Supreme Court New South Wales

• Medium Neutral Citation: Perpetual Trustees Victoria Ltd v Malouf [2012] NSWSC 1119
• Hearing dates: 1 June 2012
• Decision date: 31 October 2012
• Jurisdiction: Common Law
• Before: Davies J

Decision

(1) The Second Defendant's Notice of Motion of 3 January 2012 and his Amended Notice of Motion of 17 February 2012 are dismissed.

(2) The Second Defendant is to pay LawCover's costs of the Motions.

• Catchwords: INSURANCE - possession proceedings - cross-claim against solicitor - application to join insurer pursuant to s 6 Law Reform (Miscellaneous Provisions) Act - when event giving rise to claim for damages occurred - whether insurer bound by pleading of third party - when damage first suffered - when reasonably ascertainable that recoupment is impossible - whether cause of action accrued prior to inception of policy
• Legislation Cited: Fair Trading Act 1987; Insurance Contracts Act 1984; Law Reform (Miscellaneous Provisions) Act 1946; Legal Profession Act 1987; Uniform Civil Procedure Rules
• Cases Cited: Bailey v New South Wales Medical Defence Union Ltd (1995) 184 CLR 399; Hawkins v Clayton (1988) 164 CLR 539; Kenny & Good Pty Ltd v MGICA(1992) Ltd (1999) 199 CLR 413; Key Nominees Ltd v Ace Insurance Ltd [2008] NSWDC 62; Nigel Watts Fashion Agencies Pty Ltd v GIO General Ltd (1995) 8 ANZIC 61,235; Perpetual Trustees Victoria Ltd v Malouf [2008] NSWSC 834; Ross v Cook [2009] NSWSC 671; The Owners - Strata Plan No 50530 v Walter Construction Group Ltd (in liq) [2007] NSWCA 124; Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514; West Wake Price & Co v Ching [1957] 1 WLR 45
• Texts Cited: Derrington & Ashton, The Law of Liability Insurance (2005) Lexis Nexis, 2nd Ed.
• Category: Interlocutory applications
• Parties: Perpetual Trustees Victoria Ltd (Plaintiff); Anis Malouf (First Defendant); Albert Anis Malouf (Second Defendant); Alice Malouf (Third Defendant); Charles Alroy Goldberg (Cross-Defendant); Registrar-General of NSW (Cross-Defendant); Law Cover Insurance Pty Ltd (Interested party)
• Representation: Counsel: A Barwick (Plaintiff); E Yin (First Defendant); R Stitt QC (Second Defendant); A Crossland (Third Defendant); G Stilianou (Registrar General); T M Faulkner (Law Cover Insurance Pty Ltd); Solicitors: Mills Oakley Lawyers (Plaintiff); Legal Aid NSW (First Defendant); WKA Legal Pty Ltd (Second Defendant); Craig Milne & Associates (Third Defendant); Solicitor for Registrar-General of NSW (Registrar-General of NSW); Mullane & Lindsay (Law Cover Insurance Pty Ltd)
• File Number(s): 2006/263470

Judgment

1 This is an application by the Second Defendant to join Law Cover Insurance Pty Ltd as a Defendant to a second cross-claim he has brought against a former solicitor, Charles Goldberg pursuant to s 6(4) Law Reform (Miscellaneous Provisions) Act 1946. The background to the matter is usefully summarised in a judgment of McCallum J in Perpetual Trustees Victoria Ltd v Malouf [2008] NSWSC 834. The following summary is gratefully extracted from that judgment. Without any disrespect I shall refer to the Second Defendant as Albert to distinguish him from his father who is the First Defendant.

Background

2 In the underlying proceedings, the Plaintiff seeks possession of a property originally owned by the First and Third Defendants, Mr and Mrs Malouf. The Second Defendant, Albert Malouf, is their son. The property in question is apparently Mr and Mrs Malouf's home (according to Albert's pleadings).

3 Mr and Mrs Malouf say that in May 2004, thinking that they were providing short term assistance to Albert, they were driven to the offices of a solicitor, Mr Goldberg, where they signed certain documents, the contents and effect of which were not explained to them.

4 They later learned that Mrs Malouf was no longer an owner of the property, that Albert had become a tenant in common with his father and that a mortgage of $700,000 had been placed over the property. The documents executed by Mr and Mrs Malouf included:

(a)a transfer of Mrs Malouf's interest in the property to Albert which resulted in Mr Malouf and Albert holding the property as tenants in common in equal shares;

(b)a loan agreement between the Plaintiff as lender and Mr Malouf and Albert as borrowers for a loan facility drawn down to an amount of $700,000;

(c)a mortgage over the property securing the loan (which is the mortgage sought to be enforced in these proceedings).

5 The advance of $700,000 was paid to Albert out of Mr Goldberg's trust account in June 2004. Albert used the funds to invest in the short term lending market. According to his pleadings, he agreed on 3 June 2004 to advance the sum of $700,000 to two men, George and Habib Farah who, it appears, had interests in a group of companies that owned various restaurants. One of those companies, Clivedon Enterprises Pty Ltd, was also a borrower. I shall refer to them collectively as "the Farah group". The loan was for a term of three months at an interest rate of 5% and, in default, 10%. Interest was paid to Albert in advance.

6 The Farah group defaulted in repayment of the $700,000 to Albert, which was required to be repaid on 3 September 2004, and it transpired that Albert did not hold the security of registered second mortgages over various properties as he alleges he had been given to believe by Mr Goldberg.

7 Without the funds that were required to be repaid by the Farah group on 3 September 2004, Albert and Mr Malouf have fallen into default under the mortgage granted to the Plaintiff to secure the original advance to them.

8 Mr and Mrs Malouf have cross-claimed against Mr Goldberg for negligence and breach of the Fair Trading Act 1987. They claim that neither of them is fully literate in the English language and that Mr Goldberg did not explain the nature and effect of the documents they signed and did not ask them or otherwise enquire whether they understood the documents. They say they were not advised to obtain independent legal advice and that the advice given by Mr Goldberg was of a very limited nature.

9 Mr Goldberg has ceased to practice as a solicitor. On 15 July 2004 the Law Society cancelled his practising certificate and appointed a manager to his practice by resolution of the Council of the Law Society under s114B of the Legal Profession Act 1987.

Some procedural history

10 Mr and Mrs Malouf filed a cross-claim on 25 February 2011 naming the Plaintiff, Albert (the Second Defendant) and Charles Goldberg as the Defendants. By reason of Mr Goldberg's ceasing to practice and being licensed as a solicitor Mr and Mrs Malouf made application to join Law Cover pursuant to s 6(4) of the Act.

11 On 5 May 2007 Albert filed a cross-claim against Mr Goldberg. He also made application for leave under s 6(4) to join Law Cover. Both those Motions were heard by McCallum J. In the judgment to which I have referred her Honour noted at [13] that there was no appearance for Albert at the hearing and that she accordingly dismissed his application. On the application of Mr and Mrs Malouf she determined that the event giving rise to the claim against Mr Goldberg, that is, the suffering of loss by Mr and Mrs Malouf, was suffered before 30 June 2006. The result was that the procedure under s 6 was not available because the event giving rise to the liability of the insured occurred before entry into the relevant contract of insurance. The relevant contract of insurance ran from 1 July 2006 to 30 June 2007.

12 McCallum J's judgment was given on 15 August 2008. On 3 January 2012 Albert, acting for himself, filed a Notice of Motion asking that McCallum J's judgment be set aside pursuant to r 36.16.2(b) UCPR.

13 Thereafter, Albert filed the present Motion (entitled Amended Notice of motion) on 17 February 2012. Mr Stitt QC who appeared for Albert on the application said that Albert did not wish to pursue the Motion of 3 January 2012 and that it should be dismissed. He said also that Albert did not purse prayers 3,4 and 5 in the Amended Notice of Motion. These prayers concerned applications under various provisions of the Insurance Contracts Act 1984.

14 The only issue, therefore, that I have to decide, is whether leave should be given to Albert to join Law Cover Insurance as a defendant pursuant to s 6(4) of the Act. The other parties to the proceedings (the Plaintiff, Mr and Mrs Malouf and the Registrar-General) took no part in the hearing of the Motion.

The case against Mr Goldberg

15 The case pleaded by Albert against Goldberg in his cross-claim can be summarised as follows.

16 Some time before April 2004 Albert was in the course of negotiating an arrangement with a finance broker for Albert to lend $850,000 to the Farah group. The money was to be advanced in two stages with the first advance being $150,000 and the second $700,000. The second advance was to be obtained by Albert from the Plaintiff.

17 Albert retained Goldberg to act for him and in particular to provide advice in relation to security properties offered by the borrowers to secure the loans. Although the cross-claim does not expressly say so, what appears to be alleged is that Goldberg was negligent in that he did not investigate the security properties adequately or at all with the result that Albert made the first advance of $150,000 and simply obtained an unregistered mortgage over one or more of the properties accompanied by a caveat. In fact, each of the security properties was subject to a mortgage in favour of Perpetual Trustee Company Ltd ("Perpetual") and each property had a minimum of three caveats in respect of other lenders.

18 In respect of the proposed second advance of $700,000 by Albert Goldberg provided advice involving a proposed transfer of a mortgage from a pre-existing unregistered mortgagee in relation to the security properties. It seems that the intention was that Albert would, in that way, become the second mortgagee in respect of the security properties. It seems that Goldberg permitted Albert to borrow the $700,000 from the Plaintiff, transfer his mother's interest in the parents' home at Kemps Creek to him (by reason of a stipulation of the Plaintiff) and advance the money to the borrowers or at their direction prior to Goldberg ensuring that the proposed security arrangements were in place and that they were adequate. In particular some of the caveators with priority did not give their consent to the registration of the mortgage that was to be transferred to Albert and, in any event, that mortgage ultimately provided no security to Albert for the second advance.

19 As mentioned there was a default on 3 September 2004 by the borrowers. On 6 February 2006 Habib Farah became bankrupt. On 2 March 2006 an Administrator was appointed to Clivedon Enterprises Pty Ltd and it subsequently went into liquidation. On 3 March 2006 George Farah became bankrupt.

20 Thereafter Perpetual exercised its power of sale in respect of the security properties and after the discharge of the debt due to it there was no surplus for subsequent security holders.

Section 6 Law Reform (Miscellaneous Provisions) Act 1946

21 Section 6 relevantly provides:

(1)If any person (hereinafter in this Part referred to as the insured) has, whether before or after the commencement of this Act, entered into a contract of insurance by which the person is indemnified against liability to pay any damages or compensation, the amount of the person's liability shall on the happening of the event giving rise to the claim for damages or compensation, and notwithstanding that the amount of such liability may not then have been determined, be a charge on all insurance moneys that are or may become payable in respect of that liability.

...

(4)Every such charge as aforesaid shall be enforceable by way of an action against the insurer in the same way and in the same court as if the action were an action to recover damages or compensation from the insured; and in respect of any such action and of the judgment given therein the parties shall, to the extent of the charge, have the same rights and liabilities, and the court shall have the same powers, as if the action were against the insured:

Provided that, except where the provisions of subsection (2) apply, no such action shall be commenced in any court except with the leave of that court. Leave shall not be granted in any case where the court is satisfied that the insurer is entitled under the terms of the contract of insurance to disclaim liability, and that any proceedings, including arbitration proceedings, necessary to establish that the insurer is so entitled to disclaim, have been taken.

22 McCallum J summarised the principles concerning this section as follows:

[15]The section seeks to secure the performance of any obligation of the insurer to pay insurance moneys to the insured, and any obligation of the insured to pay damages to the claimant. It does so by creating a new right with an associated remedy to enforce it: Bailey v New South Wales Medical Defence Union Ltd (1995) 184 CLR 399 at 446 to 447 per McHugh and Gummow JJ, Brennan, Deane and Dawson JJ agreeing at 415.8. Section 6(1) creates a statutory right which arises on the happening of the "event" giving rise to the claim against the insured. The relevant event is whatever completes the claimant's cause of action against the insured: The Owners - Strata Plan 50530 v Walter Construction Group [[2007] NSWCA 124] at [24].

[16]The remedy to enforce performance of the obligation secured by such a charge is the direct right of action against an insurer given by s 6(4), subject to the requirement for leave. Section 6(4) does not direct the Court to deny leave only in a case where it is satisfied both of the entitlement to disclaim liability and that necessary steps have been taken to establish entitlement to do so. Leave must be refused in those cases but may also be refused, as a matter of discretion, even if the prohibition does not apply: Bailey at 448.5; Tzaidas v Child [2004] NSWCA 252 at [17] per Giles JA; The Owners - Strata Plan 50530 v Walter Construction & Ors [2006] NSWSC 552 at [19] per McDougall J.

[17]Leaving aside any question of discretion, it is important to bear in mind that the remedy cannot exist in the absence of the right - there is no occasion for granting leave in the absence of a charge. Accordingly, a threshold question in any application for leave under s 6(4) is whether a charge under s 6(1) has arisen, or may have arisen.

[18]The evidence relied on by LawCover stated that, commencing 1 July 2006, LawCover insured solicitors who had ceased practice for claims made against them during the period of insurance. The relevant policy is described as run-off cover and includes a clause under which LawCover agrees to indemnify the solicitor against civil liability for a claim that arises from the legal practice of the firm and is "first made" against the solicitor during the period of insurance. The policy is accordingly one of the kind commonly known as a "claims made" policy.

[19]In the case of such policies, the procedure under s 6 is not available when the event giving rise to the liability of the insured occurs before entry into the relevant contract of insurance, because no charge can arise over insurance moneys that might be payable under a contract that does not yet exist. Until the decision of the Court of Appeal in Strata Plan 50530, that proposition was the subject of competing authority. As noted by Giles JA at [1], full expositions of the competing approaches are found in Schipp v Cameron [1999] NSWSC 997 (Einstein J) and FAI General Insurance Co Ltd v McSweeny (1997) 154 ALR 229 (Lindgren J). The Court of Appeal concluded that despite the force of the reasons for the approach taken by Lindgren J (which held that the charge which the section creates exists on and from the happening of the event giving rise to the claim), the terms of s 6 constrain the adoption of that approach: per Giles JA at [2]; per Hodgson JA at [29]; Tobias JA agreeing at [38].

[20]Accordingly, it is neither necessary nor appropriate for me to consider the competing views. Authority binding on me establishes that, on its proper construction, s 6(1) does not give rise to a charge where the event that completes the relevant cause of action against the insured occurs before the inception of the contract of insurance during the term of which the claim is made on the insured.

23 As noted by McCallum J the relevant insurance policy with LawCover commenced on 1 July 2006 and ran until 30 June 2007. It was a "claims-made" policy. There appears to be no dispute in the present matter that Mr Goldberg was served with Albert's Cross-Claim on 14 March 2007.

24 The principal issue to be determined, therefore, is when the event giving rise to the liability arose. If it arose before the inception of the Policy leave should be refused because the insurer would have no liability: Walter Construction at [24] and [30]. The event is whatever completes the claimant's cause of action: The Owners - Strata Plan No 50530 v Walter Construction Group Ltd (in liq) [2007] NSWCA 124 at [24]; Malouf at [15].

The parties' contentions

25 Albert contended that the event was the sale of the final security property, 18 Second Avenue, Maroubra, by Perpetual on 6 October 2006. It was only at that time, he submitted, that recoupment became impossible for Albert from the loans he had made to the Farah group.

26 LawCover submitted, first, that the event was Mr Goldberg's breach of his contract of retainer in 2004 when the first loan was made. At that time, LawCover submitted, Albert's cause of action in contract was complete. That breach was the event giving rise to Mr Goldberg's liability to Albert. The fact that a cause of action in negligence may not have been complete until a later period of time (when damage was suffered - whenever that was) was irrelevant because s 6 is simply concerned with the "happening of the event giving rise to the claim for damages".

27 LawCover submitted, secondly, that if the time of suffering damage was the relevant enquiry that loss was suffered in about December 2005 at about the time Albert defaulted in repayment of his loan to the Plaintiff. At that time, it is said, he incurred certain costs and expenses.

28 Alternatively to those dates LawCover submitted that by April 2006 recoupment of his money by Albert was impossible. By that date only one of the security properties remained to be sold (18 Second Ave) and the sale in April of a relevantly identical property (20 Second Ave) made it objectively clear, it was submitted, that recoupment was impossible.

"Recoupment becomes impossible"

29 The enquiry about recoupment becoming impossible derives from what was said by Gaudron J in Hawkins v Clayton (1988) 164 CLR 539 at 601:

[I]f the interest infringed is an interest in recouping moneys advanced it may be appropriate to fix the time of accrual of the cause of action when recoupment becomes impossible rather than at the time when the antecedent right to recoup should have come into existence, for the actual loss is sustained only when recoupment becomes impossible.

30 This was subsequently picked up in Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514 at 533 and explained at greater length by Gaudron J in Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413 as follows:

[13]So far as concerns the claim in negligence, the notion that the entire loss sustained in this case is to be treated as caused by market forces assumes that the tort was complete when the loan was made. There is some basis in logic for that view because, as soon as the mortgage was taken by Permanent Custodians, it was less valuable than it would have been if the value of the property had been as stated. On that basis, however, the damages should be the difference in the value of the mortgage, not the loss that would arise in the event of a hypothetical sale on the day that the advance was made, which, in essence, is what is involved in the notion that, in this case, the entire loss is referable to market forces.

[14]Where economic loss is said to have resulted from a transaction entered into in reliance upon negligent advice or information, the approach of this Court has not been confined to looking at the immediate situation brought about by entry into the transaction. That is because, as was pointed out in Wardley Australia Ltd v Western Australia, "[w]ith economic loss, as with other forms of damage, there has to be some actual damage" and not simply "[p]rospective loss"15. And where a transaction involves benefits and burdens, "no loss is suffered until it is reasonably ascertainable that, by bearing the burdens, the plaintiff is 'worse off than if he had not entered into the transaction'."

[15]It was pointed out in Wardley that "[t]he 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." Wardley was concerned with an action for damages for breach of s52 of the Act. However, there is no reason in principle why the position should be any different in tort.

[16]The interest that a mortgage lender seeks to protect by obtaining a valuation of the proposed security is not simply an interest in having a margin of security over and above the mortgage debt. Rather, it is that, in the event of default, it should be able to recoup, by sale of the property, the amount owing under the mortgage. And that is also the interest of a mortgage insurer. It is the risk that recoupment might not be possible that calls the valuer's duty of care into existence. And it is the interest in recoupment that is infringed by breach of that duty. Moreover, the time that loss occurs (and hence the time when the tort is complete) is when recoupment is rendered impossible. In the case of a mortgage transaction, that will occur when it is reasonably ascertainable that sale will result in a loss19. At the earliest it will be when default occurs and, at the latest, when the property is sold.

31 The only other judge in Kenny & Good to have discussed the matter in these terms was Gummow J who said:

[82]Further, the appellants furnished the valuation on the footing that an investment of trust funds to the extent of 65 per cent of the valuation would be suitable for a term of 3-5 years, the difference between the valuation and 65 per cent thereof providing a safeguard or "cushion" against losses upon enforcement of the security. The interest of MGICA was that, in the event of default, the mortgagee would have the capacity to recover the amount secured by realising its security and without calling upon the insurance. To the extent that MGICA recouped to the mortgagee the moneys secured by the mortgage, it would have an interest in the security by way of subrogation.

...

[84]This case also bears a temporal aspect which apparently differs from that assumed in Banque Bruxelles. Whatever may have been the situation upon the facts of the various appeals in Banque Bruxelles, the cause of action of MGICA in negligence accrued when the damage to its interest (as indicated above) was sustained. This was, at the earliest, when the mortgagor defaulted, and certainly when the property was sold.

[85]Mason CJ, Dawson, Gaudron and McHugh JJ in Wardley Australia Ltd v Western Australia considered the economic loss arising from conduct which contravened s52 of the Trade Practices Act. Their Honours said:

"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."

[86]They went on to distinguish the detriment suffered by a person when first entering into an agreement relying on the negligent misrepresentation and the legal concept of "loss or damage" which may manifest at a later time. These propositions apply with equal force to the tort of negligence and to this case.

[87]The above characterisation of MGICA's interest accords with both MGICA's commercial expectations and the nature of the risk being met by the valuation. MGICA's risk was not fixed at the time of the valuation. Rather, it varied during the life of the mortgage insurance. The terms of the Report reveal that the valuation, in conjunction with MGICA's policy of not insuring more than 65 per cent of the value of a property, was designed to guard against a part of this risk, namely a fall in the property market. The Report specifically provided that the property was a "suitable security for investment of trust funds to the extent of 65% of our valuation for a term of 3-5 years". The suitability of the property for loan investment, and for the provision of mortgage insurance in respect of that loan, was not fixed at the time of investment. Rather, the representation extended for a future period of 3-5 years.

...

[89]MGICA's risk of non-payment "crystallised" at the moment of realisation, when the relationship between the market value of the property and the moneys secured became fixed in the relevant sense. MGICA sustained an economic loss arising from the fall in the property market as a result of the valuation because the value of the property had been negligently overstated in circumstances where MGICA would not have entered into the transaction but for the valuation. The "loss" which is recoverable was sustained at the time of default and not at the time of entering into the transaction.

32 To understand the competing contentions about when loss was first suffered some further facts are necessary.

The value of the security properties

33 After the Farah group defaulted in relation to the first advance RPG Property Services valued the five security properties on 31 August 2004 as follows:

(a)16 Second Ave$1,500,000

(b)Doncaster Ave$ 485,000

(c)Pelican St$ 900,000

(d)20 Second Ave$1,425,000

(e)18 Second Ave$1,425,000

34 On 21 and 22 September 2005 John Dignan Valuers provided valuations of the five security properties as follows:

(a)16, 18 & 20 Second Ave$5,499,000

(b)16 Second Ave $1,800,000

(c)Pelican St$1,250,000

(e)Doncaster Ave$ 540,000

35 Albert said in his affidavit that when he received the Dignan valuations he believed that there would be sufficient funds for his loans to be repaid because of the increase in value of 16 Second Avenue and Pelican St from the RPG valuations.

36 On 18 November 2005 the property at 16 Second Avenue was sold for $1,010,000. Contracts for the sale of Pelican St and Doncaster Ave must have exchanged sometime in November 2005 because a letter from the Farah group's solicitors, Uther Webster & Evans dated 29 November 2005 informed Albert's solicitors of those matters. It appears, however, that the sales did not settle until May or June 2006. The price obtained for Pelican St was $580,000 and for Doncaster Ave $460,000. The letter from Uther Webster and Evans said that there would be

Insufficient funds from the sale of all three properties to meet the $4,015,998.04 that is currently owed to Perpetual.

It is apparent that the shortfall to Perpetual would be slightly less than $2,000,000.

37 There is a further letter from Uther Webster & Evans dated 22 December 2005 to Albert's solicitors. The letter relevantly said:

1.Our clients have exchanged Contracts on three properties. Copies of each of the front page's of the front pages of the contract, including the front page for the sale of the property which is expected to settle at 3.00pm today is enclosed for your perusal. That is expected to raise approximately $2.7 million.

2.There is approximately $4 million owed to Perpetual Trustee Company Limited ("Perpetual") and after receipt of those sale proceeds, that will leave a balance of approximately $1.3 to $1.4 million.

3.There are two remaining properties, namely 18 and 20 Second Avenue, Maroubra. Your client, as the Assignor of the Diana Maria Di Marino Caveat No. 9817495 is the next first ranking caveator after Perpetual. Your client, having the next equitable mortgage and certainly ranking way ahead of the other caveators, will receive depending on the amount received for the two remaining properties, 18 and 20 Second Avenue, Maroubra, most, if not, all of the amount due and owing to him. This obviously depends on what the value of the proceeds from the sale of 18 ad 20 Second Avenue, Maroubra.

4.As you will see, 16 Second Avenue, which is the property that we are trying to settle today, sold for $1,010,000.00.

5.Even if the properties at 18 and 20 Second Avenue, (which have much nicer and substantial houses on them), sell for that value, there will still be a surplus available to your client.

6.Our clients have valuations on those properties showing that they are worth in excess of $1.5 million each and our clients' family is attempting to purchase those properties for $3 million in order to pay out the balance to Perpetual and then to the next ranking caveators etc.

38 This letter is difficult to understand. The contract prices of the three properties which had been sold totalled $2,050,000 not $2.7m. The shortfall, therefore, was $1,965,998.04 and not $1.3 to $1.4 million. Albert was owed $850,000 plus interest. The price for which the two remaining Second Avenue properties would need to sell, therefore, would be a little over $1.4 million each for Albert to have any chance of recovering his capital let alone any interest then due ($1,965,998.04 + $850,000 = $2,815,998.04). That would also depend on his being the next secured creditor having priority over the other caveators. Presumably the valuations referred to in paragraph 6 of the letter were those of John Dignan of September 2005.

39 There was also in evidence a document evidencing the running account of the Farah group with Perpetual which tended to show that the position was a little worse from Albert's point of view. This document identified the dates upon which proceeds of sale were received from the various security properties. The document discloses the following:

(a) On 21 December 2005 the sum of $978,596.45 was received by Perpetual for the sale of 16 Second Avenue;

(b) In respect of the sale of Pelican St, $504,619.86 was received on 8 May 2006 and a further sum of $47, 026.05 (probably the accounting for the deposit) on 12 May;

(c) In respect of Doncaster Avenue, $409,087.96 was received on 25 May 2006 and a further sum of $36,908.35 on 29 May;

(d) The amount outstanding to Perpetual on 23 June 2006 was $2,313,108.85.

40 On the basis of this document, and ignoring creditors who may have had priority over Albert's mortgage the two remaining Second Avenue properties would need to sell for in excess of $1,550,000 each for Albert even to recover his capital ($2,313,108.65 + $850,000 = $3,163,108.85).

41 Moreover, 20 Second Avenue had sold by 28 April 2006 for only $950,000 as disclosed in a letter from Lincoln Smith, Perpetual's solicitors, to Albert's solicitors of 28 April 2006. In the same letter it was disclosed that 18 Second Avenue failed to sell at the auction. The running account document disclosed also that on 1 August 2006 Perpetual received in respect of the sale of 20 Second Avenue $895,998.93 and on 10 August $33,018.35.

42 The valuations by RPG Property Services in August 2004 described 18 and 20 Second Avenue in almost identical terms. Each had the same site area, the same number and description of rooms, the same fixtures and features as well as PC items. The only discernible differences were that 18 Second Avenue had timber windows whereas 20 Second Avenue had aluminium windows, and 18 Second Avenue had a 4 burner stove whereas 20 Second Avenue had a 5 burner stove.

43 In the light of these matters it must now be determined when the event giving rise to the liability arose.

When did the event happen?

44 It is apparent from what is said in Bailey v New South Wales Medical Defence Union Ltd (1995) 184 CLR 399 at 446 that what is described as "the event" in s 6 is what causes the charge on the insurance moneys to arise and brings about the liability to pay under the policy of insurance. So the event is whatever completes the cause of action against the insured: Walter Construction at [24] and [30]. Of course, where there is a claims-made policy (as here) the obligation to pay does not arise until the claim is made in respect of the event.

45 It is important, therefore, to examine the policy to determine what is insured by it and to see what is the cause of action alleged against Mr Goldberg.

46 The Policy says:

What we insure You For and When

2.We agree to indemnify you against civil liability for a claim that:

(a)arises from the legal practice of the firm; and

(b)is first made against you during the period of insurance.

None of the exclusions in cl 25 are relevant.

47 The term claim is defined in cl 32 as meaning:

(i) a demand for, or of an assertion of a right to, compensation or damages; or

(ii)an intimation of an intention to seek compensation or damages.

48 In the Second Cross-Claim Albert brings against Mr Goldberg Albert alleges a retainer with Mr Goldberg in early April 2004 that Mr Goldberg would act as his solicitor in relation to an advance of $150,000. Thereafter he retained Mr Goldberg to act for him on a second advance of $700,000.

Albert pleaded that the retainer included implied terms (inter alia) to provide appropriate advice whether sought or not to ensure that Albert properly understood the transactions, their consequences and the alternatives available to him.

49 He then alleges that Mr Goldberg was negligent in that he did not advise Albert of a number of aspects of the transaction concerning the security properties, unregistered interests and matters of priority. Albert then alleges that if he had been provided with the appropriate advice he, Albert, would not have made the advances.

50 Whether the Policy responds to the claim is not dependent upon the way the claim is pleaded. As Derrington & Ashton, The Law of Liability Insurance (2005) Lexis Nexis, 2nd Ed., say at [8-282]:

The nature of the claim made by the third party claimant is not conclusive in determining whether the cover applies in such a situation, and does not control the position between the insurer and the insured, which depends upon the true nature of the claim as found by the court.

Support for that is to be found in Nigel Watts Fashion Agencies Pty Ltd v GIO General Ltd (1995) 8 ANZIC 61,235 and West Wake Price & Co v Ching [1957] 1 WLR 45 at 48, 53 and 58.

51 Although Albert has not pleaded expressly that Mr Goldberg breached the terms of his retainer so much is implied by the pleading of what are said to be implied terms of the retainer and the negligent acts alleged which are inconsistent with the terms of the retainer. The result is that, if the allegations are established, Mr Goldberg is liable for breach of his retainer with Albert. That breach took place in 2004 when the loans were made. The cause of action to which the Policy responds (civil liability for a claim) is complete on the breach. The "event", therefore, occurred in 2004 prior to the inception of the Policy.

52 It is irrelevant that the tort of negligence arising form the same matters may not be complete until a later time because damage has not been suffered. There are not two or more events for the purpose of s 6. Such an approach is entirely consistent with what was said in West Wake Price & Co where Devlin J (as he then was) said (at 53):

I do not consider that the underwriters are bound by the way in which the claimant has chosen to formulate his claim. I think underwriters can properly invite the court at this stage to ascertain the true nature of the claim.

53 The Policy does not, therefore, respond to the claim. It was not in existence at the time of the happening of the event which gave rise to the claim for damages: Walter Construction at [30] - [33].

54 If I am wrong in that conclusion it is necessary to examine when it is that loss was first suffered by Albert, on the basis that the true nature of the claim is a liability in Mr Goldberg in negligence.

55 Although Albert's cross-claim might be thought to have pleaded the claim against Mr Goldberg as a no-transaction case (paragraphs 10 and 28) its characterisation as such is not determinative of when loss can be said to have first been suffered. When loss has first been suffered must, for example, take account of what was said in Kenny & Good concerning recoupment of loss. But other loss, more than what is negligible, may be able to be shown before recoupment becomes impossible.

56 To finance the making of the second loan of $700,000 Albert borrowed the money from the Plaintiff. As a result of the defaults of the Farah group Albert himself defaulted under the loan from the Plaintiff in either July 2005 (Albert's affidavit of 12 May 2007 paragraph 152) or October 2005 (Albert's affidavit of 18 May 2012 paragraph 29).

57 LawCover argues that Albert first suffered loss when he incurred interest and other charges on the borrowings from the Plaintiff in about May 2004. However, that borrowing cannot be divorced from the on-lending of those funds to the Farah group at a higher rate of interest. Where recoupment is the touchstone it cannot be said that the costs of the borrowing would not ultimately be recouped from the Farah group by the terms of their borrowing from Albert. In the same way that the lending of the amounts of $150,000 and $700,000 cannot be said to be a loss until recoupment becomes impossible neither can it be said that Albert's liability for interest and other expenses of his borrowing is a loss until recoupment is impossible. His borrowing is inextricably linked with the on-lending. When it is now known that the Farah group did not adhere to the terms of its borrowings the ultimate enquiry must still remain when recoupment from the Farah group became impossible.

58 Although it can fairly readily be assumed that when Albert defaulted to the Plaintiff he became liable for default interest there was no evidence about this. Nor was there any evidence that such default interest may not have been built into the borrowing arrangements between Albert and the Farah group.

59 The significant portion of the argument at the hearing of the motion was directed to the question of when it was that recoupment became impossible. I turn now to consider that matter.

60 In Ross v Cook [[2009] NSWSC 671 at [36] I accepted what Johnstone DCJ said in Key Nominees Ltd v Ace Insurance Ltd [2008] NSWDC 62 at [18] that recoupment become impossible when "it becomes reasonably ascertainable by objective evidence" that sale will result in a loss. The parties in the present case appeared to accept that such was the appropriate approach.

61 What I also said in Ross v Cook at [41] was this:

A valuation is an expression of opinion, albeit informed opinion, but standing alone is insufficient to amount to objective evidence that makes it reasonably ascertainable that a loss will result.

The present case provides some clear justification for such a statement.

62 On 21 September 2005 Mr Dignan valued Pelican St at $1,250,000. Within two months it sold for $580,000. On the same date he valued 16 Second Avenue at $1,800,000. Within two months it sold for $1,010,000. On the same date he valued 16, 18 and 20 Second Avenue at $5,499,000 in total. Since his assessment of 16 Second Avenue was that it was worth $1,800,000 he was valuing the remaining Second Avenue properties at $3,699,000 together. 20 Second Avenue was sold in July 2006 for $950,000 and 18 Second Avenue was sold for $970,000 in October 2006, a total of $1,920,000.

63 I mention this, not to criticise the valuer because there may have been matters beyond the valuer's knowledge or control, and I accept that there was a considerable gap between his valuations of 18 and 20 Second Avenue and the sales of those properties. Nevertheless, the comparisons between the valuations and the sale prices demonstrate the dangers of accepting a valuation as objective evidence for the purposes of establishing when recoupment is impossible. Nor do I consider that acceptance of a valuation standing alone satisfies the task of ascertaining "reasonably".

64 Although the evidence was left somewhat unclear about where Albert's priority in the security properties was in terms of other caveators I am prepared to assume in his favour that he ranked second after Perpetual. Nor is it clear precisely to what Albert was entitled against the Farah group in terms of outstanding interest and other costs. Again, I am prepared to assume in his favour that recoupment meant recovery of $850,000 being the principal of the two advances.

65 Since the Policy commenced on 1 July 2006 the enquiry is whether by 30 June 2006 it was reasonably ascertainable that recoupment was impossible. If it was, the event for s 6 purposes would have happened prior to the inception of the Policy. There would, therefore, be no property to which the charge could attach.

66 The closest date before 30 June about which there is any evidence is 23 June as shown in the running account of what was owed to Perpetual. As at 23 June 16 Second Avenue, Doncaster Avenue and Pelican Street had all sold and settled. The amount still outstanding to Perpetual was $2,313,108.85.

67 20 Second Avenue had sold by 28 April 2006 for $950,000. Assuming in Albert's favour that the whole of that amount came to Perpetual that would still leave an amount outstanding to Perpetual of $1,363,108.85. Albert was owed $850,000 meaning that the one remaining property, 18 Second Avenue would have to sell for $2,213,108.85 to avoid recoupment becoming impossible. That was a figure considerably above the most optimistic valuation of that property. Moreover, when an almost identical property next door (20 Second Avenue) had recently sold for $950,000 it could be said quite confidently that $2,213,108.85 would not be obtained for it.

68 It was, therefore, reasonably ascertainable that recoupment by Albert of the advances he had made was impossible by 30 June 2006. If the happening of the event was recoupment becoming impossible, on the basis that the Cross-Claim is considered to be pleaded in negligence alone, the event happened before the Policy incepted on 1 July 2006.

69 By reason of information known to Albert and/or his lawyers prior to 30 June 2006, or information reasonably ascertainable from Perpetual or otherwise, what was contained in the letters from Uther Webster and Evans in November and December 2005 ceased to have relevance for the enquiry at hand. However, justified the optimism of Uther Webster and Evans may have been at that time developments and information available in the first six months of 2006 changed the situation fundamentally. When 20 Second Avenue sold for only $950,000 it was clear that Albert would not recover his money or very much of it.

70 The event giving rise to the claim for damages occurred no later than 30 June 2006 either because it took place when Mr Goldberg breached his retainer or when loss was first demonstrated in respect of a negligence claim in June 2006 in the manner described. Albert's claim to be entitled to join LawCover pursuant to s 6(4) fails.

71 LawCover put forward a number of discretionary grounds on which the application should be refused in the event they were otherwise unsuccessful. It is not, in the circumstances necessary to consider those grounds.

Conclusion

72 I make the following orders:

(1) The Second Defendant's Notice of Motion of 3 January 2012 and his Amended Notice of Motion of 17 February 2012 are dismissed.

(2) The Second Defendant is to pay LawCover's costs of the Motions.

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Decision last updated: 31 October 2012