Gardiner v Agricultural and Rural Finance Pty Ltd - [2007] NSWCA 235

Reported Decision: (2008) 251 ALR 322(2008) 83 ALJR 196(2009) 25 BCL 112

Appeal Outcome: Special leave granted by the High Court - 18 April 2008

New South Wales

Court of Appeal

CITATION: GARDINER v AGRICULTURAL AND RURAL FINANCE PTY LTD [2007] NSWCA 235

HEARING DATE(S): 19-22 February 2007

JUDGMENT DATE:
6 September 2007

JUDGMENT OF: Spigelman CJ at 1; Basten JA at 142; Handley AJA at 356

DECISION:
(1) Allow the appeal and set aside orders 1-6 made in the Equity Division on 11 April 2006 with respect to the Appellant.
(2) Give judgment for the First Respondent (Agricultural and Rural Finance Pty Ltd) against the Appellant (Bruce Walter Gardiner) in an amount of $31,616.35, together with interest, but otherwise dismiss the Summons in the Equity Division.
(3) Dismiss the Appellant’s cross-claim with no order as to costs.
(4) Dismiss the First Respondent’s cross-appeal against the Appellant.
(5) Dismiss the Second Respondent’s cross-appeal against the Appellant.
(6) Dismiss the First Respondent’s motion of 7 November 2006 to amend the Summons filed in the Equity Division.
(7) Order that the First Respondent pay 50% of the Appellant’s costs of the proceedings in the Equity Division.
(8) Order that the First Respondent pay 50% of the Appellant’s costs of the appeal and in respect thereof grant the Second Respondent a certificate under the Suitors’ Fund Act 1951 (NSW) if not disqualified pursuant to s 6(7) thereof.

CATCHWORDS:
CONTRACT – general contractual principles – construction and interpretation of contracts – consideration of surrounding circumstances – relevance of regulatory scheme – prescribed interests – Corporations Law Pt 7.12
CONTRACT – general contractual principles – construction and interpretation of contracts – relevant event for purposes of indemnity agreement – distinction between ”cause” and “event” – issue is immediate rather than ultimate cause
CONTRACT – general contractual principles – construction and interpretation of contracts – force majeure – “beyond the control of” – mere commercial impracticability not sufficient
CONTRACT – general contractual principles – construction and interpretation of contracts – “punctuality” – waiver – acceptance of late payment
EQUITY – general principles – misrepresentation – reliance on representation – weight given to ex post facto claims of reliance – loss or damage “by “ misrepresentation – Corporations Law s 1005

LEGISLATION CITED: Australian Securities and Investments Commission Act 2001 (Cth), ss 12DA, 12DB, 12GH
Corporations Act 2001 (Cth), Ch 5C
Corporations Law, ss 762, 995, 996, 1005, 1006, 1023B, 1024, 1024A, 1024B, 1067, 1069, 1325, 1454, Pt 7.11, Div 5 of Pt 7.12
Income Tax Assessment Act 1936 (Cth), Pt IV, Pt IVA
Trade Practices Act 1974 (Cth), ss 51A, 52, 75B, 82, 84
Trustee Act 1925, s 92

CASES CITED:
Ambatielos v Anton Jurgens Margarine Works [1923] AC 175
Andar Transport Pty Limited v Brambles Limited (2004) 217 CLR 424
Ankar Pty Limited v National Westminster Finance (Australia) Limited (1987) 162 CLR 549
Ayoub v Euphoric Pty Limited [2004] NSWCA 457; 12 BPR 22, 735
BI (Contracting) Pty Limited v AW Baulderstone Holdings Pty Limited [2007] NSWCA 173
Bowtell v Goldsborough Mort & Co Limited (1905) 3 CLR 444
Cackett v Keswick [1902] 2 Ch 456
Chandris v Isbrandtsen-Moller Co Inc [1951] 1 KB 240
CIC Insurance Limited v Bankstown Football Club Limited (1997) 187 CLR 384
Codelfa Constructions Pty Limited v State Rail Authority of NSW (1982) 149 CLR 337
Coghlan v S. H. Lock (Aust) Ltd (1987) 8 NSWLR 88
Colliers Jardine Pty Limited v Castle Mall Properties Pty Limited [2005] NSWCA 311
Crowe v Graham (1968) 121 CLR 375
Davis v Commissioner for Main Roads (1968) 117 CLR 529
Federal Commissioner of Taxation v Sleight (2004) 136 FCR 211
F D Normoyle Pty Limited v Transfield Pty Ltd (2005) 63 NSWLR 502
Finch v Underwood (1876) 2 Ch D 310
Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd (1957) 59 SR (NSW) 122
Fraser v NRMA Holdings Ltd (1995) 55 FCR 452
Glebe Island Terminals Pty Ltd v Continental Seagram Pty Ltd (1993) 40 NSWLR 206
The Glendarroch [1894] P 226
Global Funds Management (NSW) v Rooney (1994) 36 NSWLR 122
Global Sportsmen Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82
Halford v Price (1960) 105 CLR 23
Hancock v Williams (1942) 42 SR(NSW) 252
Henville v Walker (2001) 206 CLR 459
House of Peace Pty Limited v Bankstown City Council (2000) 48 NSWLR 498
HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640
Hyundai Merchant Marine Co Limited v Dark Brook Coal (Sales) Pty Limited [2006] FCA 1324
I&L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109
K & S Lake City Freighters Pty Limited v Gordon & Gotch Limited (1985) 157 CLR 309
Kenyon, Son & Craven Ltd v Baxter Hoare & Co Ltd [1971] 1 WLR 519
Leeds & Hanley Theatre of Varieties v Broadbent (1898) 1 Ch 343
Lion Nathan Australia Pty Limited v Coopers Brewery Limited (2005) 223 ALR 560
Lion Nathan Australia Pty Limited v Coopers Brewery Limited (2006) 156 FCR 1
MacDonald v Robins (1954) 90 CLR 515
Maggbury Pty Limited v Hafele Australia Pty Limited (2001) 210 CLR 181
Mayer v Isaac (1840) 6 M&W 605; 151 Eng. Rep. 554
McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579
Minister for Immigration and Ethnic Affairs v Teoh (1995) 183 CLR 273
National Roads and Motorists’ Association v Whitlam [2007] NSWCA 81
Network Ten Pty Limited v TCN Channel Nine Pty Limited (2004) 218 CLR 273
Pacific Carriers Limited v BNP Paribas (2004) 218 CLR 451
Parkes Management Ltd v Perpetual Trustee Co Ltd (1977) 3 ACLR 303
P J Van Der Zijden Wildhandel N.V. v Tucker & Cross Limited (1975) 2 Lloyd’s Rep. 240
Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 335
Provimi Hellas AE v Warinco AG [1978] 1 Lloyds Rep 373 (CA)
Provincial Insurance Australia Pty Limited v Consolidated Wood Products Pty Limited (1991) 25 NSWLR 541
R v Wilson; Ex parte Kisch (1934) 52 CLR 234
Rava v Logan Vines Pty Ltd [2007] NSWCA 62
Repatriation Commission v Vietnam Veterans’ Association of NSW Branch Inc (2000) 48 NSWLR 548
Ricochet Pty Ltd v Equity Trustees Executors and Agency Company Ltd (1993) 41 FCR 229
Rosenberg v Percival (2001) 205 CLR 434
Siqueira v Noronha [1934] AC 332
South Sydney Council v Royal Botanic Gardens [1999] NSWCA 478
Sperry Rand Australia Limited v Arrandale Properties Pty Limited [1979] VR 409
Sykes v Reserve Bank of Australia (1998) 88 FCR 511
Toll (FGCR) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165
Travel Compensation Fund v Tambree (2005) 224 CLR 627
Vidler & Co (London) Ltd v R Silcock & Sons Ltd [1960] 1 Lloyd’s Rep 509
Wardley Australia Ltd v Western Australia (1992) 175 CLR 514
Way v Hearn (1862) 11 CB (NS) 774; 142 Eng. Rep. 1000
Wilkie v Gordian Runnoff Ltd (2005) 221 CLR 522
Wilson v Stewart (1889) 15 VLR 781
Wilson v Zealandia Soap and Candle Trading Co Ltd [1928] G.L.R. 120
J W Carter and David Yates “Perspectives on Commercial Construction and the Canada SS Case” (2004) 20 J of Contract L 233 at 235-237
Nuncio D’Angelo “The Indemnity: It’s All in the Drafting” (2007) 35 ABLR 93 at 96-102
Daniel Gosewitch “Difficulties with Indemnities Between Business Entities” (2006) 34 ABLR 89 at 96
Lewison, “The Interpretation of Contracts” (3rd ed, 2004) at [12.02]
E. McKendrick, “Force Majeure and Frustration of Contract” (2nd ed, 1995)
James O’Donovan and John Phillips “Modern Contract of Guarantee” Thompson Law Book Co loose leaf service at [5.100].
G. Treitel, “Frustration and Force Majeure” (1994)
Sir Guenter Treitel, “Frustration and Force Majeure” (2004, 2nd ed) at 309
Spencer Bower, Turner & Handley “Actionable Misrepresentation” 4th ed 2000 pp12-13
Australian Securities Commission Policy Statements:
PS 23 Approval of Deeds Relating to Prescribed Interests
PS 55 Covenants in Deeds
PS 82 Covenants in Deeds: Non-Mining Primary Production Schemes
PS 89 Trustees and Representatives – Approvals for Prescribed Interest Schemes
PS 90 Related Party Trustee Approvals

PARTIES: Bruce Walter Gardiner – Appellant
Agricultural and Rural Finance Pty Ltd – First Respondent
Oceania Agriculture Pty Ltd – Second Respondent

FILE NUMBER(S): CA 40232/06

COUNSEL: R. Smith SC/M. Jones – Appellant
S. Robb QC/C. Bevan – First Respondent
G. Inatey SC/G. Ellis – Second Respondent

SOLICITORS: Clayton Utz – Appellant
Evangelos Patakas & Associates – First Respondent
Colin Biggers & Paisley – Second Respondent

LOWER COURT JURISDICTION: Supreme Court

LOWER COURT FILE NUMBER(S): SC 50063/03

LOWER COURT JUDICIAL OFFICER: Young CJ in Eq

LOWER COURT DATE OF DECISION: 29 March 2006

LOWER COURT MEDIUM NEUTRAL CITATION: [2006] NSWSC 202

CA 40232/06
SC 50063/03

SPIGELMAN CJ
BASTEN JA
HANDLEY AJA
6 September 2007

GARDINER v AGRICULTURAL AND RURAL FINANCE PTY LTD & ANOR

On 28 April 1997, Oceania Agriculture Ltd (“Oceania”) filed a prospectus with the Australian Securities Commission in relation to a project identified as the “Port Macquarie Tea Tree Plantation”. Investors in the project acquired rights in respect of particular allotments of land on which tea trees would be planted. The project was intended to run for 17 years.

The project was promoted by Gerard Cassegrain & Co Pty Ltd (“GCC”), of which Oceania was a wholly owned subsidiary. The land was owned by Endwise Holdings Pty Ltd, which was owned half by GCC and half by the managing director of GCC, Mr Claude Cassegrain. The plantations were managed by Oceania.

The Corporations Law, as in force in 1997, required the appointment of an independent trustee to protect the rights and interests of the investors. The trustee was Australian Rural Group Ltd. Endwise Holdings leased the land to the trustee, which in turn sub-let the land to Oceania.

The investment scheme involved a financing arrangement whereby a company known as Agricultural and Rural Finance Pty Ltd (“A&R Finance”) provided finance such that, in the first year of the investment, the investors were only required to provide approximately one third of the investment in cash. In addition, investors were required to make two advance interest payments on the loans, the first at the time of application and the second at the commencement of the second year. Most investors also entered into an indemnity agreement under which Oceania agreed to indemnify their obligations of repayment under the loan contracts in particular circumstances.

A&R Finance received an initial capital contribution from GCC of $300,000 to cover the cost of the loans. Thereafter, it obtained further funds through a “round-robin” arrangement, whereby the application moneys lent to investors were paid to Oceania and then on-lent to A&R Finance, which lent the funds to further investors.

On application, an investor was required to pay licence and management fees amounting to $24,060. Over the 17 years of the project, annual licence and management fees were to be paid to Oceania at an increasing rate, commencing at $1,854. It was anticipated that after the second year of the project, the licence and management fees would be met from the proceeds of the sale of the oil. This was based upon an anticipated increase in the price for tea tree oil. However, the price instead fell dramatically from $55 per kilogram in 1997 to $15 per kilogram by the time the project terminated in January 2003.

The project deed was an agreement between Oceania, the trustee, Endwise Holdings and GCC as “settlor”. It provided that the project would continue in operation for 80 years, subject to earlier termination. The project deed provided that termination could occur if the office of trustee became vacant and a new trustee was not appointed within 60 days.

On 27 September 2002 an administrator was appointed to the trustee. The trustee retired on 5 November 2002. Pursuant to clause 46.4 of the project deed, the project terminated on 4 January 2003.

On termination, the First Respondent, A&R Finance commenced proceedings in the Equity Division against all of the borrowers, seeking payment of loan moneys which it claimed were repayable by each investor on cessation of the scheme. The proceedings involving the Appellant, Mr Gardiner, were pursued as a test case.

The borrowers argued that the indemnity agreement was effective and enforceable, thereby releasing them from any obligation to repay amounts under the loan agreements. Mr Gardiner also filed a cross-claim, asserting breaches of s 52 of the Trade Practices Act 1974 (Cth), ss 995 and 996 of The Corporations Law and ss12DA and 12DB of the Australian Securities and Investments Commission Act 2001 (Cth).

Young CJ in Eq gave judgment in favour of A&R Finance and dismissed the cross-claim by Mr Gardiner.

On appeal, Mr Gardiner sought to reagitate each of the issues on which he was unsuccessful below.

The Court held, allowing the appeal in part and dismissing the cross-appeal:

A. Construction of loan agreement and indemnity agreement

(per Spigelman CJ)

1. Identifying the meaning of terms in a contract requires consideration of the surrounding circumstances and the purpose and object of the transaction. [8]

Toll (FGCR) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165 cited.
McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579; Maggbury Pty Limited v Hafele Australia Pty Limited (2001) 210 CLR 181; Pacific Carriers Limited v BNP Paribas (2004) 218 CLR 451; Wilkie v Gordian Runnoff Ltd (2005) 221 CLR 522; Codelfa Constructions Pty Limited v State Rail Authority of NSW (1982) 149 CLR 337; South Sydney Council v Royal Botanic Gardens [1999] NSWCA 478 referred to.

Lion Nathan Australia Pty Limited v Coopers Brewery Limited (2005) 223 ALR 560; Lion Nathan Australia Pty Limited v Coopers Brewery Limited (2006) 156 FCR 1 approved.

2. The taxation advantages of primary production schemes which are structured like this scheme constitute an important surrounding circumstance for the interpretative task. [35], [51]

3. The general principle is that ambiguity in an indemnity should be construed in favour of the party providing the indemnity. Where, as here, the party providing the indemnity drafted the indemnity, an ambiguity will not necessarily be construed in its favour: [21].

Andar Transport Pty Limited v Brambles Limited (2004) 217 CLR 424 distinguished.

Rava v Logan Vines Pty Ltd [2007] NSWCA 62 doubted in part, approved in part.
Ankar Pty Limited v National Westminster Finance (Australia) Limited (1987) 162 CLR 549; Chan v Cresdon Pty Limited (1989) 168 CLR 242; Mayer v Isaac (1840) 6 M&W 605 at 612; Halford v Price (1960) 105 CLR 23 at 30, 34, 40, 41 and Davis v Commissioner for Main Roads (1968) 117 CLR 529; Coghlan v S. H. Lock (Aust) Ltd (1987) 8 NSWLR 88 referred to.

(a) The Relevant “Event”

(per Spigelman CJ and Basten JA, Handley AJA agreeing)

4. The relevant event for the purposes of cl 2(d) of the indemnity agreement was the failure to replace the trustee:[24], [29], [64], [195], [356].

5. The trial judge erred in holding that a “cause” cannot be an “event” within cl 31(a). The better view is that the phrase “other causes beyond the control of the farmer” is apt to identify relevant “events”, both in terms of cl 31 and cl 2(d) of the indemnity agreement: [53], [196].

6. The context to this agreement indicates that what is required is a direct and immediate cause, rather than identification of some ultimate or “real” cause. The factual inquiry that a search for a “real” cause may entail would undermine the certainty that such a contractual provision requires. Here the immediate cause was the failure to replace the Trustee: [102], [106], [208], [358].

(per Basten JA)

7. The failure to appoint a replacement trustee was an event having the quality of a physical or material restraint imposed by an external actor and thus fell within the scope of cl 31(a): [198].

8. In order for the investors to benefit from the tax deductions, it was necessary that they carry a commercial risk of failure of the venture. The relevant contractual provisions should not be given a construction that would remove that level of risk. The only relevant risk for a financed investor who purchased the indemnity was the risk that, if the project failed for commercial reasons, the investor would lose part or all of his or her investment: [200].

(b) Control of the Farmer

(per Spigelman CJ and Basten JA, Handley AJA agreeing)

9. The failure to appoint a replacement trustee was an event “beyond the control of” the Appellant: [73], [213], [357].

(per Spigelman CJ)

10. The text refers to the farmer in the singular, it does not envisage collective action to replace the trustee and there is nothing to suggest it was contemplated that the replacement of a trustee was within their joint “control”: [71]-[73].

(per Basten JA)

11. Even if the Appellant was able to act in concert with other investors, it may reasonably be inferred that he would have been unsuccessful in appointing a replacement trustee because there was no readily accessible source of funds, other than through the manager, from which to pay a trustee: [213].

12. Clause 7 of the loan agreement is best construed as constituting part of the definition of the primary liability under the agreement, rather than an exclusion or exception to the borrower’s duty to perform. Thus, the onus of proof fell on the lender to establish that a liability had arisen because the indemnity was not effective and enforceable: [217].

Glebe Island Terminals Pty Ltd v Continental Seagram Pty Ltd (1993) 40 NSWLR 206; Kenyon, Son & Craven Ltd v Baxter Hoare & Co Ltd [1971] 1 WLR 519, applied.

(c) Meaning of “as a result of” in the force majeure clause

(per Spigelman CJ)

13. Changes in economic conditions, which significantly alter the commercial aspects of an arrangement, even though in one sense they are “beyond the control” of a party to a commercial agreement, may not fall within such a general phrase in a Force Majeure clause. Mere commercial impracticability may not be sufficient: [93].

P J Van Der Zijden Wildhandel N.V. v Tucker & Cross Limited (1975) 2 Lloyd’s Rep. 240; Hyundai Merchant Marine Co Limited v Dark Brook Coal (Sales) Pty Limited [2006] FCA 1324 referred to.

(per Basten JA)

14. Performance will not be beyond the control of a party to a contract merely because performance becomes uneconomic for the supplier of goods and services. A more stringent test of supervening impossibility may need to be applied where the recipient of services asserts frustration of purpose: [227].

Hyundai Merchant Marine Co Ltd v Dartbrook Coal (Sales) Pty Ltd [2006] FCA 1324; Vidler & Co (London) Ltd v R Silcock & Sons Ltd [1960] 1 Lloyd’s Rep 509; PJ van der Zijden Wildhandel NV v Tucker [1975] 2 Lloyds Rep 240; Provimi Hellas AE v Warinco AG [1978] 1 Lloyds Rep 373 (CA); considered.

Summary of findings regarding construction

(per Basten JA)

15. The following findings were made at [233]:

(i) the relevant event, for the purposes of cl 2(d)(i) of the indemnity agreement, was the failure to replace the trustee within 60 days of the vacancy occurring;
(ii) as a result of that event, the investors (in this case the Appellant) ceased to carry on the business;
(iii) that event was a cause beyond the control of the investors (the Appellant);
(iv) even though the investors could not have relied on market conditions as a cause beyond their control to excuse their performance under the licence and management agreement, they did not seek to do so;
(v) although market conditions may have made it difficult for the manager to find a replacement trustee, it was not established that those conditions frustrated the purpose of the contract so as to prevent the manager performing its obligations to the investors under the contract;
(vi) it was not established that the “true cause” of the termination of the business was a material diminution of the amount available for distribution to investors, or even that the manager and the (putative replacement) trustee could properly act on an opinion to that effect if they were otherwise inclined to hold that opinion; and

(vii) accordingly, accepting that the event relied on by an investor for the purpose of invoking cl 2(d) of the indemnity agreement had to be an event which would excuse the investor’s performance for the purposes of cl 31(a) of the licence and management agreement, the vacancy in the office of trustee was such an event.

(d) Punctual payment

Summary of findings on punctuality

(i) First and second loan agreement

(per Basten JA, Spigelman CJ agreeing, Handley AJA disagreeing)

16. The first and second payments were punctually paid for the purposes of the indemnity: [129], [268], [360].

(ii) Third loan agreement

(per Basten JA, Spigelman CJ and Handley AJA agreeing)

17. All payments under loan contract 3 were punctually made for the purposes of cl 2(a) and (b) of the indemnity agreements. The Appellant owed no obligation to pay any amount to A&R Finance under those agreements by operation of cl 7 of the loan agreement: [268], [360].

(iii) Fourth loan agreement

(per Basten JA, Spigelman CJ and Handley AJA agreeing)

18. Payments under the fourth loan agreement were not punctual: [130], [267], [360].

Summary of reasons on punctuality

(per Spigelman CJ)

19. The use of the word “punctually” in contractual documentation usually requires a payment to have been made on the day provided in the contract and on no later day: [110].

Leeds & Hanley Theatre of Varieties v Broadbent (1898) 1 Ch 343 referred to.

20. However, the issue is one of interpretation which depends on the full context. The fact that the Indemnifier here did not have a direct financial interest in the punctuality of payments is an unusual contextual element which leads to the word “punctuality” losing its usual connotation of precision in timing. Moreover, the long term nature of the agreement makes it unlikely that a late payment at the outset was intended to render the Indemnity Agreement ineffective: [110], [118], [123]-[124].

Andar Transport Pty Limited v Brambles Limited (2004) 217 CLR 424 distinguished.

Sperry Rand Australia Limited v Arrandale Properties Pty Limited [1979] VR 409; McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579 referred to.

(per Spigelman CJ, Handley AJA disagreeing)

21. In the contract under consideration, punctuality is satisfied where the person who is entitled to the benefit of the original obligation accepts the actual payment as constituting punctual payment. It is not necessary to find evidence of variation of a date for payment: [126], [129], [359].

(per Spigelman CJ)

22. There is no evidence that the fourth payment was accepted by Oceania as punctual: [130].

(per Basten JA)

23. A condition requiring punctual payment is intended to operate from time to time as the payment obligations arise and it is not sufficient that all payments have been made by the time the question of fulfilment of the condition arises. The meaning of a particular condition must be understood within its own contractual context. Compliance is a question of fact which must be separately determined in each case. The conditions as originally agreed may be varied by later agreement between the parties: [242].

MacDonald v Robins (1954) 90 CLR 515; Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd (1957) 59 SR (NSW) 122; Finch v Underwood (1876) 2 Ch D 310; Leeds & Hanley Theatre of Varieties v Broadbent [1898] 1 Ch 343; Sperry Rand Australia Ltd v Arrandale Properties Pty Ltd [1979] VR 409, considered.

24. The interlocking agreements should, so far as possible, be read together so that cl 5 of the loan agreement operated consistently with cl 2 of the indemnity agreement: [259]. The obligation to repay the outstanding balance of the principal was conditioned on the lender opting to require repayment for default: [260].

(per Basten JA, Handley AJA disagreeing)

25. In relation to the first and second loan agreements, the letter of 2 June 1999 should be understood as an extension of the time for due and punctual payment: [261], [264]. It amounts to an undertaking that the lender would not exercise any right under cl 5.1(a) or (b) to call up the outstanding amount under the loan for failure to make due and punctual payments: [263], [361]-[362], [365], [371], [376].

B. Breach of Fiduciary Duty

(per Basten JA, Spigelman CJ agreeing, Handley AJA not deciding)

26. The evidence relied on by the Appellant does not establish that the projects were terminated as a result of any conduct engaged in by Oceania in breach of its obligation to act in the best interests of the investors. Accordingly, other issues relating to this basis of defence and cross-claim need not be addressed: [135], [278].

C. Misleading and deceptive conduct: Representations by Mr Lloyd

(per Spigelman CJ)

27. Save with respect to the fourth payment, it is strictly unnecessary to determine the Appellant’s cross-claims. However, given the resources already expended by the parties and the fact that this is a test case for a significant number of other investors, it is not appropriate to remit these issues for redetermination: [131]-[132].

(per Basten JA)

28. As the Appellant succeeds on the contractual construction points, the representations by Mr Lloyd need not be addressed: [279].

(a) The Appellant’s estoppel and misleading and deceptive conduct case against A&R Finance with respect to Project 1 & Project 2

(per Handley AJA, Spigelman CJ agreeing)

29. The trial judge’s findings that the first representations were made cannot be disturbed, based as they must have been, at least in part, on the judge’s assessment of the appellant’s demeanour: [136], [388].

30. The trial judge’s decision that Mr Lloyd, who made the first representation, had no authority to make that representation on behalf of A&R Finance should not be disturbed. Therefore A&R Finance cannot be held liable for the representations with respect to Project 1: [136], [397].

31. A finding that the second representation did occur is appropriate, although no finding was made by the trial judge: [136], [399].

32. Mr Lloyd had no authority to bind ARF during the telephone conversation that constituted the second representation. Therefore A&R Finance cannot be held liable for the representations with respect to Project 1 or Project 2: [136], [400].

(b) The Appellant’s misleading and deceptive conduct case against Oceania with respect to Project 1

(per Handley AJA, Spigelman CJ agreeing)

33. The trial judge’s findings that the Appellant did not rely on the representations cannot be disturbed: [136], [412], [416].

Rosenberg v Percival (2001) 205 CLR 434; Global Sportsmen Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82 applied.

(c) The Appellant’s misleading and deceptive conduct case against Oceania with respect to Project 2

(per Handley AJA, Spigelman CJ agreeing)

34. It should be assumed that the further representations allegedly made in May 1998 were made: [136], [413].

35. However, given the finding that the Appellant did not rely on Mr Lloyd’s opinion when investing in Project 1 it is not possible to find reliance when investing in Project 2: [136], [415], [416]

D. Prospectus Claims

(a) With respect to Prospectus 1

(Handley AJA, Spigelman CJ agreeing)

36. The trial judge’s dismissal of the first prospectus case on the basis that the Appellant did not read or rely on the supplementary prospectus cannot be supported. This Court must consider the issue for itself. In determining questions of reliance an appellate court has regard to the direct evidence of the investor, the findings of the trial judge, and the probabilities based on the circumstantial evidence: [234], [453].

Siqueira v Noronha [1934] AC 332 cited.

(Spigelman CJ)

37. Claims of reliance on financial representations by investors in such contexts should not be given much weight. The hindsight bias of an investor who has made a loss in a tax driven scheme is such that disbelief rather than mere scepticism is generally the appropriate response: [140].

(Handley AJA, Spigelman CJ agreeing)

38. The element of the Appellant’s first prospectus case reliant on the repayment understanding fails for lack of proof: [137], [440].

39. Of the additional elements of the Appellant’s first prospectus case only the alleged funds subscribed representation remains relevant. This aspect of the case, assuming that it had been proved, fails for lack of reliance: [138], [446], [455], [465], [471], [742], [475], [477].

40. On the evidence, the probabilities are that the Appellant’s decision to invest in both Projects was based on tax benefits, the loans, the indemnities and the commercial prospects of tea tree oil. The Court should not infer that the disclosure of the A&R Finance funding arrangements would have affected the Appellant’s decision to invest: [138], [474], [477].

Cackett v Keswick [1902] 2 Ch 456 cited.

(per Basten JA)

41. The representations in the first prospectus which are claimed to be misleading or deceptive fell into two categories. The first concerned the liabilities of Oceania as at the date of issue of the prospectus; the second concerned the use of funds provided by the investors to Oceania: [286].

42. There was an understanding between GCC, Endwise and Oceania that Oceania would meet the loan expenses and repayments incurred by GCC in relation to the overdraft facility with the Commonwealth Development Bank. The denial in the first prospectus that Oceania had any undisclosed liabilities was false and misleading: [297].

43. The fact that the funds paid by the investors were on-lent to A&R Finance or Mr Cassegrain in a “round-robin” arrangement rendered the statements in the prospectus regarding the use of the licence and management fees false and misleading: [305].

46. In order to claim relief under s 1005 of the Corporations Law, the Appellant needed to establish that A&R Finance was a “person involved in” the contravention of the Corporations Law, that he suffered “loss or damage” and that his loss was suffered “by” the contravention: [309]-[310].

47. As A&R Finance was knowingly concerned in the conduct involving false and misleading representations, it can be said to have been “involved in” the contravention for the purposes of s 1005(1) of the Corporations Law: [309].

48. The trial judge’s finding that the Appellant did not read or rely on the supplementary prospectus of 6 August 1997 was an incorrect finding on the evidence: [319].

49. The relevant causal connection is between the misrepresentation and the decision to make the investment. As the Appellant succeeded in the construction of the loan agreements associated with Project No. 1, namely the first three loans, his liability is limited to loan contract 4. Thus, it is the causal connection between the relevant misrepresentations and the decision to invest in Project No. 2, pursuant to the second prospectus, with which the court is concerned: [322].

50. The tentative view is expressed that A&R Finance could not defend itself against the cross-claim on the basis that it was not responsible for the misrepresentations in the first prospectus, because the prospectus was materially misleading in relation to the financing arrangements, to which A&R Finance was a party: [343].

51. However, there was an intervening cause of the Appellant’s loss, being his failure to comply with the preconditions to the operation of the indemnity. This failure was not linked to his reliance on the first prospectus. Therefore, the Appellant may not have been entitled to the relief sought on the basis of any false or misleading statements in the first prospectus: [345].

(b) With respect to Prospectus 2

(per Handley AJA, Spigelman CJ agreeing)

52. The failure of the Appellant’s first prospectus case means that his second prospectus case based on the deficiencies of the first prospectus must also fail: [138], [486].

53. Of the additional elements of the second prospectus case relating to the payments by OAL to GCC, those claims that relate to investments made before evidence of those payments must fail: [490].

54. Of the additional elements of the second prospectus case relating to the falsification of statements about OAL’s non-current liability to GCC, the relevant information was available to the Appellant and it has not been established he relied upon it when making the decision to invest in Project 2: [138], [495].

(per Basten JA, Spigelman CJ agreeing)

55. It may be that if the Appellant had read the second prospectus and September 1998 accounts with greater care he would have been aware that the funds received by Oceania were made available to A&R Finance to permit further loans to investors. However, such carelessness does not demonstrate the falsity of his assertion that he placed reliance upon the misleading statements in the first prospectus in deciding to invest in Project No. 1: [138], [333]-[335]. There is insufficient evidence to establish the positive inference that the Appellant relied on the misleading statements. However, as he succeeds in relation to the first three loan contracts, and fails on the fourth on the prospectus claims for other reasons, the matter need not be pursued: [138], [336].

(per Basten JA)

56. Although there was no express statement about the financing arrangements in the second prospectus, the accountants’ report would place an interested and informed reader on notice that the viability of both A&R Finance and Oceania would be in doubt in the event of termination of the project: [326].

57. There is no error in the primary judge’s conclusion that the Appellant failed to demonstrate that his decision to invest in Project No. 2 was materially affected by any false or misleading statement in the second prospectus: [327].

58. The requirement that the loss be suffered “by” the misleading or deceptive conduct encompasses both a connection between the representation and the plaintiff’s conduct and a connection between the representation and the loss suffered: [329].

59. The representation need not be the sole or even the dominant cause of the plaintiff’s conduct, but may be one of a number of factors inducing a decision that produces loss: [330]. The fact that a plaintiff has acted carelessly or unreasonably will not preclude recovery: [331].

Henville v Walker (2001) 206 CLR 459; Ricochet Pty Ltd v Equity Trustees Executors and Agency Company Ltd (1993) 41 FCR 229; Sykes v Reserve Bank of Australia (1998) 88 FCR 51, applied.

60. The misrepresentation need not be the sole cause of the loss, as long as the breach materially contributed to the loss: [337]-[340].

Henville v Walker (2001) 206 CLR 459; Travel Compensation Fund v Tambree (2005) 224 CLR 627, applied.

CA 40232/06
SC 50063/03

SPIGELMAN CJ
BASTEN JA
HANDLEY AJA
6 September 2007

GARDINER v AGRICULTURAL AND RURAL FINANCE PTY LTD & ANOR

Judgment

1 SPIGELMAN CJ: The facts, issues and submissions are set out in the judgment of Basten JA which I have read in draft. I wish to express my own reasons on the issues of contractual interpretation that arise.

2 The relevant provisions of the contractual documentation are set out by Basten JA. However, it is convenient, in order to understand my reasons, to repeat particular provisions.

3 The Loan Agreement provides:

“7 The Lender acknowledges and agrees that the Borrower shall have no liability to repay any part of the Principal Sum outstanding or any interest thereon if the indemnity granted under the Indemnity Agreement as defined in the Project Deed is effective and enforceable in accordance with Clause 2 of the Indemnity Agreement.”

4 It is pertinent to note the reinforcement of cl 7 of the Loan Agreement by cl 4 of the Indemnity Agreement, which provides:

“4 The Lender agrees and acknowledges that the Borrower may rely upon the Indemnity set forth herein and that notwithstanding any failure on the part of the Indemnifier to punctually perform any covenant or obligation contained herein the Lender shall not have recourse to the Borrower if the Indemnity herein contained is effective and enforceable in accordance with the terms of Clause 2.”

5 Clause 2 of the Indemnity Agreement provides:

“The Indemnity referred to in Clause 1 shall be effective and enforceable if:

(a) the Borrower has punctually paid the interest payable pursuant to Clauses 3.2 and 3.3(a) of the Loan Agreement; and

(b) the Borrower has punctually paid the reductions of the Principal Sum set forth in Clause 4.1 of the Loan Agreement; and

(c) the Borrower is not otherwise in default of any covenant or obligation contained in the Loan Agreement (save and except for any covenant or obligation to repay principal and interest which is subject to the Indemnity) or the Licence and Management Agreement; and

(d) the Borrower has ceased to carry on the Business as a result of:

(i) any event described in Clause 31(a) of the Licence and Management Agreement; or

(ii) any decision of the Manager and the Trustee to terminate the Project pursuant to the Project Deed where that decision was made as a result of any event described in Clause 31(a) of the Licence and Management Agreement; or

(iii) any resolution of Farmers to terminate the Project pursuant to the Project Deed where that resolution was as a result of any event described in Clause 31(a) of the Licence and Management Agreement or

…”

6 Clause 31 of the Licence and Management Agreement which is entitled “Force Majeure” provides:

“31(a) The Farmer, the Licensor, the Manager and the Trustee are excused from performance of any of their respective duties and obligations under this agreement whenever and to the extent that such performance is prevented or interrupted or delayed by reason of any action or requirement of any government authority or by any wars, public disorders, acts of enemies, sabotage, strikes, lockouts, labour or employment difficulties, accidents, breakdowns, fires, storms, tempests, hail, wind or events of nature or acts of God or any other causes beyond the control of the Farmer, the Manager, the Licensor or Trustee (as the case may be), but the Farmer, the Licensor, the Manager and the Trustee must at all times use all commercially reasonable endeavours to overcome or alleviate the effect of any such events as specified above.”

Contractual Interpretation

7 The general approach to the interpretation of commercial contracts applicable in the common law of Australia has been stated in a number of recent judgments of the High Court. (See McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579 at [22]; Maggbury Pty Limited v Hafele Australia Pty Limited (2001) 210 CLR 181 at [11]; Pacific Carriers Limited v BNP Paribas (2004) 218 CLR 451 at 461-462; Toll (FGCR) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165 at 179; Wilkie v Gordian Runnoff Ltd (2005) 221 CLR 522 at [15].)

8 The most recent general statement is that of the joint judgment in Alphapharm at 179 where the Court said:

“[40] … The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.”

9 The contemporary approach to contractual interpretation was succinctly stated by Gleeson CJ in McCann v Switzerland Insurance supra at [22]:

“ … [A] commercial contract … should be given a business like interpretation. Interpreting a commercial document requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure.”

10 This passage was expressly adopted by the joint judgment in Wilkie v Gordian Runoff supra at [15].

11 In a number of joint judgments the High Court has adopted an approach to statutory interpretation which requires attention to the broader context of the words in issue in the first instance, not only after some kind of “ambiguity” has been identified. (See, e.g. CIC Insurance Limited v Bankstown Football Club Limited (1997) 187 CLR 384 at 408; Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 335 at [69] and Network Ten Pty Limited v TCN Channel Nine Pty Limited (2004) 218 CLR 273 at 280-281.) There is nothing new about this approach. (See e.g. R v Wilson; Ex parte Kisch (1934) 52 CLR 234 at 244.) However, its application in recent cases was based on a judgment of Mason J in K & S Lake City Freighters Pty Limited v Gordon & Gotch Limited (1985) 157 CLR 309 at 315.

12 It has been suggested that Mason J adopted a different approach to the task of contractual interpretation by requiring the identification of ambiguity in the first instance. (See Codelfa Constructions Pty Limited v State Rail Authority of NSW (1982) 149 CLR 337 at 348.) I have, however, expressed the view that his Honour did not intend to confine the approach to contractual interpretation in that way but that his reference in Codelfa at 348 to the proposition that language may not only be “ambiguous” but also “susceptible of more than one meaning” invoked a concept of “ambiguity” extending to any situation in which the scope and applicability of the formulation was, for whatever reason, doubtful. (See South Sydney Council v Royal Botanic Gardens [1999] NSWCA 478 at [35].)

13 This approach is consistent with the subsequent authority in the High Court, particularly the passages to which I have referred in Pacific Carriers and in Alphapharm. In this respect I agree with the reasoning in the Federal Court at first instance in Lion Nathan Australia Pty Limited v Coopers Brewery Limited (2005) 223 ALR 560 at [78]-[79] and on appeal in Lion Nathan Australia Pty Limited v Coopers Brewery Limited (2006) 156 FCR 1 at [45]-[52], [98], [101] and [254]. In this respect also, contractual interpretation has been brought into alignment with statutory interpretation. (See Bowtell v Goldsborough Mort & Co Limited (1905) 3 CLR 444 at 456-457; Minister for Immigration and Ethnic Affairs v Teoh (1995) 183 CLR 273 at 287-288; Repatriation Commission v Vietnam Veterans’ Association of NSW Branch Inc (2000) 48 NSWLR 548 at [116].)

14 In Andar Transport Pty Limited v Brambles Limited (2004) 217 CLR 424, the joint judgment said:

There are “principles of construction applicable to contractual indemnities”. [17]
“notwithstanding the differences in the operation of guarantees and indemnities, both are designed to satisfy a liability owed by someone other than the guarantor or indemnifier to a third person”. [18]
the principles applicable to construing guarantees are “relevant to the construction of indemnity clauses”. [18]
pursuant to Ankar Pty Limited v National Westminster Finance (Australia) Limited (1987) 162 CLR 549 at 561, approved in Chan v Cresdon Pty Limited (1989) 168 CLR 242 at 256, “ambiguous contractual provisions should be construed in favour of the surety … A doubt as to the provision in a guarantee should therefore be resolved in favour of the surety”. [17]
accordingly, the ambiguity in the indemnity should “be construed in favour of” the party providing the indemnity. [29]

15 The reasoning in Andar has been applied in subsequent cases. (See e.g. BI (Contracting) Pty Limited v AW Baulderstone Holdings Pty Limited [2007] NSWCA 173 at [25] & [92]; Ayoub v Euphoric Pty Limited [2004] NSWCA 457; 12 BPR 22, 735 at [41]; F D Normoyle Pty Limited v Transfield Pty Ltd (2005) 63 NSWLR 502 at 509-510, [47]; Colliers Jardine Pty Limited v Castle Mall Properties Pty Limited [2005] NSWCA 311 at [40]-[41]; National Roads and Motorists’ Association v Whitlam [2007] NSWCA 81 at [66]-[69], [81].

16 With respect, I do not think it is accurate to describe the reasoning in Andar at [19] as characterising the principle as “an aspect of the contra proferentem rule”. (Rava v Logan Vines Pty Ltd [2007] NSWCA 62 at [51] per Campbell JA.) However, the High Court left open the possibility of following the approach in Mayer v Isaac (1840) 6 M&W 605 at 612; 151 Eng. Rep. 554 at 557 where the guarantor/indemnifier has in fact prepared the document.

17 Observations have been made to the effect that, in its application to indemnity clauses, the approach in Andar is not entirely consistent with the general approach to contractual interpretation suggested by the cases listed in [7] above. (See J W Carter and David Yates “Perspectives on Commercial Construction and the Canada SS Case” (2004) 20 J of Contract L 233 at 235-237; Daniel Gosewitch “Difficulties with Indemnities Between Business Entities” (2006) 34 ABLR 89 at 96; Nuncio D’Angelo “The Indemnity: It’s All in the Drafting” (2007) 35 ABLR 93 at 96-102; James O’Donovan and John Phillips Modern Contract of Guarantee Thompson Law Book Co loose leaf service at [5.100].)

18 In this context the joint judgment in Andar at fn [34] referred to Halford v Price (1960) 105 CLR 23 at 30, 34, 40, 41 and Davis v Commissioner for Main Roads (1968) 117 CLR 529 at 534 where the High Court construed ambiguous provisions in, respectively, a professional indemnity policy of insurance and an indemnity contra proferentem the guarantor/indemnifier who prepared the document.

19 What this illustrates is that there is more than one principle involved in the task of contractual interpretation, which must be undertaken in accordance with the general approach identified above as applicable to commercial contracts. (See Coghlan v S. H. Lock (Aust) Ltd (1987) 8 NSWLR 88 at 92 F-G.)

20 I agree with the conclusion of Campbell JA in Rava v Logan Wines supra:

Andar

21 Where, as here, OAL drafted the indemnity it is not, in my opinion, entitled to the benefit of the approach adopted in Andar. Accordingly, an ambiguity will not necessarily be construed in its favour.

The Interpretation Issues

22 Four issues of interpretation arise in the present case.

(i) Whether the vacancy in the office of Trustee and its continuance for a period of 60 days was an event within cl 31(a).

(ii) Whether the failure to fill the vacancy was beyond the control of the Appellant.

(iii) Whether the Appellant ceased to carry on business “as a result” of the event identified in answer to (i) or did cessation occur, as the Respondents contend, as a result of the collapse in the market for tea tree oil.

23 The judgment of Basten JA sets out the general structure and objects of the tea tree oil investment scheme which constitute the relevant surrounding circumstances. Of particular significance for the task of interpretation that arises in these proceedings is the closely interrelated nature of the documents. The issues in dispute arise as a matter of interpretation of the Indemnity Agreement, which in turn refers to the Loan Agreement, which in turn refers to the Licence and Management Agreement and all three Agreements refer to the Project Deed for the investment.

24 As Basten JA shows, the relevant triggering event was the vacancy in the position of Trustee. The relevant surrounding circumstances extend to the role of the Trustee in the project. That is, in turn, determined by the detailed regulatory scheme found in the Corporations Law at the relevant time, which reflects a long period of development in Australian legislation for the regulation of investment in what were called, at the time, prescribed interests. Many of the detailed provisions of the interrelated agreements reflect requirements under the Corporations Law including, perhaps most materially, the requirement for an independent Trustee with defined rights and obligations. For these reasons the task of interpretation before the Court must commence with an understanding of the Corporations Law requirements.

The Regulatory Scheme

25 The principal provisions designed to protect investors are found in Div 5 of Pt 7.12 of the Corporations Law (“the Law”) entitled “Prescribed Interests”. Further provision is found in the Corporations Regulations (“the Regulations”) relevant to Pt 7.12. Finally, there are a number of Policy Statements issued by the then regulatory authority, the Australian Securities Commission (“the ASC”), which built on a long course of practice by it and its predecessor regulatory authorities. These Policy Statements were: PS 23 Approval of Deeds Relating to Prescribed Interests; PS 55 Covenants in Deeds; PS 82 Covenants in Deeds: Non-Mining Primary Production Schemes; PS 89 Trustees and Representatives – Approvals for Prescribed Interest Schemes and PS 90 Related Party Trustee Approvals.

26 The particularly relevant features of this regulatory scheme, with which the documentation in issue in the present proceedings had to comply, were as follows:

No issue, offer or invitation to purchase a prescribed interest can be made other than pursuant to an approved deed (s1065 of the Law).

Approval of a deed requires application to the regulatory authority, the ASC (s1066 of the Law and reg 7.12.01 of the Regulations).

The ASC issues an approval for a person to act as a Trustee or representative for the purposes of a particular deed (s1067 of the Law).

A deed must contain a range of specific covenants (s1069 of the Law, as extended pursuant to s1069(1)(n) by reg 7.12.15).

Particular covenants are prescribed with respect to the obligations of a trustee (s1069(1) of the Law and reg 7.12.15(2) of the Regulations, reflected in cl 34 of the Project Deed).

The overriding obligation of a trustee is to exercise due diligence and vigilance in carrying out its functions and duties and protecting the rights and interests of the holders of prescribed interests (s1069(1)(e)(i)) of the Law, reflected in cl 34.1 of the Project Deed).

An approved deed must also contain a covenant that the Trustee will retire from office at the request of the management company if, relevantly, the Trustee is placed in liquidation or where a receiver is appointed and not removed within 30 days. (Regulation 7.12(2)(e) and 7.12.15(8), reflected in cl 37.1 of the Project Deed.)

ASC PS 89 contains detailed provisions outlining the criteria which the ASC applies when deciding whether to approve a person to act as a Trustee in relation to a deed. These include requirements as to an applicant’s character, its ability and resources to perform its functions and to satisfying the ASC that the Trustee and its officers will act independently of the management company and establishing appropriate standards of accountability (see ASC PS 89 cll 35 – 95).

ASC PS 89 also makes provision for “fast track approvals” with respect to the appointment of a Trustee for a particular deed, but only in the case of applicants who had been accepted for entry into the fast track approval procedure (ASC PS 89 cll 12-16 and 110-111).

27 The role of the trustee in a prescribed interest scheme was a fundamental feature of the regulatory scheme. That role has been described as a “safeguard” (Parkes Management Ltd v Perpetual Trustee Co Ltd (1977) 3 ACLR 303 at 310) and as a “watchdog” (Global Funds Management (NSW) v Rooney (1994) 36 NSWLR 122 at 133). Doubts about the efficacy of the performance of this role has led to statutory change, so that managed investment schemes now have a “single responsible entity”, reflected in Ch 5C of the Corporations Act 2001 (Cth). However, at the time relevant to the issues in these proceedings, the role of a trustee as a fundamental protection for investors was clearly a central feature of the scheme, reinforced by a detailed regulatory process for determining which corporations would be permitted to assume the role.

28 Perhaps most relevantly, the retirement of a trustee upon the appointment of a liquidator or a receiver was, as I have noted, an express requirement of the Regulations.

29 It is clear from this analysis that the existence of a trustee is of fundamental significance to the regulatory scheme. This is reinforced by the regulation of those who are permitted to become trustee in accordance with ASC PS 89. As I have noted, that Policy Statement also makes provision for “fast track approvals”, but only in the case of persons who had already been accepted for entry into this particular approval procedure. Such prior approval could be of particular significance in the case of a liquidation or receivership where expedition is required.

30 It is also pertinent to note that nothing in the regulatory scheme impinges on the relevant aspects of the Loan Agreement or of the Indemnity Agreement, which fall to be interpreted in the present proceedings.

31 Section 1069(3) of the Law provided that the ASC could declare that, subject to specified terms and conditions, a particular deed need not contain specific covenants. The Project Deeds under consideration in the present proceedings notably omit one of the significant covenants, together with the detailed provisions made for its enforcement, namely the buy-back covenant. As required by s1069(1)(c) of the Law, such a covenant bound the management company to buy the prescribed interest from an investor. This covenant was a significant protection for investors.

32 ASC PS 55 outlined, in considerable detail, the way the ASC would approach applications for modifications of the required covenants in deeds. Most relevantly, however, ASC PS 82 made specific provision with respect to Primary Produce Production Schemes of the character under consideration in the present proceedings. With respect to such schemes alone, the ASC indicated that it would grant an exemption from the buy-back requirements. In this regard the ASC noted that the taxation benefits available for such schemes had the result that, in effect, there was no secondary market for such interests. ASC PS 82 indicated the concern that the ASC had about granting this exemption and set out detailed conditions before it would do so.

33 Certain aspects of the structure of the scheme presently under consideration, and of the disclosures in the Prospectus, were required as a condition for exempting the scheme from the buy-back requirement. In particular cl 29 of PS 82 provides:

“29 Accordingly, the ASC will grant relief to schemes only if:

(a) the business of the scheme is non-mining primary production;

(b) the management company is responsible for ensuring that the primary production services required in relation to the scheme are performed;

(c) investors are led to expect tax benefits because some or all subscription moneys from entering into the scheme are deductible and there are grounds to believe the deductions will be allowed; and

(d) each prospectus contains a prominent statement advising potential investors that:

(i) investments in the scheme should be viewed as being made for a fixed and specified term;

(ii) interests in the scheme are likely to be illiquid because it is unlikely there will be a secondary market; and

(iii) investors have no right to require their interests to be brought by the management company or any other person or to have their interests redeemed.”

34 As is apparent, the regulatory scheme for the particular kind of investment in issue in these proceedings, recognised the critical role of the taxation regime in such a scheme.

The Taxation Regime

35 The taxation advantages associated with expenditure on primary production which, in other areas of investment, would be treated as expenditure on capital account rather than on income account, is one of the most important characteristics of primary production schemes. This constitutes an important surrounding circumstance for the task of contractual interpretation.

36 A careful consideration of the Prospectus for each project, which are in relevantly identical terms, manifests the centrality of the taxation treatment associated with this investment.

37 First, the very characterisation of each investor as a “Farmer” with a licence over a particular allotment of land, described as a “Farm”, on which a certain number of tea trees will be planted, is itself a manifestation of the necessity for the person incurring the expenditure, to be personally characterised as a primary producer for purposes of the income tax legislation. The terminology of “farms”, “licences”, “licence agreements”, “allotments of land” turns on the necessity to give the investor this particular status.

38 On the very first page of the Prospectus there is a statement required, as I have pointed out above, by the ASC in order to grant exemption from the buy back requirements of the Law, that:

“Interests in the Project are likely to be illiquid as it is unlikely that a secondary market will exist for the securities offered by this Prospectus.”

39 As I have said, this consequence arises from the fact that the taxation benefits were of such significance that sale of the investment in a manner capable of creating a secondary market was not regarded as feasible. It is for this principal reason that, in the case only of tax driven primary production schemes, the ASC was prepared to grant an exemption from the buy back requirement in accordance with ASC PS 82 as outlined above.

40 On the second page of the Prospectus, in the letter from the Manager, the following appears:

“Under present legislation taxation deductions are available to Farmers carrying on the business of primary production for profit. Such deductions should be available to investors in this Project (see the Taxation Opinion from Arthur Anderson in Section 6).”

41 As Basten JA indicates, for an investor on the maximum marginal rate the flow of funds is such that, setting aside timing considerations, an investor has a small positive cash flow from making the investment. In this computation the tax deductibility of the original investment is the crucial component. There may be an upside from sales but, at least for borrowing investors who can rely on the indemnity, the downside is minimal, if any at all.

42 The taxation status of the scheme is set out at length in the Opinion from Arthur Andersen, annexed to the Prospectus. The Opinion refers to all of the basic documentation including the Project Deed, the Licence and Management Agreement, the Loan Agreement and the Indemnity Agreement.

43 The Opinion summarised the Loan Agreement, relevantly, as follows:

“This Agreement is optional and allows a Farmer to borrow $22,750 for each Allotment from the Lender for the purpose of assisting the Farmer to pay the initial management fees due under the Licence and Management Agreement. In addition, the Lender is to advance a further $1,854 per Allotment on 30 June 1998 (subject to compliance with the loan agreement) to pay the Licence and Management Fees for the year ending 30 June 1999.

The Farmer will be obliged to reduce the principal by the sum of $8,750 by:

(i) 31 October 1997; or

(ii) three (3) months after execution of the Loan Agreement (if entered into after 31 October 1997).

Upon execution of the Agreement, the Farmer is obliged to pre-pay the first year’s interest on the Principal at the rate of 8.5% per annum (ie $1,438). On or before 30 June 1998, the Farmer is also obliged to pre-pay the second year’s interest on the Principal at the rate of 8.5% per annum (ie $1,348).”

44 With respect to the Indemnity Agreement, the Arthur Andersen Opinion stated:

“The indemnity is only relevant and enforceable in the event that the Project is terminated due to:

(i) ‘Force Majeure’; or

(ii) The effluxion of time

and the Farmer has complied with the terms of the Licence and Management Agreement and the Loan Agreement and in particular the provisions relating to principal reductions and interest payments referrable to the first two years as set out above.”

45 The Arthur Andersen Opinion summarised the position as follows:

“Provided the horticultural activities are conducted in the manner described in the Licence and Management Agreement and the Project Deed, it is our view that:

Each Farmer will be carrying on a business of horticulture in respect of their Allotment(s);
A tax deduction is available pursuant to Section 51(1) of the Act in respect of expenditure incurred by each Farmer on licensing the Allotment and planting, supervision and maintenance of the trees;
The Farmer will be entitled to a deduction in the year the expenditure is incurred, being the year that the Farmer executes the Licence and Management Agreement and the outgoing of $23,850 (comprising $23,750 management fee and $100 licence fee) per Allotment is made. Where the Licence and Management Agreement is executed prior to 30 June 1997 and payment of $23,850 per Allotment is made prior to that date, the Farmer will be entitled to a deduction of $23,850 in the year ended 30 June 1997. Where the execution of the agreement and payment occurs during the year ended 30 June 1998 the deduction will be available in the year ended 30 June 1998;
The Farmer will also be entitled to a deduction for $1,854 in the year ended 30 June 1998 for the Licence and Management Fees for the year ended 30 June 1999 which are prepaid on 30 June 1998 from the further advance by the lender.
The Farmer will be entitled to an allowable deduction in the year of income ended 30 June 1997 of 1/365 of 13% of the cost of the germinated tea tree seeds, 13% of the costs of the germinated tea tree seeds for each of the next seven (7) years and the balance in the following year;
Interest charges incurred by a Farmer on funds borrowed to pay the amounts due under the Licence and Management Agreement will be tax deductible to the borrower pursuant to Section 51(1) of the Act in the year in which the interest expenditure is incurred;
The Farmer who enters into the Indemnity Agreement will be entitled to a deduction of 1/365 of 20% of the indemnity fee, 20% thereof in the next four years and the balance in the following year;
A Farmer can take the above tax deductions into account in determining whether to vary the Farmer’s quarterly instalments of 1998 provisional tax;
Pursuant to Section 25(1) of the Act proceeds from selling the tea tree oil in respect of each Allotment will be assessable income to the Farmer in the year that these proceeds are derived;
Any payment by the Indemnifier to the lender under the Indemnity Agreement is likely to be assessable income in the form of a constructive receipt by the Farmer;
Where a Farmer’s application money is refunded and the Licence and Management Agreement is not executed the Farmer has not incurred the expenditure and no tax deduction is available to the Farmer;
Pursuant to the terms of the Project Deed an amount refunded to a Farmer may include interest. In these circumstances the interest refunded, less any interest charges incurred by the Farmer on funds borrowed will be assessable income of the Farmer in the year in which the refund is made.”

46 The Arthur Andersen Opinion went on to outline the circumstances, in accordance with Taxation Rulings, in which expenditure would be regarded as deductible for primary production and concluded:

“We have reviewed the above rulings and in our view, provided the activities carried out by the Farmer are in accordance with the Licence and Management Agreement, each Farmer will be carrying on the business of horticulture in respect of their Allotment. This is on the basis that:

The requirements of the Licence and Management Agreement establish that the Project is carried out with a significant commercial purpose, and on a large scale;
The commercial nature of the project is also supported by the appointment by the Farmers of a professional manager with appropriate qualifications and experience to manage their horticultural operations. The ongoing duties and obligations that are contractually imposed upon the Manager over the life of the plantation provide clear indication of the repetitive nature of the activities and the organised business-like manner in which those activities are carried on;
Each Farmer has an interest in an identifiable area of land upon execution of the Licence and Management Agreement;
The Agricultural Report contained in the Prospectus confirms that:
(i) the horticultural operations carried on by each Farmer are comparable to ordinary horticultural operations,
(ii) subject to the normal risks associated with horticultural operations, the Project is expected to be commercially viable.

Farmers (both individually and collectively) maintain control over operations carried out on their land through the rights and powers contained in the Licence and Management Agreement and the Project Deed.”

47 The Arthur Andersen Opinion went on to deal with other aspects of the taxation treatment of other elements of the scheme.

48 Furthermore, the Opinion noted:

“In the event the Indemnity Agreement becomes operative for the reasons set out therein, a question may arise as to whether any tax consequences would arise for the relevant Farmer.

In our view, no consequences would arise under the Commercial Debt Forgiveness legislation for the reason that the debt would be extinguished by the Indemnifier agreeing to pay the Lender any relevant principal balance and such a transaction is not within those provisions.”

49 As is apparent from this observation, the structure of the scheme which interposes an Indemnifier between the Borrower and the Lender, was required by reason of this legislation.

50 With reference to the general anti-avoidance provisions of the taxation legislation the Opinion noted:

“Based on the financial projections prepared by the Manager, it is our opinion that it could not be concluded objectively that a Farmer was entering the Project for the dominant purpose of obtaining a tax benefit.

In particular, it could not be concluded objectively that a Farmer would have an expectation that the performance of the Project would be such that the provisions of Indemnity Agreement would be triggered. Rather it could reasonably be expected that a Farmer will repay in full the loan from the proceeds of the Project.”

51 There can be no doubt that the tax treatment, particularly the deductibility of the key items of expenditure, was an essential feature of the scheme.

The Relevant “Event”

52 The first issue of interpretation that arises is whether the vacancy in the office of trustee is an “event” for purposes of s2(d)(i) of the Indemnity Agreement. This turns only on whether or not the vacancy in the office of trustee falls within the words “any other causes beyond the control of”, relevantly, the Appellant.

53 I agree with Basten JA that the distinction which appealed to Young CJ in Eq between an “event” and a “cause” is unattractive. Something that is otherwise characterised as a “cause” can also be described as an “event”.

54 The effect of a vacancy in this office as a relevant event is twofold. First, it excuses each of the parties, beyond whose control the vacancy can be found to be, from performance of their duties and obligations by force of the Force Majeure clause itself. This is not, however, the relevant application of the “event”. This case is concerned with the manner in which cl 2 of the Indemnity Agreement picks up such part of cl 31(a) of the Licence and Management Agreement as describes “any event”.

55 The case law on force majeure clauses is not directly applicable because the cases involve the court applying the whole of the clause, not just the words identifying the triggering ‘events’, to use the language of the Indemnity Agreement.

56 The use of the word “other” in the phrase “any other causes beyond the control of the Farmer etc” does not, in my opinion, gives rise to the application of the ejusdem generis principle. There are well known limitations on the utility of the ejusdem generis principle, not least in commercial contracts. (See e.g. Chandris v Isbrandtsen-Moller Co Inc [1951] 1 KB 240 at 244-247.) I do not find it helpful to attempt to characterise the list of matters in cl 31(a). It is neither profitable nor, in my opinion, possible, to identify a “genus” of any kind in the list in cl 31(a). This is a case in which the general provision, namely “any other cause beyond the control of the” party, indicates the genus to which the identified matters belong. (See Ambatielos v Anton Jurgens Margarine Works [1923] AC 175 at 185-186; Crowe v Graham (1968) 121 CLR 375 at 388).

57 Accordingly, rather than reading down the words “any other causes beyond the control of” the party by reference to the preceding list of matters, it is the matters in the list which will be read down by reason of the general characterisation. Such events as “labour or employment difficulties” and “accidents” will only be relevant if they can be said to be “beyond the control of” the relevant party.

58 The position of the Trustee is, as my above analysis of the regulatory scheme shows, and the Project Deed confirms, an essential aspect of the entire project. The particular clause which created the vacancy was, as I have indicated above, an express requirement of the Regulations.

59 A vacancy in the office of Trustee is, from the point of view of a party not able to “control” the situation, as powerful as the most severe of the “external” events specifically listed in cl 31(a). Indeed, unlike some of those “events”, no question of fact and degree arises. The project cannot continue where there is a vacancy in this office for more than 60 days. It terminates by force of cl 46.4 of the Project Deed.

60 Counsel for the Second Respondent submitted that the case was not run at first instance on the basis that the mere vacancy in the office was the relevant event. It was conducted on the basis that the conduct of the Respondents which resulted in the vacancy was the relevant event. However, it was not suggested that the evidence or the defendants’ case would have been any different at trial.

61 The Appellant’s case focused on the First Respondent’s request under cl 37.1 of the Project Deed that the Trustee retire. Retirement was required upon receipt of the request and the vacancy was thereby created. Although his primary submission was that the relevant event was termination as a result of the conduct of OAL, the Appellant did consider the alternative of termination as a result of the vacancy. He submitted that Young CJ in Eq erred when he concluded that the vacancy for more than 60 days was not beyond the control of the Appellant.

62 The Second Respondent submitted that Young CJ in Eq correctly determined that the relevant event was termination as a result of the vacancy.

63 The Respondents’ submissions that this was not an “event described” in cl 31(a) of the Licence and Management Agreement for purposes of cl 2(d)(i) of the Indemnity Agreement should be rejected. I would also reject the submission of the Second Respondent that the vacancy is not “an event described” in cl 31(a) for the purposes of cl 2(d)(i) of the Indemnity Agreement. The words “beyond the control of” a party, constitute a ‘description’.

64 The vacancy in the office of Trustee which led to termination under cl 46.4 is, in my opinion, the relevant event. His Honour’s finding to that effect was correct.

Control of the Farmer

65 The second interpretation issue arises from the reference in cl 31(a) of the Licence and Management Agreement to the proposition that, the “event” must be a cause “beyond the control” of, relevantly the Farmer. The submissions in this Court on the part of the Respondents were to the effect that the Appellant could have taken steps to ensure the appointment of a new trustee. I proceed on the assumption that the Appellant bore the onus in this respect.

66 The way in which cl 31(a) of the Project Deed is picked up by cl 2(d) of the Indemnity Agreement has the effect that the words “beyond the control of” the Farmer are part of the description of an “event” for purposes of cl 2(d)(i) of the latter Agreement.

67 This was a publicly marketed investment scheme. The size of the investment required for each allotment was a comparatively small amount. No doubt it was expected that most investors would apply for more than one allotment. However, that was not a matter that impinges on the interpretation of a word such as “control”. The contracts have to be interpreted on the basis of each individual investment with respect to each of which a borrowing, and therefore an indemnity, may apply. It was not, in my opinion, the intention that each investor, drawn from as wide a range as the Prospectus sought, was to be regarded as having the capacity to take steps to appoint a replacement Trustee.

68 The right to appoint that Trustee is expressly granted to the management company, and, indeed, pending such appointment, the manager may, with ASC approval, act as Trustee. (See Project Deed cl 37.1, set out by Basten JA.)

69 Provision is made in the Project Deed for meetings of Farmers at which a resolution can be passed giving “directions” to the Manager (cl 33.9) provided, relevantly, that the resolution “relates solely to the management of the Project” (cl 41.22). I assume that a resolution requiring the Manager to appoint an identified Trustee under cl 37.1 would have been effective. In any event the Farmers would have had a right to make an application under s92 of the Trustee Act 1925, for the appointment of a new Trustee.

70 These mechanisms are of little moment when, as is the case here, there is no express obligation upon the Manager to tell Farmers that it has made a retirement request under cl 37.1, or even that the Trustee has retired and the 60 day vacancy period has commenced.

71 There is nothing to suggest that it was contemplated that, after retirement of a trustee, the diverse group of investors, let alone any one investor, could take steps to appoint a replacement, let alone that that was a matter within their “control”. The regulatory regime for prescribed interests which I have outlined above, was based on the need to protect investors who find it difficult to act collectively.

72 The “event” for purposes of cl 2(d)(i) constituted by the words “other cause beyond the control of the Farmer” in cl 31(a) refers to the Farmer as an individual. The word “Farmer” is defined in cl 1.1 of the Licence and Management Agreement to mean “the person described in Item 1 of the First Schedule”. There is no room for the application of the general cl 1.2(b) provision that the singular includes the plural. The text does not envisage collective conduct by the whole body of Farmers for the purposes of cl 31(a).

73 Subject to the Respondents’ submission that the phrase “beyond the control of” the Farmer should be given a narrow interpretation, the expiration of the period of 60 days without a new Trustee being appointed was, in my opinion, ‘beyond the control’ of the Appellant as an individual investor.

74 The Respondents place considerable emphasis on the proposition that the Australian Taxation Office (“ATO”) would not have approved that deductibility of the critical expenditures under the scheme if, as a matter of substance, the loans could be classified as “non-recourse loans”. They submit that the interpretation of the indemnity agreement for which the Appellant contends, which gives a wide meaning to “beyond the control”, is such that the scheme would, in substance, become one involving a non-recourse loan.

75 The Respondents contend that if the arrangements were such that there was not a significant degree of commercial risk on the part of each individual Farmer, having in mind the overall structure of the scheme, then the investors would lose the tax deductibility of the expenditure. Accordingly, the proper interpretation of each of the provisions that falls to be interpreted in the present proceedings should be approached from the perspective that it was intended to operate in the way which preserved the tax deductibility of the payments.

76 Specifically, the First Respondent submits that it would be wrong to construe cl 31(a) as if it simply said “any cause beyond the control of the Borrower”, because this would have had the effect of making the loans non-recourse. This was so, it was submitted, because the capacity of an individual Farmer to control activities and outcomes about the project was so limited that virtually everything was beyond the control of the individual investor. On this basis the First Respondent supported the interpretation of Young CJ in Eq, set out by Basten JA.

77 The First Respondent submits that tax benefits “would have been denied to the Farmers had their loans been effectively non-recourse because of the OAL indemnity operating in all circumstances beyond the control of the Farmers”. Numerous references to the evidence were relied upon in support of this proposition.

78 Furthermore, the First Respondent contends that, if the loans were non-recourse, this would attract the general anti-avoidance provision in Pt IVA of the Income Tax Assessment Act 1936. For this proposition the submissions relied on the judgment of the Full Federal Court in Federal Commissioner of Taxation v Sleight (2004) 136 FCR 211. This judgment was, of course, delivered well after the relevant event. However, Pt IVA was a matter that required consideration and, indeed, was considered in the Arthur Andersen Opinion contained in the Prospectus.

79 The Second Respondent made submissions to similar effect.

80 The Respondents’ submissions in this respect should, in my opinion, be rejected. A review of the evidence listed in par [11] of the First Respondent’s Submission in Reply do not support the contention. Nor does the judgment in FCT v Sleight. Even if it is appropriate to characterise the loan as “non-recourse” by reason of the breadth of the indemnity, which I do not accept, this characterisation is only one matter taken into account by the ATO in the evidence relied upon and in the reasoning in FCT v Sleight. Nothing suggests that it was determinative.

81 The ATO required investors to undertake significant commercial risk. Nothing in the materials relied upon suggests that the ATO required an investor to be at risk of loss by personal repayment of loans. In any event, there was part payment here. The investors did make two interest payments and a principal payment. This expenditure was at risk and the arrangement was, at least to that degree, unable to be characterised as “non-recourse”.

82 The “non-recourse” nature of a loan was one element in a multi-factorial analysis undertaken by the ATO. It was not the only commercial risk of concern to the ATO.

83 Similarly, the application of Pt IV in FCT v Sleight was directed to determining whether tax avoidance was the dominant purpose of the claimed deduction. This also involved a multi-factorial analysis in which an indemnity/loan arrangement of the kind presently under consideration was one factor but was not determinative. Indeed the reasons of the Court hardly mention it, let alone emphasise it. In any event, the decision was given several years after the investments in issue in these proceedings.

84 Amongst the documents said by the First Respondent to support its contention was the letter from the ATO to the Second Respondent which indicated that tax deductions would be permitted. This correspondence occurs after the investment was made but nevertheless indicates the kind of issues known to arise in this context.

85 The ATO stated, relevantly:

“You are advised that the management fees are commercially based. It is noted that the participants pay the management fees by taking out a loan from Agricultural and Rural Finance Pty Ltd. The round robin arrangements, the indemnity and the borrowing by OAL from other sources to fund the activities are of some concern. However, in looking at the substance of the financial arrangements, it is possible to see that substantial real funds have been made available to the manager to undertake the necessary activities and the Participants bear some real financial risks.

444 He said that he based his decisions to invest in October 1997 and March 1998 on Mr Lloyd’s statements at the investment seminar (1/13 para 39; 1/16 para 54). In other words he based his decisions on the availability of loan funds and the protection he thought was conferred by the indemnity and not on representations in the prospectus.

445 In his second and last affidavit of 10 May 2005 (1/36), two and a half months before the trial, he referred to para 7 of his earlier affidavit and said (para 2) that, in addition to the matters then referred to, he noted when he read the original prospectus another five matters which included the alleged funds subscribed representation (1/36 para 2)). He said, (1/37 paras 3, 5) consistently with his pleading (para 34, Red 73) that these five matters caused him to understand that the funds subscribed would be spent by OAL on the project and for no other purpose.

446 Of the five additional matters only the alleged funds subscribed representation remains relevant.

447 He referred (para 6) to eleven matters he had been asked to assume were true, and said (para 7) that he had been aware of those matters he would not have made any of the investments.

448 The eleven matters included four (para 6(h) to (k)) which post-dated his investments in Project 1 and are not relevant to this part of his case.

449 Other matters (para 6(d), (e)) related to payments allegedly made by OAL to GCC, Endwise and the Commonwealth Bank recorded in annexure C to his affidavit (1/42). None of these payments before April 1998 were proved (paras [437]-[440]). The matters assumed in para 6(f), and (g) did not occur prior to the appellant’s last investment in Project 1 in March 1998.

450 The remaining matters (para 6)(a), (b), (c)) related to the repayment understanding in June 1997, the letters, and OAL’s accounts for the year ended 30 June 1997 which recorded these “liabilities” to GCC and Endwise. These did not falsify the alleged funds subscribed representation because the arrangement contemplated “repayment” after 30 June 2000 out of OAL’s general cash flow, more than two years after the appellant’s last investment in this Project in March 1998.

451 The matters listed in para 6 of the second affidavit (para [447]) did not include the ARF funding arrangements.

452 The appellant explained (1/39 par 8) why he would not have made his investments if he had known of these matters, saying that the letters and the repayment understanding were contrary to his belief that the Project had the backing of the Cassegrain family, and the letters would have raised concerns about the financial viability of OAL and the family.

453 In determining questions of reliance, in contexts such as this, an appellate court has regard to the direct evidence of the investor, the findings of the trial judge, and the probabilities based on the circumstantial evidence. Evidence of the former kind is entitled to little weight, especially when the investor has been rejected as a reliable witness on other questions. The circumstantial evidence includes the materiality of the matters which were misrepresented or not disclosed.

454 The problem of proving reliance and inducement in a prospectus case based on non-disclosure is not a new one. In Cackett v Keswick [1902] 2 Ch 456, 463-4 Farwell J said:

“Now, it cannot be enough for a man to swear that he would not have entered into the contract if he had known something that was concealed from him. It is easy to be wise after the event, and many men can honestly persuade themselves when a company has failed that they would have been influenced by a circumstance which in all probability would have made no impression whatever on their mind when considering an investment or speculation. The test must be, is the omission material? And if the Court sees that the fact is of such a nature that it might reasonably deter, or tend to deter the ordinary investor … this is sufficient. It is in great measure an inference of fact to be drawn … from the circumstances of the case.”

455 Recapitulating to this point:

(a) In his first affidavit, 7 years after the October 1997 investment, the appellant said he relied on the Lloyd representation at the investment seminar (para [443]).

(b) He then identified 17 matters in the original prospectus which had caught his attention. None of them related to the ARF funding arrangements or the falsity of the alleged funds subscribed representation.

(c) In his second affidavit he identified a further 5 matters which he noted. Only the alleged funds subscribed representation remains relevant (para [445]).

(d) He referred to 11 matters and said that if he had known about them he would not have made investments in Project 1 (paras [447]-[452]).

(e) They did not include the ARF funding arrangements (para [451]). The appellant submitted otherwise in his written submissions in reply (para 57) but the evidence referred to (Blue 1/39) does not support the submission.

456 OAL maintained both Projects until 6 November 2001 when it advised the Trustee that it no longer had the financial resources to continue operations (Blue 8/3021). The Trustee advised the investors on 22 November (8/3024-7).

457 The appellant did not plead or prove that OAL had failed to comply with its obligations as manager under the Licence and Management Agreement (2/824, 836) before 6 November 2001. Its obligations included conducting “the Farmer’s business in a proper and efficient manner”, involving land preparation and planting, the harvesting and processing of trees, and the marketing of the tea tree oil (2/837-9). The appellant inspected the plantation with Mr Lloyd in March 1998 and was satisfied with what he saw.

458 The original prospectus (2/512) stated that the developers assumed a base price for Australian tea tree oil of $55.00 a kilo in 1997 increasing at a rate of 4% per annum. However by early 2001 the price had fallen to $15.00 a kilo with no prospect of a recovery beyond $20.00 a kilo (Judgment paras [117]-[118], noting that the prices were per kilo and not per tonne).

459 The original prospectus assumed that the Projects would pay their way without further funding from OAL or the investors once the trees could be harvested 15-24 months after planting (2/455). The dramatic collapse in the market price for tea tree oil falsified this expectation (Judgment paras [134], [184]). The falsity of the alleged funds subscribed representation and the ARF funding arrangements would not have affected the viability of the Projects if the market price had remained near the level forecast. This representation was not material at the time.

460 If the price had held up OAL’s intention (formed on the evidence in June 1997) of making voluntary payments after 30 June 2000 from its cash flow would not have mattered. In any event OAL could have made loans to GCC instead of voluntary payments, and the effect on OAL’s cash flow and assets would have been much the same.

461 The budget in the original prospectus (2/545) showed how OAL intended to spend the funds subscribed assuming the minimum of 50 or the maximum of 400 farms were “sold”. The budget in the latter case was as follows:

Maximum Subscription (400 Farms)

Expenditure Items
(All amounts in $’000s)

Manager & Related Parties
Non-Related
Expenses

Total

Fund Raising-950950

Project Design & Approvals-120120

Drainage, Hydrology & Land Preparation2501,2901,540

Seedling Maintenance & Planting1,6008002,400

Irrigation150-150

Administration & Management640-640

Plantation Maintenance750-750

Research & Development600-600

Contingency, Profit & Risk2,350-2,350

Totals6,3403,1609,500

462 The maximum subscription would raise $9.5 million, of which $2.35 million (or 24.7%) would represent the provision for contingencies and OAL’s profit and risk (provision for profit etc). The original prospectus stated that this would be spent as required to meet any unforeseen costs or variation in costs. Nothing was said about the consequences of a dramatic fall in the price of tea tree oil. The figures in the other section of the table projected a provision for profit etc of $133,000.00 or 20.2% if only the minimum number were sold.

463 In the result 140 farms were “sold” (Blue 2/457H) to produce subscriptions totalling $3,325,000.00. OAL’s provision for profit etc at the rate of 24.7% of this figure would be $821,275.00, and at the rate of 20.2% would be $671,650.00. Each figure is more than the reduction of $514,326.00 in GCC’s loan account on 30 June 1998.

464 The alleged funds subscribed representation based on par 8.1 of the original prospectus (2/543) did not state that the funds would not be spent for any other purpose. The statement was in general terms, and the negative relied on by the appellant has to be implied. The representation in par 8.9 which included the table, was detailed and comprehensive. It made it clear that the whole of the funds subscribed would not necessarily be spent on providing the contractual services. A reasonably careful reader would pay more attention to the detailed representation but, in any event, the two representations must be read together, and the composite representation excludes any negative that might otherwise be implied in par 8.1 if it stood alone.

465 OAL was entitled to use the funds representing the provision for profit etc as it saw fit provided it established and maintained the Project until the tea trees could be harvested. The composite representation of OAL’s intention would not be falsified by its intention after 27 June 1997 of making voluntary payments out of the provision for profit etc. Moreover OAL did not make the alleged funds subscribed representation (“and for no other purpose”) in the original prospectus that the appellant claimed to have relied on (para [445]).

466 When the appellant made his investment in Project 1 he would not know how many farms OAL would “sell” in this Project above the minimum subscription of 50. The latter must have been achieved, to his knowledge, before 30 June 1997 because his wife’s subscription was retained. The appellant would not know what funds OAL should have had in hand as its provision for profit etc.

467 The appellant and his wife invested in seven farms in Project 2 on 25 June 1998, and he invested in a further two farms on 10 May 1999. The appellant received a copy of the original prospectus for Project 2 (3/1148) which included a report of the investigating accountant (3/1214-20) and read it in June 1998 (1/18). The report contained the accounts of OAL and ARF as at 30 June 1997. The OAL accounts disclosed (1218) the loan accounts totalling $780,751.00 and the management fee of $286,000.00 charged by GCC. They also disclosed (1217) receivables from ARF of $1,058,750.00 (current) and $1,391,250.00 (non-current). The ARF accounts disclosed these amounts as liabilities (1220) and assets which included non-current “loans to investors” of $1,694,000.00.

468 A person of commercial experience who read the accountant’s report with a minimum of attention who regarded the alleged funds subscribed representation as material could not fail to notice that OAL had lent funds subscribed by investors to ARF which had used them to fund loans to other investors.

469 The prospectus and supplementary prospectuses for Project 2 (herein together the second prospectus) did not include OAL’s accounts at 30 June 1998 (Blue 5/1958). However the appellant, as an investor in Project 1, received those accounts in September 1998 when he read them (Blue 1/19). It was not suggested that they did not properly disclose OAL’s financial position as at 30 June 1998.

470 These accounts, which also disclosed the position as at 30 June 1997, would have revealed to the appellant, had he been interested, that as at 30 June 1997 OAL had liabilities to GCC and Endwise, that GCC had charged a management fee of $286,000 to OAL, and that both companies had become financially interested in Project 1. They would also have revealed that $741,000.00 had been paid to GCC during the year ended 30 June 1998, and had not been spent on providing the services described in the Management and Licence Agreements.

471 These disclosures in the second original prospectus and the 1998 accounts provoked no complaint from the appellant, and did not deter him from making his investments in Project 2 on 25 June 1998 and 10 May 1999. If he appreciated the significance of the matters disclosed he did not consider them to be material. If he did not appreciate their significance it must have been because he was not sufficiently interested in the accounts to study them with any care.

472 The Judge said (para [179]) that he was not prepared to find that repayment of part of the loans by OAL during the 1998 financial year “had any effect whatsoever on Mr Gardiner’s decision to invest”. This finding cannot be disturbed.

473 The appellant did not state in his affidavits that the ARF funding arrangements were a matter, which, if disclosed in the prospectus would have caused him to decide against making these investments (para [455(e)]). This omission is understandable given the disclosures in the second original prospectus

474 On the whole of the evidence the probabilities are that the appellant invested in both Projects because of the tax benefits they offered, the loans, the indemnities and the commercial prospects of tea tree oil at the time. His decision to invest in seven farms in Project 2 on 25 June 1998 soon after the decision of the Taxation Office on 9 June to accept the 1997 tax deductions for Project 1 is proof of this.

475 Although it appears that the ARF funding arrangements falsified the composite funds subscribed representation from the outset, the appellant did not plead reliance on the composite representation. He only relied on the alleged funds subscribed representation (“and for no other purpose”) (para [445]).

476 The appellant said in terms in his second affidavit that had he known about the letters, the repayment understanding and the GCC repayments they would have made him aware that the alleged funds subscribed representation. He did not refer to the ARF funding arrangements for this purpose. The matters he relied on did not falsify the composite representation and there was no direct affidavit evidence from the appellant that disclosure of the ARF funding arrangements would have changed his investment decisions (paras [451]-[455(e)].

477 I have not been persuaded that the Court is entitled to find, and should find, that the appellant relied on the alleged funds subscribed representation, assuming that had been proved, when making his investments in Project 1 and I am not prepared to infer that disclosure of the ARF funding arrangements would have affected his decisions to invest. For these reasons his appeal in respect of the first prospectus case fails and must be dismissed.

The second prospectus case against OAL

478 The original second prospectus included OAL’s accounts at 30 June 1997 as part of the report of the investigating accountants (3/1214-20). This revealed that as at that date OAL had a non-current liability by way of loan from GCC and Endwise of $780,751.00 and GCC had charged it a management fee of $286,000.00 (Blue 3/1214-8).

479 The cross-claim pleaded (para 33, Red 72) that the second prospectus failed to disclose the following:

(a) That the ‘loan’ by GCC to OAL described as a non-current liability as at 30 June 1987 had been partly repaid before the date of the second prospectus.

(b) That the repayment was ‘in breach of’ the arrangement recorded in the letters.

(d) That GCC was in financial difficulties and dependent on funding from OAL to meet its obligations.

(e) The ARF funding arrangements.

480 Paragraph 33 of the cross-claim also pleaded that the non-disclosure of these matters made the second prospectus and the representations pleaded in para 27 false and misleading.

481 The following statements in the original second prospectus (para 27, Red 57-8) were alleged to be false and misleading or misleading and deceptive: (paras 33, 37, Red 72-3, 74):

(a) The alleged funds subscribed representation (para 26(c) incorporated in para 27(a)).

(b) Except as disclosed, no interest existed in the Project for the benefit of any promoter (para 26(d) incorporated in para 27(a)).

482 The appellant read the second prospectus (Blue 1/17-19).

483 Inducement and reliance were pleaded in paras 34-6 (Red 73-4). Para 34 alleged that the appellant believed the alleged funds subscribed representation. Para 35 alleged that if the repayment understanding, the GCC repayments in breach of the arrangements in the letters, early repayment of the loan accounts because GCC was in financial difficulties, and the ARF funding arrangements had been disclosed in the prospectus for Project 1, the appellant would not have invested in Project 2.

484 Paragraph 36 alleged that if the second prospectus had disclosed any one or more of the matters referred to in para 33 (para [479]) the appellant would not have invested in Project 2.

485 Paragraph 38 alleged that by reason of the matters pleaded in para 33 (para [479]) which were not disclosed in the second prospectus, the representations alleged in para 27 of the cross-claim (para [481]) were misleading or deceptive.

486 The failure of the appellant’s first prospectus case means that his second prospectus case based on the deficiencies in the first prospectus must also fail.

487 The appellant’s second prospectus case repeated in respect of that prospectus a number of the allegations of misrepresentation and non-disclosure made in the first prospectus case. They were:

(a) the ARF funding arrangements,

(b) the alleged funds subscribed representation,

488 The appellant’s first prospectus case having failed his allegations in respect of the same deficiencies in the second prospectus must share the same fate.

489 There remains for consideration a number of new claims (para [479]) based on payments by OAL to GCC and the falsification of statements in the second prospectus about OAL’s non-current liability to GCC, that it was alleged should have been disclosed but were not.

490 There was no evidence that any payment or payments were made by OAL to GCC before 25 June 1998 (paras [437]-[440]), and the claims in respect of the investment on 25 June 1998 which depend on such a payment having been made must fail.

491 The appellant’s affidavit evidence of the reasons for his decision to invest in Project 2 was confined to paras 68 and 77 of his first affidavit (1/18, 19, cf 1/37 paras 3-5). These were as follows:

“68 After satisfying myself that the structure of Project 2 mirrored that of Project 1 including the availability and operation of the Indemnity, I decided to invest in Project 2.

…

77 Based on my understanding of the terms of the Prospectus and Supplementary Prospectuses for Project 2, including that the structure of Project 2 mirrored that of Project 1, and my understanding of the advantages of the Project which I referred to … above, I decided to invest in an additional two farms in Project 2.”

492 OAL’s accounts as at 30 June 1998 disclosed the “debt” to GCC as a current liability, GCC’s loan account as at 30 June 1997, the reduction in the “debt” during the 1998 financial year, and the use of funds subscribed by investors for this purpose.

493 The matters it was claimed should have been disclosed occurred before the appellant’s last investment in Project 2 in May 1999.

494 However those matters were disclosed either in the original second prospectus or OAL’s 1998 accounts (Blue 5/1958) or both. As already mentioned (para [482]) the appellant read the original second prospectus in June 1998 (1/18) and as an investor in Project 1, received and read a copy of the 1998 accounts in September 1998 (Blue 1/19).

495 For the reasons already given (paras [467]-[471]) his knowledge of the existence and contents of the original second prospectus and these accounts compels a finding that he has not established that the matters now complained of were material to his decision to invest and were relied on by him when he made his investments in Project 2. Indeed his failure to react to the information in the original second prospectus and the 1998 accounts throws light on the whole of his case in respect of both prospectuses. For these reasons his appeal in respect of the second prospectus case fails and must also be dismissed.

496 I agree with Orders 1, 4, 5 and 6 as proposed by Basten JA. I would have given judgment for the first Respondent against the Appellant for the amounts due in respect of the first and second loan agreements in addition to the amount of $31,616.35 due under the Fourth Agreement, together with interest. I also agree that the Appellant’s cross-claim should be dismissed but I would have made different orders for costs in this Court and the Equity Division. I agree that the First Respondent should have a certificate under the Suitors Fund Act if not disqualified.

**********

Reported Decision:	(2008) 251 ALR 322(2008) 83 ALJR 196(2009) 25 BCL 112
Appeal Outcome:	Special leave granted by the High Court - 18 April 2008

CITATION:	GARDINER v AGRICULTURAL AND RURAL FINANCE PTY LTD [2007] NSWCA 235
HEARING DATE(S):	19-22 February 2007
JUDGMENT DATE:	6 September 2007
JUDGMENT OF:	Spigelman CJ at 1; Basten JA at 142; Handley AJA at 356
DECISION:	(1) Allow the appeal and set aside orders 1-6 made in the Equity Division on 11 April 2006 with respect to the Appellant. (2) Give judgment for the First Respondent (Agricultural and Rural Finance Pty Ltd) against the Appellant (Bruce Walter Gardiner) in an amount of $31,616.35, together with interest, but otherwise dismiss the Summons in the Equity Division. (3) Dismiss the Appellant’s cross-claim with no order as to costs. (4) Dismiss the First Respondent’s cross-appeal against the Appellant. (5) Dismiss the Second Respondent’s cross-appeal against the Appellant. (6) Dismiss the First Respondent’s motion of 7 November 2006 to amend the Summons filed in the Equity Division. (7) Order that the First Respondent pay 50% of the Appellant’s costs of the proceedings in the Equity Division. (8) Order that the First Respondent pay 50% of the Appellant’s costs of the appeal and in respect thereof grant the Second Respondent a certificate under the Suitors’ Fund Act 1951 (NSW) if not disqualified pursuant to s 6(7) thereof.

CATCHWORDS:	CONTRACT – general contractual principles – construction and interpretation of contracts – consideration of surrounding circumstances – relevance of regulatory scheme – prescribed interests – Corporations Law Pt 7.12 CONTRACT – general contractual principles – construction and interpretation of contracts – relevant event for purposes of indemnity agreement – distinction between ”cause” and “event” – issue is immediate rather than ultimate cause CONTRACT – general contractual principles – construction and interpretation of contracts – force majeure – “beyond the control of” – mere commercial impracticability not sufficient CONTRACT – general contractual principles – construction and interpretation of contracts – “punctuality” – waiver – acceptance of late payment EQUITY – general principles – misrepresentation – reliance on representation – weight given to ex post facto claims of reliance – loss or damage “by “ misrepresentation – Corporations Law s 1005
LEGISLATION CITED:	Australian Securities and Investments Commission Act 2001 (Cth), ss 12DA, 12DB, 12GH Corporations Act 2001 (Cth), Ch 5C Corporations Law, ss 762, 995, 996, 1005, 1006, 1023B, 1024, 1024A, 1024B, 1067, 1069, 1325, 1454, Pt 7.11, Div 5 of Pt 7.12 Income Tax Assessment Act 1936 (Cth), Pt IV, Pt IVA Trade Practices Act 1974 (Cth), ss 51A, 52, 75B, 82, 84 Trustee Act 1925, s 92
CASES CITED:	Ambatielos v Anton Jurgens Margarine Works [1923] AC 175 Andar Transport Pty Limited v Brambles Limited (2004) 217 CLR 424 Ankar Pty Limited v National Westminster Finance (Australia) Limited (1987) 162 CLR 549 Ayoub v Euphoric Pty Limited [2004] NSWCA 457; 12 BPR 22, 735 BI (Contracting) Pty Limited v AW Baulderstone Holdings Pty Limited [2007] NSWCA 173 Bowtell v Goldsborough Mort & Co Limited (1905) 3 CLR 444 Cackett v Keswick [1902] 2 Ch 456 Chandris v Isbrandtsen-Moller Co Inc [1951] 1 KB 240 CIC Insurance Limited v Bankstown Football Club Limited (1997) 187 CLR 384 Codelfa Constructions Pty Limited v State Rail Authority of NSW (1982) 149 CLR 337 Coghlan v S. H. Lock (Aust) Ltd (1987) 8 NSWLR 88 Colliers Jardine Pty Limited v Castle Mall Properties Pty Limited [2005] NSWCA 311 Crowe v Graham (1968) 121 CLR 375 Davis v Commissioner for Main Roads (1968) 117 CLR 529 Federal Commissioner of Taxation v Sleight (2004) 136 FCR 211 F D Normoyle Pty Limited v Transfield Pty Ltd (2005) 63 NSWLR 502 Finch v Underwood (1876) 2 Ch D 310 Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd (1957) 59 SR (NSW) 122 Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 Glebe Island Terminals Pty Ltd v Continental Seagram Pty Ltd (1993) 40 NSWLR 206 The Glendarroch [1894] P 226 Global Funds Management (NSW) v Rooney (1994) 36 NSWLR 122 Global Sportsmen Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82 Halford v Price (1960) 105 CLR 23 Hancock v Williams (1942) 42 SR(NSW) 252 Henville v Walker (2001) 206 CLR 459 House of Peace Pty Limited v Bankstown City Council (2000) 48 NSWLR 498 HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640 Hyundai Merchant Marine Co Limited v Dark Brook Coal (Sales) Pty Limited [2006] FCA 1324 I&L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109 K & S Lake City Freighters Pty Limited v Gordon & Gotch Limited (1985) 157 CLR 309 Kenyon, Son & Craven Ltd v Baxter Hoare & Co Ltd [1971] 1 WLR 519 Leeds & Hanley Theatre of Varieties v Broadbent (1898) 1 Ch 343 Lion Nathan Australia Pty Limited v Coopers Brewery Limited (2005) 223 ALR 560 Lion Nathan Australia Pty Limited v Coopers Brewery Limited (2006) 156 FCR 1 MacDonald v Robins (1954) 90 CLR 515 Maggbury Pty Limited v Hafele Australia Pty Limited (2001) 210 CLR 181 Mayer v Isaac (1840) 6 M&W 605; 151 Eng. Rep. 554 McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579 Minister for Immigration and Ethnic Affairs v Teoh (1995) 183 CLR 273 National Roads and Motorists’ Association v Whitlam [2007] NSWCA 81 Network Ten Pty Limited v TCN Channel Nine Pty Limited (2004) 218 CLR 273 Pacific Carriers Limited v BNP Paribas (2004) 218 CLR 451 Parkes Management Ltd v Perpetual Trustee Co Ltd (1977) 3 ACLR 303 P J Van Der Zijden Wildhandel N.V. v Tucker & Cross Limited (1975) 2 Lloyd’s Rep. 240 Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 335 Provimi Hellas AE v Warinco AG [1978] 1 Lloyds Rep 373 (CA) Provincial Insurance Australia Pty Limited v Consolidated Wood Products Pty Limited (1991) 25 NSWLR 541 R v Wilson; Ex parte Kisch (1934) 52 CLR 234 Rava v Logan Vines Pty Ltd [2007] NSWCA 62 Repatriation Commission v Vietnam Veterans’ Association of NSW Branch Inc (2000) 48 NSWLR 548 Ricochet Pty Ltd v Equity Trustees Executors and Agency Company Ltd (1993) 41 FCR 229 Rosenberg v Percival (2001) 205 CLR 434 Siqueira v Noronha [1934] AC 332 South Sydney Council v Royal Botanic Gardens [1999] NSWCA 478 Sperry Rand Australia Limited v Arrandale Properties Pty Limited [1979] VR 409 Sykes v Reserve Bank of Australia (1998) 88 FCR 511 Toll (FGCR) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165 Travel Compensation Fund v Tambree (2005) 224 CLR 627 Vidler & Co (London) Ltd v R Silcock & Sons Ltd [1960] 1 Lloyd’s Rep 509 Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 Way v Hearn (1862) 11 CB (NS) 774; 142 Eng. Rep. 1000 Wilkie v Gordian Runnoff Ltd (2005) 221 CLR 522 Wilson v Stewart (1889) 15 VLR 781 Wilson v Zealandia Soap and Candle Trading Co Ltd [1928] G.L.R. 120 J W Carter and David Yates “Perspectives on Commercial Construction and the Canada SS Case” (2004) 20 J of Contract L 233 at 235-237 Nuncio D’Angelo “The Indemnity: It’s All in the Drafting” (2007) 35 ABLR 93 at 96-102 Daniel Gosewitch “Difficulties with Indemnities Between Business Entities” (2006) 34 ABLR 89 at 96 Lewison, “The Interpretation of Contracts” (3rd ed, 2004) at [12.02] E. McKendrick, “Force Majeure and Frustration of Contract” (2nd ed, 1995) James O’Donovan and John Phillips “Modern Contract of Guarantee” Thompson Law Book Co loose leaf service at [5.100]. G. Treitel, “Frustration and Force Majeure” (1994) Sir Guenter Treitel, “Frustration and Force Majeure” (2004, 2nd ed) at 309 Spencer Bower, Turner & Handley “Actionable Misrepresentation” 4th ed 2000 pp12-13 Australian Securities Commission Policy Statements: PS 23 Approval of Deeds Relating to Prescribed Interests PS 55 Covenants in Deeds PS 82 Covenants in Deeds: Non-Mining Primary Production Schemes PS 89 Trustees and Representatives – Approvals for Prescribed Interest Schemes PS 90 Related Party Trustee Approvals
PARTIES:	Bruce Walter Gardiner – Appellant Agricultural and Rural Finance Pty Ltd – First Respondent Oceania Agriculture Pty Ltd – Second Respondent
FILE NUMBER(S):	CA 40232/06
COUNSEL:	R. Smith SC/M. Jones – Appellant S. Robb QC/C. Bevan – First Respondent G. Inatey SC/G. Ellis – Second Respondent
SOLICITORS:	Clayton Utz – Appellant Evangelos Patakas & Associates – First Respondent Colin Biggers & Paisley – Second Respondent

LOWER COURT JURISDICTION:	Supreme Court
LOWER COURT FILE NUMBER(S):	SC 50063/03
LOWER COURT JUDICIAL OFFICER:	Young CJ in Eq
LOWER COURT DATE OF DECISION:	29 March 2006
LOWER COURT MEDIUM NEUTRAL CITATION:	[2006] NSWSC 202