Eastern Gardens Pty Ltd v Stone

SUPREME COURT OF SOUTH AUSTRALIA
(Full Court)
EASTERN GARDEN PTY LTD v STONE & ANOTHER
Judgment of The Full Court
(The Honourable Chief Justice Doyle, The Honourable Justice Besanko and The Honourable Justice White)
20 April 2005
TRADE AND COMMERCE - TRADE PRACTICES AND RELATED MATTERS - CONSUMER PROTECTION - MISLEADING, DECEPTIVE OR UNCONSCIONABLE CONDUCT - CHARACTER AND ATTRIBUTES OF CONDUCT - SILENCE AND CONCEALMENT
CORPORATIONS - MANAGEMENT AND ADMINISTRATION - DIRECTORS AND OTHER OFFICERS - IN GENERAL
Appellant agreed to lease premises to a company of which the respondents were shareholders - Company was to conduct a restaurant business - Appellant required guarantee of lease from all directors - first respondent was appointed an alternate director but was not involved in running of restaurant business - Once appellant became aware of respondents' shareholdings it sought guarantees from respondents, but no such guarantees provided - Business failed and company vacated premises - Allegation of misleading or deceptive conduct by silence - Requirement of guarantees from "all directors" did not include alternate directors not acting in capacity of director - first respondent not a "deemed director" or "de facto director" at relevant times - Appellant not entitled to guarantees from first respondent - first respondent under no duty to disclose to appellant his involvement in the company, including his shareholding - Omission of first respondent to inform appellant of his involvement did not constitute misleading or deceptive conduct - Even if misleading and deceptive conduct established, it was not established that loss was caused by that conduct as no reliance placed by appellant on first respondent's conduct - Evidence did not establish knowledge of facts essential to finding that first respondent aided and abetted misleading conduct by company - Trial Judge correct in refusing application to amend statement of claim at late stage during trial - Appeal dismissed.
Trade Practices Act 1974 (Cth), s 52, s 75B, s 82; Fair Trading Act 1987 (SA), s 56; Corporations Law s 60; Corporations Act 2001 (Cth), s 9; Retail and Commercial Leases Act 1995 (SA), s 12, referred to.
Software Integrators Pty Ltd v Roadrunner Couriers Pty Ltd (1997) 69 SASR 288; Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 39 FCR 546; Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31; Kaze Constructions Pty Limited v Housing Indemnity Australia Pty Ltd (1990) 12 ATPR 41-017; Spedley Securities Ltd (in liq) v Bank of New Zealand (1991) 13 ATPR 41-143; Kimberley NZI Finance Ltd v Torero Pty Ltd (1989) 11 ATPR (Digest) 46-054; Bank of New Zealand v Spedley Securities Ltd (in liq) (1992) 27 NSWLR 91; Warner v Elders Rural Finance Ltd (1993) 41 FCR 399; Winteron Constructions Pty Ltd v Hambros Australia Ltd (1992) 39 FCR 97; Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 12 FCR 477; Strathmore Group Ltd v Fraser (1991) 9 ACLC 3,140; Markwell Bros Pty Ltd v CPN Diesels (Qld) Pty Ltd [1983] 2 Qd R 508; Playcorp Pty Ltd v Shaw (1993) 10 ACSR 212; Walsh v Lonsdale (1882) 21 Ch D 9; Yorke v Lucas (1985) 158 CLR 661; Rural Press Ltd v ACCC [2002] FCAFC 213; (2002) 118 FCR 236; Lam v Ausintel Investments Aust Pty Ltd (1989) 97 FLR 458, applied.

EASTERN GARDEN PTY LTD v STONE & ANOTHER
[2005] SASC 157
Full Court: Doyle CJ, Besanko and White JJ

DOYLE CJ: I would dismiss the appeal. I agree with the reasons given by White J. There is nothing that I wish to add.
BESANKO J: In my opinion this appeal should be dismissed. I agree with the reasons for judgment of White J and there is nothing I wish to add.
WHITE J:
Introduction
This is an appeal from a decision of a Judge of this Court.
The questions on the appeal are whether the first respondent, Dr Stone, engaged in misleading or deceptive conduct, or was an accessory to the misleading or deceptive conduct of another, and if so, whether that conduct caused the loss of rental income alleged by the appellant.
The appellant, Eastern Gardens Pty Ltd, which was the plaintiff at trial, agreed to lease premises then under construction in Hutt Street, Adelaide to Niprust Pty Ltd for the purpose of conducting a restaurant business. Niprust Pty Ltd later changed its name to Tribecca Pty Ltd. Although at many of the times relevant in these proceedings, the company was known as Niprust Pty Ltd, I will refer to it in these reasons as “Tribecca”.
The appellant is a member of the Karidis Group of Companies, the chief executive of which was Mr Gerry Karidis. The commercial property manager in the Karidis Group was a Mr Kaldis. Both Mr Karidis and Mr Kaldis gave evidence at the trial.
The first respondent, Dr Stone, was the second defendant at trial. He was a shareholder of Tribecca.
The first defendant at trial was a Mr Sangster, who was also a shareholder in Tribecca. The second respondent to the appeal (the third defendant at trial) was a Ms Holmes, who was the third shareholder in Tribecca.
The appellant sought to recover from the defendants damages equivalent to the loss of rent it suffered when Tribecca abandoned the leased premises after approximately 11 months of occupancy. The trial Judge found Mr Sangster liable to the appellant in the sum of $291,230 but dismissed the claims against Dr Stone and Ms Holmes. The appellant was ordered to pay the costs of Ms Holmes on an indemnity basis.
The appellant appeals against the judgment dismissing its claim against Dr Stone and against the refusal of the trial Judge, part-way through the trial, to allow an amendment to the statement of claim.
There is no appeal against the decision with respect to the liability of Mr Sangster and Ms Holmes. By its notice of appeal, the appellant did challenge the order that Ms Holmes be paid her costs on an indemnity basis but that ground of appeal was abandoned on the hearing of the appeal. Neither Mr Sangster nor Ms Holmes took any part in the hearing of the appeal.
The appellant claims that by reason of misleading or deceptive conduct of Dr Stone, or in the alternative, misleading or deceptive conduct of Tribecca to which Dr Stone was an accessory, it did not obtain a guarantee to which it was otherwise entitled and to which it could have had recourse following the default of Tribecca.
Factual Background
In early 2000, negotiations took place between Mr Sangster on the one hand and representatives of the appellant on the other about the possible lease by Mr Sangster, or a company nominated by him, of the restaurant in the building then being constructed by the appellant. Those negotiations resulted in Mr Sangster executing, on 17 May 2000, an Agreement to Lease the premises. The Agreement to Lease identified the lessee as “Howie Gordon Sangster and/or nominee”. It was accepted at trial that Tribecca was the nominee and that it was bound as lessee by the terms of the Agreement to Lease.
By the Agreement to Lease, the lessee agreed to lease the restaurant on terms set out in the agreement for a term of seven years. The agreement provided that the parties would enter into a formal lease containing “the terms and conditions set out in this agreement and otherwise the terms and conditions of the lessor’s standard lease”. Mr Sangster had a copy of the appellant’s standard lease at the time when he executed the Agreement to Lease.
The Agreement to Lease contained, in clause 19, a guarantee by persons described as “the Guarantors”. The agreement also provided that the guarantors would execute a formal guarantee within 14 days of being provided with that formal guarantee. Mr Sangster was the only person who signed the Agreement to Lease as lessee, and the only person who signed it as guarantor. It will be necessary to return later, in more detail, to the provisions in the Agreement to Lease concerning the provision of a guarantee. It is sufficient to note at this stage the claim of the appellant that those provisions entitled it to guarantees from all shareholders and all directors of Tribecca and, in particular, from Dr Stone.
Later in 2000 (28 June 2000), Mr Sangster became a director of Tribecca. Later still (20 September 2000), each of Mr Sangster, Dr Stone and Ms Holmes became shareholders in Tribecca. By a shareholders’ agreement entered into on 11 November 2000 Dr Stone was appointed as an alternate director, so as to be able to act in the place of Mr Sangster. It seems that prior to that written agreement Mr Sangster may have informally appointed Dr Stone as an alternative director. As the trial developed, and on appeal, the appellant sought to attach some importance to Dr Stone’s position as an alternate director.
Mr Sangster had experience in running restaurants. Dr Stone and Ms Holmes did not. The conduct of the restaurant business was to be left to Mr Sangster.
The building in which the restaurant was located was completed at the end of September 2000. Shortly after that date, Tribecca went into possession and commenced fitting out the restaurant and preparing for its opening. The restaurant opened on 15 November 2000.
Although a formal Memorandum of Lease was presented by the appellant to Tribecca on 8 December 2000, it was never executed by Tribecca. A Deed of Guarantee, as contemplated by the Agreement to Lease, was presented to Mr Sangster at the same time as the Memorandum of Lease was delivered to Tribecca. However, Mr Sangster did not execute that Deed of Guarantee.
The evidence showed that Dr Stone, at least initially, intended that his involvement in Tribecca should be that of a passive investor. He did, however, involve himself, to some extent, in the establishment of the restaurant business. During 2001, when the restaurant failed to prosper, his involvement increased. It will be necessary to return to his involvement in more detail later. The appellant’s case was that Dr Stone’s involvement was of a kind as to make him a deemed or de facto director of Tribecca.
The appellant became aware of the shareholdings in Tribecca of Dr Stone and Ms Holmes at least by 22 June 2001. That information was contained in documents sent from the Liquor Licensing Commission to the appellant’s solicitors. Following receipt of that information, the appellant sought guarantees from each of Dr Stone and Ms Holmes in relation to the lease but those guarantees were not provided.
Throughout 2001, the restaurant business faced financial difficulties. Each of Dr Stone and Ms Holmes provided additional funds. However, the business continued to fail to prosper and Tribecca abandoned the premises on 8 October 2001. It was in arrears in the payment of rent. It took some months before the appellant could obtain a replacement tenant, and when it did so, it was at a rental lower than that to which Tribecca had agreed.
The Appellant’s Claims
Although the appellant initially advanced a number of causes of action, by the conclusion of the trial its claims were more confined. It alleged that each of Tribecca, Sangster, Stone and Holmes had, contrary to s 52 of the Trade Practices Act1974 (Cth) and s 56 of the Fair Trading Act1987 (SA), engaged in misleading or deceptive conduct.[1] As pleaded, that conduct comprised their alleged failure or refusal to inform the appellant of the change in shareholding in Tribecca which had occurred during the year 2000 (by which each of Mr Sangster, Dr Stone and Ms Holmes had become shareholders in Tribecca). Part way through the trial, the appellant sought leave to amend the statement of claim so as to plead that each of Tribecca, Mr Sangster, Dr Stone and Ms Holmes had failed or refused to inform it of Dr Stone’s appointment as an alternate director of Tribecca on or about 20 September 2000. The trial Judge refused to allow that amendment to be made. As already noted, that refusal was also the subject of the appeal. I will return to that later.
[1]As the content of s 52 of the Trade Practices Act 1974 (Cth) and the content of s 56 of the Fair Trading Act 1987 (SA) are, relevantly, the same, I will, for convenience, refer in these reasons to s 52 only.
The appellant’s claim was that by failing to inform it of the change in shareholding (and, as the appellant would have it, of the appointment of Dr Stone as alternate director), each of Tribecca, Mr Sangster, Dr Stone and Ms Holmes had engaged in misleading or deceptive conduct by silence.
The appellant also sought to establish liability against Dr Stone by relying on s 75B of the Trade Practices Act. It was alleged that he was liable as an accessory to the contravention of s 52 by Tribecca.
The Appellant’s Loss
Following the abandonment of the premises by Tribecca, the appellant did not obtain a replacement tenant until 15 April 2002. The new tenant did not become liable to pay rent to the appellant under the terms of his agreement with the appellant until 15 June 2002. The rental which the new tenant agreed to pay was less than that which Tribecca had agreed to pay.
Tribecca’s claim in the proceedings was for the difference between the rental payable by Tribecca under its Agreement to Lease and the rental paid by the new tenant.
The Decision of the trial Judge
The trial Judge found that neither Tribecca nor any of its shareholders was obliged to inform the appellant of any change in the shareholding of Tribecca. Her Honour rejected the appellant’s claim that Tribecca and Dr Stone in particular had engaged in misleading or deceptive conduct by silence. Her Honour found that as there was no obligation on Tribecca or Dr Stone to reveal the change of shareholding and because the appellant had never sought from Tribecca, Mr Sangster or Dr Stone information as to the shareholding of Tribecca, the omission to provide that information could not constitute misleading or deceptive conduct.
The trial Judge found, in addition, that there had not in any event been reliance by the appellant on Tribecca, or Mr Sangster or Dr Stone to provide information as to the change of shareholding.
As the trial Judge had refused to allow the amendment to the statement of claim sought by the appellant, it was not necessary for her to consider the claim that Tribecca and Dr Stone had engaged in misleading or deceptive conduct in failing to inform the appellant of Dr Stone’s appointment as an alternate director.
Silence as Misleading and Deceptive Conduct
As already noted, the conduct of Tribecca and of Dr Stone which is said to have been misleading or deceptive was their omission to inform the appellant of the change of shareholding in Tribecca and, as the appellant would have it, of the appointment of Dr Stone as an alternative director of Tribecca.
The legal principles and the relevant authorities relating to the circumstances in which silence may constitute misleading or deceptive conduct were reviewed by the Chief Justice in Software Integrators Pty Ltd v Roadrunner Couriers Pty Ltd[2]. I respectfully adopt, without repeating, that review.
[2] (1997) 69 SASR 289.
From that review, I identify the following principles as being particularly pertinent to the present appeal.
1.Conduct which consists of remaining silent can, in some circumstances, constitute misleading or deceptive conduct.[3]
2.Where the silence relied on, if it is to come within the extended definition of engaging in conduct contained in s 4(2) of the Trade Practices Act, must fall within the notion of “refusing to do an act”, that refusal must be other than inadvertent.[4]
3.In considering whether there is a contravention of s 52, silence is to be assessed as a circumstance like any other.[5]
4.Mere silence without more is unlikely to constitute misleading or deceptive conduct. Remaining silent will, however, constitute misleading or deceptive conduct if the circumstances are such to give rise to the reasonable expectation that if some relevant fact does exist, it will be disclosed.[6]
5.A reasonable expectation that a fact, if it exists, will be disclosed will arise where either the law or equity imposes a duty of disclosure[7] but is not limited to those circumstances. It is probably not possible to categorise all the circumstances in which a reasonable expectation of disclosure may arise but they include circumstances in which a statement conveying a half truth only is made, circumstances in which the representor has undertaken a duty to advise, circumstances in which a representation with continuing effect, which although correct at the time it was made has become incorrect as a result of some subsequent event, and circumstances in which the representor makes an implied representation.[8]
6.In considering whether a party engaged in commercial dealing may have a reasonable expectation that a fact, if it exists, will be disclosed, one needs to keep in mind that it will often be the case in such dealings that one party has more knowledge about a relevant matter than the other and yet will not, in accordance with ordinary commercial expectations, be guilty of misleading or deceptive conduct in failing to make that knowledge known to the other. In this regard, in Lam v Ausintel Investments Australia Pty Ltd Gleeson CJ said:
“Where parties are dealing at arms’ length in a commercial situation in which they have conflicting interests it will often be the case that one party will be aware of information which, if known to the other, would or might cause that other party to take a different negotiating stance. This does not in itself impose any obligation on the first party to bring the information to the attention of the other party, and failure to do so would not, without more, ordinarily be regarded as dishonesty or even sharp practice.”[9]
[3]Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 39 FCR 546; Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31.
[4]Kaze Constructions Pty Limited v Housing Indemnity Australia Pty Ltd (1990) 12 ATPR 41-017 at 51,311 per von Doussa J; Spedley Securities Ltd (in liq) v Bank of New Zealand (1991) 13 ATPR 41-143 at 53,065 per Cole J (this decision was not disturbed on appeal: (1992) 27 NSWLR 91); Software Integrators Pty Ltd v Roadrunner Couriers Pty Ltd (1997) 69 SASR 288 at 295-6.
[5] Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 at 32 per Black CJ.
[6]Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 at 32 per Black CJ, at 41 per Gummow J (with whom Cooper J agreed) in stating his agreement with the passage in the judgment of French J in Kimberley NZI Finance Ltd v Torero Pty Ltd (1989) 11 ATPR (Digest) 46-054 at 53,195; Warner v Elders Rural Finance Ltd (1993) 41 FCR 399 at 404-5 per Hill J; Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 39 FCR 97 at 112-3 per Hill J.
[7]Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 12 FCR 477 at 489-90 per Bowen CJ.
[8]See generally the judgment of Hill J in Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 39 FCR 97 at 112-15.
[9] (1989) 97 FLR 458 at 475.
In the circumstances of this case, it is appropriate, in my opinion, to adopt the same approach as that adopted by the Chief Justice in Software Integrators, namely, by enquiring whether, in all the circumstances when objectively assessed, a person in the appellant’s position would have been entitled to expect or infer that Tribecca or Dr Stone, or both, would have disclosed to it Dr Stone’s shareholding, appointment as an alternate director or involvement in the affairs of Tribecca.
The Relevant Time

Mr Walsh QC, who appeared for the appellant, submitted in the first instance that the contravention of s 52 had occurred in the period between 20 September 2000, when Dr Stone, Mr Sangster and Ms Holmes became shareholders, and 15 November when the restaurant opened.
The submissions on appeal, as I understood them, proceeded on the basis that had the appellant been informed of the “involvement” of Dr Stone and Ms Holmes prior to 15 November 2000 it would have required that they execute guarantees. In the event that they refused to do so, the appellant would, as I understood the argument, have prevented Tribecca from opening its restaurant. In that circumstance, it was submitted that the guarantees would have been provided and thus that the appellant would not have suffered the loss it claimed. It will be necessary to consider in more detail, shortly, whether the evidence was capable of making good the propositions upon which the appellant relied. For the moment, however, I note that the submission of the appellant was that a breach of s 52 had occurred by no later than 15 November 2000.
Mr Walsh QC put an alternative submission. This was that there had been a continuing failure to disclose the “involvement” of Dr Stone and Ms Holmes in 2000 after the opening of the restaurant and during the year 2001. The submission, as I understood it, was that, had the appellant known of the “involvement” of Dr Stone, it would have demanded that he execute a guarantee. Had that demand been made in late 2000 or in the first half of the 2001 year, it was said that Dr Stone would have complied with it. On this alternative basis, it was said that the contravention of s 52 continued until approximately 22 June 2001. Again, it will be necessary to turn in due course to consider in more detail the evidence upon which the appellant relied for those contentions.
It is convenient to consider first the question of whether Dr Stone engaged in misleading or deceptive conduct.
The Duty of Dr Stone Alleged by the Appellant
As already noted, the allegation in the appellant’s statement of claim was that Tribecca, Mr Sangster, Dr Stone and Ms Holmes had failed or refused to inform it of the change of shareholding which occurred on 20 September 2000. The trial Judge refused to allow an amendment to the statement of claim which would have raised the allegation that the defendants had also failed or refused to inform the appellant of Dr Stone’s appointment as an alternate director of Tribecca. The trial Judge therefore dealt with the matter on the basis that the only fact not disclosed and which it was said should have been disclosed was the shareholdings of Mr Sangster, Dr Stone and Ms Holmes.
The statement of claim also contained allegations that Dr Stone was a “deemed” director of Tribecca within the meaning of s 60(1)(a) of the Corporations Law and s 9 of the Corporations Act 2001 (Cth).[10] It was not pleaded, however, that Dr Stone should have informed the appellant of his deemed directorship or of the facts said to give rise to that deemed directorship.
[10] It was the Corporations Law which was in force at times relevant to this case.
On appeal it was argued that Dr Stone should have disclosed to the appellant his 40 per cent shareholding in Tribecca, his appointment as an alternate director in Tribecca, and the role which he was undertaking in the affairs of Tribecca.
It was submitted that Dr Stone came under a duty to disclose those matters to the appellant because of his 40 per cent shareholding in Tribecca after 20 September 2000, because he was a deemed director and, in any event, an alternate director of Tribecca, and because of his conduct in participating in the affairs of Tribecca. In effect, the matters said to give rise to the duty to disclose, and the content of the duty, were the same.
Before considering those submissions, it is appropriate to consider further the Agreement to Lease, the circumstances in which it was signed and the parties expectations following its execution.
The Entry into the Agreement to Lease
The Agreement to Lease was signed by the parties on 17 May 2000. It took the form of a pro forma document in which were inserted handwritten details of the lessee and of the tenancy. It had attached to it a Disclosure Statement of the kind contemplated by s 12 of the Retail and Commercial Leases Act 1995 (SA). Apart from the signatures, the handwritten entries on the Agreement to Lease and in the Disclosure Statement were made by Mr Kaldis.
Against the printed word “Lessee” on page 1 of the Agreement to Lease, Mr Kaldis identified the lessee as “Howie Gordon Sangster and/or nominee”. Mr Kaldis knew, when he prepared the Agreement to Lease, that Mr Sangster was contemplating that a company would be the lessee. He also knew that Mr Sangster was seeking participation by investors, as he did not have the financial capacity to embark on the restaurant business by himself.
The first page of the Agreement to Lease also contained the printed word “Guarantors”. Against that heading there followed the printed words “If the Lessee is a company, the personal guarantees of directors and shareholders are required”. Underneath those printed words were spaces in which the names and addresses of the guarantors could be entered. Mr Kaldis did not enter any names or addresses but instead entered the words “All Directors”. Mr Kaldis said that he wrote those words because, although Mr Sangster had said that he proposed that the lessee would be a company, he did not know at that stage which company would be involved nor who would be the directors or shareholders of the company.
Under the heading “Personal Guarantee” clause 19 of the Agreement to Lease provided:
“In consideration of the Lessor entering into this Agreement at the specific request of the persons (if any) referred to on the first page of this Agreement and who have signed this Agreement as guarantors (in this Agreement referred to as the ‘Guarantors’), the Guarantors hereby guarantee
·The payment by the Lessee of the rent and other monies payable by the Lessee pursuant to this Agreement;
·The performance and observance of all of the Lessee’s obligations as specified or implied in this Agreement;
·The observance and performance by the Lessee of the covenance and conditions which are to be embodied in the Lease to be prepared by the Lessor’s solicitors. The Guarantors agree to indemnify the Lessor in respect of any failure by the Lessee to pay such other rent or other monies payable by the Lessee or to observe and perform any of the obligations under this Agreement or which are to be embodied in the Lease.
The Guarantors shall execute such formal guarantee and indemnity as may be prepared by the Lessor’s solicitors to embody the terms of this clause and such other terms as the Lessor requires within 14 days of receipt of such guarantee and indemnity. Failure by the Guarantors to execute such formal guarantee and indemnity does not in any way prejudice the binding nature of this clause.
If more than one person signs this Agreement as Guarantor, this clause shall bind those persons jointly and each of them severally.”
The execution clause of the Agreement to Lease made provision for separate signature by the lessee and by the guarantors. Mr Sangster signed the Agreement to Lease both in the capacity of lessee and of guarantor. Dr Stone did not sign in either capacity.
On one view, clause 19 of the Agreement to Lease could be construed as obliging only those who were both named on the first page of the Agreement and who had themselves signed the Agreement to Lease as Guarantors to execute the lessor’s formal guarantee. On that view, only Mr Sangster was bound to execute the guarantee. On another view, however, the provisions to which I have referred could be construed as indicating agreement by Mr Sangster that, in the event that he did nominate a corporate entity to be lessee, all directors of that corporate entity would provide guarantees and that Mr Sangster and the corporate entity would procure the obtaining of such guarantees in favour of the appellant. In my opinion, the latter construction is to be preferred. The appellant was prepared to lease the premises to a corporate entity but only if personal guarantees from the directors were provided. Because their identities were not yet known, and they could not sign the Agreement to Lease as guarantors, the generic description “All Directors” was used.
The trial Judge found that the handwritten entry “All Directors” amended the requirement for guarantees from “directors and shareholders” to a requirement for guarantees from directors only. In my opinion, that conclusion is correct. There was no point to the entry of the words “All Directors” if the shareholders were also to provide guarantees. Furthermore, Mr Kaldis accepted that he understood, after 17 May 2000, that the Agreement to Lease provided for guarantees to be provided only by directors of the corporate entity.
Clause 25 of the Agreement to Lease, which had the heading “Lessee’s Acknowledgements”, provided as follows:
“The Lessee acknowledges that:
·    This offer to lease is subject to the formal written approval of and acceptance by the Lessor;
·    In deciding whether or not to accept this offer, the Lessor is relying on the accuracy and comprehensiveness of the information about the Lessee provided by the Lessee to-date (the ‘Information’);
·    If any of the Information changes materially or becomes incomplete, the Lessor must be notified immediately in writing and
·    …”
The appellant submitted that clause 25 required Mr Sangster and Tribecca to keep it informed, amongst other things, about the changes in the shareholding in Tribecca. It sought to draw support for that submission from clause 2.5.2 of its standard lease which deemed that a transfer or assignment of the lease requiring the consent of the lessor had occurred if an issue or transfer of shares in the lessee altered the effective control of the lessee.
The trial Judge found that the non-disclosure to the appellant of the change of shareholding in Tribecca which occurred on 20 September 2000 did not involve a breach of clause 25.
Introduction of Tribecca
At least by late June 2000, Mr Sangster had determined that Tribecca (then known as Niprust Pty Ltd) would become the lessee. The evidence did not disclose when Mr Sangster made that decision, nor when he first informed the appellant of that decision. It is plain, however, that at least by 7 August 2000 the appellant knew that the lessee would be Tribecca. Mr Sangster provided details of Tribecca to Mr Kaldis on 11 September 2000 and again on 14 September 2000. On each occasion he identified himself as the sole director of Tribecca. Following receipt of that information, Mr Kaldis, on 21 September 2000, requested the appellant’s solicitors to prepare the Memorandum of Lease and the Guarantee.
The Non-Disclosure of Dr Stone’s Appointment as an Alternate Director
The appellant was entitled to personal guarantees from all directors of Tribecca. I have already stated my view that it was implicit in the Agreement to Lease that Mr Sangster and Tribecca would procure the obtaining of guarantees in favour of the appellant from the directors once appointed. In those circumstances it should be accepted, in my opinion, that the appellant could reasonably have expected the disclosure to it of the names and addresses of all directors.
Mr Sangster was formally appointed as a director. There was disclosure of his appointment to the appellant. The appellant argued, however, that the expression “All Directors” in the Agreement to Lease included, in addition, anyone appointed as an alternate director and therefore that it was entitled to be informed of Dr Stone’s appointment as alternate director. Although the trial Judge refused to allow the amendment by which the appellant sought to raise this issue, it is convenient, for the moment, to consider the submission as though the amendment had been allowed.
Although the question of whether an alternate director comes within the expression “All Directors” in the Agreement to Lease is a question of construction of a contract, the appellant sought to derive assistance on that question of construction from the definition of “Director” contained in s 60 of the Corporations Law[11] and from clause 72 of the Constitution of Tribecca. It is doubtful, in my opinion, whether either provision is of assistance in construing the contractual expression.
[11]It was the Corporations Law which was in force at relevant times in 2000 and 2001: Corporations Law, as set out in s 82 of the Corporations Act1989 (Cth). The definition of “director” in s 9 of the Corporations Act 2001 (Cth) is, in any event, relevantly the same.
The word “director” was given an extended meaning in s 60 of the Corporations Law. It is possible, but unlikely, that the Agreement to Lease used the word in that extended meaning. It is pertinent to note that the Corporations Law contained no definition of the word “shareholders”. The Agreement to Lease referred to both directors and shareholders. It is not readily to be supposed that the one word was used with a statutory meaning but the other without a statutory meaning. But even if that be wrong, resort to the statutory definition does not assist the appellant.
Section 60 of the Corporations Law defined a director of a company to mean, amongst other things, a person “who is appointed to the position of an alternate director and is acting in that capacity”. Thus there are two conditions with respect to alternate directors which must exist before a person comes within the statutory definition of a director. The first is that the person be appointed to the position of an alternate director. That condition is satisfied in this case. Dr Stone was formally appointed to the position by the shareholders’ agreement of 11 November 2000 and, as it appears, had been informally appointed to that position some weeks prior to that date. The second condition is that the person act in the capacity of alternate director. The capacity in which Dr Stone could act as alternate director was defined by clause 72 of the Constitution of Tribecca. That clause provided relevantly:
“(1) A Director may, solely in the case of a single Director of a company, or, with the approval of the other Directors in the case of multiple Director companies, appoint a person (whether a member of the Company or not) to be an alternate Director in his place during such period as he thinks fit.
(2)An alternate Director is entitled to notice of meetings of the Directors and, if the appointor is not present at such a meeting, is entitled to attend and vote in his stead.
(3)An alternate Director may exercise any powers that the appointor may exercise and the exercise of any such power by the alternate Director shall be deemed to be the exercise of the power by the appointor.
….”
Thus, the Constitution provides that an alternate director may be appointed to act, and may act, in the place of the director by whom he was appointed. An alternate director is entitled to attend and vote at a meeting of the Board of Directors only if the director to whom he or she is an alternate is not present. When an alternate director does act in the place of his or her appointor, then (and only then) is that person a director for the purposes of the Corporations Law. In my opinion, the position of an alternate director is as stated by Robertson J in Strathmore Group Ltd v Fraser in respect of the comparable, but not identical, provisions in the Companies Act 1955 (NZ):
“… an alternate director is a person who is designated and acceptable as a director, but who has powers, rights, duties and responsibilities only when he is acting in place of the director for whom he is an alternate. … In my view an alternate is a director pro tem. During those times when he is acting as a director, he has the rights, powers and privileges and necessarily the consequential duties and responsibilities of a director.”[12]
[12](1991) 9 ACLC 3,140 at 3,143. See also Markwell Bros Pty Ltd v CPN Diesels (Qld) Pty Ltd [1983] 2 Qd R 508 at 518-19 per Thomas J; Playcorp Ptd Ltd v Shaw (1993) 10 ACSR 212 at 216-17 per Hedigan J.
The description of the status an alternate director in Strathmore Group Ltd v Fraser is applicable, in my opinion, whether the alternate director is appointed by an existing director, or, as in this case, by the shareholders themselves.
In the present case, there was no evidence at all that Dr Stone had acted in place of Mr Sangster. There was no evidence even of absences of Mr Sangster during which Dr Stone might have acted in his place.
I am unable to see any indication in the Agreement to Lease that the expression “All Directors” was intended to include a person who would act as director only in the place of another. The appointment of alternate directors is not uncommon. If the appellant had intended that alternate directors should provide guarantees to it, it would have been easy to say so expressly in the Agreement to Lease which it prepared. Furthermore, given the rather unusual nature of that requirement now asserted by the appellant, it is to be expected that the appellant would have specified explicitly the requirement that alternate directors provide guarantees if that is what it did intend.
I conclude therefore that the appellant was not entitled to a guarantee from an alternate director of Tribecca. That means that the appellant did not reasonably have an expectation that it would be informed (whether by Dr Stone or others) of the appointment of Dr Stone as an alternate director. Even if it did subjectively have an expectation that it would be so informed, it was not, in my opinion, entitled to require Dr Stone, as an alternate director, to provide to it a guarantee of Tribecca’s performance of its obligations.
Dr Stone as a Deemed Director?
The appellant submitted that the expression “All Directors” included a person who was a de facto director. It submitted that Dr Stone was a de facto director of Tribecca.
The appellant relied upon paragraph (b) of the definition of “director” contained in the Corporations Law which is as follows:
“Director of a company or other body means:
(b)unless the contrary intention appears, a person who is not validly appointed as a director if,
(i)they act in the position of a director; or
(ii) the directors of the company or body are accustomed to act in accordance with the person’s instructions or wishes”
The appellant submitted that Dr Stone had acted in the position of a director and, or in the alternative, that Mr Sangster, as the sole director, was accustomed to act in accordance with Dr Stone’s instructions or wishes.
In my opinion, the evidence does not support either of those contentions.
The matters on which the appellant relied were in a relatively narrow compass. The appellant relied upon the fact that Dr Stone was a joint signatory to the Tribecca bank account, on Dr Stone’s signature on behalf of Tribecca of a rental agreement with the suppliers of kitchen equipment and furniture to the restaurant, on his provision of guarantees to those suppliers, and on Dr Stone’s payment of some accounts on behalf of Tribecca. It is not necessary to discuss in detail the evidence about those matters. In each case the activities are, to my mind, no more than of the relatively routine kind which might be expected of a participant in a small company establishing a business. Neither alone, nor in combination, do they indicate that Dr Stone was acting in the position of a director.
The appellant pointed, in addition, to some meetings of Tribecca in which Dr Stone participated. These meetings occurred on 17 June 2001, 23 June 2001, 1 July 2001 and 21 July 2001. It is not clear from the Agenda and Minutes of those meetings which were tendered, whether they were meetings of the members of the company or director’s meetings. The meetings were attended by Mr Sangster, Dr Stone and his wife, and Ms Holmes and her husband (although on one occasion Ms Holmes did not attend). It is not necessary to detail the matters discussed at those meetings. It is fair to say, in my opinion, that the Minutes reveal close attention by the participants to the financial status of Tribecca, its business, and attempts to improve its profitability.

The appellant contended that Dr Stone’s participation in those meetings evidenced him acting in the position of a director. I do not agree. The participation of Dr Stone and Ms Holmes and their respective spouses has to be seen in the context in which those meetings occurred. Because the business had not prospered at all since its commencement, it required further capital inputs. The trial Judge found that in December 2000 and in April, May and July 2001, Dr Stone and Ms Holmes provided between them, in equal shares, an additional $120,000 to Tribecca by way of loan. They were, in effect, the financiers of Tribecca. It is not surprising that in those circumstances Dr Stone and Ms Holmes were taking active interest in the conduct of Tribecca’s business. Their participation in the meetings was attributable to their concern as investors about the viability of Tribecca’s business rather than an attempt on their part to act in the position of directors. It is clear enough that Mr Sangster took account of the suggestions made at those meetings and reported to the meetings what he had done by way of implementing suggestions and changes. That was to be expected having regard to the large financial contributions of Dr Stone and Ms Holmes. The difference between the activities of a de facto director on the one hand, and those of a financier whose capital is at risk in a relatively modest venture may not always be entirely clear, but in my opinion, the evidence does not establish that Mr Sangster was simply acting in accordance with instructions given by Dr Stone or Ms Holmes or with their wishes as opposed to keeping them informed about, and involving them in decisions concerning, the fate of their investment.
Accordingly, in my opinion, Dr Stone was not a deemed director within the meaning of sub-paragraph (b) of the definition of “director” in the Corporations Law. Neither Tribecca nor Mr Sangster were under any obligation to disclose Mr Stone’s participation in the affairs of the company to the appellant. Furthermore, the appellant could not have had a reasonable expectation that Dr Stone would disclose to it his participation in the business of Tribecca.
The Non-Disclosure of the Shareholding of Dr Stone
As noted above, the trial Judge found that the appellant was not entitled, by reason of clause 25 of the Agreement to Lease, to be informed of the change in shareholdings in Tribecca. The appellant challenged the correctness of that finding on the appeal.
In my opinion, the appellant could reasonably have expected that it would be informed about the shareholding in Tribecca. It is clear enough that the appellant, as lessor, required information about its lessee. It had information about Mr Sangster who was, in the first place, accepting the obligations of lessee under the Agreement to Lease. It had no information about the corporate entity which had been foreshadowed by Mr Sangster to be the lessee. The effect of clause 25 was to require that it be informed about changes in the information it had about the lessee. The changes in the shareholding of Tribecca were, in my view, changes of the kind to which clause 25 referred. I acknowledge that it might be said that the obligation in clause 25 applied only to changes in the information which had been supplied as at the date the Agreement to Lease was signed, and as no information about Tribecca had been supplied as at that date, clause 25 could have no operation. I consider, however, that that would be an unduly narrow construction of clause 25. Further, and in any event, there had been a change. Whereas originally the appellant had been told there was no detail available about the lessee, after 20 September 2000 there was detail available.
My view as to the effect of clause 25 is confirmed by reference to clause 2.5.2 of the Memorandum of Lease prepared for Tribecca’s signature (which contained the appellant’s standard terms of lease). As already noted, clause 2.5.2 deemed that a transfer or assignment of the lease requiring the consent of the lessor had occurred if a change in the shareholding altered the effective control of the lessee. Although the Memorandum of Lease was not executed by Tribecca, clause 2.5.2 is a clear statement that the appellant insisted on being informed of changes in the shareholding of its corporate lessees. Mr Sangster had agreed to execute a lease in the terms of the standard Memorandum of Lease. He, and through him Tribecca, should be taken to have been aware of the content of clause 2.5.2.
The trial Judge held that Mr Sangster and Tribecca were not bound by the terms of the Memorandum of Lease. Insofar as that document contained the appellant’s standard terms of lease to which the lessee had bound itself by Mr Sangster’s execution of the Agreement to Lease, that conclusion, in my respectful opinion, was wrong. [13]
[13] Walsh v Lonsdale (1882) 21 Ch D 9.
However, the persons subject to the obligation of disclosure of changes in the shareholding were Mr Sangster and Tribecca. Dr Stone was not subject to that duty because he was not a party to the Agreement to Lease. He had not bound himself to do anything in relation to the appellant. Becoming a shareholder in a corporate lessee does not, of itself, require disclosure of that fact to the lessor.
Accordingly, the appellant could not reasonably have had an expectation that Dr Stone would inform it of the changes in shareholding in Tribecca. His omission to so inform it could not constitute misleading or deceptive conduct contrary to s 52.
Absence of Reliance
The trial Judge found that there had been an absence of reliance by the appellant on the conduct of Dr Stone of which it complained.
The conclusion which I have reached makes it unnecessary, strictly speaking, to express a conclusion as to whether, on the assumption that there had been a contravention of s 52, the appellant had suffered loss or damage by that contravention.[14]
[14] Section 82 of the Trade Practices Act 1974 (Cth).
I note again that the only loss which the appellant sought to establish at trial was the loss of rental which it suffered after Tribecca abandoned the premises and the shortfall between the rental payable by Tribecca and the amount which the replacement tenant agreed to pay under his lease. It was said that it had suffered that loss because, with the exception of the guarantee in the Agreement to Lease, it did not have the benefit of guarantees to which it could otherwise have had recourse. The appellant did not seek to show that it had suffered a loss on any other basis.
It is not clear what steps would have been open to the appellant had it, in purported reliance on the Agreement to Lease, requested guarantees from the shareholders and they had refused to oblige. It had already accepted that Tribecca was Mr Sangster’s nominee pursuant to the terms of the Agreement to Lease. It had permitted Tribecca to go into occupation of the premises without even presenting the Memorandum of Lease to it for signature, or the Guarantee to Mr Sangster. As the Memorandum of Lease had not been executed it was not then in a position to assert that its consent was required in order that the issue of shares to Dr Stone and Ms Holmes became effective.
Mr Kaldis’ evidence was simply that had the appellant known of the involvement of Dr Stone and Ms Holmes it would have wanted guarantees “from all parties involved with the corporate vehicle”. In this respect the appellant referred to clause 2.37 of its standard terms of lease. Clause 2.37 provided:
“The Lessee agrees to procure contemporaneously with the execution of this Lease by the Lessee the execution of a Deed of Guarantee of the performance of the Lessee’s obligations under this Lease for the benefit of the Lessor from such persons and in such form as the Lessor shall require.”
The appellant emphasised the words “from such persons … as the Lessor shall require”. It was submitted that clause 2.37 would have entitled it to insist on Tribecca procuring guarantees from Dr Stone and Ms Holmes even if the Agreement to Lease did not have that effect. Had Tribecca not procured such guarantees contemporaneously with the execution of the lease, the appellant could, as I understand the argument, have prevented Tribecca opening its restaurant and thereby have enforced, in a practical way, the provision of the guarantees.
A number of points should be noted about clause 2.37. It contained an obligation which arose only upon the execution of the lease and then binding only the lessee. It did not contain an obligation which could bind Dr Stone. A breach of clause 2.37 could give rise to a direct claim only against Tribecca and, possibly, Mr Sangster.
It was not suggested, as I understood the argument on appeal, that clause 2.37 required Dr Stone to inform the appellant of his shareholding, his appointment as an alternate director or his involvement in Tribecca’s affairs. I do not, in any event, see how such an argument could succeed. Clause 2.37 is expressed very generally: there is nothing in its content to suggest that it is directed to shareholders, or directors or to others having any particular relationship with the lessee. Furthermore, the evidence does not establish that Dr Stone was even aware of clause 2.37, let alone that he had omitted, in an advertent way, to inform the appellant of any information to which the appellant was entitled by virtue of clause 2.37.
I accept that clause 2.37 may be construed as entitling the appellant to insist on guarantees from a greater number of persons than was contemplated by the Agreement to Lease. The appellant, nevertheless, faced a number of evidential difficulties in establishing that as a result of the non-disclosure of the shareholding in Tribecca it had not invoked clause 2.37 so as to obtain for itself guarantees from Dr Stone . The first was that when, on 5 December 2000, the appellant asked its solicitors to conduct an ASIC search of Tribecca, it asked to be informed about the directorships of Tribecca and not its shareholding. That suggests that the shareholding of Tribecca was not a material consideration for it at that time. Secondly, the appellant’s solicitors provided to it an ASIC printout which showed the shareholders of Tribecca were still those persons from whom Mr Sangster had acquired the company. The shareholdings of Mr Sangster, Dr Stone and Ms Holmes had not, by December 2000, been notified to ASIC. Although Mr Kaldis had no knowledge of the original shareholders and accepted that they could have been the investors whom he knew Mr Sangster needed to bring into the business, he did not then seek any guarantee from those persons. This too suggests that the shareholding of Tribecca was not, at that time, a material consideration for the appellant.
I noted earlier the submission of the appellant that it would, if guarantees had not been provided, have prevented Tribecca from opening its restaurant. In that circumstance, it submitted that the guarantees would have been provided.
In my opinion, the evidence does not support that submission. First, as the trial Judge found, the execution of the Memorandum of Lease and of the Guarantees was not linked at all to Tribecca’s possession of the premises. Mr Kaldis acknowledged that it was the appellant’s policy to permit a tenant to go into possession of the lease premises once the tenant had signed the Agreement to Lease and the Disclosure document. Furthermore, in the present case the appellant did not even present the Memorandum of Lease and the Guarantee for execution to Tribecca and Mr Sangster until 8 December 2000, approximately three weeks after the restaurant had opened. I note in addition that Dr Stone’s evidence (confirmed by Mr Sangster) was that he told Mr Sangster emphatically, in early 2000, that he was not prepared to provide any guarantee of the lease payments. Although the trial Judge made no finding about that assertion, I do not see any basis in the evidence for concluding that Dr Stone would have changed his mind.
In my opinion, even if the contravention of s 52 alleged was established, the appellant did not establish that the loss proved by it at the trial was suffered by that contravention.
Aiding and Abetting a Contravention by Tribecca
The appellant submitted that even if Dr Stone had not himself contravened s 52, he was liable pursuant to s 75B of the Trade Practices Act as an accessory to the contravention by Tribecca.
For the reasons given above, I am satisfied that the appellant did reasonably have an expectation that it would be informed by Mr Sangster or Tribecca of the shareholding in Tribecca. Neither Mr Sangster nor Tribecca did inform the appellant after 20 September 2000 of the shareholding of Dr Stone or Ms Holmes. To this extent, their conduct was misleading or deceptive.
For the purposes of considering the submission of the appellant on this topic, I will assume in its favour, and contrary to my conclusion, that Tribecca also contravened s 52 by failing to inform the appellant of the involvement of Dr Stone in the affairs of Tribecca.
In order to be liable under s 75B as an accessory to a contravention by another, the first person must have actual knowledge of the facts that give rise to that contravention and have participated in the contravention.[15] Knowledge of the essential elements of the contravention is required.[16]
[15] Yorke v Lucas (1985) 158 CLR 661 at 666-9.
[16] Rural Press Ltd v ACCC [2002] FCAFC 213; (2002) 118 FCR 236 at 281-4 [157]-[163].
In the circumstances of the present case, it would have to be established that Dr Stone knew that:
1.the terms of the Agreement to Lease entitled the appellant to be informed by Mr Sangster and Tribecca of the shareholding in Tribecca as it existed from time to time;
2.the terms of the Agreement to Lease entitled the appellant to guarantees from the directors of Tribecca and, implicitly, to be informed by Mr Sangster and Tribecca of the identity of those directors;
3.neither Mr Sangster nor Tribecca had informed the appellant of the shareholders in Tribecca; and
4.neither Mr Sangster nor Tribecca had informed the appellant of the involvement and activities in Tribecca and its business of himself and Ms Holmes.
The evidence at trial did not establish that Dr Stone knew any of those facts. Dr Stone accepted that he knew, in the year 2000, that it was common for landlords to require guarantees from the directors of corporate lessees. That evidence falls short of knowledge on his part of an actual entitlement to such guarantees by the appellant. Dr Stone’s evidence was that he had not seen the Agreement to Lease in the year 2000 or 2001. Indeed, he said that he had not seen it until preparing for trial. Although the trial Judge made no finding about that evidence, there was no other evidence which contradicted it. In those circumstances, the appellant did not establish facts (1) and (2) identified above. There was no evidence establishing that Dr Stone knew that his involvement in the business had not been communicated to the appellant. On the contrary, there was evidence indicating that Dr Stone was aware that both Mr Kaldis and Mr Karidis knew that he had some involvement in the business. The trial Judge found that Dr Stone had met both Mr Kaldis and Mr Karidis at the premises in the period leading up to the opening in circumstances such that it was clear to them that he was, at least, an investor. It was not as though his involvement was being kept secret, nor that Dr Stone thought that it was being kept secret. Thus the evidence did not establish the facts numbered (3) and (4) above.
In these circumstances, the appellant did not establish its claim based on accessorial liability.
The Refusal of the Amendment
The application to amend the statement of claim to plead that Tribecca, Mr Sangster, Dr Stone and Ms Holmes should have disclosed the appointment of Dr Stone as alternate director was made late in the trial and during the course of the evidence-in-chief of Dr Stone. The trial Judge refused to allow the amendment to be made. There were two principal reasons for that refusal. The first was the lateness of the application and the fact that, if allowed, it would require the recalling of at least Mr Kaldis and Mr Karidis and possibly Mr Sangster, resulting in significant disruption to the trial.
The second and more fundamental reason was that the trial Judge took the view that the proposed amendment did not advance significantly the appellant’s claim. In short, the trial Judge took the view that Dr Stone’s status as an alternate director was not equivalent to that of a director so as to entitle the appellant to a guarantee from him.
For reasons which I have earlier given, the trial Judge was correct in that view. In those circumstances the trial Judge was correct, in my opinion, in refusing leave to amend. Allowing the amendment would have caused significant disruption to the trial and possibly an adjournment of the trial. There was an absence of utility in the amendment.
In short, the decision to refuse the amendment was not made in error.
Conclusion
For the reasons which I have given above, I would dismiss the appeal.

[2005] SASC 157

20 April 2005

Key Legal Topics

Areas of Law

Commercial Law

Consumer Law

Legal Concepts

Misleading or Deceptive Conduct

Unconscionable Conduct

Misrepresentation

Contract Formation