JUDGMENT No. .8.2.2.,.7 4 CATCHWORDS TRADE PRACTICES - consumer protection ~ whether allegation of failure to speak could constitute a cause of action of misleading conduct or aiding and abetting under s.52 or s.75B of the Trade Practices Act 1974 FRAUD - whether allegation of failure to speak could constitute a cause of action in fraud Trade Practices Act 1974 (Cth), s52, s75B Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31, considered ALLSTATE LIFE INSURANCE CO & ORS v AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED & ORS G381 OF 1994 Coram: Beaumont J Place: Sydney Date: 8 November 1994 RECEIVED ~8 NOV 1994 FEDERAL COURT ©. AUSTRALIA PRINCIPAL REGISTRY IN THE FEDERAL RT OF AUSTRALIA ) ) Ww 'H WALES DISTRICT REGISTRY ) No. G381 of 1994 ) E DIVISION ) BETWEEN: ALLSTATE LIFE INSURANCE CO. & OTHERS Applicants AND AUSTRALIA AND NEW ZEALAND BANKIN ROUP LIMITED _& OTHERS Respondents CORAM: Beaumont J. DATE: 8 November 1994 REASONS FOR JUDGMENT (No. 3) Before the Court are notices of motion seeking to strike out certain paragraphs of the amended statement of claim dated 11 October 1994. For present purposes, it will be convenient to group the claims in question into several categories by reference to the various causes of action alleged to exist and to deal with each challenge in turn. It should be noted that here also, the complaint made by the present respondents 1s not that there are mere deficiencies of pleading. Rather, they contend that, relevantly, the facts pleaded fail to disclose, even on an arguable basis, the existence of the causes of action claimed. MThe introductory allegations in the statement of claim are sufficiently summarised in Reasons (No. 1) and need not be repeated for present purposes. TRADE PRACTICES ACT CLAIMS (a) The relevant case pleaded In respect of "All Claims" the applicants make the following material allegations: "20 At some time in J988 but at the latest by 21 September 1988, Linter Group proposed to the initial participant banks that they should. prior to the issue of the debentures, release the guarantees (as defined in paragraph 31) on condition that (a) prior to such release () Linter Group and Linter Textiles would give to initial participant banks a conformed copy of the Underwnting agreement between Linter Textiles and the underwriter, (1) Linter Textiles would irrevocably undertake to pay the net proceeds of the issue to Linter Group, and (ur) Linter Group would undertake to keep the net proceeds received from Linter Textiles on deposit until the matters set out in (b) below were implemented, and (b) after the issue of the debentures Linter Textiles would guarantee Linter Group's liabilities to the initial participant banks and the subsidiaries would guarantee Linter Textiles' liabilities to the initial participant banks, including the liabilities under the first mentioned guarantees (The proposal is hereinafter referred to as "the release and reinstatement proposal" ) 31 Prior to 12 October 1988 each of the initial participant banks had entered into an agreement with Linter Group and the subsidiaries pursuant to which the subsidiaries had agreed, amongst other things, to guarantee repayment to each respective bank of all money actually or contingently due to that bank by Linter Group ("the guarantees") 32. 33. Particulars The applicants rely upon agreements bearing the dates specified below in relation to each of the initial participant banks: Sumitomo 11 July 1988 Westpac 26 October 1987 Barclays 9 September 19838 BNZ 18 August 1988 Chase AMP 8 September 1987 Security Pacific 15 December 1987 ANZ 22 December 1987 Commonwealth 26 October 1987 SBSA 12 August 1988 Citibank Limited 8 September 1987 Citibank NA 8 September 1987 Copies of the agreements may be inspected at the offices of the solicitors of the applicants by appointment. On 12 October 1988 in accordance with the release and reinstatement proposal. each of the initial participant banks released the subsidiaries from their obligations pursuant to the guarantees ("the releases") Particulars The applicants rely upon deeds of release and discharge each dated 12 October 1988 between each of the initial participant banks, the subsidiaries, and Linter Group. Copies of the releases may be inspected at the offices of the solicitors for the applicants by appointment. Each of the intial participant banks entered into the releases in consideration of, and after receiving, undertakings from Linter Group and Linter Textiles ("the undertakings"). Particulars The undertakings are contained in letters dated 11 October 1988 from each of Linter Group and Linter Textiles to each initial participant bank. The undertakings were (a) (b) by Linter Textiles a) to procure each subsidiary to enler into a guarantee in favour of each initial participant bank in respect of the obligations of Linter Textiles to that bank, and qu) to pay the net proceeds of the issue of debentures pursuant to the prospectus ("the Procecds ') to Linter Group, by Linter Group to keep the Proceeds on bank deposit until (1) Linter Textiles had issued to each initial participant bank a guarantee of the obligation of Linter Group to that bank and (1) each subsidiary had issued to cach initial participant bank a guarantee of the obligations of Linter Textiles to that bank including the obligations under the guarantee referred to in sub-paragraph (1) Shortly after 13 October 1988 Linter Textiles entered tnto a guarantee in favour of each of the initial participant banks guaranteeing the liabilitics of Linter Group ("the Linter Textiles guarantees ') Particulars The Linter Textiles guarantees in relation to each of the mutal participant banks bear the following dates: Sumitomo 31 October 1988 Westpac 25 October 1988 Barclays 24 October 19838 BNZ 26 October 1988 Chase AMP 27 October 1988 Security Pacific ANZ Commonwealth SBSA Citibank Limited 24 October 1988 25 October 1988 26 October 1988 4 November [988 Unknown (Particulars will discovery) provided Citibank NA Unknown (Particulars will be provided after discovery) Copies (other than Citibank Limited and Citibank NA) may be inspected at the offices of the solicitor for the applicants by appointment. Linter Textiles entered into the Linter Textiles guarantees in accordance with the undertakings. Shortly after 13 October 1988 each of the subsidiaries entered into a guarantee in favour of each of the initial participant banks guaranteemg the liabilities of Linter Textiles, including the liabilities of Linter Texttles in respect of the liabilities of Linter Group, pursuant to the Linter Textiles guarantees ("the further subsidiary guarantees"). Particulars The further subsidiary guarantees bear the following dates: Sumitomo 4 November 1988 Westpac 2 November 1988 Barclays 18 November 19838 BNZ 7 November 1988 Chase AMP 27 October 1988 Security Pacific 1 November 1988 ANZ 20 January 1989 Commonwealth 27 October 1988 SBSA 4 November 1988 Citibank Limited Unknown (Particulars will be provided after discovery) Citibank NA Unknown (Particulars will be provided after discovery) Copies (other than Citibank Limited and Citibank NA) may be inspected at the offices of the solicitors for the applicants by appointment. 6. The subsidiaries entered into the furlher subsidiary guarantees in accordance with the undertakings The banks maintain that they are entitled to payment under the Linter Textiles guarantees and under the further subsidiary guarantees in priority to payments under the Indenture and the subordinated guarantees Each of the subsidiancs the Linter olficers the Linter Group, the initial participant banks coe GN cw that cach of the representations was misleading, inaccurate and untrue Each of the initial partiipant banks knew each of the facts, matters and circumstances referred to in paragraphs 6-9, 20, 21, 26-28, 20-42. 44, 45 and 47-50 and by reason of same ought to have known that cach of the representations was misleading, maccurate and untrue Each of the initial participant banks knew or ought to have known that persons contemplating purchase of the debentures either on issue or subsequently would rely on and be induced by the representations and that if persons contemplating purchase of the debentures were advised or warned of the tacts, matters and circumstances referred 10 sn paragraphs 6-9, 20 21, 26-28 30-42, 44 45 and 47-50 such persons would not purchase the debentures Each of the subsidiaries. the Linter ollicers Linter Group, saga and the inital participant banks neglected and failed to advise of warn persons contemplating the purchase of debentures or the Underwriler or the SEC of the facts matters and Each of the tnitial participant banks stood to gain finanually from the tissue of the debentures, in that (a) each of the intial participant banks had provided financial accommodation to Linter Group which was outstanding, (b) Linter Group was unuble or unlikely to be able to repay the same, (c) the proceeds of the debeatures were to be or would he avatlable to be used to repay the same, and (d) the obligations to pay interest and to repay principal in relation to the debentures Were, pursuant to the Indenture, to be subordinated to repayment of the said {inancial accommodation " Under the heading "Trade Practices Act 1974 (Cth)", the following, relevantly, is alleged: "73 In the premises in making the representations as relerred to in paragraph 30 Linter Textiles, in trade or commerce, engaged in conduct that was misleading or deceptive or likely to mislead or deceive in contravention of Section 52 of the Act In the premuses each of (e) the initial participant banks (1n paruicular by the conduct alleged in paragraphs 31, 32, 33, 34, 37, 38, 39, 40, 43, 51, 53, 55, 56 and 57), (Emphasis added) has aided, abetted, counselled or procurcd the contravention of Section 52 ot the Act by Linter Textiles, or alternatively were directly or indirectly knowingly concerned 1n, or a party to the contravention In the premuses, by the tailure to speak, each of the subsidiaries, the Linoter officers, Linter Group and the initial participant banks has, mm trade or commerce, engaged 1n conduct which was misleading or deceptive or likely to mislead or deceive 10 eee Eee contravention of Section 52 of the Act " (Emphasis added) The first challenge now made is to paras. 74(e) and 75 which, it is said, disclose no reasonable cause of action. (b) Conclusions on the application to strike out paras. 74(e) and _75 It will be convenient to deal with para.75 first. (i) Para. 7 This claim proceeds by reference to "the premises" in which, it is said, there was a "failure to speak" with the consequence that the banks thereby engaged in misleading conduct contrary to s.52. The "premises" there pleaded are, it appears, relevantly, a reference to the allegations pleaded in the paragraphs in the statement of claim set out above (that is, paras.20, 31-34, 37-40, 43, 51, 53, 55-57). In my opinion, none of those allegations could even arguably give rise to the existence of a duty to speak at common law or, more to the present point, to the existence of circumstances by reason of which the banks would be likely to mislead if they did not speak (see, generally, Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31). On behalf of the applicants, it is said that the allegations in para.20 and following are capable of being read to this effect: That the banks put Linter in the position of it (i.e. Linter) having the capacity to mislead others. However, although such conduct might, arguably at least, constitute misleading conduct on the part of the banks, I do not think that it is even arguable that the allegations in para.20 and following purport to make such a case. On the contrary, those allegations make the different case that Linter was the moving party (as para.20 alleges) and that the banks were prepared to co-operate to give effect to what Linter proposed. Such a case may constitute a claim of aiding or abetting, or being involved in, a contravention within s.75B of the Trade Practices Act (and this will arise in the application to strike out para.74(e), to be dealt with below); but it is not, in my opinion, arguable that the present pleading makes the case that the banks put Linter in the position of having the capacity to mislead. As has been said, para.75 seeks to allege that in "the premises" and "by the failure to speak" the banks, as principals (i.e. not as accessories) engaged in conduct that was likely to mislead. In my opinion, nothing in the material allegations introducing para.75 could, even arguably, constitute circumstances from which it would be possible to conclude that the banks engaged in conduct that was likely to mislead. It follows that para.75 should be struck out. (ii) Para.74(e) As noted in Reasons (No. 1) (at 23-4) under the modern system of pleading, on an application to strike out a statement of claim as disclosing no cause of action, "the question is whether it would be open to the [applicants] upon the pleadings to prove facts at the trial which would constitute a cause of action" (see The Mutual Life & Citizens' 10. Assurance Co Ltd v Evatt (1970) 122 CLR 628 at 631). As the Privy Council there pointed out (at 631), it is a different question (and one that would arise under the earlier system of pleading) whether, if the facts alleged and no other facts were proved at the trial, the law will deduce a cause of action. On behalf of some respondents, Mr. Pembroke contended that because the pleading failed to allege the degree of involvement required by the authorities in this area, especially Giorgianni v R (1985) 156 CLR 473 at 488, 500 and 506 and Yorke v Lucas (1985) 158 CLR 661 at 668-77, para.74(e) should be struck out. Whilst there may be force in Mr. Pembroke's argument if the old rules of pleading were to be applied, under the modern system the position is, as has been stated, otherwise. In my opinion, it would be open to the applicants, on the pleading, essentially for the reasons earlier given, to prove facts at the trial which would constitute the cause of action of "involvement" in Linter's alleged contravention within the meaning of s.75B. Although, as has been said, para.20 alleges that Linter initiated the proposal, it is there and elsewhere alleged that the banks participated in the plan of action alleged. This is material from which it would be possible to conclude, on the evidence at the trial, that the banks were "involved" in Linter's alleged contravention. ll. I refuse to strike out para.74(e). (ii) Proposed para.75A In the course of argument, the applicants sought leave to make a further amendment to their pleading (Ex. 8) as follows: "P: ED _AMENI TATEMENT OF CLAIM (1) Further and in the alternative, with knowledge of the intention of Linter Textiles to make the representations, each of the initial participant banks, by the conduct referred to in paragraphs 32, 33 and 34, placed Linter Textiles in a position where it was able to make the representations. (2) By reason of the matter referred to in subparagraph (1) and of the matters referred to in paragraphs 37, 38, 39, 40, 43-49, 51, 53 and 55-57 each of the initial participant banks: (a) has aided, abetted, counselled or procured the contravention of section 52 of the Act by Linter Textiles or alternatively were directly or indirectly knowingly concerned in or a party to the contravention; and (b) has, in trade or commerce, engaged in conduct which was misleading or deceptive or likely to mislead or deceive in contravention of section 52 of the Act." Leave to amend was opposed. In my opinion, it should be refused. The proposed amendment seeks in sub- paras.(1) and (2)(b) to assert again the argument I have already rejected as untenable. In sub-para.(2)(a), the aiding and abetting contention is again stated but this is already pleaded in para.74(e). 12. DECEIT AND COMMON LAW FRAUD CLAIMS These claims are pleaded in these terms: « DECEIT AND COMMON LAW FRAUD 129 kach of the representaions made by Linter Teatiles was made (a) knowing same to be false or with reckless indillerence as to truth or falsity of the same, and (b) with the intent of inducing (he applicants or their predecessors in title to purchase debentures 130 Each of the imitial participant banks mded and abetted Linter Textiles in the conduct alleged in paragraph 129 by granting the releases in consideration of the undertakings 131 Each of initial participant banks knowingly concealed the Lacts, matters und circumstances referred to in paragraphs 6-9, 20, 21, 26-28, 30-42, 44, 45 and 47-50 wath the intent that persons would purchase debentures who bul lor the representations and the said concealment would nol purchase debentures 134 In consequence of the conduct of Linter Tceatles, MUMBA and the initial participant banks the applicants and/or their predecessors in interest by their reasonable reliance thereon have suftered loss and damage 13. Particulars Refer to Particular to paragraph 76 By the law of New York the conduct on the part of Linter Textiles, SUBNMH aod the inttial participant banks and each of them referred to in paragraph 134 constituted the tort of fraud and by the law ol New South Wales that torl was committed in New York, by reason whereol, according to the law of New South Wales, tbe governing law ol the tort is the law of New York In the alternative, the governing law ol the tort 1s the law of New South Wales, notwithstanding that the tort, according to the law of New South Wales, was committed in New York In the turther alternative, according lo the law of New South Wales, the tort was committed in New South Wales, and the law to be applied is New South Wales law This Court has jurisdiction in respect of the matters in paragraphs 129 to 140 pursuant to section 32 ol the 1] ederal Court Act, those matters being associated with the matters in Paragraphs 68 to 77, which matlers are within the jurisdiction of this Court as alleged in paragraph 72 The tort of fraud according to the law ol New York 19 the sume as the tort of deceit according to the law of New South Walcs In the premises (a) Linter Textiles, Sa and the initial participant banks are hable to pay damages to the applicants tor deceit and Lraud, (b) Linter Texulcs and the initial participant banks hold on constructive trust and are liable to account to the applicants for all proceeds of the issue of the debentures respectively received by them " 14. Mr. Pembroke submitted that paras. 130-131, 134-135 and 140 should be struck out as disclosing no reasonable cause of action. In the first place, Mr. Pembroke argued that: (a) To make a party liable in deceit or common law fraud for concealment it must be established that: (i) there is an obligation on the party to disclose information to another; and (ii) An intentional failure to make such disclosure. (b) The applicants do not allege any matters from which it could be said that the respondents were under an obligation to disclose the alleged misrepresentations to the applicants. (c) Mere knowledge of facts which may suggest that representations made in a prospectus are false is not sufficient to impose an obligation on the respondents to disclose such matters to the applicants. (In relation to para.130, Mr. Pembroke also repeated his submission with respect to para.74(e) which I have already rejected.) 15. In my opinion, the allegation in para.131 suffers from the same vice as para.75 and should be struck out for essentially the same reasons (cf. Demagogue, above, and see George Spencer Bower, The Law ating to Acti e Non- Disclosure (2nd ed., 1990) Ch. 1). In other words, since no misrepresentation by the banks is alleged and since it cannot be argued that the law imposes, in the circumstances alleged, any duty of disclosure (see Bower, above, at 5-6), no reasonable cause of action is pleaded in para.131 and it will be struck out. Mr. Pembroke also challenges para.135 which, it will be recalled, pleads a tort of fraud committed in New York of which the governing law is said to be the law of New York. In this connection, Mr. Pembroke submitted (with the support of Mr. Karkar Q.C.) that the role of the lex loci in the present kind of case does no more than provide the means of determining whether the relevant facts give rise to civil liability "of the kind which the plaintiff seeks to enforce in the forum." Once that question has been addressed, the paramount application of the lex fori continues to be recognised as determining the entitlement of a plaintiff to relief. Mr. Pembroke referred to Breavington v Godleman (1988) 169 CLR 41; Stevens v Head (1993) 176 CLR 433; McKain v RW Miller & Co. (South Australia) Pty. Limited (1991) 174 CLR 1. He submitted that, insofar as it might contradict his 16. argument, the recent decision of the Privy Council in Red Sea Insurance Co. v Bouygues §.A. [1994] 3 WLR 926 was wrongly decided. On the assumption (which I am asked to make) that no purely "pleading" point is taken, in my opinion, para. 135 does not fail to disclose a cause of action under the modern system of pleading in the sense described by the Privy Council in MLC v Evatt. For present purposes, the relevant Australian conflicts law may be summarised as follows (see Halsbury's Laws of Australia Vol. 4 (P.E. Nygh)): (1) Generally, a tort is committed in the place where the wrongful act occurred rather than in the place where the resultant damage was suffered (see para.85-1440). (2) A plaintiff may sue in the forum to enforce a liability in respect of a tort occurring outside the forum if: (i) the claim arose out of circumstances of such a character that, if they had occurred within the territory of the forum, a cause of action would have arisen entitling the plaintiff to enforce against the defendant a civil liability of a kind which the plaintiff claims to enforce; (3) (4) 17. and (ii) by the law of the place in which the wrong occurred, the circumstances of the occurrence gave rise to a civil liability of the kind which the plaintiff claims to enforce. Provided a civil liability of the kind described above exists under the law of the place of wrong, the court will determine the extent of that liability according to the law of the forum (see para.85-1400). The cause of action on which the plaintiff proceeds must be one which is available against the defendant according to the law of the forum. Consequently a defendant can defeat the plaintiff's action by relying on a defence arising under the law of the forum which will bar the cause of action, even though that defence is not available under the law of the place of wrong. Similarly, no head of damages may be recovered in the forum if it is not recoverable under the law of the forum (see para.85-1410). This requirement has been interpreted to mean that the plaintiff can only recover in the forum such heads of damages as he or she would have recovered had an action 18. been brought in the place of wrong. The defendant may raise any defence of substance which would have defeated the cause of action in the place of wrong, or would have limited recovery to certain heads of damages (see para.85-1415). (5) The cause of action arises under the law of the forum but incorporates as an element the existence of a civil liability under the law of the place of wrong. Once that liability is found to exist under the law of the place of wrong, the law of the forum determines the liability of the defendant (see para.85-1425). (6) In the view of the majority of the High Court, there is no "flexible" exception to the general rule stated above as regards intra-Australian torts. There is no authority to determine the position as regards torts committed outside Australia (see 85-1430). Although not a decision of the High Court, the last sentence in (6) above must now be read in the light of the Red Sea case, above. But this hardly assists Mr. Pembroke's argument. In Red Sea, it was held that, exceptionally, in an appropriate case, a plaintiff could rely upon the lex loci even if under the lex fori the claim would not be actionable. 19. The position then is that whilst Australian conflicts law with respect to interstate torts may be settled, the same cannot be said of international torts. In my view, since para.135 raises an arguable issue, it should not be struck out. Costs of the motion will be reserved. ORDERS I will hear the parties on the form of the orders to be made in the light of these reasons. I certify that this and the preceding eighteen (18) pages are a true copy of the Reasons for Judgment herein of his Honour Mr. Justice Beaumont. Associate tee g Gf Oe Dated: 8 November 1994 Counsel and Solicitors Mr. A.R. Emmett Q.C. instructed for Applicants: by Sly & Weigall Counsel and Solicitors Mr. M.A. Pembroke instructed by for First, Seventh, Allen Allen & Hemsley Eighth, Ninth and Eleventh respondents: Date of hearing: 4 November 1994 Date Judgment delivered: 8 November 1994