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Supreme Court of the ACT Decisions |
Last Updated: 23 June 2004
HENRY POSCH v FILARIA PTY LIMITED ACN 056 933 843 and INDEPENDENT GROUP PTY LIMITED ACN 008 659 792 and DAVID SHEARER and MILLIE PHILLIPS [2004] ACTSC 45 (11 June 2004)
IAN DONALDSON JOHNSTON v FILARIA PTY LIMITED ACN 056 933 843 and INDEPENDENT GROUP PTY LIMITED ACN 008 659 792 and GRAHAME O'BRIEN and MILLIE PHILLIPS [2004] ACTSC 45 (11 June 2004)
TRADE PRACTICES - representations re sale of units in hotel - actions under the Law Reform (Misrepresentation) Act 1977 (ACT), the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1992 (ACT) - whether representations false - whether reliance on any misrepresentation - whether failure to disclose risks of future difficulties in management of hotel business false and misleading conduct - whether right of rescission - principles re causation and assessment of damages.
TRADE AND COMMERCE - representations re sale of units in hotel - claim under Civil Law (Wrongs) Act 2002 (ACT) - whether representations false - whether reliance on any misrepresentation - whether right of rescission - principles re causation and assessment of damages.
Unit Titles Act 1970 (ACT)
Law Reform (Misrepresentation) Act 1977 (ACT)
Trade Practices Act 1974 (Cth)
Fair Trading Act 1992 (ACT)
Civil Law (Wrongs) Act 2002 (ACT)
Legislation Act 2001 (ACT)
Cummings v Lewis (1993) 41 FCR 559
Brown v Jam Factory Pty Ltd [1981] FCA 35; (1981) 53 FLR 340
Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44; (1982) 149 CLR 191
Re Credit Tribunal; ex parte General Motors Acceptance Corporation, Australia [1977] HCA 34; (1977) 137 CLR 545
Collier Constructions Pty Ltd v Foskett Pty Ltd (1990) 19 IPR 44
General Newspapers Pty Ltd v Telstra Corporation (1993) 45 FCR 164
Schindler Lifts Australia Pty Ltd v Deblak (1987) ALR 275
Overlook v Foxtel [2002] NSWSC 17
RAIA Insurance Brokers Ltd v FAI General Insurance Co Ltd [1993] FCA 92; (1993) 41 FCR 164
Cummings v Lewis (1993) ATPR (Digest) 46-103
Ting v Blanche [1993] FCA 524; (1993) ATPR 41-282
Sykes v Reserve Bank of Australia [1999] FCA 746
Jacques v Cut Price Deli Pty Ltd (1993) ATPR (Digest) 46-102
Miba Pty Ltd v Nescor Industries Group Pty Ltd (1996) ATPR 41-534
Bill Acceptance Corp Ltd v GWA Ltd (1983) 50 ALR 242
Concrete Constructions Pty Ltd v Lifevale Pty Ltd [2002] NSWSC 670; (2002) 170 FLR 290
Adelaide Petroleum NL v Poseidon Ltd (1988) ATPR 40-901
State of Western Australia v Bond Corporation Holding Ltd (1991) ATPR 41-081
Edgar v Farrow Mortgage Services Pty Ltd (in liq) (1992) ATPR 46-096
Australian Competition & Consumer Commission v Universal Sports Challenge Ltd [2002] FCA 1276
Australian Competition & Consumer Commission v Danoz Direct Pty Ltd [2003] FCA 881
Australian Competition & Consumer Commission v Oceania Commercial Pty Ltd [2003] FCA 1516
Australian Competition & Consumer Commission v Global Prepaid Communications Pty Ltd [2003] FCA 1221
Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) [1988] FCA 40; (1988) 39 FCR 546
Demagogue Pty Ltd v Ramensky [1992] FCA 557; (1992) 39 FCR 31
Metalcorp Recyclers Pty Ltd v Metal Manufacturers Ltd [2003] NSWCA 213
Kimberley NZI Finance Ltd v Torero Pty Ltd (1989) ATPR (Digest) 46-054
W Scott, Fell & Co Ltd v Lloyd [1906] HCA 79; (1906) 4 CLR 572
Semrani v Manoun [2001] NSWCA 337
Johnson Tiles Pty Ltd v Esso Australia Ltd (2001) ATPR 41-794
Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177
Equity Access Pty Ltd v Westpac Banking Corporation (1990) ATPR 40-994
Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661
Argy v Blunts & Lane Cove Real Estate (1990) 26 FCR 112
John G Glass Real Estate Pty Ltd v Karawi Constructions Pty Ltd [1994] FCA 1537; (1993) ATPR 41,249
Butcher v Lachlan Elder Realty Pty Ltd [2002] NSWCA 237; (2002) 55 NSWLR 558
Walplan Pty Ltd v Wallace [1985] FCA 479; (1986) 8 FCR 27
Wardley Australia Ltd v Western Australia [1992] HCA 55; (1992) 175 CLR 514
Kabadanis v Panagiotou (1980) 30 ALR 374
Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298
Widera v Reid [2002] ACTCA 3
SS Pharmaceutical Co Ltd v Qantas Airways Ltd [1991] I Lloyds Rep 289
Schellenberg v Tunnel Holdings Pty Ltd [2000] HCA 18; (2000) 200 CLR 121
O'Meara v Dominican Fathers [2003] ACTCA 24
Lopes v Taylor (1970) 44 ALJR 412
Nuhic v Rail & Road Excavations [1972] 1 NSWLR 204
O'Donnell v Reichard [1975] VR 916
Builders Warehouse Group Ltd v Multinail Australia Pty Ltd [1998] 314 FCA (2 April 1998)
Davie v Magistrates of Edinburgh [1953] SC 34
Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705
Bowler v Hilda Pty Ltd [2000] FCA 899; (1998) 80 FCR 191
Chamberlain v Carlisle; Independent Group Pty Ltd & Carlisle [2003] ACTCA 10 (22 April 2003)
North Sydney Municipal Council v Sydney Serviced Apartments Pty Ltd (1990) 21 NSWLR 532
Cvetanoski v Filaria Pty Ltd [2002] ACTSC 103; (2002) 171 FLR 194
Potts v Miller [1940] HCA 43; (1940) 64 CLR 282
O'Sullivan v Management Agency & Music Ltd [1985] QB 428
Alati v Kruger [1955] HCA 64; (1955) 94 CLR 216
Vadasz v Pioneer Concrete (SA) Pty Ltd [1995] HCA 14; (1995) 184 CLR 102
Anema E Core Pty Ltd v Aromas Pty Ltd [1999] FCA 904
Kizbeau Pty Ltd v WG & B Pty Ltd [1995] HCA 4; (1995) 184 CLR 281
Kenny & Good Pty Ltd v MGICA (1992) Ltd (1997) 77 FCR 307
Henville v Walker [2001] HCA 52; (2001) 206 CLR 459
Medlin v State Government Insurance Commission [1995] HCA 5; (1995) 182 CLR 1
Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158
Smith New Court Securities Ltd v Citibank [1996] UKHL 3; [1997] AC 254
Miller's Annotated Trade Practices Act, 1974, 24th Ed, 1.52.25
No SC 853 of 1999
No SC 868 of 1999
No SC 980 of 1999
Judge: Crispin J
Supreme Court of the ACT
Date: 11 June 2004
IN THE SUPREME COURT OF THE )
) No. SC 853 of 1999
AUSTRALIAN CAPITAL TERRITORY )
BETWEEN: ALISON JANE WHITTLE and
ROZILIE PATRICIA MUNDAY
Plaintiffs
AND: FILARIA PTY LIMITED
ACN 056 933 843
First Defendant
AND: INDEPENDENT GROUP PTY LIMITED
ACN 008 659 792
Second Defendant
AND: DAVID SHEARER
Third Defendant
AND: MILLIE PHILLIPS
Third Party
Judge: Crispin J
Date: 11 June 2004
Place: Canberra
THE COURT ORDERS THAT:
1. there be judgment for each defendant;
2. that the counter claims be dismissed.
IN THE SUPREME COURT OF THE )
) No. SC 868 of 1999
AUSTRALIAN CAPITAL TERRITORY )
BETWEEN: HENRY POSCH
Plaintiff
AND: FILARIA PTY LIMITED
ACN 056 933 843
First Defendant
AND: INDEPENDENT GROUP PTY LIMITED
ACN 008 659 792
Second Defendant
AND: DAVID SHEARER
Third Defendant
AND: MILLIE PHILLIPS
Third Party
Judge: Crispin J
Date: 11 June 2004
Place: Canberra
THE COURT ORDERS THAT:
1. there be judgment for each defendant;
2. that the counter claims be dismissed.
IN THE SUPREME COURT OF THE )
) No. SC 980 of 1999
AUSTRALIAN CAPITAL TERRITORY )
BETWEEN: IAN DONALDSON JOHNSTON
Plaintiff
AND: FILARIA PTY LIMITED
ACN 056 933 843
First Defendant
AND: INDEPENDENT GROUP PTY LIMITED
ACN 008 659 792
Second Defendant
AND: GRAHAME O'BRIEN
Third Defendant
AND: MILLIE PHILLIPS
Third Party
Judge: Crispin J
Date: 11 June 2004
Place: Canberra
THE COURT ORDERS THAT:
1. there be judgment for each defendant;
2. that the counter claims be dismissed.
Background
* The investment brochure
* The sale to Ms Whittle and Ms Munday
* The sales to Mr Posch
* The sale to Mr Johnston
* Newspaper advertisements
* Subsequent events
The nature of the claims
* The pleadings
* The claims under the Law Reform (Misrepresentation) Act 1977 (ACT)
* The claims under the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1992 (ACT)
Evidentiary issues
* The answers to interrogatories
* The principle in Jones v Dunkel
The suggested fraud
The suggested falsity of the financial projections
The pleaded allegations of misrepresentations
(i) The property could legally be used as a residential unit
(ii) The property could legally be used by each plaintiff for their own purposes
(iii) There was flexibility of use of the units
(iv) The acquisition of each property enabled each plaintiff to take advantage of the strongest market at the time
(v) The acquisition of each property was a unique investment in one of Canberra's most famous establishments, to the benefit of each plaintiff
(vi) The acquisition of each property enabled each plaintiff to participate in one of the strongest growth industries in Canberra
(vii) The arrangement between each plaintiff and their tenant Jaywood was of long term benefit to each plaintiff
(viii) Ongoing returns of over 11% per annum on the purchase price of the property or alternatively substantial ongoing returns were available to the plaintiff
(viiiA) The terms of the contract included a term that the unit entitlements of all units were to be reasonable, having regard to the respective values of the units in the Units Plan
(ix) The acquisition of the property represented one of the most lucrative real estate opportunities on offer
(x) There was an extraordinary performance of the property from an investment perspective
(xi) The terms of the contract included a term that the agreement contained the whole of the agreement between each plaintiff and Filaria, and that no other document existed that related to the use of the property, or the rights of each plaintiff as a purchaser
(xii) The property would earn an excellent return to each plaintiff
(xiii) A substantial increase in value or alternatively an increase in value was available to each plaintiff on the purchase price of each property after the expiry of the lease back period to Jaywood
The pleaded allegations of omissions
(a) The terms of a prospectus that set out the conditions pursuant to which each plaintiffs was with others jointly to receive income and pay expenses in respect of the property
(b) The existence of the terms of a trust deed dated 16 August 1993 to which Filaria was a party
(c) The risk of problems concerning the management and operation of the Canberra International Hotel of which hotel the property formed part
(d) The risk of problems concerning the servicing of the property
(e) The fact that the property could only be used as an income earning property if it was serviced by the plaintiff or by third parties
(f) The provisions of the Corporations Law concerning the requirement to issue a prospectus had not been observed
(g) Filaria owned or claimed ownership of the fixtures, fittings and contents of the ROF Units (restaurant, reception area, office, functions rooms and shop) and the contents of the common property
(h) The terms of a joint venture deed dated 25 May 1993 including terms that Filaria expected the return from the rental of units in the Hotel (including the property) to be 2% per annum less than that to be paid by Jaywood for the lease back period, and that assistance in funding the shortfall was provided
(i) Filaria would block transfer of ownership of the ROF Units to purchasers of units for the $60,000 referred to in the contract.
The claimed relief
* Rescission
* Damages
The defences under the Limitation Act
The counter claims
Conclusion
1. These proceedings, which were heard together, were actions for rescission and/or damages based on allegations of misrepresentation and false and misleading conduct said to have induced the plaintiffs to purchase units in the Canberra International Hotel ("the Hotel") and, as a consequence, to have suffered financial losses.
Background
2. The Hotel was offered for sale in early 1993 by the Australia and New Zealand Banking Group Ltd that was then a mortgagee in possession. Several people submitted tenders for the purchase of the Hotel including Mr Richard Tindale, who was then the Chairman of Independent Group ("Independent"), and is the second defendant in each of the three proceedings. However, the successful tenderer was Ms Millie Phillips, who subsequently arranged for the Hotel to be purchased by Filaria Pty Ltd ("Filaria"), the first defendant in each of the actions. The contract for the sale of the Hotel was dated 25 May 1993. On the same day Ms Phillips entered into a joint venture deed with Mr Gary Willemsen in relation to the purchase and development of the Hotel. Filaria then proceeded to obtain separate titles under the Unit Titles Act 1970 (ACT) for the individual rooms and suites of the Hotel and offer them for sale as units with an ancillary offer of an arrangement to another company, Jaywood Pty Ltd ("Jaywood"), which would manage the hotel business.
3. There had been discussions between Mr Tindale and Ms Phillips during late April 1993 about Independent acting as marketing agents for the sale of the units. On 28 April 1993 Mr Tindale had written to Ms Phillips concerning a discussion at the Hotel on the previous Sunday and adverting to what he then regarded as appropriate selling prices for the units. In his evidence, before me, Mr Tindale explained that in suggesting appropriate sale prices he had relied upon his previous experience and, in particular, upon his experience the previous year when he had acted as the agent for sale of units in a similar development known as the Capital Executive Apartments located near the Hotel. All of the units in that development had been sold within a very short time and a number had subsequently been resold for higher prices. Independent was duly appointed to act as agents for sale of the individual units.
The investment brochure
4. A brochure entitled "Investment Report Canberra International Hotel" ("the brochure") was prepared describing the Hotel and providing a number of photographs as well as plans of typical units. The brochure was compiled by Mr Tindale who obtained the relevant information from various sources. He explained in evidence that the financial projections were based upon figures, information and views provided to him by Mr Graham Hoare who was then the manager of the Canberra Rex Hotel which was apparently owned by another of Ms Phillip's companies. He said that the brochure was "signed off" by Ms Phillips, her son Mr Robert Phillips who was a solicitor, Mr Willemsen and Mr Richard Kemp of Malleson Stephen Jacques who were acting for Filaria. It contained the following statements:
SALE DETAILS:
The strata titled serviced apartments will be offered for sale with an offer from Jaywood Pty Ltd to leaseback the units from the owner as follows:-For a minimum of 3 years, at 9% per annum indexed to CPI (capped at 9.25% for the second year and 9.5% for the third year). At the expiration of this period, Jaywood Pty Ltd proposes to offer to manage the apartments for a 10% management fee.
INTRODUCTION:
The Independent Group are pleased to be able to offer investors the opportunity to earn an excellent return from one of Canberra's best known and certainly most distinctively designed hotels. The Canberra International.
The International, however, is now no longer a hotel as such. It is being upgraded by well known Canberra developer Gary Willemsen into exclusive serviced apartments. The apartments are offered for sale with a management offer to lease the units back from the owners at a very attractive rental. The management of The International is to be handled by Jaywood Pty Ltd, an affiliate of one of Australia's largest privately owned specialist hotel management companies, The Castle Group.
As opposed to a unit title motel room as an investment, an owner of a unit title serviced apartment will have the distinct advantage of choice. Apart from the leaseback offer, owners can use the unit for their own purposes, such as a normal tenancy arrangement or occupying the unit themselves. This flexibility allows owners to take advantage of the strongest market at the time.
The 3 year lease to the management company will allow owners to take advantage of the strong growth of tourism in the A.C.T. We have prepared a financial analysis of this option as well as an overview of tourism in the A.C.T., both of which are detailed later in the report.
The Independent Group sell the majority of all major residential developments in Canberra. However, rarely do we have the opportunity to offer such a unique investment in one of Canberra's most famous establishments and in one of the strongest growth industries both here and throughout Australia.
A.C.T. TOURIST INDUSTRY - "WHY INVEST?"
OVERVIEW:
Since the early 1980's, tourism has grown to become a major part of the Nation's economy. The A.C.T. is no exception, with tourism now an important and integral part of our economic growth and development within the Territory. This is evidenced by the information collected from the Canberra Visitors Survey which shows the industry generated in excess of $400 million to the economy during 1990/91, subsequently supporting an estimated 7000 jobs within tourism and related industries. 1990 - 1991 saw a consolidation in the A.C.T., with occupancy levels at 53.18% and 53.5% respectively. Given the pilots strike of 1989 and large increases in the supply of hotel and motel rooms in that time, the A.C.T. has faired well in maintaining these levels. This has been attributed primarily by the opening of the New Parliament House, the National Science and Technology Centre and the National Convention Centre. 1992 has seen strong growth, with occupancy climbing from an annual average of 53% in 1991 to 58.7% in 1992, representing an increase of 9.7%. This growth continued in the December quarter with an occupancy rate of 62.3% being the highest in Australia for that quarter.
SUPPLY AND DEMAND:
Official figures confirm that not only is overall demand for accommodation increasing but there is a very definite swing to serviced apartments. This trend is evident Australia wide. Canberra figures show that overall motel occupancy has increased to 58.7% in 1992, while serviced apartments occupancy has increased to 65.9%.
Noel McCann of McCann and Associates, Valuers, says in a report on investment in Canberra, dated 21 May 1993.
"Our research indicates that the growth prospects for the A.C.T. Tourism market:
* is strong with very few new rooms proposed for development into the market which is assisting the trend of increasing occupancy levels;
* Australia is coming out of the National recession;
* the growth in the number of international tourists into the A.C.T. and Australia (approximately 1.5 million international tourists visited Australia in 1992, this is expected to reach 6 million by the year 2000, excluding the impact of the Sydney 2000 Olympic Bid)."
In May 1993,[sic] the then Capital Motor Inn was converted to strata title serviced apartments. They were released for sale at an average price of $123,000 for the studio apartments and up to $185,500 for a one bedroom apartment. Noel McCann reports: -
"Sale Prices
All units were sold within one hour of initial release with prices ranging from $115,000 for a studio apartment to $185,500 for a large one bedroom suite apartment. Since the initial release, our research indicates that there have been six resales. The most recent resale was for a studio apartment originally purchased fore $121,500 and resold in May, 1993 for $138,000.
Current Occupancy Levels
Our research indicates that during the months of March and April, occupancy levels were at approximately 70%. With the management pool currently having an excess of funds over and above that of the minimum guarantee".
Given these already encouraging signs, our research also shows that many existing motel rooms are about to be removed from the market through redevelopment. We have preliminary confirmation of some 600 rooms, all of which are expected to be out of the tourism market within the next few months. In addition there are a further 300 rooms that are distinct possibilities to be redeveloped.
The effect of this anticipated fall in room supply has been plotted on the following graphs. The result is quite startling and should ensure occupancy rates remain high.
Graph 1 shows a conservative net loss of 450 hotel/motel rooms and nil growth in Tourism, yet still demonstrates an increase in occupancy to 64.5%. Graph 2 allows for a projected 4% growth, indicating an occupancy of 69.7%. Graph 3 and 4 take the above two scenarios but with a net loss of 800 hotel/motel rooms, showing occupancy levels of 72.1% and 78.0% respectively. Allowing for the fact that serviced apartments are showing a higher occupancy rate than hotel/motel rooms, the forecast occupancy levels shown in the Projected Financials could be seen as somewhat conservative.
SUMMARY:
Capital Executive Apartments are a good comparison to the Canberra International, although many investors will see significant marketing benefits for the International.
Capital offered a 9% return for 2 years, and are already trading above that figure. It would be a reasonable assumption that the International will show capital gains to at least match Capital, and that the returns after the three year leaseback will have grown significantly, thus further enhancing the growth in value of the individual apartments.
5. Graphs were provided showing projections of the supply of and demand for hotel/motel accommodation in the ACT on the basis of various stated assumptions. These further statements followed:
THE MANAGEMENT COMPANY:Major hotels are not run by hotel owners but by management groups e.g., Hilton, Sheraton, Raddison, SPHC etc. The management company is a specialist in hotel administration and marketing. The Castle Group is such a company. (Jaywood Pty Ltd is an affiliate of The Castle Group)
To date The Castle Group has concentrated on managing its own hotels and currently owns 8 hotels totalling some 750 rooms. It is one of the largest privately owned hotel groups in Australia. Castle hotels are located in Tasmania, Sydney, Brisbane and Canberra. With the exception of the Great Northern in Launceston the freehold of all hotels are owned outright. The group employs a staff of 500.
Its founder/owner Millie Phillips is one of Australia's most successful businesswomen. Her financial holdings cover a chain of retirement villages, nursing homes, residential and commercial real estate. She is the driving force behind the business. Her interests include mineral exploration and Chairmanship of two publicly listed companies.
Canberra Rex Hotel
Millie Phillips purchased the Rex some 3 years ago. Despite the pilot strike and the recession her team under the leadership of Graham Hoare, Manager, has made the Rex into one of Canberra's most successful hotels.
Canberra International
The International team will be headed by Graham Hoare. It too will become an outstanding performer. The International compliments (sic) the Canberra Rex. As a sister hotel it will bring cost effectiveness of significant proportion with running expenses and marketing (sic). Graham has a proven track record in Canberra, achieving a 75% occupancy rate for the Rex in 1992, way above the industry average.
Marketing Team
The secret of The Castle Group is not only in tight cost control and quality management but in the effectiveness of its marketing team. The Castle Group are (sic) members of Flag International and uses Flag as its national and international reservations system. The Castle Group employs 7 professional marketers to promote its hotels in 5 states. Their professionalism is on level with the top hotel chains. Castle's Manager of Marketing is a Director of ITOA - Australia's umbrella tourism marketing arm (sic). Castle marketers are invited to participate in most of Australia's overseas marketing drives and all mainstream trade shows to promote the industry.
6. Tables of projected cash flows were provided purporting to show that purchasers who bought a unit for $127,000 with no deposit could expect to derive an average pre tax profit of $1,122 per annum whilst those who bought a similarly priced unit with a deposit of $32,000 could expect to derive an average pre tax profit of $4,012 per annum and a return on investment of "12.5% + Capital Gain". Explanatory notes stated that the figures were estimates only and that the tax saving shown would vary according to the owner's individual tax position.
7. These were followed by a further table under the heading "Canberra International Hotel Projected Financials" purporting to show average occupancy rates and room rates for the 1992/93, 1993/94, 1994/95, 1995/96 and 1996/97 financial years and the projected income and expenditure of the Hotel for the last four of those financial years. The table showed a "return to investor" of 9% during 1993/94, 9.25% during 1994/95 and 9.5% during 1995/96, which corresponded to the rental payable to purchasers who leased their units to Jaywood. It also showed a return of 11.9% during 1996/97, which was plainly based upon the projected profitability of the hotel business. The value of a unit as at 1996/97 was projected to be $168,000 on the basis of a 9% return, or $189,000 on the basis of an 8% return, assuming in each case the initial purchase price was $127,000. The projections were said to have been made on the basis of certain stated assumptions.
8. The brochure concluded with a disclaimer stating, inter alia:
. . .Information contained in this report has been prepared in good faith and with due care by the writers. Potential investors should take note, however, that the calculations contained in the report are based on figures provided to the writers by outside sources and have not been independently verified by the writers.
Any projections contained in the report therefore, represent estimates only and may be based on assumptions which, although reasonable, may not be correct.
If a projection has been made in respect of any outcome, including net income, occupancy rate, room rate and outgoings, such a projection is an estimate and represents only one possible result, depending on the assumption made. Potential investors should therefore satisfy themselves as to the current status of all projections, including income, occupancy rate, room rate and outgoings and use their own judgement as to the likely outcome.
Potential investors should not rely on any material contained in this brochure as a statement or representation of fact, but should satisfy themselves as to its correctness by such independent investigation as they or their legal or financial advisers see fit.
The sale to Ms Whittle and Ms Munday
9. In about July 1993 Mr David Shearer, who is the third defendant in proceedings numbered SC 853 of 1999 and 868 of 1999, had a conversation with Ms Alison Whittle about the units. She said in evidence that he had told her that his agency was offering a "fantastic investment opportunity" and that he had given her a copy of the brochure. She read the brochure and had subsequent discussions with Mr Shearer. She believed both the statements contained in the brochure and the further statements which he made to her but said that the "Information in the brochure was the deciding factor in my mother and I purchasing the unit".
10. Ms Whittle subsequently discussed the matter with her mother, Ms Rozilie Munday, and they decided that they would purchase a unit.
11. They attended a presentation at the Hotel on 11 July 1993 with the intention of purchasing a one bedroom unit but those units had all been sold by the time they reached the head of the queue. They agreed to purchase a studio unit instead and paid a holding deposit of $1,000.
12. On 23 August Filaria's solicitors advised them that the term of the proposed guarantee would be extended from three years to five years with rental in accordance with the formula previously proposed but increasing to amounts equal to 9.75% and 10.00% of the purchase price for the fourth and fifth years of the lease.
13. Mr Shearer agreed that he had been enthusiastic in presenting the Hotel as a potential investment. He had taken the statements in the brochure at face value and had regarded the purchase of units in the Hotel as a good investment. He had spoken to "dozens" of potential purchasers and clearly had only a limited recollection of the conversations with Ms Whittle, though he accepted that he would have told her that he thought the offer was a good opportunity and that he would have compared it with his own investment in a unit in the Capital Executive Apartments which had since increased in value.
14. The contract of sale was dated 9 September 1993. The date of settlement was 11 November 1993 and on the same day Ms Whittle and Ms Munday entered into a lease of the property to Jaywood on the proposed terms.
15. Ms Whittle impressed me as an intelligent and articulate person whose evidence was given in a candid and forthright manner. I have no doubt that she described the events as accurately as she could, given the passage of time. However, she was obviously not immune from the normal frailties of human memory and did not claim to provide a verbatim account of conversations that had occurred almost a decade earlier or even to have remembered how many such conversations occurred in relation to the sale of the units. Whilst I accept that Mr Shearer explained to her the investment offer in positive terms and encouraged her to participate in it, I am unable to be satisfied that he used the term "fantastic" to describe it or that he made any more specific representations in relation to it. Whilst it was submitted on her behalf that Mr Shearer had told her that there would be a capital gain at the end of the five year lease back period, she did not, in fact, claim that he had made such a representation and, since only a three year lease back arrangement was then on offer, it is highly unlikely that he would have done so.
16. Ms Whittle was at times obviously reliant upon reconstruction to answer questions about what she would have believed at the time. For example, in her evidence in chief she said that upon reading the information on page 13 of the brochure she had formed the belief that "there would be normal capital gain plus a 12.5 per cent increase on the value of the property" but subsequently admitted that she did not know what the figure of 12.5 per cent represented and that the answer had been obviously silly. In fact, she quite fairly agreed that she had understood that there was no guarantee of future capital gain and that the author of the brochure had been trying to extrapolate what might happen in the future based on past experience in a comparable development and figures from outside sources. However, she said that she had carefully read the brochure and thought that the purchase of a unit would be a very good investment which would provide a good return and might increase in value over time.
17. Ms Munday was also an obviously honest witness but she had clearly left the negotiations to her daughter and her understanding of the transaction seemed substantially dependent upon what Ms Whittle had told her. I formed the impression that she had little independent recollection of any representations that may have been made to her prior to the purchase.
The sales to Mr Posch
18. Mr Henry Posch first heard about the proposed sale of the units in mid 1993 through newspaper and television advertisements and a conversation with Ms Whittle. He was subsequently contacted by Mr Shearer who came to see him, apparently in late July or early August 1993 and discussed the units with him. He said that Mr Shearer spoke of a five year lease arrangement and gave him a copy of the brochure and other documents including one which stated -
CANBERRA INTERNATIONAL
THE BEST INVESTMENT
Why are the investment experts so excited?
1. PRIME INNER NORTH LOCATION
2. GUARANTEED MINIMUM 9% RETURN FOR FIVE YEARS
$123,950
offers a nett rental of
$214/week
indexed to CPI for 5 years!
3. NO BODY CORPORATE FEES
4. UNDER MARKET VALUE - EXCELLENT CAPITAL GAIN PROSPECTS
Other residential property investments are performing strongly to show a nett return (before rates and land tax) of 5.5%. There is no where else in Australia that prime real estate offers a 9% return with this level of security.
If you have NO DEPOSIT you can afford to own one of these exceptional apartments and show an after tax profit before Capital Gain of
in the first year of ownership
*To Approved Purchasers based on a marginal tax rate of 43% . . .
19. The document invited prospective purchasers to contact Mr Shearer and was accompanied by two other documents, one providing an example of the returns that might be derived in the first two years of such an investment and the other setting out the expected purchase costs of the investment, required borrowings, annual expenses, tax deductions and tax savings calculated by reference to marginal rates of 38%, 43% and 48%.
20. There was some discussion concerning the contents of the brochure and the other documents. Mr Posch said that Mr Shearer had been very enthusiastic about the development and that he had described it as an "excellent investment" which would produce "excellent capital gains". Mr Posch said that the figures suggested he would receive an excellent return on any investment in the units and that the potential capital gains "seemed very attractive". He accepted the statements contained in the brochure and further statements made by Mr Shearer.
21. Mr Shearer's recollection was that he had spoken to Mr Posch at the first meeting about a three year leasehold arrangement and, since it appears that the decision to offer five year rather than three year leases was not made until about 21 August 1993, it seems likely that Mr Shearer's recollection is more accurate. The document referring to a minimum return for five years must have been given to Mr Posch later. He agreed that he would have discussed the brochure with Mr Posch and that it was very likely that he had told Mr Posch of his experience with his unit at the Capital Executive Apartments and the capital gain he had made. He said that he would have spoken about the potential for capital gains on units at the Hotel and would have expressed the view that the guaranteed returns during the lease back period were supportable by the operations of the Hotel.
22. Mr Shearer later took Mr Posch to the Hotel to inspect a number of the units and he ultimately purchased units 24 and 33. Contracts of sale were apparently exchanged on 15 October 1993 and settlement occurred on 12 November 1993.
23. There was a sustained attack on Mr Posch's credit and at one point his answers in cross-examination appeared to involve clear admissions that he had attempted to create an impression that was quite false, though he subsequently explained that he had been confused. I accept that he would have been likely to have evaluated the financial projections with some care since he already owned about ten investment properties and managed his own business. However, he seemed to find it difficult to recall precisely what Mr Shearer told him. That is entirely understandable given not only the diversity of his business and investment interests but, more importantly, the fact that the conversation had occurred almost a decade before he was called to give evidence. At times he was clearly dependent upon reconstruction. For example, he gave evidence that he had thought that the capital gains would be excellent "because there was no capital gains tax to be paid also at that time". In fact, of course, capital gains tax was introduced in 1985. Whilst I accept the general thrust of his evidence I formed the distinct impression that Mr Shearer's recollection of the relevant meetings and discussion was more accurate.
The sale to Mr Johnston
24. Mr Ian Johnston first heard about the sale of the units in about October or November 1993 during discussions with his sister and brother in law who had just paid a deposit on a unit. Either he or his wife subsequently contacted Independent and Mr Grahame O'Brien, the third defendant in proceedings numbered 980 of 1999, came to their home, apparently on the evening of 3 November 1993. During the course of the meeting Mr O'Brien gave him a copy of the brochure, there was some discussion and Mr Johnston did some calculations on a piece of paper. He was told that the proposed lease arrangement had been changed to five years and it was suggested that the proposal was similar to the development of the Capital Executive Apartments, though he agreed that the Hotel was superior to that development. In cross-examination, Mr Johnston conceded that he had looked at the disclaimer and understood that "the figures are estimates, they are projections". He said that he believed they had been prepared by people who knew the industry and that they were estimates and projections based on some value which he thought were achievable.
25. During his evidence Mr Johnston was again taken through the brochure and invited to recount any conversation that he could recall having with Mr O'Brien in regard to particular pages during that meeting. At one point he referred to page 4 and said "...in that it was described that the management would be by an experienced group that would carry on, and what would be expected is that that management by rights would perform very well and that they would naturally carry on for - after the five years". In fact, there are no statements to this effect on page 4 of the brochure. He may have been intending to assert that Mr O'Brien had told him these things when they reached page 4, but even in that event, this statement would appear to have been incorrect because he later agreed that he had asked about how the management would carry on after the five years and that Mr O'Brien had not answered. He did claim that on a subsequent occasion Mr O'Brien had told him that if a number of people were not happy with the management at the end of the initial five year period the majority would rule and a new management organisation could be put in place. It was not suggested that anything turned on this assertion and the confusion seems to have merely provided another example of the difficulty that witnesses understandably had in attempting to recall conversations that had occurred so long ago.
26. Mr Johnston's wife who had been present at the meeting was not called as a witness and Mr Foster, who also appeared on Mr O'Brien's behalf, submitted that I should draw an inference, pursuant to the principle in Jones v Dunkel that her evidence would not have assisted his case. The principle in Jones v Dunkel is discussed later in this judgment but, for present purposes, I need say only that having regard to the time that has passed since the evening in question I would not be prepared to assume that the failure to call her was attributable for fear of what she might say rather than her inability to recall exactly what was said. In any event, the suggested inference would not have had any significant impact on the outcome of Mr Johnston's claim.
27. On 5 November 1993 Mr O'Brien showed Mr and Mrs Johnston some units at the Hotel and they thereupon agreed to purchase two units and paid holding deposits on them. They later changed their minds about the purchase of these units but did subsequently purchase a one bedroom unit for a price of $164,950 and entered into a five year lease to Jaywood from 4 February 1994.
28. Mr O'Brien said that he had gone to Mr Johnston's home on the evening of 3 November 1993 and that he had worked through the brochure with him, though he was unable to recall in how much detail. He would have adverted to the important points and believed he would have mentioned the guaranteed returns and management options at the end of the lease back period. He also owned a unit in the Capital Executive Apartments and believed he would have mentioned that.
29. Mr O'Brien clearly had only a vague recollection of the conversations with Mr Johnston and the latter's account of them was more detailed and precise. However, whilst I have no doubt that Mr Johnston gave his evidence honestly, I was sometimes left in real doubt as to whether his answers reflected a clear memory of the relevant conversation or, perhaps, a subconscious reconstruction of what, in hindsight, he thought would have been said. I accept that Mr O'Brien probably told him that Jaywood might be willing to continue managing the Hotel after the leases expired but I am not satisfied that he assured him that, in the event of some dissatisfaction, the majority would rule and a new management organisation could be put in place.
Newspaper advertisements
30. A number of newspaper advertisements were tendered in evidence and, whilst none of the causes of action were based upon any representations contained in them, it was suggested that they revealed the representations likely to have been given prominence in subsequent discussions. Since both Mr Shearer and Mr O'Brien seemed to have used the brochure as the basis for discussion, I ultimately found these clippings to be of limited assistance.
Subsequent events
31. It is common ground that at the time of purchase, the units were worth what the plaintiffs paid for them. Indeed, counsel for the plaintiffs called a valuer, Mr Frank Brodrick, to prove this fact.
32. Mr Brodrick gave evidence that values subsequently began to decline as occupancy rates fell due to the election of a Coalition government in 1996, downsizing of the public service, a slowdown in the local economy and an increased number of serviced apartment developments throughout Canberra.
33. Despite the decline in occupancy rates, Jaywood duly paid the agreed rentals for the whole of the five year period.
34. Each of the leases contained an "option" pursuant to which Jaywood agreed that if appointed manager of "such number of Units as hold not less than two-thirds of the voting entitlements in the Body Corporate" it would enter into a further management agreement for a fee equal to 10% of the gross receipts from the letting of the premises. As the end of the period covered by the leases approached however, it became apparent that the plaintiffs and other unit owners wanted an extension of the existing leases or some other agreement that would provide guaranteed returns and that they were not prepared to exercise the option in the leases for Jaywood to manage the Hotel for a further period in return for a management fee.
35. Jaywood did make another offer to continue managing the Hotel but it was again on the basis that the returns to individual unit holders would be dependent upon the profits derived from the provision of accommodation to hotel guests after deduction of management fees.
36. Some of the unit owners were clearly unwilling to accept this offer. An association called the "Canberra International Hotel Unit Holders Association" ("CIHUHA") was formed. Ms Whittle, Mr Posch, Mr Johnston and other unit holders proceeded to join it. Members of the association made enquiries about other potential managers and, ultimately began to negotiate with the Premier Hotel Group ("Premier") to replace Jaywood.
37. On 1 February 1999 Ms Phillips wrote to the unit holders on behalf of Jaywood asserting that the company's dedication to the performance of the Hotel was guaranteed by its continuing ownership of forty-two units and providing what should have been a sobering note of warning:
. . . However without certainty of tenure forward planning is impossible. Without assurance that the Hotel will remain in Castle's management puts forward planning on hold. Such a situation is dangerous to any business. For tourism which plans one two years ahead it is disastrous. Whether the uncertainty of the hotel's future is known to the market place and is causing the serious drop in business is unknown. What is certain is that Canberra's tourism is undergoing serious difficulties, and that insecurity of management must impinge on performance.We have been advised a legal structure has been formed to represent unit owners, but that not all unit owners have entered into an arrangement with this Body Corprate. [sic]
We now advise that if an acceptable arrangement is not reached within the next 21 days, Castle will seriously reconsider its continuity in management. Units under our ownership and under guaranteed rental will be transferred to Canberra Rex management; the reduced running costs will enable selling these rooms at highly competitive rates and will seriously dislocate the Canberra International's business.
It is therefore imperative that the unsatisfactory state in the management agreement is quickly resolved . . .
38. Ms Whittle agreed that she had recognised that the letter contained a threat and accepted that it had evoked general animosity amongst her and other unit holders.
39. On 16 February 1999 Mr Vickers, the president of CIHUHA, wrote to unit holders stating that the committee was of the view that Ms Phillip's letter had been intended to raise concern and perhaps cause them to rush into signing Jaywood's proposed lease. The author added that he thought the suggestion that Filaria's units might be managed from the Canberra Rex Hotel was a "bluff". On the following day Jaywood gave one months notice of its intention to terminate its agreement with those unit holders whose leases had expired or were due to expire that day.
40. On 19 February 1999 the solicitors for CIHUHA wrote to Jaywood's solicitors stating that CIHUHA was willing to consider new leases similar to the existing ones in that rents would be fixed and not dependent upon profit.
41. On 24 February 1999 CIHUHA resolved that the proposal put forward by Jaywood for the further management of the Hotel be rejected. Ms Whittle agreed that at that time she was unaware of any offers or even expressions of interest from alternative managers.
42. Further correspondence between the solicitors for Jaywood and CIHUHA ensued. On 3 and 4 March 1999 the former wrote to the latter complaining that no contact had been received from them or their clients with a view to furthering the negotiation process and requesting that the matter be dealt with urgently. On 5 March the latter responded, indicating that CIHUHA was prepared to meet only if Jaywood was prepared to consider a fixed rent. If not, CIHUHA would consider any written management proposal together with proposals from other potential managers.
43. On 17 March 1999 Jaywood's solicitors again wrote to CIHUHA's solicitors conveying a further offer involving a lease for five years with two option periods, each of five years, and rental calculated on the basis of 3% of the gross revenue and 5% of the net operating profit. Clarification of this offer was provided in a further letter written on 19 March 1999 stating that Jaywood intended funding any operating losses from its own resources subject to recovery from future profits.
44. On 20 March 1999 Mr Vickers wrote to unit holders referring to alternative proposals for management of the Hotel. The letter stated that any new manager would presumably offer to manage Ms Phillip's units in the same manner as the others and that "The suggestion of running her units out of the Rex seems legally feasible, but highly impracticable". The letter conveyed Mr Vickers' impression that Jaywood would cease to manage the Hotel within several weeks and added, "Whether that separation is easy or difficult remains to be seen".
45. On 26 March 1999 Jaywood issued a further notice of intention to terminate the lease agreements with effect from 26 April 1999.
46. In a letter dated 6 April 1999 Mr Vickers advised unit holders that the association had met on 16 and 30 March 1999 and that "the meeting" had been firmly of the view that Jaywood should be removed as manager of the Hotel. The letter set out the steps that he considered necessary to achieve that objective and stated that "Premier have been asked to manage the Hotel from May 1, regardless of whether the fine details of their arrangement have been finalised by that time".
47. In a further letter apparently sent on or before 26 April 1999, Ms Phillips again wrote to "ALL INTERNATIONAL HOTEL UNIT OWNERS" referring to the decision as an "unconsidered invitation for economic disaster". The letter again contained significant warnings:
. . . If the Castle Group is voted out, the Canberra Rex will be used to sell the 57 units we own and manage. We will be able to undersell the International by servicing our units from the Rex. We may be forced into rental strategies that could prove at odds with the promotion of the hotel. To protect our reputation, we will be forced to notify clients we no longer are the managers. This could result in long term cancellations, and affect the International's ability to attract business.Business is adversely affected by instability in management. Having two competing managers run the same hotel is disastrous. Investors will shun such a property. Travel agents will avoid it. Staff morale will sink and impact on performance. Five years work of turning an underperforming hotel into one of high repute will be lost. Earning good-will is a long hard battle - losing it is fast. Your investment, already under threat from the current and projected hotel over supply and Canberra's subdued economy must suffer the consequences. Its value could collapse. Duplication of management will end the possibility of the hotel joining any chain hotel group . . .
48. The letter concluded with the cautionary plea:
. . . It is still possible to avoid disaster, save our hotel and secure the value of your investment. Please take time to consider these implications.
49. A special general meeting of CIHUHA was apparently held on 29 April 1999. In a note to CIHUHA members, presumably distributed immediately before or at the start of the meeting, Mr Vickers referred to the letter from Ms Phillips and stated, "I can assure you that her letter raises nothing new".
50. The meeting resolved to:
* revoke Jaywood's special privilege to use the common property areas of the Hotel with effect from 1 May 1999;
* direct Filaria to sell the units containing the restaurant, reception area, office, functions room and shop ("ROF units") to CIHUHA or its nominee upon payment of $60,000; and
* have all agreements for Jaywood to manage the Hotel terminated with effect from 1 May 1999.
51. Jaywood thereupon removed its property and the Hotel closed.
52. The Hotel reopened for business on 24 May 1999 under the name "Pavilion on Northbourne". The majority of the units were managed by people associated with Premier though the precise arrangement with the unit holders is not clear. On 25 August 1999, some three months later, CIHUHA informed its members that Premier had formed a subsidiary company called "Pavilion Pty Ltd" to promote a proposed scheme of management and indicated than an agreement was expected to "follow shortly".
53. It is now clear that Ms Phillips proceeded to have the units retained by Filaria separately managed as she had foreshadowed. It is not clear whether she did so because she was not satisfied that the new arrangements were adequate to ensure the efficient management of her units, whether she acted out of spite, or whether she simply wished to withdraw from a continuing association with other unit holders after relations had apparently become somewhat acrimonious. Whatever her motivation, she was obviously entitled to take a different course from that adopted by other unit holders and the pleadings do not raise any issue as to the propriety of her decision.
54. However, as a consequence of the different courses adopted, two separate hotel businesses have been carried on in competition with each other in the same building for some years. This has obviously had a seriously detrimental impact upon profitability. During the hearing in May 2003 evidence was given that units were then available at a rate of $60 per night. This was, of course, significantly below the average room rate of $87.47 per night said to have been obtained in that portion of the 1992/1993 financial year prior to 28 February 1993.
55. The returns which the plaintiffs have derived from their units since the termination of the lease to Jaywood have been meagre and the values of units are now much lower than the prices paid for them in 1993. In a report annexed to his statement of 21 March 2003, Mr Brodrick explained that the values of the units had fallen dramatically due to the competition between the two hotel businesses in the one building, the fact that no money had been spent on the development for five years, the fact that the ROF units had been sold "as a result of court action" and publicity arising from the pending proceedings.
56. It should be noted that the brochure had not contained any representation as to the continued profitability or value of the units under different management. Nor did it represent that Filaria would undertake to have its residual units managed by a manager other than Jaywood, chosen by other unit holders. On the contrary, the brochure stressed that all unit holders would be free to choose how to use their units.
57. The evidence does not establish that any net losses would have been sustained had the plaintiffs and other unit holders exercised the options to have Jaywood continue to manage the Hotel on the basis specified in the leases or on either of the other bases subsequently offered, though the earlier decline in occupancy rates referred to by Mr Brodrick may have adversely affected the return on their investments for some period.
The nature of the claims
58. The plaintiffs claim to be entitled to rescind the contracts for the purchase of their respective units and have sought consequential orders restoring them to the financial position they would have enjoyed had they not entered into that transaction. In the alternative, they claim damages.
59. On the other hand, counsel for the defendants contend that the claims are essentially misconceived because the evidence does not show that the plaintiffs had been induced to purchase the units by any misleading or deceptive conduct and because, even if they had, it is common ground that the units had been worth what they paid for them at the time and they have not suffered any compensable loss. The case put on behalf of the plaintiffs has involved trawling through the brochure in the hope of finding some opinion or projection, the basis for which could not now be established, and relying upon the perceived opportunity thereby presented to pass on to the defendants' losses actually caused by poor business decisions and neglect on the part of the plaintiffs and other unit holders. The development of a situation in which two hotel businesses were competing in the one building and the other factors responsible for the claimed losses were not caused in any real sense by any minor errors in the brochure or even by the purchase of the units. Even if some prima facie chain of causation could be implied, it had been broken by supervening events several of which clearly constituted a novus actus interveniens. Alternatively, the plaintiffs had failed to mitigate their own damage by accepting one of Jaywood's offers to further manage their units or by selling them when the impasse developed.
The pleadings
60. The ambit of the case is, of course, defined by the pleadings and, as mentioned earlier, the plaintiffs' claims are based upon allegations of misrepresentation and/or false and misleading conduct prior to the purchase of their respective units. Despite successive amendments to the Statement of Claim, including one made after the commencement of the trial, some of the complaints made by and on behalf of the plaintiffs appeared to relate to claims that had not been pleaded or particularised.
61. As Mason CJ and Gaudron J stated in Banque Commerciale SA (liq) v Akhil Holdings Ltd [1990] HCA 11; (1990) 169 CLR 279 at 286-287:
The function of pleadings is to state with sufficient clarity the case that must be met; Gould and Birbeck and Bacon v Mount Oxide Mines Ltd (In liq) [1916] HCA 81; (1916) 22 CLR 490 at p 517, per Isaacs and Rich JJ. In this way, pleadings serve to ensure the basic requirements of procedural fairness that a party should have the opportunity of meeting the case against him or her and, incidentally, to define the issues for decision. The rule that, in general, relief is confined to that available on the pleadings secures a party's right to this basic requirement of procedural fairness. Accordingly, the circumstances in which a case may be decided on a basis different from that disclosed by the pleadings are limited to those in which the parties have deliberately chosen some different basis for the determination of their respective rights and liabilities. See, eg, Browne v Dunn (1893) 6 R at p 76; Mount Oxide Mines (1916) 22 CLR, at pp 517-518.Ordinarily, the question whether the parties have chosen some issue different from that disclosed in the pleadings as the basis for the determination of their respective rights and liabilities is to be answered by inference from the way in which the trial was conducted. It may be that, in a clear case, mere acquiescence by one party in a course adopted by the other will be sufficient to ground such an inference.
62. This passage was quoted by Cooper J in Cummings v Lewis (1993) 41 FCR 559 at 578 in a portion of his judgment with which Sheppard and Neaves JJ expressed agreement.
63. In the present case there can be no suggestion that the parties have chosen some issue different from that disclosed in the pleadings as the basis for the determination of their rights and liabilities or that any of the defendants have acquiesced in any attempt by the plaintiff to raise issues outside the bounds of the pleadings. Both Mr Walton SC, who appeared with Mr Mossop for Filaria and Ms Phillips, and Mr Foster SC, who appeared with Mr Pike for Independent and for Mr O'Brien and Mr Shearer, repeatedly made it clear that they had come to court to meet the case pleaded against their clients and would not consent to any enlargement of the issues. Mr Gunst QC, who appeared with Mr Gillespie-Jones for the plaintiffs, ultimately conceded that his clients were bound by the pleadings.
64. This point must be stressed because the tenor of Ms Phillip's letters and conduct in early 1999 clearly caused considerable resentment amongst many of the other unit holders and some of the submissions made on behalf of the plaintiffs were directed towards her conduct at that time. Mr Gunst at one point described her conduct as "spiteful". In fact, I gained the impression that the plaintiffs and other unit holders may have had some antipathy towards Ms Phillips even before the confrontation that emerged following her letter in early 1999. However, the origins of that antipathy were not revealed with any clarity by the evidence and may have been attributable to nothing more significant than disappointment at Jaywood's refusal to offer further guaranteed returns and pique at the confrontational tone in the first letter quoted. In any event, no cause of action based upon her conduct at that time has been pleaded and evidence of the events that then transpired is only relevant, if at all, to the extent to which it may cast light on the causes of action relating to alleged misrepresentations and misleading or deceptive conduct in 1993 and related issues such as the causation or mitigation of damages. The proceedings do not provide any avenue of redress for grievances, however deeply felt, arising from subsequent conduct unrelated to the causes of action that have been pleaded.
65. The pleadings also define the issues that may properly be raised in relation to representations and conduct of the parties prior to the plaintiffs' purchase of the unit in 1993.
66. Hence, whilst Mr Gunst sought to raise allegations of fraud, the absence of any pleading to that effect necessarily means that they are relevant, if at all, only insofar as they may cast light on the issues that properly arise for determination in relation t the causes of action that have been pleaded.
67. The pleaded causes of action rely upon various statutory provisions in the Law Reform (Misrepresentation) Act 1977 (ACT), ("the Misrepresentation Act"), the Trade Practices Act 1974 (Cth), ("the Trade Practices Act") and the Fair Trading Act 1992 (ACT), ("the Fair Trading Act").
The claims under the Law Reform (Misrepresentation) Act 1977 (ACT)
68. The Misrepresentation Act was repealed by the Civil Law (Wrongs) Act 2002 (ACT) and replaced by certain provisions in chapter 9 of the later Act. Section 151 of the later Act initially provided that ch 9 does not apply to a misrepresentation or agreement made before 30 May 1977 but, subject to that proviso, its provisions were obviously intended to have retrospective effect. As a result of subsequent amendments, ch 9 became ch 13 and s 151 was transmuted into s 226 before expiring on 1 November 2003. However, the present proceedings were commenced prior to the enactment of the later Act and it was conceded that the plaintiffs had an accrued right to maintain them as if the earlier Act had not been repealed; see s 84 of the Legislation Act 2001 (ACT). In any event, ch 13 substantially reproduces the provisions of the earlier Act relied upon by the plaintiffs and even if they had been obliged to seek leave for the statement of claim to be further amended to reflect the current provisions, the causes of action would have remained essentially unchanged.
69. The claim for rescission was based upon the provisions of s 3 of the Misrepresentation Act which was in the following terms:
If a person has entered into a contract after a misrepresentation has been made to the person, the person shall, if otherwise the person would be entitled to rescind the contract without alleging fraud, be entitled, subject to this Act, to rescind the contract notwithstanding that--(a) the misrepresentation has become a term of the contract; or
(b) the contract has been exercised; or
(c) a conveyance, transfer or other document has been registered under a law of a State or Territory as a result of the contract.
70. It should be noted that, whilst this provision effectively removes certain bars to rescission, a claimant is obliged to demonstrate that he or she would otherwise have been be entitled to rescind the contract without alleging fraud.
71. The right to damages for misrepresentation was provided by s 4 which was in the following terms:
(1) If a person enters into a contract after a misrepresentation has been made to the person by--(a) another party to the contract; or
(b) a person acting for, or on behalf of, another party to the contract; or
(c) a person who receives any direct or indirect material advantage as a result of the formation of the contract;
and as a result of so entering into the contract the person suffers loss, any person (whether or not he or she is the person by whom the misrepresentation is made) who would be liable for damages in tort in relation to the loss had the misrepresentation been made fraudulently, shall, subject to this section, be so liable, notwithstanding that the misrepresentation was not made fraudulently.
(2) It is a defence to an action under subsection (1) that--
(a) if the representation was made by the defendant--the defendant had reasonable grounds for believing, and did believe up to the time the contract was made, that the representation was true; and
(b) if the representation was made by a person acting for or on behalf of the defendant--both the defendant and that person had reasonable grounds for believing, and did believe up to the time the contract was made, that the representation was true.
72. Section 5 provided a further power towards damages in lieu of a rescission. That section was in the following terms:
(1) If in proceedings arising out of a contract it is proved that a person has rescinded, or is entitled to rescind, the contract on the ground of misrepresentation other than fraudulent misrepresentation, the court, after consideration of the consequences of the rescission, and the consequences of a declaration under this subsection, in the circumstances of the case, may, if it considers it just and equitable to do so, declare the contract to be subsisting and award the damages it considers fair and reasonable.(2) Damages may be awarded against a person under subsection (1) whether or not the person is liable for damages under section 4 (1) but--
(a) a court shall, in assessing damages under a provision of section 4 or this section, take into account any award of damages under this section or section 4, as the case requires, or of damages or compensation under any other law; and
(b) in assessing damages or compensation in proceedings under any other law relating to a contract, the court shall take into account any award of damages under this Act.
The claims under the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1992 (ACT)
73. The plaintiffs relied primarily upon s 52 of the Trade Practices Act which provides as follows:
(1) A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.(2) Nothing in the succeeding provisions of this Division shall be taken as limiting by implication the generality of subsection (1).
74. This section does not, of itself, create a cause of action. However, s 82 provides that:
(1) A person who suffers loss or damage by conduct of another person that was done in contravention of a provision of Part IV, IVA, IVB or V or section 51AC 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 6 years after the day on which the cause of action that relates to the conduct accrued..
75. The plaintiffs also rely upon ss 12 and 15 of the Fair Trading Act. Subsection 12(1) is in the following terms:
A person shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
76. Whilst this section substantially reproduces the terms of subs 52(1) of the Trade Practices Act, the ACT enactment applies to individuals as well as corporations. Furthermore, whilst the limitation period prevailing at the time of the alleged misrepresentations for actions based upon a breach of s 52 of the Commonwealth Act was three years, the limitation period for actions based upon breaches of the Fair Trading Act has always been six years.
77. The relevant portion of subs 15 provides that:
(1) A person shall not, in trade or commerce, in connection with the sale or grant, or the possible sale or grant, of an interest in land or in connection with the promotion by any means of the sale or grant of an interest in land--. . .
(b) make a false or misleading representation about--
. . .
(v) the use to which the land is capable of being put or may lawfully be put;
. . .
78. Since the enactment of the Trade Practices Act in 1974 there have been numerous cases involving the interpretation of s 52. In Brown v Jam Factory Pty Ltd [1981] FCA 35; (1981) 53 FLR 340 at 348 Fox J explained that:
Section 52(1) is a comprehensive provision of wide impact, which does not adopt the language of any common law cause of action. It does not purport to create liability at all; rather does it establish a norm of conduct, failure to observe which has consequences provided for elsewhere in the same statute, or under general law. . . In my view effect should be given to the ordinary meaning of the words used. They should not be qualified or (if it be possible) expanded, by reference to established common law principles of liability. At the same time, known concepts, such as those concerning the torts of deceit and passing off and the analyses made of them over the years, may prove helpful in deciding a case under s 52(1). It does not matter that a representation constituting "conduct" relates to a future event, or that what is said may not amount to a warranty. The view has not been taken that "conduct" necessarily involves a continuing course of conduct, or of repeated events, or of conduct known to the public or a group of the public.. . . Intention is not a necessary ingredient . . . The tort is more objective, but it is not precisely correct to apply the concept of the hypothetical reasonable man. One looks to the audience, or the relevant part of it, and, eccentricities and absurdities aside, asks whether the conduct complained of was to them misleading or deceptive; but the question is not simply whether they (or he) were (or was) misled. Whether the conduct was misleading or deceptive is a matter for the court . . . .
79. In Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44; (1982) 149 CLR 191 Gibbs CJ said at 198:
The words of s 52 require the Court to consider the nature of the conduct of the corporation against which proceedings are brought and to decide whether that conduct was, within the meaning of that section, misleading or deceptive or likely to mislead or deceive. Those words are on any view tautologous. One meaning which the words "mislead" and "deceive" share in common is "to lead into error". If the word "deceptive" in s 52 stood alone, it would be a question whether it was used in a bad sense, with a connotation of craft or overreaching, but "misleading" carries no such flavour, and the use of that word appears to render "deceptive" redundant.
80. In Re Credit Tribunal; ex parte General Motors Acceptance Corporation, Australia [1977] HCA 34; (1977) 137 CLR 545 at 561 the Court said:
"Misleading" is a word which is capable of expressing various shades of meaning, sometimes signifying that which is subjectively misleading and at other times that which is objectively misleading. Its meaning therefore is apt to be influenced, indeed decisively influenced, by the context in which it is found. Here the setting in which s 52(1) appears is shown by the headings "Pt V - Consumer Protection" and "Division 1 - Unfair Practices". In this context the prohibition contained in the sub-section emerges as an important general prohibition against a corporation in the course of trade or commerce engaged in a form of conduct, a trade practice, which is unfair. The unexpressed assumption which underlies the prohibition is that the conduct so enjoined is not conduct in which the corporation is required to engage by, or under the compulsion of, some other law enacted in the interests of consumers.
81. It has been suggested that there is nothing in s 52 that confines its operation to conduct engaged in as a result of failure to take reasonable care. A corporation which has acted honestly and reasonably may nevertheless be liable for a breach of s 52 if its conduct has, in fact, misled or deceived or is likely to mislead or deceive: see Miller's Annotated Trade Practices Act, 1974, 24th Ed, 1.52.25 at p 413.
82. In considering whether particular statements were deceptive or misleading, the court is not bound by common law authorities suggesting that laudatory statements, commonly referred to as "puffs" are not actionable. In an action for breach of s 52 the statements and the circumstances in which they were made must be assessed by reference to the terms of the legislation: Collier Constructions Pty Ltd v Foskett Pty Ltd (1990) 19 IPR 44 at 53. Nonetheless, the section does not require any conclusion that all to whom statements of a commercial nature are made should be assumed to be so naïve and gullible that they would be deceived or misled by any lapse into hyperbole, however extravagant. As Davies and Einfeld JJ said in General Newspapers Pty Ltd v Telstra Corporation (1993) 45 FCR 164 at 178:
The particular facts of the case must be considered in the light of the ordinary incidents and character of commercial behaviour.Thus, in the ordinary course of commercial dealings, a certain degree of "puffing" or exaggeration is to be expected. Indeed, puffery is part of the ordinary stuff of commerce. So also is a certain degree of "put-off", evasion or obfuscation by commercial people seeking to resist disclosing information which is confidential. Discussions in commerce are so understood.
See also Schindler Lifts Australia Pty Ltd v Deblak (1987) ALR 275 at 285 and Overlook v Foxtel [2002] NSWSC 17 at [121].
83. A statement of opinion may implicitly convey a representation that the opinion is grounded on a rational foundation by reason of superior knowledge and/or expertise: see RAIA Insurance Brokers Ltd v FAI General Insurance Co Ltd [1993] FCA 92; (1993) 41 FCR 164.
84. In the present case, of course, the plaintiffs' claims are based largely upon allegations of misrepresentation in relation to future events. Claims of this kind must be considered in the context of s 51A of the Act which provides as follows:
(1) For the purposes of this Division, where a corporation makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act) and the corporation does not have reasonable grounds for making the representation, the representation shall be taken to be misleading.(2) For the purposes of the application of subsection (1) in relation to a proceeding concerning a representation made by a corporation with respect to any future matter, the corporation shall, unless it adduces evidence to the contrary, be deemed not to have had reasonable grounds for making the representation.
(3) Subsection (1) shall be deemed not to limit by implication the meaning of a reference in this Division to a misleading representation, a representation that is misleading in a material particular or conduct that is misleading or is likely or liable to mislead.
85. A similar provision is contained in s 11 of the Fair Trading Act.
86. The mere fact that a statement as to what is likely to occur reflects a present opinion or state of mind does not prevent the statement from being constituting a representation as to the future. An accountants' projections as to future earnings have been held to involve such representations: see Cummings v Lewis (1993) ATPR (Digest) 46-103. Similarly, in Ting v Blanche [1993] FCA 524; (1993) ATPR 41-282 the Court held that a statement by an agent about the rental income likely to be achieved if the property were leased was a statement both as to the agent's present state of mind and a representation as to the future. See also Sykes v Reserve Bank of Australia [1999] FCA 746; Jacques v Cut Price Deli Pty Ltd (1993) ATPR (Digest) 46-102; and Miba Pty Ltd v Nescor Industries Group Pty Ltd (1996) ATPR 41-534.
87. However, the fact that such a statement can be so categorised does not justify treating it as a promise or warranty that the events in question will occur. Hence, the fact that predicted events have not occurred does not, of itself, justify a conclusion that the representation was misleading or deceptive: Bill Acceptance Corp Ltd v GWA Ltd (1983) 50 ALR 242 at 250; Concrete Constructions Pty Ltd v Lifevale Pty Ltd [2002] NSWSC 670; (2002) 170 FLR 290 at 343-344. In the absence of some undertaking to ensure things are done, the representation will normally be understood as conveying no more than an opinion as to what is likely to occur in the future though, as previously mentioned, it may well convey an implicit representation that the opinion is grounded on a rational foundation by reason of superior knowledge and expertise. Any consideration of whether such a representation is or is capable of being false or misleading must obviously be considered in all the circumstances of the case, including the nature of the representation, any qualifications expressed, any stated or implicit basis for the representor's opinion and the extent, if any, to which it influenced or was likely to have influenced representees having regard to other prevailing beliefs or opinions concerning the same subject matter.
88. In a number of cases it has been suggested that s 51A provides that the burden of establishing the existence of reasonable grounds is on the party making the representation: see Adelaide Petroleum NL v Poseidon Ltd (1988) ATPR 40-901; State of Western Australia v Bond Corporation Holding Ltd (1991) ATPR 41-081; Edgar v Farrow Mortgage Services Pty Ltd (in liq) (1992) ATPR 46-096 and Ting v Blanche [1993] FCA 524; (1993) 118 ALR 543. This view has recently been challenged by Emmett J in Australian Competition & Consumer Commission v Universal Sports Challenge Ltd [2002] FCA 1276 where his Honour said at [46]:
Another question concerning the effect of s 51A(2) is whether the provision does no more than require a corporation to go into evidence. That is to say, it does not ultimately reverse the onus but simply provides that the deeming takes effect unless [emphasis added] the corporation adduces some evidence to the contrary. Once such evidence is adduced, it is for the Court to make a judgment on the balance of probabilities, having regard to all the evidence, as to whether the corporation had reasonable grounds for making the representation. If an applicant elects to adduce no evidence as to that question, then the only evidence before the Court would be that adduced by the corporation. Whether that is adequate to establish that the corporation had reasonable grounds for making the representations is a matter for the Court. However, once the corporation has adduced some evidence, there is no deeming arising from s 51A(2).
89. Counsel for the defendants urged me to adopt this interpretation of the section which, as Dowsett J observed in Australian Competition & Consumer Commission v Danoz Direct Pty Ltd [2003] FCA 881 at [173] appears to be inconsistent with the intention of the legislature as stated in the Explanatory Memorandum but to accurately reflect the wording of the section. See also Australian Competition & Consumer Commission v Oceania Commercial Pty Ltd [2003] FCA 1516 and Australian Competition & Consumer Commission v Global Prepaid Communications Pty Ltd [2003] FCA 1221. Whilst the interpretation suggested by Emmett J does seem to more accurately reflect the literal meaning of the words of the section, I would be inclined to follow the preponderance of authority on this issue. However, for reasons that will become clear, the adoption of this interpretation rather than that suggested in the earlier authorities to which I have referred would have no influence on the outcome of the proceedings.
90. An omission may be misleading in some circumstances: see, for example, the observations of the Full Court of the Federal Court of Australia in Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) [1988] FCA 40; (1988) 39 FCR 546 per Lockhart J at 556-557. However, the omission must be one which, in the circumstances, is capable of misleading the offeree and that requirement is not satisfied merely by establishing that an offeree had not thought about a particular risk or risks inherent in the proposed venture. As Black CJ said in Demagogue Pty Ltd v Ramensky [1992] FCA 557; (1992) 39 FCR 31 at 32:
Silence is to be assessed as a circumstance like any other. To say this is certainly not to impose any general duty of disclosure; the question is simply whether, having regard to all the relevant circumstances, there has been conduct that is misleading or deceptive . . . To speak of "mere silence" or a duty of disclosure can divert attention from that primary question. Although "mere silence" is a convenient way of describing some fact situations, there is in truth no such thing as "mere silence" because the significance of silence always falls to be considered in the context in which it occurs. That context may or may not include facts giving rise to a reasonable expectation, in the circumstances of the case, that if particular matters exist they will be disclosed.
This passage was quoted with approval by Handley JA in Metalcorp Recyclers Pty Ltd v Metal Manufacturers Ltd [2003] NSWCA 213 at [14].
91. In Kimberley NZI Finance Ltd v Torero Pty Ltd (1989) ATPR (Digest) 46-054 at p 53, 195, French J said:
If in a particular case silence would, as a matter of fact, constitute misleading or deceptive conduct, sec 52 by virtue of its prohibition of such conduct imposes its own statutory duty to make disclosure.The cases in which silence may be so characterised are no doubt many and various and it would be dangerous to essay any principle by which they might be exhaustively defined. However, unless the circumstances are such as to give rise to the reasonable expectation that if some relevant fact exists it would be disclosed, it is difficult to see how mere silence could support the inference that that fact does not exist.
92. This passage was cited by Gummow J, with whose reasons Black CJ and Cooper J expressed agreement, in Demogogue Pty Ltd v Ramensky at 41 where his Honour added that, as the passage suggests, one may give s 52 full effect without entirely doing away with what Barton J described as "superior smartness in dealing": see W Scott, Fell & Co Ltd v Lloyd [1906] HCA 79; (1906) 4 CLR 572 at 580.
93. In Semrani v Manoun [2001] NSWCA 337 Beazley JA, with whose reasons Mason P and Ipp AJA agreed, explained in a succinct passage at [62] that for silence to be actionable, the representor must have had actual knowledge of a matter which he intentionally refrained from telling the representee in circumstances in which there was either a duty to disclose or where the representee had a reasonable expectation that such information would be disclosed to him/her.
94. Whatever the nature of the conduct, it will be misleading or deceptive only if it induces or is capable of inducing error: see Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44; (1982) 149 CLR 191 at 198; and Johnson Tiles Pty Ltd v Esso Australia Ltd (2001) ATPR 41-794 at 42,546. Furthermore, a Full Court of the Federal Court of Australia has held that, irrespective of whether conduct produces or is likely to produce confusion or misconception, it cannot, for the purposes of s 52, be categorised as misleading or deceptive unless, in all the circumstances of the case, it contains or conveys a misrepresentation: see Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177 at 202. Whether conduct amounts to a misrepresentation is a question of fact to be decided by considering what is said and done against the background of all surrounding circumstances, per Deane and Fitzgerald JJ at 202-203; see also Equity Access Pty Ltd v Westpac Banking Corporation (1990) ATPR 40-994 at 50,950.
95. In any event, any representation relied upon as contravening s 52 must have been made by or on behalf of the defendant or at least adopted by him or her rather than merely passed on with an express or implied disclaimer as to any belief in its truth or falsity: Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661 at 666. See also Argy v Blunts & Lane Cove Real Estate (1990) 26 FCR 112; John G Glass Real Estate Pty Ltd v Karawi Constructions Pty Ltd [1994] FCA 1537; (1993) ATPR 41,249 at 41,359; and Butcher v Lachlan Elder Realty Pty Ltd [2002] NSWCA 237; (2002) 55 NSWLR 558.
96. On the other hand, it is sufficient to show that the relevant conduct was engaged in by a servant or agent on the defendant's behalf. In addition to any common principles of agency that might otherwise be applicable, s 84(2) provides that:
Any conduct engaged in on behalf of a body corporate:(a) by a director, servant or agent of the body corporate within the scope of the person's actual or apparent authority; or
(b) by any other person at the direction or with the consent or agreement (whether express or implied) of a director, servant or agent of the body corporate, where the giving of the direction, consent or agreement is within the scope of the actual or apparent authority of the director, servant or agent;
shall be deemed, for the purposes of this Act, to have been engaged in also by the body corporate.
97. An identical provision is contained in s 48(2) of the Fair Trading Act.
98. This provision is of wide application and, in some respects at least, it appears to enlarge the scope of vicarious liability for the acts of agents beyond that which would be recognised at common law: Walplan Pty Ltd v Wallace [1985] FCA 479; (1986) 8 FCR 27 at 36 -38.
99. In Taco Company of Australia Inc v Taco Bell Pty Ltd, Deane and Fitzgerald JJ, at 202 - 203, suggested a number of principles to assist in determining whether or not conduct could be characterised as being misleading or deceptive:
First, it is necessary to identify the relevant section (or sections) of the public (which may be the public at large) by reference to whom the question of whether conduct is, or is likely to be, misleading or deceptive falls to be tested. . . .Second, once the relevant section of the public is established, the matter is to be considered by reference to all who come within it, "including the astute and the gullible, the intelligent and the not so intelligent, the well educated as well as the poorly educated, men and women of various ages pursuing a variety of vocations". . . .
Thirdly, evidence that some person has in fact formed an erroneous conclusion is admissible and may be persuasive but is not essential. Such evidence does not itself conclusively establish that conduct is misleading or deceptive or likely to mislead or deceive. The court must determine that question for itself. The test is objective. . . .
Finally, it is necessary to inquire why proven misconception has arisen. . . The fundamental importance of this principle is that it is only by this investigation that the evidence of those who are shown to have been led into error can be evaluated and it can be determined whether they are confused because of misleading or deceptive conduct. . . .
100. Despite the note of encouragement evident in use of the word `finally' in the last paragraph of this passage, a finding based on the application of these principles that a person has engaged in misleading or deceptive conduct does not, of itself, give rise to any entitlement to damages or other forms of relief. A plaintiff must establish a cause of action such as that provided by ss 82 which require proof that he or she has suffered loss or damage "by" the misleading or deceptive conduct in question. Whether or not any claimed losses have been caused by such conduct is a question of fact to be determined in the context of relevant facts and circumstances: see Wardley Australia Ltd v Western Australia [1992] HCA 55; (1992) 175 CLR 514 at 525 - 533.
101. Having regard to the similarity of language between the relevant sections of the Trade Practices Act and those of the Fair Trading Act, it seems clear that the principles to which I have referred also apply, albeit mutatis mutandis, to the claims under the latter enactment.
Evidentiary issues
102. Whilst numerous evidentiary rulings were made during the course of the trial, two aspects of the evidence were the subject of particular debate.
The answers to interrogatories
103. Counsel for the plaintiffs sought to rely upon answers to certain interrogatories affirmed by Mr Jeff Wade, the company secretary of Independent, ostensibly on behalf of the second and third defendants in each case. This course was opposed by Mr Foster who maintained that neither Mr Shearer nor Mr O'Brien had authorised Mr Wade to provide answers on his behalf or to verify them by affidavit.
104. Mr Gunst indicated that he was not prepared to accept these assertions from the bar table and it was necessary for evidence to be obtained from Mr Wade and the solicitor who had prepared the answers and witnessed his signature. Both were cross-examined on their affidavits and both were the subject of criticism in the written submissions filed on behalf of the plaintiffs. Nonetheless, it was conceded that their evidence could generally be accepted "except where it is in conflict with evidence from one or more of the plaintiffs' witnesses". No such conflict was suggested. I have no doubt that their evidence was both truthful and accurate.
105. Mr Wade said that he quite possibly did not read the answers before affirming them and that he had relied totally upon the solicitor for the accuracy of the answers. The solicitor confirmed that she had intended to draft answers only on behalf of Independent and was unable to explain how they came to appear under the heading "answers of the above named second and third defendants . . .". Accordingly, I accept that neither Mr Shearer nor Mr O'Brien authorised the provision of the answers.
106. The criticism of the solicitor was gratuitous and raised no issue of relevance to the outcome of the present proceedings. Furthermore, she was not the only person to have made a mistake in drafting the title of documents concerning the interrogatories. The title of the documents extracting the relevant interrogatories and answers which were prepared by the plaintiffs' solicitors and tendered by the plaintiffs' counsel referred to Mr Shearer as the third defendant in each of the three cases. As regrettable as such errors may be, even competent professional people are not infallible.
107. Counsel for the plaintiffs also relied upon an answer elicited from her in cross-examination to the effect that, if she had drawn answers to be sworn or affirmed by Mr Shearer and Mr O'Brien, they would have been the same as those that had been affirmed by Mr Wade. Answers to interrogatories are not pleadings but part of the evidence: Kabadanis v Panagiotou (1980) 30 ALR 374 at 381. Hence, it was argued, they may be tendered against the party providing them as an admission. In this case they were prepared by the solicitor for the relevant parties after conferences with them and, accordingly, are as much admissions as if sworn by them.
108. I am unable to accept this submission. Whilst the relevant principle is clear, the submission overlooks the obvious fact that neither Mr Wade nor the solicitor were authorised to make the admissions on behalf of either Mr Shearer or Mr O'Brien. The acknowledgement by the solicitor that she would have drafted similar answers for their signatures can not have the effect of ratifying otherwise unauthorised admissions or otherwise making them admissible. In the absence of any claim for privilege, statements made by Mr Shearer and Mr O'Brien to their solicitor would themselves be admissible as admissions, but in the present case it appears that the answers were based upon information drawn from a number of sources and file notes of the instructions actually obtained by Mr Shearer and Mr O'Brien were not tendered.
109. For convenience I admitted the interrogatories subject to objection, leaving it to counsel to include argument on this issue in their final submissions. For the reasons I have given, I now rule that they are inadmissible.
110. I might also mention that, whilst this issue was pursued with some vigour, there was no subsequent attempt to cite the disputed answers in support of any of the plaintiffs' claims.
The principle in Jones v Dunkel
111. Counsel for the plaintiffs also submitted that the trials of the actions were remarkable for the evidence not called by the defendants and submitted that a number of inferences should be drawn against them by reason of the principle in Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298. Whilst some authorities concerning this principle were cited, some of the more specific submissions seemed to be predicated upon an assumption that any unexplained failure to call a witness who could conceivably have given relevant evidence justified an adverse inference against the party who might have been expected to adduce his or her evidence. It also seemed to be have been assumed that such an inference need not relate to any particular issue but could have the effect of tipping the scales against that party in some generalised manner. In fact, the principle is not so expansive.
112. As the Court of Appeal explained in Widera v Reid [2002] ACTCA 3 at [21]:
The principle in Jones v Dunkel is that an unexplained failure by a party to call a witness may, in appropriate circumstances, lead to an inference that the evidence of that witness would not have assisted that party's case. See Jones v Dunkel at 308, 312 and 320-1; O'Donnell v Reichard [1975] VR 916 at 929; and Bandi v Mingot (1976) 12 ALR 551 at 559-60. However, the significance of any such failure will ultimately depend upon whether, in the circumstances, it should be inferred that the party expected to call the witness feared to do so. There may be many circumstances in which such an inference would be entirely inappropriate. For example, a party may be unaware of what the witness could say or may have reason to believe that he or she would not tell the truth. See, for example, Ho v Powell [2001] NSWCA 168; (2001) 51 NSWLR 572.
113. The failure to call a potentially relevant witness is a factor which a court may take into account if, in all the circumstances, it regards it as a relevant consideration. It cannot be a relevant consideration unless the party against whom it is sought to have the inference drawn is required to explain or contradict something: SS Pharmaceutical Co Ltd v Qantas Airways Ltd [1991] I Lloyds Rep 289 at 305; Schellenberg v Tunnel Holdings Pty Ltd [2000] HCA 18; (2000) 200 CLR 121 at [51]. However, in an appropriate case it may permit a court to more readily accept other evidence or draw inferences adverse to the party who has chosen not to call evidence to the contrary: O'Meara v Dominican Fathers [2003] ACTCA 24 at [69]. Even then, the rule does not permit a further inference that the untendered evidence would have been damaging to the party who might have been expected to call the witness and cannot be used to fill gaps in the evidence or convert conjecture and suspicion into inference: Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 at 308, 312 and 320-1; Lopes v Taylor (1970) 44 ALJR 412 at 418 and 422; and Nuhic v Rail & Road Excavations [1972] 1 NSWLR 204 at 206-7; see also O'Donnell v Reichard [1975] VR 916 at 929; and Builders Warehouse Group Ltd v Multinail Australia Pty Ltd [1998] 314 FCA (2 April 1998).
114. In the present cases, it was argued that adverse inferences should be drawn against the defendants both in relation to their failure to tender documents and to call witnesses. At least insofar as the latter contention is concerned, the submissions made on behalf of the plaintiffs often seemed to ignore the passage of time since the relevant events in 1993 and to assume that any failure to call a witness must have been attributable to fear of what he or she might say rather than his or her inability to accurately recall the terms of conversations that had occurred more than ten years earlier or to add any significant evidence to that already adduced. Furthermore, most of the submissions related to people who were not shown to have played any significant role in the relevant events.
115. First, it was submitted that there had been no adequate explanation for the defendants' failure to tender documents containing contemporaneous records or calculations used in the preparation of figures included in the brochure. The short answer to this contention is that there is no evidence that any such documents exist. As counsel for Independent have pointed out, evidence was given by Mr Tindale, who prepared the brochure, Ms Phillips, who had engaged him to do so, and Mr Hoare, from whom Mr Tindale claimed to have obtained the information and opinions on which the figures were based. Whilst there was considerable dispute about the credibility of the evidence given by these witnesses, the relevant issues can not be resolved by unfounded speculation that there may have been working papers that were not mentioned in evidence, that such papers may still exist and that one or more of the defendants may have feared to produce them. I decline to draw the suggested inference.
116. Second, it was suggested that the defendant's failure to call Mr Phillips had plainly been "tactical and opportunistic". Mr Phillips is the son of Ms Phillips and the evidence revealed that at the time of the sales in 1993 he had been a solicitor and a director of Jaywood. It was also submitted that he had played a "pivotal role" in the preparation of the brochure. That appears to overstate the effect of the evidence. He apparently provided some legal advice concerning the brochure, engaged in some negotiation with Mr Willemsen concerning the project and had discussions with Mr Tindale concerning the redevelopment and sale of units. However, it was not suggested that he had provided any of the information that formed the basis for any of the representations or projections in the brochure. More importantly, whilst the plaintiffs' counsel submitted that I should infer that his evidence would not have assisted any of the defendants, they did not seek to relate that submission to any particular issue or identify any other evidence which should more readily be accepted or inferences that should be more readily drawn by reason of the failure to call him as a witness. What seemed to be suggested was that plaintiffs' case could be bolstered by a generalised inference to the effect the defendants must have had something to hide. However, as I have mentioned, the rule in Browne v Dunn does not permit an inference that the untendered evidence would have been damaging and cannot be used to convert conjecture or suspicion into inference or to fill gaps in the evidence. I decline to draw the suggested inference.
117. Third, it was submitted that similar inferences should be drawn from the defendants' failure to call either Mr Willemsen or Mr Arnold who was Ms Phillip's "tax accountant". It was suggested that both could have given evidence about the preparation of the brochure and the figures contained in it but this suggestion seems to have been based substantially upon conjecture and there has been no further attempt to identify some other evidence which should more readily be accepted or some inference that should be more readily drawn by reason of the failure to call either of these men as a witness. Again, I decline to draw the suggested inference.
118. Fourth, it was submitted that further inferences should be drawn from the defendants' failure to call Filaria's financial controller and auditors. This submission was supported by argument about the perceived inadequacy of other evidence adduced by the defendants to explain the financial projections in the brochure. However, this argument was based substantially upon a contention that the apparent optimism reflected in the projected figures was not warranted by the past performance of the Hotel, the experience and expertise applied by Mr Hoare and/or promising trends in the market for hotel accommodation. It was not suggested that the financial controller or the auditors would have had any expertise in these areas and, whilst it was argued that figures for "other income" should not have been taken into account, the criticism of the projected figures was not based upon perceived arithmetical errors. Furthermore, whilst Ms Phillips suggested that the financial controller would have looked at the figures, she explained that it had been Mr Hoare's "call", that he had known what to expect out of a hotel and that "we would only do the percentages". It was not suggested that the extent to which returns for subsequent years were projected to be higher than those achieved by the previous owners had been based upon the financial controller's judgment or experience and any arithmetical or accounting exercise he may have undertaken was not shown to have had any real relevance. There is no evidence that the figures in question were ever audited. Accordingly, I can see no basis for any inference that any of the defendants feared to call these witnesses or that there is any other evidence that might more readily be accepted or inference that might be more readily drawn by reason of their failure to do so. There is no basis for the suggested inference.
119. Fifth, it was submitted that a Jones v Dunkel inference should be drawn by reason of the defendants' failure to tender two reports which had apparently been prepared by a valuer, Mr Powderly. In response to this submission, counsel for Independent argued that the failure to adduce evidence in rebuttal does not require acceptance of uncontradicted expert evidence. On the contrary, experts have a duty to provide the court with the necessary scientific criteria to permit the accuracy of their conclusions to be tested and an independent judgment made by the application of these criteria to the facts proved in evidence: Davie v Magistrates of Edinburgh [1953] SC 34; and Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705. Whilst that is no doubt correct, it does not follow that, in making such a judgment, a court could not take into account the fact that the party against whom the evidence has been tendered has obtained reports from another expert in the same field and declined to adduce them in evidence. An inference that the evidence of the further expert would not have assisted that party may rationally enable the court to more readily accept the conclusions of the other expert. Accordingly, I accept the submission made on behalf of the plaintiffs and draw the inference suggested.
120. Sixth, it was submitted that I should draw an inference from the defendants' failure to call Mr Hall, a solicitor whom Mr Tindale claimed had advised him that units in the Hotel could be used for normal residential purposes notwithstanding the purpose clause permitting use only as serviced apartments, and an unnamed officer of the Department of Environment and land Planning ("DELP") who had allegedly provided similar advice. In other circumstances, I might have been inclined to accept this submission. However, in the absence of any evidence to suggest that such advice would have been surprising or unexpected, I would not be prepared to assume that either of these people would remember being asked such a question and providing a perhaps `off the cuff' answer more than a decade prior to the trial. Furthermore, Mr Tindale said that he was unable to recall the name of the officer in DELP who had expressed this opinion. Hence, even if I were to infer that the evidence would not have assisted the defendants, that inference would not materially assist the plaintiffs. There is no contrary evidence which might be more readily accepted and, as I have mentioned, a Jones v Dunkel inference does not permit a further inference that the evidence of a potential witness who was not called would have been damaging to the party who might have been expected to call that person or convert conjecture and suspicion into inference. In all the circumstances, I decline to draw any such inference.
The suggested fraud
121. The case most strongly pressed by counsel for the plaintiffs in their closing submissions was that Filaria had fraudulently offered unrealistically high rentals in order to induce prospective investors to purchase the units at inflated prices. Mr Gunst submitted, in essence, that Filaria and Independent had known that such high rentals could not have been supported from the profits that were likely to have been derived from the Hotel business and would have to be subsidised. By offering rentals at that level and guaranteeing them for an extended period, the defendants were able to create an unduly favourable impression of the underlying profitability of the Hotel business and thereby obtain more money for the units than their true value.
122. Both Mr Walton and Mr Foster vehemently protested that such a case had not been pleaded and that during the course of the trial each had made it clear that his clients would not consent to any enlargement of the issues beyond those properly foreshadowed in the statement of claim. Mr Gunst rejoined that the plaintiffs had not been obliged to plead fraud as it was not an element of the causes of action upon which they relied. This was not a wholly satisfactory answer. The third amended statement of claim not only fails to allege fraud but discloses no allegation that the rents were either inflated or commercially unsustainable, let alone that any of the defendants had known that they would be unsustainable or had fixed them at an unsustainably high level for the express purpose of beguiling potential investors into buying units at inflated prices.
123. The pleadings are also devoid of any allegation that the plaintiffs had been induced to pay an inflated price for their unit. In fact, the plaintiffs' counsel repeatedly disavowed any suggestion that the value of the units at the time of purchase may have been less than the purchase price. At one point during the course of his closing submissions Mr Gunst did seek to draw a distinction between market value and real value but the distinction did not appear to have any relevance in this case because Mr Brodrick, an expert valuer called on behalf of the plaintiffs, gave evidence to the effect that the true value of the unit at the time of purchase was precisely what each of the plaintiffs had paid for each unit. Whilst I was left with reservations as to the reliability of some portions of Mr Brodrick's evidence there was no challenge to this valuation and no evidence to the contrary. It is true that the valuation took into account the rental entitlements provided by the lease back to Jaywood Pty Ltd and the level of income thereby provided would undoubtedly influence the value of the unit. Nonetheless, he valued the unit with the benefit of hindsight, knowing that the income derived from the Hotel had fallen markedly after the expiration of the lease and presumably uninfluenced by any of the predictions or projections made in the advertising brochure which had been published more than a decade before he gave evidence.
124. There was no application for leave to further amend the third amended statement of claim in order to incorporate the unpleaded allegations to which I have referred and, as counsel for the defendants fairly pointed out, the trial of the action was not conducted on the footing that their clients would have had to meet a case of that nature.
125. It is true, as Mr Gunst argued, that in considering a case for false and misleading conduct it is appropriate to take into account the whole of the conduct alleged rather than merely considering each aspect of a defendant's conduct in isolation. However, that does not mean that a plaintiff is relieved from the obligation of pleading the alleged facts with sufficient particularity to give the defendant adequate notice of the case which he or she will be required to meet and to enable the issues in the case to be adequately identified. In the present case the allegations that the rental levels were economically unsustainable, that Filaria and Independent were aware of that fact, that the rentals had been set at such levels for a fraudulent purpose, and that the plaintiffs had been induced to purchase at an inflated price were all notably absent from each successive version of the statement of claim. Hence, even if there had been evidence to support these contentions, it would have been quite unfair to permit the plaintiff to rely on such a case.
126. In fact, the evidence did not support those contentions. Counsel for the plaintiffs did not seek to adduce any evidence with a view to establishing that, in the light of the information then available, the rentals offered in 1993 were obviously unsustainable. Mr Gunst did seek to develop quite extensive arguments based upon what appeared to be records of the income and expenditure of the Hotel during the first eight months of the 1992/93 financial year in which the previous owners had operated the Hotel prior to the sale to Filaria. However, the arguments seemed to be predicated upon an assumption that any future projections should have been based solely upon these figures. There is obviously no axiom of commercial practice to the effect that those who take over businesses of limited profitability never do better than their predecessors. Furthermore, in the present case, the approach seemed to presuppose that, if those making projections as to the likely financial performance of the Hotel had approached their task honestly, they would surely have ignored such considerations as the potential for increases in profitability due to such factors as the proposed refurbishment of the Hotel premises, Filaria's extensive experience in hotel management, Mr Hoare's expertise and recent success in increasing the profitability of the nearby Canberra Rex Hotel, the fact that the Hotel would become part of an existing chain and thereby derive the benefit of referrals from other Castle hotels, and the advertising and public relations activity conducted on behalf of the chain as a whole.
127. Mr Gunst also relied upon documents that, he submitted, made it clear that Ms Phillips had devised a plan to offer subsidised rentals in order to ensure the sale of units at inflated prices. Mr Tindale had written to Ms Phillips on 27 April 1993 providing details of Independent's marketing services in respect of the Hotel that, he suggested, would include advice on the pricing for all units and advice on the "level of guaranteed return required to ensure sales". On the following day he wrote to her again suggesting that studio apartments might be sold at $120,000-$130,000 and one bedroom units for $170,000-$180,000. A document dated 10 May 1993 and apparently prepared by Ms Phillips refers to the purchase of the Hotel as "possibly the most profitable deal I have encountered" and states "The International is trading at profits of $800,000 per annum. Subsidising the guaranteed return could costs the managing partner at a realisation of $20M some $1M per annum" (sic). Ms Phillips denied being the author of this document but, whilst I do not accept Mr Gunst's submission that this denial reflected deliberate dishonesty on her part, I am satisfied on the balance of probabilities that she was the author.
128. However, these documents need to be understood in context. All were written prior to Filaria's acquisition of the Hotel and at a time when Ms Phillips was attempting to weigh the potential profits of the then proposed transaction against potential risks in the light of the limited information then available to her. There was nothing inherently improper or inappropriate about her proposal to offer potential investors a guarantee that, whatever the profitability of the Hotel proved to be, they would derive at least a minimum rate of return from their investment for a stipulated period. Furthermore, any prudent business person in her position would obviously have understood that, even if the prospects for the business seemed exceptionally bright, the provision of guarantees would inevitably involve a measure of financial risk and it was axiomatic that the magnitude of that risk would increase in correspondence with any increases in the amounts guaranteed. This would also have been clear to Mr Tindale. It was entirely reasonable for him to have offered advice as to the level of guarantee necessary to attract potential investors and it was entirely reasonable for Ms Phillips to have calculated the maximum amount of money potentially at risk by reason of the contingent liability that she was being asked to accept. Neither of these matters offer, of themselves, any basis for the inferences which Mr Gunst urged me to draw. Nor, in my opinion are such inferences justified by the mere fact that Ms Phillips subsequently agreed to the offer of increased rentals and ultimately, an extended lease back period. The provision of leases on those terms offered real and not merely illusory benefits to potential purchasers who were thereby ensured of receiving a high rate of return for an extended period, irrespective of the financial fortunes of the hotel business.
129. It would obviously be possible for unwary investors to be beguiled into paying inflated prices as a result of rental levels or guaranteed returns that bore no relationship to the underlying profitability of the business, but a plaintiff seeking to mount such a case must obviously plead and establish the elements of the relevant cause of action. Where, as in the present case, it is suggested that a defendant has acted fraudulently, it must be shown that he or she had intended to induce the relevant belief that it had been false, that he or she had done so, knowing of or at least reckless as to its falsity, and that he or she had done so for the alleged purpose. In the present case, as I have mentioned, these issues have not been raised in the pleadings and the evidence does not support the factual contentions upon which they would have had to have been based.
130. Whilst Mr Gunst submitted, in essence, that both the terms of the lease back offer and the use of the word "guaranteed" implied that the business had an underlying profitability sufficient to support the proposed rent payment, the brochure made it abundantly clear that what was being proposed was a new business venture. It stated that the International "is now no longer a hotel as such" but was being upgraded into exclusive serviced apartments to be offered for sale with a management offer to lease the units back from the owners. It explained that the management "is to be handled by Jaywood Pty Ltd" and explained that the management team "will be headed" by Mr Hoare and it "will become an outstanding performer". Furthermore, whilst it referred to average occupancy rates and average room rates for the eight months prior to 28 February 1993, it clearly stated that any projections as to the future profitability of the business were predicated upon the stated assumptions as to factors likely to impinge upon future profitability.
131. Even if the brochure had been capable of creating an impression that the level of rental might have been set at a level which was in some way related to the expected profitability of the new business, there was plainly no basis for any inference that the rentals offered for future years were based upon the profitability of the Hotel under different management during earlier years.
132. In short, the allegation of fraud was neither pleaded nor proven and the argument proferred in support of it was not only inconsistent with contention that the units were worth what the plaintiffs paid for them but apparently predicated upon a failure to recognise that in predicting future profitability the defendants were entitled to take into account the likely affect of the proposed refurbishment and the other potential benefits offered by the new management of the Hotel and its incorporation into the Castle chain.
The suggested falsity of the financial projections
133. Mr Gunst also argued that the financial projections contained in the brochure were either deliberately or inadvertently exaggerated in that they were based upon income figures which inappropriately included certain items and expenditure figures which inappropriately omitted certain items. These contentions were supported by extensive argument and analysis.
134. Again, the allegations were not pleaded and, while some of the contentions were raised in cross-examination of defence witnesses, none of the defendants acquiesced in any implicit suggestion that the scope of the proceedings should be expanded to include such issues. On the contrary, both Mr Walton and Mr Foster made it clear that their clients would not consent to any expansion of the issues beyond those defined by the pleadings. They pointed out that if such a case had been pleaded, it would have been incumbent upon the defendants to prove that there was a reasonable basis for any representations as to the future and indicated that they would have needed to have obtained particulars as to the precise nature of any alleged falsity, attempted to obtain financial records from the previous operators of the Hotel and sought expert evidence from suitably qualified accountants as to the validity of the approach undertaken. The need to respond to the allegation in this manner was implicitly acknowledged by Mr Gunst who actually invited me to draw inferences against the defendants based on the principles in Jones v Dunkel as a result of their failure to adduce evidence of that kind. The submission was made in the course of an argument which was broadly directed to all of the representations as to future returns and/or capital gains but, at least insofar as it related to this issue, it faced the obvious objection that the defendants could not be expected to adduce evidence in answer to a case not pleaded against them.
135. I would not have granted an application to further amend the pleadings in order to raise this issue, given the passage of time since the projections were prepared, the fact that the plaintiffs had already been given the opportunity to amend the pleadings on several occasions, the late stage of the trial at which the issue was first raised, the likelihood that the financial records of the earlier hotel business may no longer be available, and the delay, expense and potential prejudice which such a course would have involved. However, no such application was made and the issue remained unpleaded. Nothing occurred during the course of the trial to warrant a conclusion that the issue could fairly be raised by the plaintiffs.
136. I should, perhaps, mention that on the evidence before me, I would have found that the projections had reflected Mr Tindale's genuine belief and that they had been reasonably based.
137. Mr Tindale gave evidence that the projections had been prepared by Mr Hoare and/or extrapolated from figures which he had provided in the light of the limited records of the Hotel's profitability in the previous financial year, the performance of the nearby Canberra Rex Hotel under his management, trends in hotel occupancy rates and tariffs and his general experience and expertise in the industry.
138. Mr Gunst did not contend that Mr Hoare lacked experience or expertise but argued that I should reject Mr Tindale's account of Mr Hoare's involvement and instead conclude that Mr Tindale had substantially made up the relevant figures himself.
139. Mr Hoare gave evidence to the effect that he could not remember the conversations described by Mr Tindale and suggested that he would not have made projections going beyond the next financial year. However, the suggested conversations had occurred more than a decade earlier and I formed the impression that Mr Hoare had experienced substantial difficulty remembering what had occurred and had been largely reliant upon reconstruction. He had not spoken to Ms Phillips since 1995 or 1996 and they had not parted on good terms. He also seemed curiously defensive and his attempts to reconstruct what he would or would not have done did not seem soundly based. For example, he rejected the suggestion that he may have prepared the projections for Mr Tindale and said that he would have felt very uncomfortable about discussing such figures with him even at Ms Phillips' request, but was unable to explain why he would have been uncomfortable about complying with a direction by the principal of his employer to assist her agent by the provision of accurate information and honestly held opinions based on his experience in her company's employment.
140. In a letter dated 3 June 1993 Ms Phillips informed Mr Tindale that she had instructed Mr Hoare to prepare "1994-1996 projections" and strongly recommended that Mr Tindale discuss them directly with him. Mr Hoare agreed that he had met Mr Tindale on several occasions in about early June 1993 and, when shown notes relating to income and expenditure at the Hotel between July 1992 and February 1993 and projections for the 1993/94 financial year, conceded that they were in his handwriting. A note from Ms Phillips addressed to Messrs Willemsen and Tindale and dated 11 June 1993 was headed "Re International - Richard Tindale" and stated "Financial Analysis - OK'd by Graham Hoare. Let it roll."
141. Mr Tindale had the overall responsibility for the preparation of the report which was to be published by Independent, whilst, in contrast, Mr Hoare apparently played a much more limited role in relation to the provision of at least some projected figures and participation in some discussions concerning such figures. I think it is quite possible that Mr Hoare has substantially forgotten what he actually did at that time and that, in hindsight, he has come to see his role as having been more limited than it was. In any event, having had the opportunity of observing both men in the witness box over extended periods, I formed the distinct impression that Mr Tindale's recollection of the relevant events was more accurate. Having regard to the apparently contemporaneous documents to which I have referred, I have no doubt that the projections contained in the brochure were based upon figures provided by Mr Hoare.
142. Mr Gunst also submitted that if, as Mr Walton had suggested, Mr Hoare was unreliable, then no reliance could be placed on any financial projections he may have made. However, the fact that I regard his memory of events that occurred many years earlier as unreliable, does not justify a conclusion that the work he then undertook was unreliable. On the contrary, Mr Hoare was clearly well qualified to express opinions as to the likely profitability of the reformed Canberra International Hotel and the trends evident in projected figures are broadly consistent with the more general predictions made by Mr McCann and other promising information referred to in the brochure.
143. Mr Gunst also relied on evidence elicited from Mr Hoare in cross-examination that the figures for 1993/94 in his draft document would have really been a guess and that any attempt to look forward beyond that period would have been even more of a guess. However, I am unable to accept this evidence. Mr Hoare was clearly attempting to reconstruct what he thought he would have done or could have done rather than what he actually recalled doing and even that reconstruction was not convincing. He did not seem to be the type of person who would have irresponsibly provided, let alone subsequently confirmed, financial projections relating to the future profitability of a large hotel, units of which were to be offered for sale to the general public. Nor did he seem to be the type of person who would have been willing to mislead Mr Tindale and others by at least tacitly passing off mere guesses as reasonably based projections. I formed the distinct impression that his reconstruction was coloured by emotion. It was less clear whether this was attributable to reluctance to accept responsibility for financial projections of which he had little if any memory, anxiety about the prospect of being asked to justify them, concern that he might be blamed for any losses sustained by the plaintiffs and other unit holders, residual bitterness toward Ms Phillips or a combination of these factors. His responses to questions about what financial analysis Ms Phillips may have been referring to in the fax of 11 June 1993 certainly seemed more emphatic, if not vehement, than might have been expected. His statement, "I can't predict anything" was clearly defensive and unrealistic. I do not accept that a person of his experience in managing large hotels would have habitually faced the future relying only on guesswork rather than projections based upon sound analysis of past performance, market trends and financial analyses to guide him.
144. In fact, I found his evidence on this issue so unconvincing as to raise doubts about the honesty of his assertions. However, I ultimately concluded that defensiveness and other emotional factors coupled with the passage of time and his fading memory may have led him to some actual belief that he could have played no real part in the projections. In any event, I do not accept his evidence that he did not provide Mr Tindale with the detailed figures upon which the projections in the brochure were based or that any such figures would have been mere guesses.
145. Despite some equivocation, he did seem to remember having some confidence that if he became manager of the Hotel he could improve its performance and that there was some growth in the market for hotel accommodation at that time. There appears to have been substantial grounds for such optimism as demonstrated by his performance in improving the profitability of the Canberra Rex, the report by Mr McCann and other information in the brochure including the fact that the Capital Executive Apartments had had occupancy rates of about 70% in March and April 2003. .
146. Subsequent events demonstrated that his confidence was well founded. On 26 April 1994 he wrote to Mr Robert Phillips providing a comparison of the performance of the Hotel since he had taken over its management with that achieved under the previous management which revealed a considerable improvement. He added, "This comparison is most encouraging because the increase we have achieved is based upon no extraordinary circumstances taking place in Canberra, we were simply servicing business in a traditional manner." He agreed that at the time he wrote that letter he had thought that the future of the Hotel was "exceptionally encouraging", though he quickly added that it had been "cautious optimism". The letter also stated that "All indicators lead to the conclusion that hotels can be optimistic for some time to come" and that "With consistent high occupancies the industry will certainly push for higher rates and better yields". He expressed the opinion that 1994/95 should see the hotel "comfortably achieve an occupancy rate of 75% with a room rate of $91.92". The aversion to predictions suggested in his evidence was not evident in these statements.
147. In all the circumstances, I am satisfied that the projections were based on figures supplied by Mr Hoare and that they were reasonably based. Furthermore, Mr Hoare was not employed by any of the defendants but by another company in the Castle Group and, even if he had misled Mr Tindale, the provision of figures apparently based upon an analysis of the relevant and available information by a person with his experience and apparent ability would have been a reasonable basis for the representations which Mr Tindale made in reliance upon them.
148. In any event, I am not satisfied that any of the plaintiffs gave the projections as to the underlying profitability of the hotel business substantial consideration or that they were an effective cause of their decisions to purchase the units. The plaintiffs were clearly attracted by the guaranteed returns provided by the leases. Ms Whittle and Ms Munday readily accepted the offer of a five year lease in lieu of the three year lease suggested in the brochure even though the rental for the fourth year was to provide a return of only 9.75% rather than the 11.9% profit projected for that year and apparently neither Mr Posch nor Mr Johnston complained that the five year leases they were offered would not provide a return equal to that figure. Even if they had been concerned to see that the projected returns were sufficient to cover the agreed rentals and perhaps to provide some support for the suggested prospects of capital gains, there is nothing in their evidence to support an assumption that any minor inaccuracy in the figures would have influenced their decision to purchase their units.
149. The plaintiffs were asked, in general terms, whether they had relied on the figures on page 14 of the brochure and whether they would have entered into the transactions had they known they were false. The answers were predictable but inadequate to prove this aspect of the plaintiffs' cases. They had obviously relied on the information in the brochure, much of which they had no means of independently verifying, in the sense of believing it to be true and I have no doubt, that if they had been told that some of it was untrue, they would have been concerned about being deceived or misled and withdrawn from the proposed purchases. However, the relevant question is not whether they would have reacted in that manner to an evocative statement suggesting generalised falsity but, whether the figures contained in the brochure caused the plaintiffs to purchase the units when they would not have done so on the basis of accurate figures. Hence, even if an allegation that the projected figures had been false in some respects had been pleaded and proven, answers to such generally phrased questions could not have supported a conclusion that any inaccuracy, however minor, had been an effective cause of their decisions.
150. To take one example, if the figures for "Other Income" shown on page 14 of the brochure had not been taken into account, as Mr Gunst suggested would have been appropriate, that would have reduced the total income of the 1996/97 financial year from $4,834,729 ($4,654,188 + $180,541) by the amount of $180,541, a reduction of about 3.7%, and the profit from $2,541,580 ($4,834,729 - $2,293,149) by the same amount, a reduction of about 6.8%. If the projected "Return to Investor" had been reduced by a similar proportion, the figure of 11.9% would have had to have been adjusted to about 11.1% (11.9% less 6.8% of 11.9). None of the plaintiffs were asked whether that would have made any difference to their decision to purchase and, having regard to their evidence about the factors that had induced them to purchase and the level of rentals they were prepared to accept, I would not be prepared to draw any inference to that effect. In fact, the evidence did not, in my opinion, prove that the "Other Income" should not have been taken into account but, even if it had, that would not have been sufficient to establish any of the pleaded causes of action. It was not suggested that the plaintiffs were given a warranty that the projected figures would be achieved and the inclusion of the "Other Income" figures was not shown to have influenced their decisions to purchase the units.
151. In short, the allegations as to the falsity of the financial projections were neither pleaded nor proven and were apparently predicated upon a failure to recognise the fact that in predicting future profitability the defendants were entitled to take into account the likely affect of the proposed refurbishment and the other potential benefits offered by the new management of the Hotel and its incorporation into the Castle chain. Furthermore, even if some errors did occur, the evidence does not establish that those errors had a significant impact on the plaintiffs' decisions to purchase the units.
The pleaded allegations of misrepresentation
152. Whilst the plaintiffs may be entitled to rely upon the combined effect of several alleged misrepresentations and/or false or misleading acts or omissions, each such allegation may form the basis for a separate cause of action and, for the sake of clarity, it is appropriate to deal with them sequentially.
(i) The property could legally be used as a residential unit
153. A representation to this effect was clearly made in the brochure.
154. The purpose clause of the lease permitted the building to be used only for motel accommodation or the provision of "serviced apartments". The latter term was not defined in the lease and both Mr Walton and Mr Foster submitted that it was sufficiently broad to encompass residential use of the units by owners or long term tenants.
155. Mr Gunst submitted that this submission could not be sustained given the decision of the Full Court of the Federal Court in Bowler v Hilda Pty Ltd [2000] FCA 899; (1998) 80 FCR 191. In that case, however, neither Black CJ nor Cooper J seem to have expressly addressed this issue, though Black CJ seems to have implicitly accepted that serviced apartments could not be used for permanent residence (at 199). Heerey J said (at 202) only that "It seems at least to be accepted that a permitted use as a serviced apartment would not comprehend permanent residence." That remark was obiter and seems to reflect only his Honour's perception that counsel for the parties in the appeal had implicitly accepted this proposition. Mr Gunst also referred to remarks made by the Court of Appeal of the ACT in Chamberlain v Carlisle; Independent Group Pty Ltd & Carlisle [2003] ACTCA 10 (22 April 2003) that the promotional material for the Hotel seemed to have been at odds with the terms of the Crown lease. Whilst this remark does provide some support for Mr Gunst's contention, it was made during an introductory statement to the effect that the pleaded allegations could be arguably supported and was followed by an indication of the real issues arising on the appeal. It does not appear that any argument was addressed to this question or that their Honours were expressing any concluded view.
156. Whilst I can readily accept that a purpose clause permitting use of property as residential accommodation should not be taken to authorise the use of such a property as a serviced apartment (North Sydney Municipal Council v Sydney Serviced Apartments Pty Ltd (1990) 21 NSWLR 532), I have some difficulty in understanding why planning authorities might wish to prevent someone from occupying a serviced apartment on a long term or even permanent basis or why the use of the adjective "serviced" in a purpose clause should be taken to have such an effect. In many cases, of course, such accommodation would be quite unsuitable for a family, but the same observation could be made of studio and one bedroom apartments zoned for residential use and there is no obvious reason why a single and perhaps partially disabled person or a professional couple might not take advantage of the facilities made available in relation to such apartments. Purpose clauses are essentially directed to the nature of the use rather than the nature of the tenure under which they are occupied or the period during which they may be used. There may be some clauses which specify that a building may only be used for short term crisis or emergency accommodation but, in the absence of any such provision, it is difficult to see any justification for construing a clause which, on its face, merely limits the purpose for which a building may be used, as involving some implied limitation as to the period during which a particular occupant may use it for that purpose. The term "serviced apartments" does not, of itself, appear to justify the implication of some requirement that they be rented only by the day or week rather than occupied on a more long term basis, let alone the implication of some criterion for determining where the dividing line between short and long term occupancy might be found. I think I am entitled to take judicial notice of the fact that other types of property such as caravan parks or hotels which usually offer short term accommodation may also have a sprinkling of permanent residents and I can see no reason to imagine that, in permitting units to be used as serviced apartments, the Commonwealth was attempting to exclude that possibility. In the absence of any authority directly on the point, I would not be prepared to assume that the plaintiffs could not have lawfully occupied their own unit.
157. In any event, the representations were clearly statements of opinion as to the scope of the legal entitlements that purchasers such as the plaintiffs would be entitled to enjoy if and when the purpose clause was changed and the purchase was completed. In such circumstances, even if the opinion is found to be erroneous, it is open to a defendant sued for breach of s 4 of the Misrepresentation Act, s 52 of the Trade Practices Act or s 12 of the Fair Trading Act to establish that it had been based upon reasonable grounds. In the present case Mr Tindale, gave evidence that he had been told by Mr Allan Hill, a solicitor, that serviced apartments could be used for residential purposes and that he obtained similar advice from one of the senior officers of the Department of the Environment Land and Planning ("DELP").
158. Neither Mr Hill nor the officer from DELP was called to confirm the provision of such advice and, as I have mentioned, Mr Gunst submitted that I should draw an inference, pursuant to the rule in Jones v Dunkel, that the evidence of those people would not have assisted the defendants though I rejected that submission.
159. Whilst Mr Gunst mounted a sustained attack on Mr Tindale's credit, I formed the view that he was an entirely honest witness and saw no reason to doubt the credibility of his account of making the enquiries and receiving advice consistent with the representations as to the permissible use of the units. Bowler v Hilda was not decided until 1998, some five years after the conversations in question, and Mr Tindale's evidence of receiving advice contrary to the assumption upon which that case was apparently conducted does not seem inherently implausible. In any event, I accept his evidence concerning this issue.
160. I find that Mr Tindale had a reasonable basis for the representation and that he believed up until the contract was made that it was true. Mr Tindale was a director of Independent and at least in the circumstances of this case it follows that Independent should also be taken to have had a reasonable basis for the representation and to have believed up until the contract was made that it was true.
161. The position of Filaria is somewhat less clear since Ms Phillips did not give evidence directly addressing her belief about this issue or the grounds upon which it may have been based. However, this seems to have been her first venture involving serviced apartments, she had entrusted Independent with the marketing of the units after meeting Mr Tindale and learning of his extensive experience in the Canberra real estate industry and she had apparently approved the release of the brochure only after receiving a fax from him confirming that Mr Hoare had confirmed the accuracy of the financial figures. I see no reason to suspect that the failure to raise this issue with her in the course of her evidence had not been attributable to mere oversight and there is no apparent reason for her to have doubted the accuracy of the representation contained in the brochure. Having regard to the overall thrust of her evidence, I think it is reasonable to infer that she believed it and that she did so because she had trusted Mr Tindale to ensure that the contents of the brochure were accurate.
162. I accept the evidence of Mr Shearer and Mr O'Brien to the effect that they believed in the truth of the representations at all relevant times and also accept that the statement made in the brochure issued by Independent, which was their employer, constituted reasonable grounds for that belief. Mr Gunst argued that, since they had made the representations on behalf of Independent and hence on behalf of Filaria, the defence provided by s 4(2) of the Misrepresentation Act would only be available if they were to establish that both Independent and Filaria also held the requisite belief on reasonable grounds up until the contract was made. I do not accept that submission. It is clear from paragraph 4(2)(a) that if the representation was made by the defendant personally, then it is the defendant who must have held the requisite belief on reasonable grounds until the making of the contract. Paragraph 4(2)(b) applies only when the representation has been made by a person acting for or on behalf of the defendant. Hence, Independent would be able to invoke the defence only by proving that both it and the employee who made the representation on its behalf on the relevant occasion held the requisite belief on reasonable grounds throughout the relevant period. Furthermore, since Independent was the agent for Filaria, it would be incumbent upon the latter to prove that it, Independent and the relevant employees of Independent all held such a belief on reasonable grounds throughout the relevant period. However, whilst the section may make defendants liable for representations made by their servants or agents without reasonable belief in their truth, the converse is not true. The section does not make an agent who has acted in good faith and on reasonable grounds liable merely because a principal had not shared his or her belief or been privy to the reasonable grounds upon which it had been based.
163. I should also mention that it is clear from Ms Whittle's evidence that she was not induced to enter into the contract by the prospect of being able to use the property as a residential unit. It is true that she agreed with a leading question suggesting that she had "relied" on the representation, but I did not take this answer to involve an assertion that she had been induced to enter into the transaction by the representation but rather that she had accepted what she was told and had not sought independent verification of it. On the contrary, she made it perfectly plain that the unit had been bought as an investment and that, whilst she had understood that she had had the option of living in it, she had nonetheless decided to lease it so that she could take the benefit of the guaranteed rental referred to in the brochure. Whilst it is, of course, conceivable that a person leasing a unit for a period of years might nonetheless draw some comfort from the knowledge that he or she could subsequently occupy the unit or lease it privately to others on a long-term basis, Ms Whittle did not suggest that she had considered either possibility, let alone that either had been a decisive factor. She bought the property as an investment. It is a small studio unit consisting of a single room with an en suite bathroom. Whatever may have been the position in relation to some of the suites in the Hotel, it is difficult to imagine that either Ms Whittle or Ms Munday would have anticipated living in a unit of this kind as a residential unit.
164. Similarly, I do not accept that the representation had any significant influence on Mr Posch's decision to purchase the units. He conceded that he had had no intention of living in the units and whilst he did claim that "the thought crossed my mind about letting my children live there", they were only six and eight years old at the time. He also conceded that "the main thing I looked at was the capital gains and they seemed very attractive".
165. Mr Johnston gave evidence that he had discussed with Mr O'Brien the possibility of selling their house and living in it when he and his wife were older but did not suggest that this prospect had been a factor in his decision to purchase the unit. He had clearly purchased it as an investment and intended that it be used as a serviced apartment and I do not accept that this representation was causally related to his decision.
166. None of the plaintiffs claimed to have purchased their unit or units with the intention of entering into normal tenancy arrangements or in contemplation of any such possibility.
167. Furthermore, Mr Brodrick confirmed that the truth or falsity of this representation would not have affected the value of any of the units at the time of purchase.
(ii) The property could legally be used by the plaintiffs for their own purposes
168. While I accept that a representation of this kind was made, it is by no means clear what meaning would have been conveyed to the relevant section of the public or what the plaintiffs understood it to mean. If it had been construed to mean that potential investors would be entitled to occupy the unit as a residence then it would have added nothing to the more specific representation that I have already dealt with. If, on the other hand, it was construed to mean that they were not obliged to lease the property to Jaywood and would have been at liberty to make some other arrangement in relation to management of the unit, then it has not been shown to be misleading or deceptive. In any event, the evidence does not establish that it had any real influence on the plaintiffs' decisions to purchase their units.
(iii) There was flexibility of use of the units
169. Again, I accept that this representation was made but I am not satisfied that it was misleading or deceptive. Potential purchasers would presumably have understood this representation to mean only that they would be free to choose whether to participate in the lease back offer, use the unit for their own purposes, such as by means of a normal tenancy arrangement, or occupy it themselves or, even perhaps, that they would be free to adopt a different course once any initial lease had expired. In any event, the evidence does not establish that it had any real influence on the plaintiffs' decisions to purchase their units.
(iv) The acquisition of each property enabled each plaintiff to take advantage of the strongest market at the time
170. As counsel for the defendants pointed out, this allegation seems to be based upon a misunderstanding as to the effect of a statement made in the brochure. After asserting that an owner would have the advantage of choice and referring to various possible uses of the unit, the brochure stated: "This flexibility allows owners to take advantage of the strongest market at the time" (emphasis added). It was not the acquisition of the property that was said to permit the advantage. The reference to the strongest market at the time did not involve any representation as to the market for units of this kind in 1993. It meant merely that investors would be able to make decisions about whether to lease the unit, continue to use it as a serviced apartment or use it for some other purpose and that the ongoing entitlement to make choices of that nature would enable them to take advantage of whichever market proved to be the strongest at the time the decisions were made. None of the plaintiffs suggested that they had understood the statement to have any other meaning.
(v) The acquisition of each property was a unique investment in one of Canberra's most famous establishments, to the benefit of each plaintiff
171. This representation apparently relates to the statement in the brochure that "rarely do we have the opportunity to offer such a unique investment in one of Canberra's most famous establishments" and other statements as to the potential benefits of purchasing units in the Hotel. In the context in which it was made, I think that the quoted statement was a mere "puff' but, in any event, the plaintiffs did not establish that it was false, misleading or deceptive.
172. When Mr Brodrick was requested to advise whether the representation was true he initially provided a draft report dated 12 February 2003 in which he responded with the word, "Yes". The plaintiffs' solicitors then wrote to him generally remonstrating with him about opinions expressed in the draft report and suggesting that it had been inappropriate to describe the investment as unique and that the Hotel was not as famous as the Hyatt or Lakeside hotels. Mr Brodrick then provided a further report amending the answer to "Yes to unique investment and No to one of Canberra's most famous establishments".
173. Despite Mr Brodrick's ultimate acquiescence in the suggestion by the plaintiffs' solicitor that the Hotel was not one of Canberra's most famous establishments, I do not accept that the description was either misleading or deceptive. Fame, like beauty, may to some extent lie in the eye of the beholder but I do not accept that a representation that this Hotel was one of the most famous establishments in Canberra necessarily suggested that it was one of two best known. I see no reason to suppose that the representation would have been misleading to potential investors and the evidence does not establish that it was inaccurate.
174. Furthermore, the plaintiffs had some knowledge of the Hotel themselves and none suggested that this representation was a contributing factor to their decision to purchase their unit or units.
(vi) The acquisition of each property enabled each plaintiff to participate in one of the strongest growth industries in Canberra
175. Again, I think that this statement was a mere "puff" but, in any event, there was no evidence to suggest that this representation was false. Mr Brodrick also dealt with this representation in his draft report of 12 February 2003 again answering an enquiry as to the truth of the representation with the single word, "Yes". After receiving the letter from the plaintiffs' solicitors he modified this answer only by adding the words "at the time of release". Hence, the plaintiffs have not only failed to prove the falsity of this representation but affirmatively established its truth.
176. In any event, it was a representation as to a contingent future event, namely, that if and when the plaintiffs purchased a unit they would then be able to participate in one of the strongest industries in Canberra. There were reasonable grounds for such a representation. The portions of the report of Mr Noel McCann that were quoted in the brochure and the statements as to trends in occupancy levels, the accuracy of which was not questioned by Mr Brodrick or any other witness, provided ample grounds for asserting that the provision of accommodation of this kind constituted a strong industry in Canberra. It may be true that Mr McCann did not attempt any comparison between the hotel industry and other industries such as retail shops or light engineering but, insofar as the representation may have implied such a comparison, it was obviously a mere "puff" and the plaintiffs did not suggest that they had understood the representation in that light or that they had been induced to enter into the contract by reason of a belief that the hotel industry was strong compared to others.
(vii) The arrangement between the plaintiffs and their tenant, Jaywood was of long term benefit to the plaintiffs
177. No explicit representation to this effect seems to have been made. Insofar as any representation to that general effect could be implied from the other statements in the brochure and/or the oral statements of Mr Shearer or Mr O'Brien, it would obviously have been limited to the period during which Jaywood remained a tenant of the plaintiffs. Yet it is common ground that throughout the period of the tenancy they received rentals of 9% to 10% of the purchase price per annum and that such returns were substantially greater than those that might have been expected from other property investments at that time. It was clearly of long term benefit to the plaintiffs to have received those returns over that extended period.
178. I do not understand the plaintiffs to have been contending that there was some representation to the effect that, even when the lease to Jaywood had concluded, they would derive some continuing benefit from their previous relationship with the company. There was clearly no representation to that effect and the plaintiffs did not suggest that they had acted upon such a belief.
(viii) Ongoing returns of over 11% per annum on the purchase price of each property or alternatively substantial ongoing returns were available to each plaintiff
179. The allegation of a representation that ongoing returns of over 11% per annum were available to the plaintiffs appears to have been based upon the figure of 11.9% which the last table in the brochure included as the projected rate of return for the 1996/97 financial year, albeit in the context of the stated assumptions. In fact, the accuracy of any projection as to what return the plaintiffs might have derived from their unit in the year following the expiration of the proposed three year lease became substantially irrelevant once the plaintiffs had accepted the offer of a five year lease which stipulated the returns payable to them during the fourth and fifth years. In maintaining the pleaded allegations the arguments of the plaintiffs' counsel seems to have been predicated on an assumption that the representation implicit in that figure could be notionally transposed from the 1996/97 financial year to the 1998/99 financial year and thereafter. I can see no rational basis upon which such an assumption could be supported. Each of the plaintiffs entered into leases involving fixed rentals for periods of five years expiring on various dates in the 1998/99 financial year and none claimed to have been told that they could expect returns in excess of 11% in that or subsequent financial years.
180. Furthermore, even the initial representation was clearly qualified by reference to the assumptions to which I have referred and the plaintiffs seem to have readily accepted the offer of the five year lease notwithstanding the fact that it offered a return of only 9.75% during the 1996/97 financial year rather than the 11.9% return projected in the table. There is no basis for any allegation that one or more of the defendants made a representation that returns of more than 11% per annum would be available to the plaintiffs after the conclusion of the five year lease or for any finding that the plaintiffs were unaware of the fact that the earlier projections from the 1996/97 financial year had been based upon the stated assumptions.
181. A representation to the effect of the alternative formulation that substantial ongoing returns were available to the plaintiffs was clearly implicit in the various statements made in the brochure but there is no reason to regard it as having been false, misleading or deceptive. The plaintiffs received substantial ongoing returns for a period of five years. The projections concerning the supply and demand of hotel accommodation generally extended only until December 1995 and the projections for the likely performance of the Hotel extended only until the 1996/97 financial year. At most, the brochure implied that there were good prospects of obtaining a substantial return from the property for some unspecified period after the then contemplated three year lease had expired. The plaintiffs' counsel seemed to suggest that this implied representation extended to an unqualified assurance that substantial returns would be available to the plaintiffs throughout the entire period that they owned the unit. I do not accept that such an implication can validly be drawn. It was clear from the brochure that, once the lease had expired, future returns on the unit would be dependent upon the profitability of the Hotel business and whilst the projections extended into the year after the three year leases would have expired, they were heavily qualified by stated assumptions and the notes of caution sounded in the disclaimer. The brochure did not suggest, and the plaintiffs did not claim to have understood, that there was any representation to the effect that this Hotel would be immune from the impact of fluctuations in the level of tourism, the emergence of new competitors, unexpected increases in costs or any of the other factors that might influence the profitability of any hotel business.
182. Insofar as there was a representation to the effect that there were good prospects of substantial long term returns on the investment for potential purchasers such as the plaintiffs, that representation has not been shown to be false, misleading or deceptive and insofar as it may be construed as a representation to a future matter there were clearly reasonable grounds for making it. That is evident from the statements attributed to Mr McCann in the brochure and from the other facts set out under the heading "A.C.T TOURIST INDUSTRY - "WHY INVEST?". As previously mentioned, no criticism was offered of the statements attributed to Mr McCann. The only statements set out under that heading that were the subject of any real challenge by counsel for the plaintiffs were those suggesting that it would be a reasonable assumption that the capital gains derived from units in the Hotel would at least match the capital gains achieved from the sale of units in the Capital Motor Inn and that returns after the then proposed three year lease would have increased significantly. Again, insofar as these statements involved representations as to the reasonableness of the relevant assumption or prediction, they have not been shown to be false, misleading or deceptive and, insofar as they may have involved representations as to future matters, there were clearly reasonable grounds for making them.
(viiiA) The terms of the contract included a term that the unit entitlements of all units were to be reasonable, having regard to the respective values of the units in the Unit Plan
183. There is no evidence that a representation to this effect was ever made. Nor is there any evidence that the plaintiffs' entitlements under the unit plan were not reasonable. Understandably, this allegation was not pressed in argument.
(ix) The acquisition of the property represented one of the most lucrative real estate opportunities on offer
184. There is no evidence that this representation was ever made. Counsel for the plaintiffs did not directly address this issue during the course of their submissions and, whilst the particulars assert that it was made in writing, I have been unable to find any passage to this effect. I can only presume that the plaintiffs' case on this issue was intended to be dependent upon a contention that the representation arose inferentially from one or more of the statements contained in the brochure. In fact, I am not satisfied that the brochure conveyed such an implied representation or, if it did, that it added any material content to the specific representations that it did contain.
185. In any event, it is clear that the plaintiffs were offered a rate of return ranging from 9% in the year following the acquisition of their unit to 10% in the last year of the lease and that these returns were much more "lucrative" than those obtainable from other residential units at the time. There is no other evidence to suggest that such a representation would have been false, or that the making of it would have constituted misleading or deceptive conduct by any of the defendants.
186. Furthermore, none of the plaintiffs suggested that they had understood the brochure to convey such a representation or that any belief formed as a consequence had any causal effect upon their decision to purchase the unit.
(x) There was an extraordinary performance of the property from an investment perspective
187. Again, it seems clear that an express representation to this effect was never made and the allegation appears to reflect an unwarranted gloss upon the more specific representations made in the brochure.
188. Whilst a representation may, of course, be conveyed by inference, the pleading of generalised expressions devised by the plaintiffs' legal advisors as a means of characterising or describing the claimed effect of specific representations lend little, if any, substance to a plaintiff's claim. Whatever hyperbole the pleadings may contain, it will still be necessary to closely examine the substance of what was said to determine whether any misrepresentation or misleading or deceptive conduct has been established. I am not satisfied the misrepresentation was made or that, if it was, it added anything to the specific representations contained in the brochure. Nor am I satisfied that, if made, it was false or that the making of it constituted misleading or deceptive conduct.
(xi) The terms of the contract included a term that the agreement contained the whole of the agreement between each plaintiff and Filaria, and that no other document existed that related to the use of the property, or the rights of each plaintiff as a purchaser
189. This allegation is inherently misconceived.
190. First, whilst the contracts for the sale of the units did contain such a term, there was no antecedent representation to the effect that such a term would be included in the contracts and the plaintiffs did not contend that this term had any influence on their decision.
191. Second, the clause was a contractual warranty rather than a representation of fact.
192. Third, even if the words of the contractual warranty could properly be characterised as involving a representation of fact, it was not one made by Independent, Mr Shearer or Mr O'Brien, none of whom were parties to the contract or even shown to have been aware that they contained such a term.
193. Fourth, it has not been suggested that the agreement between the plaintiffs and Filaria extended beyond the written contract.
194. Fifth, the covenant that no other document existed that related to the use of the property, if taken to involve a representation of fact, obviously fell to be construed in the context of any prevailing legislation and the other provisions of the contract. Having regard to the preceding and following words, the clause was clearly intended to provide a warranty to the effect that the plaintiffs' use of the property and the exercise of their other rights as purchasers would not be restricted or affected by any easement, trust, deed or other document. The suggestion that any such representation was false was based only upon a contention that the trust deed between Ms Phillips and Mr Willemsen was a document relating to the use of the property and/or affecting the plaintiffs' rights as purchasers. In fact, there was nothing in that deed which limited or purported to limit the use of any of the units that the plaintiffs had purchased or their rights as purchasers.
195. Sixth, the suggestion that this term, taken in conjunction with the special condition concerning the ROF units, involved an implied representation that a majority of unit holders would be entitled to have the ROF units transferred to them for the sum of $60,000 appears to be based upon misinterpretations of both the term and the special condition. To the extent to which the special condition conveyed any representation, it did so only by the words that created the contingent rights which the plaintiffs enjoyed in conjunction with other unit holders and the agreements containing this condition had been forwarded to the plaintiffs' respective solicitors who were presumably able to provide legal advice as to its effect. Terms of an agreement are, of course, interpreted by reference to the apparent intention of the parties but even if it is theoretically possible for words of contracts to mislead or deceive parties as to their apparent intention, I am not satisfied that this is such a case. There was nothing in the contract to suggest that contingent right could be exercised by majority resolution.
196. Furthermore, it appears that none of the plaintiffs were aware of any prospect of obtaining any entitlement in relation to the ROF units until well after they had made a firm decision to purchase their units and that the additional benefits conferred by this special condition, however construed, came as an unanticipated bonus rather than a factor that had influenced their decision.
(xii) The property would earn an excellent return to each plaintiffs
197. In the context of the more precise representations made in the brochure I am inclined to regard this statement as a mere "puff" but, in any event, it involved nothing more than an expression of opinion as to the potential earnings that the plaintiffs and other potential purchasers would be able to derive in the future. Having regard to the lease back offer and generally buoyant state of the hotel industry, there were plainly reasonable grounds for such a representation. Indeed, Mr Brodrick expressly agreed that the units had provided an excellent return on investment during the period covered by the leases. The written and verbal statements made to the plaintiffs did not extend to any representation that they would derive an excellent return forever, irrespective of market fluctuations or supervening events, and I do not accept that any of the plaintiffs believed that to be the case.
(xiii) A substantial increase in value or alternatively an increase in value was available to each plaintiff on the purchase price of each property after the expiration of the lease back period to Jaywood
198. Whilst there were some general representations to the effect that potential purchasers could expect to realise a capital gain on their investments, there were clearly reasonable grounds for such expectations.
199. The more specific allegation that such a capital gain would be achieved after the expiration of the lease back period to Jaywood seems to be based upon material in the brochure predicting a capital gain and offering projections as to the likely value of the units in the 1996/97 financial year. The plaintiffs' counsel again presented arguments apparently predicated upon a notional transposition of this representation into the 1998/99 financial year when the five year lease expired. However, as I have mentioned, the financial projections in the brochure were sustained, even on the stated assumptions, only until the 1996/97 financial year and it was not suggested that the return to investors would remain uninfluenced by unexpected downturns in the hotel industry.
The pleaded allegations of omissions
200. Some of the submissions made on behalf of the plaintiffs seemed to imply that an offeror not only has a duty to forsake any advantages gained due to "superior smartness in dealing" by disclosing any known disadvantages to the offeree but to attempt to divine any conceivable risk of disadvantages arising by reason of supervening events occurring in the future and to disclose those risks to the offeree. However, the statutory provisions relied upon by the plaintiffs do not have the effect of wholly abrogating the principle of caveat emptor, making every contract uberrimae fidei or otherwise requiring every offeror to anticipate and explain every conceivable business risk to every offeree. Such a proposition would not only require an expansion of the words "misleading" and/or "deceptive" beyond that attributed to them in either decided cases or English dictionaries, but would cause chaos in the commercial and financial sectors of society. To take but one example, it would presumably mean that stockbrokers constantly contravened s 52 by facilitating share transactions without fully investigating every factor likely to impinge upon the earnings of each company and the future value of its shares. Section 52 does not create a duty to investigate and a failure to disclose even known facts will only constitute a breach of s 52 if it is conduct that is or is likely to be misleading or deceptive. Furthermore, as French J suggested in Kimberley NZI Finance Ltd v Torero Pty Ltd, it is difficult to see how mere silence could mislead or deceive a person about the existence of some fact unless the circumstances were such as to create a reasonable expectation that if such a fact existed it would be disclosed.
201. In the present case there are a number of allegations of omissions said to constitute misleading or deceptive conduct.
(a) The terms of a prospectus that set out the conditions pursuant to which each plaintiff was with others jointly to receive income and pay expenses in respect of the property
202. Whilst it is clear from clause 17.2 of the lease that the lessee, Jaywood, had agreed to prepare a prospectus within twelve months of the date of the sub lease, there is no evidence that that document was in existence prior to the plaintiffs purchasing the unit or that any of the defendants were in a position to predict what the terms might be. Jaywood was not, of course, a party to the proceedings.
203. During final submissions, counsel for the plaintiffs put the matter differently, arguing that their clients had been deprived of the additional information required in a prospectus. This proposition may be readily dismissed. It was not been pleaded, no attempt was made to establish that Filaria had had any obligation to produce a prospectus prior to the relevant sales, the allegedly required information was not identified and it was not shown that its provision would have had any influence on any of the plaintiffs' decisions.
(b) The existence of the terms of a trust deed dated 16 August 1993 to which Filaria was a party
204. As previously mentioned, the existence of the trust deed did not affect the rights of the plaintiffs save insofar as it contained provisions dealing with the ROF units that were substantially the same as those contained in each of the contracts for the sale of each of the unitsto the plaintiffs. The plaintiffs had agreed to purchase the units without any expectation that they would acquire such rights.
(c) The risk of problems concerning the management and operation of the Canberra International Hotel of which hotel each property formed part
205. Any problems concerning the management of the operation of the Hotel did not emerge until about five years after the plaintiffs' purchased their units and there is no evidence that anyone had foreseen these problems or could reasonably have done so. Nor was there any basis for a contention that anyone in the position of the plaintiffs could reasonably have expected the defendants to provide a list of the risks that could conceivably arise in the operation of a hotel business.
(d) The risk of problems concerning the servicing of each property
206. It is not clear what is meant by this formulation but, on the assumption that it relates to the deprivation of services and facilities as a consequence of the management problems encountered in about 1998, the same considerations apply.
(e) The fact that each property could only be used as an income earning property if it was serviced by the plaintiffs or by third parties
207. As previously mentioned, I do not accept that the property could only be used as a serviced apartment but, in any event, the plaintiffs did not purchase their units with the intention of using them in any other manner.
(f) The provisions of the Corporations Law concerning the requirement to issue a prospectus had not been observed
208. It has not been established in the course of these proceedings that there was any breach of the Corporations Law. Counsel for the plaintiffs asserted that I had previously made findings of such a breach in Cvetanoski v Filaria Pty Ltd [2002] ACTSC 103; (2002) 171 FLR 194. However, that was a case involving different plaintiffs suing in somewhat different circumstances and, in any event, I did not make any finding to the effect that purchasers of units in the Hotel acquired "prescribed interests" as defined in the Act and that a prospectus was therefore required.
(g) Filaria owned or claimed ownership of the fixtures, fittings and contents of the ROF Units, (restaurant, reception area, office, functions rooms and shop) and the contents of the common property
209. As previously mentioned the plaintiffs conceded in cross-examination that they had not understood that they or other purchasers were acquiring any interest in the ROF units or in any of the fixtures, fittings or contents of such units. The possibility of acquiring any such interest, albeit in common with other unit holders, was raised only in the contracts for sale and the nature and extent of the plaintiffs' rights were defined by the relevant clause. As mentioned earlier, the acquisition of any entitlement seems to have been an unexpected bonus rather than an expectation which had been a factor in the plaintiffs decision to purchase the unit.
(h) The terms of a joint venture deed dated 25 May 1993 including terms that Filaria expected the return from the rental of units in the Hotel (including the property) to be 2% per annum less than that to be paid by Jaywood for the lease back period, and that assistance in funding the shortfall was provided
210. The joint venture deed does not include terms suggesting that Filaria expected such a shortfall and, as Mr Walton pointed out, the allegation seems to have been based upon a misinterpretation of a clause in the deed which suggests that after payment of body corporate levy and rates and taxes, the net return to the unit holder would be approximately 2% per annum less than the gross rental payable in relation to the units. The deed did contemplate that funding might be required for a short fall between the income of the Hotel and the amounts required to be paid as rent to unit holders but, as I have mentioned, that was contained in a deed between joint venturers, only one of whom was agreeing to accept liability for an as yet unascertainable rental liability, though any profits or losses on the venture were to be shared on a 40/60 basis between Ms Phillips and Mr Willemsen.
211. Furthermore, the deed was entered into on the same day as the contract for purchase of the Hotel. No financial projections had been prepared at that time and the parties to the deed would presumably have had no reliable means of estimating how long it might take to revive the flagging fortunes of the hotel business and hence how long it might be before the income was sufficient to meet the costs of rent. It was obviously prudent to make provision for any loss that might be sustained by Filaria in the interim to be equitably shared by the joint venturers and the fact that their agreement contained a clause to that effect provides no rational ground for impugning the integrity of their conduct or for any implication that they must have known that the profitability of the Hotel would be less than that subsequently suggested by the brochure.
212. In these circumstances, I am unable to see any basis for the contention that the plaintiffs could have had a reasonable expectation that if such a deed had existed it would have been disclosed. None of the plaintiffs claimed to have had such an expectation and, as I have previously mentioned, they were all obviously well aware that the income derived from the business could fluctuate and saw the guaranteed income offered by the lease back arrangement as the dominant factor in their decision to purchase.
(i) Filaria would block transfer of ownership of the ROF Units to purchasers of units for the $60,000 referred to in the contract
213. There is no evidence to suggest that prior to the plaintiffs' purchases of their units that Filaria had any intention of blocking any transfer of the ownership of the ROF units. In any event, as I have already mentioned, the allegation seems to have been based upon a misconstruction of the relevant special condition in the contract and, since the plaintiffs did not claim to have had any expectation of acquiring any interest in the ROF units at the time they decided to purchase their unit, there is no basis for any inference that they had a reasonable expectation that if Filaria had had such an intention it would have been disclosed.
The claimed relief
214. In their claims for rescission and/or damages, the plaintiffs contended that they should be placed in the position they would have enjoyed had they never purchased their units. Should rescission be possible, the full purchase price and costs of purchase should be repaid together with damages for the amount that would otherwise have been earned by the use of the money or interest less only the total amount of rent and other income received. Damages should otherwise be assessed by reference to the difference between the purchase price and the current value together with the costs of purchase and the amount that would otherwise have been earned by the use of the money or interest less the total amount of rent and other income received. In essence, they seek a complete indemnity for all losses sustained on their investments.
215. On the other hand, as I have mentioned, counsel for the defendants repeatedly made the point that, even if the plaintiffs had been able to establish that some aspect of the conduct of one or more of the defendants had involved some misrepresentation or had otherwise been misleading or deceptive, the claims should be dismissed because the evidence did not reveal that the plaintiffs had suffered any compensable loss. Prima facie, a person who is induced to purchase property as a consequence of misrepresentation or other tortious conduct is entitled to damages equal to the difference between the purchase price and the true value of the property at the time of purchase: Potts v Miller [1940] HCA 43; (1940) 64 CLR 282. The true value is, of course, determined with the benefit of hindsight and in the context of the true facts. Hence, the likelihood that others, equally ignorant of the truth, may have been willing to pay as much as the plaintiff is not a material consideration. However, the appropriate measure of damages does not ebb and flow with movements in valuation between the time of the purchase and the time of trial.
Rescission
216. Rescission is essentially an equitable remedy and as Dunn LJ observed in O'Sullivan v Management Agency & Music Ltd [1985] QB 428 at 4568, even if adequate grounds for such a remedy have otherwise been established, a contract may be set aside in "equity only if it is possible to achieve what is practically just by granting rescission and restitution together with orders for accounts". In Alati v Kruger [1955] HCA 64; (1955) 94 CLR 216 at 223-224 Dixon CJ, Webb, Kitto and Taylor JJ explained that equity has "always regarded as valid the disaffirmance of a contract induced by fraud even though precise restitutio in integrum is not possible, if the situation is such that, by the exercise of its powers, including the power to take accounts of profits and to direct inquiries as to allowances proper to be made for deterioration, it can do what is practically just between the parties, and by so doing restore them substantially to the status quo." The statement was quoted by Deane, Dawson, Toohey, Gaudron and McHugh JJ in Vadasz v Pioneer Concrete (SA) Pty Ltd [1995] HCA 14; (1995) 184 CLR 102 at 112 who added at 115 that the court must look at what is practically just for both parties.
217. Mr Gunst submitted that in considering whether to order rescission pursuant to s 87 of the Trade Practices Act, courts were not subject to what he described as the inhibitions reflected in such cases as Alati v Kruger. However, as Burchett, Kiefel and Hely JJ said in Anema E Core Pty Ltd v Aromas Pty Ltd [1999] FCA 904 at [36]:
Whilst a flexible approach to remedies is permitted by s 87(2) Trade Practices Act 1974 (see Myers v Transpacific Pastoral Co Pty Ltd (1986) ATPR 40-673), equitable principles applicable to relief such as rescission furnish in general a guide to the discretion given by s 87: Munchies Management Pty Ltd v Belperio (1988) 58 FCR 274, 84 ALR 700, at 714. As Gummow J said in Marks v GIO Australia Holdings Ltd [1998] HCA 69; (1998) 158 ALR 333 at 364 (with the agreement of Gaudron J at 339, 340-341): "the principles regulating the administration of equitable remedies afford guidance for, but do not dictate, the exercise of the statutory discretion conferred by s 87". See also Akron Securities Ltd v Iliffe (1997) 143 ALR 457 at 471-473, per Mason P. Conduct amounting to affirmation and difficulties concerning proper restitution may result in disentitlement to rescission, as cases such as Munchies v Belperio; Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) [1988] FCA 40; (1988) 39 FCR 546, 568; [1988] FCA 40; 79 ALR 83, 106 show. So far as concerns allegations of fraud, the former case shows that ... the position is not different.
218. Ms Whittle and Ms Munday have since sold their unit but Mr Gunst submitted that Mr Posch and Mr Johston were entitled to orders for rescission of the contracts for the purchase of their units. I am unable to accept that submission. On the contrary, even if I had found that one or more of the plaintiffs had been induced to enter into the contracts of purchase by reason of misrepresentation or conduct that was otherwise misleading or deceptive, I would have concluded that rescission was clearly an inappropriate remedy.
219. No exercise of judicial power, including the power to take accounts of profits and to direct inquiries as the allowances that should properly be made for deterioration could restore the parties substantially to the status quo or permit rescission on terms that would be practically just. Mr Posch has owned his two units since November 1993 and Mr Johnston has owned his unit since April 1994. Both men have not only received income from the units but tax deductions as a consequence of their investment in them. The dramatic decline in the value of the units during the past few years was partially due to the failure of all of the unit owners, including Mr Posch and Mr Johnston to provide funds to maintain the Hotel and it would obviously be unfair to take a course that would effectively require Filaria to bear the consequences of this neglect. It would also be unfair to order rescission in the face of evidence that the reduction in value has been substantially due to the presence of competing businesses in the Hotel, ensuing litigation and adverse publicity when these developments have not been shown to have been attributable to any fault on the part of Filaria and, on the contrary, appear to have been triggered by unwise commercial decisions by the plaintiffs and other members of CIHUHA. Furthermore, Filaria has now sold its other units in the Hotel.
220. Even if it had been established that the plaintiffs had been induced to purchase the units by misleading and deceptive conduct on the part of Filaria, I would not have been satisfied that it would be just to order rescission and require Filaria to resume ownership of those units presently owned by Mr Posch or Mr Johnston.
Damages
221. The plaintiffs' claims for damages would also have been untenable. As previously mentioned, the plaintiffs maintained that at the time of purchase their units were worth what they paid for them and Mr Brodrick, apparently armed both with hindsight and instructions from the plaintiffs' solicitors as to the true facts, valued each of the properties in question and offered his expert opinion to that effect. I must confess to some suspicion that the approach adopted by the plaintiffs may have been attributable to the need to avoid any contention that the claims by Mr Posch, and perhaps Ms Whittle and Ms Munday, were statute-barred and even to some concern that Mr Brodrick may have been influenced, perhaps subconsciously, by this consideration or by the prevalence of sales at similar prices. However, at least in this respect, his opinion remains unchallenged and uncontradicted and the plaintiffs, who bear the onus of proof, can have little ground for complaint if their case on this issue is accepted. In any event, I am obliged to proceed on the basis that it is common ground that none of the plaintiffs suffered any loss on the initial transactions.
222. Since the submissions of counsel revealed considerable dispute as to the effect of more recent High Court pronouncements on issues of causation and damages, it may be appropriate for me to refer to the leading authorities in somewhat more detail than I might otherwise have considered necessary.
223. The general principles governing the assessment of damages in cases of this nature were laid down by the High Court in the subsequent case of Kizbeau Pty Ltd v WG & B Pty Ltd [1995] HCA 4; (1995) 184 CLR 281 per Brennan, Deane, Dawson, Gaudron and McHugh JJ at 290 -
Actions based on s 52 are analogous to actions for torts. It follows that, in assessing damages under s 82 of the Act, the rules for assessing damages in tort, and not the rules for assessing damages in contract, are the appropriate guide in most, if not all, cases.In an action for damages for deceit for inducing a person to enter a contract of purchase, which is an action that is closely analogous to an action for damages for breach of s 52, the courts have consistently held that the proper measure of damages is the difference between the real value of the thing acquired as at the date of acquisition and the price paid for it. Nevertheless, although the value is assessed as at the date of the acquisition, subsequent events may be looked at in so far as they illuminate the value of the thing as at that date. A distinction is drawn, however, between subsequent events that arise from the nature or use of the thing itself and subsequent events that affect the value of the thing but arise from sources supervening upon or extraneous to the fraudulent inducement. Events falling into the former category are admissible to prove the value of the thing, those falling into the latter category are inadmissible for that purpose. Thus, the takings of a business subsequent to purchase are generally admissible, not only to prove that a representation concerning the takings was false but also to prove the true value of the business as at the date of purchase. Even when some difference exists between the conditions under which the business was conducted before and after purchase, evidence of subsequent takings may be admissible, "subject to due allowance being made for any differences in relevant conditions". But if it is established that the decline in takings has been caused by business ineptitude or unexpected competition, evidence of subsequent takings is not admissible to prove the value of the business as at that date, events such as ineptitude, and unexpected competition being regarded as supervening events. In some cases of deceit, it may also be proper to compensate the defrauded party not only for the difference between the value of the thing acquired and the price paid for it but also for losses induced by the fraud and directly incurred in conducting the business. All of these principles are appropriate to the assessment of damages under s 82 where a breach of s 52 of the Act has induced a person to purchase a business.
224. The principle in Potts v Miller upon which counsel for the defendants relied, has not been overruled though, it is clear from a number of cases including Gould v Vaggelas [1985] HCA 75; (1985) 157 CLR 215; Kenny & Good Pty Ltd v MGICA (1992) Ltd (1997) 77 FCR 307 and Henville v Walker [2001] HCA 52; (2001) 206 CLR 459 that the application of this principle may not always provide adequate compensation for loss sustained by contravention of s 52.
225. In Gould v Vaggelas, Gibbs CJ said at 221-222 -
There is no reason in principle why the defrauded purchaser should not recover damages for all the loss that flowed directly from the fraudulent inducement (unless, possibly, the loss was not foreseeable). If the purchaser, besides paying more for the business than it was worth, has suffered additional losses which resulted directly from the fraud he ought to be compensated for them. Of course, the court must be satisfied that the loss did result directly from the fraud and not from some supervening cause such as the folly, error or misfortune of the purchase himself . . .
226. The Full Court of the Federal Court said in Kenny & Good Pty Ltd & Anor v MGICA at 328 that this formulation recognises that a defrauded purchaser is not necessarily entitled to all losses flowing from the transaction into which he or she was induced to enter. It is not sufficient to demonstrate that the losses would not have occurred but for the transaction into which he or she was induced to enter.
227. Nonetheless, counsel for the plaintiffs argued that the subsequent all subsequent losses were causally related to any misrepresentation or otherwise misleading or deceptive conduct on the part of the defendants because the plaintiffs would otherwise not have purchased the units and would never have been exposed to the losses. The events of early 1999 were "irrelevant". The plaintiffs were entitled to damages based on the difference between the purchase prices and current values of their units and in addition, any losses sustained in the subsequent use and management of them.
228. This argument really seems to depend upon an unstated assumption that the so called "but for" test of causation applied to claims under s 82 of the Trade Practices Act rather than the "common sense" test of causation accepted by the High Court of Australia in March v E & MH Stramere Pty Ltd [1991] HCA 12; (1991) 171 CLR 506. If questions of causation were to be determined solely by reference to the "but for" test one might be driven to conclude that there were almost unlimited causes for any event. In the present case, for example, the plaintiffs would not have purchased the units if the Hotel had not been built, the previous owners had retained ownership or approval for the units plan had been withheld, but that does not mean, as a matter of common sense, those losses should be regarded as having been caused by those events.
229. Counsel for the plaintiffs sought to support their argument by citing the following passage from the judgment of McHugh J in Henville v Walker at [106]:
If the defendant's breach has "materially contributed" to the loss or damage suffered, it will be regarded as a cause of the loss or damage, despite other factors or conditions having played an even more significant role in producing the loss or damage. As long as the breach materially contributed to the damage, a causal connection will ordinarily exist even though the breach without more would not have brought about the damage.
230. However, this passage did not reflect any attempt to overrule March v E & MH Stramere Pty Ltd and resuscitate the "but for" test of causation. His Honour was addressing a different issue; namely, whether a party was liable for damages for loss attributable not only to the contravening conduct but other unrelated causes. Henville v Walker concerned a claim for damages for misleading or deceptive conduct said to have induced the appellants to purchase land for the purpose of redevelopment by the construction of a small block of home units. In considering whether to purchase the land for that purpose they had undertaken a feasibility study based upon their own expertise in estimating the cost of construction and the advice of the vendor's agent as to selling prices and marketability. The cost proved to have been underestimated, the selling prices overestimated and the state of the market for home units was misrepresented. Hence the appellants' decision to embark upon the project had been attributable both to their own errors and to the contravening conduct of the respondents. The principle that may be extracted from the passage is that if, as a matter of common sense, contravening conduct has materially contributed to loss or damage, then that is normally sufficient causal connection, even though other factors may have played a more significant role in the causation of the loss or damage and that it would not otherwise have been sustained.
231. His Honour had already affirmed and explained the "common sense" test of causation in the following passages at [97] and [98]:
Some philosophers draw a distinction between a condition that is necessary only and a cause that is both necessary and sufficient to produce the event. The common law has avoided the technical controversies inherent in the logic of causation. Unlike science and philosophy, the common law is not concerned to discover universal connections between phenomena so as to enable predictions to be made. The common law concept of causation looks backward because its function is to determine whether a person should be held responsible for some past act or omission. Out of the many conditions that combine to produce loss or damage to a person, the common law is concerned with determining only whether some breach of a legal norm was so significant that, as a matter of common sense, it should be regarded as a cause of damage. As Lord Wright pointed out:
"The law cannot take account of everything that follows a wrongful act .... In the varied web of affairs, the law must abstract some consequences as relevant, not perhaps on grounds of pure logic but simply for practical reasons."
"More than once in recent years, judges have pointed out that the issue of causation cannot be divorced from the legal framework that gives rise to the cause of action. In Barnes v Hay, Mahoney JA said:
"[T]he determination of a causal question involves, in my opinion, a normative decision as to whether, for the purposes of the case, the precedent act for which the defendant is responsible should be seen as causal of the plaintiff's loss. And, in my opinion, that evaluation is made, not by a 'test' or 'guide' such as the 'but for' test, but by a functional evaluation of the relationship and the purposes and policy of the relevant part of the law."
232. Furthermore the passage upon which the plaintiffs' counsel relied was immediately followed by a statement to the effect that even when contravening conduct has been shown to have materially contributed to the relevant loss or damage there may be exceptional cases in which an abnormal event has intervened between the breach and the damage and in which it may be right as a matter of common sense to hold that the breach was not a cause of the damage.
233. His Honour proceeded to cite an earlier decision of the High Court in Medlin v State Government Insurance Commission [1995] HCA 5; (1995) 182 CLR 1 at 6-7 where Deane, Dawson, Toohey and Gaudron JJ said -
The ultimate question must, however, always be whether, notwithstanding the intervention of the subsequent decision, the defendant's wrongful act or omission is, as between the plaintiff and the defendant and is a matter of commonsense and experience, properly to be seen as having caused the relevant loss or damage. Indeed, in some cases, it may be potentially misleading to pose the question of causation in terms of whether an intervening act or decision has interrupted or broken a chain of causation which would otherwise have existed. An example of such a case is where the negligent act or omission was itself a direct or indirect contributing cause of the intervening act or decision.
234. His Honour referred to the judgment of Win LJ in Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158 at 168 but said that his Lordship's view that damage would be too remote if the person deceived had not himself behaved with "reasonable prudence" or "reasonable commonsense" confused remoteness with contributory negligence and causation. These concepts could not be imported into s 52 or s 82 of the Act.
235. In another passage relied upon by counsel for the plaintiffs, his Honour said at [148] that once a plaintiff demonstrates that a breach of duty has occurred "that is closely followed by damage, a prima facie causal connection will be established" and that it is the defendant who must disentangle, so far as possible, the various contributing factors.
236. Gleeson J said, at [13], that the legislation is not intended to protect only the careful or the astute and that negligence on the part of a victim will not provide a bar to an action for damages under s 82 unless the conduct is such as to destroy the causal connection between the contravention and the loss or damage. His Honour then turned to issues relating to the measure of damages, observing that the only express guidance given by the section is to be found in the concept of causation expressed in the word "by" and that the task is to select a measure of damages that confirms to the remedial purpose of the Act and to the justice and equity of the case. The principles of the common law relevant to the assessment of damages in tort were not "controlling" but represented an accumulation of valuable insight and experience that may well be useful in applying the Act. His Honour referred to the principle that if the defendant fraudulently induces a plaintiff to buy grazing land and undertake a pastoral business the defendant does not thereby become an underwriter of all losses incurred by the plaintiff's business for so long as it continues to be carried on, whenever and however those losses may arise. His Honour said that, similarly, a plaintiff fraudulently induced to buy shares may be unable to recover for loss or depreciation occasioned by subsequent events. His Honour cited the passage from the judgment of Gibbs CJ in Gould v Vaggelas which I have already quoted and, unlike McHugh J, cited with evident approval a decision of the House of Lords in Smith New Court Securities Ltd v Citibank [1996] UKHL 3; [1997] AC 254 adopting the view of Win LJ in Doyle v Olby (Ironmongers) Ltd that damage is too remote when the person deceived does not himself behave with reasonable prudence, reasonable commonsense, or can in any true sense be said to have been the author of his own misfortune. The damage that he seeks to recover must have flowed directly from the fraud perpetrated upon him.
237. Gaudron J took a somewhat different approach, stating at [61] that s 82 should be understood as taking up the commonsense approach referred to in March v E & MH Stramere Pty Ltd save as modified or supplemented by the provisions of the Act but explaining, as McHugh J had done, that this approach requires no more than that the tortious act should have materially attributed to the loss or injury suffered. Her Honour said at [70], where loss or damage results from two or more acts or events, it is for the person whose contravening conduct materially contributed to the loss or damage to establish what component of that loss or damage is referable to some act or event other than his or her contravening conduct.
238. Hayne J also took the view that it was sufficient that the respondent's contravention of the Act had been one of the factors that had caused the appellants to purchase and develop the land and hence suffer loss. His Honour said at [165] that the carelessness of the person who had suffered the loss or damage should not be taken into account in deciding what was the amount of loss or damage actually suffered. However, his Honour acknowledged at [166] that there may be cases where some of the loss suffered by a person following the conduct of another in contravention of the Act may not be loss suffered "by" the contravening conduct and, as an example, suggested that, if the appellants had chosen for extraneous reasons to change the design of the units part way through their construction and thereby wasted some of the cost of construction already incurred, it might be said that the extra costs had not been caused by the respondent's contravention.
239. Gummow J expressed agreement with the reasons for judgment of both McHugh J and Hayne J.
240. None of the judgments in Henville v Walker suggest either that the common sense test of causation should not apply to cases of this nature or that the passage from the joint judgment in Kizbeau Pty Ltd v WG & B Pty Ltd should no longer be accepted as a correct statement of principle.
241. The present case is more closely analogous to the situation that commonly arises in the purchase of pastoral land or a business than that involved in the purchase of land for redevelopment as in Henville v Walker. In any event, as Deane, Dawson, Toohey and Gaudron JJ said in Medlin v State Government Insurance Commission in the passage cited by McHugh J in Henville and Walker at [108], the ultimate question must be whether, notwithstanding the intervention of the subsequent events, the defendant's wrongful act or omission is, as between the plaintiffs and the defendants and as a matter of commonsense and experience, properly to be seen as having caused the relevant loss or damage.
242. Mr Foster relied heavily upon the approach taken by Finn J in Hilda v Bowler which was a somewhat similar case involving a claim for damages under s 82 in relation to loss suffered as a consequence of the purchase of a unit in reliance upon a representation that the plaintiffs would be entitled to live in it. In that case, his Honour held that the plaintiffs were entitled to recover the difference between the value of the unit at the time of the purchase and what the plaintiffs had paid for it but rejected a more substantial claim for the difference between subsequent outlays and receipts. In doing so, his Honour adverted to a number of principles including a proposition that the relevant factual question in each case was whether the loss claimed had resulted directly from the misleading and deceptive conduct. In the light of the subsequent decision in Henville v Walker it now appears that the earlier decisions of the Full Court of the Federal Court of Australia upon which his Honour relied for this proposition can no longer be accepted as correctly reflecting the effect of the section.
243. Given the general nature of the debate between counsel including widely divergent submissions as to the effect of Henville v Walker, it may be appropriate for me to briefly state a number of principles which I think emerge with reasonable clarity from the authorities:
(a) in assessing damages under s 82 the courts must ask what loss or damage has been caused "by" the conduct committed in contravention of the Act and, in answering that question, the court is not constrained by common law principles or equitable doctrines, though it is likely to receive considerable guidance from the accumulated wisdom they reflect;
(b) the plaintiff bears the onus of proving that the contravening conduct was a cause of the relevant loss or damage;
(c) the necessary causal relationship will be established if it is shown that the contravening conduct materially contributed to the loss or damage even if there were other, perhaps more significant, cause of the factors;
(d) whilst loss is generally to be measured by comparing the position which the plaintiff would have enjoyed but for the contravening conduct with that resulting from the conduct, any issue as to whether the contravening conduct made a material contribution to relevant loss or damage is to be determined by reference to the commonsense test of causation referred to in March v E & MH Stramere Pty Ltd;
(e) the fact that contravening conduct is followed closely by the relevant loss will often be sufficient to establish a prima facie case as to the existence of a causal relationship;
(f) if there is a prima facie case that the contravening conduct was a cause of the whole of the loss or damage, it is nonetheless open to the defendant to show that, for some reason, part of the loss should not be regarded as having been caused by such conduct but, in that event, it is incumbent upon the defendant to disentangle that component of loss from any other loss that has been so caused;
(g) negligence on the part of a plaintiff will not disentitle him or her to the protection of the Act or, of itself, warrant a conclusion that the loss or damage is too remote, though it may be necessary to determine whether, notwithstanding the negligent acts of the defendant, the contravening conduct of the plaintiff can properly be regarded as having been a cause of the relevant loss or damage;
(h) in a case where the false and misleading conduct has induced the purchase of property, the usual starting point is to assess the difference between the purchase price and the true value at the time of the purchase, having regard to the approach suggested in Potts v Miller;
(i) however, the plaintiff is also entitled to damages for any subsequent loss for which the contravening conduct of the defendant may, by the application of the commonsense test of causation, properly be seen as a material cause;
(j) in considering issues of this kind, it is necessary to take into account the effect which the false or misleading conduct has had on the actions of the defendant and if, as in Henville v Walker, such conduct has induced not only the initial purchase but subsequent activity in relation to the property, losses caused by such activity will also be recoverable.
244. In the present case, had I found that any of the defendants had been guilty of false or misleading conduct in making representations as to income and capital gains that could be expected after the initial five year leases and that the plaintiffs had thereby been induced to purchase the units and retain them for an extended period, I would unhesitatingly have held that they were entitled to damages for all of the losses incurred as a consequence of their reliance upon such representations. However, I have been unable to make those findings.
245. The case for the plaintiffs was conducted on the basis that they had been induced by the alleged misrepresentations and/or misleading or deceptive conduct to purchase the units. None of them suggested that they had been induced by such conduct to retain the units for a decade or more since purchase and the evidence does not suggest that any loss closely followed any allegedly contravening conduct. There was no net loss that occurred as a direct result of the purchases and no net loss in the years immediately following the purchase was established. Whilst there may have been some reduction in values as occupancy rates declined towards the end of the periods covered by the leases, that would have been offset by the high rentals and tax benefits derived by the plaintiffs and it was not alleged or proven that any net loss would have been sustained prior to the termination of Jaywood's management of the Hotel, let alone that any net loss would have been sustained over the whole period between the time of purchase and the trial, had it not been for that fateful decision and the events thereby precipitated. As Mr Brodrick said in the report annexed to his statement of 21 March 2003, the dramatic fall in the value of the units was caused by the expiration of the guarantees, the competition between the businesses in the Hotel, court actions and a failure by the unit holders to provide funds for the continued maintenance and upkeep of the Hotel. The plaintiffs are obviously not entitled to complain about the expiration of "guarantees" that were honoured for the whole of the agreed period and it was not shown that any of the other matters were caused by any fault on the part of any of the defendants, let alone that they were attributable to the alleged conduct in 1993.
246. I am unable to accept that, applying the common sense test of causation, any contravening conduct in 1993 can properly be regarded as a cause of the losses sustained between 1999 and 2004. No question of "disentangling" arises. This is not a case like Henville v Walker in which loss or damage closely followed the purchase of the relevant property, thereby establishing a prima facie case in relation to the causal connection, and there is no other loss or damage from which the losses sustained in the later years needed to be disentangled. It is rather a case in which, as a matter of common sense, the losses sustained by the plaintiffs could not be seen as having been caused by any conduct that may have induced the plaintiffs to purchase their units in 1993 but, rather, by ill-considered decisions made by the plaintiffs and others in 1999. It has not been suggested that these decisions were themselves induced by any contravening conduct on the part of any of the defendants. Furthermore, even if, for some reason, it had been incumbent upon the defendants to show that the subsequent losses were attributable not to any contravening conduct on their part but to a novus actus interveniens, the events of early 1999 clearly answered that description and the evidence of Mr Brodrick clearly shows that they were the real precipitating cause of the losses.
247. Ms Whittle and Ms Munday claimed damages for loss of the rental income and capital gain that they would have derived from another property that Ms Whittle said they would have bought had she and her mother not been persuaded that a unit in the Hotel was a better investment. As a matter of principle, such a claim may be sustainable but, whilst I am sure that Ms Whittle gave her evidence honestly, she was clearly struggling to recall the sequence of events and I was not satisfied that she and her mother could or would have purchased the relevant property at that time.
248. I can see no basis for a conclusion that it would be just and equitable to require any of the defendants to compensate the plaintiffs for losses which appear to have been substantially attributable to management decisions taken some five years or more after the units were purchased and to the plaintiffs' failure to provide funds for maintenance of the Hotel in the years prior to trial.
249. Consequently, I agree with the submissions of counsel for the defendants that, even if causes of action had otherwise been established, no compensable loss was demonstrated.
250. It is unnecessary to consider the alternative submissions that the plaintiffs failed to take reasonable steps to mitigate their own losses.
The defences under the Limitation Act
251. In each case, defences were filed alleging that the claims were effectively barred by the provisions of s 11(1) of the Limitation Act 1985 (ACT) and s 82 or 87 of the Trade Practices Act.
252. As I pointed out in Carlisle v Filaria Pty Ltd [2002] ACTSC 33 (2 May 2002), whilst a cause of action in contract accrues from the time of the relevant breach, a cause of action or tort is not complete until the plaintiff has suffered actual loss and the limitation period does not commence to run until that time. See also Independent Group Pty Ltd v Carlisle [2003] ACTCA 10. However counsel for the plaintiffs made it clear that it was not suggested that any loss had been sustained prior to the expiration of the leases in late 1998 or early 1999 and the case was essentially fought on that basis. Hence, no question arises as to whether any of the claims have been instituted outside relevant limitation periods.
The counter claims
253. In each case Independent made a claim for orders requiring Filaria to contribute to any damages that Independent might be ordered to pay the plaintiffs.
254. In support of these claims, it was submitted that, whilst Mr Tindale had assumed responsibility for the preparation of the brochure, he had relied substantially on the provision of information and advice by Mr Hoare who for that purpose should be taken to have been acting as Filaria's agent. The report had also been "signed off on" by other agents of Filaria including Ms Phillips. Hence, it was argued, if I were to find that any misrepresentation had been made concerning the financial projections or the nature or history of the Castle Group, the principal responsibility should fall upon Filaria rather than Independent.
255. However, this contingency does not arise and the counter claims must be dismissed.
Conclusion
256. Counsel for the plaintiffs put every argument that could reasonably be advanced on their clients' behalf but, despite their forensic diligence, I am not satisfied that any cause of action or even legitimate grounds for grievance against any of the defendants has been established. It is understandable that the plaintiffs and, no doubt, other investors who purchased units in the Hotel are acutely disappointed at the poor returns on their investment, but their losses were not attributable to misrepresentation or false or misleading conduct in 1993.
257. The plaintiffs were not misled as to the nature of the property they purchased or as to their entitlements under the associated leases. None of the factual statements made to them concerning matters such as increased occupancy rates in other hotels or rates of return on comparable investments have been shown to be false or reasonably capable of misleading investors such as the plaintiffs and, insofar as the opinions expressed to them may be regarded as representations with respect to future matters, those who made them had reasonable grounds for doing so. In any event, such predictions seem to have had little, if any, influence on their decisions. If what they were told about their entitlements to use the units as permanent residences was incorrect, then they were misled only because Mr Tindale made an honest mistake by acting on apparently reliable advice and it was not shown that the error had any effect on their decision to purchase them. Allegations that rents were set at unsustainably high levels and that profit projections were unrealistic or vitiated by error were neither pleaded nor substantiated. Furthermore, the units were worth what the plaintiffs paid for them and the lessee duly honoured its obligations under the leases.
258. The losses which the plaintiffs have sustained seem to have occurred substantially because of management decisions taken in 1999 and a failure to provide the necessary funds to adequately maintain the Hotel. The events of 1999 seem to have left the plaintiffs with considerable resentment against Ms Phillips but no cause of action based upon those events was pleaded. The plaintiffs have instead sought to disclaim responsibility both for their initial decisions to purchase the units and for subsequent decisions in relation to the management and maintenance of the Hotel and to attribute losses substantially caused by events in 1999 to some fault on the part of one or more of the defendants in 1993. No adequate basis for these contentions has been demonstrated.
259. As previously mentioned, there was no evidence to suggest that any losses would have been sustained had the plaintiffs and other unit holders exercised the options to have Jaywood continue to manage the Hotel on the basis specified in the leases or on either of the other bases subsequently offered. Furthermore, the brochure had contained no representation as to the continued profitability or value of the units under different management. Nor did it represent that Filaria would undertake to have its residual units managed by a manager other than Jaywood chosen by other unit holders. On the contrary, the brochure stressed that all unit holders would be free to choose how to use their units.
260. The claims against the defendants have not been established and no issue arises for determination on the counter claim.
261. I will hear counsel as to costs.
I certify that the preceding two hundred and sixty one (261) numbered paragraphs are a true copy of the Reasons for Judgment herein of his Honour, Justice Crispin.
Associate:
Date: 11 June 2004
Counsel for the plaintiffs: Mr C Gunst QC with Mr S Gillespie Jones
Solicitor for the plaintiffs: Gillespie-Jones & Co Solicitors
Counsel for the first defendant and third
party: Mr M Walton SC with Mr D Mossop
Solicitor for the first defendant and third
party: Meyer Clapham Lawyers
Counsel for the second and third
defendants: Mr L Foster SC with Mr I Pike
Solicitor for the second and third
defendants: Sparke Helmore Solicitors
Dates of hearing: 19, 20, 21, 22, 23, 26, 27, 28, 29 May 2003
9, 13, 14, 15, 16, 17, 20, 21, 22, 23, 24 October 2003, 18, 19 November 2003,
3, 4, 5, 6, 9, 10 February 2004
Date judgment reserved: 10 February 2004
Date of judgment: 11 June 2004
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