FEDERAL COURT OF AUSTRALIA Richards v Macquarie Bank Limited (No 3) [2012] FCA 1523 Citation: Richards v Macquarie Bank Limited (No 3) [2012] FCA 1523 Parties: TRACEY RICHARDS v MACQUARIE BANK LIMITED AND STORM FINANCIAL LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) ACN 064 804 691 File number: QUD 590 of 2010 Judge: REEVES J Date of Ruling: 5 December 2012 Catchwords: EVIDENCE – agreed statement of facts – relevance – where fact in issue is whether investors were "consumers" within the meaning of s 4B of the Trade Practices Act 1974 (Cth) and s 12BC of the Australian Securities and Investments Commission Act 2001 (Cth) – whether personal circumstances of investors relevant to whether margin loans obtained were "of a kind ordinarily acquired for personal, domestic or household use" EVIDENCE – relevance – whether witness' evidence-in-chief relevant to pleaded program or plan of action – hearsay – whether Court has general discretion to admit evidence that is hearsay – application of s 64 of the Evidence Act 1995 (Cth) – where no evidence that witnesses that made representations unable to testify or their testimony would cause undue expense or delay – application of admissions exception s 81 Evidence Act 1995 (Cth) – whether evidence admitted under s 81 against one party can be used as evidence against another – application of s 83 Evidence Act 1995 (Cth) Legislation: Australian Securities and Investments Commission Act 2001 (Cth) Corporations Act 2001 (Cth) Evidence Act 1995 (Cth) Federal Court of Australia Act 1976 (Cth) Trade Practices Act 1974 (Cth) Cases cited: Australian Securities and Investments Commission v Macdonald (2008) 68 ACSR 126; [2008] NSWSC 995 Australian Securities and Investments Commission v Rich (2005) 54 ACSR 28; [2005] NSWSC 471 Australian Securities and Investments Commission v Vines (2003) 48 ACSR 282; [2003] NSWSC 995 Carbotech-Australia Pty Ltd v Yates [2008] NSWSC 1046 Jacara Pty Ltd v Perpetual Trustees WA Ltd (2000) 106 FCR 51; [2000] FCA 1886 Leveraged Equities Ltd v Goodridge (2011) 191 FCR 71; [2011] FCAFC 3 Lym International Pty Ltd v Marcolongo [2011] NSWCA 303 Australian Law Reform Commission, Evidence, Report No 26 (Interim), 1985, vol 1, para 641 Date of hearing: 1 November and 5 December 2012 Date of publication of reasons: 12 March 2013 Place: Brisbane Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 45 Counsel for the Applicant: Mr D Campbell SC with Mr B Jones Solicitor for the Applicant: Levitt Robinson Counsel for the First Respondent: Mr J Sheahan SC with Mr A Pomerenke Solicitor for the Second Respondent: Allens Counsel for the Second Respondent: The Second Respondent did not appear IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 590 of 2010 BETWEEN: TRACEY RICHARDS Applicant AND: MACQUARIE BANK LIMITED First Respondent STORM FINANCIAL LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) ACN 064 804 691 Second Respondent JUDGE: REEVES J DATE: 5 DECEMBER 2012 PLACE: BRISBANE REASONS FOR RULING (Corrected from transcript) 1 These proceedings are representative proceedings commenced by Mrs Richards on her own behalf and on behalf of a number of class or group members under Part IVA of the Federal Court of Australia Act 1976 (Cth). They concern the conduct of Macquarie Bank Limited (Macquarie) and Storm Financial Ltd (Storm), the first and second respondents respectively. In the course of hearing this matter, I have made a number of evidentiary rulings. These reasons relate to two such rulings. FACTUAL AND LEGAL CONTEXT 2 It is appropriate to begin by briefly recounting the factual and legal background to these proceedings. 3 Among other things, Mrs Richards claims that she suffered loss or damage as a consequence of her involvement in an investment scheme that was operated jointly by Storm and Macquarie, or alternatively, that was operated by Storm alone with Macquarie's knowing involvement. The essence of this claim is that the investment scheme in question (the Storm Scheme) was a "managed investment scheme" as that expression is defined in s 9 of the Corporations Act 2001 (Cth) (the Act) and it therefore had to be registered as such under s 601ED(5) of the Act. Since the Storm Scheme was not so registered, Mrs Richards claims that she is entitled to be compensated by Macquarie under s 1325 of the Act for the loss and damage she claims to have suffered by investing in it. 4 To invest in the Storm Scheme, Mrs Richards borrowed moneys from Macquarie in the form of margin loans. As a consequence, in addition to her managed investment scheme claim, Mrs Richards has made a number of other claims against Macquarie, including claims for breach of contract, misleading or deceptive conduct, and unconscionable conduct. Her breach of contract claims are based upon alleged breaches of the express or implied terms of the various margin loan agreements that she entered into with Macquarie. The misleading or deceptive conduct claims are based on a number of matters that Macquarie allegedly failed to disclose to Mrs Richards about the operation and management of her margin loans, particularly relating to margin calls. Finally, her unconscionable conduct claims broadly relate to the Loan to Security Ratios (LSRs), sometimes referred to as LVRs (V = Value), that Macquarie applied to Mrs Richards' margin loans. 5 In the interests of the efficient conduct of the trial of these proceedings, a large amount of evidence has been tendered in the form of agreed statements of fact, that is, statements by witnesses that Mrs Richards and Macquarie agreed represented those witnesses' testimony. In addition, a small number of witnesses gave oral testimony. OBJECTION TO STATEMENT OF MR AND MRS ENSOR 6 Macquarie objected to paras 1 to 14 of the agreed statement of facts of Mr and Mrs Ensor (the Ensors). 7 The Ensors were customers of Storm from late 2003 until late 2008. During that period they entered into a number of margin loan agreements with a lender called Colonial Margin Lending (Colonial). Paragraphs 1 to 14 of the Ensors' agreed statement set out their personal circumstances, including matters such as: their age, marital status, dependants, education levels, employment history (including their incomes), their financial position before they became customers of Storm and the nature of their superannuation investments. 8 Macquarie's sole ground of objection to the 14 paragraphs in question was relevance. Section 55(1) of the Evidence Act 1995 (Cth) (the Evidence Act) defines relevance as: … evidence that, if it were accepted, could rationally affect (directly or indirectly) the assessment of the probability of the existence of a fact in issue in the proceeding. Contentions 9 Mr Jones, for Mrs Richards, submitted that the 14 paragraphs were relevant to Mrs Richards' breach of contract and unconscionable conduct claims against Macquarie. Among other things, those claims depend on whether Mrs Richards can establish that she falls within the definition of the word "consumer" as defined in s 4B of the Trade Practices Act 1974 (Cth) and s 12BC of the Australian Securities and Investments Commission Act 2001 (Cth). For present purposes, that requires her to show that the margin loans she obtained from Macquarie were "of a kind ordinarily acquired for personal, domestic or household use". For convenience, I will refer to this as the "consumer" fact in issue. 10 Mr Jones submitted that the assessment of the purpose for which Storm investors, like the Ensors, acquired their margin loans cannot be made in a vacuum. He submitted that evidence of their personal circumstances and backgrounds could rationally affect the assessment of the probability that they acquired those margin loans for personal, domestic or household use. Thus, he submitted, that evidence met the relatively low threshold test for relevance contained in s 55 of the Evidence Act. 11 Mr Pomerenke, for Macquarie, submitted that the 14 paragraphs concerned did not bear on the purpose for which the Ensors acquired their margin loans, much less the use commonly made of such margin loans. He submitted, this evidence was therefore too remote from the "consumer" fact in issue. However, Mr Pomerenke did not submit that the subjective purpose of the Ensors, or the other Storm investors, could not be relevant to the "consumer" fact in issue: cf Leveraged Equities Ltd v Goodridge (2011) 191 FCR 71; [2011] FCAFC 3 at [416]. Consideration – the 14 paragraphs of the Ensors' statement are relevant 12 The definition of relevance in s 55 of the Evidence Act (outlined at [8] above) does, as Mr Jones submitted, set a relatively low threshold for the admissibility of evidence. This point was highlighted by Sackville J in Jacara Pty Ltd v Perpetual Trustees WA Ltd (2000) 106 FCR 51; [2000] FCA 1886 at [47], where his Honour quoted the observations of the Australian Law Reform Commission on the definition of relevance (that later became s 55 of the Evidence Act) as follows: The definition requires a minimal logical connection between the evidence and the "fact in issue". In terms of probability, relevant evidence need not render a "fact in issue" probable, or "sufficiently probable" - it is enough if it only makes the fact in issue more probable or less probable than it would be without the evidence - ie, it "affects the probability". The definition requires the judge to ask "could" the evidence, if accepted, affect the probabilities. (Australian Law Reform Commission, Evidence, Report No 26 (Interim), 1985, vol 1, para 641) 13 In my view, the 14 paragraphs of the Ensors' statement meet this relatively low threshold. Specifically, I consider there is sufficient logical connection between, on the one hand, the evidence of the Ensors' personal circumstances, including their lack of experience with matters of business and investment and interrelated factors such as their education and, on the other hand, the probability of the existence of the "consumer" fact in issue. Of course, the question whether the Ensors' evidence ultimately assists to establish that fact must await determination after the conclusion of this trial. In this respect, I should make it clear that the remarks I have made above should not be taken as expressing any concluded view on that issue. 14 For these reasons, I allowed paras 1 to 14 of the Ensors' agreed statement of facts to be admitted in evidence. objection during EVIDENCE-IN-CHIEF OF MR MCCULLOCH 15 Macquarie objected to a question that was asked during evidence-in-chief of Mr David Robert McCulloch by Mr Campbell SC, counsel for Mrs Richards. 16 Mr McCulloch was employed by Storm from March 1999 to January 2009. Initially, Mr McCulloch was employed as Storm's sole group accountant. Later, he became one of Storm's senior financial advisers and was appointed to its executive committee. Throughout his employment, Mr McCulloch negotiated with various banks and other financial institutions on behalf of Storm and Storm's clients. 17 During the course of his evidence-in-chief, Mr Campbell took Mr McCulloch to an email dated 14 July 2005. That email was sent by Mr McCulloch to Mr Emmanuel Cassimatis and other personnel within Storm. Mr Emmanuel Cassimatis and his wife Julie Cassimatis (the Cassimatises) were the founders of Storm and were its sole directors. As Storm's corporate structure developed, they became its sole executive directors and joint chief executive officers. The email to which Mr McCulloch was taken included the following statement: As you may be aware, we are endeavouring to achieve a target of $200M in FUM with Challenger by 07 Sept 2005. Currently, FUM is about $90M – ie $90M has been input in the 7.5 months from inception, 19/10/04 to 30/06/05. That means we have to write a similar amount for the next two months so it is all systems go. I was informed by counsel that "FUM" is an acronym for "funds under management". 18 Having been taken to this email, the following exchange occurred between Mr Campbell and Mr McCulloch: MR CAMPBELL: Do you have any knowledge as to why a target of $200 million was set with Challenger to be completed by that date? MR MCCULLOCH: To the best of my recollection, that was, I believe, the 12-month anniversary date of the inception of the fund and to the best of my recollection, I recall a meeting whereby Emmanuel told us, as advisers, that we were going with a new fund and they had promised that new fund manager – in this case Challenger – they would give them $200 million in business by a set date. MR CAMPBELL: Were you told any other reason as to why this amount was to be invested with Challenger? MR MCCULLOCH: Yes. MR CAMPBELL: Who told you that? MR MCCULLOCH: Mr and Mrs Cassimatis. MR CAMPBELL: When did they tell you this? MR MCCULLOCH: Prior to inception of the fund in the first instance. MR CAMPBELL: Some time prior to writing this email? MR MCCULLOCH: Some time prior to the writing of this email, yes. MR CAMPBELL: What did they tell you? I interpolate that Challenger was an associated entity of Macquarie through which it provided margin loans to certain Storm clients. 19 Mr Sheahan SC, counsel for Macquarie, objected to Mr McCulloch answering the final question (above) on the grounds of relevance and hearsay. Contentions and relevant legislative provisions 20 On the relevance ground, Mr Campbell submitted that the means by which Macquarie obtained its business from Storm was relevant to the program or plan of action whereby Storm advised its clients to take out margin loans with Macquarie. He submitted this went to the matters pleaded in subpara 10(a) of the statement of claim, as follows: As a result of the matters set out in paragraphs 5 to 9 above, at all material times Macquarie and Storm carried on a Scheme (the "Scheme") having the following essential features: (a) Storm procured the Applicant and Group Members (i) to borrow money from Macquarie pursuant to new Macquarie Margin Loans or, in addition, to increase their borrowings from Macquarie under such new or existing Macquarie Margin Loans; and (ii) to invest the money borrowed, together with the Applicant and Group Members' own equity, to acquire units in the special funds. 21 Mr Campbell added that: ... this material is... evidence which goes to help prove a material fact, namely, that Storm procured [Mrs Richards and the group members] to participate in the [Storm] scheme. 22 As to the hearsay ground, Mr Campbell submitted that the statement the Cassimatises made to Mr McCulloch constituted a statement that was adverse to Storm's interests and therefore it fell within the exception set out in s 81 of the Evidence Act. There is no dispute that at this time the Cassimatises were the human minds and will of Storm and were therefore able to make such an admission on its behalf. 23 Section 81 of the Evidence Act relevantly provides that the hearsay rule and the opinion rule do not apply to evidence of an admission. The word "admission" is defined in the Dictionary to the Evidence Act in these terms: admission means a previous representation that is: (a) made by a person who is or becomes a party to a proceeding (including a defendant in a criminal proceeding), and (b) adverse to the person's interest in the outcome of the proceeding. 24 Mr Campbell submitted that once the evidence was admitted as relevant in the proceedings, that is, as an admission against Storm, it could then also be used as evidence against Macquarie. On this aspect, he relied upon Australian Securities and Investments Commission v Macdonald (2008) 68 ACSR 126; [2008] NSWSC 995, per Gzell J (Macdonald). 25 Mr Campbell made two further submissions. First, he submitted that the evidence could be admitted under the exception to the hearsay rule stated in s 64 of the Evidence Act, on the basis that the makers of the statement, viz the Cassimatises, were available to be called to give evidence. Secondly, he relied upon what he referred to as the Court's general discretion to admit such evidence. 26 Both of these submissions can be rejected immediately. Section 64 of the Evidence Act provides: (1) This section applies in a civil proceeding if a person who made a previous representation is available to give evidence about an asserted fact. (2) The hearsay rule does not apply to: (a) evidence of the representation that is given by a person who saw, heard or otherwise perceived the representation being made; or (b) a document so far as it contains the representation, or another representation to which it is reasonably necessary to refer in order to understand the representation; if it would cause undue expense or undue delay, or would not be reasonably practicable, to call the person who made the representation to give evidence. (3) If the person who made the representation has been or is to be called to give evidence, the hearsay rule does not apply to evidence of the representation that is given by: (a) that person; or (b) a person who saw, heard or otherwise perceived the representation being made. (4) A document containing a representation to which subsection (3) applies must not be tendered before the conclusion of the examination in chief of the person who made the representation, unless the court gives leave. (Notes omitted) 27 In this instance, there was no evidence that undue expense or delay would be caused if the Cassimatises were called to give evidence, or that it was not reasonably practicable to call them. Thus, the conditions set for the operation of s 64 (at [26] above) did not exist. Further, I was not taken to any provision in the Evidence Act, nor to any principle at common law, that supported the general discretion to admit this evidence propounded by Mr Campbell. 28 Mr Sheahan began his reply to Mr Campbell's submissions by accepting that, since Storm was, strictly speaking, a party to these proceedings, Mr Campbell could tender Mr McCulloch's answer to the question to which objection was taken as an admission against Storm (on the presumption it was an admission). Mr Sheahan acknowledged that would overcome the hearsay objection insofar as Storm was concerned. On this aspect, it should be noted that Storm was placed in liquidation in March 2009 and its liquidators indicated near the outset of these proceedings that they did not propose to take any part in the proceedings. However, Mr Sheahan submitted that the answer to the question in issue could not operate as an admission against Macquarie, relying upon s 83 of the Evidence Act. Section 83(1) provides: Section 81 does not prevent the application of the hearsay rule or the opinion rule to evidence of an admission in respect of the case of a third party. 29 Further, s 83(2) provides: "The evidence may be used in respect of the case of a third party if that party consents." 30 Finally, the expression "third party" is defined in s 83(4) in these terms: third party means a party to the proceeding concerned, other than the party who: (a) made the admission; or (b) adduced the evidence. (Emphasis in original) 31 On the relevance ground, Mr Sheahan submitted that what Mr McCulloch was told by the Cassimatises as the reason for setting a target of $200 million FUM was not relevant to any pleaded issue in the proceedings. He submitted the question to which he objected did not go to the issue whether Storm procured Mrs Richards and the group members to obtain loans from Macquarie, but instead it went to the reason why a target of $200 million FUM was set by Storm. Consideration – evidence relevant but not admissible as an admission against macquarie 32 Dealing with the relevance ground first, I considered that the reason why Storm set a target of $200 million FUM for loans that it was to procure from Macquarie for its investor clients could rationally affect the assessment of the probability of the fact in issue raised by para 10(a) (at [20] above), that is, that Storm procured Mrs Richards and other group members to borrow monies from Challenger or Macquarie. 33 However, the hearsay ground is more problematic for Mrs Richards. In Macdonald, Gzell J made rulings under ss 135 and 136 of the Evidence Act that restricted the use of certain expert and lay evidence in those proceedings. After setting out ss 135 and 136, which provide for the discretionary exclusion of evidence on what may be broadly termed prejudicial grounds, and ss 55 and 56 which deal with relevance, Gzell J stated (at [5] and [8]): 5. It is to be noted that the term [relevance: set out at [7] above] is defined in respect of a proceeding, not in respect of a party to the proceeding. Thus evidence that tends to establish the happening of an event in which A but not B was involved is relevant evidence notwithstanding that it has no relevance to issues joined in respect of B…. That means prima facie relevant evidence in respect of one party is admissible against all parties in the proceeding and for any purpose. … 8. I said prima facie this was the position because section 56 of the Evidence Act is subject to other provisions of the Act, including the discretions to exclude evidence in Part 3.11 and, in particular, sections 135 and 136. 34 Gzell J then turned to consider the operation of ss 135 and 136 of the Evidence Act and various authorities on those provisions. In the course of that analysis, his Honour referred to the decision of Austin J in Australian Securities and Investments Commission v Vines (2003) 48 ACSR 282; [2003] NSWSC 995 (Vines) and observed (at [17]): Austin J adverted to the significance of the statutory scheme relating admissibility to the proceeding and not to a party. 35 In the same paragraph, Gzell J quoted what Austin J had said in Vines at [22] in support of that proposition. Gzell J further observed (in Macdonald at [22]): In Australian Securities and Investments Commission v Rich (2005) 54 ACSR 28; [2005] NSWSC 471 Austin J held certain documents to be admissible. At paragraphs 27 to 28, his Honour referred to Vines as the basis for accepting the submission that if reports or minutes were admissible as admissions, they were admissible in the proceeding, as the reports had the degree of relevance necessary to satisfy section 55 of the Evidence Act. 36 All these statements provide support for Mr Campbell's submissions. However, when one goes to the pivotal decision of Austin J in Australian Securities and Investments Commission v Rich (2005) 54 ACSR 28; [2005] NSWSC 471 (Rich), it becomes apparent that Austin J was there dealing with a different situation to that which arises in this case. 37 In Rich, Austin J considered the admissibility of parts of two reports, the Green and Miller report and the Ernst & Young report, together with some email correspondence. The two reports related broadly to the cashflow position of One.Tel, the company at the centre of those proceedings. 38 Having addressed the relevance of those documents (at [26]), Austin J stated at [27]: In addition to their original and hearsay relevance, the reports and the associated minutes are relevant, according to ASIC, because they record conduct of Mr Silberman that amounted to an implied admission by him that the financial position of the company was substantially as recorded in the reports. ASIC will submit that if the reports and minutes are admissible as admissions against Mr Silberman, they are admissible in the proceeding: Australian Securities and Investments Commission v Vines (2003) 48 ACSR 282 ; [2003] NSWSC 995. Mr Silberman was the chief operating officer of One.Tel at the time the two reports were produced, he was also present at board meetings of One.Tel when those reports were discussed and he made some comments about the reports during the course of those discussions. 39 While the precise para of Vines was not identified by Austin J in the quotation from Rich (at [38] above), it would appear that his Honour was referring to Vines at [22]. That paragraph, as outlined above at [35], is also the paragraph Gzell J referred to in Macdonald. 40 It is apparent, therefore, from these decisions that neither Gzell J in Macdonald, nor Austin J in Rich or Vines, was dealing with the effect of s 83 of the Evidence Act in relation to the tender of a representation allegedly constituting an admission under s 81. Certainly, there is no mention of the former section in any of these decisions. 41 However, there is a number of other decisions that deal specifically with the operation of s 83 of the Evidence Act. It is sufficient to refer to just two of them. The first is a decision of Brereton J in Carbotech-Australia Pty Ltd v Yates [2008] NSWSC 1046. In that case, his Honour was considering the admissibility of certain evidence that had been objected to on hearsay grounds. Brereton J stated (at [8]): Nonetheless, at least so far as it involves a conclusion that the conduct is dishonest, the evidence would offend the opinion rule. As against Mr Yates, that would not exclude its admissibility because of the operation of (NSW) Evidence Act 1995, s 81(1), which provides that the hearsay rule and the opinion rule do not apply to evidence of an admission. However, Evidence Act, s 83(1), provides that s 81 does not prevent the application of the hearsay rule or opinion rule to evidence of an admission in respect of the case of a third party, and subs (2) provides that such evidence may be used in respect of the case of a third party only if that party consents. 42 The second is a decision of the New South Wales Court of Appeal in Lym International Pty Ltd v Marcolongo [2011] NSWCA 303. In that case, their Honours were considering the admissibility of certain evidence going to post-contractual conduct. Campbell JA stated (Sackar JA agreeing, not considered by Basten JA) (at [125]): If being an admission were the only route through which post-contractual conduct could be available as an aid to finding the terms of a contract not wholly in writing, there would be limitations on the use to which that conduct could be put. Conduct relied on as an admission is evidence against the party to litigation on whose behalf the admission is made, but it is not evidence against any other party to the litigation unless that other party consents: s 83 Evidence Act. 43 From these decisions, I considered that it was clear that s 83 of the Evidence Act applied to set aside the "admission" exception to the hearsay and opinion rules provided for in s 81 to the extent that the "admission" concerned was sought to be tendered against another party to the proceeding (as defined in s 83(4)) unless that other party consented to the tender under s 83(2). 44 Two final points need to be made. First, the nature of Mr Sheahan's objection to Mr Campbell's question made it obvious that Macquarie did not consent, under s 83(2), to the tender of Mr McCulloch's answer as an admission against it. Secondly, Macquarie clearly fell within the definition of "third party" in s 83(4). 45 For these reasons, I considered Mr Sheahan's hearsay ground of objection was sound because, even if the answer to the question to which objection was taken could be tendered as an admission against Storm under s 81 of the Evidence Act, it could not be tendered as an admission against Macquarie, in the absence of its consent under s 83(2) of that Act. I certify that the preceding forty-five (45) numbered paragraphs are a true copy of the Reasons for Ruling herein of the Honourable Justice Reeves. Associate: Dated: 12 March 2013