Supreme Court New South Wales Medium Neutral Citation: Banks v Alphatise Pty Limited [2014] NSWSC 1437 Hearing dates: Friday 17 October 2014 Decision date: 17 October 2014 Jurisdiction: Equity Division Before: Brereton J Decision: Leave to amend statement of claim granted. Application to strike out refused. Catchwords: PROCEDURE - pleading - allegation of actual knowledge - whether neceesary to plead or particularise facts from which actual knowledge to be inferred - held, not necessary CORPORATIONS - misrepresentations as to future matters - misleading and deceptive representations - accessorial liability Legislation Cited: (UK) Rules of the Supreme Court 1883, 19 r 22 (Cth) Federal Court Rules 2011, 12 (NSW) Uniform Civil Procedure Rules (2005) r 13.4, 14.28, 15.4, 15.15 Cases Cited: Addenbrooke Pty Ltd v Duncan (No 2) [2013] FCA 820 Burgess v Beethoven Electrical Equipment Ltd [1942] 2 All ER 658 Davis v Halliday Financial Management Pty Ltd [2014] NSWSC 1371 Giannerelli v R (1983) 154 CLR 212 In Fox v H Wood (Harrow) Ltd [1963] 2 QB 601 Lyons v Kern Konstructions (Townsville) Pty Ltd (1983) 70 FLR 135 Yorke v Lucas (1985) 158 CLR 661 Category: Interlocutory applications Parties: Matthew Banks (plaintiff) Alphatise Pty Ltd (first defendant) Paul Pearson (second defendant) Representation: Counsel: J McLeod (plaintiff) C N Bova w T E O'Brien (second defendant) Solicitors: Adams Wilson Lawyers (plaintiff) King & Wood Mallesons (second defendant) File Number(s): 2014/211332 Judgment (ex tempore) 1HIS HONOUR: By notice of motion filed on 7 October 2014, the second defendant Paul Pearson seeks an order pursuant to (NSW) Uniform Civil Procedure Rules 2005, r 13.4, that the proceedings as against him be dismissed, and alternatively, an order pursuant to UCPR, r 14.28, that claims 4, 5, 6 and 7 of the relief claimed in the statement of claim, in so far as they concern him, and paragraphs 3, 37 and 39 of the statement of claim, be struck out. 2In the substantive proceedings, the plaintiff Matthew Banks sues the first defendant Alphatise Pty Ltd and Mr Pearson for various forms of relief arising out of an agreement between the first defendant and the plaintiff which, in short, it is alleged that the first defendant did not perform. Alternatively, the plaintiff alleges that a term of the agreement amounted to a representation as to a future matter, and that that representation was misleading and deceptive by reason that the first defendant did not have reasonable grounds for making the representation when it was made. The sole case against the second defendant is that he was knowingly concerned in the making of the alleged misrepresentation. 3As originally pleaded, the statement of claim did not contain a distinct allegation that the second defendant knew that the first defendant did not have reasonable grounds for making the alleged representation. As is very well established, knowledge by an alleged accessory of each component of the contravention is a material fact in the cause of action against the accessory, and must be distinctly alleged; see, for example, Yorke v Lucas (1985) 158 CLR 661; Giannerelli v R (1983) 154 CLR 212; Addenbrooke Pty Ltd v Duncan (No 2) [2013] FCA 820, [20]. 4The original pleading accordingly did not disclose a complete cause of action against the second defendant, who was therefore entitled to have it struck out. However, in the course of correspondence preceding the hearing of the motion, the second defendant foreshadowed seeking amendments to the statement of claim and, in particular, adding as paragraph 37(i) the following: In the light of subparagraphs 37(a) - 37(h) above, at the time the 4.5 per cent shareholding representation was made, Mr Pearson knew that Alphatise did not have reasonable grounds for making it. 5The preceding subparagraphs of paragraph 37 include allegations that Mr Pearson was the founder of the Alphatise venture and its controlling mind, that he was the sole director of the first defendant during the relevant period, that he executed the agreement on behalf of the first defendant, and that he knew what it contained and knew its effect. 6The second defendant submits that the amendment does not cure the defect because it amounts to a bare allegation of knowledge, and does not plead the material facts from which it will be contended that an inference of knowledge should be drawn. In that respect, Mr Bova for the second defendant invokes the recent judgment of Kunc J in Davis v Halliday Financial Management Pty Ltd [2014] NSWSC 1371, and in particular, the following passage: [25] However, as was set out by the Full Court of the Federal Court in Young Investments Group Pty Limited, the inquiry as to the whether an allegation has been sufficiently made does not stop at the point of identifying that a bare factual allegation of the kind the law requires to be made has been pleaded. A further inquiry needs to be answered, namely "whether the cause of action is pleaded at the level of particularity that is sufficient to define the issues and inform the other party of the case that it has to meet, in the context of the particular allegations." It is against that further inquiry that the proposed amended statement of claim fails. [26] There will be cases where the mere allegation of actual knowledge by a defendant will be sufficient as a matter of pleading. The circumstances of that case will make it obvious how it can be said that a defendant had actual knowledge of something. This does not seem to me to be such a case. [27] As I raised with counsel in the course of argument, actual knowledge can be proven in a number of ways. There may be cases where it is done by direct evidence, that somebody told the defendant of the particular matter which was said to be the subject of the actual knowledge. In other cases, which it seems to me this will be one, an allegation of actual knowledge will be sought to be made out by inviting the Court to infer that there was such knowledge from other objectively provable facts. The reason I say that this case seems to be one of the latter is because of what is said in the solicitor's affidavit. The solicitor's affidavit, in what seems to me still to be, with respect, an inchoate way refers to facts from which the plaintiffs will apparently urge the Court to infer that actual knowledge of the kind alleged was possessed by the defendants. [28] If the plaintiffs are to make out the allegation of accessorial liability, any further pleading will need to do more than just allege that the relevant defendants had actual knowledge of the matters alleged. In a case of this kind the material facts which are required to be pleaded must extend to pleading those facts by reason of which it will be alleged that the defendants had the relevant actual knowledge. I do not regard that as a matter of mere particulars. They will be material facts which will need to be proved in their own right. [29] It may be that whatever material facts the plaintiffs can properly allege that find their way into a further version of the amended statement of claim may still be insufficient to sustain the inference that the defendants had the actual knowledge sought to be alleged against them. That will be a matter which may have to be considered when leave is sought, as it will have to be, to file any further proposed amended statement of claim. 7With great respect, but for the reasons that I will now elaborate, I am unable to agree that the facts from which it is contended that an inference of actual knowledge should be drawn are material facts that must be pleaded in a pleading. 8The starting point is the judgment of the Court of Appeal of the United Kingdom in Burgess v Beethoven Electrical Equipment Ltd [1942] 2 All ER 658, in which the Court was constituted by Lord Greene MR and, MacKinnon and du Parcq LJJ. In that case, the plaintiff applied for further particulars of a defence which alleged that the plaintiff had a certain intention. The application was for particulars of the paragraph: ... if the defendants propose at the trial in support of the allegation to rely on or adduce any evidence in chief as to any specific fact or facts document or documents or overt act or acts of the plaintiff. 9The application was refused by a master, whose refusal was affirmed by a judge. The ground of refusal was that under the rules, no such particulars could be obtained. The relevant rule, then (UK) Rules of the Supreme Court 1883, 19 r 22, provided: Wherever it is material to allege malice, fraudulent intention, knowledge or other condition of the mind of any person, it shall be sufficient to allege the same as the fact without setting out the circumstances from which the same is to be inferred. 10After observations by the Master of the Rolls to the effect that the rule meant what it said, despite some differing views that had in the past been expressed by other judges and in other works, his Lordship said that this was not only because of the rule (at 659H): It seems to me that where, in order to allege a complete cause of action, it is necessary to allege malice, fraudulent intent, knowledge or other condition of mind, it would not require a rule to say that the cause of action will be adequately stated from the point of view of its not being demurrable merely by alleging what everyone would know must be alleged ... 11His Lordship continued (at 660A): It is to be observed that under r 4 of the order which is the general rule laying down the requisites of a sufficient pleading, every pleading is to contain and contain only a statement in summary form of the material facts on which the party pleading relies for his claim or defence as the case may be, but not the evidence by which they are to be proved. In a case where malice or some other condition of mind forms an ingredient in the cause of action, the material fact is the existence of that condition of mind, and to proceed to alleged circumstances from which the existence of that condition of mind is to be inferred appears to me to be pleading evidence and nothing more. 12Similarly, it seems to me that to plead facts from which it is to be contended at trial that an inference of actual knowledge is to be drawn, is to do nothing more than plead evidence, not material facts. 13In Fox v H Wood (Harrow) Ltd [1963] 2 QB 601, the defendant in an action for personal injuries raised contributory negligence against the plaintiff, alleging that he had stepped into a hole in floorboards when he knew or ought to have known of its presence. It was held that the plaintiff was entitled to particulars. Diplock LJ, as he then was, with whom Danckwerts and Ormerod LJJ agreed, said (at 604): In my judgment, the master was right in ordering particulars of the facts and circumstances from which the plaintiff ought to have known of the opening or of the hole. Mr Allen has argued that an allegation that someone ought to have known something, like an allegation that someone knew something, is an allegation of a condition of mind, and that therefore, particulars of it ought not be granted. It seems to me that that proposition is an erroneous one, an allegation that a person ought to have known something has implicit in it not only an allegation that he did not know something which is an allegation of a state of mind, but also an allegation that facts and circumstances existed from which he ought to have acquired, either by observance or by inference, the knowledge of which he was deficient ... 14Thus the conventional position is that while it was not necessary to plead facts from which it would be contended that an inference should be drawn of actual knowledge, it was necessary, if not to plead, at least to particularise, facts from which constructive knowledge, as distinct from actual knowledge, would be alleged. 15In Lyons v Kern Konstructions (Townsville) Pty Ltd (1983) 70 FLR 135, Fitzgerald J, observed that under the then rules of the Federal Court - which are substantially indistinguishable from the current rules of this Court - the position had moved on. Order 12 of the (Cth) Federal Court Rules 2011 provided that a party pleading any condition of mind shall give particulars of the facts on which he relies, but defined "condition of mind" as excluding, for relevant purposes, "knowledge". However, the rule then provided that the Court may order a party to file and serve particulars including, where he alleges knowledge, particulars of the facts on which he relies. That substantially mirrored the then provisions of the (NSW) Supreme Court Rules 1970, and is not relevantly distinguishable from current UCPR, r 15.4, read in conjunction with r 15.15. 16His Honour said (at 146): These rules, like the modern English rules, involve the departure from the previous practice under which no more was or could be required of the party than that he allege a condition of mind which was an ingredient of the cause of action as a fact in his pleading. Particulars were not required and could not be ordered, Burgess v Beethoven. Now under the rules, particulars are required in the first instance of any condition of mind alleged other than knowledge, and particulars of knowledge may be ordered although only after the defence is filed unless the Court is of an opinion that it is necessary or desirable that the particulars be delivered in order to enable the respondent to plead, or for some other special reason. 17The reason for excluding actual knowledge from the requirement to plead or, in the first instance at least, particularly, the facts from which it will be inferred is, in my view, obvious. Generally speaking, actual knowledge or the state of the defendant's mind in that respect, is something that is primarily in the knowledge of the defendant. A defendant does not need particulars to know whether or not to admit actual knowledge. It might ultimately be proved by documents elicited in the course of discovery, or by admissions in cross-examination. It might be inferred from other matters, but they are all matters of evidence which inform the material fact of actual knowledge. 18As I have said, to require one to plead facts from which actual knowledge is to be inferred would be contrary to the fundamental principle that one does not plead evidence, but only the material facts that constitute the cause of action. 19In my view, therefore, the statement of claim, if it is amended to include the allegation in paragraph 37(i), is not demurrable but sufficiently pleads a cause of action against Mr Pearson. 20That is not to say that the Court might not order particulars, pursuant to UCPR, r 15.15, of the facts from which an inference of actual knowledge was to be drawn. The rule makes clear that such particulars can be ordered, and the cases to which I have referred confirm as much, at least since the amendments to the rules after Burgess v Beethoven, but - as Kunc J said (at [26] set out above), there will be cases where the mere allegation of actual knowledge will be sufficient. In my view, it will always be sufficient as a matter of pleading, and it will often be so as a matter of particulars, because the defendant does not need particulars to admit or deny what was in his or her own mind. In this case, what is alleged is that the first defendant company did not have reasonable grounds for making a representation. It is further alleged that the second defendant Mr Pearson was the directing mind and will of the company at the relevant time, and that it was through him that the company acted. In those circumstances, it is not difficult to see how it is said that the defendant had actual knowledge of whether or not the company had reasonable grounds for making the representation. 21I do not exclude the possibility that particulars of the allegation of knowledge might be ordered, but, in any event, that should not be done until after a defence has been filed. The reason for that is that the defendant should be able to answer an allegation of actual knowledge without requiring particulars, because the defendant knows what was or is in his own mind. 22On the question of costs, the first statement of claim was demurrable, but the defendants lost the argument on the second version. 23The Court therefore orders that: (1)The plaintiff have leave to amend the statement of claim by filing an amended statement of claim in the form of annexure A to the affidavit of Ashley Miller sworn 16 October 2014 herein, subject to verification. (2)There be no order as to costs, to the intent that each party bear its own costs of the motion. (3)The proceedings be adjourned to Monday 17 November 2014 at 9am before the Registrar for directions. ********** 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. Decision last updated: 10 December 2014