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Supreme Court of New South Wales |
Last Updated: 8 May 2005
NEW SOUTH WALES SUPREME COURT
CITATION: McLean Tecnic & Anor v
Digi-Tech & Ors [2005] NSWSC 386
CURRENT JURISDICTION:
FILE NUMBER(S): 50169/99
50087/00
HEARING DATE{S): 5, 6, 7,
8 and 11 April 2005
JUDGMENT DATE: 02/05/2005
PARTIES:
McLean Tecnic Pty Limited & Anor (Plaintiffs)
Digi-Tech (Australia)
Limited & Ors (Defendants)
JUDGMENT OF: McDougall J
LOWER COURT JURISDICTION: Not Applicable
LOWER COURT FILE
NUMBER(S): Not Applicable
LOWER COURT JUDICIAL OFFICER: Not
Applicable
COUNSEL:
A J Sullivan QC/H W D Stowe (for McLean
parties)
J C Sheahan SC/B F Katekar (for Digi-Tech
parties)
SOLICITORS:
Atanaskovic Hartnell (for McLean
parties)
Blake Dawson Waldron (for Digi-Tech parties)
CATCHWORDS:
TRADE AND COMMERCE - Trade practices - misleading or deceptive conduct -
where "Profit Potential Representation" held in appeal proceedings
to constitute
misleading or deceptive conduct - causation - whether plaintiffs suffered loss
by that representation - whether plaintiffs
suffered loss by directly relying on
representation - whether plaintiffs suffered loss by indirectly relying on
representation -
whether open to plaintiffs on pleadings to submit that loss
suffered by indirectly relying on the representation - whether inference
that
plaintiffs relied on representation available on evidence
DAMAGES - Trade
practices - Trade Practices Act - where conduct taken to be misleading or
deceptive by operation of s51A - whether
deeming provision inoperative when
considering whether conduct caused loss or damage for purposes of ss 82 and
87
DAMAGES - Trade practices - whether correct method for assessment of
damage involves consideration of value of benefits to plaintiffs
at trial -
whether benefits acquired by plaintiffs had value at trial
TRADE AND COMMERCE
- Trade practices - causation - where plaintiffs liable for certain balloon
payments - whether that liability caused
by misleading or deceptive conduct or
by plaintiffs' failure to exercise options to avoid liability - whether
misleading or deceptive
conduct materially contributed to loss or damage -
whether plaintiffs' conduct constituted fresh and independent cause of loss or
damage
ACTS CITED:
Evidence Act 1995
Trade Practices Act
1974
DECISION:
See paras [147]-[150] of judgment
JUDGMENT:
IN THE SUPREME COURT
OF NEW SOUTH
WALES
EQUITY DIVISION
COMMERCIAL
LIST
McDOUGALL J
2 May 2005
50169/99 McLEAN TECNIC PTY LIMITED & ANOR
v
50087/00 DIGI-TECH (AUSTRALIA) LIMITED &
ORS
JUDGMENT
1 HIS HONOUR: The defendants, to
whom I will refer as “Digi-Tech” unless it is necessary to
distinguish between them, developed products
known as the “Terminal
Adapter” and the “Freerider”. They wished to exploit those
products in Australia.
The remaining plaintiffs, to whom I will refer as
“the McLean parties” unless it is necessary to distinguish between
them, invested through McLean Tecnic in partnerships designed to exploit those
products in New South Wales. Digi-Tech has been found
to have engaged in
conduct that was misleading or deceptive, or likely to mislead to deceive, in
relation to representations made
by it as to the profit potential of those
products. The question for decision is whether the McLean parties suffered loss
or damage
by that misleading or deceptive conduct. That resolves into two
issues:
(1) Whether the McLean parties relied on, or were induced by, the
misleading or deceptive representations as to profitability in deciding
to enter
into the relevant agreements.
(2) If the first question is answered in
favour of the McLean parties, whether they suffered loss or damage, or will
suffer loss or
damage, as a result.
Background
2 The
dispute that I have very briefly described originally involved many more parties
as plaintiffs, and some multiplicity of proceedings.
The proceedings were heard
by Einstein J over 26 days in May and June 2002. His Honour gave reasons on 13
August 2002 under the
name Brand & Ors v Digi-Tech (Australia) Ltd &
Ors, Kelliher & Ors v Digi-Tech (Australia) Ltd & Ors: [2002] NSWSC 416.
3 Appeals were brought from his Honour’s decision. The Court
of Appeal gave judgment on 23 March 2004, under the name Digi-Tech v
Brand: [2004] NSWCA 58. Because of the way in which their Honours dealt
with the issues that were argued, it was necessary for there to be a further
hearing,
on limited issues, at first instance. Those issues were issues 5, 6
and 8:
(1) Issue 5: Would the investors have entered into the relevant
transactions if they had been told that Digi-Tech did not have reasonable
grounds for the revenue and profit projections upon which the Deloitte
Indicative Valuation was based?
(2) Issue 6: were the investors entitled
to relief by way of orders under s 87(2)(ba) and damages under s 82 of the
Trade Practices Act 1974?
(3) Issue 8: was the exercise of
options for McLean Tecnic P/L invalid because:
(a) at the time of
exercise in relation to one partnership, it had an existing liability in
relation to the other; and
(b) it was indebted to DTSPL?
4 The
Deloitte Indicative Valuation was one of the documents provided by Digi-Tech to
prospective investors.
5 Issue 8 was not pursued on the further
hearing. Nor was the question of reliance dealt with in the way suggested by
issue 5.
The facts
6 The parties (ie the remaining
parties – the McLean parties and Digi-Tech) prepared an agreed narrative
of facts. I set them out:
“A Introduction
1 These
matters concern claims arising from participation in an investment scheme
involving two telecommunication products
(“Products”).
2 Proceedings at first instance were
originally heard before Justice Einstein, in respect of which judgment was
delivered on 13 August
2002.
3 Various parties appealed from the judgment
of Justice Einstein, and the judgment in that appeal was delivered on 23 March
2004.
4 The matter was remitted by the Court of Appeal for a further hearing
at first instance in relation to a number of specific issues.
5 In the
original proceedings:
(a) the plaintiffs were various investors in the
business associated with the investment scheme (“DTSPL”),
which included McLean Tecnic Pty Ltd and AI McLean Ltd (“McLean
Parties”);
(b) the defendants were companies in the Digi-Tech group
of companies, which owned the intellectual property rights associated with
the
Products, (“Digi-tech Parties”).
6 Since the appeal, the
Digi-tech Parties have settled with (and the relevant plaintiffs have
discontinued their proceedings against
the Digi-Tech parties) all
investors/plaintiffs except the McLean Parties. Therefore, the only parties
remaining in this hearing
are the McLean Parties and the Digi-Tech
Parties.
B The Products
7 The Products comprise two
telecommunications products known as the Terminal Adapter and the Freerider.
8 The Terminal Adapter was a product which enabled the logging on of a
number of functions contemporaneously on a single ISDN (digital
network)
telephone line, for example, a facsimile, telephone, e-mail and EFTPOS.
9 The Freerider was a software system which allowed a particular type of
data network (being a synchronous network) to be used simultaneously
for
multiple functions such as sending facsimiles and other secondary data, for
example, telemetry or PC file transfers, between
locations connected to the same
network. The additional data was sent by capturing available but unused
bandwidth in the computer
network.
C The original investment scheme
10 Digi-Tech owned the intellectual property rights associated with the
Products.
11 The investment scheme was put together by Gary Urwin of Horwath
& Horwath.
12 The essence of the transaction which Mr Urwin proposed to
the Digi-Tech parties was for Digi-Tech to assign the intellectual property
rights relating to the products to a partnership of Australian investors for
agreed consideration.
13 The final structure of the transaction was
established on 30 June 1997, at which time:
(a) A partnership was formed in
relation to each Product: the Terminal Adapter Investor Partnership, and the
Freerider Investor Partnership.
The original investors agreed to contribute
differing amounts to the capital of each partnership. With some exceptions,
those amounts
were in multiples of $500,000;
(b) Digi-Tech Australia Ltd
(DTAL), a New Zealand company and a subsidiary of Digi-Tech Communications Ltd
(DTCL), entered into an
agreement with the Terminal Adapter Investor Partnership
for the sale and purchase of the Terminal Adapter intellectual property
rights
in Australia for a five year period
(c) DTAL also entered into an agreement
with the Freerider Investor Partnership for the sale and purchase of the
Freerider intellectual
property rights in Australia for a five year
period;
(d) each of the Terminal Adapter Investor Partnership and the
Freerider Investor Partnership granted an exclusive licence to use those
intellectual property rights in Australia to an Australian company, Digi-Tech
Software Pty Ltd (DTSPL). The partners in those partnerships
were the
shareholders in DTSPL in the same proportions that they held interests in the
partnerships;
(e) DTSPL entered into a supply agreement with Digi-Tech
Manufacturing Ltd (DTML), a New Zealand company (and subsidiary of DTCL),
for
the supply of products using the Terminal Adapter and Freerider intellectual
property rights;
(f) investors in the Terminal Adapter Investor and Freerider
Partnerships entered into option agreements with DTCL and another of
its
subsidiaries, Digi-Tech Equities Limited (DTEL). The options were exercisable
between 15 April 1999 and 31 July 2000. By exercise
of an option, the investors
could effectively relieve themselves of any liability for the outstanding
purchase price by compelling
DTEL (in the case of a corporate investor), to
subscribe for sufficient capital in the investor to make the outstanding
payments;;
(g) under the terms of the sale and purchase agreements the
partners in the relevant partnerships were required to make payments to
DTAL
over a period of three and a quarter years by way of relatively small
instalments each quarter and a large "balloon payment"
on 30 September, 2000 (if
an option was excercised at any time between 15 April 1999 and 31 July 2000 then
the balloon paynment became
payable at that time). In addition, they were
required to make payments to DTEL by way of an option (or underwriting) fee and
payments
to DTSPL by way of subscription for the shares in DTSPL. The payments
due in each year from an investor subscribing for a $500,000
share in the
partnership are set out in Appendix F to the judgment of Justice Einstein
(except that it shows the balloon payment
as due 31 July 2000): Red
4/1214;
14 The terms of the transaction documents giving rise to this
structure are not in issue in this case. The key terms of the more significant
transaction documents are set out below.
Partnership Agreements
15 The partners (ie, the investors) in each Partnership agreed to enter
into and carry on the business of manufacturing, importing,
marketing,
distributing and selling the product concerned in Australia (cl 2.1). The
Partnership had the right to use the intellectual
property rights under the Sale
Agreement (cl 2.2). Each partner agreed to maintain their shareholding interest
in DTSPL, which was
the licensee company, for as long as the partner retained
its capital interest (cl 2.4(a)(i)). Each partner agreed to pay all future
calls
made on the shareholding interest in DTSPL for as long as the partnership
interest was retained (cl 2.4(a)).
The Sale Agreements
16 DTAL, as the owner of the intellectual property rights to the
Products, assigned to each relevant Partnership for five years all
its right,
title and interest in those rights in respect of Australia, including an
exclusive right to use and exploit those rights
in Australia in accordance with
each Sale Agreement (cl 2.1).
17 "Intellectual Property Rights" were defined
to mean all intangible property rights of DTAL relating to the Products
including (among
others) know-how and trade secrets, whether or not capable of
protection by a patent, and the copyright to the relevant software.
18 DTAL
was entitled to terminate each Sale Agreement without prejudice to its other
rights if the Partnership concerned either committed
a material breach which was
incapable of being rectified or committed a material breach which was not
rectified within a reasonable
time after written notice of the breach had been
given (cl 4.1).
19 On termination or expiry of each Sale Agreement, each
Investor (partner) was required to pay the balloon payment - if it was
outstanding
(cl 5.3(b)).
20 Each investor (partner) was required each
quarter to make payment of an instalment in respect of the purchase price and a
contribution
to the capital of DTSPL. The total amount payable by the Investors
each quarter was approximately $347,000.
The Licence Agreement
21 The Licence Agreement ran in tandem with the term of the Sale
Agreement. Pursuant to the Licence Agreement, the parties to the
Investor
Partnerships licensed to DTSPL the exclusive right to use and exploit the
Intellectual Property Rights in Australia.
Option Agreements
22 The steps required for an Investor (partner) to exercise an option
varied depending upon whether the Investor was a corporate body
or a natural
person.
23 If the Investor was a corporation, generally speaking the option
was granted to its holding company. When the option was exercised,
the holding
company would remain as a shareholder with its existing shares and DTEL would
subscribe for new share capital sufficient
to pay the outstanding balloon
payment due.
24 By clause cl 4(b), the investor warranted that, on the date
on which the option was exercised, the "Company" would have no indebtedness
other than the "Investor Debt" to any person.
25 "Investor Debt" was defined
to mean "the proportion of the purchase price payable to DTAL pursuant to the
Sale Agreement for which
the Investor is severally liable less all amounts paid
by or on behalf of the Investor to DTAL by way of instalment and the Instalment
Debt". "Instalment Debt" was defined by reference to the outstanding
proportions of the purchase price instalments payable to DTAL.
D Tax
advantages and the Deloittes Valuations
26 An attraction of the scheme
was the anticipation that the partners (the Investors) would obtain tax
deductions for the full amount
of the capital expenditure involved in the
purchase by equal instalments spread over the period of the transaction (5
years), while
the payments of the pauchase [sic] price were not spread equally,
but were heavily weighted towards the end (the balloon payment).
In the years
until the balloon payment became due the structure permitted each of the
investors to claim a $1 deduction for every
15 cents of actual expenditure.
Payment of the balloon was effectively avoided by the exercise of the
option.
27 An opinion had been obtained from senior counsel which confirmed
(on the basis of certain assumptions) the tax deductibility, pursuant
to Div 10B
of Pt 3 of the Income Tax Assessment Act 1936 (Cth), of the capital expenditure
on the intellectual property.
28 The key to the realisation of the expected
taxation benefits, as expressed by senior counsel, was the need for the
Investors to
have "a reasonable expectation that the revenue generated from
these products by the exploitation of the intellectual property would
be
sufficient to meet the installments of the price which they had to pay ...". The
total installments of the purchase price payable
by investors (including the
balloon payment) was approximately $70 million. Were such an expectation to be
held, according to senior
counsel, "the dominant purpose will be the obtaining
of the commercial return on investment and not the obtaining of an increased
tax
deduction".
29 Digi-tech carried out its own valuation of the Products, and
additionally retained Deloitte Touche Tomatsu to provide an analysis
of the
gross profit margins that might be obtained from the exploitation of the
intellectual property rights, and a valuation of
those rights.
30 On 4 April
1997 Deloitte produced a gross margin review for the Terminal Adapter and
Freerider ("Gross Margin Review") and on 22 April 1997 produced an
indicative valuation of these products ("Indicative Valuation").
31 The Gross Margin Review contained gross margin projections based on the
projections prepared by Digi-Tech (“Digi-Tech Projections”).
The Digi-Tech Projections calculated projected “gross margins” in
the Australian marketplace, by reference
to a number of assumptions, including
market size, market penetration, revenue per site.
32 On the basis of the
projections of revenue and gross margin, Deloittes projected net revenues
(before tax) of about $282 million,
and valued the Products at between $67m and
$74m.
E Involvement of the McLean Parties in the investment scheme
33 The McLean Parties were not involved in DTSPL, from its inception on
30 June 1997.
34 Ian McLean first became aware of the opportunity of
investing in DTSPL and the partnerships in around March 1998, when the
possibility
was raised by his accountant, Mr Werner Bali of the firm Rost &
Kitchener.
35 Mr Bali first became aware of the transaction in late 1997.
At that time, one of his partners was advising his own client in relation
to
possible investment in the business. In around February 1998, that partner
informed Mr Bali that his client was not proceeding
with the investment, shortly
after which Mr Bali raised the possibility of investment with Mr McLean.
36 After Mr McLean expressed possible interest, a meeting was arranged at
the offices of Horwarths on 18 March 1998, attended by Gary
Urwin, Andrew
Sneddon, Werner Bali and Ian McLean.
37 The opportunity to invest in DTSPL
and the partnerships had arisen because a number of the original investors had
defaulted, and
Horwarths [sic] were at that time looking for replacement
investors.
38 Mr McLean ultimately decided to invest. He caused the
incorporation of McLean Tecnic Pty Ltd as a special purpose vehicle to become
the partner in the Digi-Tech Business, and caused AI McLean Ltd to guarantee the
obligations of McLean Tecnic Pty Ltd in relation
to the transaction.
39 The
McLean Parties executed transaction documentation in Canberra on 4 May 1998, by
which the interests of the defaulting original
partners were assigned to the
McLean Parties, and they assumed certain liabilities to DTAL under a deed of
novation.
40 By reason of the transaction documents executed by the McLean
Parties on 4 May 1998 (which are exhibited in IM3), McLean Tecnic
Pty Ltd became
a partner of the Terminal Adaptor and Freerider partnerships, on terms
effectively identical to the original investors
in relation to ongoing rights
and obligations.
41 The payments which were due by the McLean Parties arising
from participation in the transaction (excluding additional funds for
further
research and development) are set out in a document which is at page X of the
Tender Bundle. By way of summary, the payment
obligations included:
(a) 8
payments of $154,454.99 between May 1998 and June 1999, totalling
$1,235,640;
(b) a final balloon payment of $22,214,234.83, due on or before
30 September 2000.
42 The total amount actually paid by the McLean Parties in
connection with their participation in the transaction is as set out in
paragraphs 67 and 68 of the Affidavit of Ian McLean sworn in these
proceedings.
F Operation of DTSPL
43 As at June 1997, further
adaptation, research and development were required before Terminal Adaptor could
operate in Australia;
and further development and field testing was required
before Freerider could be marketed.
44 Expected buyers of the Products did
not materialize, and sales fell below projected levels.
45 On 25 March
1999, DTAL purported to terminate the Sale Agreements relating to the Terminal
Adapter Partnership and, on 7 September
1999, the Sale Agreements in relation to
the Freerider Partnership. In both instances it did so on the grounds of what
were said
to be breaches identified by earlier notices and repudiation.
46 After terminating the Sale Agreements, DTAL demanded payment from each
Investor of the balloon payment and other outstanding amounts.
47 Between 20
and 28 September 1999, the Investors in the two Partnerships (including the
McLean Parties) purported to exercise options
by notices addressed to DTAL.
Digi-Tech disputed that the options were validly exercised.
“
The issues
7 The parties also prepared an agreed
outline of issues. I set them out:
“1 The case in the remittal
hearing is limited in scope to certain aspects of the McLean Parties' claim
under the Trade Practices Act.
2 The relevant findings which bind the
Court on this rehearing include:
(a) The findings by Justice Einstein (not
challenged on appeal) dismissing the Plaintiffs' claims in relation to the
Suitability Representation
(in paragraph 95(a) of the Second Further Amended
Summons in proceedings no. 50169 of 1999 (the TA Summons) and
paragraph 91(a) (the first) of the Second Further Amended Summons in proceedings
no. 50087 of 2000 (the FR Summons)) and the Profit Potential
Representation (in paragraph 95(b) of the TA Summons and paragraphs 91(a) (the
second) and 91(c) in the
FR Summons), in so far as it related to existing facts
(paragraph [62] of the Court of Appeal's Judgment).
(b) The Court of Appeal
found that Justice Einstein erred in failing to deal with the Plaintiffs' case
that the Profit Potential Representation
amounted to a representation that the
products had a high revenue and profit potential, with "high" being understood
by reference
to the particulars in paragraph 95 of the TA Summons (paragraph
[79] of the Court of Appeal's Judgment).
(c) The Court of Appeal found that,
so understood, the Profit Potential Representation was a representation as to a
future matter
and was misleading and deceptive as Digi-Tech did not adduce
evidence that it had reasonable grounds for making the representation
(paragraph
[127]).
3 In this hearing, the first question is causation: ie, whether the
McLean Parties suffered loss and damage by reason of DTAL making
the Profit
Potential Representation, as understood in accordance with paragraph 2(b)
above.
4 There are 2 limbs to the McLean Parties' case on
causation:
(a) firstly, "direct causation", based on the contention that Ian
McLean personally read the Deloittes Reports, and invested in the
Digi-Tech
Business in reliance upon the Deloittes' Indicative Valuation;
and
(b) secondly, "indirect causation" based on the contention that if Werner
Bali had been aware that there was no reasonable basis for
the Digi-Tech
Projections, he would have advised Mr McLean against the investment in the
Digi-Tech Business; and if Mr McLean had
received such advice, he would not have
made the investment.
5 Digi-Tech disputes:
(a) that causation can be
established on either of those limbs;
(b) that reliance on either limb is to
be addressed by reference to the Deloittes’ Indicative Valuation other
than to the extent
that that valuation was included in the particulars (ii) and
(iii) to Paragraph 95(b) of the TA Summons, and in the particulars (ii)
and
(iii) of each of paragraphs 91(a) (the second) and 91(c) in the FR Summons;
(c) that the second limb is available on the pleadings.
6 If the McLean
Parties fail to establish the element of causation in relation to the claim for
misleading and deceptive conduct,
the parties are in agreement that the
substantive orders made by Justice Einstein in the original proceedings be
affirmed.
7 If the McLean Parties establish the element of causation in
relation to the claim for misleading and deceptive conduct, there will
be
further issues as to:
(a) the nature of the relief (if any) to which the
McLean Partis are entitled;
(b) costs in respect of the proceedings before
Justice Einstein.”
The Profit Potential
Representation
8 It is sufficient to set out para 95(b) of the
statement of the plaintiffs’ contentions in the Terminal Adapter
proceedings
to understand how the McLean parties put their case both in relation
to the Terminal Adapter partnership and in relation to the Freerider
partnership. So far as is relevant to the McLean parties, para 95 alleged that
before McLean Tecnic entered into the relevant documentation,
the defendants
represented to it (and others) that:
“(b) The Products had a high
revenue and profit potential;
Particulars
The representation was express and contained in the following
documents:
(i) DTAL Information Memorandum dated May 1997:
·
“The Licensee will attain an investment in the data communications field
which can provide exciting returns” (section 2).
· “In
particular, the Software used to drive two of the Products is believed to have
some unique features and an extremely
high revenue and profit potential. These
two (sic) Products are:
“... the ISDN Multi-data DA” (section
5, page 1).
· “ ... the total potential gross profit available
from the market is calculated to be $184.2 million (increasing to $1.94
billion
should Telstra offer ISDN to private homes)” (section 4, page
1).
· In assessing the gross profit margin which a Licensee may make
from this market, Digi-Tech has assumed a market penetration
of 50% and an
average profit margin of AU$300 per TA. This shows a gross profit of $92.1
million. In the event that ISDN is offered
to private homes and only 10% of
private homes purchase an ISDN Multi-Data TA, then as gross profit increases to
AU$267.7 million.
It should be note[d] however that margins for large orders may
be lower. Market forces will ultimately dictate” (section 5, page
2).
· “Digi-Tech has been informed that the potential of the
Product will meet Telstra’s needs, is somewhere between
50% and 100%
replacement of the 19,000 users, with result in gross sales from this one sale
of AU$13.3 million if the above is achieved”
(section 7, page
2).
(ii) “Review of FreeRider and Terminal Adapter Gross Margins
Digi-Tech Communications Limited April 1997” prepared by
Deloittes Touche
Tohmatsu:
· Table 4: Terminal Adapter Gross Margin Analysis Summary
|
[ IMAGE ] |
Market size |
Projected gross margin AUSS |
Market Penetration |
Projected gross margin AUSS000 |
|
[ IMAGE ] |
[ IMAGE ] |
[ IMAGE ] |
[ IMAGE ] |
[ IMAGE ] |
|
Transend users |
19,000 |
300 |
50% |
2,850 |
|
EFTPOS users |
350,000 |
300 |
50% |
52,500 |
|
Other businesses |
240,000 |
300 |
50% |
36,000 |
|
Sundry other networks |
5,000 |
300 |
50% |
750 |
|
Potential home users |
5,852,518 |
300 |
10% |
175,575 |
|
Total |
[ IMAGE ] |
[ IMAGE ] |
[ IMAGE ] |
267,675 |
Source: Digi-Tech projections
(Paragraph 3.2).
(iii)
“Indicative Valuation of the FreeRider and Terminal
Adapter Products
for the Australian Market” by Deloittes Touche Tohmatsu April
1997:
· “Terminal Adapter Sales and Gross Margin Analysis
Summary
|
First Five Years Ended 31 December 2002 |
|
[ IMAGE ] 1998
$0001999 $0002000 $0002001 $0002002 $000 |
|
Sales54,05771,601263,550156,76578,601 |
|
Gross Margin25,09833,243122,36272,78336,493 |
|
Gross margin %46%46%46%46%46% |
|
Second Five Years Ended 31 December 2007 |
|
[ IMAGE ] $0002004 $0002005 $0002006 $0002007 $000 |
|
Sales50,70039,11127,52315,9344,346 |
|
Gross Margin23,53918,15912,7787,3982,017 |
|
Gross margin %46%46%46%46%46% Source: Digi-Tech projections
|
(Paragraph 6.6).”
9 The Court of Appeal characterised
this case as follows:
“69 The pleading in the summons of the Profit
Potential Representation is far more than a bald assertion that “the
products
had a high revenue and profit potential”. Some definite purpose
has to be ascribed to the lengthy and detailed particulars
given in support of
this allegation. On the face of the pleading, that purpose is self-evident,
namely, the particulars give colour,
content and a degree of specificity to the
generality of the representation alleged. The particular matters alleged in the
particulars
are not pleaded as individual representations separate from the
allegation of the material representation (namely, that the Products
had a high
revenue and profit potential). This is manifest from the clear distinction made
in the pleading between the material allegation
made and the particulars to that
allegation. The particulars particularised the high revenue and profit potential
alleged in the
material allegation that comprised the Profit Potential
Representation. They did not constitute separate representations on which
the
appellants were relying for their cause of action, nor can they be divorced from
the material allegation made.”
10 Thus, their Honours
concluded:
“77 We conclude that the appellants conducted their case
at trial on the basis that the Profit Potential Representation was
constituted
by the collective effect of the revenue and gross profit forecasts contained in
the Indicative Valuation, based as it
was upon the gross margin projections
contained in the Gross Margin Review, which figures, in turn, were referred to
in a document
described as the Information Memorandum (see the particulars to
para 95 of the summons). The appellants did not conduct the case
upon the basis
that the Profit Potential Representation was constituted solely by the material
allegation in para 95, unaffected
by the particulars thereto; nor did they
conduct the case upon the basis that each particular projection particularised
in para 95
constituted an independent and separate representation on which they
separately relied.”
How the McLean parties put their
case
11 The McLean parties relied on the affidavit and oral evidence
of Mr (Alan) Ian McLean and of their former accountant, Mr Werner
Bali, and on a
substantial body of documentary evidence. However, none of their evidence
suggested that they had relied directly
on the Profit Potential Representation
(ie upon the representation pleaded and particularised in para 95(b) of
the summons in the Terminal Adapter proceedings). Mr McLean’s
evidence
was that he tried to read through the whole of the written material furnished by
Digi-Tech, which included both the Indicative
Valuation and the Gross Margin
Review on which (among other things) the Indicative Valuation was based.
However, Mr McLean gave
no evidence that he had actually read or paid attention
to, let alone relied upon, the material referred to in the particulars to
para
95(b). Nor, except in the most general way, did Mr Bali.
12 Instead, Mr
McLean’s evidence was that he noticed and relied upon the valuation of $70
million that, he said, was expressed
in various places in the Indicative
Valuation. The Indicative Valuation did indeed refer, in a number of places, to
a valuation
of the products falling within a range of $67 million to $74
million. Mr McLean’s evidence was that, consistent with his usual
approach to figures, he selected a figure in the middle of the range: in this
case, $70 million.
13 The McLean parties submitted that it was open to
them to prove reliance on, or inducement by, the Profit Potential Representation
in this way. The Indicative Valuation was on its face prepared by the
discounted cash flow method. Thus, it was necessary for Deloittes
to take into
account the projected cash flows to be derived from the exploitation of the
products over the 5 years’ life of
the partnerships. This they purported
to do, by referring to their Gross Margin Review. The Indicative Valuation made
it clear
that, on the assumption that the cash flows would be as summarised in
the Gross Margin Review, then a valuation based on the discounted
cash flow
method over the relevant period of years would produce a figure within the range
to which I have referred.
14 The McLean parties submitted that this
approach to what may be called for convenience the question of reliance was
supported by
passages from the decision of the Court of Appeal. Digi-Tech
submitted that it was not open to the McLean parties to put their case
in this
way, and that nothing in the Court of Appeal’s decision permitted them to
do so.
15 If I were approaching the matter afresh, and uninstructed
either, in general, by the previous history or, specifically, by what
was said
in the Court of Appeal, I would incline to the view that it was not open to the
McLean parties to put their case in this
way. However, I cannot approach the
matter in that way. I must have regard to the history of the matter as it was
summarised by
the Court of Appeal and, specifically, to the way in which the
Court of Appeal said the relevant issues were argued. I therefore
turn to the
decision of the Court of Appeal.
The Court of Appeal’s
reasons
16 The parties, in their agreed narrative, set out in tabular
form those of the 10 issues argued in the Court of Appeal that were
relevant to
the McLean parties; the way those issues were dealt with by Einstein J; and the
way those issues were dealt with by the
Court of Appeal. For convenience, I
reproduce that table below:
|
|
Issue |
Trial |
Appeal |
|
1. |
Did the Investors plead (or were they otherwise entitled to press and have determined) a case that Digi-Tech had represented that the products had the high revenue and profit potential in the "Digi-Tech projections |
Not considered to have been the pleaded case. Whether otherwise entitled to
make that case not addressed. |
This issue is decided in the affirmative, that is, in favour of the
appellants |
|
2. |
Did Digi-Tech represent that the products had the revenue and profit potential in the "Digi-Tech projections" (i.e., that those forecasts of future revenues and profits could be achieved)? |
No. |
Digi-Tech made express representations that the Products had high revenue and
profit potential. "High" is to be understood by reference
to the particulars in
paragraph 95 of the summons. Those particulars are based on documents that were
not disputed. Accordingly,
the answer to Issue 2 is in the affirmative. |
|
3. |
Was the representation in relation to revenue and profit potential with respect to a future matter and therefore subject to the deeming provision in s 51A(2) of the Trade Practices Act 1974? |
No. |
It is undesirable to apply past judicial pronouncements as to factors
relevant in other cases as a code of conditions that must be
satisfied for s 51A
to apply. The ordinary meaning of the language of the section is plain enough to
provide the key to whether it
applies in a particular case. |
|
4. |
Was the Profit Potential Representation misleading and deceptive because Digi-Tech had not adduced evidence that it had reasonable grounds for making it? |
Not clear whether addressed in relation to projections. |
The $72.5m purchase price depended substantially on the 50% market
penetration estimate being correct. The evidence revealed at least
three
respects in which this estimate was defective. Moreover, Digi-Tech did not
adduce evidence that it had reasonable grounds for
making the representation.
Digi-Tech therefore did not discharge the burden upon it to establish such
reasonable grounds. The Profit
Potential Representation was misleading and
deceptive in material respects and the answer to this issue is in the
affirmative. |
|
5. |
Would the investors have entered into the relevant transactions if they had been told that Digi-Tech did not have reasonable grounds for the revenue and profit projections upon which the Deloitte Indicative Valuation was based? |
No (although slightly narrower question addressed). |
The finding of the trial judge that reliance was not established cannot
stand, since both bases on which his Honour relied for his
conclusions were
erroneous. |
|
6. |
Were the investors entitled to relief by way of orders under s 87(2)(ba) and damages under s 82 of the Trade Practices Act 1974? |
Not dealt with. |
The resolution of this issue depends to a substantial degree on the answer to
Issue 5. Issue 6 is remitted for re-trial on the same
basis as Issue 5.
|
|
7. |
[Irrelevant to McLean Parties] |
|
|
|
8. |
Was the exercise of options for McLean Tecnic P/L invalid because: (a) at the time of exercise in relation to one partnership, it had an
existing liability in relation to the other; and (b) it was indebted to DTSPL? |
(a)Yes. [1379]-[1380] |
McLean Tecnic could have assigned its rights and duties to two separate but
related companies, each wholly owned by A I Mclean. If
this had have been done,
there would have been no breach of warranty. The trial judge was justified in
preferring the submissions
advanced on behalf of Digi-Tech on this issue.
|
|
9. |
Was the exercise of options for Kalifair P/L, Kalinick P/L, McLean Tecnic P/L, Brand, Chambers, Kelliher, Smith, O'Loughlin and Whiting invalid because on the day of exercise each was (or in the case of natural person investors, their nominee company became) liable for withholding tax? |
No. |
Digi-Tech failed to establish that any part of the payments said to attract
withholding tax was a royalty, in accordance with Stanton v Federal
Commissioner of Taxation [1955] HCA 56; (1955) 92 CLR 630 and Federal
Commissioner of Taxation v Sherritt Gordon Mines Limited [1977] HCA 48; (1977) 137 CLR
612. This was an essential element of both Digi-Tech's arguments on this
issue. |
|
10. |
[Irrelevant to McLean Parties] |
|
|
17 As the parties noted, references to “the appellants”
in the Court of Appeal’s reasons, and in the parties’
summary of
those reasons, is a reference to, relevantly, the McLean parties.
18 In
para [63], the Court of Appeal noted that, “Issues 1 to 6 concern only the
appellants’ case in regard to the Profit
Potential Representation to the
extent that that representation was said to be as to future facts. The
appellants’ contention
in this regard was that Digi-Tech’s conduct
was misleading because it had represented that each of the Terminal Adapter and
Freerider had a high revenue and profit potential (with the term
“high” being qualified or coloured as we explain
below).”
19 I have already set out para [69] of their
Honour’s reasons, in which they explain how the word “high” in
the
Profit Potential Representation was to be “qualified or
coloured”; and para [77], in which their Honours summarised how
the McLean
parties conducted their case at trial in relation to that representation. Their
Honours dealt with issue 5 at paras [132]-[165].
At para [139], in answering
issue 5, they said that it is necessary to determine the purpose for which the
appellants entered into
the transaction. They then noted in para [140] that the
focus at trial was on the intrinsic value of the business and its profitability.
They said:
“140 Thirdly, the difficulties are compounded by the
fact that at the trial the focus in regard to the reliance issue was on
how the
absence of reasonable grounds affected the intrinsic value of the business and
its profitability. The appellants’ pleadings
do not allege that, had they
known that there was a serious risk that groundless assumptions had been made by
senior counsel when
advising that taxation deductions were likely to be allowed
(because there was an absence of reasonable grounds for the revenue and
profit
projections and the represented value of the Intellectual Property Rights), they
would not have entered into the transaction.
This issue was not mentioned in the
judge’s reasons. It seems that the case was not presented or investigated
in this way before
him.”
20 It appears from para [141] that, in
oral argument in the appeal, the appellants put their case on the basis that the
Profit Potential
Representation caused them to believe that substantial tax
benefits would be received. The McLean parties did not put their case
this way
before me.
21 In the course of considering issue 5, the Court of Appeal
dealt with what was called “the indirect causation theory”.
It
appears that the appellants sought to argue that the misleading or deceptive
conduct alleged against Digi-Tech had caused Deloittes
to produce their
Indicative Valuation supporting the price asked for the investment, and had
caused the promoter of the scheme, Mr
Gary Urwin, to propose it to the
investors. The Court said at para [158], as to this formulation of the
case:
“To complete the chain of causation, there must be something
linking the appellants’ loss to their entry into the investment
scheme.
That link is the inducement of the appellants and their consequential act of
entering into the transaction to their prejudice.
Without that link there is no
proof that the misleading conduct caused the loss.”
22 The McLean
parties did not press this theory of causation before me. However, their case
might be called one of “second
hand” reliance; in that (so they
submitted) they relied upon a representation that was itself founded upon the
representation
alleged and particularised in para 95(b) of their statement of
contentions, as explained by the Court of Appeal.
23 In relation to
issue 6, whether the McLean parties would have entered into the transaction had
they not been misled, the Court
of Appeal said at para [168] that it might also
be necessary to see what other expectations motivated them to enter into the
transaction.
Their Honours said:
168 Issue 6 may also turn, at least to
a degree, on whether the appellants were induced to enter into the transaction
solely or partly
by their expectation that they would receive the expected tax
benefits, and whether the intrinsic value of the business had some
part to play
in inducing them. If the intrinsic value of the business was an inducing
factor, the degree and extent of the overstatement
may be relevant to the relief
that is ordered. The latter aspect does not appear to have been an issue at the
trial. It was not
suggested that this Court would be in a position to make any
findings on this question.
169 If the expected tax benefits were a
relevant motivating factor (as seems to have been the case), it would probably
be necessary
to determine whether the misleading conduct caused the tax
deductions to be disallowed. This is a matter that was not investigated
before
Einstein J, although the importance of the expected tax deductions to the
appellants seems to have been significant. We think
it preferable that this
question – if it is relevant (and, as noted, it seems to be) – be
decided after an appropriate
joinder of issue at trial.
24 In the hearing
before me, the McLean parties did not suggest that the expected tax benefits
played no part in their decision to
enter into the transaction. However, they
said, the representation of value, based on the representation of cash flow
(ie on the Profit Potential Representation) was material, because the
expectation of tax benefits of itself would not have motivated
them to enter
into the transaction.
25 When one has regard to what was said by the
Court of Appeal, it must follow, I think, that it is open to the McLean parties
to
put their case on causation as, before me, they did. In particular, what the
Court said at para [140], where their Honours referred
to the way that the case
was put before Einstein J, suggests that this proceeded on the basis that
reliance on the statement of value
must necessarily involve reliance on its
foundational element, namely the cash flows which were valued (and which were
the subject
of the Profit Potential Representation as particularised in para
95(b) of the statement of contentions).
26 Mr JC Sheahan SC, who
appeared with Mr BF Katekar of counsel for Digi-Tech, submitted that a case
based on a representation as
to value was different, in one significant respect,
to a case based on a representation as to future profits. He submitted that
a
representation of the former kind was as to a present matter, whereas a
valuation of the latter kind was as to a future matter.
Thus, he submitted,
whilst the latter could invoke the operation of s 51A of the Trade Practices
Act, the former could not.
27 Mr AJ Sullivan QC, who appeared with
Mr HWD Stowe of counsel for the McLean parties, submitted that a representation
of value conveyed
two representations. First, it conveyed a representation that
the opinion expressed in the valuation was held. Second, it conveyed
a
representation that the opinion of value was based on reasonable grounds. He
relied on the decision of Lindgren J in MGICA (1992) Ltd v Kenny & Good
Pty Ltd (1996) 70 FCR 236. Thus, he submitted, there was a sufficient
relationship between the misleading or deceptive conduct that the Court of
Appeal had
found against the Digi-Tech parties and the material on which the
McLean parties said they relied.
28 For the reasons that I have given,
I think that I am required, by the decision of the Court of Appeal, to accept
that it is open
to the McLean parties to put their case in the way that they do.
Thus, I do not think that I need to express a concluded view on
this argument.
Reliance or inducement
29 I therefore consider the
question of reliance or inducement on the basis that it is open to the McLean
parties to put their case
in the “second hand” way that I have
described. I should, however, make it clear that if the McLean parties were to
be confined strictly to the pleaded case – ie if they were
required, to succeed, to show that they had relied directly (and not at second
hand) on the Profit Potential Representation
– then I would conclude that
it failed. It would fail, on this basis, simply because there was no evidence
that Mr McLean,
or Mr Bali, had taken into account in any direct way the Profit
Potential Representation.
30 Further, and regardless of the way in
which the McLean parties put their case, I note that there was no evidence,
either from Mr
McLean or from Mr Bali, of reliance on the matters referred to in
subparas (i) and (ii) of para 95(b) of the statement of contentions.
That is to
say, there was no evidence that either Mr McLean or Mr Bali had considered the
DTAL Information Memorandum of May 1997
or the Gross Margins Review of April
1997. The case on reliance was based exclusively on subpara (iii) – the
Indicative Valuation.
The applicable
principles
31 Mr Sullivan referred to very many authorities
dealing with the question of causation. Since the relevant principles were not
disputed,
I do not propose to refer in detail to what was said. It is
sufficient to say that, for the purpose of showing an entitlement to
damages
under s 82 of the Trade Practices Act or relief under s 87, a plaintiff
must demonstrate, where a contravention of s52 is relied upon, that the
misleading or deceptive conduct that is proved was a material cause of the loss
(Henville v Walker [2001] HCA 52; (2001) 206 CLR 459, 480 [61] (Gaudron J), 493 [106]
(McHugh J)). It follows that it is not necessary to show that the contravening
conduct was the
sole, or even a dominant cause; and it may be sufficient that
the conduct “played some part, even if only a minor part”
in causing
the loss or damage asserted (Butcher v Lachlan Elder Realty Pty Ltd
[2004] HCA 60; (2004) 79 ALJR 308, 335 [150] (McHugh J)). The relatively low threshold of
materiality is emphasised by descriptions such as “not neglible”
(Monroe Schneider Association (Inc) v No 1 Raberem Pty Ltd [1991] FCA 592; (1991) 33 FCR
1, 5 or “non trivial” (Ricochet Pty Ltd v Equity Trustees
Executors & Agency Company Ltd [1993] FCA 99; (1993) 41 FCR 229, 235).
32 In
the present case, the McLean parties acknowledged that there were two effective
causes of their decision to enter into the transaction.
One was the
availability of very substantial tax benefits (represented, and shown, to be a
multiple of the sums actually invested
leaving aside the balloon payment). The
other, they submitted, was their reliance on the Profit Potential
Representation. They
sought to demonstrate this reliance in the “second
hand” way that I have summarised.
Mr McLean’s
evidence
33 Mr Sheahan submitted that, regardless of any
considerations of honesty, Mr McLean’s evidence was too unreliable to
support
any finding.
34 It is clear that Mr McLean suffered from
difficulties in reading, comprehension and memory. He said so himself, in paras
29 to
35 of his affidavit sworn 16 March 2005. He thinks that those problems
are getting worse with age (he is now aged 76 years), but
said that they have,
to an extent, afflicted him all his life. However, he says, he had “an
extremely good memory in relation
to all matters concerning the operation of
electrical motors” (see para 34(a) of his affidavit; his business, which
had been
very successful, involved the repair of electrical motors and included
electrical sales and mechanical repairs); and that, more generally,
he had
better recall of “visual images, physical activities, and numbers”,
much more readily than written text (affidavit,
para 34(b)).
35 Mr
McLean was assessed by a clinical psychologist, Professor Richard Mattick.
Professor Mattick’s reports, which were tendered
without objection,
concluded, among other things, that Mr McLean had impaired verbal memory, and
that the verbal memory problems
that he reported appeared to be genuine,
significant and impairing his function (see, for example, Professor
Mattick’s report
of 2 March 2005, exhibit PX1, at para 12.9.2). I should
note that Professor Mattick’s reports were tendered by the McLean
parties
and that Digi-Tech did not object to their admission; thus, no question arose
for my consideration of their admissibility
– see, for example, s102 of
the Evidence Act 1995.
36 Mr McLean’s assessment of the
reliability of his memory, as recorded by Professor Mattick, was more succinct
and, I think,
more informative on this point than his affidavit. In para 5.10.2
of the report of 2 March 2005, Professor Mattick records that
Mr McLean said
that: “my memory is bloody rotten”; he forgets names and has to use
notes to remind himself to whom he
is talking; and forgets what he has read even
though he understood what he was reading at the time he read it.
37 On
reviewing Mr McLean’s testimony (written and oral), and my impressions of
him in the witness box, I have no confidence
whatsoever that his evidence
reflects actual recollection rather than reconstruction. I have no sense of
persuasion, based on his
evidence, that the events he described did in fact
occur. Human memory is notoriously both fallible and suggestible. Mr McLean
is
dealing with events that occurred in the second half of 1997 and the first half
of 1998 – seven to eight years ago. His
testimony is not based on any
contemporaneous note or recollection. In an ordinary case, it may be accepted
that, whilst a witness
has forgotten the precise detail of events that occurred
so long ago, he or she might, nonetheless, have an actual recall of events
of
particular significance. Thus – particularly where regarded objectively
those events might be expected to have occurred
– the witness’
recollection of them may be persuasive, to the point that it is accepted as
providing a basis for a finding
in fact that the events occurred.
38 In
Watson v Foxman (2000) 49 NSWLR 315, McLelland CJ in Eq had occasion to
discuss the fallibility of human memory, in the context of a representation
case. Although his
Honour was talking of recollection of words in a
conversation (where the conversation, or the words in question, were said to be
misleading or deceptive), I think that what he said may be applied with equal
force to memory of events and matters other than conversations.
His Honour
pointed out at 319 that the degree of fallibility increases with the passage of
time; and that, consciously or otherwise,
the processes of memory may be
affected by self interest. He said:
“Furthermore, human memory of
what was said in a conversation is fallible for a variety of reasons, and
ordinarily the fallibility
increases with the passage of time, particularly
where disputes or litigation intervene, and the processes of memory are
overlaid,
often subconsciously, by perceptions or self interest as well as
conscious considerations of what should have been said or could
have been said.
All too often, what is actually remembered is little more than an impression
from which plausible details are then,
again often subconsciously, constructed.
This is a matter of ordinary human experience.”
39 In my view, what
his Honour said may be transposed exactly to Mr McLean’s testimony
concerning: his reading of the documents
presented to him; that which he now
recalls having focused on; and that which, he now says, was of significance to
him. I think
that the process of reconstruction is particularly acute in his
case, because I think that the starting “impression”
is one based on
a perception of his position rather than on some – even dim – actual
spark of remembrance. I do not,
however, find that this is because he is
seeking to be dishonest, or seeking deliberately to colour his evidence.
40 Nonetheless, I think that the problem is acute for two reasons. The
first is the fact that Mr McLean’s recollection is extremely
poor, so that
his capacity for recollection, as opposed to reconstruction, is at best very
slight. The second is that the context
in which he now gives evidence is one
focusing entirely on the question of reliance, as a result of the decision of
the Court of
Appeal. These considerations reinforce my view that the persuasive
character, or probative weight, of McLean’s evidence is
at best
negligible, and that, absent corroboration (either by other evidence or by
concordance with the probabilities objectively
ascertained), it is insufficient
to discharge the probative burden resting upon the McLean parties to prove
reliance, or inducement.
41 In a representation case, where it is clear
that material is given to a person for the purpose of persuading him or her to
enter
into a transaction, where the material in context is capable of having
that effect, and where the person considers that material,
human experience
suggests that a decision made thereafter to enter into the transaction will have
been influenced, to a greater or
lesser degree, by reliance upon the material
provided. In other words, human experience suggests that, to some extent, the
material
will have induced the decision, or that the decision will have been
made in reliance upon it. Thus, where the person testifies that
he or she was
induced by, or relied upon, the material, a tribunal of fact may feel justified
in accepting this evidence because
it accords with the objective probabilities.
42 There is no doubt that, in representation (or s 52) cases, the Court
may proceed on the basis of a presumption or inference of reliance in the
circumstances to which I have referred.
See, for example, Gould v
Vaggelas (1983) 157 CLR 215. However, as the Court of Appeal pointed out in
this case at para [143], factual findings made on the basis of credibility
rather
than inferences or presumptions “must override any inference or
rebuttable presumption”. Thus, their Honours concluded
at para [144], the
matter could not automatically be “determined on a Gould v Vaggelas
presumptive basis. Where the credibility of the witnesses who testified on the
issue is seriously called into question – and
on reasonable grounds ... -
it would not be just to decide the matter by resort to a presumption”.
43 It was for that reason that their Honours remitted issue 5 for
further hearing; and they did so acknowledging (at para [146]) that
the McLean
parties “stand in a different position to the other appellants as they
entered into the transaction at a relatively
late stage ... and different
considerations apply to them”. Even so, their Honours concluded,
“the question of reliance
as it affects the McLean appellants would also
be best resolved after a re-trial ... the question raised by the McLean
appellants’
appeal in respect of Issue 5 should not be determined in
isolation but after a full consideration of all the contextual circumstances
once they have been ventilated fully in evidence”.
44 There were
a number of other aspects of Mr McLean’s evidence, apart from his
acknowledgements to the Court and Professor
Mattick of the fallibility of his
memory, that have affected my assessment of his credibility. He had almost no
recall of any of
the salient, and important, aspects of the transaction, and in
some respects, the recollection that he had was either inconsistent
with the
transaction as presented to him or, more plainly, wrong. Thus, he thought, he
was buying a 40% interest in the two partnerships,
for a figure of $1.2 million.
The interest (as he ultimately accepted) was 31.6% (or perhaps 31.7%). The
purchase price included
not just the first two years’ instalments
totalling approximately $1.2 million (the figure on which Mr McLean seized), but
also the balloon payment of (in round figures) $22 million. It is clear, both
from the documents and Mr Bali’s evidence, that
Mr Bali explained to Mr
McLean in May 1998 that the total purchase price was the sum of those amounts.
Further, Mr McLean said that
he had no understanding that he was acquiring
interests in partnerships, for a limited period of time. He said that he had
understood
that he was buying an interest in an ongoing business (presumably,
one that would continue for as long as the proprietors wished).
(I have not
overlooked that the investment was made not by Mr McLean personally, but by his
special purpose company McLean Tecnic;
in this context, nothing turns on the
lifting of the corporate veil.)
45 Nor, in this respect, did Mr
McLean’s evidence receive any corroboration from Mr Bali. The only
evidence of any explanation
given by Mr Bali to Mr McLean was that, as
mentioned, Mr Bali explained that the purchase price included not only the first
two years’
payments, totalling about $1.2 million, but also the balloon
payment of $22 million. (Mr Bali gave some further advice on this
topic, to
which I shall return.) That evidence, which I accept, does not assist in
accepting Mr McLean’s evidence; indeed,
I think, it tells against it. Nor
is there anything in the documents to corroborate Mr McLean’s testimony.
46 I have no doubt that Mr Bali understood that the investment was of a
limited nature: in partnerships having a duration of five
years. I have little
doubt that Mr Bali would have explained this to Mr McLean; any other view was
inconsistent with the cash flow
schedules that Mr Bali sent to Mr McLean. Thus,
I think, it is more likely than not that Mr McLean understood at the time that
he
was acquiring interests of limited duration. If this were not so, however,
then another problem would arise. The Indicative Valuation
on which, Mr McLean
says, he relied, and through which, the McLean parties say, they relied on the
Profit Potential Representation,
related to five years of cash flows. If Mr
McLean did not, at the time, understand that this was what was being acquired,
then there
is a stark division between the substance of the Profit Potential
Representation on the one hand, and the transaction that, Mr McLean
on this
hypothesis, understood was the subject of the Indicative Valuation. In those
circumstances, it would be difficult to understand
how the Profit Potential
Representation could have induced a decision to enter into the transaction if Mr
McLean had then understood
it as he now (on his evidence) understands it.
47 There are at least two explanations for Mr McLean’s lack of
recollection of the nature and important elements of the transaction.
One is
that his memory is so poor that he has simply forgotten them. The other is that
his focus (indeed, Mr Sheahan submitted,
his sole focus) was on the tax benefits
available under the investment, so that he did not focus on the other elements.
In reality,
I think, the explanation is a combination of these. I think, for
reasons that I shall explain shortly, that Mr McLean’s real
interest was
in the apparent tax benefits; and that, at the time, he focused on these; and
that, as a result and because of his defective
memory, his recollection of so
many important elements is so poor.
48 Even on the central question of
what Mr McLean said he saw and relied upon, his testimony was confused and
inconsistent. In his
affidavit, Mr McLean identified the $70 million valuation
as one of the factors that persuaded him to cause the McLean parties to
enter
into the transaction. This must be taken to be a reference to his “mid
point” summary of the range of $67 million
to $74 million referred to in
the Indicative Valuation. However, in cross examination, Mr McLean identified
the $70 million figure
as being one for profitability or sales. When asked what
he recalled about the material provided to him, he said:
“A. The
thing that I do recall was that, and it's very, very strong in my mind, the only
thing I really have any total recall
on is that I read an area that indicated
the profitability of the company and I think I even marked, I marked one of the
books, I
was thinking okay there's a 70 million.
Q. I am asking what you
do recall, not what you thought of it, I want know what you recall seeing?
A.
I recall the 70 million as a figure in my head.
SHEAHAN: Q. Am I right
in saying Mr McLean what sticks in your mind as you are sitting there when you
read the material you were
impressed by a figure of $70 million?
A.
Yes.
Q. As being what attributed to the value of the business or
something like that?
A. No. The 70 million as I recall it was a figure of
sales and -
Q. That was what you were wanting to buy in an opportunity
to get access to those levels of sales?
A. Yes, but - that's correct. But
the thing that also buoyed my enthusiasm was the fact that the company was
operating. There was
also at around about that time the talk was - I am sure it
was Telstra, I think, I have got an idea NAB were mentioned, but certainly
Telstra were mentioned that there were just waiting on orders to be placed,
really that. That got me right up and running on it,
you know.
49 It
will be noted that Mr McLean specifically contradicted the proposition put to
him that the $70 million that impressed him was
one “attributed to the
value of the business”.
50 At T18, Mr McLean was referred to the
Indicative Valuation. When looking at it, he referred to p 629 (the pagination
refers to
the tender bundle exhibit PX4) and said that he did not recall that
but that:
“I do remember the 628 page. That’s where I would
have - that’s where I did get my $70 million out of.”
(T18.20)
51 Page 628 of exhibit PX4 was the first page of the Indicative
Valuation. Under the heading “Opinion”, it stated:
“In
our opinion, the indicative fair market value of the Freerider and Terminal
Adaptor products for the Australian market based
on Digi-Tech’s projected
market penetration for the five year period ended 31 December 2002 is in the
range of $67 million
to $74 million.”
Mr McLean then
said:
“That’s one, that $70 million that I am talking to you
about was very significant because it indicated to me that was
coming from
Deloittes, it indicated to me, well, we were looking at a very profitable
business.” (T18.35)
52 He did not recall that there was any other
part of the Indicative Valuation which he had read (T18.41).
53 Mr
McLean’s evidence at T18 struck me as being reconstruction, based on his
observing that the valuation range of $67 million
to $74 million at p628 of
exhibit PX4. It is inconsistent with the answer given by him at T13-14 referred
to above. It is also
inconsistent with a subsequent answer given by him on the
same topic at T44.50:
Q. I take it from what you said you understood
that you were buying a right to participate as to 40 percent in a business with
projected
sales revenues of $70 million, am I right so far?
A. Yes, that
sounds right.
54 There were other occasions where Mr McLean accepted the
proposition that he was investing, or contemplating investing, in a business
that had sales revenues of $70 million: see T42.25 and T43.35-.50. This
indicates further the difficulty of placing any reliance
upon Mr McLean’s
testimony as to his thought processes in the first half of 1998.
55 Mr
Sullivan submitted, relying on Professor Mattick’s third report, that the
general weakness of Mr McLean’s memory
was not inconsistent with his
retaining “the capacity to recall limited and general matters”.
However, Mr McLean’s
evidence was, in substance, that the $70 million
valuation, which in the witness box he said he recalled seeing in the Indicative
Valuation, was fundamental to his decision to proceed with the transaction. Mr
McLean’s previous statements and affidavits
were proved. Although in each
of them he said, in substance, that he had relied on the Indicative Valuation,
he did not in any of
them identify the $70 million figure that he now attributes
as the central point of that valuation. I would have thought it likely
that, if
Mr McLean had any actual memory, it would have been of the figure: particularly
given his evidence that, when he saw a range
of figures, he tended to select a
figure at the mid point of the range. His failure to recall the $70 million
figure in his previous
statements and affidavits casts doubt upon his purported
recollection of that figure now.
56 Mr Sullivan further relied on
statements in paras 57(b) and (c) of Mr McLean’s affidavit sworn on 16
March 2005. Those statements,
Mr Sullivan submitted, show that Mr McLean
“would not have acquired his interest in Digi-Tech unless he was
comfortably satisfied
that the $70 million valuation was reasonable”.
However, neither of those statements purports to be a recollection of the
relevant events, or of Mr McLean’s thought processes, in April/May 1998.
Each of them is prefaced with the words “It
is my present belief
that”. Those words deny recollection, and on the contrary suggest
reconstruction: a process in which
the danger of suggestability is particularly
significant.
57 Further, if Mr McLean’s evidence were to be
accepted, it would suggest that his recall is of agreeing to purchase, for the
sum of $1.2 million, a 40% interest in a business worth $70 million. The
inherent improbability of such an opportunity being offered
is yet another, and
I think significant, indicator of the unreliability of Mr McLean’s memory.
That he could purport to remember
such a transaction is an indication of the
difficulty in attributing any persuasive weight to Mr McLean’s
testimony.
58 Another matter of concern in Mr McLean’s evidence is
his portrayal of himself as someone to whom figures, and financial information
were a mystery – he said that his knowledge of them “is almost
zilch” (T53.30). Mr Bali did not confirm this.
On the contrary, his
evidence was that, on his observations, Mr McLean could absorb and understand
financial information, and would
ask intelligent questions when it was provided
to him (T93.20-94.20). I prefer Mr Bali’s evidence on this point. It may
very
well be that Mr McLean’s understanding of financial information has
deteriorated since 1998. Nonetheless, his evidence sought
to suggest that it
was the same (and very poor) then as now. Indeed, he suggested, when during
cross examination he was shown AI
McLean’s income tax return for the 1998
financial year, he thought that the loss shown was “reference
numbers”;
he “didn’t realise they are dollar signs”
(T53.25). I regard that evidence as implausible and unworthy of belief.
59 For these reasons, if the question of reliance were to be decided
only by reference to Mr McLean’s testimony, without reference
to what I
perceive to be the objective circumstances, or context, I would conclude that
the McLean parties have not made out their
case. I add, in case I have not
already made it clear, that Mr McLean’s testimony is not corroborated in
this respect by other
evidence, so that reliance case stands or falls on my
acceptance of what Mr McLean says.
Events leading up to the
transaction
60 Mr McLean’s business, relating to electrical
motors and other matters, had prospered. He sold it in 1998, and realised a
capital sum of about $10 million. That sum he, through his company, invested.
Some of the investments were solid (for example,
investments in rental
properties). Others were of a more speculative nature. One somewhat
speculative investment was in options
trading.
61 The details of Mr
McLean’s options trading (as he believed it to be) are irrelevant. It was
conducted through two men, Mr
James Hutchings and Mr Terry Tindall. In about
1996, Mr McLean invested about $100,000 with Mr Hutchings. He received monthly
statements
purporting to show the trading that had been conducted with his
money, and the results of that trading. In 2000, it became apparent
that the
whole operation was fraudulent; but, in 1997 and 1998, there was no basis for Mr
McLean to think that this was so. On the
contrary, the records provided to him
purported to show that the trading had been extremely profitable. He was able
to withdraw
large amounts of “profit”; and at the same time, the
amount of his investment increased.
62 Mr Bali said that, “in
around late 1997”, Mr McLean contacted him concerning his projected
income. According to Mr
Bali, Mr McLean said that the projected figures
“looked pretty good, but there will be a lot of tax involved. Mate, what
are
we going to do about my tax?” Mr Bali said that Mr McLean repeated
that question on two subsequent occasions. (Mr McLean
would not accept that he
repeated the question on two subsequent occasions, but I do not find his
evidence on this point persuasive.
I think that Mr Bali is likely to have
remembered both the substance of the initial approach and the repetition of the
question.
I accept Mr Bali’s evidence on this point.)
63 It is
not surprising that, in the second half of the calendar year 1997, Mr McLean
thus regarded his financial prospects. A summary
of options trading prepared by
Mr Bali, or his firm Rost & Kitchener, shows that during the month of July
1997, AI McLean appeared
to have derived profits of almost $2.5 million from
option trading; and $2.9 million for the six months from July to December 1997.
64 Mr Bali said that he became aware of the Digi-Tech investment in late
1997, through one of his partners. In about February 1998,
Mr Bali became aware
that the investment opportunity was still available and formed a view that it
might interest Mr McLean. He
introduced it to Mr McLean as “an
interesting high tech business proposal with tax benefits”. Mr Bali
obtained the documents,
and discussed them with Mr McLean. Although Mr Bali was
somewhat coy on the point, I have no doubt that he explained the tax benefits
to
Mr McLean. To the extent that Mr McLean sought to suggest otherwise, I do not
accept his evidence.
65 The documents obtained by Mr Bali, and
subsequently by Mr McLean, included a “white folder”. That folder
comprised
a number of documents including draft agreements, the Gross Margins
Review, the Indicative Valuation and a copy of the tax opinion
supporting (on
certain assumptions) the deductibility of the amount agreed to be invested.
66 I have no doubt that Mr Bali understood the outline of the proposal.
In essence, as applicable to the McLean parties, it required
AI McLean to pay a
very substantial amount to acquire interests in the partnerships formed to
exploit the products. According to
the tax advice, if the McLean parties
entered into the transaction with the reasonable expectation that the licence
fees earned from
exploitation of the products over the five year duration of the
investment would be sufficient to meet the instalments of purchase
price, then
the dominant purpose would be the obtaining of the commercial return on
investment, so that the full amount of the instalments
of purchase price would
be deductible over the five year life of the partnerships.
67 The
purchase price, overall, was $72.5 million. The interest available to the
McLean parties was a 31.6% interest. I have no
doubt that Mr Bali understood,
and explained to Mr McLean, that the available deductions would offset, wholly
or very substantially,
the very large profits that AI McLean appeared to be
deriving from its options trading activities.
68 The other significant
feature of the proposal was the option. That related to the
“balloon” instalment of the purchase
price. In substance, it
enabled an investor, in the third year, to relieve itself of liability to make
the balloon payment by putting
it back to Digi-Tech. (It may be noted that this
was considered in the tax advice; the opinion expressed was that, assuming the
expectations of gain were held, the option was not “a mechanism for rebate
of the purchase price thereby decreasing the annual
deductions”, but
“a hedge against the risk of failure of the project”.)
69 The effect was that (having regard to the interest available to the
McLean parties) tax deductions in excess of $3 million might
be available for
the 1998 and 1999 financial years. Clearly, that would absorb a very
substantial amount of options trading profit;
and at a tax rate of 36% (Mr
Bali’s evidence as to the applicable rate at the time) would generate cash
savings very much in
excess of the total $1.2 million instalments payable during
those years. Further, if the put options were exercised according to
their
terms, there would be no liability to pay the balloon amounts. I do not regard
those circumstances, regarded objectively,
as providing any support for the
proposition that Mr McLean is likely to have focused on the value attributed to
the business in
the indicative valuation. In my view, Mr McLean was looking for
a tax deduction to soak up his option trading profits (I note, in
passing, that
the profits purportedly attributed to him for the 1999 financial years were even
higher than those for 1998).
Other relevant
circumstances
70 Both Mr McLean and Mr Bali sought to suggest
that the prospects of success of the Digi-Tech venture were of importance.
However,
their behaviour simply fails to bear this out. No investigation
whatsoever – no “due diligence” – was carried
out. Mr
McLean, inconsistent with his practice on other occasions, did not inspect
Digi-Tech’s premises either in Australia
or New Zealand. Neither Mr
McLean nor Mr Bali made any attempt to obtain and review up to date management
accounts, budgets, projections
or the like. They made no check whatsoever on
the business; indeed they did not even check whether the products had been
launched.
71 These matters are of particular significance given that
the Indicative Valuation was dated April 1997 – twelve months before
Mr
McLean decided to proceed. No attempt was made to see whether the performance
of the business in the intervening time had matched,
exceeded or fallen short of
the projected trading levels on which the indicative valuation was based.
72 Mr Bali acknowledged that, had he been approaching the transaction as
one in which in substance Mr McLean was acquiring a 31% interest
in a $70
million business, he would have suggested that Mr McLean make enquiries about
business plans, forecasts, strategies and
trading results; and that, in the
present case, he made no such suggestion (T119.7). To my mind, this evidence
– reluctantly
given though it was – confirms that, in Mr
Bali’s mind, the transaction was not one of business investment, but one
undertaken
for its apparent tax effect.
73 In Gentry Brothers Pty
Ltd v Wilson Brown & Associates Pty Ltd (1996) ATPR 41-460, Kiefel
J dealt with the question of want of reasonable care on the part of an applicant
at 41-611. Her Honour noted that an applicant
does not have to establish
that reasonable care was taken, before showing a right to relief under the Act.
(As Gleeson CJ put it
in Henville at 468 [13], “[t]he purpose of
the legislation is not restricted to the protection of the careful or the
astute”.) However,
her Honour noted, there may be cases where the lack of
enquiry may show that the plaintiff was not interested in the truth or otherwise
of the representation, so that it can be said that, as a matter of fact, the
plaintiff did not rely upon it. The circumstances of
this case – the
total absence of anything resembling an investigation, let alone an appropriate
level of due diligence, for
an investment in excess of $23 million –
strongly support the drawing of such an inference.
74 There are other
matters that in my view support the drawing of this inference. Even if Mr
McLean does not now understand that
the total purchase price payable was not
just $1.2 million, but the further balloon payment of $22 million, he understood
it in April
1997. Mr Bali sent to Mr McLean on two occasions the schedule of
payments. That schedule referred not only to the first two years’
instalments, but also to the balloon.
75 When Mr Bali first sent the
schedule of payments to Mr McLean, on 3 April 1998, he sent also the management
accounts of Digi-Tech
Software Pty Ltd (the operating company in New South
Wales, owned by the investors; it was not a member of the Digi-Tech Group) for
the six months to 31 December 1997. It was plain from those management accounts
that the company had not traded during that time
– its only income was
$484 for interest. But this was a company that was expected to make sales for
the calendar year 1998
of $64.625 million and to earn thereon a net profit after
tax slightly in excess of $15 million. If the McLean parties were contemplating
investing in the two partnerships as a genuine commercial venture, on the basis
of the revenues projected as disclosed in the indicative
valuation, this
document should have set the alarm bells ringing. It did not.
76 When
Mr Bali resent the schedule of payments to Mr McLean on 4 May 1998, it was not
encumbered by the management accounts. Mr
Bali’s copy bears his
handwritten notes against the totals of the payments to be made. They describe
the payments as “payable
by McLean”. They divide them up into the
payments for the 1998 financial year, the payments for the 1999 financial year,
and
the balloon payment due on 31 July 1999. As to that last payment, Mr
Bali’s handwritten note says, “walk away or renegotiate
future
terms”. Mr Bali’s evidence was that he explained those matters to
Mr McLean. Mr McLean says he has no recollection
of any explanation of the
balloon. I accept Mr Bali’s evidence on this point.
77 Further,
Mr Bali confirmed that, as part of his explanation, he would have explained to
Mr McLean that the payment of $600,000
by 30 June 1998 would produce a tax
deduction in that financial year “of about $3 million” (T100.5). Mr
McLean’s
evidence, in a general fashion, was that he had no
contemporaneous understanding (ie in 1998) of the extent of the tax
savings. I do not accept that evidence; on the contrary, I conclude, it was the
apparent availability,
and extent, of the tax savings that were of primary
interest to Mr McLean.
78 Nothing in these circumstances provides any
support for the proposition that Mr McLean was interested in the value
attributed to
the business. On the contrary, I think, his failure to carry out
any sort of enquiry or due diligence process (particularly when
aware of the
management accounts for the six months to 31 December 1997), and the failure of
Mr Bali to suggest to Mr McLean that
any enquiries or due diligence process
should be carried out, make it clear that Mr McLean’s evidence, that he
was interested
in this as a business venture and not just because of its
apparent tax benefits, should not be accepted.
Subsequent
events
79 After the McLean parties entered into the transaction
to acquire their interests in the two partnerships, Mr McLean became aware
of a
number of problems. For example, the accounts of Digi-Tech Software for the
1998 financial year became available in late February
or early March 1999.
Those accounts showed that the company had not traded. It had earned less than
$3,000 in income, from interest
and foreign currency gains. Its salary expense
was less than $10,000 (although it had also incurred “Consultancy
Fees”
in excess of $240,000). Yet, according to the Indicative Valuation,
the company was supposed to derive in excess of $64 million
revenue, and $15
million in net profit after tax, for the calendar year to 31 December 1998. The
financial statements must have
given Mr McLean and Mr Bali the strongest
possible reason to think that the forecast revenues had not been, and would not
be likely
to be, achieved (or that anything like them had been, or would be
likely to be, achieved); but they made no enquiry, and expressed
no complaint.
(Indeed, Mr McLean made no complaint as to performance, or lack of performance,
until Digi-Tech gave notices of termination
to the partnerships in early 1999.)
80 Further, after 30 June 1998, Mr McLean became aware that one of the
major “planks” of the Digi-Tech Software business
– a tender
to supply the products to Telstra – had failed. He also became aware
that, contrary to his prior understanding,
the Terminal Adaptor was still being
developed, and that the Freerider had not been developed at all. Again, he made
no complaint;
nor even any inquiry.
81 The inference from all this, in
my view, is that Mr McLean was not concerned about the commercial success or
failure of the venture.
It confirms that his motivation in entering into the
venture was the apparent availability of very substantial tax benefits, and
that
his present recollection of focus on the projected value of the business should
not be accepted as persuasive.
Mr Bali’s
evidence
82 Mr Bali was an employee of, or partner in, the firm
of Rost & Kitchener for over twenty years, until he retired at the end
of
February 2004. Rost & Kitchener were the accountants for the McLean parties
for many years. From about 1990 until his retirement,
Mr Bali was “the
primary contact” for Rost & Kitchener in its dealings with the McLean
parties.
83 There were some difficulties in Mr Bali’s evidence.
For example, after Mr McLean had decided that the McLean parties would
invest in
the Digi-Tech venture, there was a delay in proceeding to settlement. The delay
was caused because it was thought that
there would be very substantial stamp
duty payable on the McLean parties’ acquisition of interests in
partnerships. That concern
was dispelled on 1 May 1998, apparently when it was
confirmed that the partnerships had not carried on business in New South Wales
up until that time, so that no stamp duty was payable.
84 Mr
Bali’s memorandum of fees was replete with references to “stamp
duty”, commencing on 6 April and continue
through to 29 April. They show
that he had concerned himself with the stamp duty question on twelve occasions
between those dates.
Nonetheless, Mr Bali, in cross examination, sought to
suggest that he had not concerned himself, or been involved in, the stamp
duty
issue: see, for example, T103.30. He sought to explain the plethora of
references by saying that he saw himself “really
as a mail box
situation” between “the various parties”. He suggested
– absurdly, in my view – that
the parties “wouldn’t have
dealt with each other”: see T105.30-.50. The whole of his evidence on the
stamp duty
issue, at T103-105, is unacceptable. I think that Mr Bali
prevaricated on this issue because he knew that truthful answers would
indicate
that he was well aware that Digi-Tech’s position was that the partnerships
had not traded up until the time that the
McLean parties acquired their
interests in them; and that this was inconsistent not only with Mr
McLean’s professed interest
in buying into a viable business for
commercial reasons, but also inconsistent with reliance on cash flows, and a
valuation based
on them, that were twelve months out of date, and that could be
seen, from the simple fact that the partnerships had not traded,
to be
inaccurate.
85 Although these matters give me some concerns about the
reliability of Mr Bali’s evidence, I think that, in general, he is
to be
preferred to Mr McLean to the extent that they are inconsistent. That is
because it is apparent that Mr Bali had at least
some actual recollection of
events, even if that recollection was coloured (as I think it was) by a desire
to minimise his involvement
in the transaction.
86 Taking Mr
Bali’s evidence at its highest, it is apparent that he did not give any
advice to Mr McLean on the commercial or
other aspects of the transaction or,
specifically, on the Indicative Valuation or the assumptions and figures on
which it was based.
87 Mr Bali said that he scanned, or
“skimmed”, the folder of material that included the Indicative
Valuation, the Gross
Margin Review and the tax advice, but that he did not read
them in detail and did not identify and analyse the assumptions underpinning
them. He was not aware of, and therefore gave Mr McLean no advice as to, the
detailed nature of the assumptions on which the Indicative
Valuation was based
and other matters that he did understand from his scanning of the material.
88 Mr Bali did say that he was aware of certain key features of the
investment proposal, including (he said) that the Indicative Valuation
“was around $70 million” and that there were tax benefits that were
“some multiple of the cash outlay”.
Although Mr Bali said that
“[i]t was unequivocally [his] view that the Deloittes reports were
typically relevant to any decision
to invest in the Digi-Tech business”,
neither he nor Mr McLean gave any evidence that he expressed this view to Mr
McLean or
that he discussed with Mr McLean, or advised him in any way on, the
Indicative Valuation or the assumptions, including the Gross
Margin Review, on
which it was based.
89 At this point, I should note that Mr
McLean’s evidence was that he left it to Mr Bali and to the McLean
parties’ solicitor,
Mr Peter Simms of Peter Cornelius & Partners, to
provide him with commercial advice. Mr Bali has denied that, from his
perspective,
this was so. Mr Simms has died since the relevant events.
However, it is apparent from Mr Simms’ correspondence that he was
involved
(as one would expect) purely in relation to legal aspects of the transaction,
including satisfying himself as to stamp duty
implications and as to the
drafting of the various transaction documents. I do not accept Mr
McLean’s evidence on this point.
But the fact that Mr McLean saw fit to
give that evidence, coupled with the lack of any commercial analysis carried out
by Mr McLean
himself and the fact that neither Mr Bali nor (on the documents) Mr
Simms did so, confirms my view that the investment was undertaken
for tax
purposes, not as a genuine commercial investment.
Analysis
90 For these reasons, I do not accept, as
having any probative value, Mr McLean’s evidence that he relied upon, or
was induced
by, the statements in the Indicative Valuation as to the likely
value, on the assumptions there set out, of the partnership businesses.
Nor do
I regard the surrounding circumstances as providing sufficient corroboration of
Mr McLean’s evidence to persuade me
to accept it on this point; and, a
fortiori, I do not regard those circumstances as sufficient of themselves to
enable me to draw an inference of reliance or inducement.
91 In some
cases, acceptance of evidence as to reliance may be facilitated because, if the
evidence is not accepted, there is no other
readily available explanation for
what happened. This is not such a case. There are, as I have said, at least
two suggested reasons
why the McLean parties entered into the transaction with
Digi-Tech. Rejection of Mr McLean’s account does not mean that there
is
no explanation; it means that there is no evidence other than the conceded
matter, namely the apparent availability of very substantial
tax benefits.
92 I have not overlooked Mr McLean’s evidence to the effect that
it was his understanding that, to get tax deductions, the business
had to be
successful. However, I think that if that understanding were held by him (and I
do not regard his evidence as particularly
compelling on the point), then it
related to the normal “dollar for dollar” tax loss situation, where
profits must be
earned before the benefit of the tax losses can be enjoyed. I
do not regard it as applicable at all to an investment of this nature,
which was
promoted on the basis that tax losses of approximately six times the amount
actually invested would be available (this,
of course, assuming that the
investors would put back to the vendor the obligation to make the balloon
payment). Although Mr Bali
could not recall the precise 6:1 ratio, he was aware
that the deductions were a substantial multiple of the amount invested; and
I
have no doubt that he explained this to Mr McLean.
93 Nor have I
overlooked the point that, as the advice of Senior Counsel included in the
information given to Mr McLean and Mr Bali
made clear, it was necessary for Mr
McLean to have a reasonable expectation that the revenues of the business would
be sufficient
to meet the instalments of purchase price. This does not assist
the McLean parties. There are two reasons why this is so.
94 Firstly,
as I have already noted, the Court of Appeal pointed out at para [140] that the
McLean parties did not plead a case that,
had they known there was a serious
risk that groundless assumptions had been made in the taxation advice (because
of an absence of
reasonable grounds for the revenue and profit projections and
the represented value of the products), they would not have entered
into the
transaction.
95 Secondly, and more significantly, neither Mr McLean nor
Mr Bali suggested that they had paid any attention to the revenue and profit
projections, for the purpose of satisfying themselves that there was material
that could enable the McLean parties reasonably to
hold the expectation, as to
revenues being sufficient to repay the purchase price, upon which the advice of
Senior Counsel was founded.
Mr McLean did not say that he had paid any
attention to, or in any way relied upon, any of the projected figures as to
revenues
and profit. On his case, his attention was focused on the value of the
business; and, having regard to the way in which the relevant
assumption was
framed in the tax advice, that was not material to enjoyment of the tax
deductions.
96 Thus, whilst the assumption on which the tax advice was
predicated might have been thought to be conducive to an examination of,
and
reliance upon, the projected revenues and profits, there is simply no evidence
that Mr McLean did so in any direct fashion, or
that Mr Bali undertook this task
for him. Further, even if Mr McLean’s evidence as to his focus and
reliance on the valuation
were accepted, he did not say that he sought to
satisfy himself, by looking at the cash flows that were discounted to arrive at
the
valuation, that the valuation was reasonable. As I have already said, he
did not even look at the Gross Margin Review, or at the
extract from the Gross
Margin Review set out in the Indicative Valuation as the foundation of the range
of values derived (T25.25-.35).
That is to say, Mr McLean did not, on his
evidence, even look at the key item within para (iii) of the particulars to para
95(b)
of the statement of contentions.
97 I therefore conclude that the
McLean parties have not proved that they relied on, or were induced by, the
Profit Potential Representation
in deciding to acquire, and acquiring, their
interests in the Terminal Adapter and Freerider partnerships.
Loss
or damage
98 The conclusion to which I have come makes it unnecessary
for me to express a view on the damages claim. However, since the matter
was
fully argued and in case I am wrong in the conclusion to which I have come, I
will set out my findings and (so far as I am able
to do) conclusions on the
question of damages.
99 The McLean parties sought damages equal to the
amounts actually paid by them, together with interest. They also sought either
an order under s 87(2ba) of the Trade Practices Act relieving them of
their obligation to pay the balloon payments, or damages in the amount of the
balloon payments, together with interest.
100 Because separate
arguments were addressed to these two claims, they require separate
consideration. There was also a separate
argument as to the operation, in this
context, of s 51A. I will start with that.
The section 51A
argument
101 Mr Sheahan submitted that the only finding that the
conduct of Digi-Tech was misleading, was one based on the operation of s 51A.
That is correct. As he submitted, s 51 operates “because of the deeming
effect of s 51A(2)”. Next, he submitted that s 51A(2) operates only for
the purposes
of the application of subs (1), and that subs (1) operates only for
the purposes of Division V of the Act, whereas ss 82 and 87 are found in Part VI
of the Act. Again, those submissions are correct.
102 Next, Mr Sheahan
submitted, “[i]ssues of causation arise under Part VI”. Thus, Mr
Sheahan submitted, the operation of s 51A was limited. He submitted
that:
(1) in considering the question of causation, the effect of ss 51A
and 52 in the present case is to show that the particular conduct was misleading
or deceptive.
(2) However, in considering whether that misleading or
deceptive conduct caused damage, s 51A had no operation, so that it remained
the
McLean parties’ onus to show that the projected revenues or estimate of
value were not reasonably based, or were wrong.
103 It is not necessary
for me to express a concluded view on this submission. However, since the
matter was fully argued, I will
indicate why I think this submission should be
rejected.
104 Section 82(1) and s 87(1), (1A) all operate, relevantly
for present purposes, where “[a] person ... suffers loss or damage by
conduct of another person
that was done in contravention of a provision of Part
... V ...”. (Section 87(1), (1A) add a further condition, namely
“is likely to suffer”, before the reference to loss or damage, but
nothing of present
significance turns on this.) The focus, for purposes of
causation, therefore requires proof that there has been conduct of another
person in contravention of Part V. If a person suffers loss or damage
“by” that conduct, then the relevant provisions are engaged.
105 The effect of s 51A may be summarised as follows:
(1) For the
purposes of Division 1 of Part V, a representation as to a future matter made
without reasonable grounds is “taken to be misleading”.
(2) For the purpose of the application of that provision, a
representation with respect to a future matter is “deemed”
to have
been made without reasonable grounds unless the corporation “adduces
evidence to the contrary”.
106 Section 52 prohibits a
corporation, in trade or commerce, from engaging in conduct that is misleading
or deceptive or likely to mislead or deceive.
The effect of what in truth is
the double deeming effect of s 51A is that a contravention of s 52 is made out
where the requirements of s 51A(1) and (2) are met. Subsection (2) deems a
representation to have been made without
reasonable grounds unless the
corporation adduces evidence to the contrary. Subsection (1) provides that a
representation made without
reasonable grounds “shall be taken”
– in effect, deemed – “to be misleading”.
107 There is no magic in the concept of deeming. In some circumstances
(perhaps the more common use), it creates a “statutory
fiction”
(Mutual Pools & Staff Pty Ltd v Federal Commissioner of Taxation
[1992] HCA 4; (1992) 173 CLR 450, 468 (Dawson, Toohey and Gaudron JJ)). In other cases,
however, deeming may be used to define, or to express a conclusion: Hunter
Douglas Australia Pty Ltd v Perma Blinds [1970] HCA 63; (1970) 122 CLR 49, 65-66 (Windeyer
J).
108 In the latter case, Windeyer J explained the different senses
in which the word “deemed” and its cognate forms are
used.
Referring to the concept that the word “deemed” is often used to
extend the meaning of some term to a subject
matter that it does not properly
designate, his Honour said:
“... the verb ‘deem’ or
derivatives of it, can be used in statutory definitions to extend the denotation
of the
defined term to things it would not in ordinary parlance denote. This is
often a convenient device for reducing the verbiage of
an enactment. But that
the word can be used in that way and for that purpose does not mean that
whenever it is used it has that
effect. After all, to deem means simply to
judge or reach a conclusion about something. ... The words ‘deem’
and ‘deemed’
when used in a statute thus simply state the effect or
meaning which some matter or thing has – the way in which it is to be
adjudged. This need not import artificiality or fiction. It may be simply the
statement of an indisputable conclusion ....”
109 As his Honour
pointed out at 66, the two different senses in which the word is used may be
described as “fictitious”
and “factitious”. He then
said, at 67:
“There is no presumption, still less any rule, that
wherever the word ‘deemed’ appears in a statute it demonstrates
a
‘fiction’ or some abnormality of context. Sometimes it does. Often
it does not. Much depends upon the context in
which the word appears
....”
110 Gleeson CJ (with whom Cripps JA agreed) expressed similar
views in Macquarie Bank Ltd v Fociri Pty Ltd (1992) 27 NSWLR 203, 207,
and pointed out that the construction of a deeming provision may turn not on the
meaning of the word “deemed”,
but on the statutory purpose for which
the deeming is used.
111 Section 51A(2) is a “factitious”
deeming: it is used for the avoidance of doubt, or to express a conclusion, and
not
to extend the operation of subs (1) to something that it could not otherwise
embrace. Likewise, I think, the words “is taken
to be” in subs (1)
are used in the same way. They require the result that, where the conditions
that precede them are met,
the conclusion that follows them must be reached.
Again, they do not require a conclusion that could not otherwise be available.
112 The result is that, where s 51A is engaged (ie where a
corporation makes a representation as to a future matter that is either proved
or deemed to have been made without reasonable
grounds for doing so), there
“is taken to be” a contravention of s 52.
113 In the
present case, the operation of s 51A establishes, as between the McLean parties
and Digi-Tech, that Digi-Tech has contravened
s 52. Thus, for the purposes of
ss 82 and 87, it is established between the McLean parties and Digi-Tech that
Digi-Tech has engaged in conduct done in contravention of Part V. That being
established (or “taken to be” established), it is necessary only for
the McLean parties to show that they
have suffered (or, for the purposes of s
87, are likely to suffer) loss or damage “by” that conduct. But
attention must be paid to the composite expression. The
sections do not focus
(for example) on conduct that was misleading or deceptive or likely to mislead
or deceive. Because the contravention
of Part V is established through the
operation of s 51A, there is established one of the conditions to the operation
of ss 82 and 87. It is the other condition, whether loss or damage was suffered
“by” that conduct, that remains for examination.
114 It
would have been open to the McLean parties to seek a declaration that Digi-Tech
had engaged in conduct that was misleading
or deceptive, or likely to mislead or
deceive, upon the basis of the matters that were proved (including, proved by
operation of
the deeming effect of s 51A). That declaration would establish, as
between the McLean parties and Digi-Tech, one of the foundations
for damages
under s 82 or relief under s 87. It is difficult to see why the McLean parties
should be in any different, and more disadvantageous, position because they have
not
sought declaratory relief.
115 Further, when one considers that the
purpose of Part VI of the Trade Practices Act (in which ss 82 and 86 are
found) is to make provision for the enforcement of and remedies for
contraventions of other parts of the Act, it is very difficult
to understand
what statutory purpose could require the proof again of something that has
already been established. The submission
overlooks both the evident statutory
purpose and the simple proposition that one function of a deeming provision is
to provide a
mode of proof of that which is deemed. It would be quite
extraordinary if the legislature, having smoothed the path of a victim
of
misleading or deceptive conduct in some circumstances through the enactment of s
51A, thereafter sought to put obstacles in the
way of the victim’s
attempts to obtain damages or other relief. I see no reason to attribute to the
legislature such an inconsistent
duality of approach.
Recovery of
amounts actually paid
116 The McLean parties’ evidence was
that the following amounts were paid:
(1) $1,186,069.59 towards the
acquisition of interests in the two partnerships.
(2) Expenses totalling
$621,210.14.
(3) Legal, accounting and other fees totalling $51,636.50.
117 The amount referred to in subpara (1) is the total of the first two
years’ instalments for each of the partnerships –
the figure that
has been referred to, more than once, as $1.2 million.
118 The amount
in subpara (2) represents in substance the McLean parties’ share of
further research and development expenses
incurred in relation to the products.
I note that, to the extent that these amounts included items of consequential
loss, Digi-Tech
did not submit that they were thereby irrecoverable. Nor did
Digi-Tech submit that the amounts had not been paid, or that they were
not in
principle proper to be included among the damages that would be recoverable if
the McLean parties otherwise succeeded. Digi-Tech’s
case, both in
relation to these amounts and in relation to the obligation to make the balloon
payments (in respect of which the McLean
parties sought either relief under s 87
or damages under s 82) was that the McLean parties had failed to demonstrate
“that the obligations [they] assumed were more burdensome than the rights
they received were valuable”. Digi-Tech submitted that the rights
obtained by the McLean parties had some value and that,
this value not being
proved, the damages case must fail. (Separate submissions were addressed to the
balloon payments, with which
I deal in the next section of these reasons.)
119 In a representation case (be it a case claiming damages for fraud,
or a case under s 52 based on misleading and deceptive representations), damages
are sometimes assessed by comparing the price paid by a plaintiff with
the value
it received: both being assessed at the date the relevant transaction was
undertaken. In HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd
[2004] HCA 54, the High Court discussed this approach, and qualifications to it,
at paras [35] and following. Their Honours pointed out that the
rule,
“sometimes described as the rule in Potts v Miller” [1940] HCA 43; (1940) 64
CLR 282, was neither universal nor inflexible. They said that the test was not
the difference between price and “market value”,
but between price
and “real value” or “fair value” (or a number of other
synonymous expressions). Market
value was relevant only where it could be
equated to real or fair value. Their Honours said further that market value
might be disregarded
for a number of reasons, including that there may be no
market.
120 Their Honours at para [39] referred to the way in which
courts may take into account matters occurring after the date at which
the
investment was made (the later date, of course, being the date when the
assessment is being performed). In this respect, their
Honours said (citing
Dixon J in Potts at 298 and Gibbs CJ in Gould at 220) that causes
of decline in the value of what has been bought, which were inherent in the
thing itself, could be taken into
account, where causes that were extrinsic or
supervening or accidental should not.
121 In the present case, that
approach would enable the Court to take account of supervening events that bear
on the quantification
of damages where those supervening events reflect the
incidents of the transaction itself. For example, if it were the nature of
the
property bought that there was no real market for it (as, I think, is the
present case), then the failure of the McLean parties
to seek to sell the
property cannot necessarily amount to a failure to mitigate; and the absence of
a market can be taken into account
in assessing whether the rights had any real
value.
122 However, the High Court also considered an alternative
approach. This approach focused on the value of the benefits left in the
plaintiff’s hands at trial. In this case, their Honours at para [63]
cited with approval the approach of the House of Lords
in Smith New Court
Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1996] UKHL 3; [1997] AC 254.
The majority in that case held that there might be circumstances in which a
defendant was required to bring to account only the
actual proceeds, or value,
of the asset, where it was shown that he had acted reasonably in retaining it.
The fifth member of the
House, Lord Steyn (who concurred in the result) stated
that the fundamental requirement was to compensate the plaintiff for loss,
that
the rules of assessment are means of giving of effect to that fundamental
principle, and that the approach of valuing assets
at the date of the
transaction is “simply a second order rule applicable only where the
valuation method is employed”
(at 284). His Lordship concluded that,
where the valuation method was not appropriate, the Court could assess loss
without reference
to the date of the transaction or any other particular date,
if so to act would give effect to the fundamental compensatory principle.
123 The High Court at para [65] indicated that such an approach might be
available under s 82, and that it might be appropriate in particular
circumstances. They said (omitting citations):
“There is certainly
no reason why an approach of that kind is not open under s 82 of the Act. The
deduction of true value at the acquisition date from the price paid is no more
than a guide to the assessment of
damages under s 82. Section 82 does not in
terms refer to that method, and the width of s 82 permits other approaches to
the assessment of damages so long as they work no injustice. The alternative
approach advocated by the
plaintiff has particular appropriateness in the
present circumstances. That is because a primary reason for the common
adoption,
in assessing damages in deceit, of the test of comparing the price
paid for an asset with its true value when acquired is the desirability
of
separating out losses resulting from extraneous factors in the later history of
the asset. ... [Where] there are no losses resulting
from extraneous factors
to separate out, there is correspondingly less need to look to a comparison of
purchase price and real value
on acquisition as the appropriate
approach.”
124 Thus, at para [67], their Honours concluded that
this approach was capable of producing a fair outcome where the asset bought
was
not readily marketable, and where there were no extraneous factors bearing upon
its depreciation in value. However, in view
of the conclusion to which their
Honours had come on the primary position put by the plaintiff, it was not
necessary for them to
express a considered view.
125 In the present
case, the McLean parties relied upon what the High Court in HTW Valuers
called “an alternative approach”. Of course, the rights acquired by
them under the Digi-Tech transaction had expired
by the time of the hearing
before me. That could be thought to make it inappropriate to carry out an
assessment of the value of
the benefits received by the McLean parties as at the
date of hearing (or as at any date after the rights expire). I am not sure
that
this is so, because it is possible now to look back and see precisely what
benefits flowed to the McLean parties under the transaction.
But in any event,
the exercise could be carried out at some other time (for example, the date of
expiry of the rights); and the
precise time chosen is unlikely to produce a
significantly different outcome.
126 If, as the decision in HTW
Valuers appears to indicate, the alternative approach is open in principle,
I think that this would be an appropriate case to adopt it.
Firstly, as I have
indicated, the very nature of the rights is that there is no ready market for
them, so that it is difficult, to
the point of impossibility, to attribute a
real “market value” to them at any given time. Secondly, the
valuation of
the rights necessarily involves some informed assessment of sales
and revenues. The only assessment that was carried out is the
one, prepared by
Digi-Tech and summarised in the Gross Margin Review and relied upon in the
Indicative Valuation, that was found
to be misleading or deceptive. Thirdly, to
the extent it is appropriate to have regard to events that occurred after the
transaction
was consummated in May 1998, those events suggest very strongly that
the rights are unlikely to have had substantial value.
127 If the
assessment is carried out as at the date the McLean parties entered into the
transaction, then it is correct to say that
some value might be assigned to the
rights, because then, looking forward and ignoring what has happened since, they
might be thought
to have had some value – even if not the value attributed
to them by the parties in their agreement. But if, as I think is
the case, it
is appropriate to take account of events that have since occurred (at least to
the extent already indicated), then it
can be seen that those prospective
benefits were in fact valueless. The benefit flowing under the transaction, or
under the agreement,
was the capital value of the cash flows. There were in
fact no positive cash flows; on the contrary, there were substantial negative
cash flows; and there were substantial amounts paid out by the McLean parties.
128 I do not think that the tax benefits are to be taken into account
either way. They were not rights received by the McLean parties
under their
agreement with Digi-Tech; at most, they were a benefit that might have accrued
to the McLean parties had the tax treatment
of the arrangements followed the
expectation that was held when the McLean parties entered into the transaction.
Equally, the unavailability
of those tax benefits does not form loss for which
the McLean parties are entitled to be compensated; and no such claim was made.
This is not to say that the apparent availability of the tax benefits was not a
major attraction (indeed, on my findings, the only
inducing attraction) of the
arrangements. It is to say only that the benefits are an incident, or result,
of the transaction, and
not something that was offered under it; and that the
failure to recoup them does not form a head of recoverable loss.
129 The
McLean parties (strictly speaking, AI McLean, to whom the benefit of the losses
was transferred) lodged tax returns claiming
the benefit of the deductions.
They learned that the Commissioner of Taxation had disallowed the claims by
other partners. Upon
learning that, AI McLean withdrew its returns and
submitted fresh returns in which the deductions were not claimed. Digi-Tech did
not submit that it was unreasonable for AI McLean so to act; and the McLean
parties did not submit that the loss of the benefit of
the deductions was
something for which they were entitled to be compensated in damages.
130 Mr Sheahan submitted that the findings of Einstein J
“powerfully support a conclusion that the rights had substantial
value”.
His Honour’s findings were:
(1) “The evidence
in fact establishes that the Terminal Adapter did have a high revenue and profit
potential as at June 1997.”
(para [1116])
(2) Digi-Tech had
reasonable grounds for representing that the product (again, I think, the
Terminal Adapter) did have a high revenue
and profit potential, even if there
were no reasonable grounds for the particular forecasts and assessments in the
Deloittes reports
(para [1134], and see para [1135], from which it seems that
the preceding paragraph referred to the Terminal Adapter).
(3) Digi-Tech had reasonable grounds for the representation (in the
general rather than the particular sense) that Freerider had high
revenue and
profit potential (para [1155]).
131 Those findings may support a
conclusion that the products had some, and perhaps even substantial, value as at
June 1997 (which,
it will be noted, is the date as at which para [1116] speaks).
They do not show that the products had some, let alone substantial,
value as at
May 1998 (by when, for the reasons already discussed, it was becoming apparent
that the revenue projections were unlikely
to be met, at least in the form
summarised in the Indicative Valuation). And if, as I think is appropriate, the
assessment is to
be carried out at a later date, and with the benefit of
hindsight, they cannot stand in the way of the facts that are known.
132 For these reasons, if it were necessary for me to assess damages, I
would have concluded that the McLean parties had made out
an entitlement to the
total of the sums claimed, as indicated in para [116] above.
The
balloon payments
133 The issue in relation to the balloon
payments was whether, as Digi-Tech put it, the McLean parties’ liability
for those
payments was due not to the misleading conduct alleged against
Digi-Tech, but to the McLean parties’ failure effectively to
exercise the
option to avoid the liabilities.
134 The McLean parties’ response
was to characterise this as a defence relying upon contributory negligence.
That is to say,
they characterised Digi-Tech’s submission as being that
the loss (or risk of loss) in respect of the balloon payments flowed
not from
the misleading or deceptive conduct that engendered the transaction “but
rather by the [McLean parties’] negligence
in failing to properly exercise
the option”.
135 I am not sure that Digi-Tech’s submissions
on this point should be so characterised. For Digi-Tech’s submission to
succeed, it is necessary to show that the cause of the loss, in respect of the
balloon payments, was not any misleading or deceptive
conduct but the failure
effectively to exercise the option. For Digi-Tech to succeed, it would not be
necessary to show that the
failure to exercise the option was negligent; this
defence could succeed equally well if the McLean parties had made a conscious
and rational decision not to exercise the option.
136 The law
accommodates multiple causation in this context, as in the context of reliance.
Thus, in Henville, McHugh J (with whom Gummow J agreed) said at 493 [106]
that a contravention that “materially contributed” to the loss
or
damage suffered would be regarded as a cause of that loss or damage. It would
not matter if other factors or conditions played
an even more significant role.
There might, however, be a limiting case where the intervention of some
“abnormal event”
between breach and damage led to the “common
sense” result that the breach was not a cause of the damage. His Honour
said (omitting citations):
106 If the defendant's breach has "materially
contributed" to the loss or damage suffered, it will be regarded as a cause of
the loss
or damage, despite other factors or conditions having played an even
more significant role in producing the loss or damage. As long
as the breach
materially contributed to the damage, a causal connection will ordinarily exist
even though the breach without more
would not have brought about the damage. In
exceptional cases, where an abnormal event intervenes between the breach and
damage,
it may be right as a matter of common sense to hold that the breach was
not a cause of damage. But such cases are exceptional.
137 His
Honour’s point was picked up by the majority (Gaudron, Gummow and Hayne
JJ) in I&L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2002] HCA 41; (2002)
210 CLR 109, 130 [62]. Their Honours endorsed the “material
contribution” approach, and said that it was only where the alleged
contravention did not materially contribute to some part of the loss that it was
appropriate to speak of the cause of that part of
the loss as being
“independent” of the contravention. Their Honours said (omitting
citations):
62 As was recognised in Henville v Walker, there may
be cases where it will be possible to say that some of the damage suffered by a
person following contravention of the
Act was not caused by the contravention.
But because the relevant question is whether the contravention was a
cause of (in the sense of materially contributed to) the loss, cases in which it
will be necessary and appropriate to divide up the
loss that has been suffered
and attribute parts of the loss to particular causative events are likely to be
rare. Further, it is
only in a case where it is found that the alleged
contravention did not materially contribute to some part of the loss claimed
that
it will be useful to speak of what caused that separate part of the loss as
being "independent" of the contravention. Although the
respondent submitted to
the contrary, for the reasons given earlier, there is no basis in this case for
concluding that some identifiable
part of the loss suffered by the appellant was
caused by the appellant's carelessness and not by the respondent's
contravention.
Indeed, the division of responsibility made by the primary judge
(attributing two-thirds of the "fault" to the respondent and one-third
to the
appellant) reveals that this is so. Subject to one qualification, no attempt
was made, whether at trial or on appeal to
the Court of Appeal or this Court, to
identify particular elements of the overall loss as attributable to particular
causes.
138 In Henville, McHugh J at 505 [140] dealt with the way
in which “the unreasonable conduct of the claimant” could be taken
into account
in assessing damages under s 82. He said that, “if part of
the loss or damage would not have occurred” but for that conduct,
“it will be appropriate
in assessing damages under s 82 to apply notions
of reasonableness in assessing how much of the loss was caused by the
contravention of the Act ...”. This
suggests that, if conduct of the
claimant is to be relied upon as breaking the chain of causation, then that
conduct must be a “but
for” independent cause of at least some part
of the loss or damage. However, in I&L Securities, the majority
pointed out at 128-129 [58] that this was not a sufficient test. Their Honours
said that it might be said, of two
independent causes, that the loss would not
have occurred “but for” each. However, their Honours said, this
does not
demonstrate either that one rather than the other was the cause, or
that neither was a cause, of the loss.
139 Further, at 129 [60] their
Honours showed why it was that s 82 did not require enquiry into and comparison
of the relative degrees of culpability of a plaintiff and a defendant. Their
Honours
said that is because the terms in which the Trade Practices Act
prescribes norms of behaviour, and provides remedies for contravention of those
norms, do not require the consideration of “some
a priori
assumption about distributing responsibility for loss or damage suffered between
those who have contravened the Act and those who
have not”. The policy of
the Act did not require a claimant’s carelessness that did not involve a
contravention of the
Act to be taken into account to reduce the amount of loss
or damage caused by the contravener’s conduct, for which the claimant
is
to be compensated or for the prevention of which orders are to be made under s
87. Thus, their Honours concluded at 130 [61]:
“Nothing in the
words of ss 82 or 87 requires or permits a court to make orders which will
compensate a person who has suffered loss or damage by conduct in contravention
of a relevant provision of the Act for only part of the loss or damage which has
been suffered by that person by that conduct and
which will not be, or has not
been, remedied by the making of some other order under s 87.”
140 A plaintiff’s conduct will only become relevant in the
causation enquiry where it is so dominant that it constitutes a fresh
and
independent cause. As Gleeson CJ put it in Henville at 468 [13],
“[n]egligence on the part of a victim of a contravention is not a bar to
an action under s 82 unless the conduct of the victim is such as to destroy the
causal connection between contravention and loss or damage”. (I
do not
regard his Honour’s dissent in the result of that case as detracting from
the force of that observation.) McHugh J
expressed a similar view in I&L
Securities at 136 [85] where he approved the approach of French J in
Pavich v Bobra Nominees Pty Ltd [1988] ATPR (Digest) 46-039:
“contributory negligence was irrelevant unless it could be shown that the
applicant’s carelessness or disregard for their
interest was the
cause of or or some part of a claimed loss” (his Honour’s
emphasis); and that “although the contravening conduct may be the sine
qua non of the loss claimed, there may come a point where the
applicant’s own conduct was “so dominant” in the causal chain
as to constitute a novus actus interveniens”.
141 The
facts relating to the failure of the McLean parties to exercise their options
are relatively simple. The McLean partner in
each of the partnerships was
McLean Tecnic. Thus, McLean Tecnic had a liability to Digi-Tech under the
Terminal Adapter partnership
documents for the balloon payment relating to that
partnership; and a separate liability to Digi-Tech under the Freerider
partnership
documents for the balloon liability to Digi-Tech in respect of that
partnership.
142 Clause 2.2 of each of the option agreements provided
that the options could be exercised by AI McLean “provided that there
is
no outstanding breach of any of the warranties and undertakings” set out
in clause 4. By clause 4.1(b), AI McLean warranted
that, on the date of
exercise of the option, McLean Tecnic would have no indebtedness to any person
other than the debt in respect
of which the option was exercised.
143 Einstein J held, and the Court of Appeal agreed, that for each
option, the existence of indebtedness under the other partnership
agreement
meant that there was a breach of clause 4.1(b). Thus, in neither case was the
exercise of option effective.
144 Digi-Tech submitted in the Court of
Appeal, and the Court of Appeal appeared to accept, that AI McLean could have
escaped this
problem simply by incorporating two wholly owned sole purpose
companies: one to be the partner in each partnership (see paras [216],
[217] and
[221]).
145 This is not a case where the McLean parties did not seek at
all to exercise the options – either because of negligence or
otherwise.
They sought to exercise them, but were thwarted because they had not understood
or applied the terms of the relevant
agreements. That may amount to negligence;
but it is hard to see it as amounting to negligence of such magnitude as to
displace
entirely, in the consideration of causation of loss, the hypothetical
effect of Digi-Tech’s misleading or deceptive conduct.
146 Because I have concluded that the question of reliance must be
answered against the McLean parties, it is impossible for me to
express a
concluded view on this aspect of the case. It only arises if, contrary to my
findings, there are two separate causes of
this loss. If it arose, it would
require an analysis of the relevant significance, or dominance, of those causes,
and an analysis
of whether one was, in relation to the loss relating to the
balloon payments, so dominant as in effect to demonstrate the absence,
in the
exercise of common sense, of any causal effect to the other. That having been
said, on the hypothetical assumption that the
transaction (involving the
complexities that led to the failure of the attempts to exercise the options)
had been induced by reliance
on misleading or deceptive conduct, it is difficult
to see how the ineffective exercise of the options, flowing from the very
complexity
of the transaction hypothetically induced, could be said to
constitute a fresh cause, or novus actus interveniens .
Conclusions and order
147 I return to the issues that were
remitted by the Court of Appeal and answer them as follows:
(1) Issue
5: Would the investors have entered into the relevant transactions is they
had been told that Digi-Tech did not have reasonable grounds
for the revenue and
profit projections upon which the Deloitte Indicative Valuation was
based?
Answer: The parties did not lead evidence on, or address
submissions to, this question. I cannot answer it.
(2) Issue 6:
Are the investors entitled to relief by way of orders under s 87(2)(ba) and
damages under s 82 of the Trade Practices Act 1974?
Answer: No.
(3) Issue 8: was the exercise of
options for McLean Tecnic P/L invalid because:
(a) at the time of
exercise in relation to one partnership, it had an existing liability in
relation to the other; and
(b) it was indebted to DTSPL?
Answer: This issue was not pressed.
148 In turn, the
causation issues posed by the parties – whether the McLean parties
suffered loss and damage by reason of Digi-Tech
making the Profit Potential
Representation (as explained by the Court of Appeal) – must be answered
“No”.
149 It follows, as the parties agreed, that the
substantive orders made by Einstein J should be affirmed.
150 I direct
the parties within seven days of the publication of these reasons to bring in
short minutes of order to give effect to
them. If there is no agreement on the
costs orders to be made, I will hear the parties on costs.
**********
LAST UPDATED: 02/05/2005
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