JUDGMENT No. wnctOSy St 45 CATCHWORDS TRADE PRACTICES - Sale of units "off the plan" - First mortgage - liquidation of developer - Statement that developer "owner" by estate agent - Whether misleading or deceptive - Whether estate agent or directors of company liable - Whether negligent mis-statement - Whether collateral contract. Trade Practices Act 1974 - ss.52, 75B. THOMAS JAMES BARNETT and OTHERS v. ABVAY PTY. LTD. and OTHERS No. WAG 35 of 1983 Fox J. 21 December 1984 Sydney IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH DI G DIvISs JUDGE: DATE OF ORDER: WHERE MADE: ) ) REGISTRY } ) ) No. WAG 35 of 1983 BETWEEN : THOMAS JAMES BARNETT and JOAN MARY BARNETT First Applicants AND: PETER ANDREW GORMAN and JOAN MARGARET GORMAN Second Applicants AND: ABVAY PTY. LTD. First Respondent AND: KENNETH JAMES POLLA Second Respondent AND: BRIAN SAMUEL TOTTERDELL and JEANETTE LESLEY TOTTERDELL Third Respondents ORDER Fox Jd. 21 December 1984 Sydney. THE COURT ORDERS THAT: l. The application/be dismissed. 4 hi ORG tns4 all He respondents ote han Nou; vd I 2. The applicants pay the costs of the respondents (other than Abvay Pty. Ltd.) of the application. IN THE COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISTON No. WAG 35 of 1983 —~wew BETWEEN : THOMAS JAMES BARNETT and JOAN MARY BARNETT First Applicants AND: PETER ANDREW GORMAN and JOAN MARGARET GO Second Applicants AND ABVAY PTY. LTD. First Respondent AND: KENNETH JAMES POLLA Second Respondent AND: BRIAN SAMUEL TOTTERDELL and JEANETTE LESLEY TO DELL Third Respondents CORAM: FOX J. DATE: 21 December 1984 REASONS FOR JUDGMENT FOX J. In these proceedings, the first applicants (Mr. and Mrs. Barnett) and the second applicants (Mr. and Mrs. Gorman) seek damages for breaches of 8.52 of the Trade Practices Act 1975 ("the Act"), and at common law for breaches of a collateral agreement and for negligent mis-statements of fact against one or more of the first respondent, the second respondent and the third respondents. There are in effect two proceedings being heard together, the first applicants and the second applicants having separate causes of action in respect of the matters alleged. On 16 November 1983 the first respondent (Abvay) went into compulsory liquidation. Judgment was entered against it for want of a defence on 29 June 1984, damages remaining to be assessed. I have been told that it is without funds. The third respondents were the two directors of Abvay and in control of it. The proceedings continue against the remaining respondents, the statement of claim having been amended in the meantime to add acclaim for interest. Abvay did not appear before me. The remaining parties have agreed that the question of liability should be decided first, leaving aside, for the moment, the question of damages. It seems unlikely that this question will be pursued separately as against Abvay. Abvay was a land developer, and in early 1981 it proposed the erection of a block of twenty-six home units on land recently purchased by it in South Perth. At an early stage, before building operations had commenced, Abvay engaged the second respondent, who was areal estate agent and mortaqage proker, to find purchasers for four home units. "off the plan". The moneys obtained in this way, and from several others purchasing on a similar basis, were intended to give early financial assistance to the venture. On or about 23 September 1981 the first applicants entered into a written contract for the purchase of three units and the second applicants entered into a contract for the purchase of one unit. Under the contracts, deposits (of $2,000 per unit) were payable on signing. The whole of the balance of the purchase price ($41,000 per unit} was paid by the second applicants on 13 October 1981 and by the first applicants on 4 November 1581. The pre-payment did not carry interest but resulted ina discount of $5,000 from the price which would otherwise have been charged. The units agreed to be purchased were not in existence at that time. Construction of the building commenced on or about 4 November 1981. Other relevant matters may be summarised briefly. Abvay borrowed heavily to purchase the land and carry out the project; the lender, Discount Factors Pty. Ltd. took a first mortgage over the land, at interest rates varying up to 21.5%; the builder became insolvent and abandoned the project; construction work was delayed for about three months and was continued by another Totterdell company; Abvay defaulted and the mortgagee entered into possession in May 1983; there was delay in getting the necessary certificate of completion from the Perth Council; the issue of strata tities was delayed; the market was depressed; and finally, under a deed to which the liquidator of Abvay was a party, the applicants and three others, being entitled to seven units in all, received the proceeds of sale of five. I understand that the main item in the claim for damages will be based on the last-mentioned consideration, resulting, I imagine, in a claim for the difference between the then market value of the units and the amount received. In any event, T am told that the damages claimed are readily quantifiable. Iwill deal first with the claim based on s.52 of the Act. Section 53 is not invoked. The relief sought 1s by way of damages, The case aqainst the second respondent, Mr. Polla, proceeds on the footing that he made certain representations to the first applicants, Mr. and Mrs. Barnett, as an agent acting within the scope of his authority from Abvay, that Abvay was responsible therefor, and that he is liable in consequence of s.75B of the Act, as an accessory (to use a convenient summary description of the various categories of people mentioned in that section). It was not disputed that, if supported by the facts, liability in Mr. Polla under the Act could be created in this way. The representations relied upon as constituting conduct which was misleading or deceptive or likely to mislead or deceive are set out in paras. 8 and 22 of the statement of claim. Paragraph 8 is as follows: "B, At the time of the said discussions referred to in paragraph 6 herein the Second Respondent represented to the First Applicants as follows: (1) That the First Respondent owned the land by which it was meant and understood that the First Respondent had used its own funds to puchase the land outright; (414) That the land the subject of the development would be encumbered by way of mortgage only in order to pay for the construction of the development; (111i) That if the First Applicants were to pay the full purchase price once construction commenced, such monies would go to pay the builder''s first progress claim which would have the effect of delaying the necessity for the First Respondent to borrow monies until a later stage; (iv) That the first-named Third Respondent always 'stood behind his companies' by which 1t was meant and understood that the first-named Third Respondent would ensure that the First Respondent fully complied with its contractual obligations to the Applicants: (v) That settlement would take place on the same basis as in the contract for the 'Manning Terrace Development' in South Perth by which it was meant and understood that settlement would take place on payment by the First Applicants of the full purchase price and the issue of Strata Titles for the units." These representations are alleged to have been made in conversations in August 1981. For the most part, there is little dispute as to what was said in the relevant discussions. The conflict is in large measure (but not exclusively) one of the order in which things were said and as to the meaning to be given to parts of the dialogue. The most critical matter is that dealt with in para. 8(1), set out above. The evidence of both Mr. and Mrs. Barnett is that Mr. Barnett asked Mr. Polla what "equity" Abvay had in the land and that Mr. Polla replied that it was "the owner". Mr. Barnett says he understood the answer to mean that Abvay had used its own funds to purchase the land. The particular importance Placed by Mr. and Mrs. Barnett on the answer, as they understood it, was that it meant that Abvay was less likely to get into financial difficulties, and that their investment was the more secure. The present representation is allied with that alleged in sub-para. (ii) above, which had significance inthe same direction. Neither Mr. Barnett nor Mrs. Barnett say that they would not have entered into the transaction if the respective representations had not been made, but I am asked to infer that the latter at least contributed to their doing so. At the time of the early discussions, when these statements were said to have been made, Mr. Polla was unaware that a mortgage had already been entered into, although he expected that in accordance with the usual practice, there would be substantial borrowing by Abvay, and a mortgage would be given by it. He says that he does not recall that he made any statement, in response to a question, about Abvay being the owner, and he is quite sure that, if said, it was not in response to a question as to what Abvay's equity was. I should say that Mr. Barnett had been the purchaser of two units in another enterprise of Mr. Totterdell's (the "Manning Terrace" development) and that he had, through Mr. Polla, lent money on several occasions on mortgage. He had some experience as an investor in land. Mr. Polla had acted for the Totterdells, or rather the company they had established, in the earlier home unit endeavour. The Totterdells had a very high credit rating with Elders Lensworth Finance Limited, which was the parent company of Discount Factors Pty. Ltd. Mr. and Mrs. Barnett knew Mr. Polla well and, I think, there was a degree of mutual trust between them. Mr. Polla knew the Totterdells well, and had confidence in them, as business people. Counsel for Mr. Polla did not attack the credibility of Mr. and Mrs. Barnett, beyond challenging their recollection of the conversations, and, of course, their understanding of them. A more broad challenge to Mr. Polla's credibility was made by counsel for Mr. and Mrs. Barnett. Without intending any reflection on the honesty of Mr. and Mrs. Barnett. I find more credible the account of events and conversations given by Mr. Polla. No contemporaneous note was made on either side respecting the conversations in question. It was quite some time, nearly two years, after the event before any of the parties mentioned sought to recall the conversations in any detail. It was known to Mr. and Mrs. Barnett before they signed the contract that there was, or was to be, a first mortgage, and they asked for a second mortgage, but were told that this was impracticable. So far as the evidence discloses, there was no further statement between the parties concerning an early first mortgage, or what moneys were lent under it, until much later, perhaps not until shortly before the current proceedings were commenced. In an application for directions by the liquidator of Abvay, made to the Supreme Court of Western Australia early this year, to which Mr. and Mrs. Barnett and Mr. and Mrs. Totterdell were parties, it was held that by reason of their payments in full, a number of creditors, including themselves, had equitable liens over the whole of the land. The deed to which I have earlier referred was approved by the Court as providing the means by which the liquidator should deal with the matter. The first mortgage was given on 8 May 1981. The total purchase price of the land was $320,000. $268,000 of this amount was paid by Discount Factors Pty. Ltd. at the direction of Abvay to the vendor to it of the land. The balance of the purchase money was paid directly by Abvay; in part at least, from funds obtained elsewhere, but whether or not those funds were borrowed does not appear. It is also unclear when this balance was paid; presumably a deposit was paid at some time before completion. The evidence is that no part of the moneys paid by the applicants was applied in payment for the land. It seems to me to be more likely than not that the question was not posed quite as Mr. and Mrs. Barnett now state it to have been. Tf it were, and had the meaning Mr. Barnett attributed to it, it is apparent that the question was not answered. Both Mr. Barnett and Mr. Polla understood well enough that such a question, if it were to be answered responsively, involved an examination of the extent of the financial interest of Abvay in the land. It presumed the existence, or at least the possibility of the existence, of a charge on the land for some amount. A statement that Abvay was the owner was, in ordinary usage, quite correct. If given in answer to a question of what equity Abvay had in the land, it could possibly be construed as meaning that there was no charge, but this would not in this case have been the more natural conclusion. The matter goes further, because, as pleaded, "owner" is alleged to have meant that Abvay had used its own funds (presumably meaning not recently borrowed) "to purchase the land outright". This involved a fuller inquiry, and certainly not one which could be deduced from a statement (or answer) that Abvay was "the owner". There are two further comments I would make on this aspect of the case. The first is that it is not self-evident that Mr. Polla would have been acting within the scope of his authority, actual or ostensible, to tell Mr. Barnett, at the time he was asked, what the financial position of 10. Abvay was in relation to the land. The second matter is that the representation alleged would in any event have provided frail assurance of security. There was nothing to prevent Abvay borrowing when and as it thought best to cover whatever expenses it incurred for whatever purpose; except that is, the caution of the lender or lenders to it. None of the applicants, before contracting, searched the register to see if a mortgage had been registered or noted on the title, and the amount secured by it. The contract made no reference to limits on borrowing by the vendor. In the result, I am not satisfied that this representation is made out. The representation alleged in sub~para. (ii) 13 cast in promissory terms, and relates to future conduct. It could of course have been cast in present terms, as a statement of Mr. Polla's belief as to what the position would be but this would have been artificial and is not the way the matter is put. The allegation, as framed, is I think but an elaboration of sub-para. (i), and is not in my view supported by the evidence. A statement by Mr. Polla inor to the effect of the language pleaded, being in promissory terms, could hardly constitute misleading or deceptive conduct by him, or by Abvay, to which it may be added that he probably could not be regarded as having Abvay's authority, or the appearance thereof, to make sucha statement. The language of sub-para. (i1), as with that of other ll. sub-paragraphs is perhaps to be explained to some extent by the fact that the same assertions are relied upon as constituting or being part of, a collateral contract. I will return to this subject later. The representation alleged in sub-para. (iii) seems to me to suffer from the same defects as sub-para. (ii). Part of it is comment. For the rest, it is promissory, and in my view is not supported by the evidence. Iam not satisfied that the moneys paid were not applied for progress payments. It is difficult to see how, on any basis, it provides a footing for substantial damages. What is relied upon in sub-para. (iv) is a meaning attributed toa salesman's comment. It does not constitute misleading or deceptive conduct, nor could 1t have contractual effect. If there is any basis in what is alleged in sub-para. (v) there could conceivably have been a claim in contract against Abvay for late performance, but it does not constitute a contravention of s.52 by the estate agent. A further claim under s.52 is pleaded in para. 22 of the statement of claim: "22. Purther or in the alternative, the First Respondent engaged in conduct which was 12. misleading or deceptive, or which was likely to mislead or deceive in that in expressly promising as a term of the said written contracts to effect settlement as alleged in paragraph 15 hereof, the said express promise at the time of its making incorporated therein the implied statements of existing fact that the First Respondent had the then present intention of fulfilling the promise and the means of so doing, but at all material times the First Respondent, by its servants or agents, or further or alternatively, the Third Respondents, never held the said intention or alternatively, never had the means to enable it to give effect to settlement in accordance with the terms of its express promise, or alternatively never held or ought never to have held a reasonable belief that it had the means to enable it to give effect to settlement as aforesaid and by reason thereof the First Respondent has engaged in conduct in the course of trade or commerce in contravention of the provisions of Section 52 of the Trade Practices Act to which conduct the Third Respondents were parties." It is sufficient to say of this claim that I see no sufficient basis in fact for any of the material allegations it contsins. The evidence is plainly to the contrary. The collateral contracts relied upon take as their basis the statements alleged in the various sub-paragraphs of para. 8 of the Statement of Claim. For reasons indicated when discussing that paragraph, the reliance upon collateral contracts must fail. There is no basis upon which they could be given contractual effect and certainly none which could bind the second or third respondents. Claims under the contract are sustainable, if at all, against the first respondent only. 13. The claim for negligent mis-statement of facts, based on the doctrine of Hedley Byrne and Co. Limited v. Heller and Partners Limited (£19643 A.C. 465 and L. Shaddock and Associates Pty. Limited v. Parramatta City Council (1981) 55 A.L.J.R. 713 is also, in my view, without substance. The claim depends upon the representation in para. 8 being established. I have dealt with these. There were no negligent statements of fact and there was no relevant duty of care in Mr. Polla, or Mr. and Mrs. Totterdell. There was no obligation, enforceable in tort, for Mr. Polla to say more than he did. There was no mis-statement by concealment. At the commencement of the hearing, the applicants abandoned reliance upon the fraud alleged in the statement of clain. The second applicants, Mr. and Mrs. Gorman, were not themselves party to any of the conversations with Mr. Polla which have been relied upon by Mr. and Mrs. Barnett. The case made for them is that they were kept informed by the latter of what Mr. Polla said, and, 1n reliance upon what they were told in this way, acted as they did to contract for the one unit. It is sufficient to say of their claims based on the discussions with Mr. Polla that they can be in no better position than Mr. and Mrs. Barnett. I would add that 1f a person in the position of Mr. Polla igs to be made liable to pay damages under s.82 of the Act because of a breach of s.52, it is my present view that there would need to bea sufficient proximity of relationship at relevant times between him and the person suing. Mr. Polla did not authorise Mr. or Mrs. Barnett to transmit to the Gormans conversations he had with the former, and, of course, there would be the greatest difficulty in accepting that in this case he did so with precision. It is not sufficient that he knew that Mr. and Mrs. Barnett were conveying relevant information to Mr. or Mrs. Gorman. The position was that the Gormans had confidence in Mr. Barnett, and accepted his statements and judgments. There remains one claim, namely that against the former directors of Abvay, Mr. and Mrs. Totterdell. This is not based on breach of the principal contract with Abvay. It is based on an alleged liability, as directors, for (a) Mr. Polla's misrepresentations;: (b) Mr. Poila's negligent mis-statements; (c) breach of the collateral contract; and (d) liability pursuant to 3.52 for the misleading or deceptive conduct alleged in para. 22. I have already found that no case has been made out under any of these heads. In relation to claims based on s.52, it would in the case of Mr. and Mrs. Totterdell, be necessary to look carefully at the application to them of s.75B. Mr. Totterdell was in fact called as a witness for the applicants. The case appears to me as one in which disappointed speculators have turned their mind back to earlier conversations, which they quite possibly recalled imperfectly, but from which in any event they have taken too much. They did not protect 15. themselves contractually or by other means, and have suffered a loss. They have sought to put their case ina variety of ways, but none permits them to recover damages against the remaining respondents. IT am of the view that liability has not been established against any of the respondents at present before me, and the case must be dismissed, with costs. I certify that this and the fou rHeen (v4)! oceding pases are a trua copy of the | t ; .> 1S Sor Judgment herein of his honsy: $ _v. Justice Fox (ahi Cer Kifer ! Associate 'ated: B/12-fe 4