Contractor Services Pty Ltd v Esanda Finance Corporation Ltd

Re: CONTRACTOR SERVICES PTY. LTD.; BERYL FRANCES WILLOUGHBY; JOHN FRANCIS
WILLOUGHBY; MICHAEL STEPHEN WILLOUGHBY; DONNA MARGARET WILLOUGHBY; MARK ROBERT
WILLOUGHBY and WILLOUGHBY INVESTMENTS PTY. LTD.
And: ESANDA FINANCE CORPORATION LTD.; VENETIA HOLDINGS PTY. LTD.; COUGAR
HOLDINGS PTY. LTD. and GARY JAMES JOHNSON
No. WA G106 of 1990
FED No. 595
Trade Practices Act s.52

COURT

IN THE FEDERAL COURT OF AUSTRALIA

WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
Sheppard(1), Pincus(1) and Burchett(1) JJ.

CATCHWORDS

Trade Practices Act s.52 - reliance on representation - effect of representations made after a contract had been entered into subject to finance but before unconditional contracts were concluded.

Trade Practices Act 1974, ss.52, 87

HEARING

SYDNEY

#DATE 30:9:1991

For the appellants: Mr J.F. Willoughby in person

as one of the second appellants and by leave for the first, third and remainder of the second appellants

Counsel for the first respondent: Mr R. Ainslie

Solicitors for the first respondent: Mallesons Stephen Jaques

Counsel and solicitor for the Mr K.J. O'Toole
second respondent:

ORDER

The parties lodge with the Presiding Judge's associate and serve upon each other by facsimile transfer within fourteen days submissions in writing in respect of the matters referred to in the reasons for judgment of the Court.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

This is an appeal from a judgment of a single Judge of this Court dismissing claims based on allegations of misleading conduct. The dispute relates to the purchase by the first appellant of a hotel at Perth called the Leederville Hotel, about the end of 1988. The appellants attempted to show that the purchase had been induced by misleading statements made by or on behalf of the vendors (the second and third respondents), as well as by such statements made on behalf of the first respondent ("Esanda") which lent money to the first appellant to enable the purchase to proceed. Put broadly, the appellants' contention was that the vendors misled them as to the hotel's turnover and that Esanda, which had been the principal financier to the vendors, misled them as to the capacity of the hotel business to service a certain loan. The appellant John Willoughby was allowed to appear at the trial and in this Court, on behalf of all the appellants. Making all allowances for his lack of experience, it has to be said that John Willoughby conducted the trial in a way which unnecessarily augmented the difficulties one would expect a trial Judge to experience, when faced with an unqualified advocate presenting a complex case.

The contracts into which the first appellant is alleged to have entered as a result of the conduct complained of were two in number: it agreed to buy the hotel land and building from the second respondent ("Venetia") for $2 million and agreed to buy the hotel business and chattels from the third respondent ("Cougar") for $750,000 plus the value of the stock. Both contracts were made on 22 December 1988. The date is important because, as will appear, it was contended on behalf of Esanda on the hearing of the appeal that the misleading conduct alleged against it took place too late to found any cause of action; but all such conduct was said to have occurred before the contracts were made.
The second appellants ("the Willoughbys") had, before the purchase complained of, conducted businesses with apparent success in Kalgoorlie. In December 1987, they were short of working capital, although they had substantial assets, and borrowed money from Esanda. They negotiated that loan with Johan Gerritsen, who was designated State Manager, Property Finance, of Esanda. This involved a consolidation, at Gerritsen's suggestion, of a number of liabilities in one loan; Esanda paid out existing lenders, taking security over various Willoughby properties. The transaction was regarded as a satisfactory one by the Willoughbys and in particular by the appellants Beryl Frances Willoughby ("Mrs Willoughby") and her son John Francis Willoughby ("John") who, as a result of their contacts with Gerritsen at that time, thought highly of him.
In September 1988, John and his brother Michael Willoughby sold some land at Boulder for a large profit and the Willoughbys then considered the possibility of making a substantial investment in a hotel in Perth. They first interested themselves in the New Beaufort Hotel and later considered the Leederville Hotel. The latter was run by Mr Lawrence Johnson and his family; Mr Johnson's son, Gary James Johnson, is the fourth respondent.
At the time when the Willoughbys first had discussions about the purchase of the Leederville Hotel, Esanda held securities relating to it in respect of substantial liabilities due by one or both of Venetia and Cougar, which were companies owned by the Johnson family. The appellants contend, and it appears clearly to be the fact, that Esanda had acquired substantial knowledge of the details of the business of the Leederville Hotel in connection with its role as financier. The nature, extent and relevance of that knowledge are discussed below.
Of the misleading conduct relied on at the trial, only two aspects were pressed on appeal. The first was a representation as to the hotel's turnover.
$40,000 Turnover
It appears to be conducive to clarity to deal with the representation as to turnover first and separately from the only other matter which is still a live issue, namely a representation made on behalf of Esanda as to the capacity of the business of the hotel to service a loan.
There was evidence from Michael Willoughby that one Glynn said, on or about 29 November 1988, that the weekly turnover of the Leederville Hotel was $40,000, half of which came through the bottle shop and half through the bars. That representation was said to have been made at a lunch at a restaurant called "Julio's", Glynn being then a real estate salesman. The learned primary Judge found, however, that Glynn was, at the relevant time, not acting on behalf of the vendors but on behalf of the Willoughbys and that he had no authority to make representations on behalf of the vendors. There was no finding as to whether Glynn in fact said what was alleged by Michael Willoughby, nor any finding on the issue whether, if said, Glynn's statement would have influenced the Willoughbys' actions.
Next, there was evidence of a similar statement made by Gary Johnson (the fourth respondent) during a tour of inspection of the hotel on 30 November 1988. There was a conflict of evidence as to precisely what was said, which the Judge resolved by finding that Johnson said that "they were turning over some $40,000 per week". His Honour held that the representation was to be taken as "no more than an indication of an approximate level of turnover at about that time"; there was much debate before us on the correctness of that view.
It was urged on appeal that it should have been held that Glynn had authority to make the representation mentioned above and that the Judge should have held that the representation made by Johnson was capable of referring, not to the turnover at a particular time, but to the annual rate of turnover. His Honour held, on the evidence, that Gary Johnson's statement about $40,000 turnover was not misleading and that conclusion was challenged.
But it is unnecessary to decide these points because it could not, in our opinion, be held in this Court that either the statement made by Glynn or that made by Johnson constituted an inducement. As to Glynn's statement, the Judge's reasons refer to remarks which are relevant to the question of inducement, so far as Mrs Willoughby was concerned:

"She went on to say that she had no recollection of what Glynn had said. He had not impressed her as anything special. Asked whether she was claiming that Glynn had said anything of significance in relation to the Leederville Hotel in the course of that lunch she replied: 'I do not know that I ever did claim that Kieran Glynn said anything'.

Asked whether it was correct to say that if he had said anything she would not have put much store by it, she agreed".

The Judge held that no reliance was placed upon Gary Johnson's statement as to turnover. In reaching that conclusion, his Honour relied upon passages in the evidence, to which we were taken by John Willoughby. It is true that there was some evidence suggesting that Johnson's statement constituted an inducement and it is also true that the passages on which the Judge relied are susceptible of a construction different from that which he gave them. Nevertheless, we think that on a question of fact of that kind, this Court would not be justified in interfering with the Judge's conclusion. It is not the law that every statement which might be expected to incline some purchasers to buy is a foundation of liability under s.52; some such statements have, in fact, no inducing effect.
The Judge's view as to the effect of Gary Johnson's statements concerning turnover is principally set out in the following passage:

"(John Willoughby) accepted the proposition put to him by counsel that it would be absurd to say that he committed himself to paying $2.75 million for the hotel because Gary Johnson had said it was taking $40,000 weekly. He agreed with his mother's evidence that it would not have made any difference to their purchase of the hotel if Gary Johnson had been a deaf mute:

'...If I may, I had to think at that stage on where I rested, who was saying what. Mr Johnson's interest was to sell his father's hotel and Mr Glynn's interest was to get a commission for himself. I mean not that you expect people to lie but if there is going to be some embellishment it is going to be by people that are either selling or commissioning.'

He was asked by the Court:

'...the effect of your evidence as I understand it is that you would not - you did not rely upon anything that Mr Johnson said about turnover in making your decision to buy the Leederville Hotel.'

And he answered:

'No Sir, I certainly took what Mr Johnson said into account but the fact that I would see no figures of the hotel and that he had told us it was turning over $40,000 a week certainly was not enough to...

It would not induce you to buy the hotel?

Not at all Sir. Well, as Mr O'Toole made the comment that it is absurd almost and I would agree, yes.'

And it is also indicative of Fran Willoughby's attitude to the represented turnover that both Gary Johnson and his bar manager, Tim Gill, recalled her saying, during a visit to the hotel on 11 January 1989, that she was not buying the business on past figures but on the figures that she could produce. I accept their evidence on that point. It was entirely consistent with Mrs Willoughby's very confident approach to her own abilities and those of her family".

It is not of great significance but, according to the record, John Willoughby said "I mean not that you expect people to outright lie ...", the word "outright" being omitted from the first quotation in the passage from the reasons just set out. It is true that, reading the passage as a whole, it may be thought to be equivocal. John Willoughby says "I certainly took what Mr Johnson said into account", but also says, in effect, that it would be absurd to say that the hotel was bought on Johnson's statement. One possible reconciliation of these two assertions is that Johnson's statement had some influence but would not, in itself, have been enough or nearly enough to induce the purchase. One must also consider whether the statement to the effect that it would have made no difference if Johnson had been a "deaf and dumb mute" was to be taken literally or as simply an example of the Willoughbys' apparent tendency to use hyperbole. These questions were, no doubt, taken into account by the Judge before he reached his view as to the effect of Johnson's statement on the Willoughbys; as we have said, we will not reverse his Honour's finding on the point.
Although the Judge made no finding about the inducing effect of the statement attributed to Glynn, it seems to us clear from his reasons that he would (if the case based on the Glynn statement had not been rejected for other reasons) have declined to find inducement; the statement was to similar effect to that found to have been made by Gary Johnson. As appears from the passage quoted above, there was strong evidence that Mrs Willoughby placed no reliance on what Glynn said; she did not recall his having said anything of significance.
In our opinion, the appellants' contentions must be rejected, insofar as they are based upon statements that the Leederville Hotel was taking $40,000 per week. The remaining question is whether the appeal should be allowed on the basis of a statement attributed to Mr Greg Smith who was, at relevant times, an employee of Esanda.
Statement on behalf of Esanda
There was no dispute that Smith made a statement relevant to the servicing of the loan which Esanda had provided to Venetia and Cougar. In paragraph 6 of Esanda's defence, it is pleaded, in effect, that at a meeting in or about early to mid December 1988 between Mrs Willoughby, John Willoughby, one Meckelberg, Gerritsen and Smith -

"Mr Smith stated words to the effect that the second and third respondents were satisfactorily servicing a loan provided by the first respondent for an amount similar to that sought to be borrowed by the first applicant ...".

(The second and third respondents below, as on the appeal, were Venetia and Cougar and the first applicant below and first appellant on the appeal was Contractor Services Pty. Ltd., the Willoughby family company which bought the hotel.)

In his oral evidence, Smith testified as follows:

"Did you make statements to Contractor Services that the vendors of the Leederville Hotel had been servicing a 2 million-dollar loan from the first respondent for over three years?---No, I did not but with clarification in our negotiations I said that they had made me feel comfortable that they were servicing a debt to an equivalent level".

A statement by Gerritsen which was tendered gave this version:

"I do recall Greg saying words to the effect that the vendors of the hotel were servicing a loan from Esanda for a similar amount to what the Willoughbys were seeking.

The way I recall this coming up was that, over lunch, the Willoughbys said that the purchase of the hotel was a good deal because they had persuaded the vendor to carry $750,000 of the purchase price by way of vendor finance.

We were being asked to finance the balance.

Greg made a comment to the effect that that should be no problem as we were already carrying a loan for that amount from the vendors which they were currently servicing".

Counsel for Esanda suggested that Gerritsen's statement should be particularly noticed, as showing the context in which Smith's statement about loan servicing was made.

The appellants' case against Esanda failed before the primary Judge, because his Honour held that Smith's statement with respect to servicing a loan was not misleading. One must consider the facts in some detail, to assess the validity of the attack on that finding. But it is also necessary to explain the history of the hotel's financial results, of Esanda's connection with the Leederville Hotel and its dealings with the Willoughbys, in order to understand the context in which Smith's statement was made.
On 12 October 1987, Smith prepared a memorandum for Esanda relating to a then proposed loan facility to be secured on the Leederville Hotel. The memorandum explained that the Johnson family bought out other interests in the hotel in February 1987, until which time it had been badly run, leading to a "cash deficit situation". It said, in effect, that after some difficulty, the Johnsons had improved the management:

"(i) Father Lawrence Johnson oversees all day to day operations of the hotel.

(ii) Sister Michele handles all bankings and accounts.

(iii) Greg has introduced a most comprehensive computerised accounting system which ... has eradicated staff pilfering and provides a total sales analysis on a daily basis ... It is most significant that since introduction of the system profits have increased ... Management is considered to be of the highest standard ...".

The proposal Smith advanced to Esanda was that borrowings be restructured on the basis that $2 million would be advanced for two years by use of 90-day bills of exchange. The money advanced was to be used to pay out existing debt and build a bottle shop at an estimated price of $100,000. Under the heading "Ability to Service", Smith remarked, amongst other things:

"We have confirmed with all existing lenders that borrowings have been met in an exemplary manner ...".

Smith set out the following sum, apparently based on projections in his memorandum:

"Net Profit $390,250 pa

ESANDA $2 M AT 15.5

$310,000

________

Surplus Margin $ 80,250 pa"

As we understand it, the purpose of this calculation was to demonstrate to Esanda that there would be a surplus profit available to the borrowers, after meeting interest payable on the proposed $2 million facility.

The memorandum went on to explain that the "client projections" in respect of the twelve month period to 31 May 1988 showed a net profit before interest of $424,816.
Under the heading "General Remarks", after further praise of the prospective borrowers, Smith described the hotel as "most profitable". He said:

"Esanda is not exposed on this transaction and ability to service is well within capacity and has been clearly demonstrated on both historical and projected bases".

Plainly enough, Smith had, or at least claimed to have, detailed knowledge of the functioning of the hotel in October 1987, a little over a year before the occurrence of the events with which the appeal is immediately concerned. He gave no evidence in support of the view that he continued to have such knowledge from that point on, but in an application for approval of Esanda's loan to the first appellant, he described the business of the hotel, in December 1988, as "well known to ourselves". It should perhaps be mentioned that when asked about that remark by the trial Judge, Smith said:

"What I meant, your Honour, there is simply that we had a situation where we had existing operators of that business that had serviced a loan to our satisfaction in an exemplary manner for $2,000,000 without any problem and that was simply how it was well known to us."

It is not easy to reconcile that answer with the expressions Smith used in the October 1987 and December 1988 memoranda. It seems plain that Smith either knew, or at least gave his superiors to understand that he knew, a great deal about the Leederville Hotel's business.

Despite the happy future Smith predicted for the business in 1987, the annual financial statements continued to record losses at a level which must, if they continued, have quickly led the Johnsons into bankruptcy.
The evidence discloses that from 1 July 1986, if not earlier, Cougar paid rental to Venetia, the owner of the freehold, for its occupancy of the hotel. Mr Lawrence Johnson was asked to explain "how the running of the hotel was split between your two companies, Cougar and Venetia?". He answered:

"Yes. Venetia was the company that owned the land and the buildings and Cougar was the company that ran the hotel.

So from these Venetia owned the hotel and Cougar ran it?--- That is right".

It appears to be convenient to lump together the Venetia and Cougar results, eliminating the effect of the payment and receipt of rental, along with any other payments between the two companies. On that basis, the financial statements showed the following results in each of the last two complete financial years before the sale to the Willoughbys:

Year ended 30 June 1987 Loss $379,779 Year ended 30 June 1988 Loss $483,116

The contrast between these figures, particularly the latter one, and the picture presented by Smith in his 1987 memorandum is striking.
It is convenient to speak of the year ended 30 June 1987 as the "1987 year" and of that ended 30 June 1988 as the "1988 year".
A number of points were made by Mr Ainslie, for Esanda, on the basis of which he suggested that the position disclosed by the financial statements should be discounted or disregarded. He submitted that the results of some business other than that of the hotel may have been incorporated in the accounts as share trading. The Cougar accounts show a net profit from share trading in the 1987 year of $13,432 and a net loss in the following year (which included the October 1987 market crash) of $60,075. If one excludes the latter figure, then the result for the 1988 year becomes a loss of $423,041 and to that extent Mr Ainslie's argument is correct.
It was also suggested that because, on the evidence, a bottle department had been constructed or re-constructed at the hotel at relevant times, that might have distorted the accounts. It is not easy to see why the construction of a bottle department should have affected the profit and loss statement, as the expenditure would presumably be of a capital kind. We can find no item in the 1987 and 1988 years' profit and loss statements of either company in which the cost of the bottle shop might have been included, except the item "repairs and maintenance" which increased from $12,584 in the 1986 year to $50,647 in the 1987 year; in the 1988 year, it was $34,518.
It is true that Mr Lawrence Johnson mentioned in evidence having spent "over $1,000,000" in two years on alterations to the hotel premises, one of those years apparently being that ended 30 June 1986. The financial statements of the 1987 and 1988 years reflect no such expenditure. Mr A.K. Ginks, who was described as Johnson's financial adviser, was of the view that money so expended "would have been either equity money or it would have been borrowings", from which one might deduce that, whenever paid, the sums in question did not come from earnings.
The year ended 30 June 1988 is of particular importance, because it was the last financial year before the sale to the first appellant. If one disregards the share trading loss mentioned above ($60,075) and eliminates the provision for depreciation made in the accounts of Cougar ($28,365), the loss is still almost $400,000. It is not easy to see how anyone with knowledge of that figure could have thought that servicing a debt such as that with which the business was burdened could have been "no problem". On the 1988 financial statements, the hotel would have been a losing proposition, even if entirely debt-free.
What view the trial Judge had as to the facts just discussed is not certainly known. It seems likely that John Willoughby did not, at the trial, argue the case in such a way as to emphasise these points. The financial statements we have mentioned were tendered and Lawrence Johnson discussed them in his evidence; reference was also made to them in the evidence of Mr Ginks, who was accountant for the hotel from 1 July 1988, and Mr I.C. Simpson, an accountant called by the appellants. If it had been part of the respondents' case that for some reason the financial statements could not be relied on, one might have expected that to be put to one of the accountants, but it was not. In those circumstances, we can see no justification for accepting the suggestion made by Esanda's counsel during the hearing of the appeal that perhaps the financial statements should not be treated as revealing a true picture. The trial Judge refers to figures in them, in his reasons, as if he accepted their correctness.
To return to the narrative of events, the Willoughbys saw the New Beaufort Hotel advertised and inspected it on a number of occasions. They also became aware that the Leederville Hotel was on the market. Mrs Willoughby and Michael discussed the Leederville Hotel, according to the appellants' case, on 29 November 1988. As we have mentioned above, Mrs Willoughby and John inspected the Leederville Hotel on 30 November and talked about it to Johnson, who made the representation as to takings which we have mentioned, found by the Judge to be an indication that the approximate level of turnover about that time was $40,000 per week.
About this time, the Willoughbys encountered Gerritsen by chance in a cafe and explained to him that they were interested in the New Beaufort or the Leederville Hotel; the possibility of Esanda providing finance was raised and Gerritsen replied that it was not something in his area but that they should speak to Greg Smith.
On 1 November 1988, John Willoughby signed an offer on behalf of the first appellant to purchase the New Beaufort Hotel for $1.5 million. It was conditional upon approval of a $1 million loan by Esanda secured on first mortgage with vendor finance for the rest. That offer was later the subject of a purported acceptance which was, in truth, a counter-offer. There was never any true acceptance of the New Beaufort offer, but during the pendency of that offer John Willoughby signed an offer for the Leederville Hotel also, on 7 December 1988. The price was $2.75 million and it was subject to finance of $2 million to be provided by a lender suitable to the purchaser. As has been mentioned above, a contract was never made by acceptance of that offer; there were ultimately two contracts each dated 22 December 1988, one with Venetia for the freehold for $2 million and one with Cougar for $750,000 plus stock.
There was a dispute at the trial as to the date on which Smith made his statement about servicing a loan; that was resolved in favour of Esanda. It appears from the evidence of Smith and Gerritsen that the statement about the possibility of servicing the loan was made in mid-December, about a week after the Willoughbys offered to buy the Leederville Hotel. It was suggested that, because of the time sequence, Smith's statement could not have been an inducement. That does not appear to us to be so, as the evidence shows that, after the statement as to servicing a loan, the Willoughbys arranged the terms of the loan and the security for it with Esanda; reaching agreement on those matters was, of course, a condition of the sale's going ahead. This point is discussed in a little more detail below.
It is not easy to state with confidence the facts which were found concerning Smith's representation; in part, the reasons of course set out evidence rather than findings. For that reason, it appears to us that it is difficult for the appellants to succeed as to the Smith representation, except on the Esanda witnesses' versions of it. These have been quoted above and it is necessary to add that the Judge made reference to an affidavit by Smith. In that, Smith said that he had had a meeting with John and Mrs Willoughby "some time in or about early to mid-December 1988", in which he had said "words to the effect that Venetia Holdings was satisfactorily servicing a loan for an amount similar to that sought by Contractor Services". His Honour also referred to the "no problem" statement of Smith, recounted by Gerritsen, and quoted above, and went on:

"Smith's evidence was broadly consistent with this account. He agreed that he had given some encouragement to the Willoughbys by saying that the Johnsons were satisfactorily servicing a loan for an amount similar to that being sought by them. I accept the evidence of Gerritsen and Smith in this regard and am satisfied that at the luncheon at Julio's on 15 December Smith made no representations as to turnover or profitability or whether or not the hotel was 'a steal'. And without going to the evidence of Cougar's bank statements in detail they demonstrate by reference to the payment of instalments due to Esanda from time to time that the company was servicing the loan and doing so out of hotel turnover".

The bank statements are those which have already been briefly referred to; the question of what they show is discussed below.

Smith made a submission to Esanda about a loan to the first appellant on 19 December 1988, and on the same day wrote to a valuer confirming his appointment to value the Leederville Hotel. John Willoughby, both before the trial Judge and on appeal, criticised the practice which was adopted by Smith of informing the valuer of the sale price. That seems to have nothing directly to do with the case, but it is of interest to note that the valuation was given, so far as one can tell from its terms, without the valuer's having had access to the financial statements for any previous year and also that, as has been mentioned above, Smith submitted the December 1988 finance proposal to Esanda in a memorandum which referred to the business as "well known to ourselves". It appears that the basis of Smith's recommendation to Esanda was the valuation which assessed the freehold and business as being worth about $2.71 million - close to what was being paid. His Honour remarked, as to that figure:

"This was assessed by reference to actual and projected turnover and profits and the assumption of liquor sales at $1,970,000 for the 12 months to 30 June 1989".

With respect, the valuation included no reference to actual profits; that is not surprising, as it appears that there were none to refer to.

A loan was approved by Esanda on 28 December 1988 and the securities included a mortgage granted by Mrs Willoughby in respect of a property she owned. The approval also, of course, set out the interest and other terms. The transaction was settled and possession was taken on 6 February 1989. The Willoughbys were soon dissatisfied and, in April, their solicitors made formal complaint to Esanda. That did not relate, however, to anything said by Smith and it is clear, as it seems to us, that such strength as the case against Esanda has is derived largely from documents revealing the hotel's financial position and Smith's knowledge of it, presumably obtained on discovery.
Those documents throw light in particular upon the statement, admitted to have given "some encouragement" to the Willoughbys, that the vendors were satisfactorily servicing a loan for an amount similar to that sought by the Willoughbys. It was argued before us that this was so, in the sense that the turnover of the hotel was sufficient to meet the interest payments; put more simply, the annual turnover figure exceeded the interest figure. Although that is a possible construction of the Smith statement about servicing a loan, it makes no practical sense. No rational purchaser could have been induced to buy or to complete the transaction by being given that information. The turnover was spoken of as $40,000 per week - about $2 million per year - and the loan was $2 million. Even if the claimed turnover was exaggerated by a multiple of two or three, it must necessarily have exceeded the interest charge.
It must be said in favour of the respondents that the evidence made it clear that the Willoughbys were not expecting the purchase of the Leederville Hotel to provide them with an income on which to live; they intended to run the hotel for a time and then hoped to redevelop the land, which they thought was suitable for that purpose. Further, there was evidence that the Willoughby family was confident and, perhaps, over-confident that they could run the Leederville Hotel better and more profitably than it had ever been run in the past. Nevertheless, the law entitled the appellants not to be misled as to the characteristics of the hotel, and the question is whether they were misled or not. More specifically, the question is whether it was misleading for the financier, to which the hotel business was supposedly well known, to say to a prospective purchaser that the vendors were satisfactorily servicing a loan on the property and to say that a similar loan to the purchasers would be "no problem", when the facts appear to have been that the business provided an income quite insufficient to pay the interest.
It is desirable now to turn to the Cougar bank statements, mentioned in the passage quoted above from the reasons. As has been made clear, they do not give any assistance on the question of how the large 1988 deficiency had been financed. The only statements in the record relate to Cougar, not Venetia, and they show a balance as at 1 July 1988 of $34,748 debit rising to $91,403 debit at the date of the contract, 22 December 1988; in between those dates, one finds large fluctuations up and down. It appears that the Judge relied upon the bank statements as showing that the interest cheques came from this account but that, with respect, is not of great consequence; it could hardly have been an inducement, or even relevant, for the financier to say to the prospective purchaser that the current owners paid their turnover into the same account out of which the interest was paid. Nor would it have comforted a purchaser to be told, as appears to have been the fact, that all the interest payments since 1 July 1988 were made by borrowings from the Commonwealth Bank of Australia, with which Cougar had its account. Over the whole of the period covered by the statements, the account mentioned was always in debit. It appears that the debt due to the Commonwealth Bank was ultimately discharged out of the monies received on the sale of the hotel by Cougar and Venetia.
The Judge made findings upon the financial performance of the hotel prior to the sale, although he remarked that it was "not really necessary to consider in any depth the performance". It appears to us that to assess whether the encouragement given by Smith to the purchaser was misleading conduct, it is indeed necessary to consider the returns from the hotel at times prior to the sale, particularly in view of the clear evidence that Esanda had some knowledge of that matter. After referring to earlier losses, the Judge discussed the figures from 1 July 1988 to 30 April 1989:

"To 30 April 1989 the figure showed a profit of $253,236. This, it must be said, included two special items namely profit on sale of goodwill and licence of $186,903 and profit on sale of plant and equipment of $204,919. Alan Ginks, an accountant who supplied accounting services to the Johnsons from 1 July 1988, said, and was not contradicted, that in the six months prior to the sale of the hotel to the Willoughby family it was trading profitably".

Following the method used above of adding together the results of the two companies which derived income from the running of the hotel, the position appears to be as follows:
Total profit for year ended 30 June 1989: $623,523

Less

Profit on sale of hotel $480,976 Profit on sale of goodwill

and licence $186,903 Profit on sale of plant

and equipment $204,919 _______ $872,798 ________ Trading loss $249,275

That is, the result of excluding the items arising from the sale of the business is a loss of $249,275. Interest charges (debited to Venetia) were $217,898 and, again, it can be seen that the books show that even if one excludes the interest paid to Esanda from the calculations, there is still a loss. If, as Ginks said, the hotel was trading profitably in the six months prior to the sale, which presumably means the six months prior to the date of settlement on 6 February 1989, it must have made extraordinary losses in the period from 1 July 1988 to 6 August 1988, to finish the period with a loss of about $0.25 million.

It is our respectful opinion that, on the evidence, and on any of the versions given by Gerritsen and Smith as to what was said about servicing the loan, the statement could have been no better than a half-truth. It is hardly conceivable that Esanda was unaware, through Smith, that since acquiring full ownership of the hotel the Johnson family's companies had been unable to make from the business profits as much as the interest payments to Esanda, or that Esanda could have been ignorant of the fact that the payments in the then current financial year (that which had begun on 1 July 1988) were being made by borrowings from a bank, the debt to which had grown considerably.
Even if one assumes that Esanda had no knowledge of the functioning of the business since Smith had looked into it about a year previously, Esanda's position is not improved. Suppose Smith knew no more than that the business had been making heavy losses in 1987 and earlier, and had no idea what its fate had been since. To say, by way of encouragement, that the Johnsons "had made me feel comfortable that they were servicing a debt to an equivalent level" was at least likely to mislead. To say (to take Gerritsen's version) that the $2 million loan to the prospective purchasers "should be no problem as we were already carrying a loan for that amount from the vendors which they were currently servicing" was hardly a fair statement of the position, for the inability of the business to provide enough income to meet the interest commitment was likely to create a considerable problem, both for borrower and lender. If Smith, as seems probable, positively knew that the business could not in December 1988 itself service the loan, a statement that would give rise to the idea that it was able to do so was obviously misleading; if, on the other hand, Smith had no further information than he had acquired in 1987, when the business had been doing very badly, he still had no right to say anything which might imply an ability in the owners of the hotel to meet a substantial annual interest commitment.
In the circumstances, such a statement would be likely to reassure a prospective purchaser as to the quality of the hotel business. In speaking of ability to "service" a loan, Smith would, we think, have been taken to have in mind more than the possibility of paying one lender with money borrowed from another. His usage is able to be illustrated by passages in his evidence; for example:

"Just reiterating what I did say, because I had financials that were old and related to previous identities back in 86, the valuation was compiled by Richard Ellis and Co. As I say, which was overviewed by Fincom and the contents of that were included in my loan application for the 2 million dollars which demonstrated the income serviceability, et cetera".

In his memorandum of December 1988, advocating Esanda's lending $2 million to the first appellant, Smith used the concept of servicing the loan, again, as characteristic of the business:

"In addition the vendor Venetia Holdings Pty Ltd currently enjoy interest only facility of $2M (Commercial Bill Finance) with ourselves and have conducted their affairs in an exemplary manner, this being a clear demonstration of the capacity of the hotel to service the debt to this level".

It is necessary to deal with two further questions raised by Mr Ainslie for Esanda. He argued that a case along the lines discussed above was not covered by the appellant's statement of claim. In paragraphs 13.2 and 13.4 of the pleading, the following representations are alleged to have been made by Smith in or about December 1988:

"13.2 The vendors of the Leederville Hotel had been servicing a $2,000,000.00 loan from the First Respondent for over three years.

...

13.4 The hotel was sufficiently profitable to service a $2,000,000.00 loan from the First Respondent to the First Applicant after payment of overheads".

It is true that the statements Smith admitted he had made about servicing the loan and those attributed to him by Gerritsen do not precisely conform to either allegation; but the allegations in the pleading seem to us to give ample notice of the nature of the case intended to be made. As to the falsity of the representations, paragraph 25.3 states:

"the hotel was insufficiently profitable to service the interest payments due in relation to the $2,000,000.00 loan by the First Respondent to the Second and/or Third Respondents or other persons associated with the Second and Third Respondents at any material time."

That, again, states the point plainly enough. Further, it is not every divergence between the evidence or the findings based on them on the one hand, and the pleading on the other, which necessitates an amendment.

Another characteristic of the appellants' pleading which should be noticed is that it does not allege that Esanda (through Smith) had knowledge or means of knowledge of the true earnings of the hotel business under the management of the vendors. There is clear documentary evidence, however, in favour of the appellants on this point and it would seem to us to be pedantic to ignore it. To prove a case of misleading conduct causing loss, an applicant need not show that the respondent knew or had means of knowledge of the truth, or that the respondent attempted to induce the actions which caused the loss. It is enough to show that the conduct was, in fact, misleading and, in fact, caused loss. But where there is evidence that the respondent had access to facts falsifying the representation, suggesting that there was an element of deliberation in the respondent's course of action, it becomes easier for the applicant to satisfy the Court that what was apparently intended was achieved; cf. Pacific Dunlop Ltd. v Hogan (1989) 23 FCR 553 at 586. For these reasons, we have not treated the evidence of Smith's knowledge of the hotel's past performance as irrelevant. We have not, however, found it necessary to discuss the evidence relating to a similar argument advanced by John Willoughby, namely that the documents showed that it was to Esanda's and Smith's advantage to substitute the security provided by the Willoughby family assets for those provided by the Johnson family.
Another question raised by Mr Ainslie and briefly discussed above was whether the appellants could succeed when, on the findings, Smith made his statement about servicing the loan about a week after John Willoughby signed an offer to buy the Leederville Hotel - on 7 December 1988. As explained above, there were on foot at that time two offers by the Willoughbys to purchase hotels, one relating to the New Beaufort and the other relating to the Leederville Hotel, and each was conditional upon finance being approved. The trial Judge found that there were no substantial negotiations between the Willoughbys and Esanda as to financing the New Beaufort Hotel; as has been mentioned, the Willoughbys' offer was never accepted, but a counter-offer was made. The only relevance of there having been two offers in being contemporaneously is that it reinforces the notion that the Willoughbys did not regard themselves as absolutely committed by the written offers. That was so, it appears, because each had a finance clause.
In Meehan v Jones (1982) 149 CLR 571, a contract for sale subject to the purchaser "receiving approval for finance on satisfactory terms and conditions in an amount sufficient to complete the purchase hereunder" was considered. Here, the clause was conditional upon a lender suitable to the purchaser approving a $2 million loan; if the Willoughbys had found Esanda to be unsuitable (for example, because it required security to be given over personal assets, as in fact it did require) they were not obliged to proceed with the transaction. In Meehan v Jones, it was held that it was for the purchaser "to determine whether or not the available finance is suitable to his needs" (580), perhaps subject to an obligation that the purchaser act honestly. In a practical sense, a clause such as that inserted in the offer signed by John Willoughby may give the purchaser a discretion; until that is exercised in favour of accepting proffered finance, the vendor is unlikely to be able to establish a right to specific performance or damages. It is true that, owing to confusion about dates, the Willoughbys gave evidence under the impression that Smith's statement had preceded the making of the offer to buy of 7 December and that was found not to be so. Nevertheless, there seems no reason to reject the suggestion, made by Smith himself, that what he said gave encouragement to the Willoughbys. They appear to be comparatively unsophisticated in financial matters, as is exemplified by their having agreed to spend such a large sum of money without any attempt to study the financial records of the hotel business; the impression one gains from the evidence is that balance sheets and the like would have meant little to them. But they were given to understand that the existing debt was being satisfactorily serviced and that was, to put it at the lowest, not the whole truth. Had it been explained that the hotel business was not returning nearly enough to pay any interest, but that the obligations under the existing mortgage had somehow been met, one would have expected even optimists such as the Willoughbys to pause.
At the trial, the Judge considered the question of liability only and not the matter of relief. In our opinion, this Court should allow the appeal against dismissal of the claim against the first respondent and find that the first appellant's purchase of the property referred to in paragraph 16 of the statement of claim was induced by misleading conduct engaged in by the first respondent, Esanda Finance Corporation Ltd. In addition, it will be necessary to set aside the orders made by the primary Judge (including the orders on the cross-claim brought by Esanda), except insofar as his Honour dismissed the application against the second, third and fourth respondents, gave judgment on the cross-claim of the second respondent (Venetia) against the appellants in the sum of $998,890.89, and ordered the appellants to pay the costs of the second, third and fourth respondents of the application and cross-claim. The setting aside of the orders made upon Esanda's cross-claim is necessary so that the trial Judge may be free to make orders under s.87 in respect of the documents upon which the cross-claim by Esanda is based, should he think it appropriate to do so. It would seem that otherwise the case should be remitted to French J. to hear further evidence and make such orders as seem to his Honour proper, having regard to the whole of the evidence and to these reasons. The parties will, however, have an opportunity to make submissions in writing, within fourteen days, as to the proper form of order, including submissions on costs.

[1991] FCA 595

30 SEPTEMBER 1991