Supreme Court New South Wales Medium Neutral Citation: Osborne v Iris Diversified Property Pty Limited [2014] NSWSC 1488 Hearing dates: 20 & 21 October 2014 Decision date: 31 October 2014 Jurisdiction: Equity Division Before: Pembroke J Decision: Claim dismissed with costs Catchwords: MISLEADING CONDUCT - reliance and causation - relevance to reliance of claimant's disclaimers and acknowledgements of non-reliance MISLEADING CONDUCT - characterisation of conduct - relevance to characterisation of alleged misleading conduct of claimant's disclaimers and acknowledgements in contract Cases Cited: Benlist Pty Ltd v Olivetti Australia Pty Ltd (1990) ATPR 41-043 Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592 Campbell v Back Office Investments Pty Ltd [2009] HCA 25 Collins Marrickville Pty Ltd v Henjo Investments Pty Ltd (1987) 72 ALR 601 Culligan v ACO Pty Ltd [2009] NSWCA 290 Keen Mar Corporation Pty Ltd v Labrador Park Shopping Centre Pty Ltd (1989) ATPR (digest) 46-048 Poulet Frais Pty Ltd v Silver Fox Company Pty Ltd [2005] FCAFC 131 Thomas v SMP (International) Pty Ltd [2010] NSWSC 822 Watson v Foxman (1995) 49 NSWLR 315 Category: Principal judgment Parties: Andrew Osborne - plaintiff Iris Diversified Property Pty Limited - defendant Representation: Counsel: M Condon SC - for the plaintiff A McGrath SC - for the defendant Solicitors: Holman Webb Lawyers - for the plaintiff Henry Davis York - for the defendant File Number(s): 2012/322441 Judgment Introduction 1This is a case about the unwillingness of an investor to accept responsibility for his own actions. He seeks to shift to the defendant the blame for an investment decision that turned out to be less successful than he hoped it would be. His initial enthusiasm for the commercial property at Campbelltown that he bought in 2009 for $6.3 million (entirely with borrowed funds) has soured, and, no doubt encouraged by legal advice, has been transmogrified into a conviction that his decision to purchase was the fault of the defendant. 2The very breadth of the plaintiff's pleaded allegations of misleading conduct, much of which were wholly unsupportable, suggests the ambitious nature of the claim. Its essential components involved the following propositions: that the defendant engaged in misleading and deceptive conduct; that the plaintiff relied on that conduct, which was a cause of his decision to purchase the property; and that the property was worth substantially less than the contract price. Critically, the plaintiff relies on statements in an earlier information memorandum supplied by the vendor's agent but ignores the terms of the subsequent contract for sale of land that he entered into. 3He remains the owner of the property and contends that he is now entitled to recover the difference (if any) between the contract price and the true value of the property at the time of its purchase, as well as certain related costs and expenses. The Black Stump Business 4A central feature of the case was the role of the defendant and certain of its related companies in the acquisition and re-invigoration of a moribund business brand known as the 'Black Stump restaurants'. The group of companies, of which the defendant formed part, was known as the Iris Group. At the time, it was controlled by Ramy Arnaout and his brother Sam Arnaout. The companies in the group had common directors. Iris Diversified Investments Pty Ltd was the parent of, among others, the defendant and two other companies named Black Stump Restaurants Pty Ltd (BSR) and Black Stump IP Pty Ltd (Black Stump IP). 5The moving force and effective controlling mind within the group, at least as far as the Black Stump business was concerned, was Ramy Arnaout. He was the only one on the board of all companies in the group and acted as its de facto chairman, at least in relation to the Black Stump business. There was no need in the circumstances for the defendant to call corroborative and cumulative evidence from Sam Arnaout. The activities of the group involved hospitality and appear to have been substantial. In July 2007 the group sold eleven of its hotels for a total consideration of $350 million. 6A brief history of the group's foray into the Black Stump business, is as follows: (a)On 23 November 2007 BSR and Black Stump IP entered into a complicated series of agreements by which they purchased the business known as 'Black Stump' for $869,000. There was little more to the transaction than the acquisition of the Black Stump brand as none of the ten previously existing Black Stump restaurants remained in operation. (b)On 5 December 2007, a press release announced the acquisition. The press release spoke of plans for a revival of the Black Stump chain, including a focus on seeking to increase the number of locations to 20. (c)From early December 2007 the group engaged consultants to redesign the Black stump logo, its signage, related promotional material and the fit out for the restaurants it hoped to acquire and develop. It also commissioned market research to be undertaken in relation to the Black Stump restaurants, their brand and the proposed new logo. (d)In December 2007 the group assessed the possible acquisition of Vaby's restaurants located in Beverly Hills, Penrith, Campbelltown and Picton as possible suitable sites for Black Stump restaurants. (e)On 19 December 2007 the defendant was incorporated. It promptly acquired the subject property at Campbelltown for a purchase price of $7,225,000. A Chili's brand restaurant and a Krispy Kreme outlet were conducted there. (f)On 20 December 2007 two of the companies in the group, then known as Chili's Restaurants Pty Ltd and Chili's Franchises Pty Ltd, agreed to acquire five Chili's branded restaurants, with a view to them being converted into Black Stump restaurants. Ultimately this acquisition did not proceed. (g)On 21 December 2007 a vacant development site at Wentworthville was acquired with the intention of possibly constructing a Black Stump restaurant on it. (h)On 5 March 2008 BSR entered into a lease of premises in the Rouse Hill Town Centre and afterwards commenced to operate a Black Stump restaurant there. (i)In June 2008, a Black Stump restaurant commenced to operate at the Campbelltown property. (j)On 10 July 2008 the defendant purchased another property at Wentworthville and leased this property to BSR. It did so on the basis that the existing Chili's Restaurant on the site would be converted into a Black Stump Restaurant. 7By August 2008, BSR was operating Black Stump restaurants at three locations: Campbelltown, Rouse Hill and the second Wentworthville site. (The plans for the first Wentworthville site did not proceed). The group's expansion plans for the Black Stump brand afterwards continued as follows: (a)In September 2008 the group engaged Kennedys Law Firm to draft a package of franchising contracts and related documents for the franchising of the Black Stump restaurants. (b)On 2 October 2008 the name of Chili's Restaurants Pty Ltd was changed to Black Stump Franchising Pty Ltd. This company was proposed to be the franchisor under the proposed franchise agreements for the Black Stump restaurants. (c)On 20 October 2008, Kennedys provided to Oscar Budai, the group's 'Director of Mergers & Acquisitions', a finalised set of franchise documents. It was now 'ready to franchise', subject to securing suitable locations and willing franchisees. (d)In November 2008 the group was in negotiations (that did not ultimately come to fruition) to acquire ten Lone Star Steakhouse & Saloon restaurants with a view to converting them into Black Stump restaurants. This included four restaurants located in south Queensland. 8From November 2008 to April 2009, there were no new acquisitions but the 'desire and plan' of the group to expand the Black Stump business did not alter. The Campbelltown Property 9As I mentioned, the defendant purchased the Campbelltown property in December 2007. The purchase price was $7.225 million. The property had last traded on the open market for $6.5 million in July 2005. At the time of purchase it was subject to two long term commercial leases. A Chili's restaurant occupied approximately 650 square metres on the site and a Krispy Kreme outlet occupied about 400 square metres on the site. 10By June 2008 the lease of the Chili's restaurant had been terminated and a fresh lease granted to BSR for the purpose of conducting a Black Stump restaurant on the premises. The lease to BSR was for an initial term of ten years ending in 2018 with three five year options to renew. By April 2009 the Black Stump restaurant on the Campbelltown site had been operating for about nine months; and the Krispy Kreme outlet continued to trade with apparent success. 11In about April 2009 the defendant elected to sell the Campbelltown property - subject to the Black Stump and Krispy Kreme leases. This did not involve any change to the aspirations of the group to expand the Black Stump restaurant chain. It meant only that two of its first three planned restaurants - Rouse Hill and Campbelltown - would be conducted from leased premises. The Plaintiff 12Coincidentally, in April 2009 the plaintiff was investigating potential retail commercial properties for acquisition. He was an investor and sole trader who had obtained an associate diploma in valuation in 1991 from what was then known as the Sydney Institute of Technology and had subsequently worked as a commercial property manager for a variety of property companies. In 2005 he commenced to conduct his own small property investment business, calling himself 'Austwide Property Investments'. The vehicle for his investments was his private trust, AKO No 2 Trust. As at May 2013, the plaintiff said that he had acquired seven commercial properties since 2005 on behalf of the trust, including the Campbelltown property. There was no evidence however as to which, if any, of those properties, had been acquired prior to the purchase of the Campbelltown property. Information Memorandum 13In April 2009 the plaintiff's interest was piqued by an advertisement in the Australian Financial Review for the auction of the Campbelltown property. On 30 April he obtained a copy of the Information Memorandum from the vendor's agent and read it carefully. He knew that its contents were only a guide and that prospective purchasers were expressly advised to rely solely on their own enquiries. He also knew that prospective purchasers were invited to request further information as they 'may require'. He also knew that a contract for sale of land would in due course be the definitive contractual document. 14The Information Memorandum contained the following statements, none of which (despite the plaintiff's pleading) was in the least bit controversial, except arguably the last two statements: The Black Stump is a 35 year old brand in NSW. With 18 stores at its peak, the restaurant chain was built up from its origins as a family owned business of butcher shops. The brand was acquired by private investment company Iris Capital in 2007, and Iris commenced a program of re-invigorating the brand and assessing each location for its viability. As a result of this process, all of the existing locations at the time Iris acquired the brand were closed and new locations sought. Significant capital has been invested in re-invigorating the brand to make it a contemporary family restaurant. The restaurants have been completely redesigned to provide a welcoming, comfortable and relaxing place where everyone can enjoy a great meal. The first store with the new branding was opened at Rouse Hill in March 2008, followed by Campbelltown in May 2008 and Wentworthville in August 2008. The business plans to expand the brand in metropolitan Sydney and in South-East Queensland with a further 10 stores in the next 12 months. The business is now ready to franchise. 15The Information Memorandum also contained a disclaimer in the following terms, which the plaintiff read and understood with perfect clarity: The information contained herein has been supplied to us. In passing the information on, it should be noted that we do so without any representation on our part as to its truth or accuracy. All interested parties should make their own inquiries, and obtain their own independent advice, in order to verify the information. (emphasis added) The Website 16The plaintiff asked no particular questions and made no particular enquiries about any of the statements in the Information Memorandum, including the statements about expansion plans and readiness to franchise. I will return later to the significance of that fact when dealing with the question of reliance. He seemed far more interested in the general information contained on the website of the Iris Group. This information, and practically nothing else, was the basis on which the plaintiff satisfied himself about the financial capacity of the tenant and its experience to conduct the Black Stump business at the Campbelltown site. 17From the information gleaned from the website, the plaintiff concluded that the Iris Group was a substantial enterprise that was likely to be of significant worth. This led him to form the view that BSR was, or was likely to be, successful; that it had the experience and capacity to continue conducting a successful operation; and that the group was continually improving the profits of all of its enterprises. His email to his finance broker immediately after the auction drew attention to the website and reflected his exuberance, as well as the significance that he placed on the contents of the website in his decision making process. Site Inspection 18On 9 May the plaintiff made a cursory visit to the Campbelltown property. It was a Saturday morning, too early to see the Black Stump restaurant in operation. He spoke briefly to Mr Lawson, the Operations Manager who was responsible for all of the pubs and restaurant venues of the group. For reasons that I will later explain, Mr Lawson made no statement and gave no assurance to the plaintiff about the profitability of the restaurant. He was not in a position to know. Nonetheless, the plaintiff remained enthusiastic about the property. The Valuation 19On 12 May the plaintiff received a valuation of the property. It was dated January 2008 and had been obtained in connection with the purchase of the property by the defendant. It confirmed a value $7.225 million, which was the price paid by the defendant in December 2007. The plaintiff was dismissive of the valuation in his evidence and insisted vigorously that he did not rely on it. Nonetheless, the valuation informed him of the recent sales of the property and tended to confirm his conviction that a price of $6.3 million would be a bargain basement price at the bottom of the market. He prided himself on his ability to buy properties at prices below market value. No Enquiries 20Apart from what he took from the website, the plaintiff exhibited practically no real interest in the particular financial position of BSR or the Black Stump business. On 4 May an invitation was extended to him to 'put you in contact with their financial controller'. The context of this invitation was his enquiry as to why the property was being sold and his question to the vendor's agent: 'Are they in financial trouble?' He did not take up the invitation and the evidence he gave to explain his failure to do so was implausible and curious. His cavalier attitude was best explained by the probability that he was either wholly unconcerned or surprisingly careless. He acknowledged that he did not know one thing about the plans for expansion or how they were to be financed. And he admitted with hindsight that he wished he had contacted the financial controller and that it would have been the prudent course to take. I do not accept his evidence as to the reasons why he did not take up the offer. He was, I thought, disingenuous on this issue. The Contract 21On 19 May 2009 the plaintiff attended the auction; secured the Campbelltown property for $6.3 million; and signed the contract for sale of land. He had earlier received an unsigned copy of the contract and had had plenty of time to consider its terms; to seek independent advice; and to make his own enquiries. He read and understood the special conditions in the contract, including special condition 32 which contained the following exclusions and acknowledgements by the plaintiff: 32. Exclusion of pre-contractual representations 32.1 This constitutes the entire agreement between the vendor and the purchaser relating to the sale of the property. 32.2 The parties have not entered into and are not bound by any collateral or other agreement apart from this contract. 32.3 The parties are not bound by any warranty, representation, collateral agreement or implied term under the general law or imposed by legislation unless: 32.3.1 such warranty, representation, agreement or term is contained in the express terms of this contract; or 32.3.2 it is an implied term or warranty imposed by statute which is mandatory and cannot be excluded by the parties' agreement. 32.4 The purchaser acknowledges that the purchaser, when entering into this contract, relied exclusively on the following matters independently of any statements, inducements or representations made by or on behalf of the vendor (including by any estate agent acting on behalf of the vendor): 32.4.1 the inspection of an investigations relating to the property made by or on behalf of the purchaser; 32.4.2 the warranties and representations expressly contained in the contract; 32.4.3 the skill and judgement of the purchaser, its consultants and representatives; 32.4.4 opinions or advice obtained by the purchaser independently of the vendor or of the vendor's agents or employees. 22I have no doubt that the plaintiff was sufficiently intelligent and experienced to appreciate the combined practical effect of the qualifications and disclaimers in the Information Memorandum, and the exclusions and acknowledgements in the contract for sale of land. And he received legal advice. His solicitor acting on the transaction was Roger Cornforth, who gave him advice on the form of the contract before its execution. The plaintiff knew and believed that, absent his own enquiries, he was taking a risk. It was however a risk that he was quite prepared to take. Reliance & Disclaimers 23Although the question of whether conduct is misleading or deceptive or likely to mislead or deceive is logically anterior to the question of whether a person has suffered loss 'by' that conduct, I propose to deal with the issue of reliance before addressing the characterisation of the defendant's conduct. For the reasons to which I have already briefly adverted, and on which I will elaborate, the plaintiff fails on both issues. 24A singular feature of this case is that the plaintiff relies entirely on the prior representations in the Information Memorandum and a single prior conversation with Mr Lawson, but fails to acknowledge the primacy of the terms of his subsequent contract for sale of land. He accepted in his evidence that by his contract, he had solemnly acknowledged and agreed that he was 'not bound by any representation that might have been made to you unless it was contained within the express terms of the contract'; that he 'had relied exclusively on his own enquiries'; and that he was 'going to have to take his own advice'. Perhaps more significantly, the plaintiff accepted that he understood at the time that that was the effect of the terms of the contract that he signed. 25These are matters that should not be ignored lightly. Reliance is a question of fact that must be assessed by looking at the events, statements and context at the time of the transaction. As French CJ said in Campbell v Back Office Investments Pty Ltd [2009] HCA 25 at [31]: Where the impugned conduct comprises allegedly misleading pre-contractual representations, a contractual disclaimer of reliance will ordinarily be considered in relation to the question of causation. For if a person expressly declares in a contractual document that he or she did not rely upon pre-contractual representations, that declaration may, according to the circumstances, be evidence of non-reliance and of the want of a causal link between the impugned conduct and the loss or damage flowing from entry into the contract. (emphasis added) 26There is a long history of sobering judicial statements to this effect. In Collins Marrickville Pty Ltd v Henjo Investments Pty Ltd (1987) 72 ALR 601 at 613, Wilcox J pointed out that the fact that a claimant states, in an agreement into which he claims to have been induced to enter by misleading conduct, that he was not so induced, may bear upon the question whether he should be believed in asserting that the misleading conduct was an inducement. 27In Keen Mar Corporation Pty Ltd v Labrador Park Shopping Centre Pty Ltd (1989) ATPR (digest) 46-048, the Full Federal Court reversed the finding of reliance by the primary judge having regard to the clear written disclaimer of reliance by the claimant. In the process, Morling and Wilcox JJ observed that 'It will ordinarily be the position that the critical step for a representee is the entry by him or her into a legal commitment ...'. 28In Poulet Frais Pty Ltd v Silver Fox Company Pty Ltd [2005] FCAFC 131, the Full Federal Court held at [102] It is sufficient to say that the authorities recognise that reliance is a question of fact and that the existence of an exclusion or qualification clause is relevant to a determination of the question whether an applicant has established reliance. 29And in Culligan v ACO Pty Ltd [2009] NSWCA 290 at [89], the Court of Appeal held that the 'relevant principles as to the significance of contractual disclaimers are well established', citing Campbell v Backoffice Investments, Keen Mar Corporation Pty Ltd v Labrador Park Shopping Centre Pty Ltd and Poulet Frais v Silver Fox. 30What is implicit in all of these decisions is that, at the gritty ground level of fact-finding and credit assessment, a court may well be justified in any given case in concluding as a matter of probability that a subsequent assertion of reliance cannot sensibly survive a prior contemporaneous written acknowledgement of non-reliance. 31For my part, I do not think that it is desirable, or even correct, to say that a claimant's disclaimer or formal acknowledgement of non-reliance will only have the effect of relieving a party from the consequences of his misleading conduct 'in rare cases': pace Burchett J in Benlist Pty Ltd v Olivetti Australia Pty Ltd (1990) ATPR 41-043 at 51,590. The administration of justice will not be well served if courts are reluctant to give effect in an appropriate case to the clear words of a formal disclaimer or acknowledgement by a claimant. Persons who make allegations of misleading conduct, and contend that they relied on the allegedly misleading conduct, should not lightly be permitted to ignore the clear words of their own solemn disclaimer of reliance. Improbability 32Furthermore, putting aside the effect of the exclusions and acknowledgements in the contract for sale of land, there was an exasperating and decidedly improbable quality about the case pleaded and presented on behalf of the plaintiff. After setting out certain statements in the Information Memorandum in paragraph 7 of the further amended statement of claim, the pleading continued: 11. The representations pleaded in paragraph 7 hereof conveyed to the Plaintiff that: (a)the Black Stump business generally, and its restaurant business on the Property specifically, were successful; (b)the Black Stump business conducted from the Property was viable because Iris Capital had chosen that location with the criterion of viability in mind; (c)the success and viability of the business were vouched by the steps that Iris Capital had undertaken from 2007 to re-invigorate the brand; (d)Iris Capital would expand its brand in metropolitan Sydney and in South-East Queensland, with a further 10 stores in the next 12 months; (e)Black Stump was successful and profitable, because it had the ability to: (i) plan the expansion of the brand in metropolitan Sydney and in South-East Queensland, with a further 10 stores in the next 12 months; and (ii) franchise; and (f)the business undertaken by Black Stump was planning to expand and was ready to franchise - which matters confirmed the success of Black Stump as a business. 33The statement of claim had undergone a number of amendments and the words underlined represented the latest of a number of iterations appearing in the further amended statement of claim. 34The original statements in the Information Memorandum from which the allegations of misleading conduct were derived are set out in paragraph [14] above. Pointedly, those statements say nothing about 'success' or 'viability' or 'profitability'. Nor do they rationally imply it. I adopt and accept the following submission of the defendant: Objectively assessed there was absolutely nothing contained on the relevant page of the IM which would cause any reasonable reader of the IM to conclude that the Black Stump business was profitable or successful or would be profitable or successful. The Plaintiff agreed that there were no such express words to that effect. Any reading of the IM to the opposite effect by the Plaintiff was entirely irrational, a topic about which he gave very evasive and generally unsatisfactory evidence. 35In fact, any reasonably astute investor who considered carefully the Information Memorandum would have recognised that the Black Stump business plan was pregnant with uncertainty and risk. Expansion plans often are. All of the Black Stump restaurants previously owned had been closed; the Iris Group was starting from scratch; the first three planned new restaurants had only been trading since March, May and August respectively of the previous year; and any plan for further expansion necessarily carried with it significant operational risk, financial risk and uncertainty of outcome. 36Perhaps the most alarming and commercially unrealistic of the pleaded misleading statements was that 'Black Stump was successful and profitable because it had the ability to plan the expansion of the brand ...'. The history of modern commercial litigation is replete with instances of failed business enterprises, infected by an excess of optimism, that have expanded too fast and borrowed too much, at a time when they were neither sound nor profitable. I do not think for a moment that the plaintiff was so naïve as to believe what the pleader attributed to him. There was, I thought, a substantial credibility gap between the true facts, and the case propounded in the further amended statement of claim. And the plaintiff's affidavits seemed to be no more than an extension of the pleading - little more than an exercise in legal drafting designed to support the pleading: Thomas v SMP (International) Pty Ltd [2010] NSWSC 822 at [23] - [29]. I formed the view that their unreliable contents were far removed from an honest and frank account of the plaintiff's true state of mind when entering into this transaction. Reliance & Causation 37The resolution of the twin factual questions of reliance and causation is dependent, of course, on the unique circumstances of each case. In this case, their resolution depends in particular on an assessment of the credibility of the plaintiff in the context of the proved contextual facts. I do not accept the plaintiff's evidence on these central issues. In my view, the plaintiff knew at the time that he could not reasonably rely on the contents of the Information Memorandum or the conversation with Mr Lawson. That is why, when making his decision to purchase the property, he acted on his own assumptions and formed his own conclusions. But he chose not to ask any questions or pursue any enquiries about the profitability of BSR or the Black Stump restaurant at Campbelltown. Nor did he enquire about the group's plans for expansion or its readiness to franchise. He ignored the invitation to speak to the group's financial controller and he gave implausible and unsatisfactory evidence to explain his failure to do so. He read and understood the exclusions and acknowledgements in Special Condition 32 of the contract for sale and received legal advice in relation to the contract. 38Instead, the plaintiff was influenced by the general information on the website of the Iris Group; his knowledge of the price paid by the defendant in December 2007; his conviction that he was buying the property at the bottom of the market after the global financial crisis; his belief that the Black Stump restaurant and the Krispy Kreme outlet were quality businesses that were bound to long leases; and his irrational assumption that the statement in the Information Memorandum that the business planned to expand, necessarily meant that the Black Stump business was successful and profitable. 39Importantly, it was the website that led to the plaintiff's conclusion that the BSR had the experience and financial capacity to continue to meet the rent payments and other outgoings under the Black Stump lease. Having made an assumption about the tenants and their ability to pay the rent, and being told by the agent that it was reasonable to expect a yield of 9%, the plaintiff then worked backwards to imply a valuation of $6.3 million - up to which price he successfully bid at the auction. He thought he had done well and was delighted with the price he had achieved. 40In his assessment of the ability of the tenants to continue to pay the rent and outgoings, the plaintiff was influenced by their 'brands' not by any hard financial figures. He neatly summarised his intuitive and simplistic reasoning in the following answer: A. The property consisted of two well-known brands who I felt very substantial and profitable, successful, and to have got them at a 9% yield, given - and you have to look at yields in the context of borrowing rates. Borrowing rates at the time were 6%, yield 9%. I thought it was a very good buy. 41For all of those reasons, I have reached the conclusion that, even if there were any misleading or deceptive conduct by the defendant, the plaintiff's alleged loss was not caused by that conduct. The defendant's conduct was not a cause of the plaintiff's supposed loss. It is therefore not necessary to consider the separate question of whether the defendant's conduct was misleading or deceptive or likely to mislead or deceive. However I will do so for completeness. Misleading Conduct 42Like reliance and causation, the characterisation of the defendant's impugned conduct as misleading or deceptive or as likely to mislead or deceiver, is also a question of fact. It requires consideration of the circumstances as a whole, including the knowledge, understanding, awareness and commercial sophistication of the plaintiff. The correct approach to the characterisation of conduct directed to identified individuals was stated by Gleeson CJ, Hayne and Heydon JJ in Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592 at [37] as follows: The plaintiff must establish a causal link between the impugned conduct and the loss that is claimed. That depends on analysing the conduct of the defendant in relation to that plaintiff alone. So here it is necessary to consider the character of the particular conduct of the particular agent in relation to the particular purchasers, bearing in mind what matters of fact each knew about the other as a result of the nature of their dealings and the conversations between them, or which each may be taken to have known. (emphasis added) 43A contemporaneous disclaimer by the defendant, and a formal acknowledgment of that disclaimer by the plaintiff - as in this case - are features that may be relevant to the characterisation of the impugned conduct as misleading: Campbell v Back Office Investments at [29]; Butcher v Lachlan Elder Realty Pty Ltd at [39]. They tend to indicate, absent other factors, that it may not be appropriate, reasonable or fair to characterise the impugned conduct as misleading or deceptive or likely to mislead or deceive. 44Even putting aside that consideration, which tends to overlap with the considerations relevant to reliance and causation, and would be sufficient by itself to defeat the plaintiff's contention that the defendant's conduct was misleading or deceptive to him, I am not satisfied that there was anything objectively misleading in the statements contained in the Information Memorandum. 45To start with, I have already made clear that there was nothing in the Information Memorandum that amounted to a representation, express or implied, that the Black Stump business generally, or the particular restaurant business being carried on at the Campbelltown property, were successful, profitable or viable. Those conclusions simply do not follow from the statements in the Information Memorandum. At the least, they would not follow to any experienced commercial investor such as the plaintiff. 46However, if it were necessary to consider the detailed financial information, none of which was known or considered by the plaintiff, the evidence is clear. The unaudited financial reports for BSR for the years ended 30 June 2008 and 2009 were in evidence. They were prepared by Pitcher Partners, the accountants for BSR, and complied with Australian Accounting Standards AASB 1031 and 110. They contained the requisite signed directors' declarations and a signed compilation report by the accountants. They revealed the following: (a)BSR earned a profit before depreciation in each year. The add back of $74,629 for depreciation in FY2008 produced a trading profit of $50,614. And the add back of $280,146 for depreciation in FY2009 produced a trading profit of $47,569. Even the Plaintiff agreed with this interpretation of the cash profit for FY2008. (b)Having started its business from scratch during the course of FY2008 (Rouse Hill in March 2008, Campbelltown in May 2008) and then continued to expand during FY2009 (Wentworthville in August 2008), the gross revenue of the Black Stump business had increased significantly, growing from $1,308,019 in FY2008 to $4,312,005 in FY2009. (c)Significant capital investment in property, plant and equipment had been made and had increased from $1,703,791 in FY2008 to $2,853,300 in FY2009. (d)Other members of the Iris Group had provided loans to BSR to fund its expansion, with loans from associates having gone from $2,018,925 in FY2008 to $2,912,010 in FY2009. (e)The directors of BSR in each of FY2008 and FY2009 had declared that it could pay its debts as and when they became due and payable. 47The plaintiff, of course, displayed no interest at the time of the transaction in investigating or considering any detailed aspect of BSR's financial and trading position. At the hearing his counsel sought to demonstrate the unprofitability of BSR and its three restaurants by selective reference to individual items in several documents described as 'trial balances'. These pieces of papers, of unproven provenance and unknown accuracy, carried little weight when compared to the signed financial reports. For all I know, they could have been drafts prepared by junior accounting staff on the basis of incomplete information - no one was able to inform me. Their probative value was insignificant and their evidentiary weight was insubstantial. 48Putting aside for the moment the effect of the disclaimers, qualifications and exclusions in both the Information Memorandum and the contract for sale of land on the characterisation of the defendant's conduct, the only issue of fact that caused me to pause was the contention that there was something objectively misleading about the statements in the Information Memorandum concerning 'expansion' and 'franchising'. The analysis of this issue requires me to consider carefully the evidence of Ramy Arnaout and to make an assessment of its honesty, reliability and credibility relating to those matters. Mr Arnaout's Evidence 49In the result, having done so, I have reached the conclusion that I should accept Mr Arnaout's evidence. He was, I thought, a truthful witness. His answers were direct, plausible and clear. He did not advocate the defendant's case and he was not evasive. He is clearly a successful businessman, but unlike lawyers and others with an eye for detail (or self -preservation), he was not in the habit of generating a paper trail. He sent and received emails like everyone else, but the key to his success was his personal contact and communication with business colleagues. He knew and spoke to many people, especially agents, brokers and hotel and restaurant owners, but he kept few records. He may not have been meticulous, but he understood his market and he was shrewd. 50Mr Arnaout's evidence was that 'the desire and plan of the Iris Group to open a chain of Black Stump restaurants, through a combination of restaurants owned and operated by BSR and by franchising the Black Stump restaurant system, had not changed by April 2009'. After careful consideration, I have reached the conclusion that I should accept this evidence. There were reasonable grounds for making this statement in April 2009, especially having regard to the steps already taken, the significant amount of money already expended, the time and effort devoted and the investments made by the group in the period since December 2007. In April 2009 Mr Arnaout was not ready to walk away. And he was not contemplating sacrificing what had already been achieved. 51There was, of course, no 'plan' in the sense of a detailed document setting out a fixed agenda with dates and timetables. It would have been commercially unrealistic to expect one. The submissions of counsel for the plaintiff sometimes seemed to assume that these should have been a documented blue print for future action. But this was not called for and the plaintiff did not expect any such thing. The group's expansion plans for the Black Stump business were of a different, more subtle and more flexible nature. They depended on the right opportunity presenting itself at the right locations at the right price. The consummation of a single successful transaction with an existing chain of restaurants could have brought about in a single stroke a substantial expansion of the Black Stump business. The plaintiff was astute enough to know this. He knew that in the property business, it is and was necessary to be patient. But he was not in the least interested in finding out any detail of the group's plan. 52Mr Arnaout, on the other hand, had not closed the door on future opportunities in April and May 2009. He was still looking, and had made it known to agents and brokers that he was still seeking proposals. The plan had not changed, although the speed which had attended the first transactions had diminished. A number of opportunities had presented themselves but the negotiations in relation to them had not resulted in any concluded deal. The cross-examination of Mr Arnaout relating to his aspirations and intentions served to reinforce and confirm my impression of his honesty and genuineness on this issue. He said that in April and May 2009 he was open to the market; that there was nothing available at that stage; that if the opportunity arose, 'we would have taken more than ten if we could'; that 'we planned to open as many as we could'; and that hopefully the effect of the global financial crisis would be to produce opportunities. He added, in response to a criticism of his lack of documents: I don't want to come across like we don't write things down, but we don't. We don't. Even when I do hotels of million dollar constructions (sic), we don't write things down. 53I believe Mr Arnaout on this issue and I accept his evidence that he maintained his 'desire and plan' to expand and franchise the Black Stump business. I regard it as more probable than not. And there was nothing to contradict or undermine his evidence except ambiguous inferences from a few other facts. One such fact was the slow-down in acquisitions, with which I have already dealt. By itself, this was not probative of the abandonment of the group's plans. Another fact was the group's decision in the first half of 2009 to accept an apparently unsolicited offer to purchase the Wentworthville property. This was however explicable on the basis that it was an offer too good to refuse and that, as Mr Arnaout explained, 'the exclusions were very exciting to us because of the fact that there was cooking equipment, furniture items ... that would enable us to quickly portalise (sic) or move the restaurant to another position ... that even incentivised that things even more'. Neither of these matters, nor anything else, was sufficient, in my view, to undermine the probability of Mr Arnaout's primary contention. And the business remained 'ready to franchise' for the reasons I explained in paragraph [7] above. The Profitability Issue 54In any event, a statement that 'the business plans to expand the brand ... with a further 10 stores' does not imply that the business will successfully achieve its objective, as I am sure the plaintiff well understood. Nor does it mean that the defendant cannot legitimately change its mind without running a risk of being found to have been misleading. The real complaint, to which the plaintiff's case returned, was that the Black Stump business was allegedly unprofitable in April and May 2009 and therefore did not have the financial capacity to expand and franchise. Apart from anything else, this contention ignores the ability and willingness of related companies in the group to continue to support and advance funds to BSR - a matter that was left unexplored at the hearing. 55I have already expressed my conclusions in relation to 'profitability'. There was no expert evidence on behalf of the plaintiff and no considered analysis of the financial position which might have formed a sound basis for a different conclusion. The selective point-taking by the plaintiff's counsel was hardly persuasive, especially in the light of the signed accounts. Ultimately, I found Mr Arnaout's evidence convincing. It was epitomised by the following passages: Q. If it was the position that they weren't profitable as at April or May 2009, can I suggest to you that you would have wanted not to expand the business but to put it on the market; what do you say to that proposition? A. Well, if they weren't profitable, as a director I wouldn't be doing my fiduciary duty, for one, and as our accountants, Pitcher Partners, would have instructed me to put it into more - I would've, I would have been in bigger trouble. I would've - I wouldn't have been allowed to trade, put it that way. Q. I want to suggest to you that you knew that these restaurants weren't making money and that you had decided, at least by April or May 2009, not to expand the business, in fact, to sell them? A. That's incorrect, no. Mr Lawson 56In addition to the exiguous statements in the Information Memorandum, the plaintiff relied on an allegedly misleading statement by the group's operations manager, Mr Lawson. The issue can be resolved at a factual level. I do not accept the plaintiff's evidence that he spoke to Mr Lawson during the inspection of the property on 9 May 2009 and was told that the restaurant was going well, that bookings were up and that the restaurant was profitable. Mr Lawson denied making any such statement and his cross examination did not detract from the force of his evidence in chief. 57There are a number of reasons for preferring Mr Lawson's evidence to that of the plaintiff: (a)It is, to start with, implausible that the plaintiff would have sought such an assurance from Mr Lawson. He knew Mr Lawson was responsible for 'operations' and that he would not therefore have any specific knowledge on the topic of profitability - a matter that was subsequently reinforced to him by Mr Venturato's email on 15 May 2009. (b)The main purpose of the inspection was to enable the plaintiff to conduct a 'physical due diligence' of the property at a time when the restaurant was not operating. The plaintiff's suggestion that the main purpose of the inspection was to make inquiries about the profit and performance of the Black Stump business was, I thought, a reconstruction. (c)The plaintiff was well aware that the person from whom he could get financial information about the profit and performance of the Black Stump business, including the restaurant at the Campbelltown property, was the financial controller of the Iris Group, yet he did not make a request for such information despite the invitation to do so by Mr Venturato on 4 May 2009. (d)Mr Lawson did not in fact have access to any information about profitability and did not discuss that subject with either Ramy Arnaout or Sam Arnaout. He would simply not have been in a position to respond to the question 'Is it profitable?' because he had no knowledge of such things. (e)While Mr Lawson did know about sales information and could therefore have answered a question like "How is the restaurant going?", he had been specifically and understandably instructed by Sam and Ramy Arnaout not to discuss such matters with potential purchasers. And it was his standard practice not to do so. Such inquiries were referred to Sam Arnaout, Ramy Arnaout or the vendor's agent. 58For those reasons, which depend solely on the unique facts of this case, as well as for the general reasons explained by McLelland CJ in Eq in Watson v Foxman (1995) 49 NSWLR 315 at 319 - 320 in relation to allegations of this kind, there is in my view, ample foundation for concluding that the plaintiff's evidence of his conversation with Mr Lawson should not be accepted. Conclusion 59The plaintiff's case fails. The parties agreed at the commencement of the hearing that the resolution of the competing valuation evidence, on which the assessment of the plaintiff's damages depended, should be heard separately and be the subject of a reference to a referee. I was informed however that the plaintiff does not seek to proceed with the reference in the event that his claim is dismissed. I therefore make the following orders: (a)I dismiss the further amended statement of claim and give judgment for the defendant. (b)I order the plaintiff to pay the defendant's costs. 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: 31 October 2014