Reported Decision: 63 ACSR 636 New South Wales Court of Appeal CITATION: Leda Pty. Limited v. Weerden & Anor. [2007] NSWCA 174 HEARING DATE(S): 19 and 20 June 2007 JUDGMENT DATE: 18 July 2007 JUDGMENT OF: Hodgson JA at 1; McColl JA at 77; Handley AJA at 78 DECISION: 1. Appeal dismissed with costs. 2. Cross-appeal dismissed, with no order as to costs. CATCHWORDS: TORTS - Negligent advice - Purchase of shares in unitholder and trustee of trust with carry forward tax losses and capital profit on sale of hotel - Purchaser seeks advice from accountant/tax expert - Accountant advises that due diligence required if certain advice is to be given - Subsequent letter gives some advice notwithstanding due diligence not undertaken - How such letter would reasonably have been understood - Whether it gave negligence advice - Whether purchase of shares caused by any such negligent advice - Whether accountant liable under the Fair Trading Act 1987, s.68 Income Tax Assessment Act 1936 (Cth), Pt.IVA LEGISLATION CITED: Taxation Administration Act 1953 (Cth) ss.8K, 8T Corporations Act 2001 (Cth) s.1318 Butcher v. Lachlan Elder Realty Pty. Limited [2004] HCA 60, 218 CLR 592 Commonwealth v. Cornwell [2007] HCA 16, (2007) 81 ALJR 933 Como Investments Pty. Limited v. Yenald Nominees Pty. Limited (1997) ATPR 41-550 CASES CITED: Havyn Pty. Limited v. Webster [2005] NSWCA 182 Monroe Schneider Associates (Inc) v. Number 1 Raberem Pty. Limited (1991) 33 FCR 1 Reiffel v. ACN 075 839 266 Limited [2003] FCA 194, 45 ACSR 67 Segal v. Fleming [2002] NSWCA 262 Leda Pty. Limited - appellant PARTIES: John Weerden - respondent/cross-appellant Leisure Management Pty. Limited - cross-respondent FILE NUMBER(S): CA 40231/06 COUNSEL: Mr. F. Douglas QC with Mr. M. Dicker for appellant and cross-respondent Mr. B. McClintock SC with Mr. R. McHugh SC for the respondent/cross-appellant SOLICITORS: Paul Bard Lawyers, Sydney for appellant and cross-respondent Blake Dawson Waldron Lawyers, Sydney for respondent/cross-appellant LOWER COURT JURISDICTION: Supreme Court - Common Law Division LOWER COURT FILE NUMBER(S): ED 3503/05 LOWER COURT JUDICIAL OFFICER: Gzell J LOWER COURT DATE OF DECISION: 10 March 2006 LOWER COURT MEDIUM NEUTRAL CITATION: [2006] NSWCA 125 IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40231/06 ED 3503/05 HODGSON JA McCOLL JA HANDLEY AJA Wednesday 18 July 2007 LEDA PTY. LIMITED V. WEERDEN & ANOR. Headnote FACTS The appellant (Leda) proposed to acquire shares in two companies: the cross-respondent (Leisure Management) and Leisure Development (Queensland) Pty. Limited (LDQ), which wholly owned the unit trust Leisure Development Trust (LDT). Leda sought advice from the respondent in relation to the impact the acquisition of these shares would have on its income tax. One issue was whether previous losses of $39 million generated by LDT could be carried forward to set off against future assessable income, in circumstances where LDT had also made what was said to be a capital profit of $45 million. The respondent informed Leda that in order to give that advice, he would need to carry out a full due diligence review. Subsequent to a conversation he had with the financial controller of Leda, despite not having undertaken a full review, the respondent gave some advice in a letter to Leda, advising among other things that if the Commissioner of Taxation considered the sole or dominant purpose of the acquisition was to obtain a tax benefit, the tax benefit could be denied pursuant to Part IVA of the Income Tax Assessment Act 1936 (Cth) (the Act). Leda acquired the shares, but the Commissioner of Taxation determined that the profit of $45 million was assessable income and that the losses of $39 million were thereby exhausted. Leda sought damages from the respondent for negligent advice in tort and misleading conduct under the Fair Trading Act 1987. The respondent argued against both heads of claim on their merits, and against the second on the basis that it was statute barred, the proceedings being commenced more than three years after the event. The respondent also cross-claimed against Leisure Management for any damages he might be held liable to pay. The primary judge found that the respondent's advice was negligent, because it should have been qualified to make it clear that he was expressing no opinion as to the availability of the tax losses; but that, because of Leda's own understanding of the issues, the advice did not materially contribute to Leda's loss. The primary judge dismissed Leda's claim, and also the cross-claim. Leda appealed, and the respondent cross-appealed against dismissal of the cross-claim. HELD (dismissing both the appeal and cross-appeal) (per Hodgson JA, with McColl JA and Handley AJA agreeing) (1) The respondent had advised that due diligence needed to be undertaken, and was acting on a compromise struck with the financial controller of Leda; and his advice could not reasonably be understood as advising on the availability or deductibility of the losses, and was accordingly not negligent. (2) Even if the respondent had been negligent, causation was not made out, because Leda was aware of the risk that the Commissioner of Taxation might treat the profit as assessable income, and of the fact that the respondent had not conducted a due diligence review and so was in no position to advise it properly. As a result, it could not reasonably rely on the letter of the respondent. (3) For the same reasons, there was no misleading conduct and thus Leda cannot succeed under the Fair Trading Act. (4) A cause of action is not complete until the plaintiff suffers actual loss or damage. Here, at the time of entry into the agreement between the parties, there was at most a chance of loss. The actual loss, at the earliest, did not crystallise until the Commissioner's decision. Hence, the claim for misleading conduct would not have been statute barred: Segal v Fleming [2002] NSWCA 262. (5) (Obiter) If the appellant had otherwise succeeded, the court would have considered whether, as a matter of public policy, the appellant ought to be refused relief because its dominant purpose in the transaction was to obtain a tax benefit by unlawful means, involving the destruction of records and misleading the Commissioner of Taxation. ORDERS 1. Appeal dismissed with costs. 2. Cross-appeal dismissed, with no orders as to costs. ********** IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40231/06 ED 3503/05 HODGSON JA McCOLL JA HANDLEY AJA Wednesday 18 July 2007 LEDA PTY. LIMITED V. WEERDEN & ANOR. Judgment 1 HODGSON JA: In proceedings in the Supreme Court, the appellant (Leda) sued the respondent (Mr. Weerden) for damages for negligent advice and for misleading conduct. Mr. Weerden cross-claimed against the cross-respondent (Leisure Management), claiming that Leisure Management was responsible for any damages that Mr. Weerden might be liable to pay. 2 In a judgment dated 10 March 2006, Gzell J decided that, although Mr. Weerden had breached his duty of care, Leda had not established that this breach of duty or any misleading conduct was a material cause of any loss; and on 29 March 2006, he gave judgment for Mr. Weerden on Leda's claim and for Leisure Management on Mr. Weerden's cross-claim, and he made costs orders generally in favour of Mr. Weerden. 3 Leda appeals from the decision against it. Mr. Weerden has put on a cross-appeal against the decision dismissing his cross-claim. CIRCUMSTANCES 4 The proceedings arise out of the acquisition by Leda in 1991 of shares in Leisure Management and in Leisure Development (Queensland) Pty. Limited (LDQ) which owned all the units in a unit trust called Leisure Development Trust (LDT), and advice given by Mr. Weerden, a taxation expert and partner of Price Waterhouse, in relation to that acquisition. 5 The LDT acquired land at Surfers Paradise in Queensland in 1984. It constructed and managed a hotel, and in doing so generated losses of about $39 million. It sold the hotel in March 1988, generating a profit of over $45 million. Having regard to the taxation regime applicable at the time, this profit was not taxable unless the property had been acquired by the LDT for the purpose of profit-making by sale or the profit otherwise arose from a profit-making undertaking or scheme. 6 Although Price Waterhouse were not the accountants for the LDT when the property was obtained, Price Waterhouse in Queensland were accountants for the LDT when the hotel was sold; and in the accounts and tax return for this period and thereafter, Price Waterhouse in Queensland treated the profit as a profit on capital account. In the years that followed, the assessable income of the LDT was set off against other losses, and there was no occasion for the Commissioner to form or declare a view about the nature of the profit from the sale of the hotel. 7 Also, in about 1987, Mr. Weerden was advising Kumagai companies concerning possible involvement in the LDT, and he prepared a memorandum in which he wrote "it would be argued that the profit [on sale of the hotel] is also not taxable, because the Trust did not buy the hotel for resale at a profit, but as an asset of a business to be carried on by it". 8 In April or May 1991, Leda began to investigate the prospects of acquiring the LDT. It was then entitled to units in the Tuggeranong Town Centre Trust, which had constructed a shopping centre in Canberra, and was about to make a large profit (about $50 million) assessable to income tax. 9 On 14 May 1991, Mr. Fazzolari, General Manager Finance of Leda, wrote to Leda's solicitors Mallesons as follows: An outline of our proposal to purchase the Leisure Developments Trust is attached, together with the Trust Deed of the Leisure Developments Trust. We request your advice on the proposal, having regard to:- (i) Required amendments to the Tuggeranong Town Centre Trust Deed. (ii) The transfer of Leda Limited's rights under the loan documents to the Leisure Developments Trust. (iii) Indemnities to be obtained by Leda in respect of the liabilities of Leisure Developments Queensland and Leisure Developments Trust, and the deductibility of the losses being purchased. (iv) Any other matter which you consider relevant. 10 On the same day, Mr. Fazzolari wrote to Mr. Weerden as follows: An outline of our proposal to purchase the Leisure Developments Trust is attached. We request your comments on the tax consequences of the purchase in general, however, specifically we require your comments on the following:- (i) The possible impact of Part IVA. (Ii) Could the management rights and property be sold either prior to Leda's purchase or shortly after? (iii) How best to eliminate the existing loans from the Trust to group/family companies. (Leisure Developments Trust balance sheet as at 30 June 1990 is attached). (iv) Alternatives to the proposed structure including alternatives which may assist in the eventual winding up of both the Tuggeranong Town Centre Trust and the Leisure Developments Trust. (v) The timing of the purchase of units by Leisure Developments Trust. This be done as soon as possible, before negotiations with a purchaser begin, or should we try to run the finance structure to its natural conclusion in December if possible. 11 This letter attached the following memorandum concerning the proposal: PROPOSAL Acquisition of loss trust Leda Limited acquires control of Leisure Developments Queensland ("LDQ") which owns all the units in the Leisure Developments Trust ("the LDT"). The LDT has tax losses of approximately $39 million in addition to property and management rights. The consideration is, say, $2,750,000 which includes $2,000,000 for the losses. Ideally the property and management rights would be sold by LDT as soon as possible after the change in ownership of the unitholder. However, if necessary these assets will be retained. Changes to Tuggeranong Trust structure On termination of the Westpac Tuggeranong facility Leda Limited is currently entitled to purchase the finance units in the trust from Westpac. The LDT would be assigned Leda Limited's rights under the Tuggeranong finance arrangement and on termination would acquire the finance units. The LDT would become the owner of 60.75% of the Tuggeranong Trust. The trust deed would be amended, if necessary, to enable the finance units to be entitled to at least 60.75% of the profits of the trust. Sale of Tuggeranong On the sale of Tuggeranong, at least 60.75% of the profit on sale would flow to the LDT and be applied against the losses. FLOW OF FUNDS Initial flow of funds LDQ will borrow $60,750,000 from Leda Finance, at interest. LDT will borrow $60,750,000 from LDQ, at the same rate of interest. LDT will pay Westpac $60,750,000. These amounts will vary if there is an early termination to the Westpac funding. It is preferable that the loans are made in the same year as the sale of the centre as the above loans would otherwise result in an increase in the Leda group's taxable income. On sale Tuggeranong Trust Tuggeranong Trust will receive, say, $170,000,000 from the sale of the centre resulting in an accounting profit of $45,000,000 and tax profit of $50,000,000. The sale proceeds will be used as follows: Sale proceeds 170,000,000) Distribution (45,000,000) Repayment fo Leda group loans (55,000,000) Loans to Leda group - at interest (70,000.000) 0 Together with existing loans, Tuggeranong Trust will have loans to group companies approximately equal to its paid up capital. LDT LDT will receive at least $27,000,000 (60% of $45,000,000). LDT will repay $27,000,000 to LDQ which will in turn repay Leda Finance. LDT will then owe $33,000,000 on which interest, at 13% would be $4,290,000 p.a. LDT would be entitled to at least 60% of the income of the Tuggeranong Trust which would have loans of $100,000,000 earning $13,000,000 p.a. Therefore tax losses not used up on the sale of Tuggeranong would be susequently (sic) used at the rate of $3,500,000 p.a. 12 On 23 May 1991, Mr. Robinson, Financial Controller of Leda (who reported to Mr. Fazzolari) prepared a memorandum concerning the proposal, which he sent to Mr. Ell, the CEO of Leda with a copy to Mr. Fazzolari: The present status of the above deal is as follows:- a. the structure of the deal has not changed from that previously discussed. b. Holt has agreed to sell for $3.376 million which includes a value for the real property and agreements of $1,000,000. c. Brian McNiven is valuing the property and agreements. d. the trusts losses totalling $39.6 million are being sold at 6 cents in the dollar. In addition there are another $2.7 million losses in the unitholder (we are yet to confirm this) and a possible further $11 million in the trust arising from the writing off of loans to the Holt family. Holt does not appear to be aware of this possibility and indeed the law is unclear on whether we will be able to use them. e. Holt is expecting Leda to get back to him today, possibly with a letter detailing our intentions. f. Mallesons have advised that in order to minimize stamp duty the Westpac units in Tuggeranong should be redeemed and reissued to LDT. g. Mallesons have given verbal approval to the deal from a legal viewpoint and will be confirming that in writing today. h. Mallesons have advised that we proceed directly with the final documentation in order to lock Holt in as soon as possible. Any interim measure such as heads of agreement will not be binding on either party. i. Price Waterhouse have given verbal approval to deal from a tax viewpoint and will confirm this in writing. Weerdon (sic) is away but has undertaken to provide this to us by Tuesday. MATTERS WHICH NEED TO BE ADDRESSED j. Leda to get back to Holt today. k. Price and terms of settlement. l. Westpac approvals The following approvals or undertakings are required from Westpac before the structure can be put in place. i. Consent to change the loan agreement to provide Westpac to be repaid by redemption of their units. At present Westpac is either repaid by purchase of the shares in Wistow and Mailgny in which case the LDT losses could not be used, or by sale of the units which would give rise to substantial stamp duty liability. ii. Consent is required to substitute LDT for Leda as the acquirer of the Westpac units under the terms of the loan agreement. iii. In the event of a sale of Tuggeranong prior to December Westpac should agree to redeem its units prior to the settlement of the sale. This is necessary as if settlement occurs first, there will be $180 million sitting in the trust with which to redeem the Westpac units. Therefore there will be no commercial purpose in the allotment of units to LDT. iv. Agreement that no part of the Westpac distributions for September and December quarters will be tax free. This will result in an increase in the distributions to Westpac for both quarters. This is required as these distributions cannot be tax free if Tuggeranong is sold during the next year. Rather than trigger Leda's tax indemnities it will be easier to address this possibility now. In addition Westpac should be left in no doubt as to the ownership of the unitholder in LDT. Should this be Barob or Teresina and Westpac is not in agreement, the worst possible outcome would be that they not approve the substitution of LDT for Leda and the entire plan would come unstuck. 13 On 27 May 1991, an employee of Price Waterhouse in Queensland, Mr. Dignan prepared a memorandum entitled "Discussion with Robin Holt" and "RE Sale of loss trust". Robin Holt was the son of Richard Holt, a principal of Leisure Management and LDQ. The memorandum was as follows: During negotiations with a potential purchaser the issue of the deductibility of a portion of the losses was raised. From the time of the commencement of construction of the Hotel to the time the Hotel opened the other party is claiming that the losses due to financing costs etc are not deductible as no s.52 notice was lodged. According to Robin it was the intention from day 1 to own and operate the Hotel. This can be documented by Board minutes etc. etc. [Therefore] There was never any intention to dispose of the bldg for a profit. [Therefore] s.52 has no application whatsoever. Provided they can establish the fact that the Trust commenced business at the stage where it started incurring expenses, there should be no problem. 14 Although the primary judge made no findings on this, in my opinion the correct inference is that the "potential purchaser" was Leda, that the "other party" was Leda, and that the "negotiations" were referable to a meeting between Mr. Ell and Robin Holt which, according to Mr. Ell's evidence, took place some time prior to a meeting they had in Sydney. 15 Also on 27 May 1991, Mr. Robinson sent a facsimile to Mr. Weerden: The purchase of the Leisure Developments Queensland is "on hold" until we have received written advice from yourself. There are two crucial points to be addressed: 1. Do the losses exist and are they available for use by Leda? 2. The final terms of the deal have not yet been determined. It would appear that one of two approaches will be adopted: a. Leda will contract to purchase for $3.4 million. $2.4 million will be paid within 60 days with the remaining $1 million due in two years time. Interest will be paid on the outstanding balance and Holt will receive a mortgage over the real property and management rights to secure the $1 million. I would imagine that there would be no further agreements dealing with the subsequent disposal of the trust's assets. b. Leda will contract to purchase for $3.5 million, payable within six months. There would be no further agreement with respect to the sale of the trust's assets. We acknowledge the need to continue the business of the trust however Bob is looking for a way to minimize his financial exposure. Do you have any suggestions? 16 On 28 May 1991, Mr. Robinson sent the following letter to Mr. Weerden: I confirm that before Leda purchase (sic) the shares of Leisure Developments (QLD) Pty Limited and Leisure Management Pty Limited we will require your written opinion on the following:- 1. The amount of income tax and capital losses carried forward as at 30th June 1990 in:- (i) Leisure Developments Trust (ii) Leisure Developments (QLD) Pty Limited 2. In each case above, the year in which the losses were incurred. 3. The effect on losses in Leisure Developments Trust in the event of the writing off of $11,680,327 of loans to group companies and directors. 4. The deductibility of the losses in the Leisure Developments Trust against income to be derived from the units to be issued in the Tuggeranong Town Centre Trust. 5. In order to facilitate the eventual winding up of the structure we propose that Leisure Developments (QLD) Pty Limited may subscribe for $60,750,000 of units in Leisure Developments Trust in order to increase the indexed cost base of its investment. In order to unwind the structure, the units would be redeemed at some point in time when the indexed cost base exceeds the redemption price. Are there any other alternatives for winding up the structure with minimal tax exposure? 6. It is proposed that either Barob Pty Limited, Leda's parent company, or Teresina Pty Limited, which in its capacity as the trustee of the Ell Family Trust owns all issued shares in Barob Pty Limited, may acquire the shares in Leisure Developments (QLD) Pty Limited. Will either event have any tax impact? 7. The terms of the purchase are not yet finalised. It is presently proposed that Leda will contract to purchase the shares for $3.4 Million, $2.4 Million to be paid within sixty (60) days with the balance due within two (2) years. Interest will be paid on the outstanding balance and the vendor will receive a mortgage over the assets of the trust. It is envisaged that the vendor will ultimately negotiate the sale of the trust's assets and in the event of the sale being in excess of $1 Million, will receive the excess. The preferred alternative from my point of view is a simple purchase at $3.4 Million with Leda retaining the assets and business for say a couple of years. This would carry some financial risk which the directors are obviously trying to minimise. Please comment on the above alternatives together with any suggestions as to how the purchase may be structured. 8. Any other material taxation consequence of the proposed transaction. As the proposed acquisition cannot proceed until we have received your advice, I ask that you please reply on or before Wednesday 29th May. If this is not possible, please contact me as soon as possible. 17 On 29 May 1991, Mr. Weerden responded with a letter addressed to Mr. Fazzolari: I refer to our conversation this morning and Steve Robinson's letter of yesterday. Most of the matters raised in Steve's letter are reasonably straightforward with the exception of point 4, the deductibility of the losses in LDT against other income. In order for us to give an opinion on the deductibility of these losses it will be necessary to carry out a due diligence review of the trust. This would require a detailed examination of a number of matters including the following: (i) income tax returns, working papers and accounts going back to the year losses are still available for carry forward; (ii) any legal agreements entered into by the trust which may have an impact on the existence of the losses; and (iii) the Trust Deed and minutes of the trustee relating to the activities of the trust. It will also be necessary to hold discussions with the Directors and Price Waterhouse Brisbane to ensure there are no matters of which we are unaware such as disputes with the Australian Taxation Office. We would estimate that a due diligence of this type would cost approximately $12,000 and take about a week after the documents become available. We briefly comment below on the matters raised in Steve's letter in order. 1. We can confirm the amount of the losses when given access to the income tax returns. 2. As in 1 above, we can confirm the year that losses were incurred when given access to the income tax returns. 3. The writing off of loans is unlikely to generate an income tax deduction. However, if the loans can be said to be "disposed" of, a capital loss may be generated. 4. Subject to the due diligence review discussed above. 5. To be advised. 6. No. 7. To be advised. 8. The major obstacle to the proposed transaction may be Part IVA of the Act. It will be critical to demonstrate the commercial purpose behind the structure of the transaction. If the Australian Taxation Office believe the transaction was entered into solely for tax reasons they may deny any tax benefits that arise. Would you please let me know if you wish us to proceed with the due diligence or if you have any other questions in relation to the proposed transaction. 18 According to a handwritten document prepared by Mr. Robinson on 1 December 1993, just before he left the employment of Leda, there was around this time the following sequence of events: We requested that JW confirm in writing to Leda the amount of tax losses in the trust. He refused to do so stating that he had not prepared the returns and would therefore need to do a due diligence review of PW Gold Coast's work. He quoted a fee of around $10,000 and estimate a few weeks to complete the task. RF and I put this proposal to WRE for his approval which was not given as the amount was excessive and the work considered unnecessary. A compromise was struck whereby Peter Malletz (sic) provided an opinion to the directors of Leisure Management P/L (the trustee of the trust) stating the amount of losses and the age of those losses. John Weerden, in response to my written request of 27 May 1991 to confirm the quantum of losses, forwarded Malletz's (sic) letter. He did so knowing that Leda would not proceed with the purchase without it and that we were therefore relying on its content. I would note that later in this memorandum, Mr. Robinson wrote the following: Most correspondence and work papers were shredded due to their tax implications however my computer files show that detailed progress reports were made on 23/5/91 and 21/6/91. 19 The primary judge accepted that, between 29 May 1991 and 3 June 1991, "a compromise was struck" in a conversation between Mr. Robinson and Mr. Weerden, and he did not accept Mr. Weerden's evidence of a conversation occurring after 6 June 1991 in which he was told that he would not be paid to undertake a due diligence. Mr. Robinson gave affidavit evidence of the contents of a conversation at this time, which made no reference to any compromise but rather suggested that Mr. Weerden simply abandoned the requirement of a due diligence. The primary judge did not find that a conversation took place in those terms; and I would understand his acceptance of the compromise arrangement impliedly rejects it. In my opinion, the 1993 document is a more reliable source than Mr. Robinson's 2003 affidavit; and since the affidavit account of the conversation is inconsistent with the making of a compromise, which the primary judge did find, I would not accept the affidavit version as being reliable. 20 On 3 June 1991, Mr. Maletz, of Price Waterhouse in Queensland, sent by facsimile to Leda and to Mr. Weerden a letter addressed to Leisure Management in the following terms: We refer to our recent discussions and provide the following information. The income tax return for the Trust showed a net income for taxation purposes of $Nil after deducting carried forward losses of $71,496. After recouping these losses the Trust has carried forward losses for taxation purposes of $39,668,033 which have been calculated as follows: Year ended 30 June 1986 7,569,490 Year ended 30 June 1987 25,003,814 Year ended 30 June 1988 7,094,729 These losses are available to be carried forward for seven years from the year in which they were incurred and offset against future income of the trust during that period. We mention that the income tax returns for the Trust up to and including the year ended 30 June 1989 were prepared from audited accounts of the Trust. The income tax returns for the year ended 30 June 1989 and 1990 were prepared from unaudited accounts provided by the Trustee. 21 A note on the facsimile coversheet indicates that Robin Holt was in Sydney at this time. Mr. Ell gave evidence of a meeting in Sydney with Robin Holt, occurring after the meeting on the Gold Coast, and he could not remember the date. In my opinion it is a reasonable inference that this was when that meeting was occurring. 22 The following day, another letter was addressed from Mr. Maletz to Leisure Management in similar terms to the one of 3 June 1991, except that paragraph 2 was in slightly different terms, as follows: The income tax returns for the Trust for the years ended 30 June 1989 and 30 June 1990 showed net incomes for taxation purposes of $Nil after deducting carried forward losses of $9,319,160 and $71,496 respectively. After recouping these losses the Trust has carried forward losses for taxation purposes as at 30 June 1990 of $39,668,033 which have been calculated as follows: 23 A copy of this letter of 4 June 1991 was attached to a letter dated 6 June 1991 from Mr. Weerden to Mr. Fazzolari, which was in the following terms: We refer to Steve Robinson's letter of 28 May 1991 and our response of 29 May 1991. We are now able to more fully answer some of the matters raised in Steve's 28 May letter after further discussions with yourself and Peter Maletz of Price Waterhouse Brisbane. In relation to points 1 and 2 raised in Steve's letter we refer to the letter from Peter Maletz dated 4 June 1991 to the Directors of Leisure Management Pty Limited (copy attached). This letter details by loss year the quantum of losses shown to be available to be carried forward to offset against LDT's future assessable income. The total carried forward losses as shown in the 30 June 1990 income tax return for LDT is $39,668,033. As mentioned in that letter, losses that the Commissioner accepts as available to be carried forward may only be carried forward for seven years from the year in which they were incurred. For example, should the Commissioner accept the $7,569,490 of losses incurred during the year ended 30 June 1986, these losses must be utilised prior to or during the year ending 30 June 1993. Point 3 of Steve's letter discusses the writing off of loans by LDT. It is possible that if any part of these loans could be seen as "traditional securities" an income tax deduction may be created on the disposal of that part of the loans. Traditional securities are securities that were acquired after 10 May 1989. It should be remembered that "disposal" is a more difficult matter to establish than a mere writing off. If the loans are post-CGT assets and part or all of them are not traditional securities a capital loss would be created on disposal. Point 5 of Steve's letter discusses Leisure Developments (Qld) Pty Limited subscribing for further units in LDT. If LDT wish to invest at some time in the future in any project, a further subscription for units would seem appropriate. Any further subscription would be indexed under the CGT provisions if held for more than 12 months. If the trust was wound up, and the corpus distributed exceeded the indexed cost base of all units held, a capital gain would accrue. As you are aware, section 160ZM reduces the indexed cost base of units held in a unit trust if non-taxable distributions are received by unitholders. This provision should be kept in mind if the trust is ever would up. Change in ownership and nature of business By virtue of section 95(1) and section 80 of the Act, a trust estate is entitled to carry forward losses even though a change in beneficial ownership has taken place. The anti-avoidance provisions relating to trafficking in losses only apply to companies. The change in beneficial ownership of LDT and the potential introduction of new business activities should not affect the deductibility of any losses provided the Commissioner cannot successfully take the view that there is an entirely new trust. This is assuming that Part IVA cannot be applied to the transaction. The Commissioner may argue that a new trust has been established if there is a complete change in ownership of, and assets of, LDT. Furthermore, his argument would gain strength should alterations occur to the Trust Deed or should there be further changes to the relationships between the settlor, trustee and unitholders. In summary, the fewer changes made to the trust structure the easier it will be to defend any future dispute with the Commissioner regarding this issue. Part IVA By entering into this transaction, it is necessary that Part IVA of the Act be considered because of the large quantum of losses shown to be held by LDT. Should LDT derive sufficient assessable income to recoup the losses shown as carried forward, our concern is that Part IVA may be considered by the Commissioner of Taxation. Part IVA operates where, on an objective view of a particular scheme and all surrounding circumstances, the Commissioner concludes that the scheme was entered into for the sole or dominant purpose of obtaining a tax benefit . Where Part IVA operates, the tax benefit is cancelled and severe penalties imposed. A "scheme" is very broadly defined and will encompass the proposed transaction. A "tax benefit" is obtained where an amount is not included in assessable income or a deduction is allowed where the income or deduction would reasonably be expected to be assessable or not deductible, respectively, if the scheme was not entered into. Eight factors are taken into account by the Commissioner in deciding whether a scheme was entered into for the sole or dominant purpose of obtaining a tax benefit. The commerciality of the acquisition of units in LDT as an investment by the Leda Group should be obvious so as not to run the risk of the Commissioner forming an opinion that Leda entered into the transaction to avail themselves of tax losses shown to be available in LDT. Point 7 of Steve's letter suggests two alternatives in relation to the proposed transaction. The first alternative includes a partial deferred settlement and mortgage over the assets of LDT. The vendor would be entitled to any profit on the ultimate sale of the trust's existing assets. This alternative may give the Commissioner scope to argue that the purpose of the acquisition was to utilise the benefit of the losses. The risk of part IVA being applied would be less if there was an outright acquisition of LDT. The maintenance of comprehensive documentation to establish the commercial nature of the transaction should be a priority for future reference should the question of Part IVA ever arise. Documentation should include details such as: - Why LDT was targeted and the business strategy of the investment; - An analysis carried out on the future benefits to be derived by the investment; and - Details of valuations carried out. Documentation and correspondence on hand that could be misinterpreted by the Commissioner and lead him to form an opinion that Part IVA may apply should be clarified immediately in the context of the entire transaction. Furthermore, any business transactions entered into subsequent to the change in beneficial ownership should continue to be in the nature of business carried out by LDT prior to the change in ownership. If this does not occur, the investment should be based on the assessment of LDT's direction at that point in time and not a preconceived strategy. In summary, the Commissioner may conclude that the acquisition of LDT was part of a scheme where the dominant purpose is seen to be to obtain a tax benefit. However, should the Leda Group provide sufficient evidence that the purpose of the transaction was of a commercial nature, the Commissioner should be persuaded that the dominant purpose was not to gain such tax benefits. Should you have any further question in relation to the above, please do not hesitate to contact Greg Stevens or myself. 24 There was in evidence a 22-page memorandum, prepared by Mr. Robinson, and originally dated 21 June 1991 but altered to 11 June 1991, having elaborate figures and diagrams. The first page of this memorandum began as follows: The detail of the proposal to use the losses of the Leisure Developments Trust is attached. Advice has been received from Mallesons and Price Waterhouse which doesn't raise any problems, other than Price Waterhouse's concern about the tax department considering Leda's dominant purpose to be the purchase of tax losses. LEISURE DEVELOPMENTS TRUST BUSINESS NOT TO BE SOLD Price Waterhouse have advised us to purchase the shares in Leisure Developments (Qld) free from any agreements with the Holts dealing with the management rights. This would involve Leda managing the property for an indefinite period. Price Waterhouse advise that:- - the purchase should be well documented including detail of * how LDT was targeted, * Leda's business strategy in acquiring the trust, * analysis of expected returns on investment, which then leads to a justification of the price Leda is paying, - Leda files should not indicate at this stage that we intend for the trust to take an interest in Tuggeranong Trust. This should not be seen as a preconceived strategy. I am currently preparing this file. All memos and notes concerning this matter up to this point, including this memo, should be shredded. 25 Thereafter negotiations proceeded concerning the purchase, and the terms of the purchase agreement. 26 A 4-page memorandum was prepared by Mr. Robinson, dated 15 July 1991. One section of this document was headed Tax Losses, and was in the following terms: The vendors have warranted that the tax losses exist and are useable. Price Waterhouse have also confirmed that the losses exist and are useable. In the event that these warranties are not correct Leda will have cause to sue for damages for any loss. If the losses are shown not to be available prior to the introduction of income into the trust, Leda's loss would be the six cents in the dollar it paid for the losses. Mallesons have advised us that in such a case it would not be clear as to what the purchase price of the losses was and suggested a side letter be provided by the vendors stating that the consideration for the losses was six cents in the dollar. Although the vendors are willing to supply this letter, I believe, as do Price Waterhouse, that such a letter would jeopardise the whole deal by highlighting the dominant purpose of the transaction as being the purchase of the tax losses. Alternatively, the price for the losses can be determined by deducting from the purchase price, the value of the other assets, as determined by the independent valuation by Eccleston & Fraser. Mallesons agree that this approach would also be acceptable in building a case for damages. If the losses are shown not to be available after the introduction of income into the trust, the damages would be quantified as the amount of tax payable and Leda would have recourse to both the vendors and Price Waterhouse. 27 The purchase agreement was made on 16 July 1991, whereby Leda purchased from Richard Holt and a Mr. Graham all the shares in Leisure Management (for $2) and LDQ (for $3,349,998). The vendors gave certain warranties, including warranties that the tax losses of the LDT totalling $39,618,568.00 disclosed in the Trust's accounts "are correct" and that they "are available to be carried forward for up to 7 years from the year of income in which they were incurred". 28 Mr. Weerden rendered the following account for his work in connection with this matter: Our fee for professional services rendered during the period 1 October 1990 to 30 June 1991 in relation to the following taxation matters. Work done in relation to the acquisition of Leisure Development Trust and associated companies including our letters of 29 May 1991 and 6 June 1991 and various telephone discussions between John Weerden, Greg Stevens, Stephen Robinson and yourself. 8,900 Work done in relation to the early termination of interest rate swap agreements including our facsimile of 14 June 1991. 1,800 $10,700 29 Subsequent events, and Leda's claims, were summarised by the primary judge: The Commissioner's assessment 12 In August 1993, the Commissioner of Taxation issued a position paper claiming that the profit on sale of the hotel constituted assessable income under the Income Tax Assessment Act 1936 (Cth), s 25A(1). Amended notices of assessment issued that exhausted the tax losses by setting them off against the profit on sale of the hotel. From adverse decisions on its notices of objection, Leisure Management applied to the Administrative Appeals Tribunal for a review of the decisions of the Commissioner under the Taxation Administration Act 1953 (Cth), s 14ZZ(a)(i) as it then stood. The Tribunal upheld the Commissioner's amended assessments on the basis that at least one of the intentions of the former directors of Leisure Developments and Leisure Management, Richard Tweedy Holt and Richard John Graham, was to construct the hotel for the purpose of resale. The issues 13 Leda claims that Mr Weerden's letter of 6 June 1991 was negligently prepared and was misleading or deceptive. It claimed damages including damages under the Fair Trading Act 1987, s 68 quantified as the difference between the purchase price of the shares and the proceeds of sale of the assets of the Leisure Trust plus the costs of objecting to the amended assessments and the costs of the proceedings in the Administrative Appeals Tribunal. DECISION OF PRIMARY JUDGE 30 On the question of whether Mr. Weerden breached a duty of care, the primary judge, after referring to the third paragraph of his letter of 6 June 1991, continued: 40 In my opinion that paragraph is to be construed as the expression of opinion by Mr Weerden that the losses were available to be carried forward to offset the Leisure Trust's future assessable income. 41 It was argued that this construction was not open because Mr Weerden had said he needed to conduct a due diligence review, he had not done so and when he wrote his letter he was still awaiting instructions to carry out that due diligence. But there is no mention of due diligence in the letter of 6 June 1991. It says that the questions raised by Mr Robinson may be more fully answered following Mr Weerden's discussion with Mr Maletz. The inference to be drawn is that Mr Weerden had abandoned his requirement for due diligence before expressing his opinion on the deductibility of the carry-forward losses. 42 And the absence of specific reference to point 4 of Mr Robinson's requests is explicable on the basis that, having expressed the view that the losses were available to be carried forward to offset future income, there was no need to address point 4 specifically. It sought an opinion as to the deductibility of the losses against future income. Mr Weerden had already expressed his opinion on that issue in his answers to points 1 and 2. 31 The primary judge then addressed the question of whether the opinion given by Mr. Weerden was qualified: 43 Mr Weerden's letter of 6 June 1991 contained a qualification that deductibility of the tax losses against future income might not be available if the Commissioner invoked the Income Tax Assessment Act 1936 (Cth), Pt IVA. But it contained no other qualification. It did not contain a qualification that due diligence was a prerequisite to any opinion on the deductibility of the carry-forward losses against future income. It did not contain any specific statement that the Commissioner had not ruled on the deductibility and the qualification that he might not accept the losses as deductible. It did not state that it was essential to analyse the nature of the profit on sale of the hotel, because if it were on revenue account, the tax losses would have been absorbed. 44 If Mr Weerden was still waiting for instructions to carry out due diligence he should, at the very least, have included a warning in the letter of 6 June 1991 that he was expressing no opinion on the deductibility of the carry-forward losses pending his carrying out of a due diligence review. 32 He then considered the duty of care, holding that "professionals are expected to exercise a standard of care that may reasonably be expected of practitioners practising in the relevant area of expertise". He considered opinion evidence given by experts. He considered a conflict of evidence between Mr. Weerden and Mr. Maletz as to the origins of Mr. Weerden's 1987 memorandum, preferring Mr. Maletz's evidence on this; but he found that Mr. Weerden only recalled the document during cross-examination and made no finding that it was present to his mind in 1991. 33 The primary judge found that Mr. Weerden elected to take the course of advising on the deductibility of the carry-forward tax losses, and having done so should have qualified his opinion: 59 In my view, in writing the letter of 6 June 1991 without the advantage of due diligence and without expressly qualifying his statement that the quantum of losses shown in the tax returns were available to be carried forward to offset future assessable income of the Leisure Trust, Mr Weerden failed to meet the standard of a prudent and reasonable taxation adviser. 34 The primary judge then considered the question of causation, as follows: 68 There is no doubt that Leda regarded Mr Weerden's advice as significant. On the day after the letter was sent, Price Waterhouse was thanked for its advice and was asked for further information about the possibility, if debts of the Leisure Trust were released, of claiming a deduction under the Income Tax Assessment Act 1936 (Cth), s 70B(2) upon a disposal of a traditional security. 69 In Mr Robinson's memorandum of 15 July 1991, the day before the settlement, it was stated that Mr Weerden had reviewed the original documentation and had agreed to all subsequent changes and all their advice, including advice on the existence and use of the tax losses was on file. 70 But it does not necessarily follow that, but for Mr Weerden's advice, the transaction would not have gone ahead. Leda was not an unsophisticated taxpayer. It was Mr Fazzolari who put to Mr Weerden a detailed proposal for the acquisition of Leisure Developments and Leisure Management and changes to the structure of the Tuggeranong Trust to assign to the Leisure Trust the right to at least 60.75% of the profits to be offset against the losses of approximately $39 million in the Leisure Trust in his letter of 14 May 1991. That letter sought Mr Weerden's comments on a number of issues including the possible impact of the Income Tax Assessment Act 1936 (Cth), Pt IVA. Leda's executives were well aware of the danger that Pt IVA posed and they, no doubt, used that risk in negotiating the figure of 6 cents in the dollar for the tax losses. The rate of tax for a private company in 1991 was 39% ( Income Tax Rates Act 1986 (Cth), s 23(3)(a)). The huge discount that Leda was able to achieve reflected the high degree of risk that the carry-forward losses would not be available as a deduction against Tuggeranong assessable income. 71 Furthermore, each of Messrs Ell, Fazzolari and Robinson was aware that a profit on sale of property acquired prior to the introduction of capital gains tax was included in assessable income if the property was acquired for the purpose of profit-making by sale or from the carrying on or carrying out of any profit-making undertaking or scheme. Mr Ell had been told by Mr Holt that Leisure Management's purpose in developing the hotel was to hold it for the long term. Mr Fazzolari had a similar understanding. He said he was aware that there would be an issue as to the tax treatment of the profit on sale of the hotel: "It was an issue we needed to understand. That is why we engaged Mr Weerden". Leda was not ignorant of the risk that the Commissioner of Taxation might treat the profit on sale of the hotel as on revenue account. Senior executives had made their own enquiries from Mr Holt. 72 Furthermore, most of the matters that Mr Traill said ought to have been raised by way of warning in the letter of 6 June 1991 were already known to Mr Ell and Mr Fazzolari. Each of them set forth five matters that they said, had they been advised of any of them, Leda would not have acquired the shares. 73 First, it was said that had Mr Weerden advised that there was some doubt that the profits realised from the sale of the hotel were treated, properly, as capital profits, the share acquisition would not have proceeded. Mr Fazzolari said he knew in 1991 that this issue would arise if the matter came before a tribunal and it was one of the matters that would have been addressed by Mr Weerden in due diligence. When the proposition was put to Mr Ell that he was aware of the problem, he evaded the question with the answer: "We had no advice that they were not properly treated." 74 The second matter was the failure to advise that it was unlikely that the Commissioner of Taxation would decide whether to allow the revenue losses and the treatment of profits from the sale of the hotel as capital profits until revenue losses were relied upon as deductions by the Leisure Trust. Mr Fazzolari conceded that he was aware of this issue. Mr Ell said: "We knew possibly, yeah." 75 The third issue was that the availability of the revenue losses was dependent upon the Commissioner of Taxation accepting that the profit on sale of the hotel was on capital account. Mr Ell was aware of this issue prior to completion and Mr Fazzolari was aware of the issue in May and June of 1991. 76 The fourth matter, that was raised by Mr Ell alone, was that Price Waterhouse, in treating the profit on sale of the hotel on capital account, had relied on the subjective intentions of the previous directors of Leisure Developments, Messrs Holt and Graham, as advised to Price Waterhouse. Mr Ell agreed that prior to completion he knew that the proper treatment of the profit depended upon the subjective intentions of Messrs Holt and Graham. 77 The fifth matter was whether the profit on sale of the hotel was treated properly depended upon a tribunal accepting the credibility of the evidence of Messrs Holt and Graham, as to their subjective intentions at the time of the development. Both Mr Ell and Mr Fazzolari agreed that they were aware of this matter prior to completion. 78 The sixth matter, raised by Mr Fazzolari alone, was that Mr Weerden failed to advise that the Commissioner of Taxation had not accepted the tax losses. But Mr Fazzolari was aware that there had been no ruling by the Commissioner about the deductibility of the losses. 79 The assertions of Mr Ell and Mr Fazzolari that, had any of these matters been raised in Mr Weerden's advice, the purchase of the shares would not have taken place, are self-serving. The fact that they were aware of the matters to which they complained Mr Weerden had not adverted, suggests, strongly, that his raising of these risks would have had no effect on Leda's ultimate decision. Leda was aware of the risks and went ahead. 80 Furthermore, Leda sought advice from Mallesons Stephens Jacques in May 1991 on the proposal having regard to, amongst other things, indemnities to be obtained by Leda in respect of the liabilities of Leisure Developments and the Leisure Trust and the deductibility of the losses being purchased. A warranty was included in the share sale agreement, and Mallesons commented in July 1991: "I note that your main concern is the effect of a breach of the warranty with respect to the amount of carry forward tax losses in LDQPL and in the Trust. I would confirm that if this warranty is breached, then Leda would be entitled to claim as damages an amount equal to the loss it suffers as a consequence of that breach of warranty." 81 And Mr Robinson had sought advice from Mallesons before settlement on the prospect of suing Price Waterhouse. Mr Robinson conceded that it was one outcome. 35 He then referred to the tax losses section of Mr. Robinson's memorandum of 15 July 1991, set out above, and continued: 82 Mr Robinson's memorandum of 15 July 1991, the day before settlement, noted that the vendors' warranties included that the tax losses carried forward amounted to over $39 million for the Leisure Trust and over $2 million for Leisure Developments and Leisure Management. The longest entry in the memorandum was under the heading Tax Losses and was as follows: "The vendors have warranted that the tax losses exist and are usable. Price Waterhouse have also confirmed that the losses exist and are usable. In the event that these warranties are not correct Leda will have cause to sue for damages for any loss. If the losses are shown not to be available prior to the introduction of income into the Trust, Leda's loss would be the 6 cents in the dollar it paid for the losses. Mallesons have advised us that in such a case it would not be clear as to what the purchase price of the losses was and suggested a side letter be provided by the vendors stating that the consideration for the losses was 6 cents in the dollars. Although the vendors are willing to supply this letter, I believe, as do Price Waterhouse, that such a letter would jeopardise the whole deal by highlighting the dominant purpose of the transaction as being the purchase of the tax losses. Alternatively, the price for the losses can be determined by deducting from the purchase price, the value of the other assets, as determined by the independent valuation by Eccleston & Fraser. Mallesons agree that this approach would also be acceptable in building a case for damages. If the losses are shown not to be available after the introduction of income into the trust, the damages would be quantified as the amount of tax payable and Leda would have recourse to both the vendors and Price Waterhouse." 83 The common law, common sense test of causation, accepts that negligent conduct may be causally connected to resultant loss or damage if it materially contributes to that result, even if other factors have contributed to the loss or damage. ( Grant v Sun Shipping Co Ltd [1948] AC 549 at 563, Bonnington Castings Ltd v Wardlaw [1956] AC 613 at 620, Gould v Vaggelas (1983-1985) 157 CLR 215 at 236, 250-251, March v Stramare (E & MH) Pty Ltd (1990-1991) 171 CLR 506 at 512-513, Medlin v State Government Insurance Commission (1994-1995) 182 CLR 1 at 7, Henville v Walker (2001) 206 CLR 459 at [60], [97], [106]). 84 But in this case, I do not see Mr Weerden's failures in his advice as having materially contributed to Leda's loss. Leda had the unqualified advice of Mr Weerden but they also had vendors' warranties and they had advice that they could sue the vendors and Price Waterhouse if the losses were not available to be offset against assessable income of the Tuggeranong Trust. And Leda was aware of the risks it said Mr Weerden failed to bring to its attention and went ahead despite the alleged shortcomings in his advice. Even if it could be said, and I doubt that it could, that Mr Weerden's failures played some part in the losses suffered by Leda, they were trifling. They could not, in my view, be regarded as material. 85 In my judgment Leda has failed to establish that Mr Weerden's breach of duty was a material cause of any loss or damage it sustained. 36 The primary judge considered that the same reasoning would apply to defeat the Fair Trading Act claim. Accordingly, he said he did not need to consider, and he did not in fact consider, the following matters: 1. Whether the Fair Trading Act claim was statute barred. 2. The question of contributory negligence. 3. The calculation of damages 4. Mr. Weerden's application for relief under s.1318 of the Corporations Act 2001 (Cth). 5. Mr. Weerden's cross-claim. ISSUES ON APPEAL 37 Leda relies on the following grounds of appeal: 1. His Honour erred in finding in paragraph 84 of the Judgment that, even if it could be said that Mr Weerden's failures played some part in the losses suffered by the Appellant, they were trifling and could not be regarded as a material cause of the loss, having regard to: (a) his Honour's finding in paragraph 68 of the Judgment that "there is no doubt that Leda regarded Mr Weerden's advice as significant"; (b) the contents of the 15 July 1991 memorandum from Mr Robinson referred to in paragraphs 69 and 82 of the Judgment; (c) the oral evidence of Mr Robinson, Mr Fazzolari and Mr Ell (all of whose oral evidence on reliance was not specifically rejected by the Court) at: (i) Mr Robinson: T59.55-.9, 62.47, 65-6; (ii) Mr Fazzolari: (references are to 7 February 2006 transcript) T112.19, T113.48, T123.46, T125.50-126.11; (iii) Mr Ell: (references are to 8 February 2006 transcript) T109.26, T109.35, T109.57, T110.07, T114.52; (d) the failure of the Respondent's counsel to cross-examine the representatives of the Appellant in relation to the assertion that they would not have gone ahead with the transaction in the absence of Mr Weerden's advice of 6 June 1991; (e) his Honour's finding in paragraph 84 of the Judgment that the Appellant "had the unqualified advice of Mr Weerden"; (f) the fact that Leda would not have retained Mr Weerden for advice at all if: (i) they did not intend to have some regard to his advice; and (ii) they were aware of all the tax risks; (g) the fact the quantum and availability of the tax losses was clearly a significant factor to the Appellant in acquiring the shares. See the proposal document prepared which was attached to the letter dated 14 May 1991 sent by Mr Fazzolari to Mr Weerden: Exhibit A, Volume 2, page 431; (h) the fact that the question whether the losses existed and that they were available for use by Leda was confirmed as being "crucial" in the letter from Mr Robinson to Mr Weerden dated 27 May 1991: Exhibit A, Volume 2, page 431; (i) the importance of the opinion of Mr Weerden on this issue as confirmed in the 28 May 1991 letter from Leda to Mr Weerden: Exhibit A, Volume 2, page 470; (j) the 11 June 1991 memorandum from Mr Robinson confirming that he regarded the advice from Price Waterhouse as not raising any problems: Exhibit A, Volume 2, page 506A; (k) the 1 July 1991 Mallesons letter confirming that Leda was relying on Price Waterhouse for taxation advice: Exhibit A, Volume 2, page 562; (l) the fact that, consistent with His Honour's findings, Leda did not seek further advice on this issue after receiving the 6 June 1991 letter from Mr Weerden prior to acquiring the shares (see paragraphs 24 to 26 and paragraph 60 of the Judgment). 2. His Honour's finding that Mr Weerden's breach of duty was not a material cause of any loss or damage it sustained was against the evidence and erroneous on the evidence. 3. His Honour erred in paragraph 84 of the Judgment by finding that, by reason of the existence of the vendor's warranties and legal advice that Leda could sue the vendors and Price Waterhouse if the losses were not available to be offset against assessable income of the Tuggeranong Trust, as referred to in the 15 July 1991 memorandum (Exhibit A, Volume 2, page 763C), Mr Weerden's failures could not be regarded as a material cause of the loss. 4. His Honour erred in paragraph 84 of the Judgment in finding that such awareness as the Appellant had of the risks associated with the transaction was sufficient to displace the reliance placed by the Appellant upon Mr Weerden's advice as a material cause of the Appellant's loss. 5. His Honour erred in finding in paragraph 73 of the Judgment that Mr Ell had evaded a question at T111.23 when on a fair reading of Mr Ell's oral evidence in its context Mr Ell had answered the question and his answer was consistent with his oral evidence at T109.20-.26, T109.33-.35, T109.53-110.07. 6. His Honour erred in paragraph 88 of the Judgment in finding that the Appellant did not suffer loss or damage by misleading or deceptive conduct of Mr Weerden and was thereby not entitled to damages under the Fair Trading Act 1987 (NSW). 7. His Honour erred in paragraph 88 of the Judgment in finding that the Appellant did not suffer loss or damage by misleading or deceptive conduct of Mr Weerden in failing to take into account the purpose and objective of the Fair Trading Act as required by the High Court in Travel Compensation Fund v Robert Tambree [2005] HCA 69 (16 November 2005). 38 Mr. Weerden relies on the following grounds in his Notice of Contention: 1. The court below erred in construing the respondent's letter dated 6 June 1991 as expressing an opinion by the respondent that tax losses of $39,668,033 were available to be carried forward to offset the Leisure Development's Trust's future assessable income. 2. The court below erred in failing to find that the respondent was not retained by the appellant to give an opinion on the availability of the tax losses. 3. The court below erred in holding that the respondent relevantly owed the appellant a duty of care. 4. The court below erred in finding that the respondent had been negligent. 5. The court below erred in finding that the material documents relating to the respondent's advice were before the court. 6. The court below should have drawn the inference that the documents destroyed by the appellant would have established that the appellant entered into the transaction fully cognizant of all the risks, including the risk that the hotel sale profit might be found to be on revenue, as opposed to capital, account depending upon the intention of the vendors when acquiring the property. 7. The court below should have found that the appellant did not prove it suffered any loss as a result of the respondent's alleged breach of duty or misleading and deceptive conduct. 8. The court below should have found that the respondent did not engage in conduct that was misleading or deceptive or likely to mislead or deceive contrary to section 42 of the Fair Trading Act 1987. 9. The court below should have found that the appellant's claim under section 68 of the Fair Trading Act 1987 was barred and cannot be maintained. 10. The court below should have found that if the appellant suffered any loss or damage by reason of the breaches alleged against the respondent, then such loss or damage was suffered by reason of the failure of the appellant to take reasonable steps to mitigate such loss or damage. 11. The court below should have found that if the appellant suffered any loss or damage by reason of the breaches of duty which are alleged against the respondent, then such loss or damage was wholly caused by or contributed to by the negligence of the appellant. 12. The court below should have found that if the respondent is liable to the appellant in respect of any loss and damage sustained by reason of the facts and matters alleged against the respondent, the respondent acted honestly, and having regard to all the circumstances of the case, ought fairly to be excused from any such liability, pursuant to section 1318 of the Corporations Act. 39 I will deal first with the question of liability in negligence, arising on the Notice of Contention; then I will deal with the question of causation. I will then consider the Fair Trading Act claim, looking at the questions of liability, causation and the limitation question. Then I will consider the remaining issues. LIABILITY AND NEGLIGENCE Submissions 40 Mr. McClintock for Mr. Weerden submitted that the primary judge erred in his construction of the letter of 6 June 1991, in that, in the context of previous communications, to the reasonable understanding of Mr. Weerden, Leda could not reasonably: (1) have held the view that Mr. Weerden had abandoned his requirement for due diligence before he expressed his opinion on the deductibility of the losses; (2) have taken the letter of 6 June 1991 as endorsing the contents of Price Waterhouse Queensland's 4 June 1991 letter; (3) have understood paragraph 3 as an expression of Mr. Weerden's opinion that the losses were available to be carried forward; and (4) have taken the letter of 6 June 1991 as answering question 4 of the letter of 28 May 1991, or taken the answers given to questions 1 and 2 as giving Mr. Weerden's opinion on the deductibility of the losses. 41 Mr. McClintock submitted that, since the letter of 6 June 1991 conveyed that it was not answering question 4 or giving Mr. Weerden's opinion on the deductibility of the losses, it was not necessary for the letter to be qualified in the way required by the primary judge. 42 Mr. Douglas QC for Leda submitted that the letter of 6 June did give advice as to the availability of the tax losses, particularly having regard to the use of the word "shown" in the first line of the third paragraph. The lack of reference to question 4 did not mean that question 4 was not being answered. In any event, questions 1 and 2 plainly sought Mr. Weerden's advice on the availability of the losses, Mr. Weerden did give advice on those questions, and Leda reasonably understood such advice to have been given. 43 Mr. Douglas submitted that although Leda has some knowledge of tax matters, plainly it was consulting Mr. Weerden as an expert and wanting his advice as an expert; and his high degree of specialist expertise was relevant to the standard of care required and to how his assertions were to be taken: cf. Butcher v. Lachlan Elder Realty Pty. Limited [2004] HCA 60, 218 CLR 592 at [50]-[51]. 44 In this case, Mr. Douglas submitted, at the very least Mr. Weerden should have said he was not advising whether the loans were available or deductible, because he had not done due diligence. The primary judge's decision was correct, or at least not shown to be wrong. Decision 45 In my opinion, the primary judge was in error in his construction of the letter of 6 June, in part because he did not, before addressing the question of construction, decide the timing and content of the "compromise" conversation between Mr. Weerden and Mr. Robinson. In my opinion, this conversation was a significant part of the context against which the letter of 6 June was to be understood; and in my opinion, the question of construction should have been approached taking into account that there was, between 29 May 1991 and 3 June 1991, a conversation the general effect of which was set out in Mr. Robinson's 1993 memorandum. 46 Another important part of the context was Mr. Weerden's letter of 29 May 1991. By describing the due diligence that Mr. Weerden was requiring, the letter made it perfectly clear that this due diligence was for the purpose of determining whether or not the losses were available or deductible (in the hands of either the vendors or the purchaser); and that by relating the need for due diligence to question 4 alone, the letter made it clear that the answers to questions 1 and 2 were not dealing with the availability or deductibility of the losses, and that this matter would be dealt with only in answering question 4. 47 The "compromise" referred to in Mr. Robinson's memorandum was to the effect that Mr. Weerden would obtain a letter from Price Waterhouse Queensland to Leisure Management, and would confirm that tax losses shown in the LDT's accounts were as set out in that letter. It was plain that Mr. Weerden was not going to undertake the due diligence that he said was necessary to give an advice on the availability or deductibility of the losses, and it was plain that he did not do so before providing the letter of 6 June. This could not reasonably be taken as meaning that Mr. Weerden was to give the advice as to the availability or deductibility of the losses without doing the due diligence that he said was necessary, but rather that, without the due diligence, he was to obtain the letter from Price Waterhouse Queensland and confirm that the amounts shown in the accounts were as stated in that letter. I do not think Leda (or a reasonable reader in Leda's position) could reasonably have understood what was happening in any other way; and in particular, it could not reasonably have understood that Mr. Weerden abandoned the requirement for due diligence and nevertheless gave the advice. 48 If it had so understood the situation, then there would not have been any element of compromise: Mr. Weerden would have been doing what he said he could not do without due diligence, in circumstances where it was plain that he was not undertaking the due diligence. 49 The two letters of 29 May 1991 and 6 June 1991 plainly addressed all the questions put except question 4. Question 6 was definitively dealt with in the letter of 29 May; and all other questions (apart from question 4) were dealt with in the letter of 6 June. The letter of 6 June, by the use of the word "shown" in the third paragraph, was referring to what was shown in the tax returns: this is made clear where the same word is used later in the same paragraph. The letter also made it clear that advice was not being given on the availability or deductibility of the losses by the second sentence of the fourth paragraph, which commences "For example, should the Commissioner accept …", showing that Mr. Weerden was not giving advice that the Commissioner would accept the losses. All these matters show that question 4, concerning availability or deductibility of the losses, was not being answered. 50 As a matter of abundant caution, it would have been prudent for Mr. Weerden to state in his letter that he was giving no opinion or advice as to whether the losses shown in LDT's accounts were available or deductible; but in my opinion, that was effectively achieved by the previous advice that he would not give such advice without due diligence, and the clear position that due diligence was not being undertaken. In any event, on the basis of the construction of the communications which I adopt, in my opinion the failure to state this in the letter of 6 June did not breach the duty of care owed by Mr. Weerden to Leda. 51 Accordingly, I would uphold grounds 1-4 in Mr. Weerden's Notice of Contention, and affirm the final decision below on that basis. CAUSATION 52 This question would arise only if I were wrong on the question of liability in negligence, and it requires identification of what Mr. Weerden should have done. The judgment of the primary judge at pars.[43] and [44] suggest two broad possibilities, one that he should have indicated issues relevant to the question of whether the losses were available or deductible, and the other that he should have stated that he was expressing no opinion on the availability or deductibility of the losses. 53 In my opinion, it was not shown that Mr. Weerden had enough understanding of the whole background to set about specifying issues relevant to the question of deductibility; so that, if he was negligent, the negligence could only be in failing to state in the letter of 6 June that he was expressing no opinion as to the availability or deductibility of the losses. Submissions 54 Mr. Douglas submitted that, the primary judge having found that Leda regarded Mr. Weerden's advice as significant (par.[68] of his judgment), he must have been in error in holding that, if Mr. Weerden's failures played some part in the losses suffered by Leda they were trifling, and could not be regarded as material (par.[84]). This was particularly so in circumstances where the primary judge found that Leda was looking to Mr. Weerden for advice on the issue of the availability or deductibility of these losses. 55 He submitted that reliance by Leda on Mr. Weerden's advice was clearly shown by the memorandum of 11 June, to the effect that Price Waterhouse's advice did not raise any problems other than the Part IVA problem; and the memorandum of 15 July, stating "Price Waterhouse have also confirmed that the losses exist and are useable". This was further shown by the evidence of Messrs. Robinson, Fazzolari and Ell that they regarded the letter of 6 June as confirming the availability of the losses. 56 Mr. Douglas submitted that the fact that Leda had some understanding of the issues involved in the question whether the losses were deductible did not mean they did not rely on Mr. Weerden's advice or that it was not reasonable for them to do so. It was because they did understand there were such issues that they consulted a tax specialist and got advice; and they were entitled to rely on that advice and did so. That was the whole point of getting advice. Accordingly, the analysis by the primary judge at pars.[73]-[78] of his judgment did not negative causation. 57 Mr. Douglas submitted that it was not necessary that the negligence be the sole or dominant cause of entry into the transaction, it was sufficient if it materially contributed to it: Reiffel v. ACN 075 839 266 Limited [2003] FCA 194, 45 ACSR 67 at [69] and cases there cited. It was sufficient that Mr. Weerden's conduct had a substantial rather than a negligible effect: Como Investments Pty. Limited v. Yenald Nominees Pty. Limited (1997) ATPR 41-550 at 43,619; or that the conduct contributed "in some not negligible degree" to the decision to enter the transaction: Monroe Schneider Associates (Inc) v. Number 1 Raberem Pty. Limited (1991) 33 FCR 1 at 5. Mr. Douglas also referred to Havyn Pty. Limited v. Webster [2005] NSWCA 182 at [112]-[118]. 58 He also submitted that the primary judge was distracted by considering the "but for" test rather than taking a common sense approach to causation; and that the primary judge erred in disregarding the evidence of Messrs. Robinson, Fazzolari and Ell because it was self-serving. In any event, the circumstance that Leda entered into the transaction shortly after receiving advice that endorsed the transaction, or at least failed to warn against it; was sufficient to support the inference that the negligent advice was causative of the loss. Decision 59 In considering the question of causation, in my opinion it is appropriate to take into account Leda's understanding of the six matters discussed by the primary judge at pars.[73]-[78] of his judgment, and the primary judge's finding at par.[71] that Leda was not ignorant of the risk that the Commissioner of Taxation might treat the profit on sale of the hotel as on revenue account, that senior executives of Leda had made their own enquiries of Mr. Holt, and that Mr. Ell had been told that Leisure Management's purpose was to hold the hotel long-term. 60 This meant that senior executives of Leda knew of the nature of the relevant risk, knew that proper treatment of the profit depended on the subjective intentions of the principals of Leisure Management, and made their own enquiries of these persons. Also, they knew that Mr. Weerden had not undertaken the due diligence he required, so they had no reason to think that he had investigated the subjective intentions of the principals of Leisure Management or any evidence which might be relevant to those intentions. 61 Another factor relevant to causation is that Leda was plainly aware of the very great risk that the Commissioner of Taxation would act under Part IVA and thereby prevent Leda from getting any taxation benefits. Leda was paying about $2.4 million for the tax losses; and if it got the full benefit of them, this would give them a benefit in excess of $15 million (losses of about $39 million at a corporate tax rate of 39 cents in the dollar). The relationship of those figures would be consistent with the chance of getting the benefit being about one in six; and although Leda presumably regarded its chances as better than that, it only did so in circumstances where its plain intention was to try to conceal from the Commissioner of Taxation that its dominant purpose in the transaction was to obtain the tax benefits. 62 Mr. McClintock submitted also that, if Mr. Weerden had explicitly qualified his advice, at the very most Leda would have done more work to ascertain the extent of the risk and, again at the very most, would have tried to negotiate a lower price (see Black 28, 119 and 194). In my opinion, objectively the risk that the principals of Leisure Management would be disbelieved as to their intentions was a far lesser risk than the Part IVA risk that Leda was prepared to take; so that in my opinion, the suggestion that greater understanding of the former risk would have meant that the transaction would simply have been abandoned is implausible in the extreme. 63 In my opinion, the reasonable inference from the circumstances as clearly established by the evidence and as found by the primary judge is that such influence as Mr. Weerden's failure to qualify his advice did have, in relation to the risk that the losses would not be available because the profit on resale would be treated as an income profit, was no more than that it left open a possibility that Leda could sue Mr. Weerden if that risk materialised; that is, as a kind of extra insurance against risk in addition to the insurance given by the vendor's warranties. That view in my opinion is supported by the terms of the memorandum of 15 July 1991. 64 For those reasons, as well as the reasons given by the primary judge, in my opinion there is no error in the primary judge's conclusion that Mr. Weerden's failure to qualify his opinion made either no contribution or at most a trivial or negligible contribution to the decision of Leda to go ahead with the purchase. In my opinion there is no inconsistency with his statement that the Price Waterhouse advice was significant. As pointed out by Mr. McClintock, the primary judge was not there saying that the failure to qualify the advice was significant. 65 Further, in my opinion it would not have been reasonable for Leda, with its knowledge of the circumstances in which the letter of 6 June was written, of the relevant risks and its own enquiries as to the intentions of Leisure Management, and of the lack of opportunity to Mr. Weerden to pursue such enquiries, to rely on Mr. Weerden's advice as negating these risks. 66 For those reasons, I would reject grounds 1-4 in the Notice of Appeal. 67 It is not necessary to consider ground 5. For reasons given by the primary judge and additional reasons given above, there were ample grounds for rejecting Mr. Ell's evidence to the effect that he would not have gone on with the transaction if Mr. Weerden had qualified his advice. Furthermore, as pointed out by Mr. McClintock, Mr. Ell's denial at Black 146, 150 and 163 that Leda's principal purpose in entering into the transaction was to obtain the benefit of the tax losses was plainly false, and enough on its own to discredit him as a witness. FAIR TRADING ACT 68 In my opinion, the same reasoning as produced the conclusion that there was no negligence also produces the conclusion that there was no misleading conduct; and I would accordingly uphold ground 8 of the Notice of Contention. Further, in my opinion the same reasoning as produced the conclusion that, if there was negligence, it did not cause loss, also produces the conclusion that Leda did not suffer loss or damage by any misleading conduct; and I would reject grounds 6 and 7 in the Notice of Appeal. 69 There were submissions on whether the claim under the Fair Trading Act was in any event statute barred, having arisen more than three years before the commencement of proceedings. Mr. McClintock submitted that any loss occurred when the agreement was made and, on Leda's submissions, Leda obtained property worth less than the price. Mr. Douglas submitted that, at that time, there was a substantial likelihood that the principals of Leisure Management would be believed as to their intentions, so that the loss occurred at the earliest when the Commissioner of Taxation disallowed the losses. 70 As to the applicable principles, I adhere to the following analysis which I gave, with the concurrence of Handley JA and Young CJ in Eq., in Segal v. Fleming [2002] NSWCA 262 at pars.[20]-[27]: 20 In Scarcella v. Lettice (2000) 51 NSWLR 302, Handley JA said (at 306): 13 A cause of action in negligence is not complete until the plaintiff first suffers actual loss or damage. Damage which is prospective or contingent does not qualify as actual damage for this purpose. See Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 (Wardley ) at 530, 531 per Mason CJ, Dawson, Gaudron and McHugh JJ. 14 In order for the plaintiffs' cause of action to be complete, the plaintiffs' actual damage must be "measurable" ( Wardley at 531), or, in the words of Lord Reid in a personal injuries case ( Cartledge v. E. Jopling & Sons Ltd. AC 758 at 772) the damage must be "beyond what can be regarded as negligible". 21 Reasons for requiring the occurrence of actual and measurable loss are given in Wardley by Mason CJ, Dawson J, Gaudron J and McHugh J at 527, as follows: In many instances the disadvantageous character or effect of the agreement cannot be ascertained until some future date when its impact upon events as they unfold becomes known or apparent and, by then, the relevant limitation period may have expired. To compel a plaintiff to institute proceedings before the existence of his or her loss is ascertained or ascertainable would be unjust. Moreover, it would increase the possibility that the courts would be forced to estimate damages on the basis of likelihood or probability instead of assessing damages by reference to established events. In such a situation, there would be an ever-present risk of under-compensation or over-compensation, the risk of the former being the greater. 22 Wardley established that a person granting an indemnity, under which he or she is obliged to make a payment when the loss of the party to be indemnified is ascertained and quantified, suffers no actual loss until this contingency is fulfilled; so that a cause of action for purely economic loss, dependent upon damage being caused by the granting of the indemnity, does not arise until that contingency occurs. However, during the discussion of this question at 175 CLR 527-533, the majority of the High Court did not disapprove of Forster v. Outred & Co. [1982] 1 WLR 86, where it was held that a plaintiff suffered actual loss, not merely prospective loss, when, on negligent advice from her solicitors, she granted a mortgage over her property to secure debts of her son. 23 Their Honours in Wardley at 529 explained Forster by reference to the immediate effect of the plaintiff's execution of the mortgage, namely, an immediate reduction in the value of the plaintiff's "equity of redemption". I think it might be more accurate to say that the effect was a reduction in the value of the plaintiff's property : prior to the granting of the mortgage, the plaintiff owned the property unencumbered, so at that stage there was no "equity of redemption". By executing the mortgage, she made the property more difficult to sell, irrespective of whether or not her son ultimately defaulted on his debts: a purchaser would pay less for the property with a mortgage still on the title, and the plaintiff would have to come to some arrangement with the mortgagee in order to remove it from the title. As I understand it, that is the immediate loss that arose in Forster . 24 In Cassis v. Kalfus [2001] NSWCA 460 at [71]-[76], I adverted to the relevance of Sellars v. Adelaide Petroleum (1994) 179 CLR 332 to the question of when economic loss occurs. That case established that the loss of a chance having commercial value is actual damage that can complete a cause of action in tort. However, there is a significant difference between the loss of a chance , on the one hand, and the chance of a loss , on the other. 25 In the former case, where a chance is lost, it will never be known how things would have turned out if the chance had not been lost, so that the only possible compensation a plaintiff can obtain is compensation for the value of the chance itself. Accordingly it is reasonable to require a plaintiff to commence proceedings within the limitation period once the chance has been lost, and reasonable to award damages on that basis against a defendant. 26 On the other hand, where a person incurs a chance, even a substantial chance, of suffering a loss, in due course it may become clear that no loss is ultimately suffered; and so long as there is some appreciable chance that no loss will be suffered, it is unreasonable to require a plaintiff to commence proceedings and unreasonable to award damages against a defendant. However, once there is actual loss, even if there is also the chance of further loss, a plaintiff must commence proceedings within the appropriate limitation period, and can obtain damages reflecting actual loss suffered plus damages reflecting the chance of any further loss. 27 A defendant bears the onus of proof of establishing that actual and measurable loss first occurred before a date six years before the commencement of proceedings: Sorrenti v. Crown Corning Limited (1986) 7 NSWLR 77 at 80, Pullen v. Gutteridge [1993] 1 VR 27 at 71-6, Bailey v. Redebi Pty. Limited (1999) Aust.Torts.Rep. 81-523 at 66,286, Cigna Insurance Asia Pacific Limited v. Packer (2000) 23 WAR 159, Cassis v. Kalfus [2001] NSWCA 460 at [65]. 71 In my opinion, this analysis is consistent with the judgment of the majority of the High Court in the recent decision in Commonwealth v. Cornwell [2007] HCA 16, (2007) 81 ALJR 933. 72 On that analysis, it could not be said that there was more than the chance of a loss by reason of disbelief of the principals of Leisure Management as to their intentions, as at the time of entry into the agreement; so that the loss caused by any breach of duty by Mr. Weerden did not occur until the Commissioner's disallowance of the losses, at the earliest. There is however another basis on which it could be said that loss occurred at the time of entry into the agreement, since Leda got property worth far less than the price, because there was no real chance that the Commissioner of Taxation would not act under Part IVA if Leda complied with its obligations of record-keeping and true disclosure under the taxation laws, and for example did not breach provisions such as ss.8K and 8T of the Taxation Administration Act 1953. If on that approach the tax losses had negligible value when the agreement was entered into, there would have been an immediate loss; but on no view could that loss have been treated as having been caused by any breach of duty by Mr. Weerden. 73 Furthermore, on that analysis, any loss subsequently caused by any breach of duty by Mr. Weerden could be no more than that negligible value of the tax losses. REMAINING ISSUES 74 I will not address any other question concerning calculation of damages, and I will not address questions concerning contributory negligence, s.1318 and Mr. Weerden's cross-claim. 75 I would make one further comment, however, on a matter of public policy. Had it been necessary, I would have considered the question whether, as a matter of public policy, Leda should have been refused relief, because its dominant purpose in the transaction was to obtain the benefit of tax losses by unlawful means, involving the destruction of records and misleading the Commissioner of Taxation, contrary to the provisions of the Taxation Administration Act. ORDERS 76 Apart from the costs of lodging the cross-appeal, it would not appear that any costs have been incurred in the cross-appeal. I propose the following orders: 1. Appeal dismissed with costs. 2. Cross-appeal dismissed, with no order as to costs. 77 McCOLL JA: I agree with Hodgson JA. 78 HANDLEY AJA: I agree with Hodgson JA. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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