Scottish Pacific Business Finance Pty Ltd v Chiat/Day/Mojo Pty Ltd; Soundstage Australia Ltd; Simon Furzer; David James Downie and Ronald James Downie [1993] FCA 439; (1993) Atpr 41-273 (7 September 1993)

FEDERAL COURT OF AUSTRALIA

SCOTTISH PACIFIC BUSINESS FINANCE PTY LTD v. CHIAT/DAY/MOJO PTY LTD;
SOUNDSTAGE AUSTRALIA LTD; SIMON FURZER; DAVID JAMES DOWNIE and RONALD JAMES
DOWNIE
Nos. WAG30 and WAG42 of 1993
FED No. 716
Number of pages - 7
Practice and Procedure
[1993] FCA 439; (1993) ATPR 41-273

COURT

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
FRENCH J

CATCHWORDS

Practice and Procedure - pleadings - misleading or deceptive conduct - fraud - causation - scheme involving factoring of debts - separate agreements alleged between principal and purported debtors - assignment of fictitious debts - finance company as factor - finance company sustains global loss - whether global loss attributable to individual debtors - accessorial involvement - elements.

Trade Practices Act 1974 (Cth) s.52, s.75B

Fair Trading Act 1987 (WA) s.10, s.68

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

Munchies Management Pty Ltd v. Belperio (1988) 84 ALR 700

Scottish Pacific Business Finance Pty Ltd v. Soundstage Australia Ltd (unrep. French J 14/5/93)

HEARING

PERTH, 25 August 1993
7:9:1993

Counsel for the Applicant: Mr G. Nettle QC

and Mr P. Collinson

Solicitors for the Applicant: Phillips Fox

Counsel for the Respondents in 42 of 1993: Mr M.J. Stevenson

Solicitors for the Respondents in 42 of 1993: Jackson McDonald

Counsel for the Respondents in 30 of 1993: Mr P.P. McCann

Solicitors for the Respondents in 30 of 1993: Majteles and Salmon

ORDER

Matter No. WAG42 of 1993
The Court orders that:

On the respondents' amended motion filed 20 August 1993 to strike out
the substituted statement of claim:
1. The motion is dismissed.
2. The costs of the motion are reserved.

Note: Settlement and entry of Orders is dealt with in Order 36 of the Federal Court Rules. Matter No. WAG30 of 1993
The Court orders that:

On the respondents' motion filed 11 June 1993:
1. The motion is dismissed.
2. The costs of the motion are reserved.

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

DECISION

REASONS FOR JUDGMENT ON MOTION TO AMEND STATEMENT OF CLAIM AND MOTION TO STRIKE OUT STATEMENT OF CLAIM
Introduction
FRENCH J A finance company says that in 1986 and 1990 it made agreements with a company called Woomera Management Pty Ltd (Woomera) to accept assignments of debts owed to that company by various parties to whom it would supply goods or services. The finance company alleges that, unknown to it, arrangements were made with various purported debtors whereby Woomera would generate false invoices for goods or services not rendered and purport to assign the debts appearing on the face of those invoices to the finance company. The alleged arrangement involved, inter alia, repayment of the finance company by the debtors out of money paid by the finance company to Woomera in consideration of the assignments and paid by Woomera to the purported debtors. The finance company says that it lost over $800,000 as a result. Woomera is now in liquidation. The finance company has issued proceedings against a number of the purported debtors which, it says, each agreed separately with Woomera to participate in like schemes for the assignment of non-existent debts. The finance company alleges that the debtors have engaged in misleading or deceptive conduct and/or fraud. It claims against individual debtors for its entire loss. This raises difficult questions of causation. In two of the proceedings the respondents have moved to strike out the statements of claim as they now stand and in doing so have raised issues of causation and the elements of accessorial involvement as well as a number of lesser pleading points.

The Proceedings to Date
2. These proceedings were instituted on 18 March 1993. On 14 May 1993, an order was made striking out the statement of claim. On 4 June, a substituted statement of claim was filed. On 15 June the respondents moved to strike out parts of the substituted statement of claim. That motion was adjourned to a date to be fixed by the District Registrar. It was set down for hearing on 25 August 1993. On 24 August 1993 the applicant filed a motion seeking leave to amend its substituted statement of claim in accordance with a minute filed with the motion. The amendment was allowed and the respondents pursued their strike out motion. Like issues were debated in Action No. 30 of 1993 between the same applicant and different respondents raising essentially the same issues. The debate on the strike out motion in each of the proceedings was heard at the same time. Given the similarities in the statements of claim, it is sufficient for present purposes to outline the minute of the proposed amended statement of claim in 42 of 1993. That outline, which follows, does not involve any findings of fact.

The Pleaded Case
3. Scottish Pacific Business Finance Pty Ltd (SPBF) alleges that on 16 April 1986 and 30 March 1990 it entered factoring agreements with Woomera Management Pty Ltd (In Liquidation) (Woomera) under which it agreed to provide factoring facilities to Woomera (para.4). By the terms of the factoring agreements, Woomera agreed to assign to SPBF all debts detailed by way of notice given at any time and from time to time by SPBF to Woomera. Woomera warranted in summary:

1. The actual supply of the goods or rendering of the services to
which the factored debts related.
2. That each factored debt would be bona fide, arising in the
ordinary course of Woomera's business, and be enforceable.
3. All contracts for the supply of goods and/or work done and/or
services rendered in respect of which a factored debt arose
would be in respect of a contract duly completed to the
satisfaction of the customer (para.5).

In para. 6 of the amended substituted statement of claim, it is alleged that in or about 1989, Woomera and Soundstage Australia Ltd (Soundstage) entered into an arrangement (the Scheme) whereby:

1. Woomera would from time to time prepare invoices purporting to
evidence work done for or services rendered to Soundstage.
2. Woomera would not in fact do any work for, or render any
services to, Soundstage as stated in the invoices.
3. Woomera would purport to assign the supposed debts owing by
Soundstage to SPBF pursuant to the factoring agreement.
4. Woomera would ensure that from time to time payments would be
made by Woomera to Soundstage to allow Soundstage to meet its
purported obligations to SPBF as stated in each invoice.
5. Payments by Woomera to Soundstage would be sourced directly or
indirectly from funds received from time to time by Woomera
from the assignment of the Soundstage debts to SPBF or from
other funds available to Woomera.
6. Woomera would thereby obtain payments from time to time from
Scottish Pacific.

Between July 1989 and April 1992 pursuant to the Scheme "and like arrangements with other persons" and in purported compliance with the factoring agreement, it is said that Woomera followed procedures under the factoring agreement to effect an assignment of Soundstage debts and other purported debts to SPBF, that copies of invoices in respect of the debts were delivered by Woomera to SPBF and other purported debtors and that SPBF gave notice of the assignment of each of the debts to the persons who appeared to be the debtors. Particulars of the debts and their assignment by Woomera to SPBF are set out in a lengthy annexure to the statement of claim (para.7). The respondents are said to have represented to SPBF in respect of each of the Soundstage debts that work had been done and services rendered as described in the relevant invoices, that the work had been done or services rendered to the satisfaction of Soundstage and that Soundstage was in fact indebted to Woomera for the amount stated in each case (para.8). Further, there was said to be a representation that the assignment of the Soundstage debt by Woomera to SPBF was effective following written notice of such assignment to Soundstage, to vest legal title to that debt in SPBF (para.8.4). Particulars of these representations, which were said to be partly oral and partly implied from conduct, were provided. In substance SPBF relied upon a system whereby, in relation to factored debts, it would check not less than forty per cent in value of the invoices by phoning the debtor direct. As part of that checking system, it is said, Soundstage was telephoned and questions put to it on various dates in relation to invoices delivered by Woomera. On each of the dates particularised, it is said that the second and third respondents, who were directors of Soundstage, had stated in substance that a payment in respect of a Soundstage debt would be made on a specified date. Payments were made by Soundstage totalling $428,756 in amounts and on dates which are particularised (para.8). Subsequently, it is pleaded, SPBF discovered and the fact is that each of the representations was untrue in that Woomera did no work for nor rendered any services to Soundstage as described in the invoices, that Soundstage was not in fact indebted to Woomera and that the purported assignment of the Soundstage debts by Woomera to SPBF was completely ineffective (para.9). SPBF relies upon the failure of Soundstage and its agents to inform it of these facts in support of the representations pleaded in para.8. The representations are said to have been made fraudulently and the pleading in para.6 and its particulars are relied upon in support of that allegation. Further, or alternatively, the representations are said to have constituted conduct by Soundstage in trade or commerce which was misleading or deceptive or likely to mislead or deceive in contravention of s.52 of the Trade Practices Act 1974 (Cth) and s.10 of the Fair Trading Act 1987 (WA) (paras. 11 and 12). The failure by Soundstage to inform SPBF during the relevant period that Woomera had done no work for nor rendered any services to Soundstage, that Soundstage was not in fact indebted to Woomera and that the purported assignment was completely ineffective, itself constituted conduct by Soundstage in trade or commerce which was in contravention of s.52 of the Trade Practices Act 1974 (Cth) and s.10 of the Fair Trading Act 1987 (WA) (para.13). In this respect again, SPBF repeats para. 6 and the particulars in para.8. The second and third respondents, David Downie and Ronald Downie, are said to have been involved in the contraventions within the meaning of s.75B of the Trade Practices Act 1974 (Cth) and s.68 of the Fair Trading Act 1987 (WA) (para.14).

4. In para.15 it is pleaded further and in the alternative that to induce SPBF to factor the debts pursuant to the factoring agreement, Woomera represented to it in respect of each debt that the work had actually been done or services actually rendered as described in the relevant invoice and had been done or rendered to the satisfaction of the debtor, that the debtor was in fact indebted to Woomera, that the debt was bona fide and had arisen in the ordinary course of Woomera's business and that the debt was valid, enforceable and subsisting for the full face value thereof. Further, Woomera was said to have represented that the debtor existed and that the assignment was effective (para.15). The representations are particularised by reference to clauses of the factoring agreement and implications from conduct of Woomera in giving notice of the assignment of debts to SPBF, delivering invoices to SPBF and requesting and receiving payment in respect of the debts. The falsity of the representations is then alleged (para.16) and Woomera's conduct is said to have constituted a contravention of s.52 of the Trade Practices Act 1974 (Cth) and s.10 of the Fair Trading Act (1987) WA). Alternatively, Woomera's failure to inform SPBF of the true position is said to have been such conduct (para.19). Each of the respondents is said to have been involved in these contraventions by Woomera within the meaning of s.75B of the Trade Practices Act and s.68 of the Fair Trading Act in so far as those contraventions concern the Soundstage debts (paras. 20, 21, 22 and 23).

5. SPBF alleges that, acting on the Soundstage representations, the misleading and deceptive conduct of Soundstage, the Woomera representations and the misleading and deceptive conduct of Woomera, it dealt with Woomera on the assumption that Woomera was exercising its rights and performing its obligations honestly under the factoring agreement, it factored the debts and made payment to Woomera in respect of the debts (para.24). But for the representations and conduct, it is alleged, SPBF would not have dealt with Woomera on the assumption that it was acting honestly, factored any of the debts or made payments to Woomera in respect of any of the debts (para.25).

6. From time to time during the relevant period and "pursuant to the Scheme and like arrangements with other Debtors", Woomera is said to have made payments to the debtors sourced directly or indirectly from funds paid by SPBF to Woomera pursuant to the factoring agreement or from other funds available to Woomera. The debtors applied the funds so received from Woomera towards meeting payments stated to be due on the copy invoices held by SPBF. In respect of the fictitious debtors, Woomera made the payments stated to be due on the copy invoices held by SPBF sourced directly or indirectly from funds paid by SPBF to Woomera or from other funds available to Woomera. Because of this, it is said, SPBF was induced to continue to belief that the Woomera representations and the Soundstage representations were true (para.26).

7. SPBF says it has suffered loss and damage. The primary loss claimed is the sum of $818,124.50 (para.27). Alternatively, SPBF, on the assumption that the Soundstage debts were valid and effectively assigned, claims a shortfall of $28,850 which is said to be due in respect of those debts.

The Adequacy of the Statement of Claim
8. The principal attack on the amended statement of claim relied upon the submission that the pleading did not expose facts upon which it could be said that conduct by Soundstage or its directors caused loss to SPBF. The particulars to para.6, it was said, do not make the connection between contraventions of s.52 of the Trade Practices Act and the respondents. A person who commits a tort is not to be held responsible for other persons committing similar torts independently.

9. SPBF says its case is simple. It was induced by the respondents' conduct to believe that the Soundstage debts offered for factoring were real Soundstage debts when in truth they were not. If SPBF had known that any debt purportedly assigned to it was not a real debt, then it would never have dealt with Woomera. It would have become apparent that Woomera did not intend to act honestly or in accordance with the factoring agreement. SPBF's case on causation was said to be a straight forward application of the "but for" test. No question of a novus actus interveniens is involved. The nature of the losses suffered is said to fall squarely within the scope of the risk created by the alleged misrepresentation.

10. In striking out the claim as previously pleaded, I said at p 9 (see Scottish Pacific Business Finance Pty Ltd v. Soundstage Australia Ltd, French J unreported, 14 May 1993):

"Of critical importance in this case...is the fact that
no causal connection is exposed between the conduct of
Soundstage and the Downies and SPBF's belief that all
invoices issued by Woomera were true and accurate.
Nor is there any causal connection shown between the
conduct of Soundstage and the Downies and the
contention that SPBF refrained from making additional
inquiries as to the genuineness of the invoices issued
by Woomera and the existence and financial standing of
the other persons and business names pleaded in
para.8.3. It is not alleged, and the proposition
could hardly be sustained, that Soundstage as a sample of
one represented a statistically significant cross-section
of the debtors justifying an extrapolation
from the represented authenticity of its invoices to
an inferred authenticity of all invoices. If that is
the basis of the claim then it would seem to have
little prospect of success. The same comment applies
to the allegations of fraud. These are critical
omissions which, in my view, render the claim in
misleading or deceptive conduct and fraud as presently
pleaded unsustainable."

Drawing a distinction between the present pleading and that previously struck out, SPBF asserts that the new pleading makes clear that if it had known the truth about the Soundstage invoices, it would have refused or ceased to deal with Woomera in relation to any debts. SPBF asserts that all of its losses flowed from the fact that it was induced by Soundstage's conduct to continue to deal with Woomera.

11. The loss recoverable for a contravention of s.52 of the Trade Practices Act 1974 is loss or damage suffered "by conduct of" the contravenor or persons involved in the contravention. In Wardley Australia Ltd v. State of Western Australia [1992] HCA 55; (1992) 175 CLR 514 at 525 in the joint judgment of Mason CJ, Dawson, Gaudron and McHugh JJ, it was said:

"The statutory cause of action arises when the
plaintiff suffers loss or damage "by" contravening
conduct of another person. "By" is a curious word to
use. One might have expected "by means of", "by
reason of", "in consequence of" or "as a result of".
But the word clearly expresses the notion of causation
without defining or elucidating it. In this
situation, s.82(1) should be understood as taking up
the common law practical or common-sense concept of
causation recently discussed by this Court in March v.
Stramare (E. and M. H.) Pty Ltd ((1991) [1991] HCA 12; 171 CLR 506),
except in so far as that concept is modified or
supplemented expressly or impliedly by the provisions
of the Act. Had Parliament intended to say something
else, it would have been natural and easy to have said so."

In applying the causative criteria under s.82 to the facts pleaded, it is necessary to bear in mind that the statement of claim should be struck out as disclosing no cause of action only if it is manifestly untenable. The question whether particular conduct caused a claimed loss will be answered by an evaluation in a practical way of the relationship between the conduct and the loss. Logical analysis can only provide part of the picture - Munchies Management Pty Ltd v. Belperio (1988) 84 ALR 700 at 712. The logical chain set up in the present case appears to be as follows:

1. Soundstage and Woomera entered into a scheme under which
Soundstage would co-operate with Woomera in the assignment to
SPBF of non-existent debts.
2. Woomera entered into similar schemes with other persons.
3. Soundstage falsely represented to SPBF that debts purportedly
owed by Soundstage to Woomera and assigned by Woomera to SPBF
were genuine debts validly assigned.
4. The Soundstage representations supported the assumption on the
part of SPBF that Woomera was exercising its rights and
performing its obligations honestly under the factoring
agreement.
5. If SPBF had been apprised of the true position by Soundstage it
would not have continued to deal with Woomera or to accept
assignment of any purported debts from that company.

On this analysis, Soundstage's misrepresentation is said to be causative of the entire loss suffered by SPBF. It is true to say that had Soundstage never entertained the alleged Scheme with Woomera, it would have made no difference to SPBF's position. There is nothing in the facts pleaded to suggest it would have. It may be assumed in that event, that SPBF would simply have accepted factored debts relating to a range of purported debtors not including Soundstage. In that sense, on the pleaded facts, Soundstage's entry into and participation in the scheme made no difference to SPBF's loss. Having once entered the Scheme and made the false representations alleged, however, it is at least arguable on the pleaded facts that Soundstage's participation supported an erroneous view on the part of SPBF that Woomera was acting according to the terms of its agreement with SPBF. Its role in that sense might not be characterised as a link in a chain of events but rather one among a number of strands which together establish a connection between conduct and loss. In my opinion the question of causation in this case is a matter to be considered in the light of all the evidence. The same applies to the question of causation so far as it relates to the allegation of fraud.

12. The respondents complain that the amended substituted statement of claim does not plead facts to show how the respondents were connected with the contravention by Woomera of s.52 of the Trade Practices Act 1974 in respect of other debtors so as to attract the operation of s.75B of the Act. As to that, SPBF says that the pleading does not allege, on the part of the respondents, involvement in contraventions by Woomera other than in respect of the Soundstage debts. The elements of knowledge which it is necessary to plead to show involvement pursuant to s.75B of the Trade Practices Act are said to be set up in the pleading thus:

(a) the terms of the scheme contemplated that Woomera would put up
the Soundstage debts to be factored, thereby representing by
its conduct that the debts existed and were bona fide;
(b) the scheme contemplated that Woomera (and the respondents)
never told SPBF that the debts did not in fact exist;
(c) the respondents knew that Woomera had factored the Soundstage
debts pursuant to the scheme because they received telephone
calls from employees of SPBF seeking verification on a number
of matters and paid SPBF from funds received from Woomera.

So far as the Soundstage debts are concerned, I accept that the pleading as it now stands discloses an arguable case of involvement and should be considered in the light of the evidence.

13. It was submitted for the respondents, in effect, that para.6 of the amended substituted statement of claim pleads a kind of conspiracy which leads nowhere in terms of relief. It seems to me that the so called scheme pleaded in that paragraph is capable of support as a fact material to the question of knowledge and accessorial involvement on the part of the respondents. It is not and would not be sufficient to support a conspiracy plea. It is not relied upon for that purpose.

14. A number of other complaints were made by the respondents about the form of the pleading. I do not consider them critical. There are plainly some matters pleaded in the amended substituted statement of claim in respect of which the respondents will be entitled to particulars but directions can be given to cover that need. In my opinion, the case made on the amended substituted statement of claim is arguable if the pleaded facts are established. The pleading should be allowed to stand and the motion should be dismissed. I will hear from the parties on the question of the costs of the strike out motion as various of the amendments to the substituted statement of claim were made following the filing of that motion. Similar orders will be made in respect of No. 30 of 1993.