FEDERAL COURT OF AUSTRALIA Reiffel v ACN 075 839 226 Ltd [2003] FCA 194 TRADE AND COMMERCE – TRADE PRACTICES – consumer protection – misleading and deceptive conduct – statements in prospectus relating to property investment – financial forecasts – independent expert report in form of negative assurances as to financial forecasts – whether report was misleading or deceptive – whether caused loss – whether time barred CORPORATIONS – prospectuses and disclosure – liability of independent expert for statements in prospectus in the form of negative assurances as to promoter's financial forecasts – whether misleading and deceptive under Australian Securities & Investments Commission Act 1989 (Cth) s 12DA or Corporations Law s 995 – whether ought be excused pursuant to s 1318 – whether caused loss Federal Court of Australia Act 1976 (Cth) Pt IVA Trade Practices Act 1974 (Cth) ss 51AF, 52 Australian Securities & Investments Commission Act 1989 (Cth) s 12DA Corporations Law ss 995(2), 1005, 1318 John G Glass Real Estate Pty Ltd v Karawi Constructions Pty Ltd (1993) ATPR 41-249 referred to Heydon v NRMA Ltd (2000) 51 NSWLR 1 followed Bowler v Hilda Pty Ltd (1998) 80 FCR 191 referred to Escott v Barchris Construction Corporation 283 F Supp 643 (1968) considered Bulfin v Bebarfalds Ltd (1938) 38 SR (NSW) 423 applied Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 applied Campomar Sociedad Limitada v Nike International Ltd (1999) 202 CLR 45 applied Sykes v Reserve Bank of Australia (1998) 88 FCR 511 cited Sydney Harbour Casino Properties Pty Ltd v Coluzzi [2002] NSWCA 74 cited Karedis Enterprises v Antoniou (1995) 59 FCR 35 referred to Blacker v National Australia Bank Ltd [2001] ATPR 41-817 referred to Murphy v Overton Investments (2001) 112 FCR 182 referred to Re International Vending Machines Pty Ltd [1962] NSWR 1408 considered Gamble v Hoffman (1997) 24 ACSR 369 considered Daniels v Anderson (1995) 37 NSWLR 438 followed Kenna & Brown Pty Ltd v Kenna (1999) 17 ACLC 1183 followed Circle Petroleum (Queensland) v Greensdale (1998) 16 ACLC 1577 followed Arnison v Smith (1889) 41 ChD 348 applied Aaron's Reefs Ltd v Twiss [1896] AC 273 applied Gould v Vaggelas (1985) 157 CLR 215 applied Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 applied Sibley v Grosvenor (1916) 21 CLR 469 cited Dominelli Ford (Hurstville) Pty Ltd v Karmot Auto Spares Pty Ltd (1992) 38 FCR 471 cited Lam v Ausintel Investments Australia Pty Ltd (1989) 97 FLR 458 cited Smith v Chadwick (1882) 20 ChD 27 cited Barton v Armstrong (1976) AC 104 cited Australian Steel & Mining Corporation Pty Ltd v Corben [1974] 2 NSWLR 202 cited Duke Group Ltd (in liq) v Pilmer (1999) 153 FLR 1 cited Henville v Walker (2001) 206 CLR 459 applied I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 76 ALJR 1461, 192 ALR 1 applied Ford et al, Ford's Principles of Corporations Law 11th ed, 2003 MARLENE JOYCE REIFFEL (for herself and representing the persons referred to in the Statement of Claim) v ACN 075 839 226 LIMITED and PANNELL KERR FORSTER CONSULTING AUSTRALIA PTY LIMITED ACN 059 506 115 N 966 OF 2000 GYLES J SYDNEY 14 MARCH 2003 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 966 OF 2000 BETWEEN: MARLENE JOYCE REIFFEL (for herself and representing the persons referred to in the Statement of Claim) APPLICANT AND: ACN 075 839 226 LIMITED FIRST RESPONDENT PANNELL KERR FORSTER CONSULTING AUSTRALIA PTY LIMITED ACN 059 506 115 SECOND RESPONDENT JUDGE: GYLES J DATE OF ORDER: 14 MARCH 2003 WHERE MADE: SYDNEY THE COURT ORDERS THAT: The matter stand adjourned for orders to be brought in to give effect to these reasons. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 966 OF 2000 BETWEEN: MARLENE JOYCE REIFFEL (for herself and representing the persons referred to in the Statement of Claim) APPLICANT AND: ACN 075 839 226 LIMITED FIRST RESPONDENT PANNELL KERR FORSTER CONSULTING AUSTRALIA PTY LIMITED ACN 059 506 115 SECOND RESPONDENT JUDGE: GYLES J DATE: 14 MARCH 2003 PLACE: SYDNEY REASONS FOR JUDGMENT Introduction 1 This case concerns the liability of an independent expert for statements made in a prospectus of a kind that is sometimes called a negative assurance, namely, a statement prefaced by the words "nothing has come to our attention which causes us to believe that (statements on behalf of the promoters) do not have" a particular quality. This is a representative proceeding under Pt IVA of the Federal Court of Australia Act 1976 (Cth) ("the Act"), the group members being persons who acquired units in the Astor Goldsbrough Trust ("the Trust") pursuant to a prospectus. In all, 148 persons applied for and obtained units in the Trust. Two persons who were associated with the promotion of the investment were excluded as group members. Of the remaining 146, twenty-two opted out pursuant to s 33J of the Act following the distribution of notices, fifty-seven have retained the solicitors for the applicant to act for them, and sixty-seven have neither opted out nor retained those solicitors. 2 The particular applicant is Marlene Joyce Reiffel (hereinafter called "the applicant"). The second respondent, Pannell Kerr Forster Consulting Australia Pty Ltd ("PKFCA") is the active respondent. The first respondent is the promoter company. As a result of interlocutory hearings, the issues to be determined have been narrowed and the trial is to proceed in stages. This contested hearing concerns the following issues: (1) Whether the conduct of PKFCA was misleading and deceptive as alleged by the applicant in the statement of claim. (2) If so, whether the applicant has suffered loss by reason of that conduct. (3) If so, the quantum of the applicant's loss. Facts 3 Before considering the issues arising in the pleadings more closely, it is convenient to deal with the facts. The facts which I find are based substantially upon the evidence of the applicant, who I accept as a witness of truth and who was generally reliable in her evidence. She gave her evidence convincingly and it accords with the inherent probabilities. I also generally accept the evidence of Mr Neil Ward. 4 The applicant was born on 9 February 1948. She joined the Commonwealth Public Service in 1965, and, apart from periods of maternity leave and a period between 1979 and 1983 when she and her then husband were farming, she was employed in various positions in the Commonwealth Public Service, up to and including the period relevant to this case. By November 1994 she had some experience in property investment, including residential property which was leased to tenants. At that time she was living in Canberra. 5 The Goldsbrough building was an old wool store situated at Darling Harbour in Sydney. It was to be converted into a block of residential apartments. In about November 1994 the applicant saw an advertisement in the Canberra Times newspaper regarding the sale of apartments in the building. She told Mr Neil Ward, a friend of hers, about the advertisement, and soon after she and he went to an exhibition in Canberra where they viewed pictures of the proposed building, building plans and a list of selling prices. The agents at the exhibition were representatives of Charles Stuart Real Estate. The applicant and Ward left their names with the agents, indicating an interest in the proposed building. 6 In about December 1994 the applicant and Ward met Mr Andrew Veron on site, while the building was in the process of being constructed. He said he was employed by Charles Stuart Real Estate at the time. They also met Mr Kenneth Gresham in the same connection. Following this, the applicant and Ward contracted to purchase a one-bedroom apartment for $179,400. It was agreed between the applicant and Ward that they would review their ownership of the property at three stages – firstly, they would consider selling when the building was complete; secondly, they would consider selling before the Olympic Games; and thirdly, they would consider selling after the Olympic Games. It was arranged that if, at any stage, either wanted to sell the apartment he or she would consider buying out the share of the other. 7 Settlement of the purchase occurred in October 1995, when the building was complete. The apartment was rented within a short time after settlement, through an organisation called Astor Goldsbrough Apartment Management Pty Limited ("Astor Management"), which, as the name implies, was the manager of the block. Gresham and Veron were connected with it. In addition to utilising the rental to pay expenses, including mortgage payments, each of the applicant and Ward contributed $80 gross per week. 8 The applicant received a letter from Astor Management, dated 19 June 1996, referring to a proposed Astor Goldsbrough hotel apartment scheme. In or about October 1996 a prospectus regarding that scheme was sent to the applicant by mail ("the 1996 Prospectus"), but she was later advised that it had been recalled by the Australian Securities Commission. In about January 1997 she was sent another prospectus ("the 1997 Prospectus"). Because of the importance of the prospectus to the case, it is necessary to set out verbatim portions of each version. 9 The general proposal was described in the 1996 Prospectus as follows: "Astor Goldsbrough is a scheme where owners of apartments in The Goldsbrough Building can participate in an apartment hotel business where a number of apartments are furnished and let for short, medium or long term stays. The objective is that all apartments which participate in Astor Goldsbrough will be treated as a single business, meaning all revenues and expenses will be "pooled", or shared and a net income/cost from operation of the business will arise. This net income/cost is then shared between the apartment owners participating in Astor Goldsbrough on an agreed basis (described below in "Sharing Formula"). Astor Goldsbrough is designed to ensure that participants share the benefits and risks associated with letting their investment apartments in The Goldsbrough. Therefore, participating in Astor Goldsbrough has the effect of Participants altering their investment for the period of Astor Goldsbrough from an investment in 100% of an apartment in The Goldsbrough Building to an investment in a percentage of the much larger business operating Astor Goldsbrough, comprising many apartments of different value and configuration." 10 What was described as a "legal overview" was as follows: "The participation in Astor Goldsbrough is achieved through a number of legal relationships, designed to achieve the "pooling" or sharing arrangements described above but preserve ownership of apartments by Participants. The business operating Astor Goldsbrough is a new unit trust established for this purpose and restricted from carrying on any other business. Participants in Astor Goldsbrough will be issued with units in this trust equal to their proportional sharing in the scheme. This trust is called Astor Goldsbrough Trust and is a trust approved under the Corporations Law as a prescribed investment trust. It has an independent trustee approved under the Corporations Law as a trustee for public investment funds and the trust deed contains covenants prescribed by the Corporations Law for investor protection. The legal structures can be described as follows: [a diagrammatic representation follows]. Astor Goldsbrough Trust gains the right to manage the apartments participating in Astor Goldsbrough and to receive income from guests staying in the apartment by leasing each apartment from the apartment owner up until 30 September 2005. The business of Astor Goldsbrough is run by the Astor Goldsbrough Trust as a principal, not on behalf of, or as agent for, individual apartment owners. The lease expires on 30 September 2005 and is terminable in the following circumstances: (a) In the first 5 years of your investment you can only take your investment out of Astor Goldsbrough if you, or the Trust Manager on your behalf, can find another apartment owner in The Goldsbrough to take your place in the investment pool. Membership of Astor Goldsbrough is separate from the ownership of your apartment. Membership of Astor Goldsbrough is an independent asset which can increase in value and is able to be transferred to other owners of comparable apartments. (b) When your apartment has been part of Astor Goldsbrough for a period of 5 years you can withdraw by giving a minimum of 1 years notice. (c) At any time you can sell your apartment, but the buyer must continue to participate in Astor Goldsbrough. (d) Astor Goldsbrough will terminate after 30 September 2005. The net profit from the business is distributed to apartment owners as rent under the lease to Astor Goldsbrough Trust, not through distributions on units in Astor Goldsbrough Trust. The Astor Goldsbrough Trust will run the apartment hotel business by engaging a Managing Agent (who is also a licensed real estate agent) to manage the business. This agent will be responsible for managing and operating the apartment hotel including marketing, bookings, guest relations, co-ordination of repairs and maintenance, furnishing the apartment, managing cash flow etc. This agent may also engage other contractors to carry out some of these functions. The advantage of having a managing agent who is also a licensed real estate agent is that the managing agent has the option of renting out apartments for short or long term leases if the apartment hotel has a period of low occupancy. … Parties involved in Astor Goldsbrough The following parties having important roles in Astor Goldsbrough: Trustee of the Astor Goldsbrough Trust Horwath Corporate Pty Limited Manager of the Astor Goldsbrough Astor Goldsbrough Funds Trust Management Managing Agent Astor Apartment Management Pty Limited" 11 A fuller description of the legal relationship, responsibilities and benefits was as follows: "The following legal relationships arise in the Astor Goldsbrough scheme: Apartment Lease – a Participant's apartment is leased to the Astor Goldsbrough Trust until 30 September 2005, or until the Participant exits from Astor Goldsbrough in accordance with the conditions set out in the Trust Deed. An approved form of the pooled rent lease is in Appendix 2. Membership of Astor Goldsbrough Trust – a Participant will be issued units in the Astor Goldsbrough Trust, giving it rights to vote at unitholders' meetings on a range of issues, including replacement of the Trustee or Manager, changing the business or business policy of the trust or winding up the trust. Apartment Hotel Management Agreement – The Astor Goldsbrough Trust appoints the Managing Agent to manage the business of Astor Goldsbrough including marketing the apartments, attending to guests' requirements and paying all expenses for the Term. Arrangements with Hotel Guests – Hotel guests will pay the Astor Goldsbrough Trust for their stay at an Apartment and other services provided by the Managing Agent in the same way as at a normal hotel or serviced apartment. If a short or medium term lease is arranged, a standard residential tenancy lease will be signed by the tenant and the Astor Goldsbrough Trust. Responsibilities and Roles of Parties Involved Trustee The Trustee of the Astor Goldsbrough Trust is responsible to: hold legal title to all trust assets, including the apartment leases, furniture, operating equipment and supplies and cash; monitor compliance by the Trust Manager and the Managing Agent with their obligations; monitor compliance with the trust deed; ensure proper reporting of the activities of the trust as they occur. The Trustee is not responsible for the business decisions relating to the Trust. Trust Manager The Trust Manager is responsible to make business policy decisions and recommendations to the Trustee and implement the trust business policies, including engaging people to carry out all of these functions. Managing Agent The Managing Agent is responsible to manage the apartment hotel business of the Astor Goldsbrough Trust in the same way as a hotel operator manages a hotel on behalf of its owner. Participants Participants are required to lease their apartments to the Astor Goldsbrough Trust, pay an initial subscription and obtain consent from their mortgagee to participation in Astor Goldsbrough. An approved form of the pooled rent lease is in Appendix 2. The application form enables applicants to authorise the Trustee of the Astor Goldsbrough Trust to sign the lease and complete the details on their behalf. The subscription payment for units will be used as working capital for the Astor Goldsbrough Trust. Participants must agree to give occupation of their Apartment to the Astor Goldsbrough Trust by 1 December 1996 or, if later, the first of the month following the date their application is accepted. If there is a mortgage over the apartment the Participant must obtain the mortgagee's consent to membership of Astor Goldsbrough. The application form has a space to enable applicants to authorise the Trust Manager to seek approval from the applicant's mortgagee. Additional Benefits Each Participant is issued with an Astor Goldsbrough Investor Goldcard. This entitles the Participant to 7 nights accommodation per year in their Apartment or an equivalent apartment in the Network, subject to room space being available when booked. No participant can book more than 3 months in advance. This accommodation offer is also not available during the Olympic period of 1 July 2000 to 1 December 2000 and special events." 12 Part 6 of that prospectus was entitled "Overview of the Hotel and Serviced Apartment Market". It was prepared for inclusion by Genitron 2000 Pty Limited ("Genitron"), the principal of which, Lyndsay Mackee, was also a director of Astor Management. It was said that Genitron had been paid a fee of $10,000 for providing the report and forecast. 13 Part 10 of the prospectus was entitled "Financial Projections". This section commenced as follows: "The financial forecasts should be read in conjunction with this prospectus and the assumptions underlying them which are described below and in section 6, "Overview of the Hotel & Serviced Apartment Market", and section 4, "Risk Factors". The forecasts have been prepared by the Trust Manager. An independent expert's report appears in section 11. The forecasts are based on the current market environment and the Manager's view of the expected hotel and hotel apartment market and economic conditions prevailing during the forecast period. A sensitivity analysis identifying changes in occupancies and average room rates appears on page 40 of this Prospectus." The sensitivity analysis to which reference is made is the last part of that section. Contrary to the statement in this section, there was no independent report in section 11 of that document. 14 I turn to the 1997 Prospectus. The general description of the business proposal, the legal overview and the parties involved are indistinguishable from the 1996 Prospectus. The section relating to Risk Factors is similar – the headings were Tourism, Hotel Supply, The Economy, Taxation, Forecasts and General Risks. The risk with the most relevance to the case is that relating to Forecasts: "The forecasts in this prospectus are based on known factors and some assumptions. A risk exists that these assumptions are not realised and therefore results differ from forecasts. Furthermore, the forecast returns may not be replicated for periods outside the forecast period." 15 The section entitled "Overview of the Hotel & Serviced Apartment Market" is also similar to the 1996 Prospectus. I will return to this in due course. The section "Legal Relationships, Responsibilities and Benefits" is also similar. The introduction to the section on Financial Projections is similar, accommodating a change in numbering for other sections. The balance of the section has been somewhat recast, with some greater detail and with somewhat amended figures. A section describing the scope of work of Genitron was added. I will return to this section later. 16 Section 12 is described as "Independent industry expert's report" ("the Report"). The Report was on the letterhead of PKFCA and signed by Mr Stephen Kelly. PKFCA had been associated with Pannell Kerr Forster ("PKF"), a well-known firm of chartered accountants, although by this time the shares in PKFCA were owned by Kelly and one other, neither of whom had any present connection with PKF. The substance of it was as follows: "re: INDEPENDENT INDUSTRY EXPERT'S REPORT FOR THE ASTOR GOLDSBROUGH APARTMENTS HOTEL 1. Introduction This report has been prepared at the request of the Directors of Astor Apartments Management Pty Limited ("AAM") for inclusion in a Prospectus to be dated on or about 6th January 1997 ("the Prospectus"), with respect to the proposed participation in an apartment hotel pool. A detailed description of the proposed income pooling concept is set out within the Prospectus under the heading Business Proposal. 2. Scope of our Work AAM has prepared the Trading Forecasts for the truncated year ending 31 December 1997 (excluding the month of January 1997, resulting in a 335 day trading year) and the calendar years ending 31 December 1998 and 1999 as presented in the section titled 'Financial Projections' in the Prospectus. The Directors of AAM have requested that Pannell Kerr Forster Consulting Australia Pty Limited ("PKFCA") provide a report setting out our opinion in relation to the amounts described in the Financial Projections as "Net Operating Profit" for the truncated 335 trading day year ending 31 December 1997, the 12 months ending 31 December 1998 and the 12 months ending 31 December 1999 and that forms part of the Apartment Hotel Trading Forecasts. We have not been requested to express, and we do not express, an opinion about any of the other information appearing in the Financial Projections. The Apartment Hotel Trading Forecasts are based on the Directors' judgement of present circumstances, operating and economic conditions the Directors expect to exist, and the courses of action they expect AAM to take. The Trading Forecasts are based on certain assumptions which must be taken as a whole. In determining whether the assumptions provide a reasonable basis for the Trading Forecasts, we have made such inquiries and performed such procedures in relation to the respective years as are reasonably able to be made or performed and as we, in our professional judgement, considered appropriate and which principally consisted of: a) discussions with the Chief Executive Officer of AAM and its consultant; b) site visit to the property to review the product; c) review of reports prepared by the [sic] AAM's consultant which have been relied upon by the Directors of AAM; d) review of the supporting work papers and assumptions underlying the Trading Forecasts having regard to the assumptions adopted in their preparation; e) testing and consistency of the Trading Forecasts having regard to the assumptions adopted in their preparation. We have also obtained such other information and explanations as it was considered necessary for the purposes of this report. However, a review of this nature provides less assurance than an audit. PKFCA has not been requested to express, and does not express, any audit or investigating accountants opinion on the Trading Forecasts. Other than in relation to the sensitivity analysis, PKFCA express no opinion on any other information appearing in the Prospectus. It should be noted that our review does not attempt to confirm the achieveability of the Directors' Forecasts as there is a considerable degree of subjective judgement involved in preparing forecast financial information, particularly in relation to a specialised business such as an Apartment Hotel. Accordingly, investors should have regard to the sensitivity analysis and business risks set out in the Prospectus. The underlying assumptions are subject to significant uncertainties and contingencies often outside the control of AAM and its Directors. Therefore, actual results often differ from forecast results because events and circumstances frequently do not occur as planned and these differences may be material. 3. Critical Assumptions The Trading Forecasts include a number of critical assumptions. The Directors have made available to us details of the assumptions used in developing the Trading Forecasts and have confirmed their assessment of their reasonableness and appropriateness, and that to the best of their knowledge and belief the documents and records supporting the assumptions are appropriate and reliable. We emphasise the following critical assumptions: a) that the Directors of AAM will secure experienced professional management of high calibre to manage the Apartment Hotel operations; b) that the Directors of AAM, through the operational management they appoint, will put into place detailed marketing and sales strategies and operational procedures so as to ensure successful penetration of target market segments; c) that at the lower levels of income pooling (less than 100 units) the internal staff of AAM will provide support to the Front Office and Marketing Departments; d) that the planned out-sourcing of guest services and operational requirements (such as housekeeping services, the provision of breakfast packs and similar operational elements) will not alter significantly from the quotations received by the Directors of AAM. The ability of AAM to meet the Trading Forecasts is influenced by many factors which are outside the control of the Directors or management of AAM, including: a) the level and location of additions to the competitive supply of hotel rooms or apartments in the market during the forecast period; b) the occurrence of major strikes in the hotel or airline industries in the forecast period; c) an unforeseen decline in domestic or international accommodation demand in the forecast period; d) the level of occupancy and average room rate which the property is able to achieve. The major assumptions made by the Directors' in the Trading Forecasts are set out in the section titled Forecast Projections in the Prospectus. 4. Opinion on the Trading Forecasts On the basis of our review and subject to the comments in this report: a) nothing has come to our attention which causes us to believe the Directors' assumptions taken as a whole, as referred to in the section titled Financial Projections, for the truncated year ending 31 December 1997 and the full calendar years ending 1998 and 1999, do not provide a reasonable basis for the Trading Forecasts; b) nothing has come to our attention which causes us to believe the Trading Forecasts have not been properly calculated based on these assumptions; c) nothing has come to our attention which causes us to believe the Trading Forecasts are not presented on a basis consistent with Australian accounting standards as in general use within the hospitality industry; d) nothing has come to our attention which causes us to believe the Trading Forecasts are not reasonable. In addition, we have reviewed the sensitivity analysis as set out in the Prospectus under the heading Financial Projections. In our opinion, the underlying assumptions used in assessing the impact on Net Operating Profit of occupancy and average room rate are reasonable. (emphasis added) 5. Subsequent Events We emphasis [sic] that any financial forecasts reflect predictions about future events, which frequently do not occur as expected and which are not capable of independent substantiation. The Trading Forecasts are also subject to assumptions as set out in the Prospectus under the heading Earnings Assumptions. In addition, the actual results of AAM will be dependent upon the management of risks to which AAM is exposed, as implemented by the Directors and management. Accordingly, it is not possible for us to warrant or guarantee that these forecasts will be achieved and we express no opinion as to whether or not the forecasts will be achieved. The Trading Forecasts should also be evaluated in the light of any events and changes in circumstances occurring after the date of this report. 6. Disclaimer This report has been prepared solely for the benefit of AAM and should not be used for any other purpose than as an expression of the opinion of Pannell Kerr Forster Consulting Australia Pty Ltd of the Trading Forecasts and the other related matters dealt with herein. No responsibility is accepted to any other party. PKFCA consents to the inclusion of this report in the form and context in which it accompanies the Prospectus. In preparing this report we have relied on information provided by AAM. PKFCA has not conducted an audit or detailed verification of the information provided to us. However, we believe, based upon our inquiries, and our evaluation of the information provided to us, that these are reasonable grounds for the statement of facts and opinion expressed herein." 17 Unfortunately, the Report cannot be properly understood without setting out much of the material from the section of the 1997 Prospectus on Financial Projections, including the following: "Earnings Assumptions The following assumptions have been made: · International & domestic visitor demand for accommodation forecasts materialise as previewed in Section 7 of this prospectus. · Additional accommodation supply is as described in Section 7. · An inflation rate of 4% per annum has been factored to account for increases in expenditure. · The Trust does not attract any income tax under the taxation law. · There will be no additional pre opening expenditure other than that forecast on page 40. · The Astor Goldsbrough Apartment Hotel will commence operating in February 1997. · During the initial set-up period, part of the administration costs will be borne by the Manager but then reimbursed by the Trust. · The average unit entitlements for studio, 1 bedroom and 2 bedroom apartments (page 14 and page 46) are representative and typical of the apartment mix. Please refer to Appendix 1 of this prospectus to identify the specific number of entitlements that refer to your particular property. · The Astor Goldsbrough Apartment Hotel will have a minimum of 100 apartments and a maximum of 250 apartments in February 1997 at commencement of operations. · Income will be distributed to participants on a monthly basis commencing on or before the 10th day of the following month. · All income will be distributed less a contingency fund of 2.5% of the net operating profit, which will be held over until the next distribution period, and shown as income on the monthly trading reports. This is designed to facilitate periodic operating expenses (non-monthly) and will provide participants with consistent income volume. A quarterly report and review of this contingency will be distributed to participants. Adjustments to income distribution will be actioned if the Trust Manager considers the contingency to be too high, and income distribution will be increased accordingly. … Forecast Earnings The Astor Goldsbrough Trust's earnings will reflect the pooling of income and expenditure to operate the Apartment Hotel. The Trust's estimated trading forecasts are given below for the period 1 February 1997 to 31 December 1999 for both a 100 and 250 apartment hotel. It should be noted that the forecast indicates trading results for a first period of 335 trading days then for calendar years. Trading Forecast Astor Goldsbrough Apartment Hotel Calendar Year ending 31 Dec Forecast 1997 Forecast 1998 Forecast 1999 (335 trading days) Apartment Hotel Size 100 250 100 250 100 250 Occupancy (%) 70% 70% 85% 85% 85% 85% Average Apartment Rate ($) 155.35 155.35 180.32 180.32 205.37 205.37 Room Rate Growth (%) - - 16% 16% 14% 14% Yield ($) 108.75 108.75 153.27 151.28 174.56 174.56 Yield Growth (%) - - 41% 39% 15% 15% Revenue Apartments 3,642,958 9,107,394 5,594,299 13,804,213 6,371,480 15,928,700 Food & Beverage 95,559 238,897 126,427 316,067 126,427 316,067 Telephone 155,190 387,975 238,317 588,059 271,425 678,563 Other 17,588 43,969 23,269 58,172 23,269 58,172 Total Revenue 3,911,294 9,778,234 5,982,312 14,766,511 6,792,601 16,981,502 Departmental Costs and Expenses Apartments 954,679 2,340,318 1,805,219 3,987,359 1,838,732 4,052,901 Food & Beverage 66,891 167,228 88,499 230,097 92,039 230,097 Telephone 116,392 290,981 203,569 458,686 211,712 529,279 Other 12,311 30,778 12,311 49,823 12,311 49,823 Total Cost of Sales 1,150,274 2,829,305 2,109,598 4,725,965 2,154,794 4,862,099 Departmental Gross Income Apartments 2,688,279 6,767,076 3,789,080 9,816,854 4,532,748 11,875,800 Food & Beverage 28,668 71,669 37,928 85,970 37,928 148,839 Telephone 38,797 96,994 34,748 129,373 59,714 149,284 Other 5,276 13,191 10,958 8,349 10,958 8,349 Total Gross Income 2,761,020 6,948,930 3,872,714 10,040,546 4,641,347 12,182,272 Undistributed Expenses Amort of pre-opening exps 36,672 36,672 39,956 39,956 39,956 39,956 Admin and general 243,678 340,048 276,120 385,320 287,165 400,733 Sales and marketing 218,577 364,296 349,084 574,255 363,048 597,225 Total Undistributed Expenses 498,926 741,016 665,160 999,531 690,169 1,037,914 House Profit 2,262,092 6,207,914 3,207,554 9,041,015 3,951,178 11,144,358 Basic Management Fee 78,226 195,565 135,852 307,143 141,286 353,215 Gross Operating Profit 2,183,866 6,012,349 3,071,702 8,733,871 3,809,892 10,791,143 Overhead Expenses Insurance 18,356 27,534 20,800 31,200 21,632 32,448 FF&E Reserve 27,534 27,534 31,200 31,200 32,448 32,448 Legal and Audit 9,178 9,178 10,400 10,400 10,816 10,815 Trustee 9,178 22,945 9,545 23,863 9,927 24,818 Trust Manager 39,113 97,782 57,926 153,572 70,643 176,608 Total 103,360 184,974 139,871 250,235 145,466 277,137 Profit before stamp duty 2,080,507 5,827,375 2,931,831 8,483,537 3,664,426 10,514,005 Stamp Duty 7,282 20,396 10,261 29,693 12,825 36,799 Profit before incentive fee 2,073,225 5,806,979 2,921,569 8,453,944 3,651,601 10,477,206 Incentive Management Fee 165,858 464,558 233,726 676,316 292,128 838,177 Net Operating Profit 1,907,367 5,342,421 2,687,844 7,777,629 3,359,473 9,639,030 Rack Rates The 1997 "rack rates" or "published rates" are $190 per night for a studio, $220 per night for a 1 bedroom apartment and $290 for a 2 bedroom apartment. These rates are reviewed annually. Revenue calculation The actual revenue is not based on rack rates but calculated on a cash receivable basis. Revenue is calculated taking into account two key factors: · Room mix · Market mix Room mix This reflects the physical number and type of apartments (studio, 1 bedroom, 2 bedroom, penthouse) occupied which generate a differing revenue mix, depending on the final physical mix, as well as demand for different room types. Market mix The anticipated market mix reflects the different market segments both within Australia and overseas. In calculating the revenue a market segment mix has been identified to reflect the market position of the Astor Goldsbrough Apartment Hotel and to plan and implement a marketing strategy to best achieve the defined objectives of occupancy levels, average room rates and yield. Strategic alliances with tour operators, corporate travel agencies and consumers, Government agencies, incentive and convention bodies and travel agents, are expected to achieve the trading forecasts contained in this prospectus. The revenue shown in the trading forecasts has been calculated to be net of commission payments and discounts to travel agents, tour operators, airlines and wholesalers. It is therefore calculated on a cash receivable basis. The anticipated market segment mix and discounts on the published room rates vary depending on the apartment type. These factors have been considered in preparing the trading forecasts. Should the market mix and room mix vary from the forecast, an indication of the impact of increases and decreases to occupancy levels and average room rates is shown in the sensitivity analysis on page 46 of this prospectus. Distribution of Income The Net Operating Profit of Subscribers Income will be distributed according to the number of Unit Entitlements of the Participants Apartment." 18 In the introductory part of the 1997 Prospectus, dealing with "common questions", question 5 was dealt with as follows: "What return will I receive on my investment less outgoings? The following table summarises the forecast monthly net returns as set out in section 11: Year ending 31/12/1997 31/12/1998 31/12/1999 monthly return monthly return monthly return Typical Studio $1,109-$1,243 $1,433-$1,659 $1,791-$2,056 Typical 1 Bedroom $1,588-$1,779 $2,051-$2,374 $2,564-$2,943 Typical 2 Bedroom $3,030-$3,395 $3,915-$4,531 $4,893-$5,616" That summary reflects the forecast unit entitlement income without reference to the outgoings or the sensitivity analysis. Suffice to say that it shows a very attractive return for a one bedroom unit purchased for $179,400, then tenanted for $260 per week. 19 On 9 February 1997 the applicant and Ward signed an application form which was part of the 1997 prospectus, and accompanied it with a cheque for $2880, being $12 per unit entitlement, and acquired units in the Trust. At about the same time they also signed a proxy form in favour of Ken Gresham or, in his absence, Murray Cameron, or, in his absence, Andrew Veron of Astor Management to vote at general meetings and annual general meetings, and a direction to the tenant of the lot to pay rent due to the trustee of the Trust. In doing so, I am satisfied that the applicant and Ward were influenced by reading the 1997 Prospectus, including section 12, being the Report. As counsel for PKFCA submits that questions of inducement and causation cannot be answered so broadly, I will return to those questions later. 20 Units were issued on 1 April 1997 and the operation of the Astor Goldsbrough Apartment Hotel then commenced. The applicant and Ward had expended $1,600 to renovate the unit to the standard required for entry to the Trust. Furniture was acquired and other miscellaneous expenses incurred. 21 The operation of the Trust can only be described as disastrous. Receipts were irregular and never approached the projected results. For example, during 1997 the highest gross receipt was at the rate of $3.63 per unit, totalling $871.20 per month. This compares with the return projected of between $1,588 and $1,779 per month. Income for that year, which was estimated to be between $17,471.48 and $19,574.63, was $4,627.20. Gross receipts in the early part of 1998 were at a lesser rate and virtually ceased in April 1998. Ultimately the Trust effectively ceased trading. On 20 April 1999 Young J of the New South Wales Supreme Court declared that the trustee "is now required to wind up the Astor Goldsbrough Trust … and that upon completion of winding up the Trust be terminated". The applicant and Ward took possession of their apartment in March 1999 and it was re-let shortly thereafter. The action is brought to recover the loss of income during the period of the Trust and for certain consequential expenses. So far as the respondent PKFCA is concerned, it is alleged that it was engaged in conduct that was misleading or deceptive or likely to mislead or deceive in contravention of s 52 of the Trade Practices Act 1974 (Cth), s 12DA of the Australian Securities & Investments Commission Act 1989 (Cth) ("the ASIC Act") and s 995(2) of the former Corporations Law. Pleading 22 It is convenient to set out the relevant portions of the Statement of Claim which plead the case involving the alleged contravention: "10. The Prospectus contained the following statements: … (g) that in the year ending 31 December 1997, if the hotel consisted of 100 apartments, the total revenue was expected to be $3,911,294, the gross operating profit was expected to be $2,183,866 and the net operating profit was expected to be $1,907,367 and if the hotel consisted of 250 apartments those figures would be respectively $9,778,235, $6,012,349 and $5,342,421; (h) that in the year ending 31 December 1998, if the hotel consisted of 100apartments, the total revenue was expected to be $5,982,312, the gross operating profit was expected to be $3,071,702 and the net operating profit was expected to be $2,687,844 and if the hotel consisted of 250 apartments those figures would be respectively $14,766,511, $8,733,871 and $7,777,629; (i) that in the year ending 31 December 1999, if the hotel consisted of 100 apartments, the total revenue was expected to be $7,792,601, the gross operating profit was expected to be $3,809,892 and the net operating profit was expected to be $3,359,473 and if the hotel consisted of 250 apartments those figures would be respectively $16,981,502, $10,791,143 and $9,639,030; … (k) that in the year ending 31 December 1997, if the hotel consisted of 100 apartments, the most likely annual return per unit was $76.29, the worst case was $72.43 and the best case was $87.71 and if the hotel consisted of 250 units, those figures would be respectively $85.48, $81.53 and $92.95; (l) that in the year ending 31 December 1998, if the hotel consisted of 100 apartments, the most likely annual return per unit was $107.51, the worst case was $101.73 and the best case was $123.00 and if the hotel consisted of 250 units, those figures would be respectively $124.44, $115.01 and $133.88; (m) that in the year ending 31 December 1999, if the hotel consisted of 100 apartments, the most likely annual return per unit was $134.38, the worst case was $127.61 and the best case was $152.52, and if the hotel consisted of 250 units, those figures would be respectively $154.22, $142.93 and $165.52; … 13. The PKF Report contained the following statements: (a) that there was a reasonable basis for the making by AGFM of the statements set out in sub-paragraphs (g), (h), (i), (k), (l) and (m) of paragraph 10 hereof. (b) that the statements set out in sub-paragraphs (g), (h), (i), (k), (l) and (m) of paragraph 10 hereof were based on proper calculations; (c) that the statements set out in sub-paragraphs (g), (h), (i), (k), (l) and (m) of paragraph 10 hereof were reasonable; (d) that there was a reasonable basis for the making by AGFM of the assumptions which underlay the statements in sub-paragraphs (k), (l) and (m) of paragraph 10 hereof. (such statements being together called "the PKF Report Representations"). … 21. The preparation by PKF of the PKF Report for inclusion in the Prospectus was: (a) conduct in trade or commerce; (b) undertaken by PKF well knowing that members of the public would take such Report into consideration in deciding whether or not to participate in the Trust. … 25. At the time that PKF made the PKF Report Representations: (a) there was no reasonable basis for making the statements referred to in subparagraph (a) of paragraph 13 hereof; (b) the statements referred to in sub-paragraph (b) of paragraph 13 hereof were not based on proper calculations; (c) the statements referred to in sub-paragraph (c) of paragraph 13 hereof were not reasonable; (d) there was no reasonable basis for the making of the statements referred to in sub-paragraph (d) of paragraph 13 hereof. Particulars (1) PKF was retained, as it well knew, to provide an "independent industry expert's report for inclusion in the Prospectus". It was PKF's duty, in the preparation of that report, to vigorously review and challenge the assumptions and projections set out in the Prospectus and to make an overall check as to whether the concept was economically feasible. (2) In particular, PKF was required to utilize, in preparing such report, its own knowledge and experience and, to the extent that it did not have appropriate knowledge or experience, PKF was obliged to conduct such enquiries or investigations as were necessary to arm itself with the information necessary to complete the task for which it had been retained. (3) Each of the forecasts or predictions found in the Prospectus and set out in sub-paragraphs (g), (h), (i), (k), (l) and (m) of paragraph 10 of the Statement of Claim [see, for example, pages 40-42 of the Prospectus] were based, inter alia, upon assumed occupancy rates. Those rates were 70% for 1997 and 85% for 1998 and 1999. No reasonable expert in the position of PKF could possibly have described such occupancy rates, or calculations arrived at by the application of such occupancy rates, as having a "reasonable basis". (4) Further, in relation to the same forecasts or predictions, the same occupancy rate is assumed, in each case, for a hotel with 100 rooms as for a hotel with 250 rooms. There was no reasonable basis for any such assumption, since a hotel of each respective size competes in a different market. (5) Further, in relation to the same forecasts or predications, the "average apartment rate" appears to have had no rational basis, either as found in the Prospectus or as otherwise determined. The starting point is $155.35 per room per night in 1997. That figure does not appear to be derived from any information contained in the Prospectus, although it may be an average of averages. This is an unreasonable basis for calculating room rate. It assumes that the suites will be occupied in the [sic] exactly the proportions of studios/1 bedrooms/2 bedrooms. (6) Further, in relation to room rates, there is no reliable basis stated for the "calculation" of average "hotel apartment rates" [see page 25 of the Prospectus]. No source of such material is provided, nor was it reasonable to apply such rates, if they were valid, to an hotel of the kind described in the Prospectus, since the concept of an "apartment hotel" was relatively new, and not clearly defined, at the time of the PKF Report. Further, there was no reasonable basis for predicting that the room rates for such an hotel would rise by 16% in 1998 and a further 14% on 1999, both of which predictions were fundamental to the calculations of profitability. (7) It follows that the calculations, for example on pages 40-42 of the Prospectus, were not proper calculations in that wrongly predicted occupancy rates and room rates were used, thus falsifying the results. No reasonable expert in the position of PKF, preparing a report for the inclusion in a prospectus, would have used or adopted such figures, or, therefore, concluded that the figures prepared by the First Respondent were reasonable or proper. (8) The statements referred to in sub-paragraphs (k), (l) and (m) of paragraph 10 were founded upon the assumptions that the figures adopted for the calculations set out at pages 40-42 of the Prospectus were reasonable. For the reasons given above, they were not reasonable and could not properly have been relied upon in determining the likely return per unit [see pages 44 and 45 of the Prospectus]. Once the underlying assumptions are demonstrated to be unreasonable or inaccurate, the mathematical calculations that depend upon such assumptions are rendered false. (9) Further, the description of the work carried out by PKF [found on page 49, line 29 to page 50, line 17] discloses that PKF made no enquiries of its own to ascertain whether such forecasts and predictions were reasonable, but merely relied upon what it was told by the First Respondent. That state of affairs is confirmed by the use, in the sub-paragraphs of paragraph 4 of the PKF Report [page 52 of the Prospectus] of the expression "nothing has come to our attention". It was not reasonable for an "independent industry expert" in the position of PKF merely to provide such a negative assurance; it was necessary for it to make its own enquiries before providing its report and such enquiries would have established that the predictions and forecasts propounded by the First Respondent, at least as to occupancy rates and room rates, were unreasonable and unrealistic. (10) What in fact PKF did was to take different assumptions and apply to them a different methodology from that adopted in the Trading Forecasts. That process was not fully or fairly disclosed, or for that matter disclosed at all in the PKF report. (11) In preparing its report, PKF failed to comply with Australian Auditing Standard 902 relating to the "review of financial reports". 26. In the premises, by making the PKF Report Representations, PKF engaged in conduct that was misleading or deceptive or likely to mislead in contravention of section 52 of the Trade Practices Act or section 12DA of the Australian Securities and Investments Commission Act." 23 Before turning to the evidence which bears upon the opinions expressed by PKFCA, there are some threshold matters to be considered. Threshold matters – nature of representations 24 It is submitted on behalf of PKFCA that the case cannot succeed (at least in the main) because all of the representations are pleaded as positive opinions as to reasonableness rather than as negative assurance opinions as they were framed. With one exception (as to the sensitivity analysis), it is correct that each of the opinions was expressed using the formula that nothing had come to the attention of PKFCA which caused it to believe that a state of affairs was not the case. A related point which was taken on behalf of PKFCA is that the opinions are not representations with respect to future matters, rather, they are representations concerning the past ("nothing has come to our attention") and the present ("which causes us to believe"). It is submitted that an opinion in this form is couched in terms of what the expert's inquiries up to the time of giving the opinion have revealed to the expert and no more. 25 Evidence has been led as to Australian accounting standards which are said to bear upon the content of a negative assurance by an expert in circumstances such as the present. Whilst such standards may well be relevant to the conduct of the expert in giving the opinion, I cannot see that they have any relevance to determining the meaning of what is said to the ordinary reader of a prospectus. The other general comment to make is that whilst it is convenient to analyse particular parts of the text of the Prospectus and the Report with some care, it is necessary to bear in mind that each is to be read as a whole and in its context. 26 The argument for PKFCA can be considered in relation to that part of section 4 of the Report which states the opinion of PKFCA that "nothing has come to our attention which causes us to believe the Trading Forecasts are not reasonable". In its baldest form, the proposition for PKFCA suggested that the words of the opinion should be taken quite literally, with the consequence that they cannot be falsified without showing that the belief expressed was not, in fact, held. This would require the practical equivalent of establishing a fraud case. Another way of putting it is that the only implied positive opinion would be that, based upon that which had come to the attention of PKFCA, it believed the Trading Forecasts were reasonable. What, if anything, does this imply as to the basis for that belief? This casts attention back to the earlier statements in section 4 of the Report immediately preceding the words in question. I would conclude that, as to assumptions, the expert is at least saying that, based upon what it knew, in its opinion the directors' assumptions provided a reasonable basis for the Trading Forecasts. It then was said that, based upon what the expert knew, in its opinion, the Trading Forecasts were properly calculated based upon those assumptions and were presented on a basis consistent with Australian accounting standards as in general use within the hospitality industry. The statement made in relation to the sensitivity analysis is positive in form – that the underlying assumptions as used in assessing the impact on Net Operating Profit of occupancy and average room rate are reasonable. I will return to the significance of that in due course. I will also return to the cumulative effect of the statements in section 4 of the Report. 27 There is little direct assistance to be gained from the authorities in relation to the content of an expert's so-called negative assurance. The only authority to which I was referred by counsel was John G Glass Real Estate Pty Ltd v Karawi Constructions Pty Ltd (1993) ATPR 41-249 ("Karawi Constructions"). The appellant was the estate agent acting for the vendor of an office building, and produced a brochure concerning the property which included a statement that the net lettable area of the building would be 180 square metres. It was found that the net lettable area in fact was significantly less. A description of part of the brochure taken from the judgment of the Full Court is as follows: "9. … On the front appears the words JOHN G GLASS and the firm's logo. On the inside of the front cover appear the insignia of some Real Estate organisations and the following: REAL ESTATE AGENTS SPECIALISING IN * Commercial and industrial sales, leasing and management * Prestige residential properties * Real estate investment consultants to Institutional investors and to developers of major properties 10. The next page simply bears the name of the appellant and its address, telephone and fax numbers together with its logo. Immediately before the back cover there is a page with the name and address of the appellant described as 'SELLING AND LEASING AGENTS" and the following: "The information contained herein has been prepared with care by our Company or it has been supplied to us by apparently reliable sources. In either case we have no reason to doubt its completeness or accuracy. However, neither John G Glass Real Estate Pty Limited, its employees or its clients guarantee the information nor does it, or is it intended, to form part of any contract. Accordingly, all interested parties should make their own enquiries to verify the information as well as any additional or supporting information supplied and it is the responsibility of interested parties to satisfy themselves in all respects." 11. On the inside of the back cover there is a statement extolling the virtues of land as a medium of investment. The back cover is plain glossy black." 28 The substance of the decision of the Full Court was as follows: "17. In our opinion an estate agent which holds itself out as, amongst other things, "consultants to institutional investors and to developers of major properties" would not be regarded by potential purchasers of properties as merely passing on information about the property "for what it is worth and without any belief in its truth or falsity". 18. Information of the kind in question, the net lettable area of a building, stands on a different footing from the puffery which often accompanies the sale of real property. The figure is one of hard physical fact. As the appellant's own calculations indicate, it is an essential factor in determining the likely profitability of a commercial building and hence its value. We think a purchaser like Karawi would ordinarily expect, to quote the terms of the appellant's own disclaimer, that the agent had no reason to doubt the completeness or accuracy of the information provided. 19. In the present case the appellant adopted the information in question and incorporated it as a central and prominent feature of their selling effort on behalf of the vendor. There was certainly no express disclaimer of the appellant's belief in the truth of the information in the brochure – indeed there was an express assertion of such belief. As part of its ordinary business the agent was providing information in a persuasive form with a view to achieving a sale of its principal's property and of course earning commission. It was this conduct which the learned trial judge, correctly in our opinion, held to be misleading and deceptive. Once the falsity of the figure was demonstrated, it seems to us that no other conclusion could follow." 29 My own limited research has revealed little direct guidance. In Heydon v NRMA Ltd (2000) 51 NSWLR 1 ("Heydon") at [428] McPherson A-JA said: "The statement in the Allen Allen & Hemsley letter and the due diligence report that "nothing has come to our attention … that causes us to believe that" there was anything misleading in the prospectus or in the conduct of issuing it does not amount to a warranty that the advice being given is correct, and it is not relied on as such. The formula adopted may perhaps be in common use on occasions like this; but it seems to me to be almost meaningless. If something had come to the defendants' attention that caused them to believe that the prospectus was misleading, it would almost certainly have amounted to fraud at common law to state the belief in the way they did; but that is because, according to Lord Justice Bowen's well-known aphorism, the state of a man's mind is as much a fact as the state of his digestion; and to misrepresent it is fraudulent. Perhaps the formula was intended to convey the idea that nothing had come to the attention of the defendants that should have caused them to believe there was nothing misleading in the prospectus; but that is not what it says and, even if it had said that, it is not clear to me that it would have made a difference to the defendants' liability in negligence. If it has any legal significance at all, it is only in relation to the defendants' alleged liability on the statute-based claims." (emphasis added) In dealing with the statutory claims, his Honour said: "431.A statement or representation which at common law might not perhaps give rise to liability because it is not one of fact, but of law or of opinion only, may nevertheless amount to "misleading conduct" for the purpose of s 52: see SWF Hoists & Industrial Equipment Pty Ltd v State Government Insurance Commission (1990) 6 ANZ Ins Cas ¶61-002; (76,688). That is because the effect of a representation falls to be judged under s 52 not, as at common law, by the state of mind or intention of the maker of the statement, but according to its effect or likely effect or impact on the person to whom it is directed: see Yorke v Lucas (1985) 158 CLR 661 at 666. However, in assessing its impact, a statement that is false is not necessarily misleading if, for example, it does no more than impart information apparently being passed on, for what it is worth, from another source without any concomitant belief in its truth or falsity: Yorke v Lucas (at 666); or if it is recognisable as an opinion that is not proffered or represented as necessarily being correct. In Inn Leisure Industries Pty Ltd (Prov liq app) v DF McCloy Pty Ltd (1991) 28 FCR 151 at 167, French J said that: "… Expert advice as to the law may convey the representation that it is based upon an underlying body of knowledge, experience or expertise possessed by the person proffering it or to which that person has access. The situations in which advice, expert or otherwise, as to the law may be misleading or deceptive for the purposes of s 52 will depend upon the context and circumstances in which it is proffered and the representations implied or expressed that accompany it." 432. If the advice is recognisable as expert opinion on the law, it carries the implication, but ordinarily no more, that, in arriving at it, reasonable skill and care has been used. Speaking of the practice of joining claims for negligence with claims under s 52, Gaudron J in Boland v Yates Property Corporation Pty Ltd (at 229 [104]; 602 [104]) said it was not uncommon: "… for such matters to be determined on the basis that the outcome of the negligence claim will determine the outcome of the s 52 claim. That seems to have been the premise upon which the present litigation was conducted. The premise is correct in this case, but only in the sense that, given the facts, if the conduct of the appellant was not negligent then it was neither misleading nor deceptive and, conversely, if that conduct was negligent, it was also misleading and deceptive." That case was one in which a claim against legal advisers for misleading conduct in the preparation of litigation failed because negligence was not established against them. It is true that, in Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 197, Gibbs CJ said that there was nothing in s 52 that would confine it to conduct engaged in as a result of a failure to take reasonable care, and that the liability imposed by s 52 in conjunction with s 80 and s 82 was "quite unrelated to fault"; but his Honour was speaking there of misleading conduct in the form of passing off, and not of conduct consisting of or constituted by giving a professional opinion. Here the persons to whom the opinion was conveyed or directed were the NRMA directors and inhouse lawyers, who were not simply inexperienced members of the public but for the most part experienced business men and women. As such they were entitled to assume that the advice had been arrived at with, or in the exercise of, reasonable skill and care, but not that it was warranted as correct or that it was necessarily proof against adverse decisions in the courts. 433. Again, in my opinion, it adds nothing to this assessment to refer in this context to the sign-off letters and the due diligence report. …" (emphasis added) 30 The other members of the Bench did not directly deal with the particular point, although Malcolm A-JA said (at [307]): "A claim in damages for misleading or deceptive conduct is dependent on the effect or probable effect on the person to whom the conduct is directed, as distinct from any want of care or state of mind of the person engaging in the conduct: Yorke v Lucas (1985) 158 CLR 661. Where a legal adviser gives an opinion there is not ordinarily any representation or warranty that the opinion is correct, only that a reasonable degree of professional care and skill has been brought to bear on the formation and expression of the opinion: see the formulation of the duty in the joint judgment in Rogers v Whitaker, (at 483) per Mason CJ, Brennan J, Dawson J, Toohey J and McHugh J. Where negligence and misleading or deceptive conduct are both pleaded based upon the same material facts, it is not uncommon for the result to be that they will succeed or fail together: Boland v Yates Property Corporation Pty Ltd, (at 229; 601) per Gaudron J. The liability under s 52 of the Trade Practices Act 1974 (Cth) when read with s 80 and s 82 is not based on fault in the context of passing off: Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 197, per Gibbs CJ. The position is different in the context of a person called upon to give a professional opinion." (emphasis added) 31 Bowler v Hilda Pty Ltd (1998) 80 FCR 191 was another case concerning representations by a real estate agent, but it is difficult to find any ratio decidendi relevant to the present problem. Black CJ decided the matter on review of the facts, Heerey J expressed views about some contentious matters of law and Cooper J took a different tack altogether. In any event, that case concerned the making of an unqualified statement of fact by an agent. This brought into play the various issues and lines of authority considered by Heerey J. The same, it seems to me, can be said of Karawi Constructions. The present case is different in character. The statements in question are limited on their face to the expression of opinion by an expert upon and in relation to statements by others. 32 I was referred to Escott v Barchris Construction Corporation 283 F Supp 643 (1968) ("Escott") and considered some other United States authorities. These authorities are of limited value because of the different statutory regimes. However, the nature of the statutory due diligence defence in the case of an expert otherwise liable in relation to a statement in a prospectus referred to in Escott is of interest, namely, that (at [53]): "… he had, after reasonable investigation, reasonable ground to believe and did believe, … that the statements therein were true and that there was no omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading …" In my opinion, this captures the essence of the duty of an expert in circumstances like the present. The discussion of materiality in Escott (see [30]-[34]) is also of interest. 33 In considering the effect of the Report, counsel for PKFCA has stressed the express limitation of the opinion to that part of the financial projections that are described as "Net Operating Profit". That, however, is the bottom line of the Trading Forecast for each of the relevant periods, and in turn forms the basis for the estimated return according to the number of unit entitlements. It is the critical figure in the sensitivity analysis. The interaction between the purported limitation and section 4 of the Report is, to say the least, opaque. Counsel for PKFCA seeks (for reasons which will become obvious) to divorce the bottom line profit forecast entirely from the earlier parts of the forecast so that, for practical purposes, all other parts of the projections, including the earlier parts of the table, can be ignored. I do not read the document in that way. At the most, in favour of PKFCA, section 4 can be read as if the words "of net operating profit" are added after "Trading Forecasts" where appearing. Even read in this way, it is not possible to divorce the forecast of net operating profit from other portions of the forecasts in the way contended. 34 In this connection, the so-called disclaimer in section 6 of the Report needs to be considered. The Report is described as "an expression of the opinion of Pannell Kerr Forster Consulting Australia Pty Ltd of the Trading Forecasts and the other related matters dealt with herein" rather than of just the Net Operating Profit. Section 5, dealing with subsequent events, also refers to the Trading Forecasts not just the bottom line. 35 Indeed, the structure of the opinion in section 4 of the Report makes this clear. It starts with the reasonableness of the directors' assumptions, moves to the Trading Forecasts having been properly calculated based on those assumptions, then deals with consistency of the Trading Forecasts with Australian accounting standards, and concludes with the overall reasonableness of the Trading Forecasts. It then reviews the sensitivity analysis. The starting point for the analysis is the assumptions by the directors. This is made clear in the paragraph preceding the opinion: "The major assumptions by the Directors' [sic] in the Trading Forecasts are set out in the section titled Forecast Projections in the Prospectus." 36 Some particular attention needs to be paid to the sensitivity analysis and the PKFCA statement about it. What is conveyed by the words "in our opinion the underlying assumptions used in assessing the impact on Net Operating Profit of occupancy and average room rate are reasonable"? It will be recalled that the sensitivity analysis showed the effect, respectively, of a reduction of five per cent in occupancy and an increase of five per cent in occupancy, and a reduction of five dollars in an apartment rate and an increase of five dollars in an apartment rate. Occupancy and apartment rate were identified as the two key variables impacting on results. The submission of counsel for PKFCA (consistently with the evidence of the author of the Report) was that the PKFCA opinion merely verified the arithmetic involved in the stated variations. It will also be recalled that the variations in the sensitivity analysis were identified as variations on the "most likely result". In my opinion, the PKFCA statement is calculated to, and does, relate to the reasonableness of the assumed variations in providing meaningful information to potential investors. The contention that it was merely arithmetic which was being checked is without substance or merit. I have no doubt that the promoters intended to, and did, convey the impression that the upper and lower variations were reasonable estimates of best and worst cases, to be compared with the most likely result. The importance of role of the sensitivity analysis appears from the Report itself, where it was said that: "It should be noted that our review does not attempt to confirm the achieveability of the Directors' Forecasts as there is a considerable degree of subjective judgement involved in preparing forecast financial information, particularly in relation to a specialised business such as an Apartment Hotel. Accordingly, investors should have regard to the sensitivity analysis and business risks set out in the Prospectus" (emphasis added) In my opinion, the role of the sensitivity analysis was to show a range which would properly account for the subjective judgments and business risks involved. Merely selecting an arbitrary (and relatively minor) mathematical variation is not the representation that this prospectus conveyed. This conclusion is of some importance, as the relevant statement in the Report was positive in form. 37 I reject the argument that the applicant fails because the representations are pleaded positively. For the same reasons, I reject the argument that for the representations to be falsified, or found misleading or deceptive, it is necessary to establish that the relevant belief or opinion was not held. On the other hand, it would not follow from the fact that it could be concluded that the belief or opinion expressed was objectively wrong that an expert opinion as to the forecasts of another would be misleading or deceptive. I agree with the substance of the opinions expressed in the case of Heydon to the effect that an independent expert does not, generally speaking, warrant the correctness of the opinion proffered. It is implicit, however, that such an expert will exercise the care, skill and judgment appropriate to the relevant field of expertise in forming and expressing the opinion. Were the opinions misleading or deceptive? 38 One matter should immediately be adverted to in this connection, namely, the expertise which was being exercised. Pannell Kerr Forster Australia was a firm of accountants with an established and substantial practice. There are aspects of the Report which might lead a reader to believe that it was an accountant's report: there was reference to audit, investigating accountant's opinion, detailed verification of information and Australian accounting standards. However, the Report is provided by PKFCA, which is described as an independent industry expert. An accountant would not normally be so described. The form of the Report seems to me to reflect expertise in both the hotel and hospitality industry and in accounting relevant to that industry, as might be expected from the consulting arm of a firm of accountants. As will appear, the author of the Report was a person with skills in the hotel and hospitality industry rather than accounting, and it was in that area that the controversy exists. However, the accounting flavour of the document could well (and, in this case, did, as will appear) add weight to the opinions expressed. 39 The case against PKFCA primarily consisted of a detailed report by Mr Warren Wilton. Wilton is a bachelor of commerce and a chartered accountant who, for many years, was a partner of Ernst & Young Australia. He retired from the partnership on 30 June 2000, but has been retained as a full-time consultant with his particular role being Director of Services to Property and Tourism clients. He had occupied the role of National Director of Services to the Property and Tourism industry at the time of his retirement from the partnership. He had also been Australian representative on the Ernst & Young International Property and Tourism Steering Committee. Over a number of years he has specialised in the property, construction and tourism area. He described his area of expertise as tourism, hospitality and leisure advisory, audit and assurance services, acquisition and due diligence, special investigations, prospectus, including investigating accountants' reports, and property advisory. He gave evidence of an impressive list of clients and a wide variety of specific assignments in the field. He is well qualified to express opinions as to all aspects of accounting as they relate to the prospectus in question, and I am satisfied that he is familiar with the business side of the industry and with the data available in that field, although he is not what might be described as a business expert. Wilton essentially provided a critique of the Report and the process and methodology by which it was prepared. He was very critical of many aspects of and relating to the Report, ranging from the procedures adopted to a number of issues of substance. He did not express any independent substantive opinion as to reasonableness of the promoters' forecasts or as to what a proper report might have concluded. 40 The author of the Report was Stephen Kelly. In 1977 he had obtained a diploma in catering and hotel operations at William Angliss College. In 1987 he was appointed a consultant to the Sydney office of PKF in their tourism and leisure section. By then, he had worked, since graduation, in the hospitality industry, mainly on the food and beverage side. In 1991 he left PKF and became the group operations manager for Resort Hotels Management Pty Ltd (the management arm of Resort Hotels of Australia). In 1992 he rejoined PKF, then Pannell Kerr Forster Consulting Pty Ltd, but left again in 1993 and started his own company, Hospitality Management Australia Pty Ltd, to provide consulting services to hotels and resorts, providing operational and strategic advice. In August 1995 he was approached by PKF and obtained a licence (or franchise) to use the name Pannell Kerr Forster Consulting Australia. Kelly became a director. Mr David Barbuto was appointed a director of PKFCA at the time. It provided tourism advice in the hospitality sector, its historical base being to provide market demand and feasibility studies for clients in the industry. Kelly was able to provide expertise in food, service and hospitality operations. Barbuto had experience in gaming. Neither had expertise as an accountant. Kelly has given evidence as to the steps he took to put himself in a position to draft the Report as he did, and his justification for the opinions expressed. He was hampered, to an extent, by reason of the fact that he was unable to locate some important back-up documents. 41 There is one fundamental difficulty with Kelly's position. His evidence as to his understanding of his role is reflected in par 10 of his statement, which is as follows: "In either the initial conversation with Catherine Warburton or conversations which I had with her shortly thereafter words to the following effect were said: CW: 'The apartment hotel complex will be managed by Astor Goldsbrough Management. They have engaged Lyndsay Mackee of Genitron 2000 Pty Limited to prepare forecasts for the prospectus. They don't need you to prepare a complete report on the viability of the project and the likely returns and room rates. This has already been done by Mr Mackee. They need you to review his figures for the purpose of preparing an industry expert's report.' SK: 'Does that mean you don't need me to complete a full report detailing the projected room rates and occupancy figures?' CW: 'Yes that's right. You will be signing off on the Directors' figures as prepared by Mackee'." 42 Lyndsay Mackee was identified in the 1997 Prospectus as one of the directors of the Trust manager. It was disclosed that Genitron had been paid a fee of $10,000 for providing its report and forecasts in the prospectus. Incidentally, it had been disclosed that PKFCA had been paid a fee of $15,750 for providing the Report. Section 7, "Overview of the Hotel and Serviced Apartment Market", commences as follows: "The following overview of the Sydney hotel and serviced apartment markets has been prepared for inclusion in this Prospectus by Genitron 2000 Pty Limited. The hotel and serviced apartment markets are relevant as the Astor Goldsbrough is an apartment hotel and thus draws on the hotel market and the serviced apartment market. As an apartment hotel the Astor Goldsbrough offers short term letting accommodation with features similar to a serviced apartment and a hotel. It offers apartments which are serviced daily and on check out (unlike a serviced apartment which is usually only serviced weekly and on check out) as well as offering all the facilities of a hotel. A capability statement and background of Lyndsay Mackee, director of Genitron 2000 Pty Limited is included in section 9, "Parties Involved". Lyndsay Mackee is a director of the Trust Manager." There is a biography of Mackee in section 9, where he is described as having an extensive background in the tourism and hospitality industry in Australia, New Zealand, Japan and Asia, Europe and the Americas, and Genitron is described as a company providing an integrated approach to business and marketing solutions for the tourism and hospitality industry. Mackee was said to have conducted extensive research and analysis of the Sydney accommodation sector and was identified as the author of section 7 and section 11 of the 1997 Prospectus. 43 The description of the scope of Genitron's work in section 11 was as follows: "In preparing the financial forecasts, Genitron 2000 Pty Limited carried out the following analyses and made appropriate enquiries to prepare a realistic business model for the Astor Goldsbrough Apartment Hotel. These analyses and enquiries consisted of: · extensive discussions with the CEO and staff of Astor Apartment Management Pty Limited; · regular site inspections of the Astor Goldsbrough Apartment Hotel, including the prototype display apartment; · consultation with a range of tourism industry participants, including tour operators, airlines, the Sydney Convention and Visitors Bureau, Tourism New South Wales, the Australian Tourism Commission and existing serviced apartment and hotel operators; · analyses of forecasts of domestic and international demand growth, forecasts from the Tourism Forecasting Council and Tourism New South Wales and the Sydney and Environs, Accommodation Demand and Supply Study – 1994/2000 initiated by the Tourism Olympic Forum were used in the preparation of the business model; · a benchmarking analysis of Sydney CBD Hotels and Apartments has been conducted to identify competitive positives and to establish a market position for the Astor Goldsbrough Apartment Hotel, through identifying optimum apartment features as well as proper consideration and analysis of service facilities to attract key market segments at competitive rates." 44 After the initial verbal instructions were confirmed in writing on 4 June 1996, Kelly, together with a subcontractor, Mr Len O'Mara, conducted an examination of the Genitron figures. Kelly gave the following evidence: "31. On or about 11, 12 or 13 June 1996, I had a conversation with Gresham to the following effect: SK: 'I don't agree with the methodology used by Mackee in deriving the room rates and occupancies. It will take too long for me to go through every step of the way that you have prepared your figures to the way I think would be appropriate. Instead, what I propose to do is run my own model which we have set up as a spreadsheet. If the figures that I come out with for occupancy and room rate accord with your figures, I'll be happy to sign-off on the figures prepared by Mackee. If they don't, the figures will have to be reviewed.' KG: 'I understand that. Will it cost me more?' SK: 'No, because we were always going to prepare our own demand and supply model as it is the only way we know to validate your results.' 32. I cannot recall whether I identified, in that conversation, the reasons for my disagreement with Mackee's methodology. The disagreement I had with Mackee's methodology related to his process of building his figures for occupancy and room rates. Mackee calculated the growth of occupancy and room rates by an analysis of competitors' hotels, projecting further annual occupations and room rates by an estimate of their market mix. In my opinion the preferable approach was to analyse historic compound growth trends and, using this as a base, apply these growth rates to determine market place estimates and derive the subject property's results as a percentage (market penetration) under a fair market share approach on an annual basis. PKFCA's demand and supply model adopted the latter approach." Kelly goes on to describe in some detail the steps that he and O'Mara took, which involved quite separate methodology to that of Mackee, utilising several special modelling databases and the supply of data from sources different to those apparently utilised by Mackee. His evidence was that he was satisfied that the total revenue forecasts and the net and gross operating profit forecasts in the 1997 Prospectus fell within a range that he considered reasonable in the circumstances, based upon his own assessment and he was therefore prepared to give the opinions that he did. 45 In closing address, counsel for the applicant gave as an example of a critical difference between Kelly and Mackee the express assumption made in the forecasts as to anticipated growth in room night demand, which included the following: "… forecast occupancy levels for 1998-2000 expected to be at or above 90%" The same proposition is put graphically showing occupancy levels in 1996 at 84.78%, 1997 at 90.71% and 1998 at 97.19%; in the sensitivity analysis for 1998 and 1999 the calculation forecast return if occupancy increased by five per cent depended upon occupancy levels of 90%. Kelly, on the other hand, held the view, then and now, that it is difficult to achieve more than 85%. 46 Kelly's evidence included the following: "14. Normally, when I am engaged as a consultant, my role is to prepare the projected room rates and occupancy figures and, from this, to determine the likely revenues and expenses of the proposed project. I then provide a report to the client, setting out my findings and assumptions relied upon. … 15. In this case, because projected room rates and occupancy figures had already been prepared by Mr Mackee ('Mackee'), I understood that my role in relation to the Astor Goldsbrough Apartment Hotel ('AGAH') was merely to confirm that the figures which had been provided to me were within a range which was reasonable in the circumstances. … 112. … Rather, my understanding was that PKFCA's role was to provide an opinion as to the overall reasonableness of the prospectus figures and, in particular, as set out in PKFCA's industry expert's report, the trading forecasts contained in the section headed 'Financial Projections' in the Prospectus (Section 11). My understanding was that PKFCA's role was not to verify every figure listed in sections 7 and 11 of the Prospectus but rather to determine whether, taken as a whole, those figures produced a result that was reasonable in the circumstances. As a result, while PKFCA reviewed the figures and statements in section 7 and 11 in a general sense, it did not do so for the purpose of determining whether each and every figure set out in that section was properly calculated. … 118. … As outlined above, my understanding was that PKFCA's role was to ensure the overall figures proposed in the Prospectus fell within a range that was reasonable, but did not extend to checking the accuracy of each figure and calculation. However, in the course of my review, I noted that many of the statements made in section 7 of the Prospectus were very broad and/or not properly referenced. … … 121. … As outlined above, PKFCA did not verify each and every figure in section 7 of the Prospectus since my understanding was that PKFCA was not, nor did it hold itself out to be, retained to check each and every calculation in the Prospectus. Having reviewed the overall results obtained by Genitron in the Prospectus, PKFCA took the view that the overall figures fell within a range that was reasonable. …" 47 In re-examination, Kelly gave the following evidence: "A number of times today you have been asked and given answers to the effect that your methodology differed from Genitron's methodology in certain respects? --- Correct. In what respects did your methodology differ from Genitron's methodology? --- Specifically where I object to Genitron's methodology as I understand it, they had taken what they believed were the competitors. They stated, Mackee stated that he had interviewed each of the general managers of those hotels or those operations. Some of them were obviously apartments and as a result of that he was able to state what the occupancy and room nights and rates were for historic band of years and then of the basis of what he said they had told him about sales mix for each of those properties. He was then able to take out the sales mix for the coming years and therefore calculate the rate, particularly the rate, but the rate and occupancy for those properties, property by property. We have never in our experience other than one market place being Adelaide ever got close to having all the properties in the area state what all their rates and occupancies were and be able to estimate through a range of devices and interview techniques what the rates were that they were giving out to corporates at 200 real nights a year versus leisure people and so on. So, our methodology, or our view was it was erroneous to do that because nobody could get that information even though we were getting it to some extent from a range of the competitors in our PKF trends database. We've always adopted the view that it was safer to rely on the BTR Tourism and Forecasting Council and ABS. Sorry, let me start again. In the historical drive we would use a compound rate based on known statistics put out by the ABS sources through BTR, ABS and international visitor surveys. That would conform our compound growths that we would use to drive forward the marketplace. The only market segmentation in room night demand levels that we ever felt comfortable with until the Tourism Forecasting Councils started to break things up in leisure versus business and conference was the breakdown of international and domestic. That was purely based on analysing the five year compounds, or three year compound growths, we used either depending on the time series and any changes. That was the basis that we grew – that we would traditionally use at the base to grow our market growth out. So, in a nutshell, we did not agree with the fact that anyone could sit there and say, 20 hotels and apartments across Sydney for the next three years were going to have this level of occupancy and rate each and this was their market positioning. We preferred to take the view that you could only grow and develop the market by the international and domestic known historical statistics and from that derive a trend." 48 In my opinion, it was misleading and deceptive to express the opinions as he did, without qualification, given his own evidence as to how he approached the task and the method by which he drew his conclusions. An ordinary reader of the 1997 Prospectus would reasonably conclude that one of the tasks (and perhaps the only task) which PKFCA had undertaken was an expert review of the Genitron forecasts and, as I have endeavoured to show, the bottom line cannot be severed from the methodology by which it is deduced. In my view, the least that was required was that Kelly for PKFCA should have disclosed the disagreement that he had with the methodology adopted by Genitron (and the effect of the disagreement upon the integers set out in the Forecast Tables), explained what PKFCA had independently done by way of investigation and methodology, and, in that light, expressed the opinion that the ultimate forecasts were within a reasonable range. That conclusion is emphasised in the present case by reason of the fact that Mackee was, effectively, a promoter who had been put forward as an expert. It was material to know that the chosen independent expert disagreed with the manner in which Mackee had approached the task. 49 In any event, it follows from the evidence of Kelly that there was no proper or reasonable basis for the statement in the Report which was made as to the sensitivity analysis, when properly understood, as he admittedly did not turn his mind to the real issue, but only concerned himself with arithmetic. 50 There is little debate about the principles involved – see Bulfin v Bebarfalds Ltd (1938) 38 SR (NSW) 423 and Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 at 463-468. Consideration of contravention of these sections in the context of a prospectus directed to a class consisting of a large number of different people with no link apart from ownership of apartments in the one building is approached at a level of abstraction not present where the representation is made to a particular individual or a small group of known persons. It is necessary to contemplate the effect of the conduct on the hypothetical reasonable members of the class (Campomar Sociedad Limitada v Nike International Ltd (1999) 202 CLR 45 at [101]-[105]). In my opinion, the omission of any reference to the matters to which I have pointed made misleading and deceptive that which was said in the Report. Having chosen to express an opinion, PKFCA was under an obligation not to mislead in doing so. Put another way, PKFCA did not hold the opinions it expressed in the manner those opinions would be understood by the reader, namely, that they related to the disclosed Genitron forecasts, not to some entirely separate exercise by the expert. 51 The alternative contention for the applicant that PKFCA did not have a proper basis for, and did not exercise proper care and skill in arriving at, the substantive conclusion to which it came as to the reasonableness of the bottom line forecast (albeit not expressed) raises different considerations. As I said, Wilton gave a detailed account of what he saw as deficiencies in the manner and method of PKFCA in carrying out its task. These deficiencies depended, in part, upon the application of certain Australian Securities Commission (as it then was) standards and certain accounting standards to what are described as negative assurance opinions. 52 Reliance was placed upon ASC Practice Note 67 issued 4 August 1997. Although this is after the prospectus was issued, Wilton gave evidence which I accept that it accorded with the understood practice amongst experts at the time of publication of the 1997 Prospectus. Some relevant portions of it are as follows: "PURPOSE 1. In this practice note, the ASC gives guidance about the standards it expects of disclosures with a director's or expert's financial forecast in a prospectus. It outlines the ASC's view that a prospectus must disclose the basis of any forecast so that investors can properly assess the forecast. The ASC also explains its view about the need for a supplementary prospectus if a forecast changes significantly. 2. This practice note does not set out when a forecast must be included in a prospectus. Directors must assess this on a case-by-case basis. However, the ASC considers that when directors consider that they do not have a reasonable basis for a reliable forecast then: (a) no forecast should be included; and (b) a forecast will not be required by s 996 or s 1022 of the Law. Directors should not include a forecast without a reasonable basis, even if they have used estimates of future performance for internal planning purposes or if comparable issuers have included forecasts in their prospectuses. A forecast that does not have a reasonable basis would not be material to investors, nor would an investor reasonably require it or reasonably expect to find it in a prospectus. … SUMMARY 4. An investor must be able to make an informed assessment of the reliability of a forecast. Therefore they must be able to assess: (a) the validity of the assumptions on which the forecast is based; (b) the likelihood of the assumptions actually occurring; and (c) the effect on the forecast if the assumptions vary. 5. The ASC recognises that excessive amounts of information should not be included in prospectuses because it makes them less comprehensible. However, the ASC considers that a prospectus must give investors enough information to assess any forecast it contains. A prospectus containing a forecast must tell investors about: (a) the assumptions made when preparing the forecast (see paras 19-21); (b) the limits of the forecast in terms of the period of the forecast and the risks that the forecast will not be achieved (see paras 23-26); and (c) an explanation of how the forecast was calculated. If the figures are not calculated on a basis that is in accounting standards or decisions of the Urgent Issues Group this will generally need to be explained (see paras 22-27). … FORECASTS 7. Prospective financial information can be prepared on the basis of assumptions about: (a) future events which management expects to take place; and (b) the actions management expects to take as at the date the information is prepared. (These are called "best-estimate assumptions".) Information about likely future results prepared on this basis may be referred to as a forecast. 8. Auditing Standard 804 issued by the Australian Accounting Research Foundation on behalf of the Institute of Chartered Accountants and Australian Society of Certified Practising Accountants, makes a distinction between a forecast and a projection. A financial forecast is generally understood to be prospective financial information based on: (a) best-estimate assumptions about conditions; and (b) events that may occur in the future and possible action intended by management. … PROVISIONS OF THE CORPORATIONS LAW … 18. The ASC considers the following matters of fact when assessing how the Law applies to a forecast in a prospectus (other than a s 1022AA prospectus): (a) What information do investors or their professional advisers reasonably require and reasonably expect to find in a prospectus in relation to a forecast so that they can make an informed assessment about the prospects of the corporation (or prescribed interest undertaking) on the basis of the forecast? (b) What information about a forecast is necessary so that the forecast is not misleading? … ASSUMPTIONS 19. A prospectus must disclose specifically the assumptions used to compile a financial forecast that materially affect the forecast outcome. The assumptions relating to expenditures, as well as revenues, should be disclosed in a profit forecast. The assumptions must give a reasonable basis for a forecast (as distinct from a projection). In a projection some assumptions will be hypothetical. However, the assumptions must still represent a realistic outcome or they will be likely to mislead. A clear statement of the assumptions on which the forecast is based puts a forecast in its proper context and reduces any tendency for it to be misleading. 20. The ASC expects prospectuses to disclose material assumptions about: (a) specific future economic conditions; and (b) particular circumstances affecting a corporation and the industries it operates in. An assessment of the impact of these assumptions on a forecast should also be included. However, the prospectus does not have to: (a) state general assumptions, such as the absence of war or natural disasters, unless the forecast takes these events into account; or (b) disclose assumptions that would not materially affect the forecast. Including a sensitivity analysis will often be the best way of showing how significant the key assumptions are to the forecast. (emphasis added) … Methodology 22. To assess the prospects of a corporation or prescribed interest undertaking based on a forecast, investors must be able to assess the reliability of the forecast. To do this, investors must be able to assess whether the key assumptions are likely to occur. Therefore, a prospectus must disclose the material details about the enquiries and research undertaken and the process followed in preparing the forecast. … RISK TO FORECAST 24. Any prospectus with a forecast must indicate what factors may lead to a significant difference between the forecast and the actual results. A forecast is likely to be misleading when the person making it has reason to believe that the actual results are likely to differ materially from those in the forecast. In these circumstances the person would not have a reasonable basis for their forecast and they should not include it. Use of ranges 25. Presenting a forecast in terms of a range (rather than a single point best estimate) makes the level of uncertainty in a forecast clearer. For example, the forecast could be that there will be a profit of 10 to 14 million dollars in the next financial year. There is a level of uncertainty inherent in any forecast. Presenting a forecast as a range may reduce the risk that investors will place undue weighting on it, as may occur with a single point forecast. However, giving a range is only appropriate for figures for significant totals, such as net profits or net assets. Ranges may be confusing or misleading if they are used for every item that appears in a profit and loss statement or balance sheet. 26. A range in a forecast must be small enough to give meaningful information about the prospects of the corporation or prescribed interest undertaking. The prospectus should state what variables will have a significant effect on the outcome within the forecast range. It may be misleading to include a range when the directors expect the results to be at the lower end of the range. If a forecast range is given, the linkage between the assumptions and the upper and lower ends of the range should be clear. It may be appropriate to express a forecast as a statement that a result of at least a certain amount is likely. (emphasis added) ACCOUNTING STANDARDS 27. A prospectus may show a forecast in the format of the corresponding financial statements required by the Law, such as a profit and loss statement or a balance sheet. These formats or references to terms such as "profits" create an expectation that the forecast is calculated under accounting standards. The ASC's view is, as a general principle, that the following should be disclosed in a prospectus: (a) the reasons for any departure from current accounting standard or decision of the Urgent Issues Group; (b) the reason a particular accounting standard is applied in a particular way when there is some discretion involved; and (c) the reason a particular accounting or disclosure treatment is adopted when current practices differ among the relevant professionals. The issuer should also disclose the effects on the forecast of the accounting treatment chosen. The effects should be disclosed in enough detail for investors to properly assess the forecast. The need to give reasons for preparing a forecast will not apply if it would not be material to investors. The ASC is not concerned with trivial or unimportant differences in accounting treatment in a prospectus. See also Practice Note 64. AVOID HIDING INFORMATION 28. If significant information about a forecast is presented in a way that investors are likely to overlook, the prospectus may be misleading: Fraser v NRMA Holdings Ltd (1995) 13 ACLC 132, Pancontinental Mining Ltd v Goldfields Ltd (1995) 16 ACSR 463. Therefore, a prospectus must present the information needed for assessing the reliability of a forecast in a way that clearly makes the connection between this information and the forecast. This normally means that the information about assumptions, and other matters underlying a forecast, must be found in the same part of a prospectus as the forecast itself. EXPERTS' REPORTS ON FINANCIAL FORECASTS 29. In Practice Note 43 the ASC has set out the additional standards it expects for the content of expert reports. Experts should refer to Practice Note 43 as well as this practice note for guidance when preparing a financial forecast, or a report on a financial forecast made by the directors or others, for a prospectus." 53 Prior to preparation of the Report, the attention of Kelly was drawn to auditing standard AUS 804. It commenced as follows: ".01 The purpose of this Auditing Standard (AUS) is to establish standards and provide guidance on engagements to audit and report on prospective financial information prepared using best-estimate and/or hypothetical assumptions. For engagements to review prospective financial information, refer to AUS 902 "Review of Financial Reports"." 54 AUS 902 was relied upon by Wilton in his criticism of Kelly and non-compliance with it is one of the particulars of breach. Whilst the standard must be viewed as a whole, it is helpful to set out some parts of it: ".01 The purpose of this Auditing Standard (AUS) is to establish standards and provide guidance on the auditor's1 professional responsibilities when an engagement to review a financial report is undertaken, and on the form and content of the report that the auditor issues in connection with such a review. 1The term "auditor" is used throughout this AUS. Such reference is not intended to imply that a person performing a review need necessarily be the auditor of the entity nor that the service being provided is an audit. The term is used to indicate that the work is required to be performed and the report prepared by persons who have adequate training, experience and competence in auditing. … .03 The objective of a review of a financial report is to enable an auditor to state whether, on the basis of procedures which do not provide all the evidence that would be required in an audit, anything has come to the auditor's attention that causes the auditor to believe that the financial report is not prepared, in all material respects, in accordance with an identified financial reporting framework (negative assurance). .. .06 The auditor should plan and perform the review with an attitude of professional scepticism, recognising that circumstances may exist which cause the financial report to be materially misstated. .07 For the purpose of expressing negative assurance in the review report, the auditor should obtain sufficient appropriate evidence primarily through inquiry and analytical procedures to be able to draw conclusions. … .09 A review engagement provides a moderate level of assurance that the information subject to review is free of material misstatement. The report provides this assurance in the form of negative assurance. (emphasis added) .10 While reviews involve the application of audit skills and techniques, they do not usually involve many of the procedures ordinarily performed during an audit. In an audit, because the auditor's objective is to provide a high, but not absolute, level of assurance on the reliability of the financial report, the auditor will use more extensive audit procedures than in a review. .11 Reviews involve limited procedures comprising inquiries of company personnel and analytical procedures applied to financial or non-financial information. Reviews of financial reports do not ordinarily involve: (a) a study and evaluation of internal accounting controls; (b) tests of accounting records; and (c) tests of responses to inquiries by obtaining corroborating evidence through: (i) inspection; (ii) observation; and (iii) confirmation. The auditor may, however, decide that additional information is required from management and/or additional procedures are necessary to obtain sufficient appropriate evidence on aspects of the financial report subject to a review (for example when the auditor has doubts as to the completeness and accuracy of the financial report). The acquisition of information in this way does not convert the engagement to an audit engagement. A review engagement may bring to the auditor's attention significant matters affecting the financial report, but it provides less assurance than would be provided by an audit that the auditor will become aware of all significant matters. .12 Although the procedures to be performed in a review will be less extensive than those necessary in an audit, the scope of the auditor's work remains the responsibility of the auditor and not that of the client. It is necessary for the auditor to consider, for example, whether any restrictions in the scope of the auditor's work imposed by the client are of such significance that a moderate level of assurance could not be provided. In such cases, the auditor would withdraw from the engagement and consider whether there is an obligation to report the circumstances necessitating the withdrawal to third parties. … .29 If the auditor has reason to believe that the information subject to review may be materially misstated, the auditor should seek additional information from the management of the entity and/or carry out additional or more extensive procedures to obtain sufficient appropriate evidence to be able to express negative assurance, or to confirm that a qualification is required. … .30 The review report should contain a clear written expression of negative assurance. The auditor should review and assess the conclusions drawn from the review evidence obtained as the basis for the expression of negative assurance. .31 Based on the work performed, the auditor should assess whether any information obtained during the review indicates that the financial report is not presented fairly in accordance with the identified financial reporting framework stated. If so, the auditor would request that the necessary revisions be made in the financial report. … .34 The review report should: (a) state that nothing has come to the auditor's attention based on the review that causes the auditor to believe that the financial report is not presented fairly in accordance with the identified financial reporting framework (negative assurance); or (b) if matters have come to the auditor's attention, include in the review report a separate section headed "Qualification" which describes the matters that were not presented fairly in accordance with the identified financial reporting framework, including the quantification of the effects of the matters or, if this is not readily determinable, a statement to that effect, and under the heading "Qualified Review Statement" either: (i) an "except for" statement of negative assurance; or (ii) an adverse statement that the financial report is not presented fairly in accordance with the identified financial reporting framework when the effect of the matter is of such a magnitude, or is so pervasive or fundamental that the financial report taken as a whole is, in the auditor's opinion, misleading or of little use to the addressee of the auditor's report; (emphasis added) (c) if there is a limitation in the scope of the engagement that, in the auditor's opinion prevents the provision of moderate assurance, include in the review report a separate section headed "Qualification" which describes the limitation and under the heading "Qualified Review Statement" a qualified statement of negative assurance that is qualified as to the effects of such adjustments, if any, as might have been required had the limitation not existed. There may be circumstances when the possible effects of a limitation are so pervasive or fundamental that the auditor will be unable to provide any assurance; (d) an emphasis of matter section, suitably headed and placed immediately after the Statement section, in the appropriate circumstances as described in AUS 702 (that is additional disclosure, inherent uncertainty, inconsistent other information and subsequent events that result in a new auditor's report or a revised financial report). The review report should not, except in these circumstances, draw attention to or emphasise any matter which has, in the auditor's opinion, been adequately dealt with in the financial report." It will be seen that the guidance to be obtained from ASC Practice Note 67 and AUS 902 is consistent with the opinions I have expressed. 55 Kelly gave evidence that he had received legal advice from Mallesons Stephen Jaques that it was not necessary to comply with the accounting standards. Be that as it may, Kelly gave detailed evidence of the steps which he, his subcontractor and staff had taken in carrying out his task. This led to a supplementary report from Wilton. In that report, Wilton continued to contend that PKFCA should have followed the accounting standards and did not, but also said: "24. Kelly claims that PKFCA did a considerable amount of work on information contained in the Prospectus on which he was engaged to report. From his Statement, it now appears that he may have undertaken more work than I gave him credit for in my original report. My difficulty in this area stems from his documentation which was not: · properly organized; · correctly indexed; · orderly; · systematically cross referenced; · designed to facilitate review; and · updated. The documentation sighted by me does not provide meaningful support for the prospective financial information on which PKFCA reported. Accordingly, I am [un]able to express an opinion as to whether or not PKFCA conducted their assignment in a professional manner as contemplated by Auditing Standards and ASIC Practice Notes. … 27. In Kelly's Statement, he explains the methodology used to prepare the Per available room/per occupied room (PAR/POR) analysis and the Demand and Supply model. The methodology includes a detailed description line by line for each computer model. I would have expected to see, in this instance, a detailed "model" with every line item of financial information on which he is reporting, agreed and cross referenced in a systematic fashion and "tied back" to detailed work papers. 28. The model would re-compute all numbers so as to detect the mathematical errors in the Prospectus and assure the overall robustness of the forecasts. For each line item, there would be an explanation or justification and/or verification of each number, amount or percentage as the case may be. In my opinion, the PKFCA work papers were disorganized, difficult to follow and incomplete, for example: - there was no evidence of updating the various models for the 100 and 250 apartment Astor Goldsbrough Apartment Hotel (demand and supply models and per available room/per occupied room analyses) for the numerous changes made over the six month period immediately preceding the issuance of the Prospectus; - there was a lack of justification or explanation for the assumptions used for each individual line item; - there was no indication that many of the queries raised and concerns voiced by Kelly were dealt with and why his concerns were dissipated to such an extent to allow him to issue his Independent Expert's Report; - the work papers were poorly identified, cross referenced and indexed; - mathematical errors in the draft and final copies of the Prospectus escaped detection; and - the financial projections (per available room/per occupied room analyses) were not properly or completely recalculated for the changes made in the financial year end reporting, for example, 30 June financial year end versus calendar year end basis. In my opinion, given the above deficiencies, PKFCA has not demonstrated that they properly conducted their review assignment in accordance with the standards and requirements detailed in my previous Report and this Supplemental Report to enable them to arrive at a professional opinion on the prospective financial information contained in the Prospectus upon which they were reporting." 56 In cross-examination, Wilton made it clear that he had not done a comprehensive critique of Kelly's statement and the documents produced with it, and did not revise his own statement line by line in response to it. Counsel for PKFCA did not seek to cross-examine Wilton in a comprehensive fashion designed to cause him to retract from particular opinions expressed in his first report. This leaves the trier of fact in a difficult situation. The issue of predicting the performance of this proposed apartment hotel is a subject requiring expertise. Wilton, who also has relevant expertise, raised a number of serious questions as to the care, skill and diligence with which Kelly carried out his task. Kelly, also with relevant expertise, gave an account which, on its face, appeared to answer or go towards answering many of the criticisms. There was an absence of either detailed refutation by or detailed cross-examination of Wilton about this evidence. 57 The consequence is that much depended upon the cross-examination of Kelly, which took place for about a day. I take into account the circumstance that the forecasts proved to be hopelessly wrong. Whilst this does not establish that there was no proper basis for the forecasts, and whilst there is a danger in the use of hindsight, the discrepancy here is so marked as to call for critical scrutiny of the evidence of Kelly. In the course of this cross-examination, he made some concessions and I was not convinced by his explanations in relation to some of the matters put to him. I must confess to feeling some disquiet during his evidence. However, he did not resile from his methodology nor the resultant opinion which he formed, which he says independently verified the bottom line of the forecast. In my view, no particular matter put to him was sufficient to destroy the basis of his opinion. I take into account the fact that Kelly's expertise in actually conducting or carrying out the business side of a forecast was, in my opinion, superior to that of Wilton. I note, in this connection, that Wilton did not do any such exercise himself. I also take into account the fact that Kelly did not attempt to comply with any of the relevant accounting standards and does not deal with the evidence that ASC Practice Note 67 codifies pre-existing practice. It is far from clear to me that, if his explanation as to what he did (and supervised) is accepted, there would be any material breach of either which would have operated here, apart from the lack of qualification of the opinions expressed to which I have referred. 58 My consideration of the evidence as a whole leads me to the view that the only basis for finding against Kelly on this aspect of the matter would be if I were prepared to hold that the exercise he undertook was not bona fide but was manipulated in order to arrive at a favourable result. I am not prepared to go that far, and, indeed, I doubt whether the cross-examination of Kelly and the submissions made on behalf of the applicant would permit that finding to be made. I therefore reject the alternative basis for finding that the Report was misleading or deceptive. 59 In coming to my conclusions as to whether the Report was misleading or deceptive, I have not relied upon s 51A of the Trade Practices Act (or the equivalent s 12BB of the ASIC Act and s 765 of the Corporations Law). The application of that section to a report of this character is controversial (Sykes v Reserve Bank of Australia (1998) 88 FCR 511 at 515, 520-521; Sydney Harbour Casino Properties Pty Ltd v Coluzzi [2002] NSWCA 74 at [48]-[53] and the cases referred to therein). There is no need to consider that issue further. Defences 60 In connection with defences, it is necessary to look more closely at the pleaded statutory causes of action. There was a degree of backing and filling by counsel as to whether s 52 of the Trade Practices Act or s 12DA of the ASIC Act was applicable. If they were both in force, then it was accepted that s 51AF of the Trade Practices Act would be applicable with the result that the ASIC Act would be the governing provision (cf GPG (Australia Trading) v GIO Australia (2002) 117 FCR 23 at [100]). However, counsel for the applicant points out that Div 2 of Pt 2 of the ASIC Act (including s 12DA) and s 51AF of the Trade Practices Act commenced operation on 1 July 1998 and would thus have no application to the circumstances of this case. That appears to be correct. In any event, the point is of little practical importance as the limitation provisions are the same in each case – whether pursuant to s 82(2) of the Trade Practices Act or s 12GF of the ASIC Act, each of which, at the time of commencement of this proceeding, had a limitation period of three years "after the day on which the cause of action accrued". The Trade Practices Amendment Act (No 1) 2001 (Cth) came into effect on 26 July 2001 and substituted a six year limitation period. Item 21 of Schedule 1 to that Amendment Act expressly provided that the extension of the limitation period from three years to six years applied to causes of action arising from conduct engaged in before 26 July 2001 if (and only if) the limitation period that applied before 26 July 2001 had not expired. In the case of the ASIC Act, the Financial Services Reform (Consequential Provisions) Act 2001 (Cth) came into effect on 11 March 2002. There was no provision that the extension applied to causes of action arising from conduct engaged in prior to the introduction of the amending legislation, and, according to ordinary principles, would have no application to proceedings commenced before the amendment. 61 This proceeding was commenced on 5 September 2000. It will be recalled that the applicant had acquired the units in the Trust on 1 April 1997. On one view, that was the time at which the damage was incurred. Counsel for the applicant submits that time only runs from the date when the applicant could have ascertained that more than a negligible part of the loss had been sustained, referring to Karedis Enterprises v Antoniou (1995) 59 FCR 35 ("Karedis Enterprises"), Blacker v National Australia Bank Ltd [2001] ATPR 41-817 and Murphy v Overton Investments (2001) 112 FCR 182. Counsel for PKFCA submits that, even if this is correct, the applicant had suffered ascertainable and quantifiable loss by August 1997, if not earlier. He referred to the fact that the June 1997 payment had not been received, as to which the applicant had not been given a satisfactory explanation, and to her evidence that she was aware that the return she was receiving was less than she had been accustomed to receiving from her tenants and that by the end of July 1997 she had calculated that she and Ward had suffered loss of $8,000 each. 62 As the various judgments in Murphy v Overton Investments illustrate, there is considerable doubt as to the application of these limitation periods. (The High Court granted special leave in Murphy v Overton Investments on 14 February 2003). I am inclined to the view that in a case such as the present, which does not have the complicating factors which existed in Murphy v Overton Investments, the cause of action was complete upon acquisition of the units, notwithstanding the decision in Karedis Enterprises. 63 It is not necessary for me to express a final view on this point, as the cause of action pursuant to s 995 and s 1005 of the Corporations Law "does not affect any liability that a person has under any other law" (s 1005(3)) and an action may be begun any time within six years after the day on which the cause of action arose (s 1005(2)). Section 995(2) provides that: "A person shall not, in or in connection with: (a) any dealing in securities … engage in conduct that is misleading or deceptive or is likely to mislead or deceive." and s 1005(1) provides (inter alia): "… a person who suffers loss or damage by conduct of another person that was engaged in in contravention of a provision of this Part may recover the amount of the loss or damage by action against that other person …" 64 Counsel for PKFCA accepts that this cause of action is available to the applicant, assuming it to be made out, but subject to the defence pursuant to s 1318. Section 1318 provides (so far as is relevant): "1318(1) If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity as such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default or breach but that the person has acted honestly and that, having regard to all the circumstances of the case, including those connected with the person's appointment, the person ought fairly to be excused for the negligence, default or breach, the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit. 1318(2) Where a person to whom this section applies has reason to apprehend that any claim will or might be made against the person in respect of any negligence, default, breach of trust or breach of duty in a capacity as such a person, the person may apply to the Court for relief, and the Court has the same power to relieve the person as it would have had under subsection (1) if it had been a court before which proceedings against the person for negligence, default, breach of trust or breach of duty had been brought. … 1318(4) This section applies to a person who is … (c) an expert in relation to a matter: (i) relating to a corporation; and (ii) in relation to which the civil proceeding has been taken or the claim will or might arise; …" There is a question as to whether liability pursuant to s 995 and s 1005 is a proceeding for default or breach of duty. I will assume, for the purposes of the argument, that it is. Counsel did not refer me to any authority as to the application of the section to an expert, namely, "a person whose profession or reputation gives authority to a statement made by him or her in relation to that matter" (s 9). The extension of the provision to include experts occurred in 1989. 65 The history of provisions like s 1318 in corporations law and trustee law is traced in Ford's Principles of Corporations Law, 11th ed, 2003, par 8.420. In relation to directors and officers of the company, it has been said that it is difficult to exercise in favour of the person who has received a benefit (Re International Vending Machines Pty Ltd [1962] NSWR 1408 at 1424; Gamble v Hoffman (1997) 24 ACSR 369 at 387). Counsel for PKFCA submits that to apply that statement to an expert would be close to rendering the extension nugatory, as most experts would be in receipt of a fee and would not be guilty of moral obloquy. I agree that it is not possible to directly apply the comments in relation to directors and officers who have wrongfully obtained a benefit, on the one hand, to professional experts, on the other. However, there are considerations in favour of being slow to utilise the section in relation to an independent expert's report in a prospectus. Acceptance of responsibility by an expert for the opinion expressed is an important aspect of the protection for investors. The ASC guidelines which are in evidence underline this by discouraging disclaimers. Nonetheless, cases can be conceived where it may be appropriate to relieve an expert from liability, even in the case of a report for a prospectus. In my opinion, this is not one of them. This was a conventional professional assignment, undertaken for reward, under circumstances where the expert expressly consented to the use of the Report in its very context. The Report was voluntarily and deliberately made. Failure to comply with the relevant accounting standards is not critical to the liability that I have found, which removes one of the bases put forward by counsel for PKFCA for application of s 1318. The discretion to be exercised according to the section is wide (Daniels v Anderson (1995) 37 NSWLR 438 per Clarke and Sheller JJA at 524-525; Kenna & Brown Pty Ltd v Kenna (1999) 17 ACLC 1183 and Circle Petroleum (Queensland) v Greensdale (1998) 16 ACLC 1577) and I decline to exercise it. Thus, whatever the position may be about the limitation period for proceedings pursuant to the Trade Practices Act and the ASIC Act, contravention of the Corporations Law has been established. Was loss or damage suffered? 66 Attention then needs to be focused upon whether the applicant suffered loss or damage by the contravening conduct of PKFCA. There is no doubt that loss was occasioned by acquiring the units. The question is whether the misleading conduct caused the acquisition. This is a causation question. It is similar to the question of inducement which arises in relation to innocent or fraudulent misrepresentation. Although the way in which evidence was led from the applicant caused some confusion as between the 1996 and 1997 versions of the Prospectus, which was, naturally, seized upon by counsel for PKFCA, I am satisfied that both the applicant and Ward read and considered the 1997 Prospectus, including the Report. I am also satisfied that reading the unqualified Report influenced each of them in favour of the investment and contributed to their decision to make the investment. The position can be encapsulated in a passage from the evidence of the applicant: "I saw it as PKF … telling me that they had looked at everything in that prospectus and they said it was reasonably sound and it was good information that was being provided." Counsel for PKFCA sought comfort from the fact that the way that the applicant and Ward explained the effect of the Report upon their minds did not precisely accord with the manner in which the representations were pleaded. I do not think that any variation is material. Furthermore, in my opinion, the impression gained by the applicant is consistent with the substance of the opinion expressed by PKFCA about the sensitivity analysis to which I referred earlier. The applicant did expressly advert to what was said about that. That alone is sufficient to provide the necessary causal link between the Report and the applicant and Ward entering into the transaction. 67 In relation to each of the applicant and Ward, counsel for PKFCA sought, in cross-examination, to elevate their understanding of the Report to an audit level, and so greater than any representation which was made. Whilst some individual answers might be consistent with that thesis, it was not established when the evidence is understood as a whole and in context. It needs to be borne in mind that this kind of evidence is, of its nature, hypothetical, with persons trying to recall well after an event what might have motivated them to enter or not enter into a transaction. It is unrealistic to expect that fine shades of meaning of particular statements, and their effect upon the mind, will be particularly recalled. Counsel for the applicant referred to what he described as the classic formulation by Lord Halsbury in Arnison v Smith (1889) 41 ChD 348 at 369: "A person reading the prospectus looks at it as a whole … You cannot weigh the elements by ounces … if the court sees on the face of the statement that it is of such a nature as would induce a person to enter into the contract, or would tend to induce him to do so, or that it would be part of the inducement to enter into the contract, the inference is, if he entered into the contract, that he acted on the inducement. …" The matter was well put again by Lord Halsbury in Aaron's Reefs Ltd v Twiss [1896] AC 273 at 280-281: "But I must protest against it being supposed that in order to prove a case of this character of fraud, and that a certain course of conduct was induced by it, a person is bound to be able to explain with exact precision what was the mental process by which he was induced to act. It is a question for the jury. If a man said he was induced by such and such an inducement held out in the prospectus, I should not think that conclusive. It must be for the jury to say what they believed upon the evidence. Looking at the evidence in this case, I should say if I were a juryman that this was a very fascinating prospectus, and was calculated to induce any one who believed the statements in it to invest his money in the concern." 68 The same point has been made in numerous cases since, in comparable circumstances: Gould v Vaggelas (1985) 157 CLR 215 at 236; Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 at 578; Sibley v Grosvenor (1916) 21 CLR 469 at 473, 478, 481-482; Dominelli Ford (Hurstville) Pty Ltd v Karmot Auto Spares Pty Ltd (1992) 38 FCR 471 at 482-483; Lam v Ausintel Investments Australia Pty Ltd (1989) 97 FLR 458 at 477-478; Smith v Chadwick (1882) 20 ChD 27 at 44; Barton v Armstrong (1976) AC 104 at 120; Australian Steel & Mining Corporation Pty Ltd v Corben [1974] 2 NSWLR 202 at 207-209; and Duke Group Ltd (in liq) v Pilmer (1999) 153 FLR 1 at 71-72 (unaffected on this point by the decision on appeal: Pilmer v Duke Group Ltd (in liq) 207 CLR 165). 69 It is not necessary that the misleading statement or statements be the sole or dominant cause of the entry into the transaction – it is sufficient if it was a cause of (in the sense of materially contributing to) the loss (Henville v Walker (2001) 206 CLR 459 at [14], [61] and [63]; I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 76 ALJR 1461, 192 ALR 1 at [33], [57], [62] and [90]. I am satisfied that misleading, unqualified opinions constituting the contravention caused (in the sense explained) the applicant and Ward to enter into the transaction. 70 It was contended by counsel for PKFCA that Ward's evidence of reliance was entirely misplaced, firstly because he would not have relied upon the Report if he had been told that PKFCA were not qualified accountants and, secondly, he conceded that if he had been told that PKFCA had not done a detailed verification of the information provided to them then he would not have relied upon the Report. As to the first, the position of PKFCA was ambiguous. Pannell Kerr Foster was a firm of chartered accountants known as such to the applicant and Ward. The particular status and expertise of PKFCA was not spelled out in the expert opinion. Much of the language of the Report is consistent with PKFCA being accountants – for example, the reference to audit, investigating accountant's opinion, and consistency with accounting standards. As to the second, it is unrealistic to divorce the particular statement to which counsel referred from the rest of the Report, in particular statements such as: "… we have made such inquiries and performed such procedures in relation to the respective years as are reasonably able to be made or performed and as we, in our professional judgment, consider appropriate …" "We have also obtained such other information and explanation as was considered necessary for the purposes of this report." Indeed, the words relied upon were immediately followed by: "However, we believe, based upon our inquiries, and our evaluation of the information provided to us, that these [sic] are reasonable grounds for the statement of facts and opinion expressed herein." Applying the principles to which I have referred, I am satisfied that the misleading statements were a material contribution to the decision of Ward to acquire the units in the Trust. This aspect of the argument has echoes of the arguments about disclaimers, for example, in Lezam Pty Ltd v Seabridge Australia Pty Ltd (1992) 107 ALR 291 at 312-313; Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 39 FCR 546 at 561; Clark Equipment Australia Ltd v Covcat Pty Ltd (1987) 71 ALR 367 at 371; and Leda Holdings Pty Ltd v Oraka Pty Ltd (1998) ATPR 41-601 at 40-516. Quantum 71 The next issue is the quantum of the loss, if any, which was sustained. In the end, there was little argument as to the appropriate method of calculating loss, the applicant having not pursued either a claim for expectation loss or a claim for the whole, rather than half, of the loss incurred in relation to the use of the apartment. It is accepted that the methodology of revised alternative 2 set out in exhibit J is appropriate. That takes account of a calculation error which was conceded. 72 Two issues are left. The first relates to the estimated gross income per week. It was contended for PKFCA that the figure should be reduced by ten dollars in each case, based firstly upon the fact that in March 1997 the apartment was let at $260 per week rather than $270 per week and, secondly, upon a concession by the valuer concerned that it would not be unreasonable to discount the estimates by ten dollars per week. I do not agree that there should be any such adjustment. The opinion of the valuer was expressed having considered the rental history of a number of apartments in the same building, and in buildings in the vicinity. The point which was put to him was that he had assessed $270 per week between April 1997 and 30 June 1997 based upon another apartment in the building, whereas in March 1997 the particular apartment in issue had been let for $260 per week. He declined to alter his opinion because he pointed out that if the rental started off at $260 per week in March it may well have risen to $270 by the following months. Neither did he concede that there should be a ten dollar discount per week. His point was that as valuation is not an exact science he might just as well increase by ten dollars per week as discount by ten dollars per week. 73 The other issue relates to an amount for the cost of leasing furniture. It was a term of the entry into the arrangement with the Trust that the apartment be furnished. The point made for PKFCA is that the furniture remained in the unit when possession was retaken and the unit was let thereafter on a furnished basis. It was said that the evidence showed that the furniture was still in good condition. The evidence on the point is scant and the submissions sketchy. There obviously would be some deterioration in the condition of the furniture during the period of use, and there was a financing cost attached to having furniture available in the first place. Prima facie, the applicant would be entitled to the diminution in value of the furniture plus an amount for the interest cost of providing it. What has been proved is that the furniture was provided by way of a leasing arrangement of some kind involving the Australia & New Zealand Banking Group Ltd, in relation to which the applicant and Ward ultimately paid $11,826 pursuant to a guarantee as apparently the lease had been with the Trustee. This would incorporate financing charges. In addition, on resuming possession of the unit, the applicant and Ward paid an amount of $3,744 to acquire the furniture from the ANZ Bank. Doing the best that I can, I would assume that the furniture was acquired from ANZ Bank at market value. I can see no proper basis for including this as a head of loss. On the other hand, I see no reason for discounting the other amount paid to the ANZ Bank, assuming, as I do, in the absence of argument on the point, that it represents in substance the cost of the furniture over the period of occupation including both interest and depreciation. 74 In the result, there should be judgment for the applicant (on my calculations) in the sum of $18,602.20. I will refrain from making any formal orders until the parties have had an opportunity of considering these reasons. The parties can also put submissions as to costs and should draw my attention to any necessary matter which I have overlooked. The orders to be made should incorporate directions for resolution of the balance of the proceeding. The matter will stand over for further argument. 75 I should briefly deal with one other matter. During final address, counsel for the applicant sought to amend the statement of claim by the addition of the following representations: "(a) that PKF, a party independent from the Directors, had conducted a review of the Trading Forecasts and sensitivity analysis, the manner, scope and conclusions of which review were fully and fairly disclosed in its report; (b) that by reason of that review, a potential investor was entitled to have a moderate level of assurance: 1. that the Directors' assumptions provided a reasonable basis for the Trading Forecasts; 2. that the Trading Forecasts has been properly calculated on those assumptions; 3. that the Trading Forecasts had been presented on a basis consistent with Australian accounting standards as in general use within the hospitality industry; 4. that the Trading Forecasts were reasonable; 5. that the assumptions underlying the sensitivity analysis were reasonable." 76 I declined to permit the amendment, over the objection of counsel for PKFCA, on the basis it was too late, and added that I did not see it as being necessary. I do not think there is the need for further reasons. The transcript records the debate. Particulars (10) and (11) of par 25 were added by amendment pursuant to leave granted during final address as they raised no surprise or any issue which had not been litigated. Although this was opposed by counsel for PKFCA, he did not seek to lead any further evidence thereafter. I certify that the preceding seventy-six (76) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gyles. Associate: Dated: 14 March 2003 Counsel for the Applicant: MJ Leeming, K Richardson Solicitor for the Applicant: Slater & Gordon Counsel for the Second Respondent: I Jackman SC, S Philips Solicitor for the Second Respondent: Minter Ellison Date of Hearing: 14-18, 22 October 2002 Date of Judgment: 14 March 2003