Negligent misstatement claim

Negligent misstatement claim

Chew v Amanatidis [2009] SASC 334, Supreme Court of South Australia (Full Court), Gray, White and Kelly JJ, 3 November 2009

(a) Summary

This case concerned two matters: (1) the relevant factors required to establish a claim in negligent misstatement; and (2) whether the trial judge’s findings of fact regarding credibility of witnesses should be overturned.  The court found that the claim in negligent misstatement was not established because the respondent’s business experience and acumen meant that no special relationship could be established to form a duty of care on the appellant’s part.  The court also considered that an appellate court could overturn findings of fact by the trial judge regarding credibility of witnesses, but no basis for overturning the judgment was established in this case.

(b) Facts

On 3 November 1999, Lee Teck Chew (Appellant) entered into a fraudulent investment scheme whereby an investor would make a loan at or above a minimum of US$100,000 and in return, interest would accrue at a minimum rate of 25% per week.  Protection was to be provided through an insurance policy and placement of the investment in an escrow account with a solicitor in the United States.

Mario and Angelo D’Aloia (Plaintiffs) were introduced to the appellant by Gregory John Amanatidis (Respondent) and the Plaintiffs provided US$100,000, in addition to the Appellant’s investment of US$60,000, to invest in the scheme. The Plaintiffs agreed to pay a commission of 4% but required a contract of indemnity in return.

The scheme in which they invested was fraudulent and, apart from two payments made to the Plaintiffs of US$22,500 and AUD$6,000 respectively, their monies were lost.  The Respondent pursued proceedings against the Appellant, claiming that he had been induced to enter into the contract of indemnity as a result of the Appellant’s negligent misstatement. The trial judge found that the Plaintiffs were not entitled to any reimbursement under the insurance policy, but found that the Respondent was liable to the Plaintiffs under the indemnity agreement for the amount the Plaintiffs lost through the investment.

The trial judge also found that the Appellant owed the Respondent a duty of care, and had acted in breach of that duty by encouraging and advising the Respondent to provide the indemnity to the Plaintiffs.  The Appellant was held liable to indemnify the Respondent in respect of the amount of judgment awarded in favour of the Plaintiffs.

The Appellant appealed the judgment on the grounds that the trial judge’s adverse findings of fact concerning credibility and reliability were incorrect, that the Appellant’s relationship with the Respondent was not such as to give rise to a duty of care, and that it was unreasonable for the Respondent to have acted on the alleged misstatement.

(c) Decision

Justice Gray (with Kelly J agreeing) allowed the appeal, overturning the trial judge’s finding of liability for negligent misstatement.  Justice White (with Gray J agreeing) held that there was no basis on which to overturn the trial judge’s findings of fact.

(i) Relevant law

Justice Gray relied on the three conditions for the existence of a duty of care in relation to the giving of information in this context set out in the judgment of Barwick CJ in Mutual Life & Citizens’ Assurance Co Ltd v Evatt (1968) 122 CLR 556 (Evatt) and restated by Brennan J in San Sebastian Pty Ltd v The Minister (1986) 162 CLR 340. The following three conditions must be satisfied:

  • the representor realises or ought to realise that the representee will trust in his especial competence to give that information or advice;
  • it would be reasonable for the representee to accept and rely on that information or advice; and
  • it is reasonably foreseeable that the representee is likely to suffer loss should the information turn out to be incorrect or the advice turn out to be unsound.

Justice Gray also considered the most recent review of negligent misstatement by the High Court in Tepko Pty Ltd v Water Board (2000) 206 CLR 1 in which Gaudron J, in discussing reliance, stated that reliance “as the test for the existence of a relationship that will call a duty of care into existence is not actual reliance, but reasonable reliance.”

Gray J also turned his attention to Evatt where Barwick CJ and Kitto J discussed reasonable reliance.  Chief Justice Barwick considered the “identity and position of the recipient of the utterance” in assessing whether there was reasonable reliance.  Justice Kitto considered reasonable reliance as being a situation where it was “reasonable for the inquirer to suppose that the other was replying with an intention of accepting the full responsibility that is ordinarily appropriate to a business transaction”.  Justice Gray emphasised Kitto J’s finding that whether the statement caused the loss depends on its potency as an influence upon a decision and that such an intention can only be inferred when the statement is supplied in the context of matters of business.

Justice White’s decision regarding the trial judge’s findings of fact was based on the principles set out by Brennan, Gaudron and McHugh JJ in Devries v Australian National Railways Commission (1993) 177 CLR 472 (affirmed in Fox v Percy (2003) 214 CLR 118): if the trial judge’s finding depends to a substantial degree on the credibility of the witness, the finding must stand unless it can be shown that the trial judge has acted on evidence which was “inconsistent with facts incontrovertibly established by the evidence” or which was “glaringly improbable”.

(ii) Application of principles

Justice Gray found that the Respondent was a “man of considerable business experience” and was “not a naïve investor totally inexperienced in the affairs of business”.  Having regard to the Respondent’s business experience and acumen, and the investment’s “lack of any commerciality”, Gray J held that reasonable reliance could not be established.  Consequently, the circumstances did not give rise to a special relationship necessary to support a duty of care on the part of the Appellant.  These matters were not matters of peripheral relevance as the trial judge considered them to be.

Justice White held that the Appellant had not demonstrated that the trial judge had erred in the factual findings of the case as he had not established that the trial judge’s findings were “glaringly improbable”.  It was not suggested by the Appellant that any of the trial judge’s findings were “inconsistent with any facts incontrovertibly established by other evidence”.

 

 

Co-authored by Rebecca Smithwick.

Published by SAI Global on behalf of Centre for Corporate Law and Securities Regulation, Faculty of Law, the University of Melbourne with the support of the Australian Securities and Investments Commission, the Australian Securities Exchange and the leading law firms.