FEDERAL COURT OF AUSTRALIA North East Equity Pty Ltd v Proud Nominees Pty Ltd [2007] FCA 1587 NORTH EAST EQUITY PTY LTD (ACN 009 248 819) v PROUD NOMINEES PTY LTD (ACN 074 270 938) AND DAVID LEWIS PROUD WAD 58 OF 2006 RARES J 25 SEPTEMBER 2007 PERTH IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY WAD 58 OF 2006 BETWEEN: NORTH EAST EQUITY PTY LTD (ACN 009 248 819) Applicant AND: PROUD NOMINEES PTY LTD (ACN 074 270 938) First Respondent DAVID LEWIS PROUD Second Respondent JUDGE: RARES J DATE OF ORDER: 25 SEPTEMBER 2007 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The document headed 'Respondents' Reasonable Grounds' will be marked for identification 2. 2. The respondents be permitted to rely upon the matters in the document marked for identification 2 as a basis for contending that they had reasonable grounds for the purposes of s 51A(2) of the Trade Practices Act 1974 (Cth) in answer to paragraph 14 of the further re-amended statement of claim. 3. The applicant have leave to make any further objection to, and to apply for any order seeking a limitation on the use of, any of the evidence already admitted or on which the respondents seek to rely referred to in the document marked for identification 2. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY WAD 58 OF 2006 BETWEEN: NORTH EAST EQUITY PTY LTD (ACN 009 248 819) Applicant AND: PROUD NOMINEES PTY LTD (ACN 074 270 938) First Respondent DAVID LEWIS PROUD Second Respondent JUDGE: RARES J DATE: 25 SEPTEMBER 2007 PLACE: PERTH REASONS FOR JUDGMENT (REVISED FROM THE TRANSCRIPT) 1 The respondents seek to rely upon a number of matters in the statement of the second respondent, David Proud, of 6 March 2007, which go to whether they had reasonable grounds for making a number of representations within the meaning of s 51A of the Trade Practices Act 1974 (Cth). The representations were pleaded in the statement of claim. They concern, substantively, the proposed design and capacity of parts of a carrot processing plant, to be constructed at North East Equity Pty Ltd's then existing Sumich production line, at Mandogalup in Western Australia. 2 The representations pleaded were made over a period of time during the second half of 2002 (see pars 7, 8, 9 and 12 of the further re-amended statement of claim). The pleading alleged they were made orally and in writing. The further re-amended statement of claim also made allegations, substantively, to the same effect in respect of claims in contract and in negligence. Among others, Mr Proud is sued as an accessory under s 75B of the Act. It is alleged that: · he aided, abetted, counselled or procured the contraventions by his company Proud Nominees Pty Ltd, trading as Proud Machinery, by making the representations sued on (see par 20); · he was knowingly concerned in, or party to, those contraventions. The particulars of this plea allege that Mr Proud had actual knowledge of all the material facts said to give rise to the contraventions. That conformed with the way in which the High Court has interpreted the imposition of accessorial liability under s 75B: see Yorke v Lucas (1985) 158 CLR 661 at 667 per Mason ACJ, Wilson, Deane and Dawson JJ. 3 In addition, the negligence claim asserted that Mr Proud and Proud Machinery made the representations with the knowledge and intention that North East Equity would rely on them so as to induce it to purchase the new production facilities and to commission Proud Machinery to procure the design and installation of those facilities. The negligence plea alleged that Mr Proud and Proud Machinery held themselves out as being capable of designing, procuring and installing the new facility by making the representations themselves and that they assumed responsibility to design, procure and install the new plant for North East Equity so as, among other things, to give rise to a duty of care in that design, procurement and installation. The breach of the duty was alleged to have occurred by the failure of the design and installation to achieve what was represented. 4 North East Equity alleged that it relied on the representations to enter into the contract of purchase and to pay over $3 million, together with other moneys, so as to install the new plant. In addition, it asserted that it removed so much of its old plant as was to be replaced and then began to use the new plant, suffering damage by reason of its inadequacy. 5 North East Equity pleaded that as a result of the representations, breach of contract and breach of duty of care, it suffered loss and damage. It particularised that, among other things, it would not have entered into the arrangements to install the new plant, purchase it or incur the cost of doing so. It also claimed for loss of profits which the under-performance of the plant, when operating, was alleged to have caused. 6 Proud Machinery was alleged to be a distributor of the equipment which it contracted to supply. There is an issue as to the extent to which it was responsible for the design of the new plant. 7 The further re-amended statement of claim pleaded the various representations, in pars 7, 8, 9 and 12. Par 9(a) alleged that Mr Proud spoke with Nicola Tana (the principal of North East Equity) by telephone or in person and made a representation that Proud Machinery and Mr Proud were possessed of sufficient knowledge, skill and experience to design, procure and install the new line or plant. Then par 14 pleaded that all the representations alleged in pars 7, 8, 9 and 12, (including par 9(c)), were representations as to future matters and that North East Equity '… will rely on s 51A of the Act'. 8 In the second amended defence, the respondents answered par 14 by repeating their several defences to pars 7, 8, 9 and 12 in the further re-amended statement of claim, which plead the representations. And, in par 14.2, the respondents made the express allegation that only representation 9(a), which was relied on in par 14 of the further re-amended statement of claim, was a representation as to an existing matter and was not a representation as to a future matter. There was a cumulative denial of the balance of the representations. 9 The defence never alleged that the respondents had reasonable grounds for making any of the representations on which North East Equity relied as future matters. 10 On 21 June 2007 I directed the parties to prepare an agreed statement of the issues which I would have to decide for trial. A first attempt at that exercise produced unsatisfactory diversity between the parties as to what they said the issues were. A second attempt produced a much greater correspondence in the issues. Those issues included whether: · the representations were representations as to future matters within s 51A of the Act; · North East Equity relied on the representations; · Proud Machinery and Mr Proud had sufficient knowledge, skill and experience to design, procure and install the new line; and · Proud Machinery and Mr Proud were negligent in that design, procurement and installation. 11 When North East Equity's case was opened, senior counsel adverted to the fact there was no responsive pleading by Proud Nominees and Mr Proud suggesting that they had reasonable grounds under s 51A(2). After coming to the conclusion of North East Equity's case, apart from the tendering of expert evidence which I directed be taken with the experts for all parties concurrently at the close of the lay evidence, counsel for Proud Nominees and Mr Proud opened his case and sought to read Mr Proud's substantive statement. During the course of debate over the admissibility of that statement and the opening it became clear that there was disagreement between the parties as to whether Proud Nominees and Mr Proud were entitled to rely upon matters in the evidence and their intended evidence to show that they had reasonable grounds for making any of the representations. 12 North East Equity relied on the absence of any plea by Proud Machinery and Mr Proud claiming that they had reasonable grounds for making the representations. It said that this was fatal to their ability to raise this point now. North East Equity said that it would be prejudiced in the presentation of its case. It said it had prepared on the pleadings and the issues and did not investigate any of the representations as being future matters for which there was no reasonable basis. That is, North East Equity said it was proceeding on the basis that having pleaded its reliance on s 51A, it was entitled to assume, in the absence of a plea to the contrary, that there would be no issue that, if the representations were established to be representations with respect to future matters, there were no reasonable grounds to which the respondents could point to support them. 13 In that respect they have the support of decisions of French J in State of Western Australia v Bond Corporation Holdings Ltd (1991) ATPR 41-081 at 52,279 and Foster J in Truth About Motorways Pty Ltd v Macquarie Infrastructure Investments Ltd (1998) ATPR 41-633 at 40,981. In the former case French J said that a party invoking the application of s 51A for a representation as to a future matter should make clear that it is doing so. He said that would put the respondent on notice that if the representation were found to have been made, it had the burden of showing, and had to plead, that it had reasonable grounds for making it. 14 In the second case, Foster J said that if an applicant asserted positively the absence of reasonable grounds for making a prediction, it had to plead the relevant factual matters specifically, although not the evidence upon which the assertions were based. He said that if s 51A was also relied upon then a respondent, in its defence, had to deal with those factual allegations as to the absence of reasonable grounds and also, in order to counter the deeming effect of s 51A, it had to assert positively the facts relied upon as establishing the reasonable grounds. 15 Heerey J, with whom Sundberg J agreed, in Sykes v Reserve Bank of Australia (1998) 88 FCR 511 at 513F-G, 521F elaborated the content of what reasonable grounds are. Heerey J said that where s 51A was relied on, intentions of a respondent who was alleged to have made representations as to a future matter without reasonable grounds, in contravention of s 52, were not to the point. He said that if there were a representation as to a future matter, s 51A required the representor to show: (1) some facts or circumstances; (2) existing at the time of the representation; (3) on which the representor in fact relied; (4) which are objectively reasonable; and (5) which support the representations made. 16 Heerey J went on to say that there was no necessary connection between the reasonable grounds and the subsequent circumstances which resulted in the predicted state of affairs not occurring. In the present case, as I understand the allegations in the pleadings and the evidence thus far, the interconnection between the absence of reasonable grounds and the predictions not occurring is much closer. 17 More recently in Fubilan Catering Services Limited v Compass Group (Australia) Pty Ltd [2007] FCA 1205, French J considered the operation and pleading of s 51A. He pointed out that the pleading there asserted that in making representations the respondents engaged in conduct that was misleading or deceptive, or likely to mislead or deceive, contrary to s 52 of the Act, '… including without limitation, by operation of s 51A …': Fubilan [2007] FCA 1205 at [535]. French J said that the pleading appeared to misconceive the operation of s 51A. He observed that there was no plea that the respondents did not have reasonable grounds for making the various statements of a promissory or predictive character attributed to them. He then said, as is the case here, that there was a plea that in reliance upon the relevant representations the applicants there entered into an agreement which they would not have done if the representations had not been made. His Honour emphasised that the cause of action was founded on a contravention of s 52 of the Act which led to a situation where loss or damage was caused to the applicant for the purposes of s 82(1) of the Act. 18 It is important to appreciate that a contravention of s 52, not s 51A, gives rise to the cause of action under s 82. Thus, in Wardley Australia Limited v Western Australia (1992) 175 CLR 514 at 525, Mason CJ, Dawson, Gaudron and McHugh JJ said that a statutory cause of action under s 82 arises when an applicant suffers loss or damage 'by' contravening conduct of another person, here the respondents. They said that the word 'by' captured the common law meaning of causation, namely that the relevant conduct was a common sense cause of the damage claimed. 19 In Fubilan [2007] FCA 1205 at [543] French J continued that that did not mean the contravention of s 52 needed to be established as the only cause, merely that the misleading or deceptive conduct could set in train a chain of events where an applicant is led into error on the basis of the conduct, either directly or through the inducement of another person who relied on the conduct, which then caused the applicant to suffer the loss or damage. His Honour observed that the way in which s 51A had been pleaded was close to unintelligible. He said that s 51A does not create a cause of action independent of that created by s 52 as read with s 82. Rather, he said, s 51A cast an evidential burden on a respondent in the sense of an obligation to adduce evidence on the issue of whether there were reasonable grounds for making the representation, and continued: 'It does not impose on the representor the legal or persuasive burden to prove that it had reasonable grounds for making the representations alleged. As Emmett J said of s 51A in Australian Competition and Consumer Commission v Universal Sports Challenge [2002] FCA 1276, the section does not reverse the onus of proof when it applies. It merely requires the alleged representor to "adduce evidence to the contrary". There may be a question whether a representor can discharge the evidential burden by pointing to evidence which forms part of the applicant's case. In my opinion a respondent may rely upon evidence called by an applicant which answers the description "evidence to the contrary". To make a promise which is not performed or a prediction which is not fulfilled is not of itself misleading or deceptive.' (Fubilan [2007] FCA 1205 [545]-[546]) 20 French J said that s 51A required that a statement about a future matter made without reasonable grounds would be treated as if it were misleading or deceptive and thus the section could be said to involve a limited extension of the scope of s 52. He emphasised that a pleading of misleading or deceptive conduct which relied upon s 51A should make clear that it involved the allegation for the representor to not have had reasonable grounds for making the statement alleged. In addition, French J noted that a pleading of misleading or deceptive conduct based upon a statement about future facts may not expressly plead want of reasonable grounds, yet invoke s 51A, in which case it could be taken to plead for want of reasonable grounds or, if that implication were not open, it should be regarded as deficient (Fubilan [2007] FCA 1205 at [547]). 21 French J also held that the analysis (which I have been describing) had consequences for dealing with the way in which a cause of action for misleading or deceptive conduct based upon statements of future fact is set up. The causal connection between a respondent's conduct in such a case and the loss or damage claimed is not the breaking of the promise or the failure of the prediction. The causal connection which must be shown to exist is a causal connection between the loss or damage claimed and the making of the promise or prediction without reasonable grounds (Fubilan [2007] FCA 1205 at [548]). 22 Today is the sixth day of the hearing of this trial. The applicant's case is substantively complete. The matters upon which Mr Proud relies as giving him and Proud Machinery reasonable grounds for so many of the representations as they seek to defend under s 51A(2) are the following matters addressed in his statement: (1) His statement of his education and training. (2) Previous dealings between Proud Machinery and Mr Proud on the one hand, and North East Equity and Mr Tana on the other. (3) Mr Proud's knowledge of previous grading facilities at North East Equity's Sumich operation. (4) Mr Proud's knowledge and experience of a Bruynooghe system installed at the Kalfresh plant in Queensland. (5) Mr Proud's dealings with the Bruynooghe factory in Belgium. (6) Mr Proud's knowledge of the equipment at Sumich to be incorporated in the new production line. (7) Mr Proud's activities as agent for Bruynooghe and another manufacturer of packaging equipment used in the new production line, Gillenkirch, and his knowledge of the capacities of the equipment supplied by each of those manufacturers. (8) Matter disclosed in the two letters said to contain the representations sued on, namely, his and Proud Machinery's letters of 29 July 2002 and 30 September 2002. 23 The respondents also rely on the contents of one paragraph in Mr Tana's evidence in which he said: 'I agree that these machines may have this capacity in isolation, however when incorporated into a complex system they are not necessarily able to run at these capacities all of the time. The key to the actual operating capacity of each machine in the new line is the feed to it. The maximum design capacity is irrelevant unless the line can provide sufficient feed to the machine.' 24 Lastly, the respondents rely on the responsive statement of an expert yet to be called by the applicants, Mr David Harris, in the sense that he was asked to review Mr Proud's statement, and to 'provide any comment that he may have as to the matters raised'. Lest it be thought that Mr Proud's statement would be easily understood as raising matters, I should observe that it is 273 pages long, albeit they are not full pages. It was not confined to setting out Mr Proud's evidence, relevant to facts in issue, of what he saw, heard or did. His statement is replete with quotations and paraphrases at great length from correspondence which, if relevant, would otherwise be in evidence, Mr Proud's commentary upon those matters, his commentary upon different allegations which appear in other extensive correspondence, commentary upon witness statements and extensive commentary upon the statement of claim itself. 25 Mr Proud's statement is hardly a document calculated to induce a lawyer, let alone a lay person, to absorb and respond to it as detailing the evidence which Mr Proud could give in an admissible form. That is not a criticism of Mr Proud who is himself a lay person. How Mr Harris could possibly have understood all that he might be asked to respond to in the morass of the 273 pages I am afraid I cannot grasp. But statements in this form should not be produced by lawyers in serious litigation. If statements are to be used in respect of contentious lay evidence (and I am not suggesting that they should be), lawyers have a responsibility to ensure that the witness gives, in his or her own words, the evidence in an admissible and, hopefully, orderly manner. Lawyers must ensure that irrelevant, rambling, or argumentative material is removed. 26 The real question is whether or not those matters relied upon by Proud Machinery and Mr Proud as their reasonable grounds should now be allowed to be used in the trial in circumstances where there had been no advance pleading of them. Nor had the respondents identified as an issue that they would be asserting that they had such reasonable grounds, other than inferentially by reference to what might appear from substantive consideration of Mr Proud's statement. 27 North East Equity's lawyers have had Mr Proud's statement since early in March 2007. North East Equity's counsel said that had they been aware of a substantive issue as to the reasonableness of the grounds on which the predictive representations were made, they would have asked their witnesses to address those matters in their evidence. Among other things that may have required Mr Harris, as the engineering expert, to visit the Kalfresh and Bruynooghe plants or factories in order to prepare a report on those matters to which Mr Proud adverted in his statement as giving him a basis for any predictions on which he wishes to rely. 28 Mr Proud asserted the following in the lengthy principal paragraph in his statement upon which the respondents rely on the present issue, namely par 102. Mr Proud commenced par 102 with a statement that his production projections were based on Proud Machinery's involvement in the installation of Kalfresh's plant, which used a Bruynooghe tank system. He said that that was a nine tank system. That was a system with the same number of tanks that North East Equity came to require be used to operate its proposed new line. Mr Proud also said the Kalfresh plant had been installed with the assistance of Bruynooghe technicians and that he had been involved in that installation, and seen how it was installed and had operated successfully. Mr Proud went on to say that he had been to Bruynooghe's factory in Europe and inspected tank systems with an officer of Kalfresh, had spoken to unspecified Bruynooghe technicians and been given a demonstration at that factory. He also referred to the fact that Proud Machinery had been agents for Bruynooghe and Gillenkirch for some time and 'therefore knew the capabilities of the items of equipment which were going to be used in this proposed system'. He then identified elements of the proposal which recorded his understanding of the capacity of various parts of the equipment. 29 The recitation of those matters, all taken from par 102 of Mr Proud's statement, shows that there is some force in the complaint North East Equity makes that if it were on notice of the reliance of Mr Proud and Proud Nominees on those matters as being their reasonable grounds for making the predictions, it may have caused investigations to be made as to the reasonableness of those matters. 30 However, the pleadings of each side are defective in properly articulating material facts, if any, which arise discretely in relation to s 51A. In addition to relying on s 51A in the further re-amended statement of claim, North East Equity pleaded that Mr Proud was accessorily liable for Proud machinery's contravening conduct by force of s 75B of the Act. North East Equity particularised that Mr Proud knew all of the material facts which established Proud Machinery's contraventions of s 52 by the making of each of the representations. 31 In those circumstances, in its pleading, North East Equity took on a burden of proving that Mr Proud knew that each representation as to a future matter, which he put forward on behalf of Proud Machinery, had no basis. This is because the absence of a reasonable basis must have been a fact material to establishing the contraventions as pleaded (see particular (i) to par 20(b) and par 14 of the further re-amended statement of claim). 32 In par 15 of the agreed statement of issues, the parties identified expressly the question whether the respondents had sufficient knowledge, skill and experience to design, procure and install the new line. 33 Again, I am of opinion North East Equity must have been on notice that part of its case would be (if it were pressing it, as I anticipate it is being pressed) making out that there was a lack of sufficient skill, knowledge and experience in the respondents. Agreed issue 15 squarely raised that there would be a specific challenge to the ability of the respondents to design, procure and install equipment which was said to be defective, because the predictions as to its performance could not be achieved, or at least achieved by the respondents. 34 North East Equity criticised a number of particular grounds which the respondents put forward as Mr Proud's reasonable grounds as lacking substantial content. Any deficiency in those particular grounds may be a matter upon which North East Equity can rely at the end of the hearing. 35 The parties have prepared the case and are now well advanced in the hearing. Doing the best I can in the present situation, I am of opinion that the interests of justice are to allow the respondents to rely upon matters that they have particularised as being reasonable grounds, subject to allowing North East Equity to revisit the admissibility of that material in terms of any proper objection, or limitation under s 136 of the Evidence Act 1995 (Cth), as to its use. That is because the objections that were taken to the admissibility of the material in Mr Proud's statement and the rulings that I made were done on the basis that the use of the material now sought to be made by the respondents had not been squarely articulated. 36 When I gave directions on 10 July 2007 and again on 9 August 2007 requiring the formulation of a clear statement of issues, I had emphasised that the Court has for some years insisted that the parties put their cases fairly and squarely on the table, so that each understands what is in issue. As I have identified above, there are substantive overlaps of the factual matters relied upon in different parts of the pleadings. It cannot be said that the plea under s 51A of the Act raised an entirely discrete, stand-alone aspect of the case that can be seen to be divorced from other material facts or evidentiary matters. Nonetheless, the respondents did not articulate clearly their reliance upon matters as going to the identification of reasonable grounds for the evidentiary purposes of s 51A(2), in the sense described in Fubilan [2007] FCA 1205 by French J, with whose reasons on this matter I agree. 37 For these reasons, I will allow the respondents to put forward matters in the document headed 'Respondents' Reasonable Grounds' as a basis for contending that they had reasonable grounds for the purposes of s 51A(2) of the Act, but I will reserve to North East Equity its rights, on any proper basis, to object to any of the evidence sought to be relied on or to seek a limitation of its use. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares. Associate: Dated: 15 October 2007 Counsel for the Applicant: MH Zilko SC and MD Cuerden Solicitor for the Applicant: Ilberys Lawyers Counsel for the Respondent: PG McGowan Solicitor for the Respondent: David Deakin Davies & Co Date of Hearing: 25 September 2007 Date of Judgment: 25 September 2007