Hull v Brailey
[2012] NSWSC 980
•04 September 2012
Supreme Court
New South Wales
Medium Neutral Citation: Hull v Brailey [2012] NSWSC 980 Hearing dates: 2-6, 9, 10, 12 and13 July 2012 Decision date: 04 September 2012 Jurisdiction: Common Law Before: Grove AJ Decision: Judgment for the defendants.
Catchwords: FINANCIAL ADVISOR - investments by clients - alleged negligence and breach of statutory duty Legislation Cited: Australian Securities and Investments Commission Act 2001
Corporations Act 2001Category: Principal judgment Parties: Richard Kenneth Hull (First plaintiff)
Richard Kenneth Hull and Lainie Hull ATF the R&L Superannuation Fund (Second plaintiff)
Lainie Hull (Third plaintiff)
Edmund Francis Brailey (First defendant)
TJC Financial Planning Pty Ltd (Second defendant)Representation: Counsel:
Mr MS White of counsel with Mr PM Afshar of counsel (Plaintiffs)
Mr TGR Parker SC with Mr CG Carroll of counsel (Defendants)
Solicitors:
McCabe Terrill Lawyers (Plaintiffs)
Holman Webb Lawyers (Defendants)
File Number(s): 2009/00297894
Judgment
The plaintiffs in this action are Mr Richard and Mrs Lainie Hull in their personal capacities and as trustees for the R&L Hull Superannuation Fund ("the Super Fund"). The defendants are Mr Edmund Brailey and TJC Financial Planning Pty Ltd ("TJC"). Mr Brailey was an accountant in a practice styled Brailey Fenton Lane and Co. In about June 2003, TJC, then and at times relevant to this action titled BFL Financial Planning Pty Ltd ("BFL"), obtained an Australian Financial Services Licence and, for the purposes of ss 716A and 916A of the Corporations Act, Mr Brailey was its authorised representative in the exercise of that licence.
Richard Hull was, and is, the Managing Director of Ateco Pty Ltd, which I understand to be in effect a wholesale importer of various makes of motor vehicles which will ultimately be sold to the public through retail distributors. Lainie Hull did not engage in paid employment and I shall later refer to her activities as a share trader and investor.
For some years, Mr Fenton, a partner in the accounting practice, had attended to their income tax returns and a social relationship between them had also developed. Toward the end of 2003, the Hulls were unhappy with the administration of the Super Fund and were also aware of the likelihood of a very large future payment to Richard Hull from a profit sharing arrangement with his employer. This arrangement was described in evidence from time to time as a bonus. The matters were raised with Mr Fenton, who referred them to Mr Brailey.
The causes of action are focussed upon investments in managed investments schemes ("MIS") in agricultural ventures made on the advice of BFL. The Hulls dealt with Mr Brailey or with employees of BFL who acted at his direction. In May 2004, Mr Hull and the Super Fund invested in Timbercorp 2004 Almond and Table Grape projects and Mr Hull invested in the Gunns' Wine Grape project. In April 2005, Mr Hull invested in the Timbercorp 2005 Almond project and he and the Super Fund invested in the Timbercorp 2005 Table Grape project.
It is not presently necessary to detail every aspect of the way the investments operated but, broadly, an investor paid an amount for which he became a sublessee of a defined portion of a hectare of an almond orchard or a vineyard and thereafter he was committed to payments for the nurture of the crop and the anticipated harvesting of the crop costs. They were long-term projects and returns were not anticipated until after the effluxion of years.
Of critical significance, however, was the issue of an Australian Tax Office ruling enabling a taxpayer to make a deduction of the upfront investment in an MIS in calculating assessable income in a given year. Also, if borrowings were made for the purpose of investment, interest paid would ordinarily be deductible. The potential advantage, therefore, of such investment to a person such as Mr Hull who, in addition to a substantial salary, was going to receive a very large distribution of profit share, becomes self-evident.
Neither Mr nor Mrs Hull had any farming experience but no adult could be ignorant of the existence of risks attaching to agriculture, particularly in Australia which was notoriously, and accurately, described by the poetess as a "land of droughts and flooding rains". As well, any crop anywhere could fall victim to plant disease, blight, insect attack or the like although, of course, steps to guard against such matters can be taken, but it could not be imagined by anyone that an agricultural crop could be rendered absolutely invulnerable.
I infer that this basic general knowledge must have been possessed by the Hulls. An expert financial advisor called by the plaintiffs, Mr Wall, sought to convey a condemnation of managed agricultural schemes and I could not fail to observe what I can only describe as a sneer as he uttered the word "scheme" when using the expression "managed investment scheme". However, he acknowledged that the tax ruling, in particular, had made such investment very popular. In context, this must mean that it was popular with advisors of reasonable competence. The evidence manifests some figures to confirm this popularity. There are reports published by the Australian Agribusiness Group which reveal elevating total investments amounting in financial year ending 2003 to $345 million, 2004 to $665 million and 2005 to $1,024 million.
Assuming that the tax ruling is likely to have been a large factor in this seemingly remarkable rise, I would nevertheless reject the inference apparently sought to be conveyed by Mr Wall that a financial advisor would be imprudent to recommend such investment. In saying this I do not overlook his minor concession that in a spread of investments a small proportion of such might be acceptable. Of course, I cannot know whether all investors in MIS relied upon financial planning advice but I would not conclude that the investors who contributed were all doing so without it.
The central complaint of the plaintiffs is that losses were incurred upon these investments and that, had they been advised prudently by BFL and Mr Brailey, they would not have concentrated on investing in agribusinesses and would have received advice spreading their investments with consequent amelioration of the losses which they claim to have suffered. That general observation should be understood with the qualification that an issue exists between the parties as to whether advice was sought primarily concerning taxation liability or for overall financial planning. To deal with the pleaded causes of action, it is necessary to consider the claimed inexperience as investors put forward by Mr and Mrs Hull.
As is revealed in the foregoing, Mr Hull is a highly paid executive and I have no reason to doubt that this reflects his abilities in the motor industry in which he has been involved both in Australia and overseas for most of his working life. In an affidavit, Lainie Hull deposed that Mr Brailey had commented to her on several occasions that he had "not seen anyone so disinterested in their own finances as Ric".
The evidence shows that he was not entirely uninterested in the processes. Product disclosure statements were supplied and he assessed the sections that he considered significant and read them. In a conversation in 2005 he spoke to Mr Marksteiner, an employee of BFL, about a proposed investment and described it as not suiting his strategy. He, and Mrs Hull, were obviously aware that BFL had not been retained to manage their investments as distinct from providing advice. They gave instructions for each investment and, as later events showed, they knew they had the authority to decline tendered advice and in fact did so.
Although, as I have said, I do not conclude that Richard Hull excluded himself from participation in relevant decision-making, the evidence demonstrates that Mrs Hull was far more active in gaining experience and knowledge about financial matters. She deposed that her response to a comment of Mr Brailey was along the lines of saying to him "That's why we have you" and in her evidence she responded frequently to questions by what became a mantra of repeating "We relied on Mr Brailey".
Some investigation in particular of Mrs Hull's experience in financial matters is necessary as the plaintiffs' arguments involve assertions that they "were naïve and inexperienced enough to trust Mr Brailey and rely on his advice".
Advice was not sought in regard to all the plaintiffs' financial activity. It was not suggested that advice was sought concerning the purchase of a flat at Port Douglas which was intended to be the subject of holiday letting and negative gearing for tax purposes. There is an indication of the alertness of Mrs Hull to taxation implications in an undated letter from her to St George Private Bank which, although undated, must have been before settlement of the purchase. It reads in part:
Enclosed is the application for the unit at Port Douglas, my accountant says that as we have already paid the deposit that can't be borrowed for tax deductions. So that means we need $445,950 plus stamp duty and costs which I think you said to allow $25,000 for.
The paperwork you sent doesn't allow for complicated investments like primary produce, on page 4 there is a loan we have from Timbercorp for grapes and almonds which because of the tax deductions allowed are cash flow positive for three years and then go into production and hopefully we earn money from them.
Neither was advice sought from the defendants concerning share trading and investment undertaken by Mrs Hull which, after 2000, was done by Mr and Mrs Hull as trustees for R&L Hull Investment Trust. It was not suggested that Richard Hull participated actively in the day-to-day operations of the Trust.
In her affidavit, Mrs Hull recounted that in 1999 she took some courses in share trading and charting. This was a considerable understatement. Some detail of the breadth of her activity demonstrates the capacities of the person with whom Mr Brailey was dealing and her likely ability to assess advice. Between 1999 and 2004, Mrs Hull paid for over fifty publications or attendance fees for seminars relating to share trading or investment. Some of this expenditure was not trivial, for example, in October 2000 she was billed $2,992 for an "analyst package" by a stock market service called Sharefinder, which she used. In that year she also purchased a pocket pager which kept her abreast of movements in price of shares listed on the Australian Stock Exchange. Through the trust, trading turnover exceeded $1million in 2003-4, $1.8million in 2004-5 and $3million in 2005-6. This activity was concurrent with investments that are the subject of the action being made. Segregated also from the advice concerning those investments, Mrs Hull traded in financial products which she conceded were highly risky and that she knew this. These included options and futures through a broker, CDM Trading Pty Ltd and contracts for difference (CFD's) through a United Kingdom company (CMC Group plc) which held an Australian Financial Services licence.
Despite the extent of this experience, she made an extraordinary claim of ingenuousness about a matter of taxation. In her affidavit she asserted that because of the tax ruling of which she was told she thought the almond growing scheme was "officially approved". In cross-examination, she adhered to the proposition that in some way the tax office was sanctioning the investment. I do not accept that Mrs Hull believed that the tax office was so doing and I find that the evidence that she gave in this regard was invented in order to fortify the proposition that they acted in reliance upon whatever Mr Brailey said.
In the ordinary sense, not by reference to s 761GA of the Corporations Act, Mrs Hull must be categorised as a very sophisticated investor. It was, I consider, intentionally deceptive of the plaintiffs to describe themselves as naïve and inexperienced even accepting, as I do, that Richard Hull was personally less intensely interested.
I have already mentioned an issue concerning the principal focus of the retainer of the defendants upon taxation or more general planning. The exclusion of the unit investment, but more significantly the multifaceted operations of the Investment Trust, undermines the usefulness of an opinion by Mr Wall as to a spread of investment which he hypothesised would be recommended by a prudent investment advisor. His spread contains, to a large degree, share investments that were expressly not the subject of seeking advice from the defendants. Upon BFL being approached by the plaintiffs, a request was made to provide information by completion of a document titled "Fact Find". Part of the document sought an expression of the degree of importance attached to various factors by the clients by circling a figure in a scale of 1 to 10. Curiously, in grading security, volatility and liquidity a scale figure of 1 represented "most important" and 10 the other extreme of "least important" but the scale is reversed in respect of inflation, taxation and performance where 1 represents "least important" and 10 represents "most important".
Except for liquidity, where figure 7 was circled, all others had figure 5 circled, which I accept was intended to mark the centre of the range. It is said that the indication concerning liquidity was an error and it was actually intended to record a tendency toward most important rather than, as it does, a tendency towards least important. It is possible that the alteration in scaling led to error but what was represented to the defendants was that liquidity tended toward being of least importance.
Completions of other sections of the document indicated a desire for long-term (seven and greater years) investment, maximum income and active involvement of the clients. A general comment was endorsed "No income needed at the moment just grow superannuation fund".
The Fact Find document contained a reminder that "1" is considered a conservative investor and "10" an aggressive investor, but note what I have observed above about grading.
A debate emerged about a description of the plaintiffs as "moderately aggressive investors". In different language, the plaintiffs asserted that they were "middle of the road" investors. Omitting indication concerning liquidity, I consider that selection at the centre of the 1 to 10 scale would make it equally accurate to describe the clients as either moderately conservative or moderately aggressive. I reject the proposition advanced by the plaintiffs that by describing them as moderately aggressive, the defendant had in some way breached a duty of care by wrongly classifying them.
The argument about this was essentially semantic but the conclusion is fortified by making the expression of desire for maximum income and active involvement. There was no dispute that seeking to maximise income would inevitably mean some raising of the level of risk in any investment and thus would lean towards aggressive rather than conservative as an applicable description.
I put into some chronology matters of relationship between the parties. The defendants made submissions concerning the desirability of reliance, when fact-finding, more on contemporary records or objective material than on purported recollections particularly the content of conversations, recounted in affidavit testimony years after the events. In a dispute of the current nature, I consider that is a sound approach. There were limited acknowledgments of reconstruction by the witnesses but, those apart, I am also satisfied that it was inevitable that, whether consciously or not, reconstruction coloured the assertions and counter assertions of all of Mr and Mrs Hull and Mr Brailey.
Keeping that in mind, I trace some significant events and encounters. On 28 November 2003, there was a conversation between Mr Brailey and Lainie Hull and one of the matters communicated was an anticipated bonus of $300,000 (in addition to Richard Hull's presumed substantial salary). As I have observed, Mrs Hull was by no means insensitive to the potential for taxation levy to be lawfully reduced.
On 4 December 2003, there followed a meeting between Mr Brailey and Mr and Mrs Hull. Again, the anticipated $300,000 bonus was file noted as being mentioned. Mr Hull testified that he told Mr Brailey that he anticipated a profit share (bonus) in the coming year of the order of $1 million. Paradoxically, if this was communicated, contrary to Mr Brailey's memory that it was not so communicated, it would add force towards an inference that taxation as such, and upon such a large sum, was the likely reason for the consultation, rather than the seeking of general financial advice. The Hulls at this time revealed their purchase of a unit being constructed in Port Douglas. This purchase was to be financed by borrowings and, similar to some other matters, was quarantined from any advice that was being sought from Mr Brailey.
Subsequently, on 15 December 2003, a letter signed by an employee of BFL, Justin Clynes, was sent to the Hulls forwarding a financial services guide and a Fact Find document for completion by them. Mrs Hull had deposed that the latter was given to them at the meeting and the inconsistency is relevant only in fortifying the view, above stated, that available records are more likely to be correct than assertions recovered from unassisted memory. The content of the guide speaks for itself and to the extent that it canvasses what is available from BFL as to costs, terms and conditions and the like, it does not assist to define what were the parameters of what it was that the Hulls were seeking. It did, however, contain this response to a question posed concerning risks attaching to any recommended investment strategies:
I will explain to you any significant risks of investments and strategies which I recommend to you. If I do not do so, or if you do not understand our explanation, you should ask me to explain those risks to you.
There has been no complaint that Mr Brailey failed to respond to any express request for advice about particular risk.
Several things happened in January 2004. Dated the 12th is a partially completed Fact Find document. I have referred elsewhere to some of its content. It appears to have been given to Mr Clynes at BFL on the 22nd. His file note refers to the need to have a letter authorising transfer from previous advisers about whom it appears that Lainie Hull had complained that they had lost $100,000 over 12 months.
In the meantime, dated the 15th, Richard Hull contracted to purchase the Port Douglas property for $495,500. His signature on the purchase contract was witnessed by Lainie Hull.
On 6 February 2004, Mr Clynes sent a letter to the Hulls with various documents concerning the transfer from the previous advisers. The letter contains a recommendation to use ABN AMRO Morgans as stockbrokers and it is clear that Mrs Hull's assertion that BFL retained them (as opposed to doing so on the Hulls' instructions) was incorrect.
It can be noted that there had been no direct contact between the Hulls and Mr Brailey since the December meeting. It was not suggested that the contact with Mr Clynes amounted to the tender of financial advice to them.
On 3 March 2004, the Hulls applied to the St George Bank for a loan of $1 million and in due course they were granted a line of credit to that amount. The application declared that the loan was for business purposes and no doubt was required by the Bank, which would have been alert to consumer credit laws that become applicable to non-business loans. There was some forensic skirmish about these funds. The available line of credit was to be used to discharge an existing mortgage of about $300,000 on the Hulls' residence and the balance, after 10 per cent deposit already paid, on the Port Douglas purchase. This would leave about $200,000 available. The defendants argued that this represented cash for intended investment and the plaintiffs denied such intention. Whichever contention is correct, the transaction manifested another financial activity which the Hulls engaged in and which they quarantined from any advice that they were seeking from Mr Brailey or BFL.
Participation by Mr Brailey resumed in May 2004. There are contrasting recollections of whether there were one or two face-to-face meetings at about this time, however, file notes by Mr Brailey of a meeting of 18 May are available. It is no novelty that file notes can be cryptic when looked at by others, nevertheless the first note simply reads "1.5m fall due 30/6/04". Having regard to the evidence of the anticipated $1 million bonus, this figure may or may not have been mentioned or may represent cumulation of salary and bonus anticipated by Mr Hull. Whatever figure was discussed, it was such that I am abundantly satisfied that both Mr and Mrs Hull were conscious of the approximate size of the potential taxation liability which would arise if such a sum were to be directly received by Mr Hull.
Again, whatever the situation or anticipation, figures were specified on a following letter of 20 May 2004 from Mr Brailey to the Hulls. Pointedly, the bold type heading of the letter reads "2004 TAX PLANNING YEAR" and the letter commences, "Further to our discussions on Tuesday night, I propose we take the following decisions regarding tax planning for this year." The emphasis has been added. Attached to the letter were proposals for investment, which I have already described as the May 2004 investments in Timbercorp Almond and Table Grape projects and the Gunns' Wine Grape project. As stated, those investments were duly made. There was also a recommendation, acted upon by the Hulls, to invest in a then unlisted commercial property trust (Cromwell).
So far as personal contact was concerned, the next chronicled record is a file note of a conversation between Mr Brailey and Mrs Hull on 26 October 2004. It was knowledge common to all concerned that payments needed to be serviced during that month in connection with the agribusiness investments. Inter alia, a note appears "1,000,000 came in for bonus". Obviously not seeking his advice, Mrs Hull also informed Mr Brailey that settlement of Port Douglas was scheduled for the next February and that they were borrowing from St George and she also mentioned that they were buying a boat. The file note also records "Bonus should be staying at 1.0m."
In January and March 2005, there are file notes of communications between Mr Brailey and Mrs Hull which I do not need to summarise for present purposes. A culminating event is evidenced by a letter dated 21 April 2005 from Mr Brailey addressed to Mr Hull. This letter recommends the purchase of further almond lots, which were available to BFL clients even though there had been a complete sell out by Timbercorp of these lots. I find nothing sinister in the existence of some arrangement whereby lots could be retained to be made available to clients.
At about this time, the Hulls spent a week at Port Douglas. The letter also forwarded the relevant product disclosure statement and observed:
It was our intention to advise you in relation to this product after our Timbercorp seminar being held on 27 April as part of your tax planning strategy.
Again, the emphasis has been added.
On 29 April 2005, there was the telephone contact between Mr Marksteiner and Mr Hull, already mentioned in another context, concerning further investment in table grapes. In the event, investment was made in both almonds and table grapes as previously noted.
On 18 May 2005, statements of advice concerning these investments were forwarded to the plaintiffs. The causes of action are founded upon the investments made up to this time, historically, however, the plaintiffs declined advice to further invest in MIS.
Of course, the foregoing does not refer to every one of the contacts between the plaintiffs and the defendants. The plaintiffs' tender bundle appears to seek totality but much of the material is not germane to disputed issues which require determination, for example, correspondence about sharing of commission and other incidental contacts.
The common law claims
Although some of the facts pertinent to the common law claims are also pertinent to the claims founded upon statutory duties (as pleaded), it is convenient to consider the two types of claim independently of each other.
The pleading asserts breach of contract by BFL as the licence holder and the particulars schedule asserted failures by Mr Brailey in giving the advice which he tendered on its behalf. In similar vein, a negligence claim expressed as breach of duty of care, is made against both defendants particularised by repetition of the assertions in respect of the breach of contract count.
The assertions need to be understood against the circumstance that no claim was made that any shortcoming in the eventual performance of the five projects in which investments had been made resulted from matters of which Mr Brailey was, or should have been, aware at the time the investments were recommended. A liquidator's report concerning Timbercorp has been included in the 11 volumes of the plaintiffs' tender bundle but no detailed canvass of that part of its content was made. No challenge was offered to the statement that, to the extent that the projects failed, this followed the global financial crisis which precipitated the collapse of Timbercorp which had operated multiple projects of which those invested in by the plaintiffs represented only a part. Senior counsel for the defendants was not contradicted when he observed that, according to the papers, the investment in almonds was, in horticultural terms, very successful and that by 2009 it seemed that the Hulls were receiving hundreds of thousands of dollars on that account. The grape projects seemed to be adversely affected by the selection of the variety of fruit being cultivated (a matter on which it could not be reasonably expected that the defendants had expertise) and consequent harvesting and marketing factors leading to a reduction in any anticipated profit.
In terms of breach of duty of care, counsel for the plaintiff placed some emphasis upon a concession by Mr Brailey concerning the absence of reasonable grounds for tendering prospective financial information. The concession has to be understood in its proper context. By way of example, I extract from the 2003 Timbercorp Almond Prospectus the following:
Prospective financial information is also predictive in character. Under the Corporations Act, we are required to have reasonable grounds for including prospective financial information about the project in this prospectus; otherwise the information will be misleading. The test in the Corporations Act requires that the grounds for including prospective financial information must be objectively verifiable. This generally requires supportive information to verify the different variables that will have an impact on financial returns. As this is a long-term project, the performance of some of the key financial variables is difficult to objectively confirm or verify, and so we have not provided forecast returns to growers for each year of the project.
These agricultural ventures were expressly planned to be conducted over a long term, extending up to 20 years. It is impossible to contemplate how any agricultural project over such terms could be the subject of objectively verifiable prospective financial information, given the very nature of the risks of agriculture. The implication of the plaintiffs' argument, if carried through, would mean that it would be always unreasonable to advise investment in an MIS or, for that matter, ever to undertake investment in an agricultural project. That is obviously not the case and I derive no assistance from the plaintiffs' submissions in these regards.
The common law claims by the plaintiffs are sought to be supported by particulars endorsed within the pleadings and I shall use the subparagraphs in paragraph 53 of the Amended Statement of Claim.
(a)Brailey should not have recommended to Ric Hull or the Super Fund investment in agribusiness managed investment schemes, or alternatively, investment of more than 5 per cent to 10 per cent of their portfolios in such schemes, in light of their risk profile, age and stated goal of preparing for Ric Hull's retirement.
As to the first assertion, for reasons already addressed I reject any proposition that it would necessarily be imprudent to invest in agricultural MIS. If it is intended to qualify the statement by the risk, age and stated goal of preparing for retirement, that attempt is undermined by the circumstance that, as I find, the prominent factor influencing the plaintiffs' consultation with the defendants was the imminent probability of a considerable taxation liability and advice was sought and given for the purpose of advantaging the plaintiffs in that regard.
The proposition that investment in MIS should be limited to 5 per cent to 10 per cent of portfolio, if supportable, must derive its support from the evidence of Mr Wall to that effect. As I have pointed out, that evidence appears to relate to a spread within a complete portfolio whereas it was clear that any advice sought from the defendants excluded share trading (and any other form of investment in financial derivatives) which was conducted by Mrs Hull through the Investment Trust and also excluded their dealings such as the negatively geared Port Douglas unit purchase. I am satisfied that, given the quarantine, the advice to invest in MIS was reasonable on two combined bases, the immediate taxation benefit and as a long-term investment suitable to the goals communicated by the plaintiffs of maximum income as well as growth for retirement.
The particulars continue:
(b) Brailey should not have recommended that, apart from the investment by Ric Hull in the Cromwell Property Trust, all other investment by Ric Hull and the Super Fund should be in 2004 and 2005 schemes.
Save the express mention of the years applicable to the schemes and the exception of the Cromwell Property Trust, this particular merely repeats the allegation contained in the first sentence of particular (a).
The next particular:
(c) Brailey failed to advise Ric Hull and the Super Fund, particularly in light of the large sums he was recommending they invest, of:
(i) the risk of agribusinesses failing or not succeeding sufficiently to grow the Super Fund or to generate the level of income required for Ric Hull's retirement;
(ii) the continuing liability of investors in the schemes to pay expenses and fund the loan repayments taken in order to fund the scheme investments, in the event that the schemes produced little or not income, or sufficient income to cover those costs;
(iii) the uncertainty in, and potential high level of, future costs required to be paid for the schemes on an ongoing annual basis;
(iv) the real risk that the costs payable in relation to the investment would exceed income and tax benefits received;
(v) the lack of any proper and adequate security for the sums invested in the schemes;
(vi) the likelihood or risk that the combination of expenses invoiced and loan repayments on short-term loans not being able to be met from Ric Hull's income;
(vii) the availability of immediate tax returns did not make the investments in the schemes viable or sound investments;
(viii) the recommended investments were ill-suited to, and inappropriate for, investors whose express goal was to grow capital in the Super Fund and to enable the Super Fund to fund Ric Hull's retirement.
These particulars essentially amount to expanded rhetoric alleging negligence. The risks articulated describe possible consequences of agricultural failure or failure to achieve hoped for returns therefrom. As I have already said, no adult could claim to be unaware of the risks of agriculture and no warning of things that are notorious was required in order to discharge a duty of care. As it is notorious that ventures in agriculture may fail, it is also notorious that success brings very substantial rewards.
The plaintiffs were supplied with appropriate product disclosure statements and, in any event, were told, and they knew, that there were continuing expenses to be met in relation to the investments. Mr Hull read the statements to the extent that he thought relevant and Mrs Hull relied upon his reading. To link continuing expenses with the possibility that income may not cover those costs is simply another observation that success in agriculture cannot be guaranteed. The same comment applies to describing uncertainty as to how much will be required. So far as prediction was practicable, the plaintiffs were given material to make them cognizant of the likely level of costs.
The imprecision of these purported particulars is manifest in the reference to comparison with tax benefits. Benefits could only be known in the future and would relate, inter alia, to the size of Mr Hull's combined salary and profit share. The defendants could only know about these matters when informed by the plaintiffs.
It was not suggested that the plaintiffs were ever given to understand, nor that they did understand, that MIS were secured investments as that term is understood in financial dealing. Nor does the evidence identify what is contemplated by reference to adequate security in particular (c)(v).
How the defendants are in breach of duty in failing to advise of a likelihood that repayments could not be met from Mr Hull's income is not clear. Such evidence as there is of his total emolument make it obvious that he had more than enough income to do so if he chose and, to the extent that it might be relevant, repayments were in fact met. Why the adviser should be seized with knowledge of a likelihood, as opposed to a possibility, is even less clear and, to repeat, no such possibility fell due.
The assertions that the investments were unsound is a challenge to the evidence, which I have previously held acceptable, that such investments were capable of being recommended by prudent and competent financial advisers. Gauge of whether they were ill suited to the particular circumstances of the plaintiffs is a conclusion available only from hindsight once it is recognised that such investments were not inherently unsound.
The particulars continue:
(d) Brailey failed to properly analyse, assess and provide appropriate advice on the basis of the actual risk profile and goals of Ric Hull, Lainie Hull and the Super Fund.
I have elsewhere indicated why I do not think that it was, on the information provided, erroneous to classify the plaintiffs within a moderately aggressive investor profile. Nor, in my view, would it be a defect in analysis to assess a profile as elevated following entry into agribusiness investments. It could be discerned that there is possible tension between the stated goals communicated by the plaintiffs in the Fact Find document of maximising income and growing the Super Fund. However, the advice given did not ignore those goals and I am not satisfied that Mr Brailey's analysis and assessment was inadequate to the circumstances. I would not expect reasonable care to require reading every word of the various product disclosure statements but, as he did, a reading of the appropriate portions of the publications should be made to enable a competent assessment of the investment. In addition I accept that, as a non-horticulturalist, Mr Brailey's visits and inspections were of appropriate value to assessing the viability of contemplated investment. I am hardly surprised that the independent reports published with the product disclosure statements are optimistic but I reject the implication in Mr Wall's evidence that they should be the subject of some suspicion so that reliance be not placed upon them or that reliance upon them would indicate imprudence.
The next particular is particular (e):
(e) Brailey failed to prepare any comprehensive financial plan or adequate statement of advice before Ric Hull or the Super Fund made investment decisions.
This allegation is literally accurate, indeed it was put in cross-examination on behalf of the defendants that no comprehensive plan or statement of advice was supplied. It was also acknowledged that such was never sought. Apart from this, two important observations need to be made. First, the absence of such documentation is entirely consistent with the defendants' posture that what was primarily sought was taxation advice and not comprehensive financial planning. And, second, it could scarcely have been the duty of the defendants to prepare a comprehensive plan when it was the plaintiffs' instruction that the advice was not to include anything about shares or other dealings being managed by Mrs Hull through the Investment Trust nor about investments such as the negatively geared purchase of Port Douglas. There was no breach of duty in this regard.
It is to be emphasised that, at its highest, the plaintiffs sought advice from the defendants and did not seek management by the defendants of their investments in whole or in part. They retained to themselves the ultimate decision as to whether they invested or did not and this was based upon their own judgment. The defendants' function was to tender advice to enable that judgment to be exercised but it was to be freely exercised by the plaintiffs themselves.
The particulars continue:
(f) Brailey failed to provide advice about other investment products or types of investment [which] were available to Ric Hull and the Super Fund or that other financial products or types of investment would be prudent and were more suitable to their stated goals, or advise as to the prudence of diversified investments and investment choices to minimise risk.
This is not a particular of breach of duty but rather a statement, assuming breach, of what alternatively might be done. Unless breach is proved, the assertions are irrelevant.
The particulars continue:
(g) In so acting, Brailey, and therefore BFL, breached the terms of the contract pleaded in paragraphs 13(a), (b), (c), (e) and (f).
Those parts of the pleading read as follows:
The retainer of BFL by Ric Hull and the Super Fund was a contract for the supply of financial services within the meaning of the ASIC Act, and contained the following terms:
(a) that the services provided by BFL would be rendered with due care and skill;
(b) that any materials supplied in connection with those services would be reasonably fit for the purpose for which they were supplied;
(c) that the services supplied and any materials supplied in connection with those services would be reasonably fit for the purposes referred to in paragraphs 12(d), (e) and (f), or are of such a nature and quality that they might reasonably be expected to achieve the results there referred to;
...
(e) that Brailey as BFL's representative would prepare a comprehensive financial plan for Ric Hull and the Super Fund;
(f) that any recommendation made by BFL or Brailey as its representative would be based on reasonable grounds for making the recommendation.
Paragraphs 13(a) and (b) have been admitted on the pleadings.
Paragraph 13(c) was not admitted. Despite its wording, it can mean no more than that reasonable care in tendering the advice had to be exercised in all the circumstances. The incorporated references in paragraph 12 are as follows:
(d) The goal of Ric Hull and Lainie Hull was to grow the funds available from the Super Fund to provide for their retirement;
(e) Ric Hull and Lainie Hull estimated they would require disposable income of $120,000 per annum during Ric Hull's retirement;
(f) that Ric Hull and Lainie Hull were middle of the road investors who wished to maximise the income received from the Super Fund for retirement.
Paragraphs (d) and (e) merely recite the goals which give context to the circumstances of the advice. I have already dealt with the assertion that the plaintiffs claimed to be middle of the road investors. As to paragraph 13 (e), I find that there was not any term of the retainer that there would be prepared a comprehensive plan as asserted and I repeat my findings in relation to paragraph 53(e) above.
As to paragraph (f), I am unpersuaded that reasonable grounds were lacking for the recommendations made by the defendants to the plaintiffs. To the extent that this particular seeks to be based upon or incorporate the statements as to returns in the product disclosure statements, one of which I have made reference to earlier, I regard the submission of the plaintiffs as relying upon a misapplication of context.
The plaintiffs have failed to establish breach of duty of care.
The statutory claims
The plaintiffs plead that by reason of the breaches of contract of retainer set out in paragraphs 13(a), (b) and (c) of their amended statement of claim, the text of which has already been set out, BFL contravened s 12ED of the Australian Securities and Investments Commission Act 2001 ("the ASIC Act"). That provision, so far as seems presently relevant, reads:
12ED Warranties in relation to the supply of financial services
(1) In every contract for the supply of financial services by a person to a consumer in the course of a business, there is an implied warranty that:
(a) the services will be rendered with due care and skill; and
(b) any materials supplied in connection with those services will be reasonably fit for the purpose for which they are supplied.
(2) If:
(a) a person supplies financial services to a consumer in the course of a business; and
(b) the consumer, expressly or by implication, makes known to the person:
(i) any particular purpose for which the services are required; or
(ii) the result that he or she desires the services to achieve;
there is an implied warranty that:
(c) the services supplied under the contract for the supply of the services; and
(d) any materials supplied in connection with those services;
will be reasonably fit for that purpose or are of such a nature and quality that they might reasonably be expected to achieve that result, except if the circumstances show that the consumer does not rely, or that it is unreasonable for him or her to rely, on the person's skill or judgment.
Attention to the requirement that a statement of claim plead facts should have led to expression in terms of breach of implied warranty rather than cross-reference to statute and so doing might have avoided some comments concerning what was being sought to raise as the issue. The written submissions by the plaintiffs are couched in terms of misleading and deceptive representations and the response by the defendants focussed upon those submissions accordingly.
It is not necessary to recite the litany of purported particulars upon which the plaintiffs seek to rely as, fundamentally, they are based upon assertions that Mr Brailey made representations as to the likely performance of the investments. I do not accept that at any time he made such predictions. What I do accept is that he used language that, if proposed investments performed in accordance with the various product disclosure statements, they could be expected to achieve the goals that the plaintiffs had indicated they desired as to income and growth.
I recognise that cash flow documents produced by the investment entities were passed to the plaintiffs, but it did not require ritual incantation for the plaintiffs to be given to understand that these were performance estimates and not guarantees. The product disclosure statements made clear why such estimates were not published in them.
I have made earlier reference to the reasonable basis for Mr Brailey advising the plaintiffs. In addition, I observe that the managing entities were public companies with a history of managing projects of the types under consideration. I repeat that Mr Brailey had undertaken physical inspections which, although he was not a horticultural expert, must have enhanced the basis of reasonableness underlying his recommendations concerning the projects. The evidence also shows that he had reference to third party research in addition to the independent reports published with the product disclosure statements.
The plaintiffs' claim founded upon breach of the ASIC Act fails.
The plaintiffs also make claims based upon asserted contraventions of the Corporations Act. The key provision upon which the plaintiffs rely is s 945A:
945A Requirement to have a reasonable basis for the advice
(1) The providing entity must only provide the advice to the client if:
(a) the providing entity:
(i) determines the relevant personal circumstances in relation to giving the advice; and
(ii) makes reasonable inquiries in relation to those personal circumstances; and
(b) having regard to information obtained from the client in relation to those personal circumstances, the providing entity has given such consideration to, and conducted such investigation of, the subject matter of the advice as is reasonable in all of the circumstances; and
(c) the advice is appropriate to the client, having regard to that consideration and investigation.
In respect of the roles of Mr Brailey and BFL, I note the requirement in subsection (3) that the licensee take reasonable steps to ensure that an authorised representative complies with subsection (1). The pleaded facts of contravention were that the defendants failed to give reasonable consideration to the subject matter of the advice, that advice given was inappropriate to the clients and that "therefore" there was no reasonable basis for the advice.
No express pleading is made of the statutory requirement to make such investigations of the subject matter of the advice as is reasonable in the circumstances. It suffices to relate back to my remarks and findings about Mr Brailey's investigation, the reasonableness of which does not seem to be the subject of challenge in the claim under this head. In any event, I am not satisfied that Mr Brailey failed to give reasonable consideration to the subject matter of the advice nor that it was inappropriate to the plaintiffs. In particular, it was appropriate to the plaintiffs' potential tax liability which would arise if nothing were done and salary and bonus were directly received. It is trite to contend that something different might have been done. Of course, it might have been. The question is whether the basis for the advice given was reasonable and in my view it was.
An isolated dispute exists between the parties about the supply of statements of advice, a requirement specified in s 946A. Section 944A applies the provisions concerning the supply of statements of advice specifically when advice is provided to a person as a retail client.
This dispute is germane to the investments with the exception of the investment by Mr Hull in the Gunns' 2004 Wine Grape project. By their pleading, the defendants deny that either of the first or second plaintiffs (Mr Hull and the Super Fund) was a retail client in relation to the Timbercorp 2004 Almond project and the Timbercorp 2005 Table Grape project (Defence [69]c) and the Timbercorp 2004 Table Grape project (Defence [69]b) and deny that Mr Hull was a retail client in relation to the Timbercorp 2005 Almond project (Defence [69]e).
Prima facie, the financial service provided by the defendants to the plaintiffs would be classified as provision to a retail client unless an exception applies: s 761G(1). In broad terms, an exception may be available when price or value exceeds a level set by regulation: s 761G(7). There are also other provisions which are declaratory: s 761G(4), mechanical: s 761G(10) and of definition: s 763B; s 764A.
The question for resolution of this issue is whether, and by permitted calculations including, where applicable, aggregations, figures are produced that remove the investments from the classification of those made to retail clients into those made to wholesale clients.
The sizes of the subleased lots are not the same for the almond orchards and the grape vineyards but it should be noted that the plaintiffs were large sublease holders, 150 almond lots in the 2004 project and 70 in 2005 and 20 grape lots in 2004 and 70 in 2005.
Senior counsel for the defendants produced spreadsheets showing calculations in accordance with the regulations seeking to demonstrate that the levels exceeded those applicable to retail clients. As a matter of calculation, I have accepted them as correct.
In written further submissions in reply, counsel for the plaintiffs stated:
Even if the products issued in each year are aggregated as having been issued "at or about the same time" for the purposes of Regulation 7.1.17B the amounts do not exceed $500,000.
No alternative calculations were offered. Where the financial product, in terms of what is being required and obligated, involves amounts payable for it on a periodic basis as is the present case, the provision "at or about the same time" is not construed to mean only an initial payment but to include the concurrency of contracted payments for the purchase as they fall due.
In a written submission, the plaintiffs contended that the defendants treated them as retail clients in 2004 because it could not be known at that point whether they fell within the provisions that would classify them as wholesale clients. The question is not one of treatment but what is the consequence of the regulations. The contradictions in the submissions of the parties emerge out of focus upon different provisions within the regulations.
The plaintiffs point to Regulation 17.1.18B(4) and, given the financing from an associated corporation of Timbercorp, pursuant to it there will be a disregarding of the amount of that financing so as to bring the investment below the applicable level of $500,000 beyond which an investor ceases to be a retail client. On the other hand, the defendants point to sub-regulation (3), which provides that in establishing the relevant amount, it is to consist of what is paid or payable to acquire or purchase the investment based financial product. I would not construe "payable" as referring only to the initial investment and those presently under consideration involved a contract for amounts to be payable during the life of the project. These are taken into account in the defendants' calculations. On that construction, the investments are such that the plaintiffs do not qualify as retail clients in regard to them.
If that be so, it follows that the alleged failure to comply under the Corporations Act provisions, as pleaded by the plaintiffs, must fail in respect of those four projects as it is prerequisite to the defendants being required to comply with them and that the plaintiffs be classified as retail clients in those regards.
The evidence does not demonstrate that the plaintiffs would have acted any differently as a result of reading the content of statements of advice nor what it is contended should have been contained alternatively to the content of those that were in fact supplied. The plaintiffs have not proved any causal link between their assertions in relation to statements of advice and any loss claimed to have been sustained by them.
There remains Mr Hull's investment in Gunns' 2004 Wine Grape project. It is not disputed that this investment falls within the purview of Part 7.7 Division 3 of the Corporations Act.
However, I am unpersuaded that, despite the difference in statutory requirement, although this is an investment by Mr Hull deemed to be a retail client, compliance or not by the defendants would have made no difference to the decision of Mr Hull to invest.
It is convenient to turn to the issue of causation. In his opening remarks, senior counsel for the defendants specified that the plaintiffs' claims were, inter alia, resisted at the level of causation. He again returned to this issue in final address.
Significance must attach to the function of Mr Brailey and BFL. They were advisers and they were not managers. Obviously, investors could, if they chose, place funds in the hands of another and delegate to that other discretion as to identity and extent of investment. Particularly in her repetition of the mantra that they relied on Mr Brailey, Mrs Hull gave the impression of seeking to shift the nature of the relationship towards being one of that kind. It was not. As already observed, the Hulls retained to themselves the right to make their own judgment and the critical decision as to whether to invest in a particular MIS or not.
The defendants accepted that, had Mr Brailey not recommended the investments, the plaintiffs probably would not have made them. Indeed, I apprehend that it is conceivable, even given Mrs Hull's wide-ranging money market interests, that they would not have heard of them. The causation question, however, is whether any loss that was sustained was caused by the advice that was tendered to them.
An answer can be derived by observation of why the projects did not perform to the level of the product disclosure statements including the associated independent reports within them.
So far as the Almond projects were concerned, I have already noted their apparent success in horticultural terms. Timbercorp collapsed and it has been said to have been a victim of the so-called global financial crisis. Be that as it may, it had been engaged in a diversity of operations of which the almond orchards were but one. The receipts by the plaintiffs until a liquidator took over make it reasonable to deduce that the almond orchards would not have been abandoned and, although I was not directed to any specific liquidator's report in this regard, it is more than mere speculation that they would have been sold and continued to be cultivated. As already noted, up to 2009 the plaintiffs were receiving substantial payments on account of the almond investments.
The losses in the almond project were not caused by breach of duty by the defendants.
The performance of table and wine grapes projects were adversely affected by viticultural and marketing factors. These were risks of agricultural ventures that were well appreciated by the plaintiffs. Mr Hull obviously had some reservations about 2005 investment in table grapes in particular and he expressed those reservations to Mr Marksteiner but, even having done so, he nevertheless made the decision to invest. In his evidence, Mr Hull accepted that he recognised greater risks in grape cultivation than in some other forms of agricultural activity.
Any losses from these investments were not caused by breach of duty by the defendants,
I recognise that these reasons do not as a pattern follow entirely the ambulations in the submissions of the parties, however while the forms of action may be dead and no longer rule us from their graves, the requirement that litigation be determined by reference to pleading is not yet interred with them. As pleaded, the plaintiffs' claims fail and there should be judgment accordingly.
This is not an occasion where it would be appropriate to make a provisional assessment of damages. If my conclusion is wrong, it may be that different conclusions apply to various of investments. The evidence of Mr Wall is not helpful in the circumstance where that his alternatives both look at a total spread of investment whereas, as I have indicated, the plaintiffs themselves quarantined aspects of investment from the defendants in any event. I should also note that there is a dispute as to whether, if damages are to be assessed, they should be "grossed up" to allow for taxation. In another case involving the same defendants, a view was expressed in favour of so doing although it was not applied as there was a verdict in their favour. The defendants dispute the correctness of that view and, as I do not turn to damages, it will not be helpful to express any purely academic opinion.
I direct entry of judgment for the defendants. The plaintiffs are to pay the defendants' costs as agreed or assessed. If it is contended that some variation in the costs order should be made, liberty to apply is granted forthwith or on two days' notice to the opposing party. That liberty, if not exercised, is to expire seven days after the publication of this judgment.
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Decision last updated: 04 September 2012
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