Smith v Noss [2006] NSWCA 37 (8 March 2006)

CITATION: Smith v Noss [2006] NSWCA 37

FILE NUMBER(S):

40601/04

40602/04

HEARING DATE(S): 9 and 10 February 2006

DECISION DATE: 08/03/2006

PARTIES:

Bronwyn Smith - Appellant/Cross Respondent

Stephen Thomas Frere Noss - Respondent/Cross Appellant

JUDGMENT OF: Beazley JA Giles JA Ipp JA

LOWER COURT JURISDICTION: Supreme Court

LOWER COURT FILE NUMBER(S): SC 3697/01, SC 1101/01

LOWER COURT JUDICIAL OFFICER: Gzell J

COUNSEL:

N Cotman SC & C Locke - Appellant

G Laughton SC & W G Hodgekiss

SOLICITORS:

Campbell Hughes Solicitors - Appellant

Stephen Noss & Associates - Respondent

CATCHWORDS:

Partnership - whether entry into partnership caused by false representations - whether would not have entered into partnership if truth known - consideration of need for "specific evidence of reliance" or evidence explaining thought processes at the time - error in insistence on such evidence - consequences as to new trial including of associated credibility-based issues.

LEGISLATION CITED:

DECISION:

Proposed orders: (1) Set aside the declarations and orders made by Gzell J in proceedings 1101/01 on 1 July 2004 and the judgment for the appellant in proceedings 3697/01; (2) Order that there be a fresh hearing on the liberty to apply in proceedings 1101/01 and a new trial of the appellant’s claims in proceedings 3697/01; (3) The respondent to pay 75 per cent of the appellant’s costs of the appeal; (4) The costs to date of the proceedings on the liberty to apply in proceedings 1101/01 and of proceedings 3697/01 to be paid as ordered by the judge(s) conducting the fresh hearing and the new trial; (5) Respondent to have a certificate under the Suitors Fund Act if otherwise qualified. Order now made that the proceedings are listed before Giles JA at 9.30 am on 15 March 2006, on which date the parties’ attitudes to mediation should be made known and, if necessary, directions will be given for filing submissions on whether the Court should make an order for compulsory mediation.

JUDGMENT:

IN THE SUPREME COURT

OF NEW SOUTH WALES

COURT OF APPEAL

CA 40601/04

CA 40602/04

SC 3697/01

SC 1101/01

BEAZLEY JA

GILES JA

IPP JA

Wednesday 8 March 2006

SMITH v NOSS

SMITH v NOSS

Judgment

1 BEAZLEY JA: I agree with Giles JA.

2 GILES JA: Mr Stephen Noss and Ms Bronwyn Smith were legal practitioners, admitted to practise on 14 June 1974 and 18 February 1984 respectively. Mr Noss had worked as an employed solicitor and then as a partner in a number of firms, and in 2000 was practising as a sole practitioner under the firm name Central Law from offices in Museum Chambers. He had particular experience in commercial law, litigation and family law. Ms Smith had worked as an employed solicitor until, in March 1999, she commenced practise as a sole practitioner under the firm name Smith Partners, also from offices in Museum Chambers, whilst working as well on a part-time basis for NRMA Insurance Ltd (“NRMA”) and the Law Society of New South Wales. By about April 2000 she had ceased the part-time work, and her work was almost exclusively the conduct on behalf of NRMA of litigation in the Small Claims Division of the Local Court over motor vehicle property claims, typically involving disputes over repair costs, hire costs and consequential loss.

3 On 1 October 2000 Mr Noss and Ms Smith entered into partnership. They practised under the firm name Noss & Smith Partners, Lawyers until the termination of the partnership on 30 November 2000. The termination was acrimonious, as has been the subsequent litigation between them.

4 On 12 January 2001 Mr Noss brought proceedings claiming the conventional orders for winding up the partnership business under the direction of the Court, the appointment of a receiver and manager and a reference to a Master in the Equity Division to conduct an inquiry and take accounts. On 15 March 2001 orders were made by consent for the winding up of the partnership, for the appointment of Mr John Lord as receiver and manager, and -

“5. Liberty to apply to either party following the report of John Lord of the asset and liability position of the partnership for further directions including, without limitation, an order that these proceedings be referred to a Master in the Equity Division to take accounts of and an enquiry into:

(a) all of the dealings and transactions of the said partnership and of the said partners or either of them;

(b) what are the assets and liabilities of the said partnership;

(c) what are the respective interests of the said partnership and the said assets.

6. Liberty to apply to either party including the Receiver and Manager on two (2) days notice.”

5 As is evident, the parties had agreed that Mr Lord should “be appointed on an informal basis to carry out the necessary accounting exercise” (this is taken from “agreed guidelines” provided to him) and that he should prepare a report, and the future course of the winding up of the partnership was to be further considered in the light of the report.

6 On 23 July 2001, however, Ms Smith commenced proceedings in which, as later amended, she alleged that in discussions prior to entering into the partnership Mr Noss made a number of representations which were false or without reasonable grounds, thereby engaging in misleading or deceptive conduct in trade or commerce contrary to s 42 of the Fair Trading Act 1987 (“the Act”); that but for the conduct she would not have entered into the partnership; and that she had suffered loss and damage by the conduct. She claimed damages and unspecified orders pursuant to s 72 of the Act. Mr Noss cross-claimed in the proceedings, alleging that he had entered into the partnership in reliance on false representations made by Ms Smith and that during and after the partnership Ms Smith had breached in a number of respects a fiduciary duty owed to him. He claimed an amount in respect of the breaches of fiduciary duty, equitable compensation and damages.

7 Mr Lord provided a report dated 25 March 2002. Order 5 made on 15 March 2001 had referred to a report “of the asset and liability position of the partnership”. The report went further. Mr Lord provided on alternative bases balance sheets for the partnership as at 30 November 2000, profit and loss accounts for the two months ended 30 November 2000 and calculations of amounts due to or owing by the two partners. The calculations took into account his remuneration in acting as receiver and manager.

8 The report of Mr Lord left disagreement between the parties, quite apart from the claims and cross claims in the proceedings of 23 July 2001. Mr Lord recorded that Mr Noss contended that pre-partnership work in progress (“WIP”) of the individual practices of Ms Smith and himself was to be included as an asset of the partnership, allocated on a 50/50 basis, and that Ms Smith alleged that the pre-partnership WIP of the two individual practices was not to be included as a partnership asset. He recorded also a minor dispute over ATM withdrawals. He prepared the accounts on alternative bases reflecting these disagreements, together with an alternative in which pre-partnership liabilities were included. More fundamentally, in the return to the Court on the liberty to apply reserved on 15 March 2001 there was dispute not only over which of the alternative accountings in Mr Lord’s report should be adopted, but over whether any of them should be adopted or whether there should be an inquiry and taking of accounts before a Master. It will be recalled that order 5 made on 15 March 2001 left open that course.

9 Gzell J heard together the proceedings on the liberty to apply and the proceedings of 23 July 2001, with the evidence in each evidence in the other. He said -

“5 ... The first issue I must determine is how work in progress was to be treated by the partners. The second issue is whether the receiver’s figures with respect to his appropriate alternative analysis should be accepted or whether an inquiry should be held by a Master and the accounts taken by him. The third issue is whether misrepresentations were made by Mr Noss and, if so, whether an inquiry should be held by a Master as to the loss or damage sustained by Ms Smith. The final issue is whether Ms Smith made misrepresentations or was in breach of fiduciary duty in terminating the partnership and in her dealings with respect to it thereafter and whether a Master should inquire into any loss or damage sustained by Mr Noss.”

10 His Honour found that the agreement between the parties was “that the work in progress of each was to be introduced to the partnership, that they were to be equal partners and the work in progress was to be treated as being of equal value”. He declined to accept Mr Lord’s figures, and considered that Mr Noss had “made out his claim that a Master take accounts and inquire into the dealings and transactions of the partnership, its assets and liabilities during the two month period of its existence”. He did not make complete findings as to the misleading or deceptive conduct on the part of Mr Noss on which Ms Smith relied, but found as to all the representations alleged that Ms Smith had “failed to establish a causal connection between them, if made, and her entry into partnership with Mr Noss”. He took a like view in relation to Mr Noss’ reliance on representations by Ms Smith, and held that his cross-claim in other respects also failed.

11 In the partnership proceedings Gzell J made the substantive declarations and orders -

“1. That the partnership between the plaintiff and the defendant known as ‘Noss & Smith Partners, Lawyers’ commenced on 1 October 2000 and was dissolved on 30 November 2000.

2. That it was a term and condition of the partnership agreement that the Work in Progress of the plaintiff and the Work in Progress of the defendant as at 1 October 2000 would become assets of the partnership and that such Work in Progress would not attract any balancing entry in the capital accounts and be treated as being of equal value.

3. That it was a term and condition of the partnership agreement that the plaintiff and the defendant would be equal partners in the partnership.

4. That it was a term and condition of the partnership agreement that the debtors of the plaintiff and the debtors of the defendant as at 1 October 2000 would not become assets of the partnership.

5. That it was a term and condition of the partnership agreement that filing fees paid by the defendant in respect of matters being conducted for NRMA Insurance Limited which were included in the defendant’s Work in Progress prior to the partnership would be reimbursed when fees were paid by NRMA to the partnership.

6. That it was a term and condition of the partnership agreement that Mr Noss assume responsibility for whatever the level of his overdraft was at the commencement of the partnership excluding any partnership expenses as had been paid from the account.

The Court Orders:

7. That the figures contained in the Receiver’s report dated 25 March 2004 be not adopted.

8. That an account be taken and an inquiry be held:

(a) as to all the dealings and transactions of the partnership and of the partners or either of them in relation to the partnership and its assets and liabilities;

(b) as to what were the assets and liabilities of the partnership as at 30 November 2000 and what became of them;

(c) in accordance with the reasons for judgment of Gzell J delivered on 24 June 2004.”

12 The formal orders were not in the appeal papers, but it was common ground (and the Court’s record show) that in the proceedings of 23 July 2001 his Honour ordered that there be judgment for Mr Noss on Ms Smith’s claim and judgment for Ms Smith on Mr Noss’s cross-claim.

13 Ms Smith appealed, with leave so far as necessary, on the questions of pre-partnership WIP (declaration 2) and referral to a Master (orders 7 and 8), and against the failure of her claims in the proceedings of 23 July 2001. Mr Noss cross-appealed (perhaps it should have been a notice of contention) in relation to a finding in those proceedings that he had misrepresented his gross earnings, but abandoned the cross-appeal at the hearing. Mr Noss did not appeal against the failure of his cross-claims in the proceedings of 23 July 2001. He filed a notice of contention in relation to upholding Gzell J’s decision on the question of referral to a Master.

14 Although in stating the issues Gzell J referred to an inquiry as to loss or damage sustained if misrepresentations were made by Mr Noss, the relief claimed in the proceedings of 23 July 2001 included relief pursuant to s 72 of the Act. We were told that at the hearing before his Honour Ms Smith had sought an order setting aside the partnership agreement ab initio. She sought the same relief on appeal. If Ms Smith succeeds in her appeal against the failure of her claims in the proceedings of 23 July 2001, there could be consequences for the other questions, although whether success in the appeal would result in a new trial was in contest. It is appropriate to deal first with this part of the appeal.

Ms Smith’s proceedings of 23 July 2001

15 In her amended statement of claim Ms Smith alleged that Mr Noss made the representations -

(a) in about August-October 1999, that before becoming a partner in a law firm at Auburn he had been a partner in Kemp Strang, Solicitors (para 7);

(b) on two or three occasions prior to July 2000, that in his practice Central Law “he had received instructions in new matters each of which the defendant expected would generate professional fees in excess of $100,000” (para 8);

(c) in about July-August 2000, that “he had extensive experience in developing commercial legal practices and had built considerable goodwill in his name” (para 9);

(d) in about July-August 2000, that “his practice Central Law had gross earnings of between $200,000 and $300,000 per annum” (para 10);

(e) in about July-August 2000, that “the partnership practice would have gross earnings of between $200,000 and $300,000 per annum from clients introduced into the practice by the defendant in matters handled by the defendant” (para 11);

(f) in about July-August 2000, that “he had an overdraft facility of $50,000 with National Australia Bank Limited which would be available for use by the partnership at the commencement thereof and which would be substantially undrawn at that time” (para 12);

(g) in July-August 2000, that he was on the board of a particular newspaper which had carried advertisements for Central Law free of charge and would carry advertisements for Noss & Smith Partners, Lawyers free of charge (para 13); and

(h) prior to 1 October 2000, that “he did not have any outstanding claims against him in his capacity as solicitor” (para 14).

16 After allegations of falsity and absence of reasonable grounds and of contravention of the Act, Ms Smith alleged that “[b]ut for the conduct engaged in by the defendant in contravention of the Fair Trading Act the plaintiff would not have entered into the partnership with the defendant” (para 21).

17 On appeal, Ms Smith relied only on misleading and deceptive conduct to be found in representations (d) and (e) above (paras 10 and 11 in the statement of claim), relying also on representation (f) above (para 12) as material to the causal effect of that conduct. It is necessary, however, to go to Gzell J’s findings as to all the representations and their causal connection with entry into the partnership. As I have said, his Honour found that Ms Smith had failed to establish the causal connection. His Honour’s findings should be seen in the light of the direct evidence as to the causal connection.

18 Ms Smith’s evidence in chief of the representations was given in an affidavit sworn on 21 March 2003. Mr Noss replied to that affidavit in an affidavit sworn on 17 October 2003, to which Ms Smith responded in an affidavit sworn on 20 November 2003. The affidavits all dealt with many other matters, but Ms Smith in her affidavits did not expressly assert that she would not have entered into the partnership but for the conduct found in the making of the representations.

19 In an affidavit sworn on 3 December 2003, however, Ms Smith said -

“4. Had I known that the representations referred to in paragraphs 7, 8, 9, 10, 13(a), 13(b) and 14 of the said Amended Statement of Claim or a majority of them were false or that Mr Noss did not have reasonable grounds for making the representations referred to in paragraphs 11, 12 and 13(c) of the said Amended Statement of Claim or a majority of them, I would never have proceeded to enter into a partnership with Mr Noss effective 1 October 2000.

5. Had I known that any of the representations referred to in paragraph 9, 10 or 14 were false I would never have proceeded to enter into a partnership with Mr Noss effective 1 October 2000.

6. Had I known that Mr Noss did not have reasonable grounds for making the representation referred to in paragraph 11 of the said Amended Statement of Claim I would never have proceeded to enter into a partnership with Mr Noss effective 1 October 2000.”

20 The cross-examination of Ms Smith did not challenge these statements. The affidavit of 3 December 2003 was not mentioned, it was not put to Ms Smith that knowledge that the representations or any of them were false or without reasonable grounds would not have affected her entry into the partnership, and it was not put to Ms Smith that her entry into the partnership came about in circumstances in which the representations were of no causal significance. The cross-examiner did put the direct question, “Why did you go into partnership with Stephen Noss”, but left the answer without further exploration and without using it as a platform for a challenge to the statements in the affidavit. The answer was -

“A. For a whole range of reasons, which included I was very busy and needed some help, needed to have systems put in place, needed, wanted to diversify my practice and he said that he had had experience in that and could assist in that way. So a whole range of reasons.”

The judge’s reasons

21 The judge said as to all the representations and their causal connection with entry into the partnership -

“29 Ms Smith alleged that Mr Noss made a number of representations to her prior to their entering into partnership. It was her case that had she known the representations were false or made recklessly she would not have entered into partnership with Mr Noss and would not have sustained the loss or damage of sharing the profits from the NRMA files with Mr Noss.

30 Ms Smith said that Mr Noss told her he had been a partner in Kemp Strang solicitors. Mr Noss said he believed he was a partner of Barraket Kemp & Strang for a short period. He said he received a salary and not a share of profits. He told Ms Smith that he established a suburban office for Barraket Kemp & Strang at Burwood. It was put to Mr Noss that he was not a partner in the firm. His name did not appear in the Law Almanac as a partner. Mr Noss denied the suggestion. The evidence went no further.

31 I found the evidence of both Mr Noss and Ms Smith to be unsatisfactory. When confronted with the Law Almanac, Mr Noss volunteered for the first time that he received a salary from Barraket Kemp & Strang. The suggestion that he was a salaried partner struck me as an opportunistic response and raised doubts in my mind as to his evidence.

32 However, while I found Mr Noss’s explanation unsatisfactory, there was no direct evidence that he was not a salaried partner. In my view Ms Smith did not establish that the statement was false.

33 In one of Ms Smith’s affidavits she swore that had she known that the representations, including the representation of membership of the Barraket Kemp & Strang partnership, were false she would not have entered into partnership with Mr Noss. I reject that evidence with respect to the partnership representation. Mr Noss was admitted to practice in 1974 and after being employed by Laws & Dean and, initially, by Barraket Kemp & Strang, he became a partner in Noss & Howitt, Palmer Jordain Noss & Howitt and in Williams Palmer Noss and the principal of Central Law.

34 There was no evidence from Ms Smith explaining how she was influenced by the assertion that after employment with Barraket Kemp & Strang, Mr Noss became for a short period of time a salaried partner. Even if the assertion was false, it does not appear to me to be likely that it had any influence upon Ms Smith’s decision to go into partnership with Mr Noss. He had been in practice for many years as a partner and as a sole practitioner. If for a brief period of his practice he was a salaried employee of Barraket Kemp & Strang rather than a partner, it made little difference to his experience.

35 The Fair Trading Act 1987, s 42(1) provided that a person should not, in trade or commerce, engage in conduct that was misleading or deceptive or was likely to mislead or deceive. I am not satisfied that Mr Noss made the representation that he was a partner of the solicitor’s firm and am not satisfied that he was in breach of that provision. Furthermore, s 68(1) provided that a person who suffered loss or damage by conduct of another person that was in contravention of s 42(1) might recover the amount of the loss or damage by action against the other person or against any person involved in the contravention. The use of the word “by” in that provision connotes causation (Wardley Australia Ltd v Western Australia [1992] HCA 55; (1992) 175 CLR 514 at 525). There was no specific evidence that Ms Smith relied upon the representation to her detriment.

36 Ms Smith alleged that Mr Noss told her that Central Law had received instructions in new matters each of which he expected would generate professional fees in excess of $100,000. Mr Noss denied making any such representation. He accepted that had he said so it would have been untrue. Ms Smith said that Mr Noss had made this assertion on two or three occasions prior to July 2000.

37 I am not satisfied that, had such statements been made, they played any part in inducing Ms Smith to enter partnership with Mr Noss. Ms Smith had to find assistance in handling the thousands of files that arrived from NRMA and she had to find a way to finance the payment of filing fees of $56 per matter. She initially rejected the idea of a partnership with Mr Noss but changed her mind after a weekend visit to the Blue Mountains and was thereafter anxious that the partnership should be established as quickly as possible.

38 In August 2000 Ms Smith asked Ms Rydstrand why Mr Noss was stalling and what was stopping him from going ahead with the partnership. She asked Ms Rydstrand to talk to Mr Noss and convince him to go ahead. Ms Smith denied that she had this conversation with Ms Rydstrand but Ms Rydstrand was not cross examined on this basis. I have no reason to reject her evidence.

39 There was no evidence that the urgency with which Ms Smith approached the formation of the partnership once she decided that it should go ahead was in any way related to representations as to the size of Mr Noss’s practice. Nor was there any evidence as to how the alleged representations played a part in her decision. In the absence of evidence of her decision making process, I conclude that Ms Smith failed to overcome her onus of establishing a causal connection between the alleged representations and her decision to enter partnership.

40 Ms Smith alleged that Mr Noss told her he had extensive experience in developing commercial legal practices and had built considerable goodwill in his name. Mr Noss denied he made such a representation but said had he done so it would probably have been true. This allegation falls into the same category as those discussed above. I am not satisfied that the representation, if made, played any part in Ms Smith’s determination to enter into partnership.

41 Ms Smith alleged that Mr Noss told her Central Law had gross earnings of between $200,000 and $300,000 per annum and that the partnership would have gross earnings of between $200,000 to $300,000 from clients introduced by him. Mr Noss’s tax returns for the years ended 30 June 1998 to 30 June 2000 were in evidence. They revealed annual fees between approximately $133,000 and $187,000.

42 Mr Noss agreed that he made the representation and said it was true. He said his tax returns had nothing to do with his gross fees. I do not accept that evidence. The income tax returns showed the figures as total business income from which business expenses were deducted. However, for the reasons discussed above I am not satisfied that Ms Smith placed reliance upon the representation in making her decision to enter into the partnership.

43 Ms Smith alleged that Mr Noss told her he had an overdraft facility of $50,000 that would be available for use by the partnership and would be substantially undrawn. Mr Noss agreed that he represented to Ms Smith that he expected his overdraft to be right down when the partnership commenced. He agreed it was not but said that was not his fault.

44 Ms Smith alleged that Mr Noss told her he was on the board of a Sutherland Shire newspaper that carried advertisements for Central Law free of charge and the newspaper would carry advertisements for Noss & Smith Partners, Lawyers free of charge.

45 Mr Noss denied he said he was on the board of a Sutherland newspaper. He said he told Ms Smith that a newspaper carried advertisements for Central Law free of charge and he said that if the partnership worked for them on a contra basis they would carry advertisements for the firm free of charge. He denied he gave an unqualified assurance that this would happen. He said it was a small newspaper that could not afford to do things for nothing.

46 Finally, Ms Smith alleged that Mr Noss told her that he did not have any outstanding claims against him in his capacity as a solicitor. Mr Noss said that he told Ms Smith of an outstanding claim. It was put to him that that was untrue and he denied it.

47 With respect to all the representations Mr Noss was alleged to have made, I am of the view that Ms Smith failed to establish a causal connection between them, if made, and her entry into partnership with Mr Noss. In my view it is insufficient for the purposes of the Fair Trading Act 1987, s 68(1) simply to assert, as Ms Smith did, that had she known that all the representations were false, or that Mr Noss did not have reasonable grounds for making the representations, or a majority of them, she would not have proceeded to enter into the partnership. The effect the representations had on Ms Smith needed to be analysed to enable the court to form a view as to the reliance placed on them by her.

48 In my judgment Ms Smith has failed to establish any entitlement to the relief claimed in her amended statement of claim.”

22 It will be seen that the judge did not find, or clearly find, whether or not representations (b) above (para 8, instructions worth $100,000), (c) above (para 9, experience), (g) above (para 13, newspaper advertising) and (h) above (para 14, outstanding claims) were made. He was not satisfied that representation (a) above (para 7, partner in Kemp Strang) was made. A representation about earnings of $200,000 to $300,000 was found to have been made; it is not clear whether the judge found the representation as to existing earnings ((d) above, para 10) or future earnings ((e) above, para 11). Representation (f) above (para 12, future undrawn overdraft) was found to have been made.

23 The judge referred in his [33] to what must have been Ms Smith’s affidavit of 3 December 2003. He said at that point that he rejected that evidence “with respect to the partnership representation”, giving two reasons. One was that there was no evidence from Ms Smith explaining how she was influenced by the partnership representation. The other was that it did not seem to his Honour likely that the partnership representation had any influence upon Ms Smith’s decision to go into partnership with Mr Noss, because salaried employment, rather than partnership for a brief period, made little difference to Mr Noss’ experience. In relation to the first reason, after emphasis that “by” in s 68(1) of the Act connoted causation, his Honour said that there was “no specific evidence that Ms Smith relied upon the representation to her detriment”.

24 Absence of explanation or of specific evidence of reliance on representations, in various forms of words including (at [38]) absence of evidence of Ms Smith’s decision-making process, was important in relation to the other representations, and some observations should be made at this point.

25 First, the essential question is causation. There may be causation from misleading or deceptive conduct if the conduct lies in failing to disclose that which in the circumstances should have been disclosed. It is not a natural use of the notion of reliance to say that there was reliance on the failure in disclosure, but causation can be found if disclosure would have caused inaction or action other than that which was taken: as was said by Besanko and Vanstone JJ in Smith v Maloney (2005) 92 SASR 498 at 514-5 -

“In a case where there has been failure to advise, as distinct from the provision of incorrect advice, it is somewhat artificial to formulate the test of causation in terms of real inducement because the court is required to consider a hypothetical question namely, what would the plaintiff have done had the defendant provided the advice he was bound to provide.”

26 Even where the misleading or deceptive conduct lies in disclosing something – making a representation which is false – the notion of reliance must be used with care. Causation will be established if there would have been inaction or some other action had it been known that the representation was false. Since the representee did not know the falsity of the representation, again there is a hypothetical question, and in such a case the scope for the representee to give evidence of thought processes at the time may be quite limited and “reliance” may mean no more than that the representee would have acted differently had it been known that the representation was false. To speak of a need for explanation or for specific evidence of reliance, or for evidence of a decision-making process, can lead to error; the question is one of causation.

27 Secondly and more fundamentally, specific evidence of reliance is not essential for proof of causation. Such evidence may be one strand, perhaps an important one, in the factual skein, but causation may be found without it. So Wilson J said in Gould v Vaggelas (1985) 157 CLR 215 at 238 -

“Where a plaintiff shows that a defendant has made false statements to him intending thereby to induce him to enter into a contract and those statements are of such a nature as would be likely to provide such inducement and the plaintiff did in fact enter into that contract and thereby suffered damage and nothing more appears, common sense would demand the conclusion that the false representations played at least some part in inducing the plaintiff to enter into the contract. However, it is open to the defendant to obstruct the drawing of that natural inference of fact by showing that there were other relevant circumstances. Examples commonly given of such circumstances are that the plaintiff not only actually knew the true facts but knew them to be the truth or that the plaintiff either by his words or conduct disavowed any reliance on the fraudulent representations. It is entirely accurate to speak of an onus resting on a defendant to draw attention to the presence of circumstances such as those I have described in order to show that the inference of the fact of inducement which would ordinarily be drawn from the fraudulent making of a false statement calculated to induce a person to enter into a contract followed by entry into that contract should not in all the circumstances be drawn. But it is no more than an evidentiary onus — an obligation to point to the existence of circumstances which tend to rebut the inference which would ordinarily be drawn from the primary facts. When all the facts are in, the fact-finding tribunal must determine whether or not it is satisfied on the balance of probabilities that the misrepresentations in question contributed to the plaintiff's entry into the contract.”

28 This was preceded by the much earlier statement by Lord Blackburn in Smith v Chadwick (1884) 9 App Cas 187 at 196-7 -

“I do not think it is necessary, in order to prove this, that the plaintiff always should be called as a witness to swear that he acted upon the inducement. At the time when Pasley v. Freeman was decided, and for many years afterwards, he could not be so called. I think that if it is proved that the defendants with a view to induce the plaintiff to enter into a contract made a statement to the plaintiff of such a nature as would be likely to induce a person to enter into a contract, and it is proved that the plaintiff did enter into the contract, it is a fair inference of fact that he was induced to do so by the statement. In Redgrave v. Hurd the late Master of the Rolls is reported to have said it was an inference of law. If he really meant this he retracts it in his observations in the present case. I think it not possible to maintain that it is an inference of law. Its weight as evidence must greatly depend upon the degree to which the action of the plaintiff was likely, and on the absence of all other grounds on which the plaintiff might act.”

See also Metalcorp Recyclers Pty Ltd v Metal Manufacturers [2003] NSWCA 213 at [50]- [52].

29 Thirdly, there was specific evidence from Ms Smith that she would not have entered into the partnership had she known that a collection of the representations (including that as to the Kemp Strang partnership) or a majority of them were false (para 4 of the affidavit). If accepted, and subject to working out a sufficient majority of the collection, this was specific evidence of causation. There was specific evidence from Ms Smith that she would not have entered into the partnership had she known that the representations presently in question, (d) and (e) above (paras 10 and 11) were false or without reasonable grounds (paras 5 and 6 of the affidavit). The evidence was in the form of blunt statements, but it was very specific as to causation. It was important amongst the facts on which causation was to be determined.

30 Returning to Gzell J’s reasons, his Honour then turned to representation (b) above (para 8, instructions worth $100,000), and in his [37] – [39] again gave two reasons for declining to be satisfied that, if the representation had been made, it played any part in inducing Ms Smith to enter into the partnership with Mr Noss. The first reason began with the finding that Ms Smith had to find assistance in handling large numbers of NRMA files and a way to finance the payment of filing fees of $56 per matter, apparently as a consideration which caused Ms Smith to enter into the partnership although not characterised by his Honour as the compelling consideration to the exclusion of all others. It went on to remark that there was no evidence “that the urgency with which Ms Smith approached the formation of the partnership once she decided that it should go ahead was in any way related to the representations as to the size of Mr Noss’ practice”. It may fairly be asked why it should have been related and why there should have been such evidence; if there was causal effect of the representation in contribution to Ms Smith’s decision to enter into the partnership, that is consistent with her thereafter seeking urgency. The second reason was that there was no evidence “as to how the alleged representations played a part in her decision”, the plural taking up the earlier generalised “representations as to the size of Mr Noss’ practice”, and that Ms Smith had not discharged her onus of proof “[i]n the absence of evidence of her decision making process”.

31 His Honour turned to representation (c) above (para 9, experience), and said only that it fell into “the same category as those discussed above”. Turning to representations (d) and (e) above, (paras 10 and 11, existing earnings and future earnings), or at least one of them, he said in his [42] that “for the reasons discussed above I am not satisfied that Ms Smith placed reliance upon the representation in making her decision to enter into the partnership”.

32 I will return to these representations presently in question, and for now seek only to identify the “reasons discussed above”. They do not seem to be the reasons in relation to representation (a) above (para 7, partner in Kemp Strang), which at least in part were that salaried employment rather than partnership at Kemp Strang made little difference to Mr Noss’ experience. They must have been the reasons his Honour gave with respect to representation (b) (para 8, instructions worth $100,000), as extended to representations “as to the size of Mr Noss’ practice”.

33 His Honour did not give individual reasons concerning causal connection with entry into the partnership in relation to the remaining representations. He took up all the representations in his [47]. The paragraph bears repeating -

“47 With respect to all the representations Mr Noss was alleged to have made, I am of the view that Ms Smith failed to establish a causal connection between them, if made, and her entry into partnership with Mr Noss. In my view it is insufficient for the purposes of the Fair Trading Act 1987, s 68(1) simply to assert, as Ms Smith did, that had she known that all the representations were false, or that Mr Noss did not have reasonable grounds for making the representations, or a majority of them, she would not have proceeded to enter into the partnership. The effect the representations had on Ms Smith needed to be analysed to enable the court to form a view as to the reliance placed on them by her.”

Consideration of the judge’s reasons

34 It may be quibbling that Ms Smith asserted individually that if she had known that representations (e) and (f) above (paras 10 and 11, existing earnings and future earnings) were false or without reasonable grounds, she would not have entered into the partnership. For them, there was no question of a sufficient majority of false representations. His Honour’s [47], however, showed insistence on more than the statements in Ms Smith’s affidavit, and that his Honour considered that the absence of what he had earlier described as specific evidence of reliance, as evidence as to how the representations played a part in Ms Smith’s decision and as evidence of her decision-making process, itself meant that causation had not been established. In referring at the end of his [47] to the need for analysis of the effect of the representations on Ms Smith, his Honour meant analysis by Ms Smith in evidence of that kind.

35 That bears upon how the judge’s reasons as to the representations presently in question are to be understood, the “reasons discussed above”. In my view, fundamental to his Honour’s conclusion that Ms Smith had not established a causal connection with her decision to enter into the partnership was his second reason, the absence of evidence of her decision-making process; not because in considering the evidence in its entirety absence of evidence of Ms Smith’s decision-making process led as a matter of fact to dominance of his first reason, but because the evidence of analysis by Ms Smith was required and in its absence he could not find causation.

36 On this understanding of his Honour’s reasons, in my respectful opinion he was in error. Ms Smith had squarely said that, had she known the truth, she would not have entered into the partnership. It was not necessary in order to establish causation that she go further, on pain of failure in proof of causal connection. An analysis of the effect the representations had on Ms Smith was necessary, but it was an analysis for the judge on the evidence as a whole; and it was for his Honour even though Ms Smith had not engaged in it.

37 I am assisted in my conclusion that his Honour took an unduly strict approach to causation by two matters.

38 First, in my opinion representations (e) and (f) above (paras 10 and 11, existing earnings and future earnings) were “of such a nature as would be likely to provide ... inducement” to enter into the partnership (Gould v Vagellas, above); or put differently it is inherently likely that Ms Smith would not have entered into the partnership if she had known that they were false. This underlines that explanation by Ms Smith of her decision-making process was not a necessity. Further explanation of this matter follows.

39 Ms Smith was acting for NRMA under an agreement which meant that she received no remuneration if the claim resolved at letter of demand stage and fixed amounts of remuneration depending on resolution after the issue of a statement of claim, after obtaining statements, after pre-trial review, or after a hearing. No remuneration was payable until the claim had been resolved. She had to fund the filing fee on the issue of a statement of claim, at the time $56.00, and was not reimbursed until the claim had been resolved.

40 Ms Smith was receiving instructions from NRMA at the rate of about 200 per week. She was working very long hours, and had some assistants, but was not coping with the volume of work. Her overdraft was almost at its limit, and she faced difficulty in funding the filing fees. Remuneration from resolved claims would be slow, because a great many were on hold awaiting decision of test cases. This lay behind Gzell J’s observations, in his [33], that Ms Smith “had to find assistance in handling the thousands of files that arrived from NRMA and she had to find a way to finance the payment of filing fees of $56 per matter”.

41 A partnership, not necessarily with Mr Noss, could provide the experience of another practitioner in establishing systems for dealing with the work, further assistants and funding for the filing fees. But what the partner brought to the partnership would be important, because the partnership would have to fund the filing fees and have financial resources sufficient to carry out the NRMA work, with further assistants, until the further time when significant remuneration would come in upon the resolution of claims.

42 Mr Noss’ representations that Central Law had gross earnings of between $200,000 and $300,000 per annum, and that the partnership would have those gross earnings from clients introduced by him, were thus of their nature important to any decision by Ms Smith to enter into the partnership. Receipt of remuneration for the NRMA work was likely to be considerably deferred, because fees were not payable until the conclusion of the matters and many of the claims were in limbo awaiting decision of the test cases. Mr Noss himself told Ms Smith in pre-partnership discussion that they would have a hard time managing overheads and would “have to survive” until NRMA matters fructified, and in late September 2001 wrote to a financier seeking to factor filing fees. Ordinarily one partner bringing work to a partnership would be interested in the value of the work brought by the other partner, but here there was more. The income stream from Mr Noss’ practice would be very significant in paying the overheads and wages, including for any additional assistants, in managing the NRMA matters, and in funding the filing fees. Its significance would be enhanced by Mr Noss’ assertion to Ms Smith that he needed to draw at least $10,000 to $15,000 per month to meet certain personal commitments, and by representation (b) above (para 8, instructions worth $100,000); because the income stream would contribute to reduction of Mr Noss’ overdraft, as Mr Noss represented would occur, whereby the overdraft could be a source of funding for the filing fees.

43 When Gzell J regarded the need for assistance and financing the payment of filing fees as a consideration in Ms Smith’s entry into the partnership, see his [37], that did not close off that Ms Smith would not have entered into the partnership had she known that the representations were false. On the contrary, it made falsity of the representations all the more important in determining whether, if the representations had not been made, she would not have entered into the partnership. I have earlier commented on his Honour’s reference to Ms Smith’s desire for urgency, which in my opinion is quite consistent with a causal connection between the representations and her entry into the partnership.

44 The second matter can be stated more briefly. As I have indicated, Ms Smith’s statements in her affidavit of 3 December 2003 were not challenged in cross-examination. The answer to the question “Why did you go into partnership with Stephen Noss?” is consistent with a causal effect of the representations presently in question. I do not say that the course taken by the cross-examiner meant that it was not open to the respondent to contend that the representations had no causal connection with Ms Smith’s entry into the partnership. Causation was accepted as a matter in issue, and it is not the law that evidence unchallenged by cross-examination must be accepted (Ellis v Wallsend District Hospital (1989) 17 NSWLR 553 at 586-8; Temiha v Sadebarth (CA, 13 May 1997, unreported). But, if the judge was effectively to reject the statements in the affidavit, the absence of challenge in cross-examination made it particularly necessary that he did so on his analysis of the evidence as a whole and explained his analysis (cf Holman v Holman (1965) ALR 274 at 278; Read v Nerey Nominees Pty Ltd (1979) VR 47 at 52; Temiha v Sadebarth). The sketchy consideration of the evidence to my mind underlines the influence in the judge’s reasoning of absence of what he described as specific evidence of reliance and by the other phrases noted above.

45 The respondent relied on Ricochet Pty Ltd v Equity Trustees Executor and Agency Co Ltd [1993] FCA 99; (1993) 113 ALR 30. The plaintiff’s officers gave evidence that they relied on statements as to customer traffic in entering into a lease of premises in a shopping complex. The trial judge found to the contrary, and that the statement were not causative of any loss it sustained. On appeal, it was submitted that the defendant had an evidentiary onus to rebut the fair inference that the officers relied on the statements, and that the judge had been bound to infer that they had been induced by the statements to enter into the lease. The Full Court did not accept the submission, and said (at 35-6) that the determination of causation was to be made on all the evidence and involved a question of judgment. As I understand it, the respondent took from their Honour’s reasons that a finding that misrepresentation might have induced a decision will not of itself establish as a matter of probability that it did, and that Gzell J was entitled to reject Ms Smith’s statements in the affidavit of 3 December 2003. That may be accepted; but I do not think it answers the error which, on my understanding of his Honour’s reasons, befell his rejection.

46 In my opinion, his Honour’s conclusion that Ms Smith failed to establish a causal connection between the representations presently in question and entry into the partnership can not stand.

Can this Court decide causation?

47 I am very conscious of the hardship which a new trial will impose upon the parties. I have reluctantly concluded that there should be a new trial.

48 The extent to which the judge’s finding on causation against Ms Smith was credibility-based is unclear. He said in his [31] that he found the evidence of both Mr Noss and Ms Smith to be unsatisfactory, apparently generally but perhaps only as to representation (a) (para 7, partnership in Kemp Strang). His Honour did, however, effectively reject as a whole Ms Smith’s evidence in the statements in her affidavit of 3 December 2003. Further in relation to the finding that the pre-partnership WIP was to be an asset of the partnership there was a stark conflict in the evidence of Mr Noss and Ms Smith, and the judge rejected that of Ms Smith. Notwithstanding what I have said about the inherent likelihood that Ms Smith would not have entered into the partnership if she had known that the representations presently in question were false, on the whole of the evidence it may be that the correct conclusion is that she would have proceeded nonetheless, and Ms Smith’s credibility is important to arriving at the correct conclusion.

49 There is also further evidence material to the conclusion with possible credibility significance. Ms Smith characterised her own shortage of money as difficult cash flow, but when asked to agree that she could not fund the filing fees answered “Well, no, I don’t think that is entirely right” and said that she did not know how she would have funded the filing fees. She said that she thought she “would have ensured that I managed the [NRMA] work on my own”. There was evidence from Mr Noss, denied by Ms Smith to the effect that he told her before entry into the partnership that $80,000 owed by two of his debtors had not been received and it looked as if his overdraft would be at its limit and he would not have available funds, and that Ms Smith told him not to worry because they were going to have “plenty of income from NRMA”. If this was said, some doubt is cast on the significance of Mr Noss’ income stream to entry into the partnership, and it is also necessary to take account of what could be seen as less than wholehearted need for a partner’s assistance and financial resources.

50 In coming to a conclusion one way or the other on the whole of the evidence Ms Smith’s credibility, shown to be vulnerable at the least by the judge’s finding concerning pre-partnership WIP, can not be put aside, and it is necessary that the decision-maker see and hear the witnesses. The appellant submitted that this case was like Metalcorp Recyclers Pty Ltd v Metal Manufacturers, where this Court decided causation for itself because it was “entitled to rely on the circumstantial evidence and find reliance because in this case the facts speak for themselves” (at [53]). In the present case, however, further facts must be found and what the facts say calls for assessment of the witnesses.

51 If there is to be a new trial, and confining attention to the proceedings of 23 July 2001, whether Ms Smith would have entered into the partnership if she had known that representations (e) and (f) (paras 10 and 11, existing earnings and future earnings) were false or without reasonable basis can not be divorced from the influence on her entry into the partnership of the other representations of which she complained. And that can not be divorced from the making of the representations, involving credibility to the extent the making of the representations was in issue, or from their falsity or lack of reasonable grounds. I do not think there could be a just determination of the proceedings unless the judge conducting the new trial is able to address afresh all the relevant evidence put before the court, unconstrained by Gzell J’s findings as to the making of the representations and their falsity (which were in any event incomplete); and that is so even if Ms Smith confines her case in the new trial to representations (e) and (f) (see The Waterways Authority v Fitzgibbon [2005] HCA 57 at [20], cf at [112] as to credibility; and CSR Ltd v Della Maddalena [2006] HCA 1 per Kirby J at [80]-[87], Gleeson CJ agreeing).

52 There should therefore be a new trial of Ms Smith’s claims in the proceedings of 23 July 2001 in their entirety. It was not suggested by the respondent that in the new trial he could revive his cross-claims in those proceedings. The failure of the cross-claims, at least as to entry into the partnership in reliance on representations made by Ms Smith, may have been open to error of the kind I have held affected the failure of Ms Smith’s claims. But there was no appeal, and Ms Noss must be taken to have accepted the result.

The consequences for the other questions

53 If in the new trial relief is granted setting aside the partnership agreement ab initio, the questions of pre-partnership WIP and referral to a Master will fall away. Consequential orders directed to reinstatement of the pre-partnership position will be made. To the extent to which remuneration received for Mr Noss’ pre-partnership WIP has gone to Ms Smith, and vice versa, the money will actually or notionally be paid back, and it will not matter whether or not the WIP was an asset of the (avoided) partnership. The orders may or may not involve referral to an Associate Judge, but will start from a clean slate and will have a different focus from the orders appropriate to winding up the partnership.

54 If in the new trial relief is not granted setting aside the partnership agreement ab initio, the questions will remain. However, there is then another consideration. As I have said, in relation to the finding that the pre-partnership WIP was to be an asset of the partnership there was a stark conflict in the evidence of Mr Noss and Ms Smith, and the judge rejected that of Ms Smith. When the proceedings on the liberty to apply in the partnership proceedings and the proceedings of 21 July 2001 were heard together, it can not be taken that the judge’s effective rejection of Ms Smith’s statements in her affidavit of 3 December 2003 did not affect the view he took of her evidence in that respect. With continued reluctance, in my opinion justice requires that there also be a new trial of the question of pre-partnership WIP; a credibility based finding on that question, arrived at in conjunction with a credibility influenced decision as to causation now to be made afresh, has been challenged on appeal and can not properly be allowed to stand.

55 This Court should therefore not decide the question of pre-partnership WIP, and there is no point in it dealing with the question of referral to a Master. There should also be a fresh hearing on the liberty to apply in the partnership proceedings. Whether that hearing should follow or take place together with the new trial of Ms Smith’s claims in the proceedings of 23 July 2001 is a matter for reconsideration and directions in the Equity Division.

Costs

56 The appellant has been successful in her appeal against the failure of her claims in the proceedings of 23 July 2001, to the extent of a new trial but not by obtaining an order setting aside the partnership agreement ab initio. There has been consequential success to the extent of a fresh hearing on the liberty to apply. It is unsatisfactory that the parties are not advanced in resolving their disputes. However, such an outcome was amongst those readily foreseeable, and in substance the appellant was largely successful overall. In my opinion, a just disposition of appellate costs, with some alleviation to reflect the appellant’s failure to obtain positive decisions in her favour, is that the respondent pay 75 per cent of the appellant’s costs.

57 The orders made in the partnership proceedings included that costs were reserved. The court records show that costs were reserved in the proceedings of 23 July 2001. It does not seem that other costs orders were made thereafter. The costs below should be in the disposition of the judge(s) conducting the new trial and the fresh hearing.

Mediation

58 Legal costs and diversion of income-earning abilities to litigation should be well appreciated by the parties, both solicitors, as evils to be suffered only if every endeavour to avoid them has been made. If they have previously tried to resolve their differences, the prospect of the new trial and the fresh hearing should move them to try again. With further advice and the assistance of a mediator, they may be able to reappraise their positions, jettison any unrealistic expectations, and come to an acceptable resolution and get on with their professional and personal lives.

59 Before this Court makes its orders, it should receive submissions on whether it should make an order for compulsory mediation. The parties may take the lead by agreeing to mediate. Their advisers will be aware of the Court of Appeal Mediation Pilot Scheme, under which a subsidy towards the cost of the mediation may be had.

Orders

60 I propose the orders, to be made if necessary depending on any mediation -

1. Set aside the declarations and orders made by Gzell J in proceedings 1101/01 on 1 July 2004 and the judgment for the appellant in proceedings 3697/01.

2. Order that there be a fresh hearing on the liberty to apply in proceedings 1101/01 and a new trial of the appellant’s claims in proceedings 3697/01.

3. The respondent to pay 75 per cent of the appellant’s costs of the appeal.

4. The costs to date of the proceedings on the liberty to apply in proceedings 1101/01 and of proceedings 3697/01 to be paid as ordered by the judge(s) conducting the fresh hearing and the new trial.

5. Respondent to have a certificate under the Suitors Fund Act if otherwise qualified.

61 These orders should not be made now. The order now made should be that the proceedings are listed before me at 9.30 am on 15 March 2006, on which date the parties’ attitudes to mediation should be made known and, if necessary, directions will be given for filing submissions on whether the Court should make an order for compulsory mediation.

62 IPP JA: I agree with Giles JA.

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LAST UPDATED: 08/03/2006