CATCHWORODS TRADE PRACTICES - misleading conduct - conflicting evidence - standard of proof. CONTRACT - presumption that formal document contains all the terms. Trade Practices Act, 1974 ss.52, 75B, 87(2)(c) Banbilla Pty. Ltd. v. Supernational Australia Limited & Anor. OLD G15 of 1986 PINCUS J. BRISBANE 15 September 1986 IN THE FEDERAL COURT OF AUSTRALIA ) QUEENSLAND DISTRICT REGISTRY ) QLD G15 of 1986 GENERAL DIVISION ) BETWEEN: BANBILLA PTY. LTD. Applicant AND: SUPERNATIONAL AUSTRALIA LIMITED First Respondent AND: ROYSTON RUSSELL JAMES Second Respondent MINUTES OF ORDER JUDGE MAKING ORDER: PINCUS J. DATE OF ORDER: 15 SEPTEMBER 1986 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. The respondents pay to the applicant the sum of $20,000. 2. The respondents pay the applicant's costs of and incidental to the proceedings, to be taxed. 3. Leave to amend the cross-claim be refused. NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALTA ) QUEENSLAND DISTRICT REGISTRY ) QLD G15 of 1986 GENERAL DIVISTON ) BETWEEN: BANBILLA PTY. LTD. Applicant AND: SUPEHRNATIONAL AUSTRALIA LIMITED First Respondent AND: ROYSTON RUSSELL JAMES Second Respondent PINCUS J. 15 SEPTEMBER 1986 REASONS FOR JUDGMENT This is an application under s.52 of the Trade Practices Act relating to an arrangement by the applicant to take up shares in the first respondent (Supernational). At discussions held for this purpose, the applicant was represented by Mr. William Bassingthwaighte and Mrs. Mary Bassingthwaighte. The pleading alleges, and it is admitted, that the applicant paid $20,009 with a view to taking shares in the first respondent, Supernational. It is said, in the first place, that there was no agreement concluded, and therefore the applicant is entitled to be repaid the $20,000. Alternatively, the pleading alleges that there was an agreement entered into, but it was induced by representations 2. which constituted misleading and deceptive conduct within the meaning of s.52 of the Trade Practices Act 1974, The representations were also alleged to be fraudulent. The pleading says, in addition, that there were essential terms of the agreement which were not fulfilled, and therefore the applicant is entitled to the $20,000 back. Lastlv, there 1s a claim in neqligence, which was not pressed. Despite the order in which the claims are set out in the pleading, the applicant put the misrepresentation case at the forefront. That was so, as I understood the matter, because the applicant desired to obtain a personal judgment against the second respondent, Royston James, on the basis of an alleqation that he had been fraudulent or was involved in the breach of s.52. [ propose to deal with the applicant's claims in that order - i.e. the misrepresentation case first and separatelv. It should also be mentioned that there is a cross-claim for $40,000 against the plaintiff: that was expressiv abandoned at the hearina,. James, who appeared for the respondents, sought to amend by substituting a different cross-claim ina sum of over $200,000. I declined to entertain that at the hearing of the applicant's claim, on the ground that the applicant had had no proper notice of the proposed amendment. It was then agreed that further consideration of the proposed amendment should be adiourned. 3. In the result, the only claim I have to consider at present is that of the applicant, for $20,000. Misrepresentation The pleaded case is, in essence, that James represented the liabilities of Supernational, during discussions which took place in October 1985, to be only about $20,000. whereas they were in truth very much larger. There is no dispute that they were verv much larger, so that the question is whether James made the representation alleged. Resolution of that difficult point depends mainly upon the evidence of James, on that of William and Marv Bassingthwaite and on analysis of some documents which were tendered. The representations complained of were made in mid-October 1985 and there is no realliv satisfactory evidence as to the then state of Supernational's financial affairs. That deficiency is not the fault of the applicant. but that of Supernational. James told me that Supernational's financial position was such that it could not afford to qet its accounts in order. Accordina toa draft document dated 21 November 1985 prepared by James, the liabilities of Supernational at that date totalled $147,751.19. His case was that $120,000 of that sum was, WN to put it in untechnical terms, not an immediate problem, and that the onlv sum in respect of which any difficulty arose was the balance, totalling $27,751.19. It is the essence of the case for the applicant that James, on behalf of the respondent, actively concealed the existence of this $120,000 in liabilities when he induced William and Mary Bassingthwaighte, on behalf of the applicant, to pay $20,000 with a view to taking shares in Supernational. William aqave evidence that he became aware, through discussions with James, that shares in Supernational would be available and that subject was discussed between James, William and Mary on 11 October 1985 for some hours. dames said that the shares available were priced at $6,000 per cent and that 10% of the capital was available for sale. He said that there were pressing liabilities and that it would be necessary to place equity with someone within a week or less. of the three witnesses on the question of Misrepresentation, mone aqave the impression of attempting to mislead me. The accounts qiven of the critical conversation on 11 October 1985 all differ from one another in siaqnificant respects, although of course the accounts of William and Mary have much more similarity to each other than either has to that of James. James, as a witness and advocate, seened to me impressively straightforward - the type of man I would find it difficult to 5. believe would be aquilty of misleading others in such a serious matter. William and Marv, on the other hand, both appeared to be fairly honest witnesses. I have had some difficultv in determinina whom to believe and have, in the end, derived little or no help from comparisons of demeanour. My conclusion is based laragelvy upon an analysis of the transcript and exhibits. It is common around that on 11 October there was a long discussion between the parties at which a principal topic was the prospect of the Bassinathwaightes ('or perhaps the applicant) investing in Supernational. The onlv documents which emerged from that discussion are before me - Exhibit 9. That consists of three sheets, two of which are headed "Accounts Pavable". One is also headed "R.J.A.", which refers to Rovston James and Associates Pty. Ltd. The other is headed "Supernational Australia Limited". The "R.J.A." sheet starts with what is described as the balance in a cheque book as at 15 October 1985. a sum of -$11,707.31. Underneath that are set out other fiaures being sums due and unpaid from August, September and October 1985. The other sheet is similarly constructed. T set out below some explanations aiven by James of the qenesis of these documents. It is important to note at the outset, however, that all his explanations depended on the view that what was being set out was not by any means the whole of the sums due bv Supernational, but only a small part of them. That 6. agains some support from the headings to which I have referred: "Accounts Payable", That heading suaqdests that only sums immediately due are included. On the other hand, there is an inherent unlikelihood in William and Marv's having solicited and obtained such detailed information about a small proportion of Supernational's liabilities and no information at all about most of its liabilities. What were the other liabilities? That is not easilv answered. It is not seriouslv disputed that no detailed information on that subject was provided until 21 November 1985. On that day, documents were presented which asserted that in addition to sundry debtors totalling $27,751.19, there were two other large sums due, namely $60,000 being a loan from Royston James and Associates Ptv. Ltd. and $60,000 described as "contingent liabilities (Spencer Sawmills)". It was said in the documents of 21 November that Spencer Sawmills had advanced $60,000 to Royston James under a loan agreement of 21 May 1984, and $25,000 to Royston James on 27 Februarv 1984 "at 15% p.a. interest only". It was said that the latter sum was on-lent first to Royston James and Associates Ptv. Ltd. and then to Supernational. The loan agreement of 21 Mav 1984 between James and Spencer Sawmills Pty. Ltd. required payment of principal and interest from "total assets", which meant the value of the assets of an investment fund to be established. The whole sum was 7. repavable in 1994. Since there was not an investment fund at the time of the discussions in 1985 (there is not vet one), nothing was then immediately payable in respect of the $60.000 loan: the whole, however. undoubtedly constituted a debt. The agreement was varied on 4 September 1985 by a document of that date made, not between James and Spencer Sawmills Pty. Ltd., but between Supernational and Spencer Sawmills Ptv. Ltd. Under it, Supernational agreed to pay interest at 1.25% per month until registration of the prospectus for the fund, but that was not to be payable except from management or other fees earned by Supernational as manager of public unit trusts. That September 1985 agreement did not substantially alter the position, which was that the debt was one due by James and no interest was payable at the time of the 1985 discussions. The other $60,000 set out in the documents of 21 November 1985 as being a loan from Royston James and Associates Pty. Ltd. is of uncertain composition. I think that $25,000 of it was the loan from Spencer Sawmills to James just mentioned. and $25,000 of it was due to one Garrie Smith. It was said in the documents of 21 November to be "repayable from profits". The same document said that no monevs were due directly between Supernational and Royston James - all loan transactions having involved Royston James and Associates Ptv. Ltd. That is, the position presented was that the $120.000 was due by Supernational to Rovston James and Associates Ptv. Ltd. which was in turn obliged to James himself. There was no evidence as to the terms 8. of the obliaation of Supernational to Royston James and Associates Pty. Ltd., but T would assume that Supernational''s obligation is confined to indemnifving Royston James and Associates Pty. Ltd. in respect of any money the latter might become obliged to pay to James himself. The loans in question are referred to again in a document dated 12 December 1985 siqned by James, forming part of Exhibit 16. That refers to the Smith loan of $25,000. the Spencer loan of $25,000, the Spencer loan of $60,000 and a $10,000 loan "re Merc Credits". The December document says nothing of the interposition of James or Royston James and Associates Pty. Ltd., but speaks of the liabilities as being those of Supernational. As to the Smith loan, the December document savs. "There is some pressure for repayment to G. Smith, and we would like to discharge this debt". That is difficult to reconcile with the statement in November that the Smith loan was repayable only out of profits. The $10.000 referred to in the December document is, I think, a personal loan of that sum from Mercantile Credits referred to in the documents of 21 November. It is desirable to mention in some detail what the three witnesses said about Exhibit 5 - the "Accounts Pavable" sheets. William said that he asked. on 11 October, for a balance sheet, that James said there were pressing liabilities and offered to provide a "written statement of the present financial position of uw é Supernational". According to William, James said the figures were the total liabilities of the company. Mary said that James said the company owed $20,000, that being the amount which had been overspent. According to her, James was asked for a balance sheet, but offered to provide instead the "figures" - "the liabilities of the company at the time". According to Mary, James said, as to the document headed "R.J.A.", that Royston James and Associates was "carrying those amounts... on their overdraft". She said that James said the sums set out in the sheets were the total amount owing by Supernational. However, Mary also gave some evidence which is difficult to reconcile with the applicant's case. She described the $20,000 as "the fiqure that was needed to immediately pay Supernational's pressing ... creditors" and that James said, "We need $20,000 to carry on." William said nothing of the $20,000 being said to constitute the amount due to pressing creditors, a statement more consistent with the respondent's case than with that of the applicant. James made a number of statements on this subject, but did not seem to have any clear recollection of what he said about it. In cross-examination of William, James said: "T may well have said, although I do not remember saying, that those current accounts, were the accounts payable for Supernational, were the total liabilities of that company. But I distinctly remember indicating that there were other liabilities of Royston James and Associates." 190, A reference to other Liabilities of Rovston James and Associates would not have helped much. unless James also said that those other liabilities were ones in respect of which Supernational had an obligation of reimbursement. James also told me that' the Bassinathwaiahtes mav have honestly misunderstood what was said and (p.160) that: "... the fact that the accounts are clearly accounts pavable and that thev were onlv ever presented as monthlv accounts, indicates that thev were nothing more than that. and were never represented to be the total liabilities of the company, although at that time, except for the liabilities incurred bv Rovston James and Associates on its behalf. those accounts there were the total liabilities of Supernational, except for the amounts owed for Rovston James and Associates. " That does not accord with the document of 11 October. As pointed out above. one of the sheets dealt with Liabilities of Rovston James and Associates Ptv. Ltd.: so that it would not have made sense to sav that the sheets set out the total liabilities of Supernational except for "the amounts owed for Rovston James and Associates". in his evidence. James indicated more uncertainty as to what he miaht have said: ",.. T clearly recall presenting them onlv with some monthlv accounts and I certainlv made no representations that they were any more than that. except T may well have said that those accounts were the liabilities of Supernational, total liabilities of Supernational apart from the monevs, liabilities incurred by Rovston James and Associates on its behalf." N tl. I take the expression "I mav well have said" as indicating that James did not really remember what he said about the sheets. James gave his evidence in chief largely under questioning from me, and that evidence includes the following passage (p.173): ",,. do I understand vou to say that you told him in one way or another right at the outset, I mean 11 October, that there were substantial liabilities not disclosed on those monthly account sheets? --- Yes. Yes, I see? --- I believe I would have. But vou do not remember saving it? --- I do not specifically remember but I do remember discussing the company situation --- In detail? --- In reasonable detail." In the end, I am left with the position that although James denied firmly enough that he represented the sums set out on the sheets to be the total liabilities, he did not put forward any firm account of what he claimed that Exhibit 5 represented. One might deduce from Mary's evidence that he said that Exhibit 5 consisted of the pressing creditors only, but an analysis of that exhibit shows that that is hardly likely. A number of the items shown in the exhibit could not have been pressing creditors, as they represented sums incurred in the current month, which was only eleven days old. One of the sums. set down as being due to the C.C.H. publishing organisation, was, on the evidence, fora subscription which had not yet been confirmed. 12, The next event of importance was that on Friday, 18 October 1985, the parties made a written agreement. which is more fullv dealt with in the next section of these reasons, and on that date $20,000 was paid as an initial payment in respect of $60,000 worth of shares to be issued. After further discussions between the parties, during which William pressed James for balance sheets or financial statements, James produced documents dated 21 November. referred to above, showing liabilities totallinag $147,751.19. If the applicant's case is correct, those documents disclosed to it for the first time that Supernational had liabilities more than seven times as areat as those initially represented. There followed discussions between James and William which seem, oddly enough, to have been concerned mainly with the question whether the liabilities were trulv due by Supernational, or were, on the other hand, due in large part by James' or his company, Royston James and Associates Pty. Ltd. By Exhibit 18, William ordered computer equipment for Supernational of substantial value. There was, eventually, agreement that William ordered the equipment a day or two before the date which Exhibit 18 bears. 28 November 1985. That is. of course, a sufficient time after presentation of the documents of 21 November to have enabled William to think about the position, and it is hard to understand why William should so unequivocally have demonstrated a continuing interest in the venture, if he then thought that he had been arossly misled. 13. Then on 5 December 1985. William wrote to James a letter referrina to "our proposed purchase of shares", and complainina of the fact that "Banbilla Ptv. Ltd. has been asked to subscribe a sum of $60,000 which values Supernational at $600,000 and vet vou refuse to identifv the company's costs with any certainty. Our intention to purchase the shares in Supernational was based on an aqreed financial situation which vou now propose to alter". The letter also complains of James' alleged failure to "adequately and accuratelv describe the present financial situation of Supernational ... If one keeps in mind that, on the applicant's case, the Bassinathwaightes had no idea before 21 November that there were substantial liabilities in addition to the $20,000 which had been discussed on 11 October, the content of this letter is strande. One would have expected the applicant, through William, simply to say that the company's position had been misrepresented. or words to that effect. The letter rather concentrates on lack of accurate information and seems to complain that James was attemptina to load onto Supernational's shoulders liabilities which were not really anv of its concern. William's conduct in the fortniaht after he supposedly discovered that he had been misled is not easv to reconcile with his account of events. I gained the impression that if he had been able to persuade James to negotiate reasonablv about the sums 14. allegedly due to Royston James and Associates Pty. Ltd., he would have been content to proceed with his investment. If it were necessary for the applicant to establish its case beyond a reasonable doubt, the application would fail. but, applying the civil standard, I have come to the conclusion that I must find for the applicant. Although I think there probably was reference to the pressing liabilities of Supernational at the meeting of 11 October, and those present concentrated their attention on Supernational's immediate problems, I am, in the end, satisfied that William and Mary asked James for a balance sheet and received Exhibit 5 as a list of Supernational's liabilities. I have not overlooked that Mr. G.L. Spencer, who was fully aware that the liabilities were much greater than $20,000. was invited to a meeting with William and Mary on 17 October 1985. That would seem a dangerous thing for James to have done if he were intent on misleading the applicant. I have also kept in mind that. according to the evidence, a Mr. Trevor Bishop, an accountant, had professional connections with both sides. and James miaqht have expected that he would disclose Supernational's financial position to the applicant. Keeping in mind, also. the cogent points made by James in his written and oral submissions, I feel, in the end. impelled to the conclusion that the applicant's allegations are substantially correct. Since the shares in question have never been issued, there is a question as to the appropriate relief. Evidence of 15. valuation was called, but it seems clear that the valuer did not have sufficient information to put a fiaqure on Supernational's prospects, which seem to me to have been by no means illusory. I am not prepared to find that the shares were valueless, but think that the appropriate order is simply that Supernational refund the $20,000 under s.87(2)({c). As James was "involved in the contravention" within the meaning of s.75B, the same order must be made against him. In view of the basis on which the matter has been decided, I think it right to qo on to determine the other question litigated. Contract A convenient starting point is the "Heads of Agreement", Exhibit 7, the operative part of which reads as follows: "It is hereby agreed that WILLIAM NELSON BASSINGTHWAIGHTE (or his nominee) of 172 Greentrees Avenue, Kenmore Hills, Queensland, ('BASSINGTHWAIGHTE') shall acquire ten percentum of the issued share capital of SUPERNATIONAL AUSTRALIA LIMITED ('SUPERNATIONAL') a company incorporated in Queensland whose registered office is 1 Wharf Street, BRISBANE in the said state. for the sum of $60,000 and that SUPERNATIONAL agrees to issue the said shares to BASSINGTHWAIGHTE. In consideration hereof BASSINGTHWAIGHTE shall pay the sum of $20,000 to SUPERNATIONAL on the date of this Heads of Agreement, with the balance to be paid upon the issue of the share certificates for the said share capital. 16. It is further aareed that upon pavment of the full consideration BASSINGTHWAIGHTE shall have the riaqht to appoint a Director to the Board of SUPERNATIONAL. " It is common around that the document was executed as a record of the aqareement come to, but William said, in effect, that it was not intended to be comprehensive. The statement of claim asserts that if there was an aqreement. the terms of it were that Supernational would certify that, as at 18 October 1985. the total liabilities were about $20,000; that Supernational would produce accounts, including a balance sheet. showing the amount of the liabilities as at 18 October: and that Supernational would verify that $118,000 had been paid to it by way of subscriptions of capital by G.J. McCahon and Spencer Sawmills Pty. Ltd. The evidence as to the agreement is rather diffuse, but its essence, so far as the applicant's case 1s concerned, is as follows. William went to see James on Friday. 18 October, because he felt he should, without further delav, give James a definite answer as to whether the offered shares could be taken up. Mr. O'Donnell of counsel for the applicant asked William what was said, and the reply was: "The basis of the meetina was that I aqreed to take a 10 percent interest in Supernational for a price of $60,000, and that T would be prepared to pay $20,000 then, and the balance when the changes to the memorandum at articles were completed satisfactorv to both sides: the balance sheet was produced and the previously subscribed capital was evidenced. That is as I remember it." 17. One would be pardoned for thinking that William intended to convey the substance of what was aareed on that day, but shortly afterwards he said, clearly enough, that he did not recall discussion about the balance sheet or confirmation of share capital being mentioned on the 18th. He said: "That the balance sheet would be produced was stated on the previous Friday, Friday the llth, and that during the week between the llth and the 18th we had discussed share capital and the memorandum and articles and it had been agreed that they would finalise to both sides' satisfaction." It is, I think, important to notice that the "Heads of Aqreement", Exhibit 7, are not entirely devoid of terms other than the property being acquired and the price. The last sentence contains an agreement that William is to have the riaht to appoint a director on payment of the full consideration: yet it is the applicant's case that there were omitted provisions of considerable significance, and that, indeed, they were conditions in the proper sense of entitling the applicant to rescind for any breach. In my view, the applicant has the difficulty that Exhibit 7 appears to be in substance a document whose execution "marks the actual conclusion of a contract": see Treitel "The Law of Contract" 6th ed., p.155. It is presumed to contain the terms aqreed on. 18. So far as I can comprehend the applicant's case on this aspect. it must be taken to be implicit in the "Heads of Agreement" that all statements of intention made bv James, relevant to the proposed share acquisition were incorporated as conditions of the aareement. I find that, on the day the agreement was made, nothing was said about any conditions, ina aeneral or in a particular way, other than those mentioned in the document itself. I am not satisfied that there was any implication to the effect mentioned. It is, I think. sianificant that William went to see James on the 18 October, not because of any request by dames that he do so. but because William was anxious to finalise the matter. He says that was because of a sense of fairness, but I cannot help thinking that William was still 'as he had been on the llth) keen to take an interest in Supernational,. and he miaht well have been concerned that if he did not secure his interests quickly, Supernational might look elsewhere, as it was very hard pressed for money. It would have been a very simple matter for William, who is a man quite capable of speaking up for himself. to say, or have inserted in the agreement, that the obligation to pay the $40,000 was conditional on quite other matters than the one there mentioned. It should be added that the statement of claim savs as one (the first) alternative that there was no aareement, but I do not follow the basis of that suagestion. I think there was an 19. agreement, in the terms of Exhibit 7. and am unable to find that there were any oral conditions attached to it. The parties might well have stipulated, for example, that the whole matter was conditional upon their reaching agreement upon alterations to the memorandum and articles, but they chose not to do so. It follows that, but for my conclusion on 5.52 of the Trade Practices Act, I would hold that there was a good contract and one enforceable by Supernational. It should be added that I make no finding of fraud against James, or against Supernational. It will be ordered that the respondents pay to the applicant the sum of $20,000, with costs and that amendment of the cross-claim be refused. 1 certify that this and the (8 preceding pages are a true cosy of tht re-loms for judgreent herein of His Fons Mr Justice Pincus Gr Lact Hep a" a v Asséciate Dated /5" So te Lek , (986,