IN THE FEDERAL COURT OF AUSTRALIA ) VICTORIA DISTRICT REGISTRY ) No. VG120 of 1992 GENERAL DIVISION ) BETWEEN: TRANSPACIFIC STANDARDBRED AGENCY PTY LTD Applicant AND: WESTBAY SEAFOODS (AUST) PTY LTD Firstnamed Respondent AND: HAROLD FRANCIS LONIE Secondnamed Respondent AND: NATIONAL AUSTRALIA BANK LIMITED Thirdnamed Respondent AND: NATIONAL AUSTRALIA BANK LIMITED Cross-Claimant AND: TRANSPACIFIC STANDARDBRED AGENCY PTY LTD, GARY KEITH EWEN and COLLEEN CLARKE Cross-Respondents CORAM: Jenkinson J. PLACE: Melbourne DATE: 7 February, 1995 REASONS FOR JUDGMENT Trial of questions arising in a proceeding for breach of contract and contraventions of s.52 of the Trade Practices Act 1974. The first-named respondent ("Westbay") sold to the applicant ("Transpacific") a fishing vessel called "Sovereign". At material times the second-named respondent Harold Francis Lonie was a director of Westbay who conducted those of Westbay's affairs which concerned Sovereign. Gary Keith Ewen was at material times a director or the secretary of Transpacific and on Transpacific's behalf arranged the purchase and managed the vessel. The dispute between the two companies has its origin in doubt entertained by the Maritime Services Board of New South Wales concerning the stability of Sovereign. The Commercial Vessels Act 1979 (N.S.W.) applies to a vessel used for a commercial purpose. At material times Sovereign was used, and the owners intended that it would be used, for commercial fishing in places which included New South Wales waters. Section 8 of the Commercial Vessels Act 1979 at relevant times made liable to conviction of an offence the owner and the master of such a vessel which is used in those waters unless - "(a)a permit relating to the vessel is in force; and (b) the vessel is used in accordance with the authority conferred by the permit." The permit contemplated by s.8 is one which the Act authorised the Maritime Services Board of New South Wales ("the Board") to issue. Sovereign, having been damaged by fire some five years after it was built, and having been modified during the consequent refitting, was the subject of a fresh permit (No. 3447) issued by the Board. The permit is expressed to have an "issue date" : 29 September 1987. But Appendix B of the permit is expressed to have the issue date 11 November 1987, and Appendix A 9 October 1987. The permit is expressed to authorise the vessel to operate within defined waters, subject to, inter alia, "any other conditions that are applicable as set out in Appendix `A'". Sub-section 6(3) requires that there be specified in a vessel permit "the terms upon which, and the conditions and restrictions subject to which, the permit was issued". Section 7 provides: "A vessel permit, while it is in force, authorises the use of the vessel to which it relates in prescribed waters of a class or classes specified in the permit subject to compliance with the terms, conditions and restrictions upon and subject to which the permit was issued." Condition (4) in Appendix A reads: "Adherence to the conditions of loading in the approved stability book." An approved stability book, in relation to such a vessel as Sovereign, was a written submission, made to the Board on behalf of the applicant for a permit, which included any direction concerning loads to be carried, and the disposition of loads on the vessel, thought necessary to ensure the stability of the vessel at sea. Upon gaining the Board's approval, the submission became the approved stability book, which was ordinarily kept on board the vessel so that the master of the vessel could refer to it at need. When permit No. 3447 was issued the Board's approval of the stability submission had not been gained. Further tests of stability and a further submission were required. That remained the position until after the written agreement for the sale of Sovereign to the applicant was made on 1 September 1988. There simply was no approved stability book during that period. It is common ground between the parties that no officer or servant or agent of the applicant was aware on 1 September 1988 that no approved stability book existed. Mr. Lonie gave evidence that he also was unaware of that circumstance at that time. A naval architect named Cropp, whose plans for the refitting and lengthening of Sovereign had been submitted to the Board for approval in May 1987, was notified by the Board in December 1987 that a "stability submission" demonstrating the vessel's ability to meet certain criteria was required by the Board. The first step in the process of formulating such a submission is to take measurements of the extent of inclination of the vessel, when it is afloat in still water, which is induced by known weights placed at particular places in the vessel. This experimentation is called an incline test or a stability test. The naval architect engaged in the preparation of a stability submission then uses the measurements taken as the assumptions on which are based the mathematical calculations which constitute the submission. Mr. Cropp conducted an incline test on Sovereign in Mr. Lonie's presence in February 1988. The records of the Board do not disclose any submission based on that test. Mr. Cropp was not called to give evidence. Mr. Lonie gave evidence that he made no enquiry of Mr. Cropp or of the Board about such a submission, and that he received no communication on the subject until after the agreement for sale of the vessel by Westbay to Transpacific had been signed on 1 September 1988. He swore that he thought Mr. Cropp knew what was required and would do it. By a letter dated 8 September 1988 the Board notified Westbay as follows: "Reference: Sovereign, Permit No. 3447. As the vessel's stability has not yet been approved, please return the `Vessel Permit' forthwith so a condition that no wet bait or fish stowage tanks are carried or used can be inserted. This condition will remain until stability is approved. You are advised that a penalty is prescribed for failing to return the Vessel Permit forthwith." The catch of a fishing vessel such as Sovereign may be stored either loose in a tank filled with refrigerated brine or packed in boxes on to which refrigerated brine is sprayed. I find that the parties entered into the agreement dated 1 September 1988 on the understanding that the vessel could lawfully store its catch and bait loose in tanks filled with brine. It is common ground that the parties did not understand the letter to be proposing a condition that the fish stowage tanks in Sovereign be removed from the vessel, but that they be not used for the storage of fish loose in brine. They understood the proposal to be that the tanks might be used for the storage of fish packed in boxes on to which refrigerated brine might be sprayed. Whether or not the last sentence of the Board's letter dated 8 September 1988 correctly stated the law, the Board undoubtedly had power, conferred by s.21(1)(e) of the Commercial Vessels Act 1979, to suspend the permit "if, on consideration of a report by a surveyor ..... the Board considers that continued use of the vessel ..... the subject of the permit should not be permitted". The word "surveyor" is defined in s.5(1) of that Act to mean "a person appointed by the Board to investigate, or examine and report upon, the design, construction, condition or sufficiency of a vessel or motor, or any part of the hull, construction, machinery or equipment of a vessel, or any component of a vessel or motor, for the purposes of this Act". (The letter dated 8 September 1988 was signed by such a surveyor.) The evidence demonstrated that the Board did consider that continued use of the vessel should not be permitted, except upon conditions which were not on 1 September 1988 specified in the permit No. 3447. The Act enabled the Board to give effect to that conclusion by cancelling the permit and, on application by the owner, by issuing a permit specifying those conditions. (See paragraph 25(1)(b) and s.18 and s. 6 of the Act.) The agreement dated 1 September 1988 ("the written contract") had been drafted by a lawyer acting for Westbay, Mr. Ian Lewis of Minter Ellison, but Mr. Ewen had drawn three further clauses which, after amendment by Mr. Lewis, were incorporated into the written contract. Those clauses read: "A1 The Vendor agrees to sell and the Purchaser agrees to buy the ship, her gear and appurtenances, her licences, endorsements and units in accordance with the descriptions contained herein and the ship her gear and equipment will be handed over on completion in seagoing condition as described and itemised in John C. Helmore report (Survey and Valuation) dated 7/6/88. A2 Unless caused by the Purchaser or its agents, the Vendor shall be solely responsible for any damage to the vessel, its hull, machinery and fittings whether due to accident, mechanical break down, until completion. Any delay in completion due to the vessel undergoing repairs in the hands of the Vendor will not cause penalty to the Purchaser as provided in clause 10. A3 Notwithstanding anything contained herein, if any searches to title, licences or units disclose any encumbrance on the ability of the Vendor to give a clear transfer of the same, the Vendor will attend to any outstanding requirements prior to completion to enable it to be able to transfer title, licences and units." The word "ship" is not defined in the written contract, but the word "vessel" is defined in clause 1(1) thereof in these terms: "`Vessel' means the registered fishing vessel `Sovereign" L.F.B.3447, complete with all equipment, trawl units, `A', `B' and `South-West' Sector licences and endorsements currently held as at the date hereof by the Vendor and/or the Vessel `Sovereign' and all other rights or entitlements now held or due to the Vessel." The use of the word "ship" in clause A1 and the word "vessel" in clause A2 was by the original draftsman, Mr. Ewen, who was not a lawyer. In the circumstances I have described the word "ship" in clause A1 is in my opinion to be understood in the same sense as the word "vessel", as the latter word is defined in clause 1(1). The written contract was expressed in clause 2 to be for the sale of "the Vessel and the Fishing Gear and Equipment". (The latter phrase is also the subject of definition in clause 1(1).) Clause 6 of the contract reads: "6. (1) Subject as herein provided, completion of the sale of the Vessel and the Fishing Gear and Equipment shall take place on the Completion Date at the offices of the Vendor's Solicitors, Minter Ellison, 40 Market Street, Melbourne, Victoria. (2) The Vendor covenants with the Purchaser that on the Completion Date the Vendor shall do all things necessary and deliver all such documents as reasonably required by the Purchaser to complete the sale of the Vessel and the Fishing Gear and Equipment and enable the Purchaser to continue to operate the fishing activities of the Vessel." The contract defined "Completion Date" to mean 30 September 1988 "or such other date as the parties agree". The report to which reference is made in clause A1 was a report and valuation of Sovereign by a marine surveyor named John C. Helmore. The report states a good deal of information about the vessel and its machinery and other equipment. The report states that the vessel has "6 only insulated and refrigerated tanks total capacity 69 tons wet fish". It is common ground, however, that there were only two forward tanks and one tank aft, which was divided into two halves. Notwithstanding Mr. Lonie's evidence that he did not recall telling Mr. Ewen before the written agreement was made that the capacity of the tanks was 36 tonnes, I find that he did tell Mr. Ewen that. On its proper construction the contract obliged the vendor to confer on the purchaser the benefit of the permit which was in existence on the date of the contract. According to the submission of Mr. Vickery of counsel for Westbay, the vendor performed that obligation. The detailed legislative scheme ordained by the Commercial Vessels Act 1979 made no provision for the imposition of any condition or restriction on the use of a vessel except by specifying the condition or restriction in the permit before the permit issued, it was submitted, or by suspending and thereafter cancelling the permit and specifying the condition or restriction in any permit thereafter issued. I infer from correspondence between Mr. Lonie and another director of Westbay, Mr. Brett Waterfield, during September and October 1988, that they thought it possible that Transpacific might refuse to complete the written contract and that there might be legal proceedings between vendor and purchaser. Correspondence between Mr. Lonie and Westbay's solicitor, Mr. Lewis, reveals Mr. Lonie's concern that Transpacific might refuse to complete the written contract because of the difficulties which the Board's requirements might cause. However, both vendor and purchaser wished the written contract to be completed, as in fact it was, on 21 October 1988. On his return from a voyage Mr. Lonie informed Mr. Ewen of the letter dated 8 September 1988 from the Board, by telephone on 20 September 1988. Before telephoning Mr. Ewen he had spoken by telephone to Mr. Cropp, who informed him that the incline test undertaken in February 1988 had led Cropp to the conclusion that the Sovereign's centre of gravity was now higher than it had been before modification in 1987. That opinion of Cropp Mr. Lonie conveyed to Mr. Ewen during their telephone conversation. On 21 September 1988 Mr. Ewen sent to Mr. Arthur Pearce, the solicitor acting for Transpacific in relation to the purchase of the vessel, a letter which included the following paragraphs: "Since speaking with you yesterday a potential problem may have reared its ugly head per the New South Wales Maritime Services Board requesting further stability tests on the vessel, this could be of serious consequence as they may request major hull modifications etc. As recent as this afternoon, we had it suggested to us that the Vendors are considering reneging or defaulting on this deal should the Maritime Services Board make their task to difficult and or to expensive in rectifying any stability deficiency." (sic) Mr. Lonie denied that he had spoken of hull modification to Mr. Ewen. Whether or not Mr. Lonie did speak of that, I find that on and after 21 September 1988 Mr. Ewen believed it to be possible that the Board might make such a request as his letter indicated. It was agreed between Mr. Ewen and Mr. Lonie that another incline test should be carried out to ascertain whether Mr. Cropp's conclusion about the centre of gravity was correct. At Mr. Ewen's suggestion another naval architect, Phillip Brown, was asked to carry out the test. The test confirmed Mr. Cropp's conclusion. On 26 September 1988 Messieurs Cropp, Brown, Lonie and Ewen were all present while that test was carried out, as I find, notwithstanding Mr. Lonie's evidence that he did not remember Mr. Ewen being on board Sovereign while the test was conducted. It is common ground that, after the test had confirmed Mr. Cropp's finding about the centre of gravity, Mr. Brown was engaged by Westbay to make a stability submission to the Board. Mr. Lonie gave Mr. Brown a letter dated 26 September 1988 in these terms: "This is to confirm that as from 24 September 1988 we are officially engaging you in your capacity of Naval Architect to conduct an Inclining Experiment on the F.V. Sovereign in Pambula Lake on 26 September 1988. This is also authority to undertake the research necessary to resolve any problems found from the resulting computations." It is common ground that a stability submission was made by Mr. Brown on or about 13 October 1988 and that Westbay paid the Board a fee of $1000 for expedited consideration of the submission. Mr. Lonie's evidence was that he had on Westbay's behalf undertaken to Transpacific that Westbay would engage and pay Mr. Brown to prepare and present to the Board a stability submission. He denied, however, that he had agreed that Westbay would do more than that. Mr. Ewen, on the other hand, gave evidence that on 26 September 1988, after Mr. Cropp's finding about the centre of gravity had been confirmed, this conversation between the two men occurred: "Mr Lonie addressed the matter in a sense that he'd a great disappointment that - that it looked it - to quote as good as I can recall, `We'd stuffed up. Looks like the sale is buggered and it doesn't look like we can proceed.' HIS HONOUR: Who said that?---Mr Lonie. Yes?---I said, `We've invested too much money and too much commitment to withdraw at this point in time. We want to proceed.' He said, `Well, what about the stability problem?' I said, `Well I'd accept your word or your guarantee' - or words to that effect - `or something indemnifying us against the problem if you can get it ratified.' He said, `Do you think Phil Brown can get it ratified through the MSB?' I said, `I don't know. He's supposed to know the leading naval architect in the MSB or the boss up there, maybe he can do wonders.' It was then put to me that perhaps we could put some concrete ballast in the keel section of The Sovereign - - - Who said that?--- - - - by Mr Lonie. Yes?---I rejected that on the grounds that we'd lose too much free board and our payload was insignificant as it was - not sufficient as it was. So he agree to ratify the problem - rectify the problem and we agreed to settle on the grounds that we got a letter to say that they would do that." The transcript is, as I find, accurate in recording the use of the word "ratified" three times, and in recording the correction by the witness to "rectify" after the third use of the word "ratify". Mr. Lonie denied that he agreed to rectify the problem of the vessel's stability and denied that he had agreed to furnish Mr. Ewen with "a letter to say that [Westbay] would do that". On 15 October 1988 Mr. Ewen sent to Mr. Pearce a handwritten facsimile message in these terms: "Arthur, Settlement Date for Fishing Vessel `Sovereign' Has been set for next Friday 21-10-88. All matters relating to licences, Endorsement etc. have been attended to by ourselves, and are in hand. However Bank wishes to sight Discharge of Mortgage on ~Original" Certificate (Ships Register) of Ownership. Bank has also asked that you make contact with their settlement section, National Australia Bank, Melb Office and arrange times etc. for next Friday. Also owner's Rep. here, will supply letter indemnifying us totally re N.S.W. Maritime Work Required (If Any). Kind Regards, Garry" The correspondence which is in evidence indicates that Mr. Brown, who did not give evidence, was in October 1988 hopeful that his stability submission would be accepted by the Board and that no further "Work" on the vessel would be required. No written request for any letter of the kind referred to in the evidence I have quoted was ever made. Mr. Ewen swore, but Mr. Lonie on oath denied, that he made several oral requests of Mr. Lonie that such a letter be supplied. Whatever else may be obscure as to the words and deeds of Mr. Ewen and Mr. Lonie from the time when they first met in the middle of 1988 until the commencement of this proceeding, the evidence leaves me with a strong impression that, for so long as the Board left Mr. Ewen undisturbed in his operation of Sovereign to win fish, neither he nor Mr. Lonie were inclined to suffer distraction from their busy, worrying and peripatetic lives in order to pursue legal questions, or to inquire into the bureaucratic workings of the Board, or to chase up promised letters. Correspondence between Mr. Brown and officers of the Board followed an erudite but not precipitate course during 1988 and 1989. In June 1989 Mr. Lonie returned to the Board a form of application, for renewal of the permit, which had, as I infer, been sent to Transpacific by the Board. In October 1989 a Board document called a "Compliance Report" recorded completion of the annual survey of Sovereign by officers of the Board, and stated that [t]he vessel may continue to ply in accordance with its Permit/s until the next survey due date", and concluded thus: "Surveyor's comments: Survey complete subject to finalising stability submission held at M.S.B. naval architects." On 5 February 1990 a firm of Sydney solicitors, Barringtons, sent to Mr. Lewis a letter in these terms: "RE: PURCHASE OF FISHING VESSEL `SOVEREIGN' We act for Transpacific Standardbred Agency Pty Ltd and refer to the agreement for the purchase of the above vessel dated 1 September 1988. We note that it was a term of the said agreement that the Vendors would attend to the production of a survey and stabilisation certificate. We are instructed that despite our client's numerous requests the stabilisation certificate has yet to be supplied. We now advise that our client has received a notice threatening to suspend the vessel permit if the said stabilisation certificate is not obtained. Accordingly we request that your client within the next 14 days take all the necessary steps to have the appropriate certificate issued and the boat placed in full survey. We advise that if such work is not carried out within the stipulated time our client will be forced to mitigate its losses by carrying out the said work and claiming the cost of such work from your client. We further advise that the costs incurred will be offset against any amounts owing to your client. Could you please confirm that your client will take the necessary steps to comply with its contractual obligations." On 21 February 1990 the Board sent to Transpacific a letter in these terms: "Re: SOVEREIGN Permit No. 3447 It is advised that vessel's stability has not yet been approved as consultant N.A. Phil Brown has not submitted revised stability book. Please return the Vessel Permit forthwith so a condition that no wet bait or fish stowage tanks are carried or used can be inserted. This condition will remain until stability is approved. You are advised that a penalty is, prescribed for failing to return the Vessel Permit forthwith." On 20 March 1990 Mr. Lewis wrote to Barringtons in these terms: "We advise that we have now received a reply from the Naval Architect in regard to his attention in obtaining the necessary stabilisation and survey certificates. He advises that he will be providing a completed copy of the stability book to the Marine Services Board this week. He advises that the MSB have been very critical of any calculations in the past and are requiring conditions which are not normally required under the Uniform Shipping Laws Code. We trust that the submissions by Mr Brown to the Board will be sufficient to enable this matter to be satisfactorily resolved." By April 1990 Mr. Ewen had commenced the process of undertaking modification of the Sovereign in order to overcome what had proved to be the otherwise insuperable difficulty of keeping the permit free of the condition which the Board had first proposed in September 1988. Mr. Vickery pointed to the absence of reference by the applicant's agents to the making of an agreement on 26 September 1988 until amendment of the statement of claim in September 1992 and to differences between the pleaded terms of that agreement and the evidence, of the conversation constituting the agreement, which Mr. Ewen gave, as constituting obstacles to acceptance of that evidence. But the evidence justifies the inference, which I draw, that both Mr. Lonie and Mr. Ewen thought that the letter dated 8 September 1988 from the Board had produced the legal result that Transpacific lacked the capacity to transfer to Westbay what the agreement dated 1 September 1988 obliged the vendor to transfer, that is a permit free of the condition specified in the letter. Mr. Vickery's submission that only by cancelling the permit and imposing the condition on any new permit to be issued could the Board achieve what the letter proposed is in my opinion probably correct, except in a case where the holder of the permit consented to the endorsement of the condition on the existing permit. In this case Westbay's acceptance of the permit, expressed to include a condition of "adherence to the conditions of loading in the approved stability book" when no such a book existed, implied, in my opinion, consent to the future imposition of conditions, the content of which would be found in the stability book when it was approved and delivered to the holder of the permit. But I infer that neither Mr. Lonie nor Mr. Ewen had formed that legal opinion. They would probably have thought after reading the Board's letter, that the condition specified in the letter was already of legal effect and that the insertion of the words of condition on the existing permit was a mere administrative formality, unless they received legal advice to the contrary. There is no evidence that either of them did receive such advice in September or October 1988. The evidence supports the inference that they did not. Even if either of them had received legal advice that Westbay could perform on completion the obligations imposed by the written contract, notwithstanding receipt of the letter, I infer that the advice would not have been expressed with great confidence. The price specified in the written agreement was $1,200,000. The directors of Westbay were planning to apply the purchase money in discharge of one of the company's obligations. Mr. Lonie's state of mind is revealed by a facsimile message sent by him on 21 September 1988 to another director of Westbay, in these terms: "This is the situation as I can best explain it. Because the Sovereign was classed as a trawler it didnt have to have a stability test prior to July 1987 when the Uniform Shipping Law Code came into force in N.S.W. As of July 1987 all vessels over 7.5 metres must have a stability test. We purchased the vessel on 14.8.87 when an interim Cert of Survey was issued but this was issued without the stability having been completed. In February 1988 we were notified by the N.S.W. M.S.B. that Inclining Experiment had to be conducted. This was completed on 16-2-88 by the original designer of the boat Owen Cropp but he didnt submit it and in fact hadnt done any work on it until we received a letter from the M.S.b. requesting the stability dated 8 September 1988. All new vessels or modified vessels as from July 1987 must have stability approved before a Certificate of Survey is issued in our case this Certificate was issued before stability was approved. We may have a case against the M.S.B. it appears that Chris Carter's side of things is O.K. This is Ian Lewis's opinion. As soon as I can possible arrange it we are going to organise another stability test probably on Monday 26th September. There will also be another Naval Architect involved who will this time complete the computations. Hopefully the problem will be solved before it gets to court action. The prospective buyer is not happy and will also be claiming from who ever it may be if it should get to that stage. Keep you posted." Chris Carter was a boat builder who had modified Sovereign after the vessel had been damaged by fire. I find that, in consideration of Transpacific's completion of the written agreement, Westbay, by Mr. Lonie, promised to do what should be necessary to procure the Board's approval of the use of the vessel without prohibition of the use of the vessel's tanks for the carriage of wet bait or wet fish. I find that the agreement was made orally between Mr. Ewen and Mr. Lonie on the vessel on 26 September 1988, substantially in the terms of the conversation narrated by Mr. Ewen in evidence. Mr. Vickery submitted that there was no consideration for such an agreement. There was no incapacity on the part of Westbay to perform the written contract, he submitted. Alternatively, the inability to transfer the permit free of the proposed condition did not go so much to the root of the written contract that it made further commercial performance of the written contract impossible, it was submitted. Even if both submissions were correct, there would in my opinion be good consideration. Each party was bona fide in doubt as to what the ultimate outcome would be if the legal consequences of the events which had occurred after the making of the written contract and before 26 September 1988 were ascertained in legal proceedings. There was nothing frivolous about the purchaser's claim that it could without breach of the written contract refuse to complete the purchase. The oral agreement was in my opinion supported by good consideration in the promise to complete. I have expressed the contractual promise as to do what should be necessary to procure the Board's approval, rather than as to procure that approval, because the sense of the expression "rectify the problem", used by Messieurs Ewen and Lonie, is explained by what else was said by them. Although some hope was entertained that the Board's approval might be gained by Mr. Brown without physical interference with the vessel, it is clear that physical interference with the vessel was contemplated as one possible means of rectifying the problem. Mr. Lonie suggested concrete ballast in the keel as one such a means. The two men were acknowledging in the conversation that the calculations and the reasoning of Mr. Brown with the officers of the Board might not suffice to rectify the problem. In those circumstances the words used amounted to a promise to do what should be necessary to procure the Board's approval. Westbay's promise implied a representation that Westbay intended to perform the promise and a representation that Westbay had the ability to perform the promise. No evidence having been adduced by Westbay that it had reasonable grounds for making either representation, it is deemed not to have had reasonable grounds for making either and each representation is to be taken to have been misleading: s.51A of the Trade Practices Act 1974 and Futuretronics International Pty. Ltd. v. Gadzhis [1992] 2 V.R. 217. The causes of action alleged by Transpacific against the third-named respondent, National Australia Bank Ltd., are based on that respondent's refusal in September 1990 to lend Transpacific money required to pay for modification of Sovereign. Breach of contract, unconscionable conduct, breach of s.52 of the Trade Practices Act 1974 and negligence were pleaded, but only breach of s.52 was pressed in final submission. National Australia Bank Ltd. ("the bank") cross-claims to recover moneys lent and interest thereon and cross-claims possession of Sovereign under a mortgage of the vessel. Transpacific and Mr. Ewen had been customers of the bank before Sovereign was bought by Transpacific. When the vessel was purchased the bank lent more than $1,000,000 to Transpacific. In early December 1989 Transpacific contracted to buy from the owner of a fishing vessel what are called boat units. Boat units give entitlement under Commonwealth legislation to the holder of the units to catch certain quantities of fish in the South East Trawl Fishery. Mr. Ewen and Mrs. Clarke had sold a stud farm during that year and had applied part of the proceeds of sale in reduction of Transpacific's indebtedness to the bank to about $750,000. Late in that year they bought a house in Bermagui as a residence for themselves, borrowing about $100,000 from the bank for that purpose. During 1989 the manager of the Narooma branch of the bank, Mr. Limbrick, had dealt with Mr. Ewen and Mrs. Clarke in relation to the banking transactions of Transpacific and of themselves. During 1989 and 1990 Mr. Ewen was chairman of the Bermagui Fishermen's Co-operative and that organisation became a customer of the bank, upon Mr. Ewen's recommendation. He was regarded by Mr. Limbrick and, from January 1990, by Mr. Limbrick's successor as manager of the Narooma branch of the bank, Kevin Carter, as a very valuable customer, both because of the substantial transactions he and Transpacific had with the bank and because of his influence in the community, which it was thought that he would use to the bank's advantage. The population of Bermagui was under 1000 and the population of Narooma was about 3000. Mr. Ewen and Mrs. Clarke enjoyed a warm social relationship with both managers. Mr. Ewen sought and was granted concessions by the bank concerning bank charges. A difference of understanding concerning the extent of security to be provided to the bank was resolved in Mr. Ewen's favour. When he sought a loan to buy the house in Bermagui it was granted without question. Shortly after taking over the Narooma branch of the bank in December 1989 Mr. Carter called on Mr. Ewen at the latter's home to introduce himself as the new manager. Mr. Ewen swore that at that meeting he explained the terms of the contract for the purchase of the boat units : a price of $108,500, payable by a deposit of $10,850 on execution of the contract on 5 December 1989, and the balance on written approval by the Commonwealth Department of Primary Industry of the transfer of the boat units, but in any event not before 5 April 1990. He swore that he explained to Mr. Carter that Transpacific might find itself in need of a loan from the bank when payment had to be made for the planned modification of Sovereign. Mr. Ewen was intending the modification to be carried out in the second half of 1990, which would not only satisfy the Board's stability requirements but also increase the vessel's capacity to catch fish, so that the entitlement conferred by the boat units could be fully exploited. Mr. Ewen swore that he told Mr. Carter that the balance of the price of the boat units would probably be paid with funds then on deposit with the Narooma branch of the bank, and that thereafter a loan by the bank of an amount between $250,000 and $350,000 might be needed in order to pay for the modification of the vessel. Mr. Ewen swore that he asked Mr. Carter "did he see any problem with that should the occasion arise" and that Mr. Carter replied : "That'd be okay". Mr. Carter gave evidence that he had very little recollection of the content of this conversation, as he had very little recollection of the content of many later conversations with Mr. Ewen concerning the bank's relations with Transpacific and Mr. Ewen. His evidence was that he did not believe that at their first meeting he was asked by Mr. Ewen about the prospect of a loan by the bank. He swore that, if he had been asked such a question and had made a response, he would have made a note of the substance of the conversation and would have placed it in the bank's file relating to Transpacific. On a number of occasions during 1990 Mr. Carter did make such a file note, as they were called in evidence by the bank's officers, concerning conversations he had with Mr. Ewen. Mr. Carter's evidence was that each file note was made very shortly after the conversation to which it related, usually on the day on which the conversation occurred. It is common ground that early in March 1990 Mr. Ewen and Mrs. Clarke spoke to Mr. Carter at the Narooma branch office of the bank about a loan of $25,000 they wanted from the bank for an extension to their house and for the construction of a swimming pool. Mr. Ewen swore that on that occasion he explained to Mr. Carter that, before the time came for completion of the purchase of the boat units, Transpacific would need the bank's commitment to a loan to enable the modification of Sovereign to be undertaken. Mr. Ewen's evidence was : "I said before we spend this money we need your answer to whether you support us in the future with this loan, should we need it" and that Mr. Carter replied : "Go ahead and spend the money". Mrs. Clarke gave evidence to the same effect. Mr. Carter's file note of the conversation reads: "1 March 1990 Garry and Colleen called to arrange home equity loan for pool. Whilst here they talked about possible extensions on the boat which by cutting off from the bulk head back and replacing it with a bigger piece he could increase carrying capacity from 40 to 80 tonnes and improve value to $2m. The boat would be out of the water for 1/2 months. Garry estimates that cost of work additional equipment and additional units would cost a total of $500,000. He wanted to know if we would look at the finance and I told him it would depend on income and potential income which he understood but was embarrassed that his accountant has been too slack to prepare 1989 F/S yet alone interim figures to December and cash flows. Told Garry these would be required. He commented that if the Bank wanted his T/D funds as security he would probably fund the extensions himself from T/D and various other sources that he did not let on. He considers his T/D funds as a capital reserve and likes to have control." Mr. Ewen denied in evidence that he had said that if the bank wanted his term deposit funds as security he would probably fund "the extensions" (that is the modification of Sovereign) from his own funds. But I find that he did say that to Mr. Carter in early March. It is very difficult to suppose that Mr. Carter misapprehended what Mr. Ewen said or that Mr. Carter deliberately made a false note on that subject. Mr. Carter made the following file note: "14 May 1990 Garry rang to update us on position. Sovereign blew a motor which has cost $50,000 to rebuild. They also have to pay a deposit on 31 trawl units they bought for $3,500 each ($108,500). Boat was out of work for five weeks with motor, and past two weeks it has been too rough to fish. He has commenced operation on getting the boat extended which will cost from $350,000. He will fund it from T/D's $208,000 and income between now and 1/9/90 when boat has got to go on the slip. Work to join new back half up with front is to take six weeks and he expects to be back in water 15/10/90. He has some minor bills to pay as well as motor etc. and has requested a temporary excess to $50,000 until 14/7/90 to clear from fishing income. He also sold some cattle which should net $14,000 also. They have had success in stirring their accountant into action as he rang me last week to say he was starting on their work. Rang A.R.M. who approved excess of $50,000 (20,000 ODL plus 30,000) until 14/7/90. He requested review be undertaken by 30/6/90. Told Garry this and that it would cost him B plus 4.5 for excess over limit. Garry has put his house on the market for $300,000 as he will end up moving to Tasmania to be closer to the action. Fresh guarantee to be taken Later Spoke to Peter Sutton about F/S and he expects to have 89's material this week. He has to prepare interim figures from Colleen's books and I put Colleen on as she was in the branch. He promised to ring Garry and Garry would fax down the required info. Note: Garry is on the Board of the South East Trawl Fishing Association which is a representative group of fisherman that is getting the Government's attention." Peter Frederick Sutton was a chartered accountant practising in Melbourne who prepared the accounts of Transpacific. Mr. Ewen agreed in evidence that he may in May 1990 have discussed with Mr. Carter the possibility that the modification would be funded from Transpacific's term deposits with the bank and income from fishing. After the contract for the purchase of the boat units had been completed in April by payment of the balance of the price, $97,650, Mr. Ewen would not on 14 May have been referring to the payment of the deposit as a future event. The reference in Mr. Carter's file note of 14 May to "31 trawl units" is a reference to what I have called "boat units". Dr. Bleechmore relied on that gross inaccuracy, in support of his carefully reasoned submission that the file notes ought not to be given any substantial weight against a finding, in accordance with the evidence of Mr. Ewen and Mrs. Clarke, that explicit promises of a loan by the bank to pay most of the cost of modification had been given by Mr. Carter In June Mr. Ewen and Mrs. Clarke called on Mr. Carter at the Narooma branch office of the bank and they were taken by Mr. Carter to lunch, according to Mr. Ewen's evidence. Mr. Ewen swore that during lunch he had informed Mr. Carter that Transpacific's recent income from fishing had not matched his expectations, that the vessel had had engine problems and that there had been problems with the crew. Mr. Ewen swore that he told Mr. Carter that he believed "we were most assuredly going to need their assistance and we wanted a firm commitment re the funds that we were talking about on previous occasions ..... the building works for Sovereign ..... we're going to need it ..... what do you say to that?" Mr. Ewen swore that Mr. Carter replied : "Well, it's there. Let me know when you want it". Mrs. Clarke gave evidence that she believed the conversation during lunch occurred "most definitely before" completion of the purchase of the boat units on 12 April. Asked what was said, Mrs. Clarke gave this evidence: "Mr Ewen said to Mr Carter that we were just about to settle for settlement for the units, and he would like to know before we settled with the units were there any problems with the loan. Mr Carter said, it's there." Mrs. Clarke had difficulty in recollecting many of the events with which the case is concerned. Mr. Carter gave evidence that he could not recall a particular lunch with Mr. Ewen and Mrs. Clarke, but he accepted that there may have been such an occasion. Mr. Carter's file notes include the following: "25 May 1990 Garry rang to talk about boat extensions. The boat has not been to sea until today and therefore hasn't earned any money for past 6/7 weeks. He is concerned that they won't catch enough fish now to fund the extension from reserves and incomes. He wanted to know how we would feel about $250,000. Told him we could not make a commitment as F/S were not available and stated the fishing industry was not that good and the prospect of having $1m out against a boat that may be worth $2.5, in a sound fishing climate of $1.5m in a depressed fishing climate was not all that inviting. Nevertheless we would look at a proposition provided 89 F/S together with 3.90 interims and cash flows were provided in a submission. He said that if the orange roughie is quoted and closed they can convert to midwater trawl which is a new and untried concept in Australia (they have had the gear for some time $30,000)." In July two file notes were made by Mr. Carter, as follows: "10 July 1990 Garry rang to update position. Boat is working again after he sacked the crew and changed it completely. Apparently previous skipper was only a young fellow and did not have his mind entirely on the job (women's influence). Since changeover of crew new skipper has caught 80 tonnes and had to give away 40 tonnes as he could't carry it. Part of the refit of the boat is a stabilisation which the MSB have demanded all boats to adhere to. The cost of this is about $300,000 which has influenced the extension/refit which will cost $400,000 all up. Plans are under way for the refit to go ahead with work being commenced on the rear portion in dry dock now. Garry asked what his chances were of borrowing $300,000 and I told him we would have to see what 88/89 figures show. 89 is finished and on its way. Fresh cash flow has been prepared and is realistic according to Garry. No commitment given on how the A/S for $300,000 would be accepted. Told him interest rate on interest only fixed is around 17 per cent all up. 24 July 1990 Garry rang in a hurry as he was leaving for Tasmania this morning. He has told the contractor that he may have to obtain finance to complete the refit and they want it in writing, i.e. copy of approval. He said he may not need finance if they have some good luck in fishing. New skipper has caught $270,000 in fish in six trips to sea, however that season is now finished. Garry didn't really know what he wanted but I think was hoping I would give him the green light to go ahead, however I told him we needed 1990's figures before Bank would consider commitment. He claimed that was different to our last conversation, however it is not. He is to give 1990 completed books to accountant today." Mr. Ewen's evidence was that there were occasions when Mr. Carter had asked for Transpacific's financial statements, but his answers to questions as to when such requests were made, when the requests were complied with, and in respect of what period a requested statement had been prepared, were quite vague . A few days after 24 July a contract for the modification of Sovereign was executed by Transpacific. The provisions in that contract concerning payment of the price were in these terms: "PAYMENT TIME AND METHOD ON SIGNING $50,000.00 FROM PURCHASER A FURTHER $50,000.00 " " 25TH AUGUST, 1990 A FURTHER $50,000.00 " " 25TH SEPTEMBER 1990 A FURTHER $100.000.00 " " WITHIN SEVEN DAYS OF SLIPPING OF VESSES (sic) TO ALLOW FOR INSPECTION BY BANK AGENT ANTICIPATED PAYMENT DATE 15/10/90 A FURTHER $100,000.00 " " 15TH NOVEMBER, 1990 BALANCE OF $54,000.00 " " ON COMPLETION OF COMMISSIONING SEA TRIALS, HAND OVER AND STABILITY TEST TOTAL $404,000.00 AS PER QUOTATION AND AGREEMENT." A month before execution of that contract Mr. Ewen had sent to the boat builder who was to carry out the modification of Sovereign a facsimile message in these terms: "Date 27.6.90 Attention: Chris Carter To: Broad Water Eng. From: Garry Ewen Re: Sovereign Start 15th/7/90 Complete 30th/11/90 Comment: Chris The Bank's proposal (or acceptance) for payment by Contract of Loan to Ourselves was the following $50,000 July 1st $50,000 August 1st $50,000 September 1st *$100,000 October 1st $150,000 On completion and Bank Inspection I have rang the Bank and told them that the timing has been put back another 2 weeks and they have said O.K. However the Bank has reminded me that we will have to service the *$100,000 October payment as agreed. Regards Garry" Although Mr. Carter had no recollection, as he swore, of discussing the instalments of the price for the modification, I find that he and Mr. Ewen did discuss that subject in June. Mr. Carter's file note of 24 July shows that the boat builder was evincing an interest in the source of the funds by which he was to be paid. In July and August withdrawals of funds from Transpacific's account at the Narooma branch of the bank funded the payment due on the signing of the contract and the first instalment of the price payable thereafter. In the last days of August the financial statements of Transpacific for the year ended 30 June 1990 were sent by Mr. Sutton to Mr. Ewen. (The statements for the preceding year had been completed in July 1990.) At Mr. Carter's suggestion Mr. Ewen addressed to Mr. Carter a typed three page letter of application for a $300,000 loan by the bank to fund the vessel's modification. Mr. Carter sent the letter with his own detailed written application to the office of the South Coast Regional Office of the bank at Wollongong where it was considered by Anthony Keith Hacking and Terence Rutledge, the assistant regional manager and the regional manager respectively. The application was refused. There is no file note after 24 July until 6 September. The latter file note reads: "6 September 1990 Regional office - AKH, advised they were declining the submission for $300,000 on the grounds that 1990 income, if reproduced in 1991, was not sufficient to service increased commitment. Tony pointed out that applicant's contribution of $300,000 is coming from farm sale surplus and not profit, which is granted as profit this year was either not earned by inexperienced skipper or used in repairs and maintenance. Tony was not willing to concede that the improvements to the vessel would allow more trouble free running and allow double the capacity and therefore considerably more income and would only consider this year's income as a guide. This makes it difficult if the cash flow isn't going to be considered. The underlying reason it appears to have been declined is because it was Cat "C". Told Tony to be prepared for a call from Garry Ewen. Rang Garry and told him fate and the reason being through lack of suitable serviceability. He was less than happy and requested R/O phone number. He stated that if he wasn't successful in turning the decision around, then we can pack up his things as he will leave the Bank and take Co-Op with him. A.G.M. is in October and he claimed to be able to sway them away. Very upset to say the least." "AKH" and "Tony" refer to Mr. Hacking. Mr. Ewen's evidence was that in late August he asked Mr. Carter to make available some of the money he understood the bank had agreed to lend, to fund the instalment due under the contract on 25 August. He swore that Mr. Carter's response was that a written application would have to be made. Mr. Ewen gave this evidence: "I said to Mr. Carter, `What do you mean, we have to make an application? Why do we have to make an application, we have never made an application before? You said we have had the money, why have we got to make an application?'. He said, `We have got a new loans manager; he needs the application; it is just a formality'." "He said it's only a formality, but you give it your best shot, it's got to go to head office". I find that what determined the time when application for approval by the Regional Manager was made was not only the request for the funds from the bank, but also the arrival of the 1989-1990 financial statements in Narooma from Mr. Sutton. I find that Mr. Ewen had been several times told by Mr. Carter that approval of the loan could not be given until those statements had been submitted to the bank. The probability is high that a bank considering such a loan as was proposed, in the circumstances which obtained at that time, would require the information which the statements would disclose. Sovereign was at that time the bank's principal security for repayment of $750,000. The realisation value of the vessel after modification would depend on the prosperity of the fishing trade in which it was designed to operate. I thought Mr. Carter an honest witness. But, if his oath be ignored, it is quite improbable that the file notes were so written as to include deliberately falsified accounts of conversations between the writer and Mr. Ewen. Mr. Ewen gave evidence that he had made an oral arrangement with Mr. Carter that the first two instalment payments, that is those falling due, after payment of $50,000 on signing, to the boat builder under the contract, each of $50,000, would be paid by the bank and that Transpacific would pay the $100,000 instalment. That evidence is not inconsistent with the terms of Mr. Ewen's facsimile message to the boat builder, which I have set out, or with the provisions of the contract with respect to payments. In fact the first of those two payments was made by Transpacific out of its own funds, as had been the payment made on the signing of the contract. I find that Mr. Ewen had been told by Mr. Carter on 10 July and on 24 July that no promise of a loan would be made until the 1989/1990 financial statements had been considered by the bank. I find that arrangements were made orally between Mr. Ewen and Mr. Carter in June as to which of the instalment payments under the proposed contract would be funded by the bank and which payments would be made by Transpacific, if the loan were granted. It seems likely that Mr. Ewen gave the boat builder to understand that the bank was committed to those arrangements . It is unnecessary that I make a finding on the point. If he did give the boat builder so to understand, yet I find that he knew that the bank was not so committed. I find that the file notes of 1 March, 14 May, 25 May, 10 July and 24 July are substantially accurate records of Mr. Carter's statements to Mr. Ewen on those dates. I have regarded Mr. Carter as a witness with a powerful motive to depict his transactions with Mr. Ewen as those of a wise and competent bank officer, both to advance his own career and to protect his employer from financial loss in this proceeding. Having scrutinised his evidence, having regard to the searching criticism to which Dr. Bleechmore subjected it in final submission, I found it persuasive. The inaccuracies in, and the omissions from, the file notes to which Dr. Bleechmore drew attention are not, as I find, indicators of error in the substance of what is recorded concerning Mr. Carter's responses to questions about the granting of the loan. I am not persuaded that Mr. Carter said anything to Mr. Ewen which constituted misleading conduct. I find that he did not make the statements about the availability of a loan attributed to him by the evidence of Mr. Ewen and Mrs. Clarke in his office in March and at lunch in June. I am not persuaded that he said anything to Mr. Ewen at their first meeting, at Mr. Ewen's home, that was misleading. Those findings leave me with no evidence of misleading conduct by Mr. Carter. It is possible that Mr. Carter gave Mr. Ewen the impression that the loan would be approved if the financial statements disclosed a trading history which justified a conclusion that Transpacific could service the loan. But that is not the applicant's case. Nor is there evidence which I am prepared to accept that Mr. Carter' conduct was such as to be likely to give Mr. Ewen such an impression. In the result there will be judgment for the bank in the proceeding against it by Transpacific. I will hear counsel concerning the other orders to be made in resolution of the questions tried. I certify that this and the 35 preceding pages are a true copy of the Reasons for Judgment of the Honourable Justice Jenkinson Associate Dated: 7 February, 1995 VG120 of 1992 Counsel for the Applicant, : Dr. J.F. Bleechmore Cross-Respondent Solicitor for the Applicant,: Ellinghaus & Lindner Cross-Respondent Counsel for the First and : Mr. P.N. Vickery Second Respondents Solicitors for the First and: Minter Ellison Morris Second Respondents Fletcher Counsel for the Third : Dr. P. Buchanan Q.C. and Respondent, Cross-Claimant Mr. A.J. Maryniak Solicitors for the Third : Russell Kennedy Respondent, Cross-Claimant Dates of Hearing : 15, 16, 17, 18, 19, 22, 24, 25, 26 and 29 August, 1994