Digi-Tech (Australia) Ltd v Brand - [2004] NSWCA 58

NEW SOUTH WALES COURT OF APPEAL

CITATION: Digi-Tech (Australia) Ltd v Brand & 5 Ors; Digi-Tech (Australia) Ltd v Kelliher & 3 Ors; Kalifair Pty Ltd & 3 Ors v Digi-Tech (Australia) Ltd & 3 Ors; McLean Tecnic Pty Ltd & 1 Or v Digi-Tech (Australia) Ltd & 3 Ors [2004] NSWCA 58

FILE NUMBER(S):
40832/02
40833/02
40838/02
40840/02

HEARING DATE(S): 21/07/03, 22/07/03, 23/07/03, 24/07/03, 25/07/03

JUDGMENT DATE: 23/03/2004

PARTIES:
(CA 40832/02)
Digi-Tech (Australia) Ltd (Appellant)
Graham Leonard Brand (First Respondent)
Robert Edward Chambers (Second Respondent)
Christopher Gerard Kelliher (Third Respondent)
Roeturn Pty Limited (Fourth Respondent)
Morrow No 1 Pty Ltd (Fifth Respondent)
Nesyear Pty Limited (Sixth Respondent)
(CA 40833/02)
Digi-Tech (Australia) Ltd (Appellant)
Christopher Gerard Kelliher (First Respondent)
Ian Michael Smith (Second Respondent)
Hametron Pty Limited (Third Respondent)
Dellfan Pty Limited (Fourth Respondent)
(CA 40838/02)
Kalifair Pty Ltd (First Appellant)
Kalinick Pty Limited (Second Appellant)
Divome Properties Pty Limited (Third Appellant)
Toltex Human Resources Pty Limited (Fourth Appellant)
Digi-Tech (Australia) Ltd (First Respondent)
Digi-Tech Equities Limited (Second Respondent)
Digi-Tech Communications Limited (Third Respondent)
John Anthony Reid (Fourth Respondent)
(CA 40840/02)
McLean Tecnic Pty Ltd (First Appellant)
A I McLean Pty Limited (Second Appellant)
Digi-Tech (Australia) Ltd (First Respondent)
Digi-Tech Equities Limited (Second Respondent)
Digi-Tech Communications Limited (Third Respondent)
John Anthony Reid (Fourth Respondent)

JUDGMENT OF: Sheller JA Ipp JA McColl JA

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S): ED 50169/99, 50087/00

LOWER COURT JUDICIAL OFFICER: Einstein J

COUNSEL:
(CA 40832/02 & CA 40833/02)
John C Sheahan SC/M Christie (Appellant)
A J Meagher SC/I M Jackman SC (Respondents)
(CA 40838/02)
A J Meagher SC/I M Jackman SC (Appellants)
John C Sheahan SC/M Christie (Respondents)
(CA 40840/02)
A J Sullivan QC/H Stowe (Appellants)
John C Sheahan SC/M Christie (Respondents)

SOLICITORS:
(CA 40832/02 & CA 40833/02)
Blake Dawson Waldron (Appellant)
Atanaskovic Hartnell (Respondents)
(CA 40838/02)
Atanaskovic Hartnell (Appellants)
Blake Dawson Waldron (Respondents)
(CA 40840/02)
Gillis Delaney Brown (Appellants)
Blake Dawson Waldron (Respondents)

CATCHWORDS:
PRACTICE AND PROCEDURE - Pleading referring to s 51A of the Trade Practices Act 1974 (Cth) - Particulars giving specificity to the alleged representation - Utility of trial judge's finding where proceeded on an incorrect assumption - Question of fact involving credibility findings - Where credibility findings made, reliance not to be determined on a Gould v Vaggelas (1983) 157 CLR 215 presumptive basis - Lack of authority must be pleaded to prevent surprise - TRADE PRACTICES - Whether representation with respect to a future matter - Approach in Miba Pty Ltd v Nescor Industries Group Pty Ltd (1966) 141 ALR 525 not adopted - Relevance of expression of belief - Proper approach to s 51A of the Trade Practices Act 1974 (Cth) - Whether representation was misleading and deceptive - Where no evidence of reasonable grounds for the representation - Whether parties had relied on the representation - Indirect causation under s 82(1) of the Trade Practices Act 1974 (Cth) - Relief under s 82 of the Trade Practices Act 1974 (Cth) - TAXATION AND REVENUE - Whether liable for withholding tax - Definition of royalty - COURTS AND JUDICIAL SYSTEM - Lengthy judgments - Importance of confining judgment to essential submissions and reasoning. D

LEGISLATION CITED:
Fair Trading Act 1992 (ACT)
Income Tax Assessment Act 1936 (Cth), ss 6(1), 128(1)(AA), 128B(5)(A), 128B(2)(B), Div 10B Pt 3
Trade Practices Act 1974 (Cth), ss 51A, 82, 87
Trade Practices Revision Act 1986 (Cth)

DECISION:
The parties should, within 21 days, file a list of orders that are common ground, a minute of proposed orders in regard to those orders that are in dispute (including costs), and written submissions in support of their respective contentions.

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40832/02; 40833/02
40838/02; 40840/02
ED 50169/99; 50087/00
SHELLER JA
IPP JA
McCOLL JA
Tuesday 23 March 2004

DIGI-TECH (AUSTRALIA) LIMITED v Graham Leonard BRAND & 5 ORS
DIGI-TECH (AUSTRALIA) LIMITED v Christopher Gerard KELLIHER & 3 ORS
KALIFAIR PTY LIMITED & 3 ORS v DIGI-TECH (AUSTRALIA) LIMITED & 3 ORS
McLEAN TECNIC PTY LIMITED & 1 OR v DIGI-TECH (AUSTRALIA) LIMITED & 3 ORS

FACTS
On 30 June 1997, a complicated transaction, involving two telecommunications products (the “Products”) was entered into by a number of corporate and individual parties. The Products were known as the ‘Terminal Adapter’ and the ‘Freerider’.

The parties were a group of investors (described in the judgment as the “Kalifair appellants” and the “McLean appellants”) and companies in the Digi-Tech group of companies (described collectively in the judgment as Digi-Tech).

Digi-Tech owned the Products. The essence of the transaction was that Digi-Tech would, in return for certain payments, assign the intellectual property relating to the Products to a partnership. This partnership would exploit those rights and, thereby, promote the Products. As a further part of the scheme, the Investors were entitled to exercise an option between 15 April 1999 and 31 July 2000 that would require Digi-Tech to take up the Investors’ rights and duties under the relevant scheme.

An attraction of the scheme for the Investors was that they could obtain tax deductions for the capital expenditure involved in the purchase of the intellectual property rights.

The valuation of the intellectual property rights was crucial to the expected tax benefits. Digi-Tech carried out its own valuation and retained Deloitte Touche Tomatsu to provide a valuation based on certain Digi-Tech projections. On the basis of these valuations Digi-Tech decided that the appropriate price for the purchase of the rights to the Products was $72.5m.

On 30 June 1997, the Investors divided the partnerships so that there was one partnership for each product. The purchase price was divided appropriately.

Under the Sale Agreements, the Investors, as partners in the relevant partnership were obliged to make payments to Digi-Tech over three and a quarter years. These payments were by way of relatively small instalments each quarter, and a larger ‘balloon’ payment on 30 September 2000. In return for such payments, the intellectual property rights to the respective Products were granted to the partnerships.

The expectation was that, unless the partnerships were highly successful, the options would be exercised so that the liability for the balloon payment would fall on Digi-Tech, rather than the Investors.

At June 1997, neither of the Products was in a state such that it could be marketed.

Digi-Tech purported to terminate the Sale Agreements relating to the Terminal Adapter partnership and Freerider partnership on 25 March 1999 and 7 September 1999, respectively. This was on the grounds of what were said to be breaches of those agreements and repudiation. Digi-Tech then demanded payment from each Investor of the balloon payment and other outstanding payments. Between 20 and 28 September 1999 the Investors exercised or purported to exercise their options by notices addressed to Digi-Tech. Digi-Tech disputed that the options were validly exercised.

HELD by the Court

Issue 1: Did the Investors plead (or were they otherwise entitled to press and have determined) a case that Digi-Tech had represented that the products had the high revenue and profit potential in the “Digi-Tech projections”?

This issue is decided in the affirmative, that is, in favour of the appellants.

Issue 2: Did Digi-Tech represent that the products had the revenue and profit potential in the “Digi-Tech projections” (i.e., that those forecasts of future revenues and profits could be achieved)?

Digi-Tech made express representations that the Products had high revenue and profit potential. “High” is to be understood by reference to the particulars in paragraph 95 of the summons. Those particulars are based on documents that were not disputed. Accordingly, the answer to Issue 2 is in the affirmative.

Issue 3: Was the representation in relation to revenue and profit potential with respect to a future matter and therefore subject to the deeming provision in s 51A(2) of the Trade Practices Act 1974?

It is undesirable to apply past judicial pronouncements as to factors relevant in other cases as a code of conditions that must be satisfied for s 51A to apply. The ordinary meaning of the language of the section is plain enough to provide the key to whether it applies in a particular case.
On that basis, the relevant representation was a representation with respect to a future matter. The trial judge erred in finding to the contrary.

Issue 4: Was the Profit Potential Representation misleading and deceptive because Digi-Tech had not adduced evidence that it had reasonable grounds for making it?

The $72.5m purchase price depended substantially on the 50% market penetration estimate being correct. The evidence revealed at least three respects in which this estimate was defective. Moreover, Digi-Tech did not adduce evidence that it had reasonable grounds for making the representation. Digi-Tech therefore did not discharge the burden upon it to establish such reasonable grounds. The Profit Potential Representation was misleading and deceptive in material respects and the answer to this issue is in the affirmative.

Issue 5: Would the investors have entered into the relevant transactions if they had been told that Digi-Tech did not have reasonable grounds for the revenue and profit projections upon which the Deloitte Indicative Valuation was based?

The finding of the trial judge that reliance was not established cannot stand, since both bases on which his Honour relied for his conclusions were erroneous.
The Court is not in a position to determine the answer to Issue 5. Accordingly, Issue 5 should be remitted to the Commercial List Judge for allocation for re-trial according to law in the light of these reasons.

Issue 6: Were the investors entitled to relief by way of orders under s 87(2)(ba) and damages under s 82 of the Trade Practices Act 1974?

The resolution of this issue depends to a substantial degree on the answer to Issue 5. Issue 6 is remitted for re-trial on the same basis as Issue 5.

Issue 7: Did Kalifair and Kalinick have the benefit of options although not signed by Divome and Toltex?

The Option Agreements contemplated that each Investor would become a party thereto. Clause 4 required the Investor to give the warranty and undertaking set out therein. The relevant solicitor’s letter disavowed any intention to give such undertakings. Divome and Toltex could not exercise the options (through Kalifair and Kalinick) while denying that they were bound by the Option Agreements.
The trial judge correctly upheld Digi-Tech’s contentions. The answer to Issue 7 is in the negative.

Issue 8: Was the exercise of options for McLean Tecnic P/L invalid because:

(a) at the time of exercise in relation to one partnership, it had an existing liability in relation to the other; and
(b) it was indebted to DTSPL?

McLean Tecnic could have assigned its rights and duties to two separate but related companies, each wholly owned by A I Mclean. If this had have been done, there would have been no breach of warranty. The trial judge was justified in preferring the submissions advanced on behalf of Digi-Tech on this issue.
The failure to plead the existence of the two debts to DTSPL must have resulted in surprise and unfairness to the McLean appellants. The trial judge’s findings regarding the debt are set aside. A re-trial is ordered on whether the indebtedness as now alleged existed at the relevant time.

Issue 9: Was the exercise of options for Kalifair P/L, Kalinick P/L, McLean Tecnic P/L, Brand, Chambers, Kelliher, Smith, O’Loughlin and Whiting invalid because on the day of exercise each was (or in the case of natural person investors, their nominee company became) liable for withholding tax?

Digi-Tech failed to establish that any part of the payments said to attract withholding tax was a royalty, in accordance with Stanton v Federal Commissioner of Taxation (1955) 92 CLR 630 and Federal Commissioner of Taxation v Sherritt Gordon Mines Limited (1977) 137 CLR 612. This was an essential element of both Digi-Tech’s arguments on this issue.
The trial judge was therefore correct in answering the question posed by Issue 9 in the negative.

Issue 10: Did Smith’s nominee company (Dellfan Pty Limited) deliver an executed deed of accession with the consequence that Smith’s option was validly exercised?

The trial judge found that Mr Smith executed and delivered the deed. These findings were reasonably open on the evidence. Any absence of authority must be pleaded to prevent the opposing party from being taken by surprise.
The question posed by Issue 10 is therefore answered in the affirmative, and the decision of the trial judge is upheld in this respect.

ORDERS

The parties should, within 21 days, file a list of orders that are common ground, a minute of proposed orders in regard to those orders that are in dispute (including costs), and written submissions in support of their respective contentions.

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40382/02; 40833/02
40838/02; 40840/02
ED 50169/99; 50087/00
SHELLER JA
IPP JA
McCOLL JA
Tuesday 23 March 2004

McLEAN TECNIC PTY LIMITED & 1 OR v DIGI-TECH (AUSTRALIA) LIMITED & 3 ORS

Judgment

THE COURT
The complexity of the issues
These reasons apply to four appeals, two notices of contention, and two cross-appeals that are before this Court. The issues, both factual and legal, are manifold and complex. The hearing of the trial occupied 26 days before the trial judge, Einstein J. Much of the evidence at the trial was adduced by way of written statements and affidavits. This meant that the trial was substantially shorter than it otherwise would have been. It also meant that there were many exhibits tendered. The appeal books containing the exhibits number 4,803 pages. His Honour’s judgment is 778 pages long with cross-referenced appendices of some 100 pages. The appeal itself was argued over five days. There are ten principal issues on appeal and many more sub-issues.
In view of the very large number of issues, we consider it to be inappropriate in these reasons to deal with each and every one of the many arguments raised by the parties. We shall confine ourselves to those arguments necessary to the adjudication of the issues identified by the parties as being the issues this Court is required to resolve. Our ability to do this has been aided considerably by the lucid arguments of all counsel.
The parties to the appeal
Not all issues arising in the trial were pressed on appeal and not all parties to the trial are appellants. We shall identify the parties to the appeals.
In CA 40838/02, Kalifair Pty Limited, Kalinick Pty Limited, Divome Properties Pty Limited and Toltex Human Resources Pty Limited are the appellants and Digi-Tech (Australia) Limited (“DTAL”), Digi-Tech Equities Limited (“DTEL”), Digi-Tech Communications Limited (“DTCL”) and Mr John Reid are the respondents. Mr Reid was a director of a number of companies in the Digi-Tech group.
The Digi-Tech group was a New Zealand group of companies, of which DTCL was the ultimate holding company. Digi-Tech designed and sold data communications products and was in the business of producing data communications hardware and software.
Kalifair and Kalinick were investors in the Terminal Adapter Partnership (to which we refer below) as from 30 June 1997. Divome and Toltex were the holding companies of Kalifair and Kalinick respectively and said to be the assignees, respectively, of the interests of Kalifair and Kalinick in the partnership.
In CA 40840/02, McLean Tecnic Pty Ltd and A I McLean Pty Limited are the appellants and DTAL, DTEL, DTCL and Mr Reid are the respondents. McLean Tecnic was a partner in the Terminal Adapter Partnership and the Freerider Partnership (to which we refer more fully below). A I McLean was the holding company of McLean Tecnic and said to be the assignee of its interests in both partnerships.
In CA 40833/02, DTAL is the appellant and Mr Kelliher, Mr Smith, Hametron Pty Limited and Dellfan Pty Limited are the respondents. On 7 October 2003 the appellants in CA 40833/02 filed a notice of discontinuance discontinuing the proceedings in respect of the whole of their claim against the third, fourth, seventh and eighth respondents, i.e. Mr O’Loughlin, Mr Whiting, Onefish Pty Limited and Twofish Pty Limited; according to the notice the respondents concerned consented to the discontinuance.
Mr Kelliher was a partner in the Freerider Partnership and Hametron was said to be the assignee of his interests in that partnership. Mr Smith was a partner in the Freerider Partnership. Dellfan was alleged by Mr Smith to be the assignee of his interests in that partnership. Mr O’Loughlin was a partner in the Freerider Partnership as was Mr Whiting. Onefish was said to be the assignee of Mr O’Loughlin’s interests in the partnership and Twofish was said to be the assignee of Mr Whiting’s interests therein.
In CA 40832/02 DTAL is the appellant (and cross-respondent) and Messrs Brand, Chambers, Kelliher and Roeturn Pty Ltd, Morrow No 1 Pty Ltd and Nesyear Pty Limited are the respondents (and cross-appellants).
Mr Brand, was a partner in the Terminal Adapter Partnership and Roeturn was said to be the assignee of his interest in the partnership. Mr Chambers was a partner in the Terminal Adapter Partnership and Morrow No 1 was said to be the assignee of his interest in the partnership. Mr Kelliher was a partner in the Terminal Adapter Partnership and Nesyear was said to be his assignee.
In these reasons we shall use “Digi-Tech” as a description (depending on the context) of any one or more (collectively) of DTAL, DTEL, DTCL, any other Digi-Tech companies mentioned, and Mr Reid. We shall refer to McLean Tecnic and A I McLean, collectively, as the McLean appellants. We shall refer to the parties other than Digi-Tech and the McLean appellants, collectively, as the Kalifair appellants. When referring to the McLean appellants and the Kalifair appellants, collectively, we shall refer to them as the appellants (or, depending on the context, as the Investors).
The transaction that gave rise to the litigation
The litigation arose out of a transaction entered into on 30 June 1997, immediately prior to the expiry of the 1997 tax year.
The transaction involved two telecommunications products, known as Terminal Adapter and Freerider (the “Products”), which were owned by Digi-Tech. The Terminal Adapter enabled the logging on of a number of functions contemporaneously on a single digital network telephone line, for example a facsimile, telephone, e-mail and EFTPOS. The Freerider was the name of a software system that allowed a particular type of data network to be used simultaneously for multiple functions such as sending facsimiles and other secondary data between locations connected to the same network.
At trial, there was a dispute between Digi-Tech and the Investors as to whether the Investors seriously intended to derive profits from the development of the Products. It was, however, common ground that at least a primary purpose of the Investors was to acquire significant tax benefits in consequence of entering into the transaction. Accordingly, the Investors had a pressing need to conclude the transaction before the 1997 tax year ended.

The transaction was based on an investment scheme devised by Mr Garry Urwin of Horwath and Horwath. The scheme, broadly speaking, initially involved Digi-Tech assigning the intellectual property relating to the Products to a single partnership with the view that the partnership would exploit those rights and, thereby, the Products.
The attraction of the scheme was that the partners (the Investors) would obtain tax deductions for the full amount of the capital expenditure involved in the purchase, spread over a period of three to four years. An opinion had been obtained from senior counsel which confirmed (on the basis of certain assumptions) the tax deductibility, pursuant to Div 10B of Pt 3 of the Income Tax Assessment Act 1936 (Cth), of the capital expenditure on the intellectual property. The key to the materialisation of the expected taxation benefits was the need, as expressed by senior counsel, for the Investors to have “a reasonable expectation that the revenue generated from these products by the exploitation of the intellectual property would be sufficient to meet the instalments of the price which they had to pay …”. Were such an expectation to be held, according to senior counsel, “the dominant purpose will be the obtaining of the commercial return on investment and not the obtaining of an increased tax deduction”.
The potential tax benefits to the Investors were believed to be extremely high; the structure devised for the scheme was thought to permit each of the Investors to claim a $1 deduction for every 15 cents of actual expenditure.
The receipt of the money so invested would not be taxable in the hands of the Digi-Tech group in New Zealand. Thus, the scheme held attraction to all parties.
Digi-Tech appreciated that an appropriate valuation of the intellectual property rights was crucial to support the price to be paid by the Investors. Without such a valuation the perceived tax benefits would be unlikely to materialise. For this reason, Digi-Tech carried out its own valuation and, in addition, retained Deloitte Touche Tomatsu to provide an analysis of the gross profit margins that might be obtained from the exploitation of the intellectual property rights, and a valuation of those rights.
On 4 April 1997 Deloitte produced a gross margin review for the Terminal Adapter and Freerider (the “Gross Margin Review”) and on 22 April 1997 produced an indicative valuation of these products (the “Indicative Valuation”).
The Gross Margin Review contained gross margin projections based on projections prepared by Digi-Tech (principally by Mr Dennis Rowe, the chief executive officer of one of the Digi-Tech companies). On the basis of the Digi-Tech projections of revenue and gross margin, Deloitte valued the Products (subject to certain assumptions) at between $67m and $74m.
On 2 May 1997, Messrs Urwin and Reid agreed that an appropriate purchase price for the rights to the Products would be $72.5m.
On 30 June 1997 the Investors were divided into two partnerships because of advice received by Digi-Tech that the numbers involved in the acquiring partnership should not exceed 20. At that time, 76.65% of the total purchase price of $72.5m was attributed to the Terminal Adapter Partnership (i.e. $55.57m) and 23.343% was attributed to the Freerider Partnership (i.e. $16.93m). That division of the purchase price was based upon the proportion of the (Deloitte) Indicative Valuation attributable to each of the Products.
The basic structure of the schemes, as they were transformed into a series of agreements on 30 June 1997, was as follows:
(a)On 30 June 1997 DTAL, a New Zealand subsidiary of DTCL, entered into an agreement with the Terminal Adapter Partnership for the sale of intellectual property rights for the Terminal Adapter product in Australia for a five-year period.
(b)On 30 June 1997 DTAL entered into an agreement with the Freerider Partnership for the sale of intellectual property rights for the Freerider product in Australia for a five-year period.
(c)On 30 June 1997 the Terminal Adapter Partnership and the Freerider Partnership each granted Digi-Tech Software Pty Limited (“DTSPL”), an Australian company, an exclusive licence to use those intellectual property rights in Australia.
(d)The partners in the Terminal Adapter and Freerider Partnerships were the shareholders in DTSPL.
(e)DTSPL entered into a supply agreement with Digi-Tech Manufacturing Limited (“DTML”) (a New Zealand company and subsidiary of DTCL) whereby DTML undertook to manufacture the Products.
(f)Investors in the Terminal Adapter and Freerider Partnerships could exercise an option between 15 April 1999 and 31 July 2000 requiring another New Zealand subsidiary of DTCL, Digi-Tech Equities Limited (“DTEL”), to take up the Investors’ rights and duties under the relevant investment scheme.
(g)The mechanism of exercising the options involved the original Investors ensuring that, at the time the options were exercised, the Investors would be companies established for that special purpose. Each original Investor was required to transfer to such a company their rights and obligations under the agreements comprising the scheme, and that company would then become liable for those obligations.
(h) Each original Investor was to hold all the shares in each special purpose company that had acquired that Investor’s rights and obligations.
(i)By the exercise of the option, DTEL became obliged to take up the shares held by each original Investor in their special purpose company.
(j)The Investors, as partners in the Terminal Adapter Partnership and the Freerider Partnership, were obliged to make payments to DTAL over a period of three and a quarter years by way of relatively small instalments each quarter and a very large “balloon” payment on 30 September 2000.
(k)In practical terms, the realistic expectation was that, unless the Partnerships were highly successful, the Investors would exercise their options between 15 April 1999 and 31 July 2000 so that the liability to make the balloon payment would not fall on them but on DTEL. In the meantime, it was believed that very substantial tax deductions would be available to the Investors.
On 30 June 1997, each Investor made an initial payment on account of the purchase, paid an option fee to DTEL (so as to have the benefit of the options) and paid the amount required to subscribe for shares in DTSPL. Subsequently, other instalments were paid as they fell due.
The Transaction Documents
The Partnership Agreements
The partners (Investors) in each Partnership agreed to enter into and carry on the business of manufacturing, importing, marketing, distributing and selling the product concerned in Australia (cl 2.1). The Partnership had the right to use the intellectual property rights under the Sale Agreement (cl 2.2). Each partner agreed to maintain their shareholding interest in DTSPL, which was the licensee company, for as long as the partner retained its capital interest (cl 2.4(a)(i)). Each partner agreed to pay all future calls made on the shareholding interest in DTSPL for as long as the partnership interest was retained (cl 2.4(a)).
The Sale Agreements
DTAL, as the owner of the intellectual property rights to the Products, assigned to each relevant Partnership for five years all its right, title and interest in those rights in respect of Australia, including an exclusive right to use and exploit those rights in Australia in accordance with each Sale Agreement (cl 2.1).
“Intellectual Property Rights” were defined to mean all intangible property rights of DTAL relating to the Products including (among others) know-how and trade secrets, whether or not capable of protection by a patent, and the copyright to the relevant software.
DTAL was entitled to terminate each Sale Agreement without prejudice to its other rights if the Partnership concerned either committed a material breach which was incapable of being rectified or committed a material breach which was not rectified within a reasonable time after written notice of the breach had been given (cl 4.1).
On termination or expiry of each Sale Agreement, each Investor (partner) was required to pay the balloon payment - if it was outstanding (cl 5.3(b)).
Each Investor (partner) was required each quarter to make payment of an instalment in respect of the purchase price and a contribution to the capital of DTSPL. The total amount payable by the Investors each quarter was approximately $347,000.
The steps required for an Investor (partner) to exercise an option varied depending upon whether the Investor was a corporate body or a natural person. If the Investor was a corporation, generally speaking the option was granted to its holding company. When the option was exercised, the holding company would sell or put the shares in the corporate investor to DTAL. If the Investor was a natural person, it was first necessary for the natural person to transfer his or her interests in the Partnership and shares in DTSPL to a corporate nominee so that the option operated with respect to the shares in that corporate nominee.
For an Investor to transfer their interests and obligations under the Sale Agreements, the Investor was required to deliver to DTAL a deed pursuant to which the transferee was bound by the Sale Agreement to perform the obligations of the Investor, i.e. a deed of accession (cl 20.4).
The Licence Agreement
The Licence Agreement ran in tandem with the term of the Sale Agreement. Pursuant to the Licence Agreement, the parties to the Investor Partnerships licensed to DTSPL the exclusive right to use and exploit the Intellectual Property Rights in Australia.
The Individual Option Agreements
The Option Agreements required any natural person wishing to exercise an option first to assign his or her interests in the Partnership in question and shares in DTSPL to a corporate nominee. Under the option, DTEL agreed to acquire the shares in the corporate nominee. This structure was adopted to enable the transfer of the interests in each Partnership and the shareholding in DTSPL to occur through a conduit company that had no liabilities. Thus, cl 2.2 provided:
“Subject to:
(a) the payment of instalments of the Option Fee from
time to time as set out in the Schedule;
(b)the Investor transferring all of its equity interests (including the Investor Debt and any Instalment Debt) in each of the Investor Partnership and DTSPL in accordance with the Investor Partnership Agreement to the Company; and
(c)provided that there is no outstanding breach of the warranties and undertakings in clause 4 of this agreement.
the Investor Option may be exercised by the Investor at any time during the Investor Option Period … “
And, in terms of cl 4(b), the investor warranted that, on the date on which the option was exercised, the “Company” would have no indebtedness other than the “Investor Debt” to any person.
“Instalment Debt” was defined by reference to the outstanding proportions of the purchase price instalments payable to DTAL. “Investor Debt” was defined to mean “the proportion of the purchase price payable to DTAL pursuant to the Sale Agreement for which the Investor is severally liable less all amounts paid by or on behalf of the Investor to DTAL by way of instalment and the Instalment Debt”.
Lack of success in marketing the products: the parties fall out
The Terminal Adapter product was designed to operate for use in New Zealand but as at June 1997 had not yet been launched. For the Terminal Adapter to operate in Australia, adaptation, research and development were required. As at June 1997, Freerider was also not in a state where it could be marketed. Its development and field testing had not been completed.
Expected buyers of the Products did not materialise. Sales were below the levels forecast and other problems were experienced in this area. Moreover, the expected tax benefits did not materialise and, indeed, at least by 2001, it had become clear that the Commissioner of Taxation would not allow the deductions claimed.
On 25 March 1999, DTAL purported to terminate the Sale Agreements relating to the Terminal Adapter Partnership and, on 7 September 1999, the Sale Agreements in relation to the Freerider Partnership. In both instances it did so on the grounds of what were said to be breaches identified by earlier notices and repudiation.
After terminating the Sale Agreements, DTAL demanded payment from each Investor of the balloon payment and other outstanding amounts.
Between 20 and 28 September 1999 - no doubt in an attempt to avoid having to pay the balloon payments – the Investors in the two Partnerships exercised or purported to exercise options by notices addressed to DTAL. Digi-Tech disputed that the options were validly exercised.
Litigation is commenced: the pleadings
The Investors commenced separate sets of proceedings against various Digi-Tech entities. The relief that they claimed, relevant to this appeal, was based on s 82 and s 87 of the Trade Practices Act 1974 (Cth) and the equivalent sections of the Fair Trading Act 1992 (ACT). In these reasons, we shall refer only to the Trade Practices Act 1974 and not to the equivalent provisions of the Fair Trading Act 1992: It was not suggested that those equivalent provisions give rise to any different consequences.
The Investors asserted in these proceedings that the notices of termination issued by DTAL were void and of no force and effect, that the relevant agreements were in full force and effect, and that the Investor options had been validly exercised.
The summonses asserted, first, a cause of action based on misleading and deceptive conduct on the part of Digi-Tech in relation to existing facts, and then, in the alternative, reliance was placed on s 51A of the Trade Practices Act 1974 and misleading and deceptive conduct involving future facts was alleged.
The misleading and deceptive conduct based on existing facts was said to involve two categories of representations. One category was referred to as the “Suitability Representation,” the other as the “Profit Potential Representation”. The misleading and deceptive conduct based on future facts was said to involve only the Profit Potential Representation.
The Suitability Representation was to the effect that Digi-Tech had represented that the Products were suitable for and capable of ready exploitation in Australia. The Profit Potential Representation was to the effect that Digi-Tech had represented that the Products had a high revenue and profit potential.
The summonses asserted that the representations were false and that the misleading and deceptive conduct had caused the Investors loss or damage. The loss or damage was pleaded to be, in effect, the purchase price, option fee and share capital contribution paid by each of the Investors and “any liability arising from these proceedings in respect of any further payments to any of the defendants”. No allegation was made that the loss or damage was constituted by loss of taxation benefits. The summonses also alleged that the Investor options had been duly exercised.
The summonses claimed orders under s 87 of the Trade PracticesAct 1974 in effect declaring that cl 5.3(b) of the Sale Agreements was not enforceable (that being the clause that required the making of the balloon payments). In the alternative, the plaintiff Investors sought damages under s 82 of the Trade PracticesAct 1974. There was no claim for the agreements to be set aside.
Digi-Tech denied that it had breached the Trade PracticesAct 1974 and asserted that the Investors’ exercise of the options was invalid on a number of different bases. In cross-claims, Digi-Tech asserted that the relevant agreements had been validly terminated and claimed amounts said to be outstanding in terms thereof.
The disposition of the proceedings at first instance
The parties had varying degrees of success before Einstein J. All Investors were unsuccessful in their Trade Practices Act 1974 claims while the Digi-Tech companies were unsuccessful in asserting the validity of the notices of termination. Some Investors successfully asserted that they had properly exercised their options and others failed on this issue.
In dealing with the claims based on misleading and deceptive conduct, Einstein J dealt separately with the Suitability Representation and the Profit Potential Representation. He also differentiated between the Investors’ contentions concerning existing facts and those based on future facts.
The only firm basis his Honour expressed for dismissing the case based on the Suitability Representation was that the Investors failed to prove that they relied on that representation. Significantly, many of the Investors testified and were cross-examined on this issue. His Honour disbelieved them. His conclusion was expressed as follows:
“The Court’s finding is that even had the particular matters of detail of which the plaintiffs now complain in terms of the suitability representations not having been disclosed and as being inaccurate, been clearly disclosed, the plaintiffs would nonetheless have proceeded with the transaction.”
He confirmed this finding later in his reasons when saying:
“Reliance has not been established”.
The judge then turned to the Profit Potential Representation. He noted:
“[T]he terms of the profit potential representations were put at a high level of generality.”
His Honour said that the expression “high” in the Profit Potential Representation was “clearly vague”. Although he said, “it has to be given content by its context,” he did not proceed to give it any content and repeated that the Investors did not assert that “the business would have a certain value”.
His Honour made it plain that he understood the Investors’ primary case on this issue to be that the Profit Potential Representation meant merely that the Products had “a high revenue and profit potential” and was not to be construed as being qualified by more specific and detailed statements that were alleged in particulars to the Profit Potential Representation in the summonses.
On this basis, the judge commented:
“The essential emphasis through all of the plaintiffs’ evidence goes to their having been misled and deceived by the suitability misrepresentations, it being those misrepresentations which are put as underpinning the suggested problems with the profit potential representations and it being put that the suggested misleading and deceptive conduct arises by reason of the suggested falsity of those representations. Whether this be because, as may well be the case, the plaintiffs very carefully indeed sought to confine their affirmative case with respect to the profit potential representations to that which had been pleaded, the fact is that the states of mind of the plaintiffs as at material times were carefully and painstakingly tested in cross-examination.
Nowhere in any of that cross-examination did the evidence to my mind, even come close to either dealing with, or certainly to proving on the balance of probabilities, any or any special significance, which the plaintiffs sought to attribute to the market size and penetration etc. flaws. Had any such special significance (or indeed significance of a material nature) been present to the minds of the plaintiffs in the course of the giving evidence in terms of being a matter in respect of which, but for the suggested mistakes, they would not have entered into the transaction, it would seem surprising indeed that such evidence did not come forward at some stage or in some discernable way.
Presumably this is because, as Mr Sheahan pointed out [Transcript 12 June 2002 at 85] the plaintiffs’ positive case had given particulars relied upon to establish the falsity of the representations, which simply did not extend to cover or suggest any market size and penetration etc flaws.
In any event the fact that some continued development or adaptation of the Terminal Adapter to meet some particular requirement or requirements of a particular Australian market or purchaser may have been necessary, by no means establishes that the product did not have a high revenue and profit ‘potential‘. The so-called ‘product’ had such potential by reason of the functionality which it exhibited and the concepts and features which had led to its inception and development.”(emphasis in the original judgment)

We repeat that the judge made these remarks in the context of making findings concerning the Profit Potential Representation in accordance with his primary understanding of what it meant, namely, that it meant merely that the Products had “a high revenue and profit potential” (without the word “high” being qualified or coloured in any way). On that basis, as is apparent from the remarks in question, his Honour found that the Investors had failed to prove that they had relied on the Profit Potential Representation. This finding was consistent with the judge’s finding as to reliance in connection with Suitability Representation.
The judge then made a number of observations on a different and alternative assumption as to the meaning of the Profit Potential Representation. This alternative assumption was that the Profit Potential Representation was to be construed as comprising the specific and detailed statements provided as particulars to the Profit Potential Representation in the summons. That is, in effect, that several representations were made. On this alternative assumption, which the judge described as “somewhat artificial”, he concluded that reliance had been established.
This finding on the alternative assumption was made despite the fact that, as the judge mentioned, the Investors did not testify that they relied on the Profit Potential Representation so construed and, understandably, were not cross-examined on that basis. It is difficult to reconcile this finding with those made by his Honour in regard to the Suitability Representation and when dealing with the Profit Potential Representation in accordance with his primary understanding thereof. We deal with this more fully below in connection with Issue 1.
The issues on appeal
The issues on appeal and the manner in which Einstein J dealt with them were set out in an agreed document handed up at the commencement of the appeal. This list of issues has proved to be of great benefit in the determination of the appeal.   The agreed issues and the judge’s answers to them (as identified and agreed by the parties) are:
“1. Did the investors plead (or were they otherwise entitled to press and have determined) a case that Digi-Tech had represented that the products had the high revenue and profit potential in the “Digi-Tech projections”?
Held
Not considered to have been the pleaded case. Whether otherwise entitled to make that case not addressed.
2. Did Digi-Tech represent that the products had the revenue and profit potential in the “Digi-Tech projections” (ie. that those forecasts of future revenues and profits could be achieved)?
Held
No.
3. Was that representation in relation to revenue and profit potential with respect to a future matter and therefore subject to the deeming provision in s 51A(2) of the Trade Practices Act 1974?
Held
No.
4. Was that representation misleading and deceptive because Digi-Tech had not adduced evidence that they had reasonable grounds for making it?
Held
Not clear whether addressed in relation to projections.
5. Would the investors have entered into the relevant transactions if they had been told that Digi-Tech did not have reasonable grounds for the revenue and profit projections upon which the Deloitte Indicative Valuation was based?
Held
No (although slightly narrower question addressed).
6. Were the investors entitled to relief by way of orders under s 87(2)(ba) and damages under s 82 of the Trade Practices Act 1974?
Held
Not dealt with.
7. Did Kalifair P/L and Kalinick P/L have the benefit of options although not signed by Divome P/L and Toltex P/L?
Held
No.
8. Was the exercise of options for McLean Tecnic P/L invalid because -
(a) at the time of exercise in relation to one partnership, it had an existing liability in relation to the other; and
Held
(a) Yes.
(b) it was indebted to DTSPL?
Held
(b)   Yes.
9.   Was the exercise of options for Kalifair P/L, Kalinick P/L, McLean Tecnic P/L, Brand, Chambers, Kelliher, Smith, O’Loughlin and Whiting invalid because on the day of exercise each was (or in the case of natural person investors, their nominee company became) liable for withholding tax?
Held
No.
10. Did Smith’s nominee company (Dellfan P/L) deliver an executed deed of accession with the consequence that Smith’s option was validly exercised?
Held
Yes.
It will be seen that Issues 1 to 6 concern the appellants’ case that rests on the Trade Practices Act 1974. In understanding how these issues are raised on appeal, it is necessary to appreciate that the appellants do not appeal against Einstein J’s findings in regard to the Suitability Representation or his Honour’s findings as to the Profit Potential Representation to the extent that the appellants’ case in that respect was as to existing facts.
Thus, Issues 1 to 6 concern only the appellants’ case in regard to the Potential Profit Representation to the extent that that representation was said to be as to future facts. The appellants’ contention in this regard was that Digi-Tech’s conduct was misleading because it had represented that each of the Terminal Adapter and Freerider had a high revenue and profit potential (with the term “high” being qualified or coloured as we explain below).
Issue 1 in the appeal
For the sake of convenience, we repeat that this issue is: “Did the investors plead (or were they otherwise entitled to press and have determined) a case that Digi-Tech had represented that the products had the high revenue and profit potential in the ‘Digi-Tech projections’?”
Senior counsel who argued this issue on the appellants’ behalf (Mr Meagher SC and Mr Sullivan QC) both submitted that the case of the appellants as to the Profit Potential Representation, as presented at trial, was that Digi-Tech had represented that the Products had “a high revenue and profit potential” on the basis that “high” was to be understood in the light and in the context of the way in which the appellants had pleaded this representation. They submitted that the particulars to the material allegation gave content to the meaning of “high”. In other words, they submitted that the Profit Potential Representation was not put as being at a high level of generality (without any qualification), as was understood by the judge, nor in the detailed way that his Honour postulated the alternative (namely, that the Profit Potential Representation involved the making of the specific and detailed representations particularised in the summonses).
Mr Sheahan SC, who together with Mr Christie appeared for Digi-Tech, resisted this submission and sought to support the judge’s approach. He submitted that the appellants were seeking to make out a case on appeal that had not been made at trial. He submitted (as his Honour found) that the appellants’ case was based on a representation of high revenue and profit potential, without “high” being qualified in any respect. He said that the appellants did not at trial contend that Digi-Tech did not have reasonable grounds for each of the particular forecasts and assessments contained in the relevant documents. He submitted that, if the appellants had pleaded a case that the particular forecasts or the assessments were misleading, then Digi-Tech would have approached its defence in a different manner by cross-examining the witnesses differently.
In the summonses, the appellants pleaded their case based on the Profit Potential Representation as follows;
“95
…
(b) The Products had a high revenue and profit potential;
Particulars
The representation was express and contained in the following documents:
(i) DTAL Information Memorandum dated May 1997:
· “The Licensee will attain an investment in the data communications field which can provide exciting returns” (section 2).
· “In particular, the Software used to drive two of the Products is believed to have some unique features and an extremely high revenue and profit potential. These two (sic) Products are:
“… the ISDN Multi-data DA” (section 5, page 1).
· “ … the total potential gross profit available from the market is calculated to be $184.2 million (increasing to $1.94 billion should Telstra offer ISDN to private homes)” (section 4, page 1).
· In assessing the gross profit margin which a Licensee may make from this market, Digi-Tech has assumed a market penetration of 50% and an average profit margin of AU$300 per TA. This shows a gross profit of $92.1 million. In the event that ISDN is offered to private homes and only 10% of private homes purchase an ISDN Multi-Data TA, then as gross profit increases to AU$267.7 million. It should be note[d] however that margins for large orders may be lower. Market forces will ultimately dictate” (section 5, page 2).
· “Digi-Tech has been informed that the potential of the Product will meet Telstra’s needs, is somewhere between 50% and 100% replacement of the 19,000 users, with result in gross sales from this one sale of AU$13.3 million if the above is achieved” (section 7, page 2).
(ii)“Review of FreeRider and Terminal Adapter Gross Margins Digi-Tech Communications Limited April 1997” prepared by Deloittes Touche Tohmatsu:

Table 4: Terminal Adapter Gross Margin Analysis Summary

Market size	Projected gross margin AUSS	Market Penetration	Projected gross margin AUSS000
Transend users	19,000	300	50%	2,850
EFTPOS users	350,000	300	50%	52,500
Other businesses	240,000	300	50%	36,000
Sundry other networks	5,000	300	50%	750
Potential home users	5,852,518	300	10%	175,575
Total	267,675

Source: Digi-Tech projections
(Paragraph 3.2).
(iii)“Indicative Valuation of the FreeRider and Terminal

Adapter Products for the Australian Market” by Deloittes Touche Tohmatsu April 1997:

“Terminal Adapter Sales and Gross Margin Analysis Summary

First Five Years Ended 31 December 2002
1998 $000		1999 $000	2000 $000	2001 $000	2002 $000
Sales	54,057		71,601	263,550	156,765	78,601
Gross Margin	25,098		33,243	122,362	72,783	36,493
Gross margin %	46%		46%	46%	46%	46%

Second Five Years Ended 31 December 2007
2003 $000		2004 $000	2005 $000	2006 $000	2007 $000
Sales	50,700		39,111	27,523	15,934	4,346
Gross Margin	23,539		18,159	12,778	7,398	2,017
Gross margin %	46%		46%	46%	46%	46%

Source: Digi-Tech projections
(Paragraph 6.6).

The particulars described the above material as the “written representations” relating to the Profit Potential Representation. Oral representations were pleaded, as well, but they were said to be merely that the Products had a high revenue and profit potential and therefore take the matter no further.
The pleading in the summons of the Profit Potential Representation is far more than a bald assertion that “the products had a high revenue and profit potential”. Some definite purpose has to be ascribed to the lengthy and detailed particulars given in support of this allegation. On the face of the pleading, that purpose is self-evident, namely, the particulars give colour, content and a degree of specificity to the generality of the representation alleged. The particular matters alleged in the particulars are not pleaded as individual representations separate from the allegation of the material representation (namely, that the Products had a high revenue and profit potential). This is manifest from the clear distinction made in the pleading between the material allegation made and the particulars to that allegation. The particulars particularised the high revenue and profit potential alleged in the material allegation that comprised the Profit Potential Representation. They did not constitute separate representations on which the appellants were relying for their cause of action, nor can they be divorced from the material allegation made.
In para 99 of the summonses, the appellants pleaded that, to the extent that the Profit Potential Representation was “with respect to future matters”, they relied upon s 51A of the Trade Practices Act 1974.
In para 44 of its defence, Digi-Tech dealt with para 95 of the summons by asserting in effect that the Profit Potential Representation was made on reasonable grounds, and those grounds were identified. Digi-Tech denied that its conduct was misleading or deceptive, but appeared to accept the onus placed on it by s 51A to prove reasonable grounds for any representations as to future matters that it had made.
It was common ground that the parties had not joined issue in an oral debate before his Honour on the question whether the manner in which the appellants sought to put their case on the Profit Potential Representation was open to them on the pleadings, or by reason of the manner in which the case was conducted. Indeed, Mr Meagher, who appeared for all the appellants below, said that the first time he had become aware of what his Honour referred to as “pleading issues” in this respect was when he read the judgment.
In his opening at trial, Mr Meagher relied expressly on the effect of s 51A in relation to the Profit Potential Representation. He drew attention to the representations as to revenue and profit in the Gross Margin Review and the Indicative Valuation as well as other documents. When he commenced his address at trial, Mr Sheahan handed up a “List of Issues” and an “Overview Submission”. These documents demonstrate that Digi-Tech recognised then that it bore the onus of proving that it had a reasonable basis for the statements (made by or on behalf of Digi-Tech in the documents relied on by the appellants) that the Products had high revenue and profit potential.
When it came to leading evidence, the appellants sought to establish their case on the Profit Potential Representation by proving the matters alleged in the particulars.
In closing addresses (by way of written and oral submissions), the appellants spelt out in no uncertain terms that their case was based, among other things, on the fact that as at 30 June 1997 neither the Terminal Adapter or Freerider had the high revenue and profit potential described in the Gross Margin Review and the Indicative Valuation, and that Digi-Tech did not have reasonable grounds for the projections in those documents. The appellants’ submissions went on to deal in great detail with why, according to them, Digi-Tech had not demonstrated it had reasonable grounds for the projections.
In its closing written submissions at trial, Digi-Tech submitted that the issue was not whether DTAL had reasonable grounds for the particular forecasts and assessments in the Deloitte report, but only whether DTAL had reasonable grounds for representing that the Products had a high revenue and profit potential. In those submissions, Digi-Tech dealt in detail with the appellants’ attack on the revenue and profit projections. In oral submissions in closing, senior counsel for Digi-Tech properly accepted that it had not been incumbent upon the appellants to give any particulars about the respects in which, for the purposes of s 51A case, the respondents’ conduct was said to have been misleading or deceptive.
We conclude that the appellants conducted their case at trial on the basis that the Profit Potential Representation was constituted by the collective effect of the revenue and gross profit forecasts contained in the Indicative Valuation, based as it was upon the gross margin projections contained in the Gross Margin Review, which figures, in turn, were referred to in a document described as the Information Memorandum (see the particulars to para 95 of the summons). The appellants did not conduct the case upon the basis that the Profit Potential Representation was constituted solely by the material allegation in para 95, unaffected by the particulars thereto; nor did they conduct the case upon the basis that each particular projection particularised in para 95 constituted an independent and separate representation on which they separately relied.
Accordingly, we do not accept Mr Sheahan’s submissions as to the meaning to be attributed to para 95 of the summons and as to the way in which the trial was run. We accept the appellants’ submissions in regard to these matters. Contrary, to Digi-Tech’s submissions, this is not a case where the appellants are seeking to depart from the case that was presented at first instance.
In our view, the judge erred in the way he approached the matter and in failing to deal with the appellants’ case that the Profit Potential Representation amounted to a representation that the products had a high revenue and profit potential, with “high” being understood by reference to the particulars to para 95 of the summons. The first issue is to be decided in favour of the appellants.
Issue 2
The second issue is: “Did Digi-Tech represent that the products had the revenue and profit potential in the ‘Digi-Tech projections’ (i.e., that those forecasts of future revenues and profits could be achieved)?”
Although the list of agreed issues records that Einstein J answered this question in the negative, this answer must be understood in the light of [1104] of his Honour’s reasons. There the judge states:
“In my view the evidence establishes that the profit potential representations were made, that is to say the defendants represented that the products had a high revenue and profit potential. I am however of the view that no representation was made to the effect that the business would have a certain value or revenue and no less.”
In other words, as we have mentioned when dealing with Issue 1, his Honour did not deal with the Profit Potential Representation in the way it was pleaded (namely, that the Products had a high revenue and profit potential, with “high” being construed by reference to the particulars to para 95 of the summons). It is in this sense that his Honour did not find that the Profit Potential Representation was made.
The consequence is that his Honour did not answer the right question, that is, whether the Profit Potential Representation, understood in the sense we have explained, was made.
Digi-Tech does not in reality dispute that it made representations that the Products had a high revenue and profit potential. It does, however, dispute the allegations made in the particulars to para 95.
The meaning of the Profit Potential Representation depends, therefore, on which of the particulars to para 95 have been proved. Unless this is known, the precise context against which the term “high” is to be measured cannot be determined.
The judge made no findings in this regard, but appeared to assume that the particulars were proved. In our view that assumption must be correct, at least as far as the written representations are concerned, as they are based on documents that are not disputed (and we have pointed out that the oral representations take the matter no further).
In our view, therefore, the answer to Issue 2 must be in the affirmative and the appellants succeed on this issue.
Before leaving this issue, two matters should be noted. Firstly, in the judge’s reasons on this aspect there is an extensive discussion as to the “belief” of Digi-Tech in making the Profit Potential Representation. This aspect of the matter goes to whether the Profit Potential Representation related to future facts and will be dealt with when that topic is discussed. Secondly, the documents containing the Profit Potential Representation also contained several disclaimers. This is a matter that Digi-Tech (rightly, in our view) dealt with under the heading of “reliance” and we shall deal with it when discussing the reliance issue.
Issue 3
This issue was described as: “Was [the] representation in relation to revenue and profit potential with respect to a future matter and therefore subject to the deeming provision in s 51A(2) of the Trade Practices Act 1974?” Einstein J answered this question in the negative.

In the circumstances, it is simply not possible to determine whether any value was attributed by the parties to the Know-how in the purchase price payable under the Sale Agreements. Additionally, if such value was so attributed, there is no way of determining what that value was. In the circumstances, Digi-Tech failed to establish that any part of the payments made to DTAL said to attract withholding tax was calculated in accordance with Stanton v Federal Commissioner of Taxation and Federal Commissioner of Taxation v Sherritt Gordon Mines Limited. On that basis, in our view, no part of that payment has been shown to be a royalty.
We agree, moreover, with Einstein J that Digi-Tech failed to establish that the Know-how had any value.
This conclusion disposes of other arguments raised by Digi-Tech in respect of withholding tax.
Accordingly, we consider that Einstein J was correct in answering the question posed by Issue 9 in the negative.
.
Issue 10
Issue 10 is: “Did Smith’s nominee company (Dellfan Pty Limited) deliver an executed deed of accession with the consequence that Smith’s option was validly exercised?”
Einstein J answered this question in the affirmative.

Clause 20.4 of the Sale Agreements provided that an Investor, wishing to transfer its interest and obligations under the Agreement, was required to deliver to DTAL “a deed pursuant to which the transferee is bound by this Agreement to perform the obligations of the Investor; …”.
Before Einstein J, Digi-Tech contended that Mr Smith failed to deliver a deed to DTAL as required by cl 20.4(a). Mr Smith’s case was that he had signed and delivered to DTAL a deed in requisite form whereby he assigned his partnership interest in the Freerider partnership to his assignee company, Dellfan.
Einstein J found that Mr Smith did execute such a deed. His Honour, however, did not expressly find that Mr Smith delivered the executed deed to DTAL. Nevertheless, Digi-Tech failed on this issue before his Honour so that it must be assumed that his Honour held, tacitly, that there had been delivery.
Digi-Tech submitted that there was no evidence that a signed deed in the form required by cl 20.4(a) was delivered to DTAL. It was said that DTAL only ever received (by facsimile) an unexecuted copy of the deed to which Mr Smith had referred in evidence.
In addition, Digi-Tech submitted that Mr Smith could not have executed the deed on behalf of Dellfan as he was not an authorised agent of the company, whose sole director was Mr Urwin. There was no evidence that Mr Urwin executed the deed; as mentioned, the judge found that Mr Smith had executed the deed.
For either or both of these reasons, Digi-Tech submitted that Mr Smith did not validly exercise the option.
In an affidavit by Mr Smith, tendered in chief, he said:
“On 14 September 1999, I sent a facsimile to DTAL advising that I had assigned my interest in the FIP and DTSPL to Dellfan. Pages 31 to 38 of Exhibit “IMS 1” are a true copy of the facsimile, the deed of assignment and deed poll.”
The facsimile letter of 14 September 1999, written by Mr Smith to DTAL reads:
“I advise that I have assigned my interest in the Freerider Investor Partnership and my shares in Digi-Tech Software Pty Limited in accordance with clause 14 of the Freerider Partnership Agreement to Dellfan Pty Limited. I enclose for your information a copy of the document by which this transfer occurred.
I enclose a deed pursuant to which Dellfan Pty Limited is bound by the Sale Agreement dated 30 June 1997.
…”
The copy of the deed that was in evidence was not executed. Nevertheless, Einstein J found that Mr Smith did execute a deed. In our view, that finding was reasonably open on the evidence.
The question remains whether an executed deed was delivered to DTAL.
In cross-examination, it was put to Mr Smith that an Investor might transfer its interest and obligations under a Sale Agreement to a transferee by delivering to DTAL a deed as required by the Agreement. Mr Smith acknowledged this. This was the only reference in cross-examination to the delivery of a deed.
It was then put to Mr Smith that he had never executed such a deed. He replied that he thought he had.
In re-examination, Mr Smith was referred to the facsimile of 14 September 1999 and to a copy of the unexecuted deed that was in evidence; he was then asked whether that was a copy of the deed to which he referred in his facsimile of 14 September 1999. He replied in the affirmative, although he acknowledged that the copy did not bear a signature. He confirmed that his testimony was that the deed “would have been executed” and it “should have been executed”. He was told to refresh his memory by reference to the facsimile of 14 September 1999 and was then asked:
“[A]re you able to state with any greater clarity one way or the other whether the copy of the Deed which you sent pursuant to which Dellfan was bound by the Sale Agreement was executed or not?”
He replied:
“I would have thought it would have been executed, because I was taking, I thought, care to do this properly. I haven’t got an executed copy in front of me, so I can’t positively swear to that.”
The following exchange then occurred:
“Q.Refreshing your recollection from [the facsimile of 14 September 1999], are you able to state with any greater clarity than you have done so far in your evidence whether the copy of the Deed which you sent was in fact executed or not?
A.     I believe it would have been.
Q.     What is the basis for that belief?
A.     That I was taking care when preparing these documents, because I was aware of the importance of them. It would be my normal practice to check documents that I was preparing.”
Mr Sheahan submitted that the evidence as a whole was insufficient to discharge the onus of proving that an executed Deed had been delivered.
Einstein J believed the testimony of Mr Smith. He believed him when he said that he would have executed the deed and found that that was sufficient to discharge the onus in relation to execution. It seems to us that, in the same way, accepting the veracity of Mr Smith’s evidence, his statement that he would have delivered a signed deed to DTAL is sufficient to discharge the onus upon him in regard to delivery. Two matters reinforce this conclusion. Firstly, Mr Smith’s evidence as to what he would have done in regard to the delivery of the deed is reinforced by his explanation for that testimony, namely, that he was taking care to ensure that the formalities were carried out properly, having regard to the importance of them. Secondly, Digi-Tech led no evidence in contradiction to that given by Mr Smith.
Digi-Tech also argued that there was no evidence that Mr Smith was authorised to sign the Deed, that being of particular significance (it was said) as the sole director of Dellfan was Mr Urwin (and not Mr Smith).
In our opinion, the answer to this submission (which was not pressed in oral argument) is that Digi-Tech did not plead lack of authority on the part of Mr Smith (and, indeed, did not cross-examine him on this issue). It is a generally accepted rule of practice that absence of authority must be pleaded to prevent the opposing party from being taken by surprise. We would not allow this argument to be raised at this stage.
Accordingly, we would answer the question posed by Issue 10 in the affirmative and uphold Einstein J’s decision in this respect.
The further conduct of the matter
The orders that should be made consequent upon our findings are particularly complex having regard to the number of appeals and cross-appeals and the different parties. There may well be matters in dispute in relation to these orders of which the Court is not aware. Moreover, it may well be that the parties have different contentions in regard to costs, having regard to the findings that have been made.
In the circumstances, we do not propose to make any orders at this stage. The parties should determine whether there is any common ground as to the orders that should be made. The parties should, in any event, within twenty one days, file a list of orders that are common ground, a minute of proposed orders in regard to those orders that are in dispute, and written submissions in support of their respective contentions.
A final comment: overly lengthy judgments
There is a noticeable increase in extremely complex and sophisticated litigation. This is one such case. The increased complexity of litigation and the great number of issues that in some cases require determination have led to some very lengthy judgments. There are other cases where the issues are less complex but the judgments are nevertheless very long, and unnecessarily so. This should be discouraged. Prolixity is an enemy of comprehensibility and, indeed, cogency,
This case was a labyrinth of facts and issues, and the task of writing a judgment was an extremely difficult one. Many of the issues resolved by his Honour are not the subject of appeal. Nevertheless, while genuine tribute must be paid to the judge for the industry and dedication manifest from his extensive reasons, it has to be said that their length and form have not facilitated the discernment and understanding of the significant issues in the appeal.
The judgment sets out in great detail the submissions advanced by the parties and the evidence of many of the witnesses. Some of this material relates to peripheral matters. The mass of these references tends to obscure the essential issues that have to be decided and makes the reasoning process difficult to follow. The reasoning process itself is overly discursive, and clear and precise findings are at times difficult to detect. In addition, findings on some important matters have not been made at all, but in fairness to his Honour, in many instances that is likely to have been because of the particular focus attributed to the issues by the parties in presenting their respective cases. All these matters loomed large in the argument on appeal.
In Customs and Excise Commissioners v A [2003] 2 All ER 736 Schiemann LJ said (at 753-754, [82]-[83]:
“A judge’s task is not easy. One does often have to spend time absorbing arguments advanced by the parties which in the event turn out not to be central to the decision making process. Moreover the experienced judge commonly has thoughts about avenues which it might be crucial to explore but which the parties have not themselves examined. It may be his duty to explore these privately in order to satisfy himself whether they are relevant. Having done the intellectual work there is an understandable temptation to which many of us occasionally succumb to record our thoughts for posterity in the judgment or to refrain from shortening a long first draft.
However, judges should bear in mind that the primary function of a first instance judgment is to find facts and identify the crucial legal points and to advance reasons for deciding them in a particular way. The longer a judgment is and the more issues with which it deals the greater the likelihood that: (i) the losing party, the Court of Appeal and any future readers of the judgment will not be able to identify the crucial matters which swayed the judge; (ii) the judgment will contain something with which the unsuccessful party can legitimately take issue and attempt to launch an appeal; (iii) citation of the judgment in future cases will lengthen the hearing of those future cases because time will be taken sorting out the precise status of the judicial observation in question; and (iv) reading the judgment will occupy a considerable amount of the time of legal advisers to other parties in future cases who again will have to sort out the status of the judicial observation in question. All this adds to the cost of obtaining legal advice.”
We endorse these remarks and would add some general comments.
One of the major reasons for the inordinate length of some judgments is the mechanical recounting of large tracts of submissions and evidence. Ordinarily, the repetition of counsel’s submissions has a twofold purpose. First, to assist in defining the issue. Secondly, to indicate that the arguments raised have been taken into account. There is good reason, however, not to repeat these arguments verbatim, but to summarise them succinctly. Similarly, the recording of large extracts of evidence has little utility unless the point the judge seeks to make from the evidence is clearly stated at an appropriate stage. Moreover, the quoted extract should be reduced to a minimum; the minimum being that particular portion on which the point is based – and no more.
Where a judgment contains excessively long recitations of the parties’ submissions and the evidence of witnesses it often becomes difficult on appeal to detect precisely which of the submissions the trial judge has upheld, and on what specific grounds, why long extracts of particular testimony are repeated, and what inferences are to be drawn from it and from what particular passages. This method of writing judgments makes it difficult to detect specific findings in the mass of material. The problem is exacerbated when the findings are scattered amidst discursive discussions.
It is generally unnecessary and undesirable to express every line of thought, including those that have proved to be unhelpful, in the judge’s chain of reasoning. This again can cause debate and confusion. It is preferable for trial judges to confine themselves to the reasoning that leads to their final conclusions.
The practice of appending cross-referenced documents to a judgment is to be discouraged. A succinct analysis of the issues and their sequential determination, involving a clear and ordered statement of the facts found is the preferred aim.
Finally, the difficulty in finding one’s way around a judgment of 778 pages, with some 100 pages of cross-referenced appendices, is self-evident. It is simply not possible to absorb the material contained in such a lengthy document in the way needed for the efficient hearing of an appeal. It also detracts from the utility of the document as a source on which the judgment of an appellate court can be based.
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LAST UPDATED: 29/03/2004