Civil Service Co-operative Society of Victoria Ltd v Blyth [1914] HCA 17; (1914) 17 CLR 601 (26 March 1914)

HIGH COURT OF AUSTRALIA

The Civil Service Co-Operative Society of Victoria Limited Defendants, Appellants; and Blyth and Others Plaintiffs, Respondents.

H C of A

On appeal from the Supreme Court of Victoria.

26 March 1914

Griffith C.J., Barton and Isaacs JJ.

Starke (with him S. R. Lewis), for the appellants.

Mitchell K.C. and A. H. Davis, for the respondents.

Starke, in reply,

Griffith C.J.

The appellants are a society registered under the Provident Societies Act 1890, the relevant provisions of which are substantially the same as those of the Companies Acts. The action is in substance an action for the rescission of contracts to take shares, and for repayment of money paid under a misapprehension when taking the shares. The rules of the Society, which were made as prescribed by the Act, authorized it to raise capital by shares of £1 each which might be paid by instalments, and any person applying for shares and making the prescribed payments became a member. The rules also authorized members to withdraw the amount of their shares at any time on short notice, subject to a power of the board of directors to suspend withdrawals if the circumstances of the Society should render it necessary. Each member on the acceptance of his application and payment of the prescribed amount received a pass-book, to which a copy of the rules was annexed, and in which were entered all payments made on account of the shares and all withdrawals. I take the following statement of facts of the case from the judgment of the learned Judge:—

In 1907 and 1908 the plaintiffs, who have no connection with one another but join in one complaint of that which they allege was an imposition practised by the same means upon all of them, paid various sums to the Society; they say by way of deposit, entitling them, as they were led to believe, to £5 per cent. on the amounts of their deposits with participation in the profits and the right of withdrawal at any time. The defendants say that the moneys so paid were paid for the purchase of £1 shares in the Society making them members of it and subject to its rules.

So far as the form of the transactions was concerned the payments were undoubtedly made in the form of taking shares in the Society.

I have to decide whether the representations made and inducements held out to the plaintiffs were of such a character as to entitle them to get their money back. The case may be concisely stated as follows:—By printed statements published by the Society persons invited to invest were told that they could get their money back at any time. They were not told that under one of the rules of the Society the board of directors had power to suspend withdrawals altogether if the circumstances of the Society rendered it necessary. The necessity afterwards arose, and the power of suspension was exercised. The plaintiffs asked to withdraw their money and were informed that they could not. Hence this action.

To that I will only add that, on the evidence, all the plaintiffs knew that they were in form applying for shares in the Society, that is, to become members of the Society. The case made by the plaintiffs is sufficiently stated in the quotation I have read.

The representations relied on were contained in two circulars, which were apparently circulated broadcast, inviting the public to become members of the Society. One of the inducements offered was that those who took shares could get their money back whenever they liked—that the conditions were in fact very like those of a savings bank, except that depositors received 5 per cent. on their deposits—that is, that they could receive back the amount paid for their shares, or so much of it as they desired, on short notice. That was, in effect, the practical course of the operations of the Society carried on in the manner prescribed by the rules.

It is not the first case of the kind that has come under my notice, and I do not think it is at all an unusual form of carrying on such business. The circulars did not make any mention of the power of the board of directors to suspend withdrawals; and, if the case rested there, there would, I think, have been established a misrepresentation of a material fact which, in a proper case, would have entitled the plaintiffs to rescission of their contracts to take shares and to get their money back. But it would, of course, be essential to show that the plaintiffs did not know of the power of suspension. If they did, they did not rely on the fact of its omission from the circulars. But the plaintiffs did not at the trial rely entirely upon the representations contained in the circulars. They relied also on conversations which they had with the secretary of the Society at the times when they applied for the shares. I will refer to what each plaintiff said on that point, in order to determine whether they relied on the omission from the circulars or on something else.

The plaintiff Blyth said that when he went to the Society's office he had a conversation with the secretary, who told him that the money was as safe as in a savings bank. Blythe said, "Are the rules the same?" by which I understand, "Do the rules correspond with those in the pass-book or have they been altered?" The answer was, "Don't bother about the rules. They do not apply. Just come and let me know when you want it, and you can have it at any time." At a later interview with the secretary he said, "What did you mean by telling me I could get my money at any time and the rules did not apply?" The learned Judge said that he did not believe all the plaintiffs' evidence as to these interviews, but taking it most favourably for Blyth the alleged representation was in substance no more than an assurance, relating to the future, that notwithstanding the existence of the rule providing for suspension Blyth need not be afraid that he would not get his money when he wanted it. That is not a representation as to an existing fact. From Blyth's own evidence, therefore, it is plain that what he relied upon was not the representation that there was no power of suspension in the rules, but the assurance that that power would not be put in force. That is a representation of an intention and not of an existing fact.

In the case of Kubale the facts are even stronger. He had been a member for some months before the transaction of which he now complains, and he says that when he went to pay in the money which he now seeks to recover he said to the secretary, "I see in accordance with rule 5 that directors have power to stop withdrawals altogether," to which the secretary replied, "You must not take any notice of that rule as it was never intended to apply, as the Society has an overdraft. You therefore need not be afraid, as when you require your money the bank overdraft will be increased by the amount which you withdraw." Again the learned Judge said that he did not believe all Kubale's evidence, but taking it most favourably for him, he was well aware of the power of the directors to suspend withdrawals, and he relied, not on the omission from the circulars to mention the particular rule, but on the assurance of the secretary that he need not be afraid that the rule would be put in operation.

With respect to Miss Tighe the case is, perhaps, not quite so clear. She says that when she went first to the office she said to the secretary, "I understood that the rules gave you the right to stop withdrawals at any time," to which the secretary replied, "The rules do not apply to the savings bank deposits at all and will not affect you in any way." She also says that at a later interview she said to the secretary, "You told me the rules would not apply to my deposit." In the face of that, how can it be said that she did not know of the existence of the rule when she applied to become a member? When she agreed to take shares she knew what the rule was, but she says that she relied on the statement in the circulars, which was literally inconsistent with the rule.

On those facts I fail to see that the plaintiffs made out a primâ facie case in respect of the misrepresentation which they allege.

But there is a further defence set up by the appellants. The transactions complained of took place in the case of Blyth in September 1907, in the case of Miss Tighe in January 1908, and in the case of Kubale in February 1908. Kubale had been a member from 1906 and knew the rules perfectly well. All the plaintiffs discovered all the facts not later than the middle of 1909. They made no communication to the Society by way of repudiating the bargain or demanding back their money or otherwise, but remained absolutely silent, until the issue of the writ in September 1911. The defendants set up, amongst other defences, acquiescence and delay. The law on that subject is, I think, settled. I need only refer to the case of Sharpley v. Louth and East Coast Railway Co.[1]. The plaintiffs here became aware of all the facts entitling them to rescind their contracts more than two years before action, and did nothing in the meantime. In Sharpley's Case, which was an action for the rescission of a contract to take shares, James L.J. said[2]:—"If a man claims to rescind his contract to take shares in a company on the ground that he has been induced to enter into it by misrepresentation, he must rescind it as soon as he learns the facts, or else he forfeits all claim to relief."

That is a statement of the law of great authority, and no instance has been given where, after such a delay as there has been here, a man who has become a member of a company and had whatever advantages there might be from being a member, has been allowed at the end of so long a time to change his mind and say, "I was misled and now wish to cease to be a member." There is no instance of such a case, and I think it would be unfortunate that one should be made. This point does not seem to have been pressed upon àBeckett J., as he does not mention it in his judgment. Under these circumstances I think that the plaintiffs fail on this point also. Each of the plaintiffs is in the same position. They have not established that they relied on the omission of the rule from the circulars, and if they did they are barred from relief by their delay.

I think, therefore, that the appeal should be allowed.

Barton J.

I am of the same opinion. What has struck me from the beginning is that the substantial misrepresentation relied on is that although there was in existence, as the plaintiffs knew, a rule enabling the directors to suspend withdrawals, it would not be enforced against them. That is not a representation of an existing fact. There was not a representation that the respondents had the right to withdraw at any time, but there was perhaps a promise that the rule permitting a suspension of withdrawals would be treated by the directors as a dead letter. That to my mind is not a representation of an existing fact.

Even supposing it were, I think the case is covered by the very short judgment of Lord Watson in Derry v. Peek[3], in which he said:—"My Lords, I agree with Stirling J. that, as a matter of fact, the appellants did honestly believe in the truth of the representation upon which this action of deceit is based. It is by no means clear that the learned Judges of the Court of Appeal meant to differ from that conclusion; but they seem to have held that a man who makes a representation with the view of its being acted upon, in the honest belief that it is true, commits a fraud in the eye of the law, if the Court or a jury shall be of opinion that he had no reasonable grounds for his belief. I have no hesitation in rejecting that doctrine, for which I can find no warrant in the law of England." Then he proceeded to say that he accepted without reservation the opinion which Lord Herschell was then about to deliver, and which is a celebrated judgment. There is not in the present case any evidence from which it can fairly be inferred that the representation, if it was one, was made recklessly or without an honest belief in its truth. The Society and its manager seem to have believed that there was no probability that the circumstances of the Society would become such as to necessitate the enforcement of the rule.

As regards the other branch of the case, it is clear upon the authorities, which are numerous, and need not be cited, that it is the duty of a person who enters a society or a company by applying to it for shares, to repudiate the contract, if he wishes it rescinded, as soon as he reasonably can after he has discovered the truth. In some cases it is said that he must do so within a reasonable time, in others that he must do so at once. I accept the proposition that he must act within a reasonable time, because that time must vary according to the nature of the case. In the case of a contract such as this, where it is reasonable to suppose that the fact of one person applying for shares will influence the action of others contemplating the same course, it is clear that the necessity for prompt action is very much accentuated, and it is in respect of cases of that kind that Judges have said that there is a necessity to act with the least possible delay. In any case it is a question of what is reasonable, and it was reasonable in this case that action should be prompt.

Now, it appears to me, without going into detail, that the delay has been so great as to disentitle these plaintiffs to relief. When one considers the nature and circumstances of the contract now sought to be repudiated, the delay amounts to an election not to avoid the contract. It is not in every case that mere delay will suffice. But in this case the rules were well known to two at least of the plaintiffs, and the existence and purport of the particular rule in question was understood by the third, if we accept her own account of her conversation with the manager. It seems to me that the plaintiffs were not exonerated from the duty of taking prompt action, and they delayed for two years.

I agree, therefore, with the judgment which has just been delivered.

Isaacs J. read the following judgment:—

Isaacs J

The two circulars did, in my opinion, contain a misrepresentation, because they stated in an unqualified manner that shareholders could withdraw the whole or any portion of their share capital, as if they had their money in a savings bank, and that though an investment in shares of the Society, it was as accessible as money upon current account, with the further advantage of having the chance of earning 5 per cent. interest. The representation was in fact false, because the rules of the Society at the time the circulars were issued gave power to the directors to suspend withdrawals whenever the circumstances of the Society rendered it necessary. Nothing but the circulars can be relied on, because the learned Judge found as a fact that Burke added nothing to the representations contained in the documents.

The learned primary Judge thought that, in the circumstances, the misstatement was not innocent in the legal sense. I am not sure whether he meant it was fraudulent within the rule of Derry v. Peek[4]. At all events, he considered it blameworthy. It certainly, to my mind, deprived persons likely to be influenced by the circulars from exercising a free judgment as to acting upon it. The circulars were intended to reach a class of persons to whom the clear and unrestricted right of withdrawal must often be of considerable importance.

If it were necessary to determine whether there was fraud or not, I should first have to consider whether the issue was fully before the primary Court. On the pleadings as they stand, the only charge of fraud was abandoned. And it is clear law, on the authority of the highest tribunal, that a charge of fraud must be substantially proved as laid, and that when one kind of fraud has been charged another kind of fraud cannot on failure of proof be substituted for it. That was held by the Privy Council in Abdool Hoosein v. Turner[5], approving of the decision of Lord Eldon in Montesquieu v. Sandys[6]. The issue may, nevertheless, have been actually accepted, and the case conducted on that basis.

But it would not be necessary to determine whether there was fraud or not, even if pleaded, because rescission is independent of fraud. Nor is it necessary to determine the question of whether the doctrine applied in Seddon v. North Eastern Salt Co.[7] and Angel v. Jay[8], cited by Mr. Starke, has any relation to such a case as the present. If that should ever become necessary I should require time to consider those cases, and especially whether the doctrine they enounce is capable of extension to a case like the present, where performance of the bargain is not entirely completed on both sides.

Assuming, however, all other difficulties were out of the way—and as to Kubale his previous membership presents a serious initial obstacle by reason of his knowledge—so as to give a primâ facie right to cancellation of the contracts, each of the respondents is nevertheless, in my opinion, disentitled to succeed by reason of his or her delay.

Before entering into the merits of that objection it is necessary to observe that the learned primary Judge has said nothing on the subject. The pleadings on both sides, however, appear to have been of little effect in controlling the conduct of the trial, and, except as to what transpired at the meetings of the Society, both sides apparently fought out on their broad merits the two questions of attack for misrepresentation, and defence on the ground of laches. I feel, therefore, at liberty to deal with this portion of the case upon the evidence given.

The degree of promptitude which equity requires in claiming rescission of a contract varies with the circumstances. It is influenced, for instance, by the nature of the property involved, whether it be wasting or not, or risky or not, and by the status or relative situation of the persons concerned, as well as other circumstances.

In the case of a contract to take shares in a public company, special promptitude is always considered necessary, and the judgment of James L.J. in Sharpley v. Louth and East Coast Railway Co.[9] is distinct. He said:—"If a man claims to rescind his contract to take shares in a company on the ground that he has been induced to enter into it by misrepresentation, he must rescind it as soon as he learns the facts, or else he forfeits all claim to relief."

In In re Scottish Petroleum Co.[10] three propositions were laid down in the leading judgment of the Court of Appeal, with reference to cases of cancellation of share contracts. The second is relevant. It refers to what it terms "the well recognized rule in equity that a person who has been induced to enter into a contract by the fraudulent conduct of those with whom he has contracted, is entitled to rescind such contract provided he does so within a reasonable time after his discovery of the fraud. In such cases the contract is voidable, not void." The third rule restricts that power to the extent of requiring it to be exercised before winding up, when interests of third parties intervene. In such case the Court withholds its assistance. If a contract be such that at common law it is rescindable by the act of the party, that is, by mere repudiation, the doctrine does not apply, because repudiation itself works avoidance, but in the case of a contract to take shares that is not sufficient. This is pointed out in the same case by Fry L.J.[11], in an important passage:—"In the case of ordinary contracts if they are voidable an express repudiation avoids them. ... This is not the case of an ordinary contract, but of a contract to take shares, which stands on a different footing. As regards such contracts the legislature has interposed, and has provided that they shall be made known in a particular way to shareholders and creditors; notice of them is given to the world. Now the general principle is that no contract can be rescinded so as to affect rights acquired bonâ fide by third parties under it. It is true that the creditors and the other shareholders have not acquired direct interests under the contract, but they have acquired an indirect interest. The shareholders have got a co-contributory, the creditors have got another person liable to contribute to the assets of the concern." This is in line with the observations of Lord Romilly in Kisch's Case[12], referred to by Mr. Mitchell.

In Scholey v. Central Railway Co. of Venezuela[13] Lord Cairns L.C. said:—"The Court would be most careful to see, in a company going on and trading, in which the rights of the shareholders and others varied from day to day, that a person coming to complain of misrepresentation of this kind, and coming to avoid a voidable contract, came within the shortest limit of time which was fairly possible in such a case."

In In re Snyder Dynamite Projectile Co.—Skelton's Case[14] Stirling J. applied these principles and thought a delay even from February 19 to March 21 too long in the circumstances.

Mr. Mitchell sought to escape from the analogy by urging that this Society, a provident society, is in such a different position that the reason does not apply. But there is sufficient resemblance to make the reason equally forcible. The Society is a corporation; creditors have no claims against the individuals, but against the corporation only; the liability of members is limited; there is a register of members, that is compulsory; it is primâ facie evidence; and what is very material as showing the legislative protection of creditors in relation to members, sec. 23 of the Provident Societies Act 1890 preserves to a certain extent the liabilities of past members in winding up.

But even if the difficulty as to creditors were out of the way, there is the mutual relation of members themselves; and the principles enunciated in the Scottish Petroleum Co.'s Case[15] and other cases show that equity would consider that relation a material circumstance in connection with the release of a shareholder.

It is unnecessary for me to examine the facts relative to the delay. That has been done by the learned Chief Justice. I will only say that in the result they show beyond controversy that the material facts were all known to the respondents years before action, and yet they continued their membership. Knowledge or belief of rights is, no doubt, an essential part of the defence of acquiescence in the sense necessary for such a defence; but it is not always necessary to prove that by direct evidence. The circumstances may be such that it will be presumed (see per Knight Bruce L.J. in Stafford v. Stafford[16]); and in so simple a case as a discovered misrepresentation, or, as the respondent Miss Tighe says, a "cheat," it is almost an irresistible inference that a person sui juris, sound in mind and body, and of ordinary intelligence, would understand enough to ask to be released altogether if he so desired. If, however, he were only dissatisfied with the exercise, as distinguished from the existence, of the power of suspension, and were willing to take the chance of its removal on the advent of more prosperous times bringing at the same time profits and interest, then it amounts to an election to stand by the contract and his fellow shareholders. This is what the respondents must be taken to have done and so I agree that the appeal should be allowed.

Appeal allowed. Judgment appealed from discharged. Judgment entered for the defendants.

Solicitors, for the appellants, Snowball & Kaufmann.

Solicitors, for the respondents, McInerney, McInerney & Wingrove.

[1] 2 Ch. D., 663.

[2] 2 Ch. D., 663, at p. 685.

[3] 14 App. Cas., 337, at p. 345.

[4] 14 App. Cas., 337.

[5] L.R. 14 Ind. App., 111.

[6] 18 Ves., 302.

[7] (1905) 1 Ch., 326.

[8] (1911) 1 K. B., 666.

[9] 2 Ch. D., 663, at p. 685.

[10] 23 Ch. D., 413, at p. 429.

[11] 23 Ch. D., 413, at pp. 438, 439.

[12] L. R. 2 H. L., 99.

[13] L. R. 9 Eq., 266, n.

[14] 68 L.T., 210.

[15] 23 Ch. D., 413.

[16] [1857] EngR 474; 1 DeG. & J., 193, at p. 202.