New South Wales Supreme Court CITATION : ALEXIA MIA PTY LTD v WINDFARM PTY LTD & 2 ORS [2003] NSWSC 13 HEARING DATE(S) : 26/04/2002 JUDGMENT DATE : 3 January 2003 JUDGMENT OF : Dowd J DECISION : Appeal upheld; verdict of court below reversed; costs awarded to plaintiff; certificate under Suitors' Fund Act 1951. CATCHWORDS : Appeal from Local Court - error of law - capacity of company to bind directors for personal undertaking - no deceptive or misleading conduct - no reliance. Fair Trading Act 1987 LEGISLATION CITED : Suitors' Fund Act 1951 Trade Practices Act 1974 Global Sportsman v Mirror Newspapers (1984) 2 FCR 82 at 88 Greco v Bendigo Machinery Pty Ltd (1985) ATPR 40-521 Henjo Investments v Marrickville (1988) 79 ALR 83 at 95 CASES CITED : Jones v ANZ Banking Group (1986) 64 ALR 347 Lennard's Carrying Co v Asiatic Petroleum Co Ltd [1915] AC 705 Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 Yorke v Luca (1985) 158 CLR 661 Alexia Mia Pty Limited (Plaintiff) PARTIES : Windfarm Pty Limited (First Defendant) Robert Gellert (Second Defendant) Benedict Noonan (Third Defendant) FILE NUMBER(S) : SC 10158/02 D Robertson (Plaintiff) COUNSEL : J Millan (First Defendant) Mr Morohan (Second Defendant) SOLICITORS : D English, Paul A Curtis & Co (Plaintiff) H Charles, Paul A Brown & Co ( First Defendant) LOWER COURT Local Court JURISDICTION : LOWER COURT 8829/99; 30019/99 FILE NUMBER(S) : LOWER COURT Magistrate H Dillon JUDICIAL OFFICER : IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION DOWD J Friday 3 January 2003 10158/02 ALEXIA MIA PTY LTD V WINDFARM PTY LTD JUDGMENT 1. HIS HONOUR: This is an appeal by way of summons from a decision of Dillon M handed down in the Local Court at the Downing Centre. The plaintiff in the original proceedings was GIO Finance Limited ("GIO") who brought an action against the respondent to these proceedings, Windfarm Pty Limited ("Windfarm") in respect of a fixed term rental agreement concerning a photocopier and a claim of damages. GIO owned the photocopier and rented it to Windfarm who was then the owner of a newsagency at Coogee. 2. In the proceedings below the First Third Party was Alexia Mia Pty Ltd ("Alexia"). Alexia was the purchaser of the newsagency business. Alexia is the appellant in these proceedings. 3. The Second Third Parties were Robert Gellert and Benedict Noonan, partners in a firm of solicitors which had drawn up the agreement for sale of the business. 4. This appeal involves the judgment which the learned magistrate gave against Alexia for the sum of $15,992.30 and costs as agreed or "if no agreement is reached the parties have liberty to apply on seven days notice to argue the question". There was no verdict entered against the Second Third Parties, that is, the solicitors, leave having been granted to restore and add that matter to the list on seven days notice. That matter was apparently treated as part heard. Background and Short Facts 5. GIO brought an action against Windfarm for recovery of the fixed term rental agreement concerning a copier which GIO owned and leased to Windfarm. 6. GIO had leased the photocopier in an agreement on 25 July 1997 for 60 months with rental instalments of $340.00. The photocopier returned to the possession of the plaintiff in November 1998 and was sold at auction. There is no issue in this appeal as to the amount of the claim which the learned magistrate found against Windfarm and in turn, for Windfarm against Alexia. The judgment being principally for the balance of forty-four payments due under the contract. 7. The coin operated photocopier was subject to a lease agreement which provided that the payment of rent was for the entire period and further provided that the renter must keep the machine under its personal control. The agreement provided that GIO could terminate the contract by giving notice or repossessing the equipment if the rent was more than seven days in default in payments. 8. There was a collateral service agreement with Ricoh for maintenance of the machine which obliged Windfarm to pay a minimum of $30.00 per month or 1.5 cents per copy to Ricoh. The customers using the copier paid either twenty or thirty cents per copy depending on the size of the paper used. Windfarm placed the business on the market for sale with a broker and advised, and it was so advertised, that the copier was to be transferred to a purchaser. 9. On 2 October 1998 Windfarm entered into agreement with Alexia for the sale of the business which was completed on 27 October having been prepared by the Second Third Party solicitors above. The agreement of the sale of business did not refer to the assignment of the photocopier lease referring only to the transfer of the existing lease on the shop. The agreement provided that the vendor was required to discharge all debts and liabilities including hiring or hire purchase agreements. 10. On 21 October 1998 Ricoh advised Windfarm's solicitors to cancel the agreement as the new owner would have to sign up on a different plan. The solicitors were told by GIO the current lessee would not be released unless the new owner approached them. 11. On 23 October Windfarm's solicitors wrote to Alexia's solicitors attaching a copy of the lease agreement advising that GIO had orally advised that the lease could be assigned subject to a satisfactory credit check being obtained. The letter then contained the following words: "The Vendor will undertake to do all things necessary to assign their interest in the aforesaid photocopier as from the date of settlement and will indemnify the purchaser for any monies owing under the lease to the date of settlement." The letter then asked: "Will the purchaser proceed to settlement accepting this undertaking and providing a similar undertaking of its own(?)" 12. On 26 October 1998 Windfarm solicitors obtained a one sentence reply from Alexia solicitors: "We refer to your letter of 23 October 1998 and confirm our client's mutual undertaking in relation to the lease for the photocopier." 13. The machine was left at the newsagency after 27 October 1998, the date of completion, and was returned to GIO in November 1998. Windfarm solicitors advised GIO of the sale on 3 November 1998 and asked for requirements to assign. GIO required payment out and gave pay out figures which were valid to 25 November 1998. On 5 November 1998 Windfarm solicitors wrote to Alexia's solicitors asking that one of Alexia's directors contact GIO to make the necessary arrangements for an assignment advising that it was desirable the matter be finalised by 25 November. 14. On 19 November 1998, GIO advised Windfarm's solicitors that arrangements had been made by Alexia to deliver the copier to GIO and that GIO proposed to take action against Windfarm. On 26 November, Windfarm solicitors wrote to Alexia's solicitors complaining about its failure to take over liability and saying that Windfarm would claim indemnity if it had to pay out GIO. On 30 November 1998 Alexia's solicitors advised Windfarm solicitors that: "An arrangement which was satisfactory to both the GIO and our client could not be reached." 15. The learned magistrate's findings were that as between Windfarm and Alexia there was a contract arising out of exchange of correspondence between the solicitors for the parties on 23 and 26 October 1998 and that breach of the contract caused loss to the defendant in the proceedings and in relation to an allegation of misleading and deceptive conduct that Alexia engaged in misleading and deceptive conduct in breach of s52 of the Trade Practices Act 1974 and s42 of the Fair Trading Act 1987 and that Windfarm relied on the conduct of Alexia and suffered damage. The Learned Magistrate's Findings 16. The learned magistrate found, and it is apparently not challenged, that the original understanding which was omitted from the contract between Windfarm and Alexia was that the assignment of the lease was part of the contract and that the exchange of correspondence evidenced that understanding and his Worship found, and this is also not challenged, that there was a new agreement relating solely to the copier, separate from the agreement for the sale of business, and the initial contract is only relevant as the context in which the new contract was made. 17. His Worship then examined the question of whether there was a breach of the contract made on the correspondence concerning the photocopier. His Worship found that the two directors of Alexia were unwilling to sign director's guarantees with respect to the requirements of GIO as to the copier. His Worship found that the directors knew that if they did not give guarantees the lease would not be assigned. Each director, in evidence, denied the refusal to sign personal guarantees required by GIO was simply because they had changed their minds. 18. His Worship found on the evidence the fact that they rented another brand new copier demonstrated that they regretted the giving of the undertaking by Windfarm and now sought to justify the refusal "to do all things necessary" to effect the assignment of the existing copier. His Worship did not accept their evidence. Alexia had submitted that there must be a distinction drawn between the directors and the company. 19. His Worship found at page 16 of his judgment that directors are organs of a company and relied on Lennard's Carrying Co v Asiatic Petroleum Co Ltd [1915] AC 705 and cited Lord Haldane at 713-714: "My Lords, a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation… If Mr Lennard was the directing mind of the company, then his action must, unless the corporation not be liable at all, have been an action which was the action of the company itself…". 20. His Worship then found that it was superficial and artificial to characterize the decisions of the two Alexia directors as personal decisions. His Worship found there was no objection in principle to giving guarantees as they had given by them in other terms and that it was manifestly obvious that the decision they took was as "the directing mind and will of the company" and that their refusal to give the guarantees was for no other reason than to avoid the assignment of the lease and that the decision, not to give the guarantees, followed "as night the day". His Worship then found that Alexia 'chose not to honour its obligations to do all things necessary' to effect the assignment of the lease. 21. It is submitted, on behalf of Alexia, that the learned magistrate fundamentally misunderstood the law relating to the relationship between a company and its directors. Mr Robertson, on behalf of Alexia, asserts that the proposition, which the learned magistrate characterised as tried law, the submission put at the hearing before him that Alexia could not bind directors to do something such as offer a director's guarantee which was to be done in their personal capacities. 22. It was put, however, on behalf of Windfarm that the issue of the refusal to sign directors' guarantees was correctly identified in his finding as to the disingenuous reasons of Alexia for not giving guarantees. 23. I think that whether his Worship be correct or not, and I make no adverse finding in that respect, if Alexia's submissions are correct then the reason that they gave is irrelevant. The issue is as to whether the company can bind directors to enter obligations such as personal guarantees. The fact that the proposed personal guarantors happen to be directors does not end the matter. The submission by Windfarm that since the two directors may have been the directing mind and will of Alexia does not work the other way to allow Alexia to control its directors. I do not accept Windfarm's submission that this is an issue of fact. 24. A decision to give a personal guarantee is indeed a very personal decision. It will vary from director to director and will vary according to the nature of the guarantee sought and the extent of a guarantee which is to be given. The agreement between Alexia and Windfarm as to whether to enter the contract did not of itself import an agreement by individual directors to put their own personal assets at risk. The fact that Alexia was a brand new company with no commercial track record and, therefore, unable to be the subject of reassurance as to its capacity to pay may have meant that it was inevitable that a personal guarantee would be sought but this, in my view, should have been included in the terms of the supplementary contract. There is nothing in the supplementary contract which binds directors to take additional steps if not spelled out in the terms of the agreement and agreed to by the directors. 25. The fact that it suited the two persons who happened to be directors of Alexia to enter into a new lease of a new photocopier was irrelevant. All Alexia had to do was to make the persons aware of the requirement for a personal guarantee. Any actions or failure to act on the part of those persons to give something as personal as a personal guarantee and thereby get around the corporate shield of the proprietary company was a matter for them. The contract made by the exchange of letters in its simplicity did not cover this contingency and there is nothing Alexia could have done which would have brought about the assignment of the lease. 26. Although it is not necessary to this decision, it seems to me, that the question of damages was of itself problematical in that there was no loss on the part of Windfarm as between it and the GIO until it ceased to make the next payment. It was entitled to recover the photocopier and either use it or sell it. The fact that it chose to do nothing other than take proceedings against Alexia does not appear to me to give rise to a claim in damages. The machine presumably had a value which exceeded a repossession value and the question of damages does not seem to me to flow. This issue, however, is not necessary, in the circumstances of the contract, for this Court to decide. 27. As to the second ground of appeal, that Alexia was guilty of misleading and deceptive conduct and that Windfarm relied upon that conduct, it is put on behalf of Alexia that the magistrate failed to clearly identify exactly what constituted the misleading and deceptive conduct of Alexia and failed to restrict his consideration of issues of causation. Alexia contend that his Worship suggests that the misleading and deceptive conduct arose out of the making of the representations by the letter of 26 October 1998 but then points out that at page 20 his Worship quite explicitly stated: "The misleading and deceptive conduct, if there was any, was not the making of the representations per se, but the subsequent failure to comply with the terms of the promise." 28. It was conceded by the learned magistrate that there was no reason to conclude the representations in the letter of 26 October 1998 were not made honestly and with the intention of fulfilling them. There was no evidence to suggest otherwise. It is submitted further that the subsequent conduct of Alexia did not involve any positive assertions to Windfarm or its solicitors. If there were any deceptive conduct it is put that it could only have been Alexia's failure to inform Windfarm of subsequent events concerning the photocopier. It is put, on the other hand, on behalf of Windfarm, that Alexia having given the undertakings and continuing in possession of the copier after completion continued to use and operate the copier in the course of the business and that it was open on the evidence before him for the magistrate to conclude these matters constituted misleading and deceptive conduct. 29. His Worship found that Windfarm was misled or deceived by the change of course of Alexia. He concedes it was not obligatory for Alexia to notify Windfarm of what it was going to do in respect of the copier but relies on a decision of Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 and Yorke v Luca (1985) 158 CLR 661 and Greco v Bendigo Machinery Pty Ltd (1985) ATPR 40-521 for the proposition that it is not necessary for a plaintiff to prove that the conduct was intentional or deliberately misleading. However, the difficulty with this finding by his Worship is that it appears to be beside the point. The conduct relied on, has to be, of itself, deliberately deceptive or misleading and simple failure to comply with a contractual promise is not per se, misleading and deceptive conduct (Jones v ANZ Banking Group (1986) 64 ALR 347; Global Sportsman v Mirror Newspapers (1984) 2 FCR 82 at 88). 30. Henjo Investments v Marrickville (1988) 79 ALR 83 at 95 is authority for the fact that silence could only constitute misleading and deceptive conduct if there was an obligation to inform the other party of the relevant matters. There was, in fact, no representation made by any of the conduct of Alexa that could be interpreted as deceptive or misleading. The photocopier remained on the premises after completion but was obviously still subject to the new contract coming into existence. It did not keep the copier but, in fact, returned it. There can be no deception or misleading in this fact. More importantly, there is no evidence of any reliance on the part of Windfarm on that action that could give rise to an entitlement under the Trade Practices Act 1974 or the Fair Trading Act 1987. 31. In any event, further, Windfarm was still capable of continuing its contract or assigning the photocopying lease to someone else. Its options may have been few but there were options. Paying out the lease and owning the photocopier was a means of earning income as, presumably, it had been in the time up to the sale of the business. It was in fact, on the face of it, still a useful photocopier from which profits were capable of being derived. 32. The fact that, as his Worship found, a periodic payment authority had been terminated was irrelevant to the fact that it was still open to Windfarm to continue to make payments under the lease. 33. It is noted that his Worship expressly found there was no obligation on Alexia to notify Windfarm of what it was doing. 34. It was further submitted by Mr Robertson on behalf of Alexia, rhetorically, 'what would Windfarm have done differently if it had been aware of what Alexia was not doing'? He answers the rhetorical question by saying that there is no evidence of what Windfarm would have done and indeed nothing that it could have done. Windfarm was contractually bound to complete the sale of the newsagency as it was bound by the lease agreement with GIO. 35. His Worship at page 21 of his judgment suggests that by 19 November Windfarm was precluded from demanding specific performance of the agreement from Alexia but does not say why this is so. This is simply a contractual matter and has no bearing on the Trade Practices and Fair Trading issues. 36. Since failure to comply with a contractual promise does not of itself constitute misleading and deceptive conduct it is my view that his Worship was in error in so finding. There is no obligation to inform but if, in fact, there was a failure to inform there is no evidence that any action could or would have been taken by Windfarm and no evidence of reliance by Windfarm. 37. In my view his Worship was in error in his findings concerning s52 of the Trade Practices Act 1974 and s42 of the Fair Trading Act 1987. 38. Accordingly, I would uphold the appeal and in my view there is nothing to displace the normal event of success on an appeal that costs should follow the event. 39. Application has been made on behalf of Windfarm for a certificate under the Suitors' Fund Act 1951 in the event of an order being made against Windfarm and it seems to me a proper case for the issue of such a certificate. 40. Accordingly I make the following orders: i. The appeal is upheld. ii. The plaintiff should have an order for costs against the defendant. iii. In the proceedings below the verdict for "the defendant against the First Third Party" should be set aside and a verdict entered for "the First Third Party against the defendant". iv. The defendant should be ordered to pay the costs of the plaintiff in the proceedings before the Local Court; v. That the defendant have a certificate under s6 (1)(a) of the Suitors' Fund Act 1951 in respect of the costs of this appeal and the costs of the proceedings before the Local Court. * * * * * * Last Modified: 02/03/2003 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.