JUDGMENT No. nS 3S..0/ 24. W_O S Trade Practices - misleading and deceptive conduct- whether false belief induced in applicants - Deed of Orderly Realisation of Securities - construction - whether obligation illusory - whether expression ambiguous - relevance of surrounding circumstances - whether obligation on respondents to ensure applicants obtained benefit of deed Practice and Procedure - whether legal professional privilege waived - certificate of independent advice - whether an inference to be drawn from failure to call evidence as to legal advice given prior to execution of documents Trade Practices Act ss 52, 82, 87 Brown v Jam Factory Pty Ltd (1981) 53 FLR 340 Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 Thomason v Council of the Municipality of Campbelltown (1939) 39 SR (NSW) 347 at 358 Attorney-General for the Northern Territory v Maurice (1986) 161 CLR 475 at 481 & 487-8 Carbone v National Crime Authority (Hill J, 28 October 1994, unreported) Hongkong Bank v Murphy [1993] 2 VR 419 at 438 United States v Woodall (1970) 438F (2d) 1317 Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83 Codelfa Construction Pty Ltd v State Railway Authority of NSW (1982) 149 CLR 337 at 348-353 Greenberg v Meffert et al (1985) 18 DLR (4th) 548 Mackay v Dick (1881) 6 App. Cases 251 at 263 Secured Income Real Estate (Australia) Limited v St Martins Investments Proprietary Limited (1979) 144 CLR 596 No. SG 52 of 1994 EMANUEL MANAGEMENT PTY LTD ACN 007 840 913 & OTHERS v ELFIC LIMITED ACN 007 606 206 (formerly ELDERS FINANCE & INVESTMENT CO LIMITED) & OTHERS BRANSON J. RECEIVED ADELAIDE 15 NOVEMBER 1994 16 NOV 1994 FEDERAL COURT OF AUSTRALIA PRINCIPAL REGISTRY COU: OF AUST: A VISIO No. SG 52 of 1994 BETWEEN: U; (ej T PTY ACN 007 840 913 SEGACTOUS PTY LTD ACN 010 748 544 MEKA SECURITIES PTY LTD ACN 007 724 629 COFORDO 251 PTY LTD ACN 010 683 584 (in its own capacity and in its capacity as trustee for the "Earl Hill Unit Trust"), GRANGEVILLE PTY LTD ACN 008 104 854 EMANUEL (NO.14) PTY LTD ACN 008 080 206 P.B.R.S. PTY LID ACN 007 799 546 PATERSON & CO PTY LTD ACN 007 679 763 GIUSEPPE NOMINEES PTY LTD ACN 007 771 486 LONSDALE STAGE 2 PTY LTD ACN 007 812 928 EMANUEL PROPERTIES PTY LTD ACN 007 740 123 EMANUEL (NO.4) PTY LTD ACN 008 036 995 EMANUEL (RUNDLE MALL) PTY LTD ACN 007 983 851 VILLA CAIRNS PTY LID ACN 010 633 459 ADRSTONE PTY LTD ACN 010 764 977 ANTLIA PTY LTD ACN 010 688 776 CENTAURUS PTY LTD ACN 010 688 767 CLOUDLAND INVESTMENTS PTY LTD ACN 010 319 730 COFORDO 260 PTY LTD ACN 010 685 775 DERWENTWATER PTY LTD ACN 010 688 721 EMANUEL (NO.7) PTY LTD ACN 008 053 352 LASCIVIOUS PTY LTD ACN 010 749 032 LEOMINOR PTY LTD ACN 010 688 758 LIVILLA PTY LTD ACN 010 748 571 SAROON PTY LTD ACN 010 633 548 WOODVILLE INDUSTRIAL PARK PTY LTD ACN 008 037 018 AIRLIE BEACH PTY LTD ACN 008 203 218 GIUSEPPE EMANUELE Applicants ELFIC LIMITED ACN 007 606 206 (formerly ELDERS FINANCE & INVESTMENT CO LIMITED), LENSWORTH PROPERTIES PTY LTD ACN 007 520 649 FG F ie ACN 007 533 888 (formerly ELDERS FINANCE LIMITED) Respondents MINU! OF OR JUDGE MAKING ORDER : Branson J. WHERE MADE : Adelaide DATE OF ORDER : 15 November 1994 THE COURT ORDERS THAT: 1. Judgment be entered for the respondents. 2. The applicants are to pay the respondents costs other than reserved costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules IN_THE FEDERAL COURT OF AUSTRALIA ) ) SOUTH AUSTRALIA DISTRICT REGISTRY ) ) GENERAL DIVISION ) No. 8G 52 of 1994 BETWEEN: EMANUEL MANAGEMENT PTY LTD ACN 007 840 913 SEGACTOUS PTY LTD ACN 010 748 544 MEKA SECURITIES PTY LTD ACN 007 724 629 COFORDO 251 PTY LTD ACN 010 683 584 (in its own capacity and in its capacity as trustee for the "Earl Hill Unit Trust"), GRANGEVILLE PTY LTD ACN 008 104 854 EMANUEL (NO.14) PTY LTD ACN 008 080 206 P.B.R.S. PTY LTD ACN 007 799 546 PATERSON & CO PTY LTD ACN 007 679 763 GIUSEPPE NOMINEES PTY LTD ACN 007 771 486 LONSDALE STAGE 2 PTY LTD ACN 007 812 928 EMANUEL PROPERTIES PTY LTD ACN 007 740 123 EMANUEL (NO.4) PTY LTD ACN 008 036 995 EMANUEL (RUNDLE MALL) PTY LTD ACN 007 983 851 VILLA CAIRNS PTY LTD ACN 010 633 459 ADDSTONE PTY LTD ACN 010 764 977 ANTLIA PTY LTD ACN 010 688 776 CENTAURUS PTY LTD ACN 010 688 767 CLOUDLAND INVESTMENTS PTY LTD ACN 010 319 730 COFORDO 260 PTY LTD ACN 010 685 775 DERWENTWATER PTY LTD ACN 010 688 721 EMANUEL (NO.7) PTY LTD ACN 008 053 352 LASCIVIOUS PTY LTD ACN 010 749 032 LEOMINOR PTY LTD ACN 010 688 758 LIVILLA PTY LTD ACN 010 748 571 SAROON PTY LTD ACN 010 633 548 WOODVILLE INDUSTRIAL PARK PTY LTD ACN 008 037 018 AIRLIE BEACH PTY LTD ACN 008 203 218 GIUSEPPE. EMANUELE Applicants ELFIC LIMITED ACN 007 606 206 (formerly ELDERS FINANCE & INVESTMENT CO LIMITED), LENSWORTH PROPERTIES PTY LTD ACN 007 520 649 EFG FINANCE LIMITED ACN 007 533 888 (formerly ELDERS FINANCE LIMITED) Respondents REASONS FOR JUDGMENT Branson J. Adelaide 15 November 1994 BACKGROUND The following background facts I understand not to be in dispute. The corporate applicants are companies which have at all material times carried on business as investors and traders in and developers of real estate. They will together be described as the "Emanuel Group". Certain of the companies have their registered offices at 100 East Terrace, Adelaide in South Australia and the remainder have their registered offices at 344 Queen Street, Brisbane 1n Queensland. The other applicant, Mr Giuseppe Emanuele, is a director of each of the companies, and it would seem, the principal force in their management. He was born in Italy and emigrated to Australia in 1952 when he was nearly 16 years of age. He settled in Adelaide with other members of his family. He obtained a licence as a land agent in 1957 and a builder's licence in 1971. He saw property development as his future and he subsequently worked hard to achieve success in this area of endeavour. By 1985 the Emanuel Group had grown to be a major property investor in Adelaide with a portfolio of approximately 50 properties. Its business involved the refurbishing of existing buildings as well as the erection of new buildings. Income was principally derived from the letting of tenancies in such buildings. The respondents are related companies incorporated in South Australia. At all material times ELFIC Limited was a merchant banker and investment banker, Lensworth Properties Pty Ltd was a mortgage financier and EFG Finance Limited was a mortgage financier and land and project developer. The respondents together and individually, and whether acting under their present or previous names, will be described as "EFG". The Emanuel Group commenced to borrow funds from EFG as early as the 1960's. In addition the Emanuel Group and EFG undertook property development in Adelaide as joint venturers. EFG was not the only provider of funds to the Emanuel Group. The group also borrowed from other lending institutions and from private investors. In May 1986 the Emanuel Group through Emanuel (No.14) Pty Ltd purchased large land holdings in Queensland from APM Forests Pty Limited ("the APM land"). The purchase price of $48M was wholly provided by EFG to Emanuel Management Pty Ltd. Its repayment was guaranteed by each of the applicants. $43M was provided as a fully drawn advance facility (see Deed of Master Agreement dated 12 June 1987) and $5M as working capital advances. The purchase was settled in June 1987. EFG took a mortgage charge over the assets of Emanuel (No.14) Pty Ltd. The charge was fixed as to all stands of timber and trees, including felled trees and logs, and floating in respect of timber royalties. The aim of the Emanuel Group was to develop and sell part of the APM land and retain other parts for long term timber harvesting. Between 1986 and 1989 the Emanuel Group purchased additional properties in and near coastal Queensland cities and towns. The properties were intended for development: they did not provide rental or other income to the group. Most of the purchases were funded by EFG but the group continued to borrow also from other financiers. During this time it appears that the cash flow of the Emanuel Group was maintained by sales of its Adelaide properties. Mr Giuseppe Emanuele moved to Brisbane and the Brisbane Office of the Emanuel Group became the principal office of the group. On 3 July 1989 Emanuel (No.14) Pty Ltd signed an agreement with Softwoods Queensland Pty Ltd for the extraction and purchase of timber from the APM land. Pursuant to that agreement Softwoods Queensland Pty Ltd undertook an obligation to pay to the Emanuel Group royalties of approximately $3.3M per year. Such royalties have been an important source of income for the Emanuel Group since late 1989. The term of the agreement is dependent upon the continuing availability of timber to harvest but could extend until the year 2004. There was a serious downturn in the property market in Australia, including Queensland, in the late 1980's and early 1990's. The Airline Pilots' strike of 1988 also impacted adversely on Queensland property values. Australian financiers commenced to deal more cautiously with borrowers. The Emanuel Group came under pressure from EFG and others of its financiers to sell land and reduce its level of indebtedness. In 1990 the extent of the indebtedness of the Emanuel Group to EFG was of the order of $123M. Portion of that indebtedness had resulted from EFG advancing funds to the Emanuel Group to allow it to meet interest obligations to EFG and to other financiers. A further portion of the indebtedness reflected working capital advanced to the Emanuel Group by EFG. From early 1991 EFG ceased to lend to the Emanuel Group to allow it to meet interest obligations. Moreover it provided working capital only according to a budget approved by it. It sought and received financial information from the Emanuel Group and budgets for the ongoing operation of the Emanuel Group were negotiated between officers of the Emanuel Group and officers of EFG. Even with the timber royalties the Emanuel Group could not alone raise the working capital which it needed to continue to operate. It had become financially dependent on EFG. By Notice of Exercise of Power of Sale dated 11 October 1991 EFG gave Emanuel (No.14) Pty Ltd notice of default under the mortgage of the APM land. By Notices of Demand dated 19 June 1992 EFG demanded payment from the applicants of $139,805,882.39 together with interest from 1 June 1992. No further action has been taken with respect to these notices. It appears that EFG has been of the view that the Emanuel Group is better suited to market its properties than EFG would be as mortgagee. From 1991 onwards meetings were held between officers of the Emanuel Group and EFG respectively at which, amongst other things, the sales program of the Emanuel Group was reviewed and marketing strategies considered. The success of the marketing strategies implemented proved to be limited. By early 1993 the combined debt of the Emanuel Group to EFG was approximately $157M. The value of the security held by EFG was estimated by staff of the Emanuel Group at $144M. The group had a total indebtedness of approximately $226M. Interest was largely if not wholly being capitalised thus increasing the total indebtedness. A report prepared on the instructions of the Emanuel Group dated November 1992 ("the Wales Report") indicated that $183M could be expected to be realised from property sales if a three year period were allowed for the disposal progran. Messrs Coopers & Lybrand, chartered accountants and business advisers, provided a report to Mr Giuseppe Emanuele dated 8 March 1993. This report was based upon information provided by the Emanuel Group, including the Wales Report, and schedules prepared by the Emanuel Group setting out the estimated value and timing of property disposals for all properties held by the group. Coopers & Lybrand reported in summary as follows:- "On the basis of the limited work undertaken by us and the financial data provided by company staff it is appropriate to conclude that: (a) With the exception of two or three properties, each secured lender will suffer a shortfall on the sale of its security; (b) The Emanuel Group currently has negative net worth and this position will continue until either: (i) property values increase significantly; and/or (ii) secured lenders debts are reduced significantly. (c) The Emanuel Group is in urgent need of further funding to continue its operations in the medium to long term; (d) The Emanuel Group should reach an understanding with its secured lenders as soon as possible; and (e) other than two minor assets in Italy and a Brisbane residence, it seems that all Emanuel Group assets have been included in the Wales Report." On 11 March 1993 the parties executed a Deed described as a Deed of Orderly Realisation of Securities. The recitals of the Deed include an acknowledgment by the Emanuel Group of defaults under securities held by EFG. They further record that:- "The Emanuel Group has requested the EFG Group to grant to it @ period of grace during which period the Emanuel Group will proceed with the marketing and realisation of the Securities. The EFG Group has agreed to the request of the Emanuel Group subject to the execution of this Deed and upon terms and conditions hereinafter appearing all of which the parties hereby admit and acknowledge." Clause 6 of the Deed is in the following terms:- "6.1 The cost of implementation and the continued 6.2 operation of the Emanuel Group shall be the responsibility of the Emanuel Group; The EFG Group shall permit at its absolute discretion the flow of funds from the Softwoods Agreement to the Emanuel Group to assist in the funding of the orderly marketing of the land the subject of the Securities in the terms hereof subject always to the Emanuel Group providing satisfactory financial information in accordance with the provisions of Clause 5 hereof. The EFG Group reserves its rights to f£1x the Mortgage Debenture Charge over Emanuel (No.14) Pty Ltd so far as the Softwoods Agreements is concerned at any time." Clause 7.1 provides as follows:- "7.1 Subject to strict compliance with the terms of this Deed and the compliance with the terms, covenants and conditions of the Securities save and except the obligations as to payment of principle and interest money the EFG Group agree not to enforce the Securities as against the Emanuel Group during the Moratorium Period." By clause 1.1 of the Deed the Moratorium Period is defined as "the period of forty (40) months commencing on 1 March 1993 and ending on 30 June 1996 or such other period as may be determined by the EFG Group from time to time". A Deposit Account Agreement in the form of a Deed made on 20 May 1993 was executed by Elfic Limited ("the Financier") on the one hand and Emanuel (No.14) Pty Ltd ("the Depositor") on the other. It provided for the Financier to open in its books a deposit account in the name of the Depositor into which the Depositor would deposit money. It further provided that such account would be under the control of the Financier and would be maintained "until there has been due performance and observance of all liabilities and obligations of the Depositor fand certain other members of the Emanuel Group] (hereinafter called "the Debtor") pursuant to the terms of any agreements made between the Depositor, the Debtor and the Financier and all securities collateral thereto." On 26 May 1993, at the request of EFG, Emanuel (No.14) Pty Ltd gave an irrevocable authority to Softwoods Queensland directing it to pay the timber royalties into the deposit account established pursuant to the Deposit Account Agreement. Between June 1993 and April 1994 timber royalties payments in the total sum of $3,256,976 were paid into the deposit account established pursuant to the Deposit Account Agreement. Over the same period $3,351,862 was paid to the Emanuel Group from that account. By letter dated 7 April 1994 addressed to Mr G Emanuele, Chairman of the Emanuel Group of Companies, Mr John F O'Grady, Managing Director of EFG Australia Limited, advised that under the terms of Clause 6.2 of the Deed of Orderly Realisation of Securities EFG had exercised its absolute discretion in respect of the release of funds from the Softwood Agreement and he confirmed that from 8 April 1994 EFG would cease to permit the flow of funds from the Softwoods Agreement to the Emanuel Group. EFG did cease to permit the flow of funds from the Softwoods Agreement to the Emanuel Group as advised by Mr O'Grady. On 1 July 1994 these proceedings were instituted. CASE FOR THE APPLICANTS The applicants case as argued has two principle limbs. First the applicants allege that they were induced to enter into the Deed of Orderly Realisation of Securities ("the DOOR") by misleading and deceptive conduct. As Mr Wells QC, leading counsel for the applicants, expressed it in his opening address:- "the misleading and deceptive conduct that the applicants point to 1s conduct constituted by both words and action which induced the applicants to believe that they would be continuing to run their businesses and that the financiers would allow them to continue to run their businesses and to achieve and take action to achieve the targeted programme established under the deed. And that the respondents, the financiers, would continue to support and provide support to the applicants so long as they continued to comply with the programme that was established for the realisation of the properties and so long as other creditors of the applicants, did not effectively obtain orders for lJliquidation or appoint receivers." The applicants further contend that the same conduct also induced them to execute the Deposit Account Agreement and the irrevocable authority to Softwoods Queensland directing it to pay the timber royalties into the deposit account established pursuant to the Deposit Account Agreement. In his written submissions Mr Wells identified the allegedly misleading and deceptive conduct relied upon in the following paragraphs:-— "5. The misleading and deceptive conduct here is that:- 5.1 EFG led Emanuel Group erroneously to believe that it was willing to consider a change in the relationship so as to give Emanuel Group a time 5.2 5.3 5.5 certain to carry out an Orderly Realisation. EFG led the Emanuel Group to believe that, subject to a review and in any event, considerations as to performance, and third party creditor interventions, it would continue to support Emanuel Group. EFG led Emanuel Group to believe that it had, upon review, decided to support Emanuel Group, by entering into the D.0O.O.R. EFG led the Emanuel Group erroneously to believe that in providing that support it reserved complete discretion as to whether to provide any further funds to the Emanuel Group (le. make any advances). EFG led Emanuel Group erroneously to believe that the foregoing reserved discretion did not extend, and was not intended to extend to inhibiting or preventing Emanuel Group's continuing use of its own income from the Softwoods Agreement (the timber income), which was needed to implement the D.0O.O.R. and to continue the Emanuel Group operations for that purpose. 5.5.1 The fact (known to both parties) that Emanuel Group could not continue to operate under the Deed without the timber income provided the conditions for EFG's conduct to induce that erroneous belief. 5.6 Grier's assurances on 10 March 1993, about Emanuel Group's continued use of the timber income, via the deposit account, served to reinforce that erroneous belief. 6. Alternatively to 5.5 above, the misleading and deceptive conduct is that EFG gave the Emanuel Group erroneously to understand that, insofar as it reserved a discretion to interfere with Emanuel Group's use of the timber income during' the moratorium period, it was a discretion that would be exercised to ensure the proper use of that income for the purposes of the Deed." As the second limb of their case the applicants say that the respondents have acted in breach of the DOOR by ceasing to permit the flow of funds from the Softwoods Agreement to the Emanuel Group. It is their contention that the discretion reserved to EFG by clause 6.2 of the DOOR 1s not an unfettered discretion but a discretion intended to empower EFG to ensure that only so much of the timber royalties as the Emanuel Group needed for the workout was available to the Emanuel Group. To construe the clause more widely, it is said, would be to allow it to be used to destroy the very purpose of the DOOR and render it illusory. ALLEGATION OF MISLEADING AND DECEPTIVE CONDUCT The applicants' case with respect to misleading and deceptive conduct was founded in large part upon the long relationship between the parties. It was put on behalf of the applicants that they saw the relationship as continuing for an indefinite time and that the absence of discussion between the parties suggesting that the relationship might change significantly led the Emanuel Group to believe that the DOOR would provide it with a period of grace of not less than 40 months provided that it directed its energies and efforts to the workout as required by the DOOR. An essential aspect of any such period of grace, it 1s said, was the continuing availability of sufficient funds to allow the ongoing conduct of the Emanuel Group business in the way envisaged by the DOOR. In this context the applicants placed weight upon Mr Giuseppe Emanuele's preference for doing business "face-to-face" rather than by formal correspondence: a preference which might have its basis in the fact that English is a second language for him. They also place weight on Mr Giuseppe Emanuele's practice of concentrating on the principle aspects of a deal rather than the details of documentation. It 1s suggested that officers of EFG were aware of these aspects of Mr Emanuele's business practices by reason of the long working relationship between them. On the balance of probabilities I find that officers of EFG were aware of these practices and preferences. I note however that Mr Rocco Emanuele, a son of Mr Giuseppe Emanuele and a director and secretary of all of the corporate applicants, has studied and continues to study commerce at tertiary level and gave evidence that he has 'come to be involved in the "detail" of transactions.' The evidence of Mr Giuseppe Emanuele with respect to dealings between officers of EFG and him prior to the execution of the DOOR is as follows:- 'John Crosby and Peter Grier represented to me during our discussions leading up to the Deed that EFG would support the Emanuel Group until 1996 at the very least, subject to the Emanuel Group meeting certain sales figures and no other lender "moving in" on the Emanuel Group. I was able to strike arrangements with other creditors and lenders of the Emanuel Group. In order for the Emanuel Group to manage, market and sell the EFG portfolio, EFG agreed to allow the Emanuel Group access to the timber royalties. EFG was aware at all times that without the timber royalties the Emanuel Group could not perform its obligations under the Deed. John Crosby and Peter Grier said to me that the Emanuel Group would get sufficient funds during the moratorium period. I never asked whether the Emanuel Group would continue to receive the timber royalties - I didn't need to. The thought that we would not receive those funds never crossed my mind for a moment. I was never worried about that. There was never any doubt in my mind that the timber royalties would continue to come to the Emanuel Group. No representative of the EFG Group ever said to me that it would stop the timber moneys at any time. No- one from EFG ever pointed out that the Deed would be drawn that way.' The evidence-in-chief of Mr Rocco Emanuele with respect to events leading to the execution of the DOOR was given in two parts. First he gave evidence from contemporaneous notes of certain meetings at which he was present. Secondly he gave evidence of his general understanding of the position between the parties. Mr Rocco Emanuele gave evidence of a telephone conversation between him and Mr Noel Jaenke of EFG on 9 February 1993 during which Mr Jaenke "stated that EFG would continue their support of the Emanuel Group on condition that all other creditors 'stayed in line''." As to his general understanding he stated:- "At no time did anyone from EFG point to any of the provisions of the Deed in which they now rely, saying that they have a discretion whether they fund the Emanuel Group or not. It is my understanding that EFG would not cut off the funding during the Deed period as long as the Emanuel Group continued to meet ongoing budgets and that no other lender or creditor "moved in", as I have described earlier. Further, in addition to the specific examples I have referred to in this statement, at a number of meetings 1t was stated by EFG that EFG would continue to provide funds to the Emanuel Group during the workout period. I did not make any notes of those statements. They were made during very regular meetings that were held between EFG Group and Emanuel Group and they were merely consistent with what I knew anyway. I cannot precisely recall the dates on which the statements were made but they were both before and after the Deed was signed. I am confident that both John Crosby and Peter Grier made such statements several times." However, the following evidence was given by Mr Rocco Emanuele in cross~examination:- "Now in February 1993, Mr Emanuele, I suggest you were very interested to know what EFG Group was going to undertake, if anything, to the Emanuel Group in respect of the future receipt of timber royalties? eae Which month are you ... February 1993? eee Yes, that is correct your Honour, but at the time no different from any other month. Well, you knew in February 1993, that the EFG Group was formulating a proposal for a deed of orderly realisation, correct? ... That is correct. One topic which was of significant interest to you, I respectfully suggest, was what EFG was going to propose in respect of the future receipt of timber royalties by Emanuel Group? ... Yes, that is correct. Because the timber royalties were the life blood of the group so far as you perceived it, were they not? see That is correct. You knew, did you not, that EFG proposed to present a deed in February 1993 which would deal with the future, at least for the next couple of years or so, of the Emanuel Group, correct? ... That 1s correct." With respect to the history of the relationship between the parties evidence was called on behalf of the respondents to show that EFG had placed the Emanuel Group on notice on occasions that EFG's ongoing support for the Emanuel Group could not be taken for granted. For example minutes of a meeting held on 14 August 1992, at which officers of EFG and officers of the Emanuel Group including Messrs Giuseppe and Rocco Emanuele were present, include the following paragraph:- "John Crosby reminded Joe Emanuele that Elders presence at the marketing meeting was due to the Groups continuing default. He stated Elders was continually reviewing its position and assistance to the Group could change at a moments notice. John Crosby stated he did not wish to be seen as a scare monger but believes the Group should be aware of the situation. He impressed on Joe and Rocco that sales were imperative." Mr Giuseppe Emanuele agreed in cross-examination that the above extract from the minutes was an accurate record of things said by John Crosby apart from the fact that he could not recall the term "scare monger" being used. He said that it was a term that he did not understand. Mr Giuseppe Emanuele also agreed in cross-examination that in early 1993 the Emanuel Group was receiving demands for repayment from creditors other than EFG which it could not meet. He stated that reaching some sort of arrangement with EFG was essential to the Emanuel Group's dealing with its other lenders. It is clear that in early 1993 the relationship between the Emanuel Group and EFG was such that EFG was in a position to, and did, control all of the Emanuel Group's expenditure - even where such expenditure was to come from the timber royalties. The following is a passage from Mr Rocco Emanuele's cross-— examination:- "Now, Mr Emanuele, as at February 1993 you had accepted, had you not, that the reality was that EFG would insist upon being asked to approve in advance all payments out of the timber royalties in that way? ... They had been doing 1t before 1993 at that stage, your Honour. Yes, I am just trying to focus your state of mind on 22 February 1993, thereabouts, that you had accepted yourself the reality that EFG could insist upon being asked for their approval in advance to any expenditure out of those timber royalties coming from Softwoods to Emanuel Group? ... Yes, I understand, your Honour. All right, If I can just explore that a bit with you, Mr Emanuele, the reasons why you accepted that EFG had that ability, are they these, firstly, you knew that the Emanuel Group was only trading at the will of EFG? ... I would go so far as to say will and desire of EFG at the time, your Honour. All right, because EFG at that time wanted it to trade and allowed it to trade, is that what you say? ... Yes, that 1s correct." There 1s other evidence which reflects on the understanding of the Emanuel Group during the weeks preceding the execution of the DOOR as to its relationship with EFG. First, as I understand the evidence of Mr Giuseppe Emanuele, the Wales Report was obtained in late 1992 by the Emanuel Group with the agreement of EFG, possibly at the suggestion of EFG. Its purpose was to provide a review of the position of the Emanuel Group at that time. Both Messrs Giuseppe and Rocco Emanuele and the Emanuel Group's long time lawyer Mr Danny Farrugia were involved in providing instructions to Mr Wales who also spoke with officers of EFG. Mr Giuseppe Emanuele agreed in cross-examination, and I so find, that the Wales Report was obtained by the Emanuel Group and provided to EFG as a basis for the consideration of a possible "period of grace" or "workout" arrangement between the Emanuel Group and EFG. Secondly the Coopers & Lybrand report dated 8 March 1993 which was prepared on the instructions of the Emanuel Group and is addressed to Mr Giuseppe Emanuele reports as follows under the heading "Group Major Lender (Elders)":- "7.1 In order to focus on how each secured lender fits 7.2 7.3 7.4 7.5 into the overall Emanuel Group, it 1s important to appreciate Elders' present position and future role. As you are aware, by far the most. significant secured lender to the Emanuel Group is Elders. Based on figures provided to us, the combined debt to Elders is approximately $157m. The Emanuel Group has recognised that 1t may not be able to continue with the property redevelopment proposals previously planned unless continued financial support 1s obtained from Elders. You met with representatives of Elders on 24 February 1993. We understand the purpose of this meeting was to request continued support by Elders in the form of sufficient advances to enable an orderly disposal of the Elders property portfolio. Following this meeting, you arranged for company staff to submit a revised timetable for the sale of property subject to Elders' security, together with an estimate of the likely sale prices that could be achieved. At the date of this report, we are not aware if Elders have provided approval for further funding to enable properties subject to their security to be realised by the Emanuel Group over the short to medium term. Elders have advised us that a document 1s being prepared covering their involvement with Emanuel Group over the next three years, and incorporating performance targets which are required to be met on an annual basis." Appendix H of this report under the heading "Review of Forecast Earnings Statement and Forecast Cash Flow Statement" includes the following paragraph - "(d)} Royalty iuncome from timber sales amounts' to approximately $3.5M per annum. Elders have a charge over this royalty income but are currently allowing the Emanuel Group use of these funds to continue trading." I accept the evidence of Mr Peter Grier, State Manager Queensland of EFG that he did not at any time state to either or both of Messrs Giuseppe and Rocco Emanuele that EFG would continue support of the Emanuel Group on condition that it continued to realise properties in accordance with on going budgets and strategies and provided that no other creditor "moved in" on the Emanuel Group. Mr Grier did not have the authority to make any such statement. I accept that in such circumstances Mr Grier would not have made any such statement. I accept the evidence of Mr John Crosby, consultant to EFG, that he did not make any statement to the effect of that set out in the preceding paragraph. I further accept his evidence that he did not say to Mr Giuseppe Emanuele or anyone else that EFG would continue to fund the Emanuel Group until 1996 through the release of the timber royalties or otherwise. I also accept his evidence that he did not ever advise Mr Giuseppe Emanuele that EFG would not stop the flow of timber royalties to the Emanuel Group, or that the Emanuel Group would get sufficient funds during the moratorium period provided by the DOOR. Like Mr Grier, Mr Crosby pointed out that he did not have the authority to make any = such statements. I accept that in such circumstances he would not have done so. Mr John O'Grady, Managing Director of EFG Australia Limited gave evidence in which he denied that he confirmed to Mr Giuseppe Emanuele, or to anyone, that EFG would not stop the flow of timber royalties to the Emanuel Group unless there was unsatisfactory financial performance by the Emanuel Group or unless other financiers moved on the Emanuel Group. Mr O'Grady further gave evidence that he had not heard Mr Grier or Mr Crosby make such statements either. I accept this evidence of Mr O'Grady. I accept that it would have been incompatible with the strategy which he was seeking to pursue with respect to the Emanuel Group for him to have made any such statements or to have allowed any such statements made by others to stand uncontradicted. I find that immediately before the meeting of 22 February 1993 between representatives of EFG and the Emanuel Group at which the draft DOOR was discussed it was well recognised by Messrs Giuseppe and Rocco Emanuele that EFG was not committed to continue funding the Emanuel Group but rather had the Emanuel account under review. I further find that it was recognised by Messrs Giuseppe and Rocco Emanuele that such review extended to the totality of the securities held by EFG including its charge over the timber royalties. Indeed as Mr Rocco Emanuele acknowledged, even before 1993 EFG had insisted upon being asked to approve in advance all payments made by the Emanuel Group out of the timber royalties. I do not accept the evidence of Mr Giuseppe Emanuele that agreement was reached between EFG and the Emanuel Group over a series of meetings in late 1992 and early 1993, the essence of which was that the Emanuel Group would continue to manage, market and sell all of its properties over which EFG held security over a time frame of 40 months. ti 2 e ary 1993 On 22 February 1993 Messrs Giuseppe and Rocco Emanuele attended a meeting at the Melbourne offices of EFG. Also present were:-— Mr John O'Grady, Managing Director of EFG Australia Limited; Mr John Crosby, Consultant to EFG; Mr Peter Grier, State Manager Queensland of EFG; Mr John Elliott, a partner of Messrs Clayton Utz, solicitors for EFG. Each of the persons present at this meeting gave evidence. Mr Giuseppe Emanuele gave evidence that by late February 1993 he knew that EFG was preparing some kind of deed for his consideration and that consideration of such deed was the main purpose of the meeting of 22 February 1993. He thought that he was aware before the meeting that Mr Elliott would be at the meeting. He agreed that at the meeting Mr Elliott went through the draft document reading and explaining certain clauses. He further agreed that he appreciated at the time that the proposed deed was the document that was going to govern the ongoing relationship between EFG and the Emanuel Group for the time period set out in the document. Mr Rocco Emanuele's evidence was that before he got to the meeting of 22 February 1993 he understood that the purpose of the meeting was to formalise a workout arrangement between EFG and the Emanuel Group. He agreed that a draft deed was discussed at the meeting and that Mr Elliott went through some of the clauses. He recalled that his father was asked at the meeting to obtain a legal opinion with respect to the document. He further recalled that Mr O'Grady said at the meeting that the proposed DOOR would have to be approved by RAMCO before it could be binding. RAMCO is an acronym for the Residual Asset Management Board of EFG which was ultimately responsible within EFG for decisions concerning the Emanuel Group account. Mr O'Grady stated in his evidence, which I accept, that at the meeting of 22 February 1993 he made clear to Mr Giuseppe Emanuele, as did Mr Crosby, that if the proposal for the Deed was approved by the RAMCO Board, a final document would be provided to his solicitors and he should take independent legal advice in relation to the document. He further stated that he made it clear to Mr Giuseppe Emanuele that the final arrangements which would be acceptable to EFG would be those set out in the Deed presented to him for execution. Mr Grier gave evidence that he recalled clearly Mr Crosby emphasising that the Emanuel Group should obtain independent advice from its own solicitors in relation to the proposed deed so that they fully understand what the proposed arrangements involved. Mr Elliott gave detailed evidence of the meeting of 22 February 1993 which I accept. The following passage comes from his evidence-in-chief:- "I explained to the Emanuel Group the major points covered by the Deed and then proceeded to take the Emanuele Group representatives through the Deed clause by clause, indicating the nature and general effect of each provision. 22. I did not omit any clauses and, during this course of this process, specifically drew the attention of the Emanuel Group representatives to clause 6 relating to the funding of the orderly realisation. The form of clause 6 in the final document did not change from the form set out in the draft discussed at the 22 February 1993 meeting. 23. I explained that EFG Group would make funds avallable from the Softwoods Agreement to the Emanuel Group to assist in the funding of the orderly marketing of the properties. I emphasised however that such funds would be made available only at the absolute discretion of EFG Group and that the funding and operation of Emanuel Group was primarily a matter for the Emanuel Group. 24. One of the reasons for the inclusion of clause 6 in the form drafted related to my ongoing concern that officers of EFG Group not be seen to be acting in a "pseudo-directorship" role in relation to Emanuel Group and I made it clear at this meeting to the Emanuel Group representatives that it was their responsibility to fund and operate the Emanuel Group and any support from EFG Group was entirely at the discretion of EFG Group. 25. I recall Mr Crosby saying to the Emanuel Group representatives at this point of the discussion that funds would only be released from the Softwoods account at EFG Group's discretion and it was their (Mr Emanuele and Rocco Emanuele) responsibility to run "the company" (being a reference to Emanuel Group). 26. Neither Mr Emanuele or Rocco Emanuele commented that the only way they were able to fund the group was through the use of the Softwoods moneys. 27. During the course of this meeting, I also explained to the Emanuel Group representatives that all of the existing securities between EFG Group and Emanuel Group, including guarantees, would remain in force. This issue was raised again later in the meeting by Mr Emanuele and I recall Mr O'Grady emphasising that EFG Group was not prepared to release any personal or company guarantees. 28. I also recall Mr O'Grady and Mr Crosby both raising with the Emanuel Group representatives that it was essential they take their own legal advice in relation to the proposed Deed. Mr Crosby said, words to the effect. "Don't come to me for legal advice. I am only a consultant, but you must understand what this means and take independent advice on ut". I was instructed by EFG Group to include such a certificate of independent advice as part of the final document. 29. Some further information was required to enable the Deed to be completed, in addition to the amendments which I had been asked to carry out. This information included details of the precise amount of debt due to the EFG Group and the minimum repayment amounts for each repayment period. At the time of this meeting, it was proposed that the repayment periods be 6 monthly over a moratorium period of 3 years. 30. Subsequent to the meeting and following discussions at the meeting, the moratorium period was changed to a period of 40 months commencing 1 March 1993 and ending on 30 June 1996 and the repayment periods were changed. 31. Mr O'Grady made it clear to the Emanuel Group representatives that further drafting of the proposed Deed would be carried out by me in accordance with instructions which had been given to me and the Deed would then be presented to the Ramco Board for approval. If the Ramco Board did not approve the proposed Deed, the matter would not proceed any further. However, if Ramco did approve the proposed arrangements, the final deed would then be submitted to Emanuel Group and its Solicitors for their consideration." I find that at the conclusion of the meeting of 22 February 1993 Messrs Giuseppe and Rocco Emanuele had been advised in unambiguous terms:-— (a) that the proposed DOOR was the document that was going to govern the ongoing relationship between EFG and the Emanuel Group for a period to be specified in the DOOR; (b) that the proposed DOOR would be presented to the RAMCO Board for approval: if such approval were not obtained the proposals contained therein would proceed no further; and (c) that the Emanuel Group should obtain its own independent legal advice in relation to the proposed DOOR. I further find that the significant clauses of the draft document were explained to Messrs Giuseppe and Rocco Emanuele during the course of the meeting. Execution of the DOOR It is not in dispute that following the meeting of 22 February 1993 the DOOR was drawn in its final form and approved by RAMCO. In its final form its includes a certificate in the following form:- "CERTIFICATE OF INDEPENDENT ADVICE I, certify that: 1. The attached document was executed by the parties of the second part on my advice. 2. The documents were signed voluntarily. DATED: SIGNED: cece ce reece ec cee eee e ence ee entntees Solicitor" The Emanuel Group constitute the parties of the second part to the DOOR. By letter dated 2 March 1993 Messrs Clayton Utz wrote to Messrs Sly & Weigall Cannon and _é Peterson, Queensland solicitors for the Emanuel Group, in the following terms:-— "We confirm that we act for EFG Australia Limited and we submit herewith Deed of Orderly Realisation of Securities for consideration and, 1f acceptable, for execution in triplicate. We request the Deed (in duplicate) be returned to us and that the Certificate of Independent Advice appearing after execution of the document be completed." On the same day Messrs Clayton Utz forwarded to Mr Giuseppe Emanuele a copy of the DOOR under cover of a letter in the following terms:- "At the request of Mr Peter Grier, we enclose herewith a copy of the Deed of Orderly Realisation of Securities, bound copies have been forwarded to your solicitors, Messrs Sly and Weigall Cannon and Peterson for the purposes of execution." On 8 March, 1993 Messrs Clayton Utz received from Messrs Sly & Weigall Cannon and Peterson two copies of the DOOR executed by the Emanuel Group. However the certificate of independent advice had not been signed. By letter dated 12 March 1993 Messrs Clayton Utz wrote to Messrs Sly & Weigall Cannon and Peterson on this issue as follows:- "We refer to previous correspondence in this matter and acknowledge that the documents have been duly signed by your clients and returned on the basis of your letter of 8 March 1993. The documents are currently with our client company for execution. Upon return of the documents, we would re- deliver them to you on the understanding that they be held to our order pending completion of the Certificate of Independent Advice which is bound into the last page of the document. We note that this will be reviewed by you and 1f you feel comfortable with the Certificate you will complete same." Under cover of a letter dated 18 March 1993 Messrs Sly & Weigall Cannon and Peterson returned to Messrs Clayton Utz the original DOOR with the certificate of independent advice completed. No evidence was called on behalf of the applicants as to the circumstances in which they executed the DOOR other than that Mr Rocco Emanuel stated that he signed it at the Emanuel Group offices. He gave evidence that he "flicked through it scantily" before signing it. He said:- "I was basically taken through the deed at that meeting {i.e. 22 February 1993] and, as I said, I had many things to sign continuously at that time, your Honour, that it was just another document that had to be signed and had to be got back very quickly". The DOOR shows that Mr Giuseppe Emanuele executed the document in the presence of Mr Rocco Emanuele and that the company seal of each of the corporate applicants was affixed in the presence of Mr Giuseppe Emanuele as Director, and Mr Rocco Emanuele, Secretary/Director. No member of the firm of Sly & Weigall Cannon and Peterson was called to give evidence and neither of Messrs Giuseppe and Rocco Emanuele gave evidence concerning legal advice received by him with respect to the DOOR. It was submitted by Mr Wells that the applicants were not required to waive their legal professional privilege with respect to such advice. The respondents, on the other hand, contend that the natural inference to be drawn in the circumstances from the signed certificate of independent advice is that the applicants executed the DOOR in reliance on advice obtained from their solicitor, and not, in any relevant sense, by reason of conduct of the respondents. They say, in effect, that this natural inference is strengthened by the applicants' failure to lead any evidence with respect to the legal advice received by them. By their statement of claim in this case the applicants raised, amongst other things, the following issues:-— (a) whether the conduct of EFG in the circumstances leading to the execution of the DOOR failed to live up to the norm established by section 52 of the Trade Practices Act - 1.e. whether as a matter of fact it was misleading or deceptive or likely to mislead or deceive persons in the position of Messrs Giuseppe and Rocco Emanuele in all of the circumstances of the case (Brown v Jam Factory Pty Ltd (1981) 53 FLR 340); (b) whether Messrs Giuseppe and Rocco Emanuele had a conscious awareness of the true facts (Srown v Jam Factory); (c) whether the applicants entered into the DOOR in reliance on conduct of EFG - 1.e. whether the damage allegedly suffered by the applicants was caused by conduct of EFG (Wardley Australia Ltd v. Western Australia (1992) 175 CLR 514). By their Defence the respondents plainly put in contest each of the above issues. They pleaded that the applicants had taken independent legal advice with respect to the DOOR. In fhomason v Council of the Municipality of Campbelltown (1939) 39 SR (NSW) 347 Jordan CJ held that where one of the issues in a case was what advice if any the plaintiff had received from her legal advisers as to her alternative legal rights, legal professional privilege could not be raised to prevent proof of the advice. At p.358 His Honour said:- "The position is analogous to that which arises in a suit in Equity to set aside a transaction on the ground of undue influence. In such a suit it has always been the practice for the defendant to cross-examine the plaintiff with a view to proving that the plaintiff had competent legal advice when he entered into the transaction, and to call and examine the legal adviser if he is available; and I have never known it to be suggested that such advice is inadmissible on the ground of the plaintiff's privilege." In considering the issue of waiver of legal professional privilege Gibbs CJ in Attorney-General for the Northern Territory v. Maurice (1986) 161 CLR 475 at p.481 emphasised that ".... whether a waiver should be implied depends on whether it would be unfair or misleading to allow a party to refer to or use material and yet assert that that material, or material associated with it, 1s privileged from production". In the same case Mason and Brennan JJ at pp.487-8 after noting that "the raison d'étre of legal professional privilege is the furtherance of the administration of justice through the fostering of truth and candour in the relationship between lawyer and client" went on to state:- 'When the privilege applies, it enables the client to keep the communication from disclosure and interferes with the public's "right to every man's evidence": Corbetts Parliamentary History (1812), vol 12, p.675. Because of this conflict between the public interest in ensuring the availability of all relevant evidence in a particular case and the public interest in the administration of justice through effective legal representation the privilege 1s confined within strict limits ... The holder of the privilege should not be able to abuse it by using it to create an inaccurate perception of the protected communication'. Deane J at p.493 and Dawson J at p.497 also expressed the view that waiver of legal professional privilege is based upon notions of fairness. (See also Carbone & Anor v National Crime Authority & Ors (Hill J, 28 October 1994, unreported) ). The issue of legal professional privilege arises in a somewhat different context in this case than it did in Maurice's Case. Here there is no question of partial disclosure of a privileged communication. In this case the applicants seek to avoid the drawing of an adverse inference which the respondents contend must flow from their failure to call any evidence as to the legal advice provided to them with respect to the DOOR. The applicants say that legal professional privilege attaches to such advice and was not waived. Consequently, they contend, it is not open for an adverse inference to be drawn. A related question was considered by Smith J in Hongkong Bank v Murphy [1993] 2 VR 419 at p.438. In considering whether certain communications between the plaintiff and its lawyers attracted legal professional privilege Smith J stated:- "But the reality is that the issues of which the alleged privileged communications form a part, are central to Hongkong Bank's claim and defence to counterclaim ... The question then to be answered is whether it would be unfair to allow the matter to proceed to trial while denying discovery of such documents." His Honour had earlier quoted from a decision of the United States Court of Appeal Sth Circuit, namely United States v Woodall (1970) 438F (2d) 1317. The quotation strikes me as apposite notwithstanding that it deals with a quite different area of the law. I set it out:- "Courts earnestly pursuing reality would be hard put to justify a rule that would allow a defendant eee to assert that his solemn pleas of guilty were negated for lack of accurate information of sentence consequences, then permit him to run a procedural play that would block the development of the plain truth which shows his own attorney told him exactly what he could expect. Not only does this specious sophistry fail to protect confidential relationships, it trifles with the truth ~- it scoffs at justice - and we reject it flatly." Here the case of the respondents is that they advised Mr Giuseppe Emanuele to obtain legal advice with respect to the DOOR and, to facilitate his doing so, they forwarded the document in triplicate to the solicitors for the Emanuel Group requesting its execution. The respondents also point out that they sought and obtained a completed certificate of independent advice with respect to the DOOR signed by a solicitor: the certificate asserts that the DOOR was executed by the Emanuel Group "on my advice", i.e. that of the signing solicitor. In my view in the circumstances of this case notions of fairness require that communications between the applicants and their legal advisers relevant to their decision to execute the DOOR are not privileged from disclosure. That is, that relevant communications between the applicants, or any of them, and their legal advisers were not in the circumstances protected by legal professional privilege. The applicants did not call evidence as to such communications. I accept the submission put on behalf of the respondents that in the circumstances it is open to me to conclude that had such evidence been called it would not have assisted the applicants' case. However on the issue of whether the conduct of the respondents in the circumstances leading to the execution of the DOOR failed to live up to the norm established by section 52 of the Trade Practices Act I see no need to call in aid any matter of inference. In my view the conduct of the respondents in this regard was not misleading or deceptive or likely to mislead or deceive within the meaning of section 52. The respondents were dealing with the applicants principally through Mr Giuseppe Emanuele but, so far as the corporate applicants were concerned, also through Mr Rocco Emanuele. Mr Giuseppe Emanuele is a business person with long experience of dealing with financiers. By early 1993 he had had some years of experience of negotiating with financiers whose full legitimate demands could not be met. Mr Rocco Emanuele had by that time undergone a business apprenticeship under his father's supervision. He had done this as a Secretary/Director of the corporate applicants during a period of financial difficulties for the Emanuel Group. Concurrently with this "apprenticeship" Mr Rocco Emanuele had undergone studies in commerce at tertiary level. EFG made it plain to Messrs Giuseppe and Rocco Emanuele that upon the execution of the DOOR the relationship between the Emanuel Group and EFG would change in that the ongoing relationship between them would be governed by the terms of the DOOR. EFG further advised and requested Mr Giuseppe Emanuele to obtain independent legal advice in relation to the proposed DOOR. By forwarding the documents to be signed not to Mr Giuseppe Emanuele but to the Queensland solicitor for the Emanuel Group EFG reinforced its stance with respect to the Emanuel Group's need to obtain independent advice. Further EFG insisted upon the executed DOOR being accompanied by a completed certificate of independent legal advice. It was submitted by Mr Wells that the conduct of the respondents was misleading and deceptive in that they failed to make it plain to the applicants that the DOOR was to constitute "a fresh start" in the relationship between the parties. As it was put to me by Mr Wells:- 'What your Honour simply needs to determine is that question, whether by EFG sending the Emanueles to a solicitor, saying, "Go and take advice", but without making the break with the past, they successfully quarantined the deed. ' In my view the conduct of the respondents in the circumstances was more than adequate to put persons in the position of Messrs Giuseppe and Rocco Emanuele on notice that the DOOR was intended to achieve a break with the past and was to govern the relationship between the parties according to its terms. In my view the conduct of the respondents sought to be impugned did not constitute misleading or deceptive conduct (Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83 at p.93). In any event, of course, conduct cannot mislead or deceive any person who is consciously aware of the true facts or correct information (Brown v Jam Factory Pty Ltd (1981) 53 FLR 340 at p.348). In my view the whole of the evidence led in this case suggests that both Messrs Giuseppe and Rocco Emanuele were aware that the DOOR was intended to provide the basis for a new relationship between the parties. I refer particularly to the evidence set out above on this topic. Moreover, on this issue I do consider it appropriate to draw an adverse inference from the applicants' failure to call evidence as to the legal advice obtained on their behalves prior to the execution of the DOOR. Further, in the absence of evidence as to such legal advice, and as to the respective understandings of Messrs Giuseppe and Rocco Emanuele following the taking of such advice, I see no reason not to accept the natural inference to be drawn from the terms of the signed certificate of independent advice: namely, that the DOOR was executed "on the advice" of the solicitor who signed the certificate. That is, that the advice of such solicitor was the cause of the applicants executing the DOOR rather than any conduct by EFG (Wardley Australia Ltd v. Western Australia (1992) 175 CLR 514 per Mason CJ, Dawson, Gaudron and McHugh JJ at p.525). Deposit Account Agreement and the Irrevocable Authority Following approval by EFG of the proposed Deposit Account Agreement and the proposed Irrevocable Authority the documents were sent by Messrs Clayton Utz to Messrs Sly & Weigall Cannon and Peterson under cover of the letter of 12 March 1993 referred to above. The portion of the letter relevant to these documents reads as follows:- "We enclose herewith for consideration and, 1f acceptable, for execution under the Common Seal of Emanuel (No.14) Pty Ltd the following:- 1. Deposit Account Agreement (in triplicate) 2. Irrevocable Authority (in triplicate). We should be pleased to receive return of the documents at your early convenience to enable this matter to proceed to implementation." On 8 March 1993 the Queensland solicitors for the Emanuel Group had provided to Messrs Clayton Utz the signed DOOR although the certificate of independent advice had not been signed. The letter from Messrs Clayton Utz of 12 March 1993 indicated an intention to return the documents to allow a "review" of the certificate of independent advice and for the certificate to be signed "if you feel comfortable with the Certificate." Six days later Messrs Sly & Weigall Cannon and Peterson returned to Messrs Clayton Utz the signed DOOR with the Certificate of Advice completed. Further correspondence between the two firms of solicitors appears to confirm that Messrs Sly & Weigall Cannon and Peterson were involved in advising the Emanuel Group with respect to the proposed Deposit Account Agreement and Irrevocable Authority. In addition the firm of Messrs Thomsons, the South Australian solicitors for the Emanuel Group, engaged in correspondence with Messrs Clayton Utz as to possible terms for the proposed authority to be addressed to Softwoods Queensland. Plainly they also were advising the Emanuel Group to some extent in this regard. On 10 May 1993 Messrs Sly & Weigall Cannon and Peterson caused to be delivered to Messrs Clayton Utz the Deposit Account Agreement (in triplicate) and the Irrevocable Authority (in triplicate) duly signed. As to the signing of these documents Mr Giuseppe Emanuele gave evidence as follows:- "Prior to the signing of the authority and the agreement I had many discussions with Peter Grier about the effect of those documents and the agreement. He assured me that these documents did not affect the dealings between EFG and the Emanuel Group. He said to me "the timber moneys still come to you, it makes no difference - you will still get the money." He led me to understand that the Situation concerning continued access to the timber royalties would be unchanged as long as the Emanuel Group continued to meet its obligations under the Deed. In reliance on his representations I agreed to sign those documents. I was told by Peter Grier that the purpose of the agreement was to ensure that creditors of the Emanuel Group other than EFG could not possibly get access to the timber royalties whilst they were being paid into the hands of the Emanuel Group. I regarded this as a legitimate purpose." Mr Rocco Emanuele gave evidence of being present at a meeting at the EFG offices in Brisbane on 10 March 1993 at which his father and Mr Grier were also present. He stated:~- "Amongst other matters I recall Peter Grier said words to the effect that EFG required that an interest bearing deposit account be set up in our respective Group's names for the timber moneys and settlement proceeds to go into. My father and I were extremely concerned about the reason for this and the appearance it may convey to CSR. Peter Grier said that "it would make no difference - you will still get the money" - "it will protect the timber moneys from other creditors". Further, he said that whilst "the Group would be able to continue to draw on these moneys" we could "tell CSR that this arrangement has been put in place to reduce the principle amount of EFG's debt." Mr Rocco Emanuele further gave evidence that on 2 April 1993 he received a call from Mr Grier who asked that he telephone his solicitor, Danny Farrugia of Messrs Thomsons, and request that Mr Farrugia speak with EFG's solicitor, Mr John Elliott. Mr Rocco Emanuele stated that Mr Grier went on to say that EFG must appear to have control of the timber money which would make it less likely for "other creditors to move on the money". He further stated that Mr Grier said that EFG had to be careful because of "shadow/quas1 directorship" ramifications. The evidence of Mr Grier with respect to the Deposit Account Agreement and the Irrevocable Authority is that it was raised at the meeting of 22 February 1993 that a deposit account would be established for the receipt of funds and that it would be from this account that payments would be made by EFG for the purpose of funding the operation of the Emanuel Group as might be approved. The minutes of the meeting of 22 February 1993 prepared by Mr Grier support his oral account, as do Mr Rocco Emanuele's notes of this meeting. I find that the topic of the Deposit Account Agreement was raised in the context of the proposed DOOR at the meeting of 22 February, 1993. As to the meeting of 10 March 1993 Mr Grier's evidence was that:- "A number of matters were discussed including the opening of the deposit account into which the proceeds of the Softwoods Agreement were to be paid. I told Mr Emanuele and Rocco Emanuele that the Emanuel Group was required to set up the deposit account, that the Emanuel Group was to request Softwoods to forward monthly proceeds to the EFG Group in lieu of sending these directly to the Emanuel Group and that the format of the request to Softwoods was to be prepared by Clayton Utz." Mr Grier also gave evidence of a further meeting on 29 March 1993 at the EFG offices in Brisbane at which Messrs Giuseppe and Rocco Emanuele were present. Mr Grier stated that it was at this meeting, after Mr Giuseppe Emanuele advised that he had not signed and returned the Deposit Account Agreement and the Irrevocable Authority, that he suggested that Mr Emanuele speak with his solicitor, Mr Farrugia, to get him to speak directly to Mr Elliott. He further stated that he told Mr Emanuele that EFG required the Deposit Account Agreement so it could control the funds from the Softwoods Agreement and to protect EFG from claims of preference from other creditors. Minutes prepared by Mr Grier of this meeting generally support this evidence although they contain no reference to control of funds. Mr Grier denied that prior to the signing of the Deposit Account Agreement he made the statements "the timber moneys still come to you, it makes no difference - you will still get the money", and "it would make no difference - you will still get the money". Mr Grier further denies that he had many discussions with Mr Giuseppe Emanuele about the effect of the Deposit Account Agreement and the Irrevocable Authority. His recollection was of discussions only on 10 and 29 March 1993. Mr Jaenke, Lending Manager of EFG, was present at the meeting of 29 March 1993. His written evidence was tendered. He was not required to be called for cross-examination. His evidence is that on a number of occasions he told Mr Giuseppe Emanuele that the timber royalties were EFG's moneys and that EFG wanted to take control over them. Mr Jaenke was present at the meeting of 29 March 1993. He stated that Mr Grier did not say words at that meeting to the effect that the Emanuel Group would get the timber royalties for the whole of the period of the DOOR. He did, however, recall Mr Grier saying on an occasion words to the effect that Softwoods would pay the money to EFG and EFG would withdraw it from the deposit account and pay it to the Emanuel Group. I find that Mr Grier probably only had two face-to-face meetings with Messrs Giuseppe and Rocco Emanuele after the meeting of 22 February 1993 at which the Deposit Account Agreement and the Irrevocable Authority were discussed, namely the meetings of 10 March 1993 and 29 March 1993. It may be that Mr Grier in addition contacted Mr Rocco Emanuele by telephone to reinforce his earlier request that Mr Danny Farrugia be asked to contact Mr Elliott. I further find that at one or other or both of the two meetings Mr Grier stated words to the effect that:- (a) EFG required the Deposit Account Agreement and an Irrevocable Authority to Queensland Softwoods to be signed; (b) the timber moneys and settlement moneys would go into the Deposit Account; (c) Softwoods would pay the timber moneys to EFG and EFG would withdraw such moneys from the deposit account and pay them to the Emanuel Group; (d) EFG would control the timber moneys; and (e) the Deposit Account would protect the timber moneys from other creditors. I do not accept the evidence of Messrs Giuseppe and Rocco Emanuele that Mr Grier in effect assured them that the Emanuel Group would continue to get the timber moneys after the signing of the Deposit Account Agreement for as long as the Emanuel Group continued to meet its obligations under the DOOR. I accept that EFG had for some time regarded itself as being in control of the timber moneys and that the Emanuel Group recognised and accepted this (see, for example, the cross—-examination of Mr Rocco Emanuele set out above). I further accept the evidence of Mr Grier (indeed it was not challenged) that in his discussions with Mr Giuseppe Emanuele in March 1993 he explained that EFG was supporting the Emanuel Group in two different ways:- (a) first there was the support provided by the DOOR, i.e. that EFG would not act on its securities provided the Emanuel Group complied with the terms of the DOOR; and (b) secondly, and quite separate, there was the support that EFG provided through funding - but that funding remained as it always had been at the absolute discretion of EFG and was under constant review. I find that it was made clear to Messrs Giuseppe and Rocco Emanuele, and that it was understood by them, that EFG would allow the timber moneys to flow to the Emanuel Group for so long only as EFG continued in its discretion to provide funding support to the Emanuel Group. In the event such moneys were allowed to flow to the Emanuel Group until April 1994. It seems to me that Messrs Giuseppe and Rocco Emanuele have in their evidence chosen to give prominence to statements made to them as to the way in which the Deposit Account Agreement, together with the Irrevocable Authority, would work as a mechanism for funding. I consider that they have consciously sought to take such statements out of their original contexts so as to alter their character from statements as to how the funding mechanism would work into statements as to how long the funding mechanism would be allowed to so work. I find, that at the times of the execution of the DOOR, the Deposit Account Agreement, and the Irrevocable Authority respectively, Messrs Giuseppe and Rocco Emanuele well understood that EFG could at its discretion cut all funding to the Emanuel Group - including the flow of timber moneys. It may be that the almost irrepressible confidence of Mr Giuseppe Emanuele in the value and future of the Emanuel Group which was exhibited by him in his evidence meant that he virtually set aside the information provided to him that continued funding was at the discretion of EFG. He was at the time, of course, in no position to bargain for a more favourable position. Mr Rocco Emanuele, who it appears signed the relevant documents without any real regard to their contents, was I conclude in 1993 and thereafter, subservient to his father in the running of the Emanuel Group and = strongly influenced by him. It may be significant that whilst speaking of "his understanding that EFG would not cut off the funding during the Deed period as long as the Emanuel Group continued to meet ongoing budgets and that no other lender or creditor 'moved in' " he fell short of asserting either a belief that EFG had undertaken to act in accordance with his understanding, or that he had signed any of the documents in reliance on any such undertaking. As to execution of the Deposit Account Agreement and the Irrevocable Authority I find that the conduct of the respondents in the circumstances leading up to the execution of the documents was not misleading or deceptive or likely to mislead or deceive within the meaning of section 52 of the Trade Practices Act. Further I find that the two documents were signed in circumstances in which the applicants placed reliance on legal advice provided to them independently of EFG. In the circumstance that no evidence has been called with respect to that advice I assume that such evidence would not have been favourable to the applicants' case. I find that it has not been established on the balance of probabilities that the two documents were executed in reliance on any conduct of EFG. In addition I am satisfied that both Messrs Giuseppe and Rocco Emanuele were aware at the time of the execution of the documents that EFG proposed to continue to exercise control over the timber royalties, as in reality it had done for some time. CONSTRUCTION OF THE DOOR Clause 6 of the DOOR is set out above under the heading BACKGROUND. It is argued on behalf of the applicants that the opening words of subclause 6.2, namely:- "The EFG Group shall permit at its absolute discretion the flow of funds from the Softwoods Agreement to the Emanuel Group ...." do not reserve an unfettered discretion to EFG to permit or not permit the flow of such funds. It 1s contended that if the words do reserve an unfettered discretion to EFG then the document is a deceptive document and any apparent obligation on EFG is illusory. The purpose served by the expression "absolute discretion", it is argued, is to give EFG the power to make judgments as to the amount of funds required by the Emanuel Group to implement the DOOR, not to allow EFG to determine that no such funds will flow to the Emanuel Group. It may first be observed that the DOOR is executed as a deed. No issue of consideration arises. The cases to which I was referred which are concerned with illusory undertakings incapable of constituting consideration are therefore of no direct relevance. The issue is one of construing the words of subclause 6.2 in the context in which they appear. However the construction of the words of a written instrument involves "more than merely assigning to them their plain and ordinary meaning": evidence of surrounding circumstances may be looked at where language is ambiguous or susceptible of more than one meaning to assist in the understanding of the way in which such words were intended to be used by the parties (see per Mason J in Codelfa Construction Pty Ltd v State Railway Authority of NSW (1982) 149 CLR 337 at pp.348-353). I am not persuaded that in the context in which it 1s found the expression "at its absolute discretion" appearing in subclause 6.2 is ambiguous or susceptible of more than one meaning. Its clear meaning seems to me to be that EFG is free to decide on grounds considered appropriate by it, whether to allow or not allow the flow of timber moneys to the Emanuel Group. It may be that it must make such decision in good faith having regard to the commercial relationship between the parties (see, for example, Greenberg v Meffert et al (1985) 18 DLR (4th) 548). No issue of lack of good faith of this kind was raised. However, if I am wrong in concluding that the clause is not ambiguous in a relevant respect, I find nothing in the surrounding circumstances which suggests that the parties used the expression "in its absolute discretion" to mean anything different from its plain and ordinary meaning. On behalf of the applicants reliance is placed on the following factors:- (a) "That without the timber income Emanuel Group would be quite unable to implement the Deed or to continue its operations for that purpose". (b) "That EFG was concerned to ensure that the timber income was properly applied by Emanuel Group towards the implementation of the Deed". (c) "That EFG was concerned to ensure that the timber income was not, and was not seen to be, accessible to third party creditors". (ad) "That EFG was concerned to ensure that timber income was not vulnerable to a potential claim by third party creditors of preferential payment". (e) "That EFG was concerned to ensure that it was not vulnerable to a claim by third party creditors that it was a "deemed director" of the Emanuel Group". I accept that each of the above was a surrounding circumstance to the execution of the DOOR. However they do not together constitute a complete picture of the surrounding circumstances. Other surrounding circumstances were that in early 1993 the total debt of the Emanuel Group to EFG was approximately $157M whilst the value of the security held by EFG was approximately $144M. The timber moneys were the only real source of income to the Emanuel Group apart from funding from EFG. EFG had for some time exercised complete control over the spending of the timber moneys by the Emanuel Group. Any spending of the timber moneys by the Emanuel Group was a diminution of the securities held by EFG - except to such extent as such spending might enhance the EFG securities. The Emanuel Group's total indebtedness at the time was approximately $226M and it had a negative net worth. EFG was the major financier to the Emanuel Group and its interests could be adversely affected by another financier placing the members of the Emanuel Group into liquidation. Other financiers were placing pressure on the Emanuel Group: they were anxious to know the attitude of EFG to the continuing operation of the Emanuel Group. Mr Giuseppe Emanuel had sought from EFG a document which he could show to his other financiers. EFG had agreed to the provision of the DOOR which could be shown to the other financiers. Construed against the surrounding circumstances set out above the DOOR can be seen as a formal document suitable to be placed before other financiers to the Emanuel Group. It records the granting of a "period of grace" to the Emanuel Group by EFG during which EFG will not enforce its securities as against the Emanuel Group provided that there is compliance with the terms of the DOOR. However it further records that the cost of the continued operation of the Emanuel Group is to be the responsibility of the Emanuel Group. In this context subclause 6.2 of the DOOR, in my view, can be seen as being intended to reflect an intention in the parties that EFG's defacto control of the timber moneys should be unaffected by the execution of the DOOR. The final sentence of subclause 6.2 in my view confirms this construction. Clause 7 of the DOOR which in effect establishes the moratorium, is drafted to be "subject to the strict compliance with the terms of this Deed." Plainly, in my view, it is to be interpreted subject to subclause 6.2. I do not accept that the proper interpretation of clauses 6 and 7 together is that EFG is empowered to ensure the proper use of the timber income for the purposes of the DOOR but is not empowered to enter into possession of the income. I further reject the argument that the power reserved to EFG "to fix the Mortgage Debenture Charge over Emanuel (No.14) Pty Ltd so far as the Softwoods Agreement is concerned at any time" did not amount to a power to do so for any proper reason under the security. The applicants sought to call in aid the generai rule expressed by Lord Blackburn in Mackay v Dick (1881) 6 App. Cases 251 at p.263 in the following terms:- "as a general rule .... where in a written contract it appears that both parties have agreed that something Shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect". The first thing to be said about this rule in the present context is that in this case it does not appear that both parties have agreed that something shall be done. Clause 7 of the DOOR makes it clear that EFG gave a strictly conditional agreement. In my view the question of whether EFG took on any obligation to act in a way which would enable the Emanuel Group to have the benefit of the contract is to be determined not by reference to any general rule of construction but by reference to the intention of the parties as disclosed by the terms of the DOOR (see, for example, per Mason J in Secured Income Real Estate (Australia) Limited v St Martins Investments Proprietary Limited (1979) 144 CLR 596 at p.607). In my view, upon its proper construction, the DOOR discloses no such intention in the parties. I conclude that in ceasing to permit the flow of funds from Softwoods Agreement to the Emanuel Group, EFG did not act in breach of the DOOR. For completeness I point out that this conclusion involves a rejection of the argument, which in the end I think was not seriously pressed, that it was an implied term of the DOOR that:- (a) EFG would continue to make working funds available to the Emanuel Group; and (b) in particular that the Emanuel Group would continue to have access during the moratorium period under the DOOR to the timber royalties or the equivalent thereof. The Statement of Claim in this matter also pleaded a contract collateral to the DOOR pursuant to which EFG undertook to continue to make working funds available to the Emanuel Group and for this purpose to allow the timber royalties to flow to the Emanuel Group. This plea was not pursued in final addresses: it cannot stand in the light of the findings set out above. Similarly the other causes of action formally pleaded in the Statement of Claim but not pressed in the applicants' final address must fail in the light of the above findings. ORDERS Judgment will be entered for the respondents. The applicants are to pay the respondents costs other than reserved costs. I will hear counsel as to reserved costs. I certify that this and the sG preceding pages are a true copy of the Reasons for Judgment of Justice Branson. a Associate: bey Dated? 15 November Vay Counsel for the Applicants 3 Mr J Wells OC with Mr R Ross-Smith Solicitors for the Applicants : Thomsons Counsel for the Respondents H Mr W Sofronoff QC with Mr H Frazer QC Solicitors for the Respondents : Clayton Utz Hearing Date : 11 August 1994