 17 September 1997

Counsel for the Applicant:	Mr R M Taperell
Solicitor for the Applicant:	Baker Love
Counsel for the Respondent:	Mr I E Davidson
Solicitor for the Respondent:	MacMahon Drake Balding
Date of Hearing:	20 August 1997
Date of Judgment:	17 September 1997