Zervas v Burkitt (No 2)

1. [1]

   BELL P: The appellant, Mr Fotis Zervas, was the second of three defendants in proceedings brought in the District Court of New South Wales by Dr Miles Burkitt who is the respondent to this appeal. The first defendant in the proceedings at first instance, Ultimate Car Rentals Australia Pty Limited (UCRA), is now in liquidation, having gone into liquidation in the course of the hearing at first instance. The third defendant to the proceedings at first instance, Mr Michael Amro, did not participate in the proceedings at first instance nor on appeal.

2. [2]

   The proceedings arose out of the crash of Dr Burkitt’s 2006 F430 Spider Ferrari motor vehicle (the Vehicle) in circumstances where it had been sub-bailed by UCRA to Mr Amro who owned a panel and paint shop in Melbourne known as Universal Kustoms.

3. [3]

   UCRA, of which Mr Zervas was the sole director, was sued in contract, bailment and for misleading or deceptive conduct in contravention of s 18 of the Australian Consumer Law (ACL). It had entered into a Vehicle Management Agreement (VMA) with Dr Burkitt to rent out the Vehicle in return for a minimum monthly payment of $2,500 and a 50% share of net profits derived from any 24 hour rental of the Vehicle.

4. [4]

   The VMA was executed in July 2015 (shortly after the crash) but backdated to 2 May 2015, the day on which Dr Burkitt delivered the Vehicle together with another one of his cars to UCRA’s showroom in Sydney. They were subsequently transported to Melbourne where the primary judge held UCRA had a branch office and where it was thought that the two vehicles would have a better prospect of being rented out.

5. [5]

   Before the Vehicle could be rented out in Melbourne, however, Dr Burkitt was told that it would need to undergo some minor repairs, detailing and also be repainted to touch up some scratches. It was in this context that the Vehicle came into the possession of Mr Amro who crashed it whilst evidently “joy riding” it in Melbourne in the company of a 16 year old girl. The primary judge unsurprisingly found that Mr Amro was liable in negligence.

6. [6]

   Mr Zervas was only sued for accessorial liability in relation to the alleged contravention of s 18 of the ACL by UCRA. The representation founding the misleading and deceptive conduct claim was that, in conversations at UCRA’s premises in Sydney on or about 2 May 2015 and at UCRA’s showroom in Melbourne in or about early June 2015, UCRA, through Mr Zervas, had represented to Dr Burkitt:

7. [7]

   The primary judge held at [27] of his judgment, in a finding not challenged by Mr Zervas, that at the time of the bailment of the Vehicle to UCRA on 2 May 2015, Dr Burkitt was:

Clear errors

1. [8]

   Notwithstanding the confined nature of the case against Mr Zervas, namely one confined to accessorial liability, the primary judge held him liable in contract, bailment and directly liable under s 18 of the ACL.

2. [9]

   None of the matters for which Mr Zervas was found liable was the subject of the pleading against him and counsel for Dr Burkitt, who appeared both at first instance and on appeal, candidly accepted that he did not ever seek that Mr Zervas be found liable in contract, bailment or for direct, i.e. non-accessorial, liability under the ACL. That this was, to say the least, regrettable is an understatement.

3. [10]

   Another consequence of the approach adopted by the primary judge was that he did not make any findings on the accessorial liability case pleaded against Mr Zervas.

4. [11]

   Counsel for Dr Burkitt was, quite properly, constrained to accept that the appeal was bound to succeed insofar as Mr Zervas had been found liable at first instance for causes of action which had not been pleaded or run against him.

Notice of contention

1. [12]

   Counsel for Dr Burkitt, faced with the clear errors made by the primary judge, relied upon a notice of contention in which he sought to uphold the primary judge’s finding against Mr Zervas on the basis that he should have been held liable for the sole case that had in fact been pleaded against him, namely one of accessorial liability under the ACL.

2. [13]

   In considering the notice of contention, this Court’s task is made difficult by the fact that, insofar as the primary judge found that both Mr Zervas and UCRA had contravened s 18 of the ACL and, as such made a finding as to what representation had in fact been made, his Honour’s finding in at least part of his judgment departed from the pleaded case of misleading or deceptive conduct in a material respect.

3. [14]

   I have already referred to and set out the pleaded representation in [6] above. Despite the use of the phrase “would be” in the pleading and indeed in his finding in [27] of the judgment set out at [7] above, the primary judge appeared, in a critical passage in another part of his judgment, to treat the representation as that UCRA had existing insurance cover for the Vehicle and concluded that, as this was not the case, the representation was false and misleading. Thus, at [125]−[129] of his judgment, the primary judge said:

4. [15]

   The difficulty with the portions of these paragraphs that I have emphasised and the conclusions they contain, including conclusions tantamount to a finding of fraud, is that they are expressed in terms which depart from the misleading or deceptive conduct case pleaded in the Amended Statement of Claim (ASOC). They are also inconsistent with the finding made at [27] of the judgment which is reproduced at [7] above.

5. [16]

   The representation as pleaded was undoubtedly one as to a future matter, and whether or not such a representation is misleading or deceptive depends upon whether or not the representor had reasonable grounds for making it at the time it was made. If reasonable grounds existed, the statement will not have been misleading or deceptive.

6. [17]

   In ACCC v Michigan Group Pty Ltd [2002] FCA 1439, Dowsett J observed at [303] that:

7. [18]

   Accordingly, it is necessary for the purposes of the notice of contention to address whether or not Dr Burkitt can establish, on the balance of probabilities, that Mr Zervas knew that the representation by UCRA on 2 May 2015 that the Vehicle would be insured was misleading or knew that UCRA lacked reasonable grounds for the representation that the Vehicle would be insured.

Did Mr Zervas know that UCRA had no reasonable grounds for the making of the representation?

1. [19]

   Mr Zervas was, of course, the sole director of UCRA and the human agent who made the representation to Dr Burkitt.

2. [20]

   In making his finding as to the representation set out at [7] above, the primary judge made reference to the following portion of Mr Zervas’ cross-examination:

3. [21]

   It is necessary, at this point, to explain Mr Zervas’ reference to “[i]f we were to take out the policy” and to “if we took it on.” There was a hotly contested issue at first instance (but not agitated on appeal) as to whether or not the rental arrangements were in fact with UCRA (with Dr Burkitt’s two vehicles to be sent to its Melbourne branch office) or, in fact, with a separate legal entity, Dream Drives Pty Ltd (Dream Drives), with which UCRA in fact only had a loose and non-legal affiliation. Part of UCRA’s defence was that the contract and bailment was not in fact with it but with Dream Drives. The primary judge rejected this argument (and it was plainly inconsistent with the VMA) but that argument explains Mr Zervas’ reference to “if we took it on”, namely that UCRA had promised to provide “cover at all times” if it took Dr Burkitt’s car into its fleet. The primary judge’s rejection of the argument that it was not UCRA but Dream Drives that “took on” Dr Burkitt’s vehicles had the consequence that UCRA’s representation was as to something that it would do which was relevantly unqualified.

4. [22]

   It was common ground that UCRA did not take out any relevant insurance. The reason why appears to be bound up with an assumption on Mr Zervas’ part that Dream Drives would take out such insurance. In this context, Mr Zervas gave the following evidence:

5. [23]

   It may be inferred, in my opinion, from this evidence that, at the time the representation, as found by the primary judge in [27] of his reasons, was made, UCRA did not have any intention of itself taking out or arranging insurance if the Vehicle was to be rented out in Melbourne, and this lack of intention was known to Mr Zervas as he was the mind and manifestation of UCRA. UCRA had no basis, to Mr Zervas’ knowledge, for giving the assurance as to insurance cover (as found by the primary judge), in circumstances where it did not itself intend to arrange it if the Vehicle was to be sent to Melbourne. The representation, fairly understood, was that UCRA would procure satisfactory and comprehensive insurance. A belief that another company would arrange insurance or that it was the other company’s responsibility to do so does not provide a reasonable basis for the making of a representation that the company with which Dr Burkitt was dealing (as found by the primary judge) would itself arrange or provide satisfactory insurance coverage.

6. [24]

   Counsel for Mr Zervas placed reliance on affidavit evidence given by Mr Zervas to the effect that, in the course of a conversation on 2 May 2015 when Dr Burkitt was in his Sydney office with him and a Mr Andrew Triantafyllos was on speaker phone from Melbourne, the following exchange occurred:

7. [25]

   The primary judge did not in terms make any finding as to this disputed conversation although he did say at [30] of his judgment that:

8. [26]

   The passage extracted from Mr Zervas’ affidavit set out in [24] above is inconsistent with the representation as found to have been made and is also premised on Dr Burkitt dealing directly with the Melbourne based Mr Triantafyllos and looking to “Dream Drives” as the party with which he was dealing. As already noted, the primary judge rejected this version of events.

9. [27]

   It follows, in my opinion, that the evidence relied upon by Mr Zervas cannot be taken as having been accepted by the primary judge. Even if it had been accepted, however, for the reason that I have given in [23] above, I do not consider it avails Mr Zervas. At best it could found an assumption that another party would arrange insurance when the representation, as found, was that comprehensive insurance would be provided by UCRA.

10. [28]

    Dr Burkitt’s evidence and case was to the effect that he would not have surrendered possession of the Vehicle to UCRA on or about 2 May 2015 but for the representations. This is no reason not to accept this claim and the primary judge so found at [128] and [157]. It is entirely plausible that a person in the position of Dr Burkitt would not have delivered possession of his very valuable vehicle had he not received an assurance from UCRA that that company would arrange comprehensive insurance coverage.

11. [29]

    For the above reasons, it follows, in my opinion, that the primary judge ought to have held that Mr Zervas was knowingly involved in misleading and deceptive conduct on the part of UCRA in that he knew of the representation and knew that UCRA was not going to take out insurance because of his belief that some other entity would take it out. This is not what was conveyed to Dr Burkitt on the findings that the primary judge must be understood to have made.

12. [30]

    In oral argument, counsel for Mr Zervas seemed to submit that the fact that the VMA contained a contractual promise to provide insurance in some way meant that Mr Zervas could not be liable under the ACL. That submission was not well founded. Whilst, in some cases, it will be the position that a pre-contractual representation is superseded by or subsumed in a formal contractual document with the consequence that the representation either ceases to be operative, or that reliance can be shown to be no longer placed on the representation but rather on the contractual promise, that was not this case, not least because the VMA was not in fact finalised or executed until well after the making of the representation as found, and the handing over of the Vehicle to UCRA in early May 2015.

Damages

1. [31]

   Counsel for Mr Zervas made an argument that the quantum of any liability of Mr Zervas to Dr Burkitt should be reduced by reason of Dr Burkitt’s failure to accept a settlement offer said to have been made by an insurer of Mr Amro to him, the result of which, it was contended, would be to substantially reduce the quantum of the verdict awarded against Mr Zervas from $183,620.94 for which he was held liable.

2. [32]

   In this context, ground 4(a) of the amended notice of appeal was to the effect that the primary judge erred in assessing damages by “[f]ailing to reduce the value of the damages claim in respect of the Vehicle by the amount of the Suncorp offer to Dr Burkitt of $160,100 in respect of the Vehicle”.

3. [33]

   This ground was based on a plea in answer to the whole of the ASOC of a failure to mitigate on the part of Dr Burkitt. This aspect of the defence was not dealt with by the primary judge.

4. [34]

   In written submissions on appeal, it was submitted on behalf of Mr Zervas that:

5. [35]

   There is a short answer to this aspect of the appeal and the argument set out above.

6. [36]

   The argument proceeds on the basis that an insurer, Suncorp, had offered to pay Dr Burkitt $160,100 by way of compensation for the damage to the Vehicle. In my opinion, the evidence in the case did not support the fact that such an offer capable of acceptance was ever made. At the very least, I do not accept that it was established on the balance of probabilities that such an offer was made. Further, in my opinion, even if such an offer had been made in an unqualified way capable of acceptance, it would be incumbent on Mr Zervas, as the party raising the argument by way of mitigation, to demonstrate that the offer was unreasonably rejected. This, too, he has failed to establish, for reasons which I will also explain below.

7. [37]

   To make good these conclusions, it is necessary to set out such evidence as there was in relation to the so called offer from Suncorp.

8. [38]

   On 1 July 2015, two days after the accident, there was a meeting between Dr Burkitt and Mr Zervas during which, according to Dr Burkitt’s account, Mr Zervas said:

9. [39]

   On 28 July 2015, Dr Burkitt received an email from “Wendy”, a Specialist Customer Service Officer, PI Claims at Suncorp in the following terms:

10. [40]

    It is to be inferred from the fact that the subject line on this email contained the number K001470232 that a claim had been lodged with Suncorp for assessment of the loss to the Ferrari. This claim was presumably lodged pursuant to an insurance policy held by Mr Amro. No insurance policy was in evidence.

11. [41]

    In [65] of his principal affidavit, Dr Burkitt said that on or about 7 August 2015, he received a telephone call from the claims manager, Mr Justin Warn, of Vero Insurance, the insurer for Ultimate Kustoms, during which words to the following effect were spoken:

12. [42]

    Mr Zervas deposed at [52] of his affidavit to a conversation with Dr Burkitt in or around early August 2015 “in regards to his insurance claim with the paint shop” as follows:

13. [43]

    Dr Burkitt responded to this evidence of Mr Zervas in his affidavit in reply (at [49]−[50]) in the following terms:

14. [44]

    On 24 September 2015, Dr Burkitt replied to the email of 28 July 2015 to which I have referred to in [39]−[40] above in the following terms:

15. [45]

    This correspondence demonstrates, in my opinion:

Cross-appeal

1. [46]

   In addition to the notice of contention, Dr Zervas filed a cross-appeal. In essence, the cross-appeal related to the fact that the primary judge had apportioned liability as between UCRA and Mr Zervas, on the one hand, and Mr Amro, on the other hand, at 50% each.

2. [47]

   The primary judge’s reasoning on this aspect of the case was contained in [179]−[192] of the judgment as follows:

3. [48]

   The primary judge also split costs 50:50 as between UCRA and Mr Zervas, on the one hand, and Mr Amro on the other hand. Dr Burkitt has also cross-appealed against that aspect of the decision.

4. [49]

   The first ground of the cross-appeal is that Mr Zervas was not a concurrent wrongdoer within the meaning of s 87CB(3) of the Competition and Consumer Act 2010 (Cth) (Competition and Consumer Act) as there was “no capacity for their acts to be either independent or joint as is required by the text of s 87CB(3)” of the Competition and Consumer Act with the result that they remained jointly and severally liable to Dr Burkitt.

5. [50]

   In my opinion, this ground is based on a misreading of the judgment although it must be conceded that the judgment is not totally clear in this respect and it can readily be understood how the misreading arose. Notwithstanding what was said in [192] of the primary judgment, reproduced at [47] above, the primary judge did not sever liability as between UCRA and Mr Zervas but, rather, held these two parties, on the one hand, to be jointly and severally liable for 50% of the damage to the Vehicle, and Mr Amro to be 50% liable. This is reflected in the orders made by the primary judge, albeit that the first order made by the primary judge included in respect of UCRA and Mr Zervas an amount of $60,000 together with interest thereon which Dr Burkitt concedes should not have been awarded against Mr Zervas, it being an amount solely referable to the contract claim which did not run against him.

6. [51]

   The second ground of the cross-appeal is that the primary judge erred in law by applying s 34 of the CL Act to the award of damages for breach of the ACL, Dr Burkitt submitting that the application of a state law to a federal cause of action was in error, and that the breach of the ACL was not one of “failure to take reasonable care” within the meaning of s 34 of the CL Act but in misleading or deceptive conduct. Thus Dr Burkitt submitted that under the CL Act, neither UCRA nor Mr Zervas were concurrent wrongdoers. In support of the submission, Dr Burkitt cited the following passage from the decision of Ball J in LM Investment Management Limited (In Liquidation) (Receivers appointed) v BMT & Assoc Pty Limited [2015] NSWSC 1902 at [83]:

7. [52]

   The answer to this ground of the cross-appeal lies in an analysis of whether or not the knowing involvement claim against Mr Zervas involved a contravention of the ACL (Cth), in which case the applicable proportionate liability regime would be that under Part VIA of the Competition and Consumer Act, or whether it involved a contravention of the ACL (NSW), in which case, the applicable proportionate liability regime is that under s 34(1)(b) of the CL Act, which relevantly provides that Part 4 of that Act applies to:

8. [53]

   To answer this question it is necessary to delve into the complexity associated with the operation of the ACL, and how it operates as a law of the Commonwealth and as a State law. This is not always properly appreciated in practice but it is important, as the facts of the present case demonstrate.

9. [54]

   The ACL is found in Sch 2 to the Competition and Consumer Act. It comprises some six chapters and runs to some 292 sections. Section 1 of the ACL provides that the Schedule applies to the extent provided by Part XI of the Competition and Consumer Act or an “application law”. That term is defined in s 140 of the Competition and Consumer Act as meaning:

10. [55]

    Part XI of the Competition and Consumer Act, headed “Application of the Australian Consumer Law as a law of the Commonwealth”, contains s 131(1) which provides:

11. [56]

    Section 131(2) extends the application of certain other sections of the ACL as a law of the Commonwealth to persons, but none of those sections are relevant to the present case.

12. [57]

    It follows that the ACL as a law of the Commonwealth does not relevantly apply to a claim against a person for involvement in a breach of s 18 of the ACL. Rather, it is the ACL as given effect to by the relevant “application law”, here s 28(1) of the Fair Trading Act 1987 (NSW) (Fair Trading Act), that applies to the claim against Mr Zervas for involvement in a contravention of the ACL.

13. [58]

    That section relevantly provides:

14. [59]

    The terms of s 32 of the Fair Trading Act should also be noted:

15. [60]

    It follows that any liability that Mr Zervas has in the present case is a liability under s 236 of the ACL (NSW) and not the ACL (Cth), and thus the proportionate liability regime under Part 4 of the CL Act applied to make the claim against Mr Zervas an apportionable claim under that Act: see also Porges v Adcock Private Equity Pty Ltd [2019] NSWCA 79 at [21].

16. [61]

    The third ground of cross-appeal in effect involved a challenge to the primary judge’s allocation of responsibility as between UCRA and Mr Zervas, on the one hand, and Mr Amro, on the other hand. It will be recalled that the primary judge held that responsibility should be allocated 50:50.

17. [62]

    “Appellate review of a trial judge's apportionment of liability as between respectively culpable parties … is governed by the stringent tests which limit appellate review of discretionary decisions”: Ghunaim v Bart [2004] NSWCA 28; (2004) Aust Tort Reports 81-731 at [45]; see also Nominal Defendant v Green [2013] NSWCA 219; (2013) 64 MVR 354 at [48]; Mikaera v Newman Transport Pty Ltd [2013] NSWCA 464; (2013) 65 MVR 578 at [35]−[36]; Nominal Defendant v Bacon [2014] NSWCA 275; (2014) 67 MVR 425 at [101]; Central Darling Shire Council v Greeney [2015] NSWCA 51 at [62]−[68].

18. [63]

    In my opinion it was open to the primary judge to apportion responsibility in the way he did, between both Mr Zervas (and UCRA), on the one hand, and Mr Amro, on the other hand, having caused or materially contributed to Dr Burkitt’s loss: see Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd (2013) 247 CLR 613; [2013] HCA 10 at [45] (Hunt & Hunt). The apportionment of responsibility involves a value judgment: Hunt & Hunt at [57] and the authorities I have referred to in the previous paragraph caution restraint against interference in such an assessment.

Costs

1. [64]

   Ground 5 of the cross-appeal challenges the primary judge’s decision in relation to the costs. The primary judge’s order in respect of costs was that:

2. [65]

   At [200] of the judgment, the primary judge said:

3. [66]

   If the basis of the primary judge’s order with respect to costs was that he had apportioned liability under the CL Act 50:50 as between UCRA and Mr Zervas, on the one hand, and Mr Amro on the other hand (and it is not clear from his judgment that this was the basis – although that would supply one explanation for it), I do not think that that was a reason justifying the costs order made.

4. [67]

   In my opinion, given that the proceedings were taken up in hearing the claims against UCRA and Mr Zervas, it is neither just nor appropriate that Dr Burkitt should in effect be deprived of a costs order as to 50% of his costs against those parties.

5. [68]

   In my opinion, and because his success on the notice of contention depended on the finding made at first instance, the costs order made at first instance should be varied so that the first and second defendants should be made jointly and severally liable for the costs at first instance on the ordinary basis.

Conclusion and orders

1. [69]

   For the foregoing reasons, the appeal should be allowed in part.

2. [70]

   Order 1 of the orders made by the primary judge should be varied so as to delete the reference to the second defendant. In addition, there should be ordered a verdict and judgment for the plaintiff against the second defendant in the sum of $119,135.96.

3. [71]

   Order 3 of the primary judge’s orders should be set aside and in lieu thereof it should be ordered that the first and second defendants are jointly and severally liable to pay the plaintiff’s costs of the proceedings at first instance on the ordinary basis.

4. [72]

   The appellant should be ordered to pay 80% of the cost of the appeal. This takes account of the appellant’s success on the appeal, his lack of success on the notice of contention, and Dr Burkitt’s lack of success on the cross-appeal (other than in respect of costs).

5. [73]

   MACFARLAN JA: I agree with Bell P.

6. [74]

   McCALLUM JA: I agree with Bell P.