Krakowski & Anor v Eurolynx Properties Ltd

[1994] HCATrans 308

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IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Melbourne No M137 of 1993

B e t w e e n -

DAVID KRAKOWSKI and HENIA

KRAKOWSKI

Appellants

and

EUROLYNX PROPERTIES LTD and

MALLESONS STEPHEN JAQUES (a

finn)

Respondents

BRENNAN J
DEANE J
TOOHEY J
GAUDRON J

Krakowski(2) 79 6/5/94

McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON FRIDAY, 6 MAY 1994, AT 9.48 AM

(Continued from 5/5/94)

Copyright in the High Court of Australia

BRENNAN J: Yes, Mr Lally.

MR MERKEL:  If Your Honour pleases, if I could have Your Honour',s leave, there are two matters. One is

that my learned friend, Mr Lally, has informed me
that the ground between us has narrowed as a result

of an instruction to agree that the admission made

should not be withdrawn. If I could have

Your Honour's leave to address Your Honours on that

matter. The other matter I wanted to do, if I

could, was to give Your Honours some transcript

references on one aspect of the submissions I made

to Your Honours yesterday, and I would ask if I

could do that to Your Honours?

BRENNAN J: Yes.

MR MERKEL:  Could I deal, firstly, with the transcript

references, Your Honours. One of the critical

issues we addressed in our submissions was the

failure of the plaintiff to discharge the onus of

the subjective aspect of the fraud case in relation
to Eurolynx. Can I indicate to Your Honours that

Mr Gilbert's evidence in respect of the following topics can be found at the following passages.

That he was solely responsible for instructing and

liaising with the solicitors concerning the

documentation appears at 526 point 25 to 527 point

8, 539 point 15, and 541 point 8. Evidence that he had no reason not to

disclose, and gave no instructions not to disclose the agreements, and did not advert to the issue of

non-disclosure is to be found at 532 point 11,

560 point 15 to 20, 538 point 21, and 539 point 12.

His evidence on the role he played in answering the

requisition is at 540 point 20 to 541 point 16, and

evidence that he did not check whether the contract

reflected the full terms of the agreement is at 549

point 14 to 549 point 19.

Cross-examination of Mr Gilbert started at

538, and we say the particular scenario now relied

upon was not put and, finally, can I give

Your Honours appeal book references in respect of

the judgments. His Honour Mr Justice O'Bryan in respect of the answers to requisitions said that

Mr Gilbert's conduct was reasonable and honest, that was at page 784. At page 792 lines 2 to 5, and 794 line 23 over to 795 line 3, His Honour

found that Mr Gilbert had acted honestly.

In respect of the solicitor His Honour made

findings at 791 line 10 to 18. The Full Court accepted those findings at page 831 line 20 to 831 line 27, and we say that when Your Honours look

Krakowski(2) 80 6/5/94

at those references, to draw an inference as sought by my learned friend of dishonesty would fly in the face of the evidence and the findings.

And could I finally give Your Honours a

reference to Akerhielm, (1959) AC 789, which I
referred to yesterday, where Their Lordships at

page 806 said that:

the principle that where a defendant has been

acquitted of fraud in a court of first

instance the decision in his favour should not

be displaced on appeal except on the clearest

grounds.

And we would say that principle should govern.

In respect of the third party proceedings, could I take Your Honours to volume 4, and identify

what appears to be left in the contest between us.

At page 909 to 910 the form of relief sought is set

out. As at present, the contest, in view of my

learned friend's instruction to, in effect, consent

to the appeal being allowed on the withdrawal of

the admission, so that the admission as to

negligence will stand, I understand he would agree

that it is appropriate to make the orders in 3.2 at

page 910.

TOOHEY J:	Why not 3.1.1?
MR MERKEL:	Your Honour, I think, as I understand what he

will be saying is that his instructions go no

further than 3.2. We would say 3.1 is a

precondition in a sense to 3.2, and logically the

orders in 3.1 should be made, but I can only inform

Your Honours of what I understand his position is.

We would say that the orders in 3.2 in a sense are

premised upon a successful declaration as to

indemnity.

DEANE J:  But if there were a new trial, as you want if you

do not succeed all the way, there would be a very

large question, if you were found guilty of fraud,

whether a solicitor who has only been guilty of

negligence is liable to indemnify you for the

consequences of your fraud.

MR MERKEL:  Yes. I understand what Your Honour is putting

and if there is a new trial, that may give rise to

a different situation. I think the situation that

we are really looking at at present is simply on the basis that if the judgment of the Full Court stands or if the appeal by the appellants to this

Court succeeds so that there is an order of the

court below as to liability, these issues on 3.1

and 3.2 would arise. If there is a new trial, that

Krakowski(2) 81 6/5/94

would give rise to different considerations, I

would understand, although we would say that the

admission would stand. Whatever consequences may

follow would be another question.

DEANE J: If there were a finding against your client as a

result of this appeal based on fraud, it does not

follow as the night the day that an admission by

the solicitors of negligence carries indemnity

because a lot of the evidence against your client,

including the oral conversations which set the

scene for the fraud, may have no relevance at all

in the action against the solicitor.

MR MERKEL:  Your Honour, that is why I said to Your Honours

that if there is a new trial, clearly declarations

as to liability would depend upon the new trial,

but we would say the proceedings having been
conducted thus far, and I understand my learned

friend agreeing that it is inappropriate to

withdraw the admission, the admission as to

negligence would not be an issue on the retrial,

and I think I referred Your Honours to a case

yesterday where the court had ordered a retrial
because of problems not dissimilar to the present,
but the admission or the evidence had stood, and we
would say the admission should stand. But the last

matter I -

BRENNAN J: What is the admission?

MR MERKEL:  The admission, Your Honour, is that if a cause

of action founded on non-disclosure is successful,

which is what the plaintiff and the appellant is

contending, then the solicitors were negligent in

non-disclosing. I think it is set out precisely at

page 904 in paragraph 2.1.7.

TOOHEY J: It is really a matter for the third party, is it

not, to tell us what, of the orders sought in the

cross appeal, are consented to? If they are

consented to, well then, I suppose, that is the end

of it, so far as we are concerned. If they are not, then we have to look at it in the light of whatever you and Mr Lally tell us.

MR MERKEL:  Yes, Your Honour, and I will not say any more on

that. Could I just indicate to Your Honours that

my learned friend is consenting to us making an

amendment to the orders sought, because if the

appeal succeeds on rescission, the order sought
in 3.1.1 is not quite accurate and my learned
friend does not oppose us seeking to amend the

orders in 3.1.1 which would be appropriate if the

Full Court judgment stands, or there is a monetary

amount to be awarded, but if rescission is ordered,

the indemnity should be in respect of the loss and

Krakowski(2) 82 6/5/94

damage suffered by reason of the orders made in

respect of the plaintiffs' claims, and if we could

have leave to put that as an alternative form of

order and deliver an amended notice of cross appeal

so that that would get the orders in correct form

if the appeal succeeds. And if we could have

Your Honours' leave to file that -

BRENNAN J:  I must confess you have lost me completely.

MR MERKEL: Sorry, Your Honour.

BRENNAN J:  The reason why you have lost me completely is

because I do not understand the basis of the claim

as between your client and the solicitor, because

the reason why I am having difficulty is this: that

I do not understand the notion of a breach of a

duty of care except it be connected to specific

damage, and if at this stage that damage is not

identified, I do not understand either the

admission that is made or the consent to the

orders.

MR MERKEL: Sorry, Your Honour. It may be that I need to

await what Mr Lally says in respect of the

submissions we had put yesterday. What I had

submitted to Your Honours yesterday is that on the

authorities I had referred to, the appeal on the

third party proceedings should result in a

declaration effectively making the solicitors

liable in respect of the conduct, the subject of

the plaintiffs' claims, and liable to indemnify us

in respect to the loss suffered.

Now, I best await what my learned friend says

concerning those submissions, but at this stage all

I wanted to say to Your Honours is that we would

seek leave without my learned friend opposing it,

to amend the form of orders sought so that there is

an alternative form of order which would be

relevant if there were rescission, that the second

respondent indemnify the first respondent in

respect to the loss and damage suffered by the

first respondent by reason of the orders made on

the plaintiffs' claims in these proceedings. So

that that issue is before Your Honours. My learned

friend, I understand, does not oppose leave to

amend to seek that order in the alternative to

3.1.1.

BRENNAN J: Loss and damage suffered by the defendant.

MR MERKEL:  Yes, by reason of the orders made by the court

in relation to the appellants' claims in these

proceedings. Possibly I should say no more than
deal with the matter, Your Honours, in the plight

of my learned friend - - -

Krakowski(2) 83 6/5/94

BRENNAN J: That includes costs or anything of that sort?

MR MERKEL:  Costs would be a separate matter for the Court,

Your Honour.

BRENNAN J: Would it? I do not understand that it would be

from those -

MR MERKEL:  Yes, we would say that would embrace costs,

Your Honour, but we have sought separate orders for

costs so it would be loss and damage but that could

include costs, but that would be a matter for the

Court. That is the order we would seek,

Your Honour. If Your Honour pleases.

BRENNAN J: 

Mr Lally.

MR LALLY: 

I will come to that aspect in due course if I

may. If I could return to where I was yesterday.
The concept of knowledge that is referred to in

Derry v Peek and the cases on fraud needs to be

considered in a different aspect depending on

whether it is knowledge in the broad sense because

somebody has been told the fact at some time of

their life and they have received that, as distinct

from the conscious knowledge where the fact is

brought to the forefront of one's mind when one is

acting and making a decision.

TOOHEY J: Mr Lally, what aspect of the appellants' appeal

are you now addressing?

MR LALLY:	As to the question of whether or not fraud can be found by inference on the failure to call evidence
because the documents, as Mr Mandie would have it, speak for themselves, where the representation is
constituted by the proffering of the contract of sale that has annexed to it the lease agreement but
does not make reference to the side agreement. And
that is the representation that was found by the
Full Court to be a positive misleading
representation and that it carried with it a representation as to the market value of the
property.

When Mr Mandie says, "Well, knowledge is

established because the solicitor drew the

documents" and he relies upon that fact that the

solicitor is the agent of Eurolynx, remembering

that the only cause of action in fraud is against

Eurolynx, they did not, despite the way the case

has now been put, seek to join Mallesons saying,

"You were fraudulent because you drew the documents

in that way and allowed them to go out".

TOOHEY J: Yes, that is what really prompted my question.

What is your interest in the area of fraud?

Krakowski(2) 84 6/5/94

MR LALLY:  My interest is this, that if the case were to be

successful on appeal, despite the findings of

Mr Justice O'Bryan in the Full Court that there was

no fraud, and should this Court allow it, it would

then be said, "Well, although Mallesons was sued

only in negligence, the cause of our predicament is

because you drew the documents". The court has

found that the documents of themselves constitute

that representation.

As the learned trial judge said, "If I look at

it on a concealment basis, you have the document

but you failed to talk about the side agreement",

or, as the Full Court - and we do not seek to argue

against the Full Court's finding as classifying it

as one of a positive misrepresentation,
nevertheless, the vice is the failure to have in

the documentation the side agreement. If the Court

were to infer fraud on the basis that this, as

Mr Mandie would have it yesterday, the real problem

is the documentation itself that was handed over

and the solicitor was not called. We did not

nominate Mr Gilbert, he told the Court yesterday.

Mr Gilbert is the relevant person who gave

evidence for the respondent and, in our submission,

the solicitor should not be seen as a principal,

but should be seen as an agent for the purpose of

merely drawing the documents, and that is as far as

the evidence should go.

TOOHEY J:	But say there was no clause 8A and associated clauses in the statement of claim, would you even
be here?
MR LALLY:	I would have thought not.
TOOHEY J:	No.  There is a sense in which you are really

purporting to speak on behalf of a witness rather

than a party, are you not? I mean in this

particular aspect of the matter.

MR LALLY: Well, in this sense that the Court was taken

yesterday as to how the case - and I do not want to

go back into the various machinations of how this

case has been conducted and the way it has been

put, and that my learned friend sought to draw away

from the way it was put to the Full Court, of being

a case of positive deliberate fraud involving the

solicitors, amongst others, and the failure to call

those. Now, it is true, Justice Toohey, that in

some respects I am, as it were, speaking for a

witness, but that witness is the relevant person

who constituted the third party, and the third

party was sued only in negligence and the evidence,

as the Court was taken yesterday, that that

admission was made at the close of Eurolynx' case

Krakowski(2) 85 6/5/94

before they would have otherwise called expert

evidence as to whether or not, should the solicitor

who prepares conveyancing documentation advise

their client accordingly, if it be a matter that it

should have been disclosed.

But there is no admission there as to fraud

and we were not sued in fraud, but there is a real

interest in being heard on this point because it

has been said, well she should have been called,

and we are at risk in that we face, as it were, the

third party proceedings. And in our written

submissions we have made clear the point that there

can be no determination of the third party

proceedings until there is some loss or damage.

We do not dispute the authorities that

Mr Merkel referred the Court to yesterday that are

well known, Port of Melbourne v Anshun and others,

that characterize the third party proceedings - - -

DEANE J: But assume against your interests that the result

of the appeal to this Court is, if the appellant

succeeds all the way along the line, that this Court says Justice O'Bryan should have ordered

rescission. Are you really saying that in that

event he should not have gone on and decided the

third party proceedings?

MR LALLY: No.

DEANE J: Well then, why should this Court not look at it

and see what he should have done in the third party

proceedings, and there your client has left it in

the situation where it admits negligence, it has

not disputed Mr Gilbert's evidence that if you had

advised him he would have followed the advice and

where it has not disputed evidence that by handing

over the contract if it did contain the

representation, it knew that that representation

was false.

MR LALLY:  That is the very point, Your Honour, that I wish

to address the Court on. It is that - - -

DEANE J: But that is the evidence, that Mallesons had acted

and had drawn up the side agreement.

MR LALLY: That is the very point. When Your Honour uses the word 11 knew 11 , is the sufficient knowledge for

fraud that that is gained by merely drawing the

documents? The cases that I want to refer

Your Honours to, the passages, demonstrate that the

knowledge that is gained because you have drawn the
documents is insufficient. It has to be a
knowledge of a guilty mind and a deliberate intent.

There would have to have been a deliberate intent

Krakowski(2) 86 6/5/94

by the solicitor that when those documents were

drawn that they would be handed over in a way that

would constitute the representation relied upon.

DEANE J:  I am not talking about a finding of fraud against

the solicitor, because fraud is not alleged. I am

talking about the consequence of the admission of

negligence in that context where you do not dispute

that you were negligent in not giving the advice,

and where you do not dispute that if the advice had

been given, as between you and the first

respondent, it would have been followed.

MR LALLY:  I accept that but - - -

DEANE J: Which is, I would have thought, a very big thing

not to dispute; but that was what happened at the

trial.

MR LALLY:  But the knowledge that is required has to be the

knowledge of the intent to defraud, because it has
been put that it is really the solicitor's fraud in

putting forward the documents that are channelled

through Mr Gilbert.

DEANE J: But the appellant does not bother about that. It

says the company made a representation through its

agents which the company knew to be untrue, and

that is my case.

MR LALLY:  But it is the knowledge of the solicitor that

they rely upon as constituting the knowledge of the

company.

McHUGH J:  I do not quite follow this, because the claim

that was made against you is set out in the

particulars which appear at pages 36 and 37 of

volume 1 of the appeal book. That is what is

alleged to constitute your negligence, and you have

admitted it.

MR LALLY:	Yes.
McHUGH J:	Now, that seems to me to be the beginning and end

of the case; that you failed to disclose the letter
of 12 September in the contract of sale, or the
vendor's statement, or you failed to advise the

defendant with respect to the disclosure of the

agreement, or you prepared and advised them to sign

answers to that requisition, which did not disclose

the existence of that letter. Now, that is what is

alleged against you and that is what you have

admitted.

MR LALLY:  Yes, that is in negligence, but the question is

whether or not it is the knowledge of the

Krakowski(2) 87 6/5/94

solicitor, because she has drawn the documents, can

be used as the relevant knowledge of the servant or

agent of Eurolynx to constitute the fraud.

TOOHEY J: But, that is what is alleged against you by the

third party.

MR LALLY:	By the - - -
TOOHEY J:	The particulars to which Justice McHugh has drawn

attention are the particulars alleged against you

by the third party, are they not?

MR LALLY:  We are the third party.

TOOHEY J: Yes, I appreciate that. Sorry, are alleged

against you by the defendant?

MR LALLY:  It is the failure to give legal advice.

TOOHEY J: Yes, but that arises not directly out of the

plaintiff's claim against the defendant, but out of

the defendant's third party suit against your

client.

MR LALLY:	Yes, because we drew the document.
BRENNAN J:	Is this what you are seeking to put, that the

allegation of the plaintiff against the defendant

is one of fraud, the relevant fraud is the fraud of

the solicitor and you, having the interest of the

third party and resisting the plaintiffs' claim,

want to make submissions with respect to that

allegation?

MR LALLY:	Yes, Your Honour.
BRENNAN J:	I see.
MR LALLY:	If I could take the Court to relevant passages

that -

GAUDRON J: Well, could I answer that, perhaps I am at a

disadvantage here. I do not understand the

allegation of fraud to be exclusively with respect

to the solicitor?

Mr LALLY: Well, it was said that - - -

GAUDRON J: Indeed, as I understand the case, it is said

that Mr Cini knew, other people knew, and at the

end of the day this is what the solicitor did.

Now, she knew that there were other arrangements,

but there is by no means that her knowledge is what

constitutes knowledge on the part of the vendor.

Krakowski(2) 88 6/5/94

MR LALLY:  Well that is what was being put by Mr Mandie

yesterday, that it is the failure to call the

solicitor, can be used to infer that it is her

knowledge because she has drawn the documents and

that Mr Gilbert was merely a channel for those

documents.

DEANE J: But what he said was a failure to call her, but he

also said the failure to call Mr Ryan and so on,

justifies an inference being drawn against the

company. Are you really suggesting we should go

into the issue of whether the solicitor has been

guilty of the fraud?

MR LALLY:  Yes, because that is the way he is putting it,

that it is the knowledge of the company is

constituted by the fact that the documents were
drawn in a certain way and were handed over in a

certain way - - -

DEANE J: But that is a diversion because the knowledge of

the company and the fraud of the company, if there

was fraud, have to be determined in a context where

Mr Ryan, who was the company, fully knew that the

purchaser was placing primary reliance on the

rental figure. Now there is nothing to suggest

that the solicitor had any knowledge of that.

MR LALLY: Precisely, Your Honour, and that is why, if the

representation has to be viewed as the

representation as found by the Full Court which

carried with it, the relevance of the market.

rental, amd that is what made it material and the

Court has found that to be material. The failure

to call a solicitor who has prepared documentation

when there is no evidence that she had or knew

anything about the relationship of the documents

being used for the purpose of considering the

question of whether or not market rental was even

being raised - - -

BRENNAN J:  Mr Lally, that is also a diversion. Why do we

need to get involved in market rental? The

representation that is relevant is the

representation that these are the contractual

arrangements. Market rental may follow from that,

it may not, but the reality of the representation

that is alleged in paragraph 4(b) in the

particulars is that,these are the contractual

arrangements.

MR LALLY:  But it is the market rental aspect that makes

that representation material.

BRENNAN J:  Why is it not simply that these are the

contractual arrangements whereas there are in fact

Krakowski(2) 89 6/5/94

other contractual arrangements which are not

disclosed?

MR LALLY:	Yes, but what is material for the purposes of the case in fraud, having a consequential claim for
damages or rescission, the essential claim was one of a capital loss. They claimed we had a capital
loss.

BRENNAN J: You can put that up if you like, but I think it

is a straw man.

MR LALLY:  But that is what, with respect, made it material.

BRENNAN J: What made it material was the interest of the

purchaser in the contractual arrangements. He

wanted to know that there was a tenant who was

bound to pay and was paying $156,000 a year.

MR LALLY:  And the tenant was bound to pay $156,000 per

year.

BRENNAN J: That is not so; only bound to pay as from the

expiration of three months.

MR LALLY:  That is the personal covenant whereby that tenant

is procured.

BRENNAN J: Read the first paragraph of the side letter. It

is not a personal covenant. It abrogates the terms

of the lease.

MR LALLY:  Yes, that is as between Eurolynx and Swaeder, but

as between Eurolynx and the purchaser the $156,000

per year is payable. It depends from where one

looks as to what is relevant.

DEANE J: Is payable by whom?

MR LALLY:  By Swaeder.

DEANE J:  Do you really suggest that if the purchaser had

knowledge of the side agreement the rental would be

payable by anyone?

MR LALLY: Payable by anyone in what respect? It is - - -

DEANE J: Presume that the proper thing had been done and

there had been full disclosure of the side

agreement. Do you really suggest that the tenant

would be liable to pay the rent for the first three

months?

MR LALLY:	To whom?
DEANE J:	To anyone.

Krakowski(2) 90 6/5/94

BRENNAN J:	To the holder of the - to the landlord.
MR LALLY:	The tenant did not have to pay Eurolynx for the

first three months. But that does not result in

any benefit for the appellants in this case because

there was no causative loss that flowed from that.

The period had almost expired, and when they find out about it they do not even rely upon it. So for

them to come to this Court and say, "That is an

aspect that they are entitled to rely upon", is a
different matter. And it is not simply a matter of

saying, "It doesn't impact on their pocket", when

they have the knowledge and determine whether or

not to act in reliance upon that. The court was

satisfied that they did not so act and why should

that result in them now being entitled to, as it

were, retrospectively say, "Even when we found out

about that and we did nothing, we want the courts

to accept that, well, we would have acted

otherwise", and their findings of fact that have

been made stand for the proposition, in short, that

it would not have made any difference.

TOOHEY J:	But if there was no third party claim, would you have any interest in the issue of fraud?
MR LALLY:	If there was no third party claim, no.

TOOHEY J: Either than perhaps a wish on the part of your

client to protect itself against the suggestion of

fraud.

MR LALLY:  Yes.

TOOHEY J: But in terms of the issues presented to the

Court, would you have an interest in the question of fraud?

MR LALLY:	No.
TOOHEY J:	So it only arises by virtue of a third party

claim, not based in fraud, but based in negligence.

MR LALLY: In negligence.

TOOHEY J: Well, it comes back, I think, to the question

that was put to you earlier, does it not: what is

your interest in negating fraud, except an

understandable interest to protect your client

against a suggestion that it might have been guilty

of fraud? But that. does not make it an issue in

this appeal.

MR LALLY:  It does in the sense that we are joined as a

third party and it is legitimate, in our

submission, to put submissions that could arguably

be sought to relate to us in the final wash up,

Krakowski(2) 91 6/5/94

that presumably Eurolynx will say, "Well, whatever

position we may find ourselves in, it has been

caused by - - -

TOOHEY J: Not by fraud of Mallesons, but by the negligence

of Mallesons.

MR LALLY:  By the negligence, and the admission of

negligence is an admission of negligence in the

failure to advise.	It is not an admission as to an
indemnity for the fraud.	And that is the reason

why you cannot simply say, well, because they were

the solicitors and drew the document, they are

guaranteeing that if there be fraud that they

therefore indemnify, and there can be no

indemnity - - -

TOOHEY J: But is that not your starting point? If there be

a finding of fraud, if there be, and then you take

it from there, but you are wanting to go back and

say that there should not be a finding of fraud.

MR LALLY:  I do, because it is my client that is selected as

one of the, and if as the submissions went

yesterday, really the major party involved in the

fraud, because it is the presentation of the

documentation constituting that representation.

Now, Mr Mandie can say they should call Mr Ryan,

who was a director; they should call Mr Cini, but

it depends upon what evidence there is to

constitute a guilty mind, and it is on that aspect
that I wanted to draw the Court's attention to that

distinction, which would be relevant when the Court

has to consider the position of the solicitor as a

servant or as an agent of Eurolynx in that respect.

Might I take the Court to the passages that I

wanted to refer to, firstly in Derry v Peek, and

the first passage is in the judgment of

Lord Halsbury, at page 344, about point 5 of the

page, where His Honour says: 

Nevertheless, if, as I have said, the facts are reconcilable with the innocence of the

directors, and with the absence of the mens
rea which I consider an essential condition of
an action for deceit, the mere fact of the

inaccuracy of the statement ought not to be

pressed into constituting a liability which

appears to me not to exist according to the

law of England.

BRENNAN J: That is a fairly familiar proposition.

MR LALLY:  Yes, it is, and the knowledge is one that is of a

guilty mind, mens rea, rather than knowledge by

reason of the fact of having drawn the documents

Krakowski(2) 92 6/5/94

per se. There has to be more than the drawing of

the documents.

MR LALLY: At the top of 348 in the judgment of

Lord Bramwell, His Honour, in the first sentence says:

It is also certain that the defendants knew

what the truth was, and therefore knew that
what they said was untrue. But it does not

follow that the statement was fraudulently

made. There are various kinds of untruth.

There is an absolute untruth, an untruth in

itself, that no addition or qualification can

make true; as, if a man says a thing he saw

was black, when it was white, as he remembers.

and knows. So, as to knowing the truth. A

man may know it, and yet it may not be present

to his mind at the moment of speaking; or, if
the fact is present to his mind, it may not

occur to him to be of any use to mention it.

The next passage is at page 375 where, after the

famous passage on 374 at about point 5 of the page,

His Honour says:

But the whole current of authorities, with which I have so long detained your Lordships, shews to my mind conclusively that fraud is

essential to found an action of deceit, and

that it cannot be maintained where the acts

proved cannot properly be so termed.

And then His Honour, at the top of 376, deals with the question of means of knowledge in the first sentence in the third line:

So, too, although means of knowledge are, as

was pointed out by Lord Blackburn in

Brownlie v Campbell, a very different thing

from knowledge, if I thought that a person

making a false statement had shut his eyes to

the facts, or purposely abstained from

inquiring into them, I should hold that honest

belief was absent, and that he was just as

fraudulent as if he had knowingly stated that

which was false.

In Angus v Clifford, (1891) 2 ChD 449, the court of

Appeal analysed the significance of those passages

in Lord Herschell's judgment and how the statement

that we are so familiar with as to knowledge in the

Derry v Peek definition should be understood. The

relevant passage is at about point 5 of 464 where

the court says:

Krakowski(2) 93 6/5/94

Now the case put for the Plaintiff is based

upon what Lord Herschell said.

There is reference to those passages, and then if

you go to the first paragraph on page 465:

The Plaintiff's counsel naturally relied upon that statement, and in particular upon this -

that fraud is proved -

not only that there is evidence of it but that it

is proved -

when it is shewn that a false representation

has been made knowingly or without belief in

its truth. They say here you made this false.

statement knowingly, you knew what the facts

were and you made it without any belief in its

truth. And if that were the whole of the

judgment, I do not think it would be easy to

answer that argument. But then one must look

a little further to see what Lord Herschell

says on pages 375 and 376. At page 375 there

is a passage which is a qualification.	I have
read it, and to my mind it qualifies the

former statement in a most material manner:

"In my opinion making a false statement

through want of care falls far short of, and

is a very different thing from, fraud, and the

same may be said of a false representation

honestly believed, though on insufficient

grounds." Therefore, you may have, as I

understand it, a false statement made, but

made without the matter being present to your

mind, and made carelessly.

It deals with some matters then as to moral duty

which I need not concern the Court with, but over

on 466 in the first paragraph, Lord Justice Lindley

goes on to say:

Now my observation upon that is this, that

when you read the whole of that part of the

judgment, you must take the observations on

page 374 as to what is said about proof of

fraud, as subject to this, that the matter to
be inquired into is fraud or carelessness. If

it is fraud, it is actionable, if it is not

fraud, but merely carelessness - it is not.

The passages about knowledge - knowingly making it, and·making a statement without

believing its truth, are based upon the
supposition that the matter was really before
the mind of the person making the statement,

and if the evidence is that he never really

intended to mislead, that he did not see the

effect, or dream that the effect of what he

Krakowski(2) 94 6/5/94

was saying could mislead, and that that

particular part of what he was saying was not present to his mind at all, that I should say is proof of carelessness rather than of fraud.

In a further decision of Nocton v

Lord Ashburton, (1914) AC 933, the House of Lords had to deal with these propositions, and at 949

point 6 of the page, after reference to

Derry v Peek and Angus v Clifford, he says:

I do not wonder that the decisions in Derry v

Peek and Angus v Clifford have on this point
given rise to some heartburning. But the

principle laid down that a mens rea is

essential, in the absence of a duty to be

careful, was no new one, nor is it now open to

question.

At page 954, the passage commences at the foot of

page 953:

It must be taken to be settled that nothing

short of proof of a fraudulent intention in

the strict sense will suffice for an action of

deceit -

go down to point 3 -

But when fraud is referred to in the wider

sense in which the books are full of the
expression, used in Chancery in describing

cases which were within its exclusive

jurisdiction, it is a mistake to suppose that

an actual intention to cheat must always be

proved.

And at the commencement of the next paragraph:

Derry v Peek simply illustrates the

principle that honesty in the stricter sense

is by our law a duty of universal obligation.

And 970 to 971, last five lines:

And it should not be forgotten that Derry v

Peek was an action wholly and solely of

deceit, founded wholly and solely on fraud,

was treated by this House on that footing

alone, and that - this being so - what was

decided was that fraud must ex necessitate

contain the element of moral delinquency.

The last page of the report 978, Lord Parmoor says:

My Lords, reference was made during the hearing in your Lordships' House to the case

Krakowski(2) 95 6/5/94

of Derry v Peek. That case decides that in an

action founded on deceit, and in which deceit

is a necessary factor, actual dishonesty,

involving mens rea, must be proved.

The next case where this knowledge aspect is

analysed that I want to refer the Court to is

Armstrong - - -

BRENNAN J: Perhaps if you could just give us the references

to them we could read them at some stage.

MR LALLY: Armstrong and Another v Strain, (1951) 1 TLR 856,

the relevant passage is at 871 to 872.

TOOHEY J: Could you just tell us, Mr Lally, in paragraph 11

in your submissions some of these cases are
referred to, are the references there sufficient

for your purposes?

MR LALLY:  Yes, it is, but the relevant passage is at the

middle of 871. It is the distinction that I wish

to emphasize as made that:

These dicta are not irreconcilable with

the alternative way of stating the law -

namely, that the tort of deceit is complete if

(together with the ingredients of inducement

and damage) there is the making of a false

statement and the knowledge that it is false,

provided that the sense in which the word

"knowledge" is being used is defined. A man

may be said to know a fact when once he has

been told it and pigeon-holed it somewhere in

his brain where it is more or less accessible

in case of need. In another sense of the word

a man knows a fact only when he is fully

conscious of it. For an action of deceit

there must be knowledge in the narrower sense;

and conscious knowledge of falsity must always

amount to wickedness and dishonesty. When

Judges say, therefore, that wickedness and

dishonesty must be present, they are not

requiring a new ingredient for the tort of
deceit so much as describing the sort of

knowledge which is necessary.

And the top of the next page at the commencement of the first main paragraph:

It is precisely that conscious

knowledge - whether it be termed "a mens rea,"
"a wicked mind," or "a dishonest purpose" -

which can never be present in the case of an

innocent division of ingredients, as in such a

case the knowledge which the principal has is

Krakowski(2) 96 6/5/94

impliedly the knowledge which a man is able to

display under direct questioning.

Now that principle is relevant, in our submission,

when the Court comes to consider that aspect of

fraud, in so far as it involves the solicitor

relied upon as evidence of fraud as against

Eurolynx.

The Court has been referred to Akerhielm's

case this morning at (1959) AC. I do not want to

take the Court to it directly, but a factor that

was involved there was the failure to call a

solicitor who had drawn the documents, and one

witness was called, but there had been a failure to

call the solicitor who had drawn the documents, and

it was the putting forward of the documents, a

letter that had been drawn by the solicitor, that

is relied upon as constituting the

misrepresentation, and the Privy Council were not

prepared to find that fraud was established by the

failure to call that solicitor who had prepared

those documents. That solicitor who had prepared them was a person who could have been called, but

was not called because there had to be the finding

of fraud, and where there had been a hearing at

trial where that fraud was not inferred and that

the court said at page 807 that:

It is improbable that if Beyer had any

fraudulent intent in this matter he any more

than the Baron would have employed a

solicitor, unless, indeed, he had it in mind

to deceive the solicitor as well as the

recipients of the circular.

Now Gross v Lewis Hillman Ltd, (1970) 1 Ch 445, is

a case that we referred in part B of our outline,

but there are two passages that I would like to

take the Court to that bear on this issue. Once

again, a case where there is misrepresentation and

letters that are sent, and at the bottom of

page 459 line G:

If James intended the letters to convey the

impression that the company was a going

concern, or was willing that a recipient

should get that impression, clearly he was guilty of fraud, because he knew very well

that it was not a going concern. But although
that is, in my -view, the impression that the

letters read together would naturally create,

James cannot be held guilty of fraud unless he

intended or was willing that they should be

read in that way. That appears clearly from

Angus v Clifford ••... and from the

Privy Council decision of Akerhielm v De .Mare.

Krakowski(2) 97 6/5/94

And at page 464 to 465, just below G:

Like my brothers, I think that the real vice

of this representation is seen by reading

Mr James' two letters together and seeing the

combination of the information which they
contain. When one reads the two letters in
that way, undoubtedly they suggest to the

ordinary reader that this was an old

established company with three retail branches

which were going concerns, and if Mr James had

applied his mind to that point, he could not

have failed to realise that such information

was utterly false. The question is, did he

apply his mind to that, and can it be said

that he made this statement with intent to

deceive or that he made it dishonestly? I

find it quite impossible to say so.

Now, when one returns to the facts of this

case and the involvement of the solicitor, she has

drawn the documentations and the person with whom

she deals was Mr Gilbert. I refer the Court to

the relevant pages of the correspondence at 565,

567 and 668, they are in volume 3. Correspondence

where Mrs Samuel is - if I take the Court to 567

you will see that it is enclosing the lease in

duplicate for perusal, and it is Mr Nick Gilbert

that she is dealing with. At 570 is the

correspondence between Hargrave Ogge with

Mrs Samuel, where she is dealing with the matters

that are required for the lease inducement.

Now, similarly at 668 the Court will find the

relevant correspondence for the answers to

requisitions on title, and again it is Mr Gilbert.

At 669, line 4, the solicitor is stating that:

Although only the Company is in a position to reply to the Requisitions, for the Company's assistance, we enclose suggested replies based

upon the Company's instructions and upon our

searches and the information we have obtained

from the relevant authorities -

So that she is there clearly setting out what seems

to be the appropriate answers. I would like the

Court to go to 669-D, where you will see what the solicitor actually did on the answers to requisitions on title. If you go to question 8, the commencing question is:

Who is in possession of the property and under

what right? -

So that the emphasis is on looking at possession

and (b) then asks:

Krakowski(2) 98 6/5/94

Particulars are required of all tenancies and

occupancies affecting the property or any

portion of the property and of the rentals

payable in respect thereof -

So it is following on after a question that is

directed to that of possession, and the lease, of course, is the relevant document that dictates as to possession. Now (c) then is somewhat wider, and

relied upon in this case, to say "Well, thereby the

side agreement should have been referred to." But

what is stated is:

Production is required for our inspection of

all leases, sub-leases and agreements relating
to the tenancy or occupation of the property

or any part of parts of it -

Now, I concede that that is somewhat wider, but it

has got to be seen in that context. Now, when

those facts are looked at in that light, and of

where Mrs Samuel has dealt with Mr Gilbert, it is

appropriate and correct, in our submission, for the

Full Court not to have found fraud constituted by

any of her involvement, because there would

otherwise have to be some evidence of a concoction

that involved an agreement where she was actively

involved with the company in respect of the matters

that are material. That a solicitor, sitting in

her office drawing documentation, if it is sought

to say Mr Gilbert of course has said, "Well, I just

handed on the documents as drawn by the solicitor,

and I had no belief that they ought to disclose the

lease" in our submissions, and I will take you

directly to, without reading it, the relevant

paragraph that sets out his evidence.

It is paragraph 19 on page 7, where we say

that in any event, as the Full Court concluded,

there is no evidence from which it should be

inferred that the respondents had a wicked mind or
dishonest purpose.	The trial judge. found that the

evidence did not show that the first respondent

believed, or the second respondent advised the

first respondent that the side agreement should be

kept confidential between the first respondent and

the tenant. The evidence of Gilbert, called on

behalf of the first respondent, was found by the

trial judge to be credible and it ought to be

accepted.

We set out the passages and from that evidence

we contend that the propositions set out there can
be stated; that Gilbert thought that the first

respondent was disclosing the terms of the lease

and all that it was required to disclose, Gilbert

Krakowski(2) 99 6/5/94

thought that the purchaser would acquire the

benefit of the lease on those terms for the period

as and from completion and Gilbert did not think

that the side agreement was anything to do with the

purchaser. The Full Court did not interfere with

the trial judge's conclusions.

If it is then sought to be said, well, there

was a failure to call, one must analyse who are the

relevant people? When the man, Cini, was

identified the evidence is just so sparse on his involvement.

DEANE J: Mr Lally, what if, and I am just asking you

hypothetically, what if the inference to be drawn

against the defendant from all the evidence was

that its officers either told or deliberately did

not tell the solicitor that Mr Krakowski was

relying primarily on the rent of $156,000 a year

and that they had deliberately not told him of the

side agreement?

MR LALLY:  I have to answer it in the -

DEANE J:  Yes. I mean, the first answer must be on the

basis that the solicitor had been told that

Mr Krakowski was relying primarily on the rent and

had been deliberately not told of the side

agreement. Now, in the absence of evidence from

her, you would be in a bit of difficulty, would you

not?

MR LALLY: If that had been the evidence, yes. If there had

been some evidence that involved her in the

material aspects of this case.

DEANE J: Well, now, the alternative to that inference that

I have suggested is that officers of the company

had deliberately not told the company's solicitor

that Mr Krakowski was primarily relying on the rent

and that the contents of the side agreement had

been kept from him.

MR LALLY: Again, there is no evidence of her involvement

with the rent or anything to do with it.

DEANE J:  But would you dispute that in that second case

there would be the basis for a finding of fraud as

against the company and that you could not say in

that circumstance that all minds involved had been

innocent?

MR LALLY:  One must address on that second example, as to

who would be the relevant minds and if it is

the - - -

Krakowski(2) 100 6/5/94

DEANE J: That is what I am putting to you. That you do not

have to, when you are dealing with a company,

identify a particular mind if you can, by an

inference, reach a conclusion that you did not have

innocence in all minds.

MR LALLY:	But the court has to be satisfied that there has been actual fraud and that some person has actually
applied his mind to that very question, and in Your
Honour's example, on the basis of our submissions,
would have to carry with it that these unidentified
people would have had to have had before their mind
the significance of the documents as - - -
DEANE J:	I said, "had deliberately not told the solicitor"

of the importance the purchaser was placing on the.

rent and of the fact that he had been kept ignorant

of the contents of the existence of the side

agreement.

MR LALLY:  Yes, well the

DEANE J: And the people who had kept him ignorant have not

been called to give evidence.

MR LALLY:  But those relevant people must, one would think,

would be the ones that she was dealing with.

DEANE J: Well, we may be at cross purposes, but I follow

what you say.

MR LALLY:	That this is the difficulty when you have matters of speculation and you have a document and it is
sought to found the basis of the representation in
correspondence, or a combination of where a
principal has some knowledge in his mind and an
agent goes off and makes a statement, the two minds
do not meet and it is said, "Well, you cannot put
an innocent mind with an innocent mind and find
fraud", but if the agent had been told some facts
that had been kept from him by the principal, but
the - - -

DEANE J: Or if the principal had deliberately kept the

agent ignorant of the relevant facts.

MR LALLY:  Yes, deliberately. Now here, evidence was called

and the appellants did not make out any case as to

why Mr Ryan, although he was named, should have

been called, other than that he was a director.

Now, one would expect a director to sign

documentation, or Mr Cini, and those two names were

really quite absent yesterday when the

representation really came down to one of, it is

the proffering of those documents, and that is why,

when Mr Mandie said, "Well really Gilbert is the

channel", that it - - -

Krakowski(2) 101 6/5/94

DEANE J: But you are confusing the making of the

representation and the people who brought about the

situation in which the representation was made.

MR LALLY:  But the case has not been put in fraud that it

was constituted as an oral representation made by

an estate agent - - -

DEANE J: That is not what I have been asking you about.

The representation was the contract and, on one

view, the view that absolves your client from any

question of fraud, is that she was not informed of

the equivocal matters that had led up to the

contract. Now, if that is so, one then comes to the query, should one, in the absence of Mr Ryan

and Mr Cini, inevitably draw the inference that she

was deliberately not informed of those matter if

she was not informed?

MR LALLY:  Yes, I understand the point, but I would be only repeating myself to put - - -

BRENNAN J: What you are saying, simply, is that there is nothing on the evidence to justify the inference

that your client knew of the critical factors and

that if the only evidence against the defendant is

the proffering of the contract, that is not

sufficient. Is that right?

MR LALLY: It is, Your Honour.

BRENNAN J: Well, there may be answers to it, but that is

your submission?

MR LALLY:  It is, and it is the -

BRENNAN J: Yes, and you have put that forward in your

written argument?

MR LALLY:	Yes.
BRENNAN J: What more do you need to say?

MR LALLY:	Now if we could just turn briefly to the cross appeal and go to page 15 of the submission.	If I
could go to page 16 paragraph 39, Mr Merkel is
seeking an order that the second respondent

indemnify the first respondent in respect of any

amount for which the first respondent may be found

liable.

He sought that order from the Full Court and

as the Court noted that he did not persist in that

application and we have set out the relevant

passage from Mr Justice Phillips judgment that as between the plaintiffs and Eurolynx still remains

to identify the loss or damage, if any, for which

Krakowski(2) 102 6/5/94

the plaintiffs should be compensated by Eurolynx

and to assess the damages and until then, it is

difficult to see how the defendant could usefully

prosecute the third party proceeding which is

dependent upon Eurolynx's liability to the

plaintiffs.

As this court has ordered a retrial between

the plaintiffs and Eurolynx on the relevant issues,

this court should not in my view, embark upon a

premature determination of the third party

proceeding. We have set out the reasons why we say

that the court was correct because although the
third party procedures is unique and permits a

defendant to claim indemnity in respect of a loss
it has not suffered, that is before a cause of

action has accrued, that as a matter of policy, the

court will not go into the third party proceedings

until you have actually had that loss or damage

identified.

The mere fact that we have joined as a third

party does not answer the question as to whether an
order for indemnity ought to be made until that

loss or damage has been determined and in our

submission, the Full Court was correct.

The Full Court had to deal with the problem

that, as Mr Merkel outlined yesterday, where the

proceedings had to be sent back for trial after

mediation and whether or not it was appropriate to

send back all of the third party proceedings and

submissions were made on behalf of the third party

that we would suffer a prejudice constituted by the

failure of Mr Merkel's client to have called

relevant evidence on its loss and damage. We

dispute what he has said to the Court yesterday and

that he has overlooked that at that time, there was

an issue still as between the then defendant and
the third party and that it is to whether or not

any loss or damage that it might be called upon to

pay Krakowski, should automatically flow on.

The point was made is that identified by you,

Justice Deane, that if you have a case in fraud,

the mere fact that there is a solicitor who has a

retainer, it is not an admission that goes to an indemnity. We did not make an admission to say,

well we agree to indemnify you; what we said is, if

it should have been disclosed, we ought to have

advised you and we were negligent in doing so.

But if in fact there was a greater price that

was received by Eurolynx because of the
misrepresentation, because of the market value

aspects, and if it had been fraudulent, we put an argument to the Court - and I will simply hand to

Krakowski(2) 103 6/5/94

the Court the outline in which you will see that

that was an issue as to what the relevant prejudice

was, we said that they would have had to have taken

into account the extra money that they received by

reason of that misrepresentation and that would
have to be brought into account, that they cannot

profit from their - whether it be fraud or whether it be misrepresentation. So if the price had been

uplifted by reason of that, according to the

valuer's evidence, we said, "In the absence of you

calling evidence that you had available to you

somebody else who was prepared to pay that exact

price, the solicitor shouldn't be looked to to pay

for that damage" .

BRENNAN J: What are the terms of the admission? If, having

regard to the facts known by your client, there

should have been a disclosure, then your client was

negligent or, if, having regard to all the

circumstances of the case there should have been a

disclosure, your client was negligent. Which is

it?

MR LALLY:  If the side agreement with the tenant is found to

be an agreement relating to the tenancy and

occupation and it is found that it ought to have

been disclosed to the purchaser at the time of

answers to requisitions on title or sooner, the

third party owed a duty of care to advise the

defendant of the need for disclosure and was

negligent in the performance of that duty.

TOOHEY J:	It is the usual problem of using the passive voice instead of the active voice.	It should have
been disclosed by whom?

MR LALLY:	It was they had the evidence, that - - -
TOOHEY J:	I am just looking at the terms of the admission.

Because it is cast in the passive, it says, "If it

means - "should have disclosed". should have been disclosed". It does not say, "If the defendant" - which is presumably what it

MR LALLY:  Yes, by the defendant.

TOOHEY J: That is in the - - -

MR LALLY:	No, it is not.
TOOHEY J:	I see.  So we are· to read it as "by the

defendant"?

MR LALLY:  It merely says that the third party owed a duty

to advise the defendant of the need for disclosure and was negligent in the performance of that duty.

Krakowski(2) 104 6/5/94

BRENNAN J: Should have advised it having regard to what

facts?

MR LALLY:  It would be the facts as known to the solicitors.

BRENNAN J: That is what you say, but I do not know whether

that is what Mr Merkel understands.

MR LALLY:  In any event, those issues remained live as to

the loss and damage, and we would just seek to hand

to the Court the copies, without referring to them,
that identify those issues that there was a live

issue as to loss and damage flowing on.

TOOHEY J: But if it does become relevant, the admission in

the terms that it was made to the Full Court was

permitted by the Full Court to be withdrawn.	It is
now, we understand from Mr Merkel, sought to

reinstate that admission in either that form or in

some other form.

MR LALLY:  No, if the Court determines that the matter is

to - we are opposed to any orders being made by the

Court that appear at 909.

GAUDRON J:  Mr Lally, if at the end of the day there is real

doubt as to what is meant by the admission, what

should happen?

MR LALLY:	There should be a full hearing of all issues.
GAUDRON J:	We should not decide for ourselves what is meant

by the admission?

MR LALLY:  No. As we say in our written submissions, they

are not precluded from calling any evidence that

might be open, and the issues can then be properly determined in a just way between the parties after

the Court has made its judgment on the relevant

facts.

BRENNAN J: Where are the third party pleadings?

MR LALLY: At volume 1; 32 is the statement of claim.

TOOHEY J:  I suppose what we really need to know is in

relation to the cross appeal so far as it affects

the third party and the notice of motion relating
to the cross appeal so far as that affects the third party, to what extent there is any issue

which this Court is called upon to resolve. In

other words, it might be, for instance, that you

say, "Well, we admit the respondents' entitlement

to the relief claimed in paragraphs X, Y and Z,"

MR LALLY:  No. We do not make any admission that they are

entitled to any relief at all because that can only

Krakowski(2) 105 6/5/94

come after there has been a determination of the

liability, and we make that clear in our

submissions.

TOOHEY J:	Does it follow that you are opposed to the notice of motion so far as it affects the third party?
MR LALLY:	We do not oppose, in so far as we have any

standing which - arguably, we have no standing in

respect of the notice of motion issued last week

because strictly the original plaintiffs should not

have given a notice of appeal to the second

respondent because they had not joined that party,

it was not an opposite party, and we were brought

into it and for that reason we consider that we do

not have any standing, but in so far as we do have

standing we do not oppose that being agitated in

the way Mr Merkel did so.

TOOHEY J: So, in effect, Mr Lally, you say the admission

that you once made and are now prepared to make

again does not ground any relief on the part of the

respondent against the third party?

MR LALLY:	Not at all, because you would have to have a whole trial as to - if there be any determination
of facts that resulted in the necessity to look at the third party proceedings, then the whole
question of what was the loss and damage and
whether it can flow from the liability between the
defendant to the plaintiff, whether that can be
passed on to the third party.  We do not consent at
all to any orders being made in that sense in the notice of appeal.
We have concluded our submissions, if the Court pleases. Could I just hand to the Court
those outlines. It is the paragraphs commencing
from paragraphs 4 onwards that deal with the issue. They were the ones that were handed to the
Full Court and as a consequence of which the
Full Court recognized that there was some prejudice
and they, as it were, offered the opportunity to
start again. If the Court pleases.
BRENNAN J:	I think we should call on Mr Merkel next to

respond on the third party proceedings.

MR MERKEL:  If Your Honours please, can I clarify the

situation concerning the admission and its scope.

The circumstances in which the admission was given

are deposed to by Mr Frawley in his affidavit at

page 846 but the particular passage is at page 851

in volume 4. Could I take Your Honours to that

passage. Could I just introduce by reference to it
by saying that the admission was drawn and phrased

in the widest possible way because it was given at

Krakowski(2) 106 6/5/94

a time when the question of calling Mrs Samuel was

an issue being considered by the defendant.

Nothing had been suggested in cross-examination of

Mr Gilbert that would suggest or found the case

that Mr Gilbert or Eurolynx was doing anything

other than being completely reliant upon Mallesons

and Mrs Samuel as to the issue of disclosure, nor

was it put in evidence or suggested anywhere in the

material that Mrs Samuel would not have known of
the significance of rent to a purchaser.

I will give Your Honours some references in a moment to that, but Mrs Samuel was the solicitor

that had been acting for Eurolynx in respect of the

leasing and sale of all the units at the

development. So it was in that context where no

issue had been joined as between the third party
and Eurolynx that would suggest any culpability,

wrongdoing or concealment of any kind that the
question then arose as to whether Mrs Samuel should

be called.

In that context, can I take Your Honours to

what was said at page 851, because what Mr Frawley

sets out there were the circumstances that arose,

and he says that he took part in some of the

conversations between counsel at the time, and then

he says whatever he deposes to is based upon what

he knew directly, or what he was told, and this was

not put in issue before the Full Court.

The firstnamed respondent intended to call a

legal practitioner to give evidence going to

the standard of care of a reasonably competent

legal practitioner in relation to the

obligation to disclose the side agreement and

would have done so had it not been for the

admission. The firstnamed respondent also

contemplated calling the solicitor from the
second respondent firm who acted for the

firstnamed respondent in the transaction with

the appellants. After detailed discussion

between myself, senior counsel for the

firstnamed respondent, counsel for the

secondnamed respondent and his instructor, the

admission contained in the form set out at p

438 of exhibit "KFFl" was obtained save that

the admission made to the firstnamed

respondent -

and then there was a transcript error that is

there, corrected - I should read it -

was "If the side agreement with the tenant,

which is exhibit "B" in this proceeding, is

found to be an agreement relating to the

tenancy or occupation of the premises .... "

Krakowski(2) 107 6/5/94

rather than "relating to the tenancy and

occupation ..... -

that corrects the error -

The words "or sooner" after the words "and it is found that it ought to have been disclosed

to the purchaser at the time of answers to

requisitions on title, .. " were inserted by agreement between the first and secondnamed

respondents at the specific request of the

firstnamed respondent to include the

contingency should the Court find there was an

obligation to disclose the side agreement
prior to answering requisitions on title, for

example, in the contract of sale, and the

vendor's statement, or even earlier.

All of the evidence which the parties to the
appeal intended to call was called at the
trial, and each party closed their case at the

conclusion of the evidence. There were no

issue reserved for further hearing.

GAUDRON J: That rather reads to me as though it was the

mere fact of its existence which brought forth the

duty to disclose; that the whole debate was

directed to whether or not the mere fact of

existence was sufficient to bring about an

obligation to disclose.

MR MERKEL:  Your Honour, we would say yes. The fact that

there was such an agreement brought about a duty to
disclose and negligence in failing to advise

disclosure, in all the circumstances of the case

which were then fully before the court and had been

fully ventilated. And we would say two things:

one is that - - -

GAUDRON J:  It would be an extraordinary admission if it

were to take account of the fact that the solicitor

was being deliberately kept in the dark, for

example.

MR MERKEL:  Yes, Your Honour, clearly, and there was never a

suggestion that that had ever occurred, and what I

was going to say to Your Honours is that, and can I give Your Honours these references - Mr Gilbert was

solely responsible for the supervision of, and

carrying through to conclusion, the whole issue of

liaison with Mallesons concerning the construction,

leasing and sale of the shopping centre. That is

at 525 point 20, to 527 point 10. Mrs Samuel was

the person at Mallesons who was in liaison and

carrying out Mr Gilbert's instructions, and acting

through Mallesons for Eurolynx. At 525 point 25

Mallesons had acted throughout; 525 point 30 had

Krakowski(2) 108 6/5/94

advised on all aspects; 526 point 25 the liaison

was between Mr Gilbert and Mrs Samuel.

The evidence that I had given Your Honours

this morning made it clear that Mr Gilbert gave

evidence which was accepted by His Honour that he

had no reason not to disclose and never gave any

instructions not to disclose and was reliant

totally on the solicitors in all respects.

And one other matter I should indicate to

Your Honours, because it has been somewhat

colouring of the case before Your Honours, that the preparation of the lease and the side agreement did not occur in the context of the sale to Mr

Mermelstein, it preceded that and the Full Court

discussed that and found to that effect at 831

point 20 to 831 point 27, so that in so far as any

suggestion is sought from surrounding circumstances

to suggest that - - -

GAUDRON J: Did they precede the first discussion where it

was indicated by Mr Mermelstein that his uncle

required rented premises with a return?

MR MERKEL:  I do not think so. I think the finding of the

Full Court was to the effect that it operated

independently of a proposed or contemplated sale to

Mr Mermelstein.	I think that is as far as we need
to put it.

TOOHEY J:  Mr Merkel, what role does the admission now play

in the issues before this Court?

MR MERKEL:  The plaintiffs' claim on the third party

proceedings are to be determined at the same and

the one hearing based on the same evidence. We say

that the plaintiffs' claims, if successful in this

appeal, will bring consequences that we contended

for in our notice of cross appeal with leave, that

the third party is liable as we have contended,

based upon the admission and the evidence we

referred Your Honours to yesterday, which is fairly
fully set out in our cross appeal.

My learned friend Mr Lally did not appear to

contest, although he said formally that he did, or
put any submission as to why the third party is not

liable to the defendant. He said in the end that,

as I understood his submission, he opposed the

relief sought on page 910 which were the orders for

indemnity, in effect, but he did not present any

submission. He opposed the orders at 909 but he

did not put a submission opposing the orders at

910.      But really we say that if this Court does not

determine liability on the third party proceedings,

the whole basis of the third party proceedings and

Krakowski(2) 109 6/5/94

the reason for them and the admission given would

be undermined and vitiated.

TOOHEY J:  I thought he went so far as to say that no

consequences flowed from the admission, which makes

you wonder why it was made.

MR MERKEL: All I can say, Your Honour, is rather than to

say what he did or did not say, what he had not put

to Your Honours, is any reason why liability in the

circumstances does not flow to his client based

upon the evidence and the admission.

BRENNAN J: Why is the admission relevant here? The

circumstances you have drawn our attention to at

851 may be relied on perhaps in order to support a

contention as between you and the third party that
they cannot resile from the admission thus made,
but from a point of view of our determination of

the third party proceedings, there was an admission

made at trial, withdrawn in the Full Court and now

made here in terms which at best, are equivocal.

MR MERKEL:	Your Honour, we would rather phrase what Your Honour puts to us differently. This Court has
before it the final hearing and determination of the plaintiff's claim and the third party
proceedings in respect of which the evidence has
now concluded. The appellants are seeking
rescission and consequential orders. This Court will either dismiss the appeal, allow the appeal
and make orders or leave the Full Court orders stand.

If any order is made in favour of the

appellants on the basis of the evidence below, the

sole basis for the third party proceedings being

heard together with the claims is that the third

party is bound by the consequences that flow from

the Court's orders on the primary claims.

We say that brings to question two separate

issues. One is whether the third party are liable

to Eurolynx for the loss Eurolynx suffers by reason

of those orders and two is, what is the extend of

the liability? We would say that at the very

minimum it would be a grave injustice if the

determination of their liability is not a matter

dealt with as part and parcel of the dealing with

both sets of proceedings.

We would say that because this was a final

hearing, based upon the authorities I referred

Your Honours to yesterday, there is no anomaly in

declaring and ordering that there be an indemnity

in respect of the loss caused by the court orders,

because that has been fully contested and there is

Krakowski(2) 110 6/5/94

nothing put to the Court that would suggest that

any of the loss is not foreseeable or unusual or

not that which naturally and properly flows from

the breach of duty.

BRENNAN J:	You say that you are entitled, if there should be an adverse judgment against you, to some relief
against the third party, based upon the material
before the trial judge.
MR MERKEL:	Yes, Your Honour.

BRENNAN J: What are the terms of the admission upon which

the trial judge was invited to act?

MR MERKEL:  The terms of the admission, Your Honour, are set

out at page 904. And if Your Honours will excuse

me, I will give Your Honours the reference to where

that was actually given at trial. It was given at

page 775, but what Mr Frawley's affidavit at
page 851 states is the word "in" at line 7 should

read "or", and that is not in dispute.

BRENNAN J: What is this? Page?

MR MERKEL: At page 775, Your Honour, at line 7 it says,

"relating to the tenancy in occupation". What

Mr Frawley said at page 851, and it is not

disputed, is the word "or occupation" should be

there.

BRENNAN J: Yes.

GAUDRON J: There was evidence then as to what Mrs Samuel

knew over and above the mere existence of the side

agreement.

MR MERKEL:	Your Honour, the evidence as to what Mrs Samuel knew, in a sense, is by inference because she had
acted for Eurolynx in respect of the construction
centre, and acted in exactly the same way as she
leasing and development and sale of the shopping
had acted in this transaction and therefore, in the
absence of any suggestion she would have not known
that there was a relationship between rental and
sale price, of which there was never any
suggestion, the inference is clear, as I understand the evidence, that she obviously would have known
the importance of disclosure of rental in the terms
of what has occurred in the present case.

Nothing was ever put or suggested in evidence

that she would not have known, and we say that in

those circumstances when the admission was made,

going back to Your Honour the learned presiding

Judge's question earlier, it really was in all the circumstances and there should be no inference

Krakowski(2) 111 6/5/94

drawn in favour of my learned friend due to the

fact, particularly, he did not call Mrs Samuel to

suggest otherwise.

Also we do say that the evidence accepted of

Mr Gilbert would be in conflict with any such

suggestion of concealment or want of full and
proper disclosure for the purpose of Mrs Samuel

being able to act and discharge her duties

properly. So we would submit that in those

circumstances the relief which we have - - -

GAUDRON J: Well, for my part, I must say I do not see that

there is anything automatic about what you say.	If
one comes to the conclusion that the company knew
that the actual rent and the precise arrangements with respect to it were material to the purchaser,
by reason that first conversation between
Mr Mermelstein and Mr Cini, which was before the
sale was negotiated, and there is no evidence that any of that was relayed to Mrs Samuel, one would
get a quite different conclusion from the conclusion, as a matter of law, that is, than you
would get if the evidence were that she had at all
stages been told of the conversation with
Mr Mermelstein.

MR MERKEL:	I understand what Your Honour is putting to me. I can only say in response that the Court has all
of the evidence and at the close of the first defendant's case, and at a point of time when the
third party was to make a decision as to whether it
would present any evidence, and it was open to the
third party to cross-examine Mr Gilbert on that
matter, and it was also open to the third party to
call evidence to suggest that the inference we say
can be properly drawn from the evidence should not,
the third party elected not to call any evidence.
And we would say that if it was suggested that the third party being Mallesons, as a firm of
solicitors of that standing, and Mrs Samuel having
her role and experience would not know the
significance to a purchaser of the representation
as to rental made in the agreement, we say no such inference could or should be drawn on the facts of the present case.
GAUDRON J:	May not the result be quite different depending

on whether there is a finding of fraud or a finding

of false and misleading and deceptive conduct?

MR MERKEL:  No, Your Honour, because the evidence is as

follows, that it is the representation that founds

the cause of action. The representation in

paragraph 4(b) of the statement of claim was made

by the defendant on the basis of documents prepared

solely be solicitors who are engaged to act and

Krakowski(2) 112 6/5/94

prepare documents fully and properly disclosing the

relevant facts which were, for present purposes,

the side agreement. If paragraph 4(b) is a

misrepresentation, it is a misrepresentation made

the representation on behalf of the defendant and

solely on the basis of the documents prepared by

on the basis of advice that it was a proper form of

disclosure and not a misrepresentation.

The evidence is quite clear that had he been

advised that a disclosure was necessary, he would

have had no reason not to disclose and would have

disclosed. Therefore, we say that if the fraud has

been brought about by reason of the non-disclosure,

which we say is the whole case of the plaintiff,

that directly brings into line the admission,

because the admission is that in all those

circumstances, being the case before the Court, the

failure to advise as to disclosure was a breach of

duty. We say that there is no basis to conclude

that the third party would not be liable to the

defendant in those circumstances.

We do emphasize, Your Honour, that even though

this Court may come to a different view as to the

evidence before the Court than His Honour in the

Full Court on the issue of fraud, what all of

Their Honours found below is that there was no

dishonesty or intent to deceive or intended or

calculated scheme for fraud on the part of the

defendant. Now, that may not, in the result that

Your Honours may arrive at, mean or have the

consequence that there is not fraud made out in the sense required by the law, but it is not fraud of a kind that we say on any public policy ground should

disentitle the defendant to the third party relief

that it seeks.

I should add, Your Honours, that it is

relevant to note that the third party did not put

in issue in its defence any what I might call

alleviating conduct or any conduct of the kind such

as deliberate concealment, which was put by

His Honour Justice Deane to my learned friend,

Mr Lally.

GAUDRON J: But, that is because they were sued in

negligence. I mean, nothing turns on that. If you

are sued in negligence, you are sued in negligence.

MR MERKEL:	We did sue in negligence. What I was saying is that nothing was put in the third party's defence
raising any special issue between it and the
defendant suggesting that the defendant had failed
to inform it of relevant materials or facts that
made its conduct not culpable in the sense that was

Krakowski(2) 113 6/5/94

admitted. They are the submissions that we do put

on the third party proceedings.

I had indicated to Your Honours that we would

seek to amend our notice of cross appeal and that

that was not opposed by my learned friend,

Mr Lally. We have had a handwritten amendment, if

I could hand that up to Your Honours and ask

formally for leave to amend because that amendment

would be relevant if Your Honours were disposed to

allow the appeal. The amendment appears at page 9,

it does not have a page number at the top of the

page, it is the fourth-last page of the document

handed up to Your Honours.

BRENNAN J: Yes, thank you, Mr Merkel.

MR MERKEL:  I think I had given Your Honours references in

relation to Mrs Samuel up to 527. Could I also

give Your Honours additional references relating to

her, and the relevant conduct. At 528 lines 10 to

15, 529 lines 15 to 20, and 532 line 10. If

Your Honours please.

BRENNAN J: Thank you. Mr Mandie.

MR MANDIE:  If the Court please. We wish to mention only

three matters, very briefly. Firstly, there have

been a number of statements about what our case in

fraud is. We say they are misstatements. What we

submitted to the Court appears in

paragraphs 31 to 37 of our written submissions, and
I will not repeat what we said there.

Could I in addition, however, mention that the very same case was put at trial, and the additional

transcript which was handed up to the Court at

pages 37b and 44b shows that Mr Watkins of counsel,

who was appearing for the plaintiffs at the trial,

contended that there was fraud which involved

Mr Cini, Mr Ryan and Mrs Samuel, and that in the

relevant sense of fraud as expounded in Derry v

Peek each and all of those individuals were

involved. That is what he said; he did not mention

Mr Gilbert.

And finally on that topic, most, if not all of

the cases that my learned friends have relied on

where reference is made to the understanding of the

representation which was had by the person who made

the representation,.or knew that it was made, those

statements of principle are made in the context

where that witness was called and gave evidence

that he had a different understanding of the

representation. That is the first matter. The

second matter is a different matter.

Krakowski(2) 114 6/5/94

BRENNAN J: That really may be relevant to the finding of fact, or the way in which the fact is found, but

the onus rests upon the plaintiff, does it not?

MR MANDIE:	Indeed.
BRENNAN J:	To find a representation bearing a meaning, which was a meaning to which the representer
adverted.

MR MANDIE:  Yes. The second matter relates to the answers

to requisitions. It was argued by my learned

friend, Mr Merkel, yesterday that there was no

evidence that the answer to requisition induced

anything. But that is not our case. Our case is

that the answer to requisition was misleading

conduct, which caused loss within the meaning of

the Trade Practices Act, and that the test of

causation is the "but for" test, that but for the

answer which was given, we would not have suffered

the loss which we did, namely that if the true

answer had been given we would have been apprised
of the true position and able to exercise our right

to rescind before completion of the contract.

So that we say that inducement is not necessary in the context of the facts of this case.

It is the absence of the true answer which failed to put us on notice, and that there is evidence

that the answer to requisition caused loss in that

sense. But for the false answer, we would have

known what the true position was and acted

accordingly. And Mr Mermelstein gave evidence,

appeal book page 145, that if he received a correct

answer to the requisition he would not have

proceeded to settlement and he would have gone

straight to his solicitors.

The final matter is that we wish to state that

we oppose the notices of motion, or the orders

sought in the notices of motion, by the first

cross appeal out of time and to give a notice of	respondent, both in relation to seeking leave to
contention. There is an affidavit of our
instructing solicitor on the file which opposes, or seeks to raise matters in contention, to that of
Mr Frawley in support of the notice of motion. I
do not wish to take the Court to the details of that affidavit, except to say that it sets out the very long time that the first respondent had to
make those applications and pointing out the facts
of the last minute nature of them.

The only positive submission I would like to

make in relation to the orders sought in the

notices of motion is this: that in our submission

the application for special leave to cross appeal

Krakowski(2) 115 6/5/94

in order to set aside the finding by the Full Court

that misleading conduct occurred ought, in our

submission, not to be granted in any event because,

in our submission, there is no reason to doubt, or

at least no reason to have sufficient doubt, that

the finding of the Full Court was wrong in relation
to misleading conduct, as the Full Court found to

have occurred.

BRENNAN J: What is the detriment which you may have

suffered as the result of the delay?

MR MANDIE:  In the upshot none, because we have really been

able to deal with everything before the Court.	If
the Court pleases.

BRENNAN J:  Thank you, Mr Mandie. The Court will consider

its decision in this matter.

MR MERKEL:  Before the matter adjourns, my learned friend,

Mr Mandie, did seek to rely on an affidavit of his

instructor. I knew that an affidavit was prepared.

I understand it contains some matters in it that

reflect on my instructing solicitor, and I would

just be concerned if that affidavit stood, in its

present form, unanswered and if the Court was

proposing to act on the material - it had to do
with when submissions were filed - that my

instructor would seek to file a responding

affidavit.

MR MANDIE: Perhaps I could resolve this, if the Court

pleases, by saying we will not rely on the

affidavit.

BRENNAN J:  In that case neither will the Court.

AT 11.48 AM THE MATTER WAS ADJOURNED SINE DIE

Krakowski(2) 116 6/5/94