Krakowski & Anor v Eurolynx Properties Ltd

[1994] HCATrans 305

,;"'~~

•

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Melbourne No Ml37 of 1993

B e t w e e n -

DAVID KRAKOWSKI and HENIA

KRAKOWSKI

Appellants

and

EUROLYNX PROPERTIES LTD and

MALLESONS STEPHEN JAQUES (a

firm)

Respondents

BRENNAN J
DEANE J
TOOHEY J
GAUDRON J

MCHUGH J

Krakowski(2) 5/5/94

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON THURSDAY, 5 MAY 1994, AT 11.21 AM

Copyright in the High Court of Australia

MR P. MANDIE, QC: If the Court pleases, I appear with my

learned friend, MR R.A.F. SAUNDERS, for the

appellants. (instructed by Peter Lustig)

MR R. MERKEL, QC: If the Court pleases, I appear with my

learned friend, MR A.J. KELLY, for the appellants

on the appeal and the cross-appellants on the

cross-appeal against the third party, and we also

appear on the notice of motion under Order 70

rule 6. (instructed by Arnold Bloch Leibler)

MR W.F. LALLY, QC: If the Court pleases, I appear with my

learned friend, MR C.M. CALEO, for the second

respondent. (instructed by Phillips Fox)

BRENNAN J: Yes, Mr Mandie?

MR MANDIE:  If the Court pleases, this appeal arises out of

a fairly straightforward set of facts. The

appellants were involved in the purchase of an

investment property for $1.56 million and it was,

in fact, a strata title unit in a shopping centre.

BRENNAN J:  You can take it we have read the judgments and

your notes of argument, Mr Mandie.

MR MANDIE:  If the Court pleases. The appeal, we say, gives

rise to four issues. The first issue is whether

the Full Court applied the wrong test in deciding

that the misrepresentation, which they found to

have been made, was not a fraudulent one, and it is

our contention that if the correct test had been

applied the evidence demonstrated that the

misrepresentation was fraudulent. And there is a

subsidiary issue as to the application of relation to proof of fraud.

section 13 of the Sale of Land Act 1962 of the

The second issue is whether if fraud be

established that recision for fraudulent

misrepresentation was available and should have

been granted by the Full Court.

The third and fourth matters relate to the

Trade Practices Act. The third one is that we say

which it did, that the remedy of setting aside the transaction should not be made available under that section.

that the Full Court was wrong in deciding that in

its application of section 87 of the

The fourth issue relates to answers to

requisitions and, in respect of that, we say that

there was misleading conduct which quite

Krakowski(2) 5/5/94

independently of the misleading conduct which

preceded the contract of sale caused additional

loss by depriving the appellants of an opportunity

to rescind the contract for innocent

misrepresentation, if for nothing else, and that

the Full Court was wrong in saying that there was

no damage suffered as a result of the misleading

answer to requisition.

They are the issues and, if I could turn to the issue of fraud, we say that the - - -

TOOHEY J: Just before you go on, Mr Mandie, the answers to

requisitions which you identify as the fourth of

the four issues, does that stand, as it were, as an

independent head of deceit or misleading or

deceptive conduct or is it to be coupled with those

other allegations that are said to found deceit or

misleading or deceptive conduct?

MR MANDIE: It stands as an independent claim under

section 52 of the Trade Practices Act that when the

requisition sought particulars of all tenancies and

production of all leases, subleases and agreements relating to the tenancy, and the answer was given:

a copy of the lease was included in the contract,

that that was misleading, as we think the Full

Court really found, because it neglected to inform

the appellants that there was a side agreement
which varied the lease in a material way, in
relation to rent, in relation to an incentive for
the tenant to go into the premises, so that the

whole terms of the agreement between the landlord and tenant, lessor and lessee, were not disclosed;

that that was misleading and that but for the

misleading answer the appellants would have

rescinded before conveyance, would have rescinded before the completion of the contract, so that is

relied on as a separate ground.

TOOHEY J: Separate in the sense that if all else fails,

nevertheless it is said that those answers provide

a cause of action under the Trade Practices Act?

MR MANDIE:  Yes. The misrepresentation which the Full Court

found to have occurred, we say was the

misrepresentation in substance which had been

alleged by the appellants from the very beginning.

If the Court would look at page 681 of the appeal

book, volume 3. It is a letter written by the then

solicitors for the appellants shortly after the

appellants had discovered the full details of the

side agreement, and it reads that they act for

Krakowski; that they are instructed:

Krakowski(2) 5/5/94

to inform you of our clients' election to

rescind the said contract forthwith by reason

of your misrepresentations with respect to the
terms of the lease .....

In order to induce our clients to enter into the said contract, you represented that you had leased the premises to Swaeder for a term of 6 years and at a rental of $156,000.00 per

annum; both commencing on the 11th September,

1989.

You failed to inform our clients that, in

consideration for Swaeder entering into its

lease of the said premises you agreed to allow

it to occupy the same rent-free for a period

of three months from the 11th September, 1989

and further pay to the tenant the sum of

$156,000.00. We are instructed that this

agreement is set out in a letter dated

12 September, 1989 from yourselves (signed by

Adam Ryan to Mr Schweda of Swaeder Sales Pty

Ltd.)

And "We demand that you confirm that you will

refund the money and take back possession", and so

on. Now, that misrepresentation we say was

followed through in the pleadings and in the

conduct of the trial by the plaintiffs.

The sale agreement to which reference is there

made appears at page 583 in the same volume, and

this is the letter, the existence of which was not

disclosed before the contract or in answers to

requisitions or at all until finally the appellants

gained full knowledge of it shortly before writing

that letter of demand. It reads:

We refer to the Lease in this matter and

confirm that notwithstanding anything to the

contrary contained in the Lease no rental

shall be payable to the Lessee for the first

three months of the term, commencing on

11 September 1989.

Furthermore on the signing of the Lease

the sum of $156,000.00 shall be paid to

Messrs Hargrave Ogge to be placed immediately in an interest bearing cheque account ..... The

account shall be in the name of the Lessee and

Neill Anthony Ogge ("the Trustee") shall be the sole signatory thereto.

The Lessee shall submit invoices - - -

BRENNAN J: This letter is reproduced in the judgments, is

it not?

Krakowski(2)	4	5/5/94
MR MANDIE:	Yes, it is.	Now, the same misrepresentations,

as referred to in the letter of demand, were

pleaded In paragraphs 4(a) and (b) of the amended

statement of claim, which appears at pages 13 to 15

of volume 1. In paragraph 4, and the relevant

subparagraphs are (a) and (b):

The Defendant represented to the Plaintiffs:

(a)	that the Defendant had leased the said
premises to Swaeder Sales Pty Ltd for a term of 6 years ..... ; and
(b)	that the said lease provided that the
rent payable by Swaeder Sales Pty Ltd for the initial 2 years of the term was

$156,000.00 per annum -

and paragraph 6 said that the -

representations were at all material times

false and untrue -

and in particular (a) referred to the side

agreement -

the Defendant agreed:

(i)     to allow it to ..... rent-free period of

three months ..... ; and

(ii) to pay to it the sum of $156,000.00 -

Further and better particulars were also given and

they appear on page 9.	Under paragraph 2 of the
request, (C)(i) to (iii):

The representations referred to in paragraph 4 of the Statement of Claim were at all material

times false and untrue because the contractual

arrangements between the Defendant and Swaeder

Sales Pty Ltd were not as there represented

but rather entitled Swaeder Sales Pty Ltd to

rent-free occupation of the said premises for

the first three months of its term and to
receipt from the Defendant of the sum of

$156,000.00; being an amount equivalent to the

first years rent -

There was some discussion in the course of the

opening at the trial and before the evidence was
called as to what the appellants' case in fraud
was, because the respondents were claiming that

they did not understand it.

DEANE J:  Mr Mandie, could I just divert you for a moment.

What was the position in relation to the 156,000?

Krakowski(2) 5/5/94

Was any defence raised or evidence led to the

effect that that or a large part of it was spent on

fixtures which became the owner's property?

MR MANDIE:  I think that the evidence was that some of it

was spent on fixtures which - - -

DEANE J: Because the letter says "fitting out", which is

ambiguous, and "stock", which one would read as

becoming the lessee's property.

MR MANDIE:  I do not think that the evidence makes it clear

what happened except that there seems to have been

a balance that was received by the lessee in any

event.

DEANE J:  Did the pleadings raise any defence to the

allegation that 156,000, then the first year's

rent, was given, to say it was not given at all?

MR MANDIE:  No. The defence admitted that the side

agreement existed but it did not say what had

actually happened.

DEANE J:  I see.

MR MANDIE: There is some material which is not in the Court

book which relates to this question of what the

fraud was and what the case was that the

respondents had come to meet and we would seek to

hand up to the Court a number of pages out of the

transcript of what I would understand to be part of
the opening on 5 February 1992, in order to

elucidate what was being said by the plaintiffs

about the fraud because this seems to be a matter

which has been raised by the respondents who are

still saying that they were not told what the fraud

was.

BRENNAN J:  Does that cover all the relevant discussion

about the particulars of the fraud?

MR MANDIE:	I think so, Your Honour, although my learned friend has produced another slab of transcript to
me, really, only this morning which perhaps bears
on it as well and I would not have any objection to
that being - - -
TOOHEY J:	To what extent are we concerned with the way in

which the case was opened, pleaded or conducted?	I
appreciate that in the material this certainly
raises a consideration but, for our purposes, how
are we concerned with it?

MR MANDIE:  Perhaps I am anticipating what my learned friend

might say, and it may be that it is more of a

matter for reply. We say that the fraud is alleged

Krakowski(2) 5/5/94

on the pleading and that really neither the trial

judge nor the Full Court has looked at what the

case really said about fraud. But perhaps it is

relevant to see what the trial judge was told,

because part of our submission is that this is a

case of fraud by inference because the people who,

we say, did not have an honest belief in the

representation that was being made were not called

as witnesses and the passage of transcript, that

does not form part of the appeal book, goes to make

it clear that the plaintiffs were saying that these

people were the ones who were said to be

fraudulent, namely the - - -

BRENNAN J:  What you are saying is that the conduct of the

trial did not depart as to the issues from those

which were pleaded.

MR MANDIE: That is right.

BRENNAN J:  Is there any reason why we cannot have whatever

you and Mr Merkel wishes us to have, and then if

either of you need to refer to it in the course of

your arguments you can.

MR MANDIE: If the Court pleases.

BRENNAN J:  Does Mr Merkel's material, which seems to be

bulkier, include yours or should we have both?

MR MANDIE:  We have ours and he has his I think,

Your Honour. My learned friend, Mr Merkel, says

there is a complete copy of the opening, which is

perhaps more than we got, but I will hand it

all up.

BRENNAN J:	I see. All right, well we can give yours back and use only one, is that right?
MR MANDIE:	Yes.
TOOHEY J: It is really at the notice of contention stage,

is it not, that these matters, with particular

aspects, seems to raise itself where it is being

said that the judgment below should be affirmed in

any event? Although it might be put against you,

for instance, where the ground of appeal is not

available to you because of the way in which the

trial was conducted below. It might be difficult

for you to anticipate that.

MR MANDIE: It is. Perhaps it is sufficient for present

purposes to say that we say that it was made clear

at the trial for the plaintiffs that fraud was

alleged in relation to the misrepresentation as to

the lease not containing all the terms of the

agreement and arrangement between lessor and

Krakowski(2) 5/5/94

lessee, that there was a cause of action in deceit

that the persons who were said to have not had the

belief in the truth of the representation were

three in number; namely Mr Cini, the estate agent,

Mrs Samuel, the solicitor, and Mr Ryan, the

director of the first-named respondent, Eurolynx,

and none of those three persons were called as

witnesses. So that if there were some case which

was not pleaded or advanced by evidence that those
witnesses or any of them believed the

representation to bear a different meaning than

that which was put upon it by the appellants and

advanced at the trial or honestly believed in

whatever meaning they did give to that

representation, there was no evidence about that.

The only witness called by the first-named

respondent was a man by the name of Gilbert who was

not one of the ones that counsel for the plaintiffs

at the trial said was involved in the fraud and it

appeared that he was a functionary who liaised

between his principals in Eurolynx, the first-named

respondent, and the solicitors, Mallesons, and

Mrs Samuel of that firm, but that he was not the

person who was involved in the direct dealings,

either with the lessee or with the purchaser, the

appellants. Mr Ryan, a director of Eurolynx,

signed the side agreement and appears to have
signed the contract and received copies of various

documents and so on, so that he was involved but

not called. Clearly Mrs Samuel was involved, on

the uncontradicted evidence, both in the

preparation of the contract with the attached lease

and its proffering to the appellants and also in

the answering of the requisitions.

BRENNAN J: Gilbert had some part in answering the

requisitions, did he not?

MR MANDIE:  Yes, he did. But he said that we just took the

solicitor's advice as to how to answer - did not

exercise any independent judgment about it.

TOOHEY J:  Does it follow then that, so far as ''to seek" was

concerned, your case really turned upon evidence

that the information was false and by inference
that it must have false to the knowledge of the

defendant?

MR MANDIE: That is right. That the defendant and its

employees and agents - director and agents - knew

that the lease was being proffered; knew that the

side agreement was not; must have known, having

regard to the appellants' clear interest in the
fact that there had to be a tenant, and a tenant in
respect of whom the rent was such that there was a

10 per cent return on the property. It goes back

Krakowski(2) 5/5/94

to the fact that the property was first offered to

the appellants as a vacant property and they came

back and said, "No, there has to be a tenant", and

then the estate agent comes back and says, "We have

got a tenant now, $156,000 a year", and that is

when the deal was done.

Now, the defendant, we say, must have known

that, by production of the lease and non-production

of the side agreement, that the relevant

representation was being made. And it is not

suggested in the pleading and it was not suggested

anywhere else that some other meaning could be

given to this representation. I suppose somebody

could have come along said, "Well, we thought they

just wanted to know what the legal rent was, not

the actual rent", to use some words which appear in

a New Zealand case that is referred to in our

written submissions.

But nothing like that was suggested. It was really never argued that the conduct in producing this lease, without producing the side agreement, meant anything other than what one would reasonably

expect it to mean, and therefore the case, we say,

in the absence of these witnesses being called, was

a very strong inference that that is what the

representation meant. They knew that the

representation was being made and they could not

have believed it to be true. Now, nobody knows

what their state of mind was because they were not

called, but we say it is impossible to think that

they would not have known the representation was

being made and they would not have know that it was

false or, at least - we do not have to go that

far - they could not have had an honest belief in

its truth.

Now, the Full Court, as the Court is aware, went along the line of saying that there was no

effect no conspiracy to deceive the appellants, but	scheming, there was no concoction, there was in
they did not look at the question:  was there an
absence of honest belief in the representation?
The trial judge referred to Derry v Peek and so on,
but he took a different view about the
representation, and said there was no
misrepresentation.  He seemed to take the view that
because the lease said that the rent was X, then
there was no misrepresentation, notwithstanding the existence of the side agreement, and he went off on
a tangent, we would say, about whether there was a
duty to disclose, and if there were no duty to disclose the side agreement, then there was no
fraud by concealment. Although he, in some passages in the parts of the transcript that have
been handed up, appears to have appreciated that

Krakowski(2) 9 5/5/94

the case of appellants was really one of saying
that the production of the contract and lease was
in itself a misrepresentation, that is not the way

his judgment reads.

What the Full Court, however, did say, as the

Court is aware, is that there was a

misrepresentation that the lease contained the

whole of the agreement between Eurolynx and the

tenant, and that no collateral agreement had been

made between Eurolynx and the tenant and,

accordingly, the Full Court held and, we say
correctly that - and it has not, as yet, been the

subject of any cross appeal although there is a

foreshadowed application - there was misleading and

deceptive conduct within the meaning of section 52

of the Trade Practices Act, but that that did not

amount to a fraudulent misrepresentation; it was

simply, presumably, an innocent misrepresentation.

The Full Court went on to say things about the

market rent. I think that they said that there was

an allegation that the production of the lease

constituted a misrepresentation that $156,000 was

the mark~t rent, but that was unnecessary for the

decision, and what we say is that the substance of

their finding was simply what the plaintiffs had

been alleging all along, that the lease did not
represent the true terms of the agreement with the
tenant, and that the proffering of the lease was a

material misrepresentation.

TOOHEY J:  But it would only be material misrepresentation

if it bore upon the value of the premises, and that

is a fairly obvious statement, but - - -

MR MANDIE:	Or if it bore upon the appellants' satisfaction that they had a solid tenant, because one of their
requirements was that they have a strong tenant and, in our submission, it is reasonable and
therefore material - it is material, because it is
reasonable to think that the terms of the lease -
and the whole arrangement between the lessor and
lessee is relevant, not only to the value of the
premises but also to whether this is a strong
tenant and the appellants might well have been -
looking at this objectively - influenced by
information that the tenant had been procured by
the offering of a three months rent-free period and a $156,000 incentive, which represented a further
12 months rent.  Now, whether that leads to a
conclusion that the tenant is as good as a tenant
who would not have been offered such an incentive
is perhaps irrelevant. The fact is, we say, that
it is material.

Krakowski(2) 10 5/5/94

It was material that the proposed purchaser

should know that, and it was material to their

decision as to whether to purchase the property.

So, certainly, it went to value but it also went to

the viability of the tenant because they were

entitled to take a view about a tenant who had been

procured by that kind of offer, and one might ask,

in a sense, how naive are we expected to be? This

shopping centre was filled with tenants, so the
evidence appears, by being offered incentives, and

this purchaser was obtained because a tenant had

been procured in that manner, and yet the manner of
procuring the tenant was concealed and no witness

has come along to tell us why, and we would say

that that is highly significant.

Our submission is that the evidence as it

stood at the trial was such that the inference was
inescapable or, at least on the balance of

probabilities, that the defendant by its servants

and agents could have had no actual or honest

belief in the truth of the representation.

TOOHEY J:	In order to establish a cause of action you would have to go further, would you not? In the case of
deceit you would have to show damage.
MR MANDIE:	Would have to show that it was material, that it

induced, that it caused damage, yes.

TOOHEY J:  And, again, in the case of a Trade Practices Act

action you would need, because of section 82, to

show damage.

MR MANDIE:  Yes. The Full Court was satisfied that it was

material. They said - in their words, "The

production of the lease was of cardinal importance"

and, I think, that is presumably what they meant,

that it did induce. There was abundant evidence at
the trial that it induced in the sense that the

plaintiffs were looking to the terms of the lease

to decide whether to buy, and but for the failure	to produce the side agreement they would not have
bought, and there is evidence to that effect.
Now, the Full Court found there was misleading conduct which caused damage. They did not consider
the actual evidence about the quantum of damage
because they did not consider the evidence that had
been called from the three valuers. But on any
view of that evidence some damage was caused.
There is a debate about what the damage was because
the valuers differed about what the true value of
the property was. But there was some monetary
loss, undoubtedly, and the Full Court ordered that there be a mediation, but if that mediation failed

Krakowski(2) 11 5/5/94

there would be a rehearing as to the question of

damages.

TOOHEY J:  But your complaint in that regard is that the contract should have been set aside.

MR MANDIE: That is right.

TOOHEY J:  So the question of the actual assessment of

damage would not have arisen on the way you put

your case.

MR MANDIE:  That is right. So that the only element

missing, in terms of the cause of action and

deceit, was the proof of the absence of honest

belief which, we say - actual and honest belief in

the representation as it must have been understood,

we say. That, we say, is a matter that should have

been inferred. Of course, it had to be by

inference because if the relevant witnesses were

not called, how else could the state of mind of -

or the lack of belief ever be proven?	Now, clearly
we cannot -

TOOHEY J:  By interrogatories, I suppose.

MR MANDIE: That is true, although that is

TOOHEY J:  Which is a fairly standard ploy in this type of

proceeding.

MR MANDIE: That is true, although it is not a procedure

which is - I am told there were interrogatories but

I do not know who delivered them or what the

answers were.

Clearly one cannot, from the absence of

witnesses, build a case which is not there, but in
our submission, the representation could have borne

no other meaning and that it is not possible for

there to have been an actual or honest belief and that the inference has to be drawn that the first	respondent knew that representation had been made
and nothing to the contrary was pleaded and no
evidence was called to the contrary. That is the essence of the matter and perhaps it is not
assisted by repetition.

We seek to rely, in the alternative, on

section 13(1) of the Sale of Land Act 1962.

TOOHEY J: We are still in the area - I am sorry to keep

coming back to this - but we are still in the area

of deceit, are we?

MR MANDIE:  Yes.

Krakowski(2) 12 5/5/94

TOOHEY J: 

I am just trying to see how the two causes of

action, whether they are running in tandem at this
stage.

MR MANDIE: 

My submissions so far are only in relation to deceit an in relation to the absence of honest

belief in the representation.

TOOHEY J: Thank you.

MR MANDIE:	We say that although section 13(1) was not pleaded, which it should have been, and was not
relied on at the trial before the Full Court, as it
should have been - - -
DEANE J:	Why should it have been pleaded because it is a

deeming provision?

MR MANDIE: Perhaps I should not concede that it should have

been pleaded, it would have been desirable to plead

it, let us put it that way.

DEANE J: If it is simply an onus of proof provision, you

would not plead it, would you?

MR MANDIE:  I would plead it out of an abundance of caution,

let us put it that way. At least at some stage,

let us put the other side on notice that we are

relying on it, and I mean, it was not mentioned.

DEANE J: What, that you are relying on a basic piece of

legislation that defines the onus of proof?

MR MANDIE:  It would have been fair but we say that it

governs the situation anyway.

DEANE J: What, the plaintiff should plead that it bears the

onus of proof?

MR MANDIE:  No.

DEANE J:  I would have thought a basic burden of proof

provision, you would assume the lawyers on both

sides were completely aware of it.

MR MANDIE: Well, that is true, and I am not making any

concessions about it, but I would have personally

felt more comfortable, but it is probably

irrelevant, if it had been mentioned.

DEANE J:  It may be that you did need to plead it because of

the matter I raised, and that is, it goes beyond a

simple burden of proof and deems something, which

means - - -

Krakowski(2) 13 5/5/94

MR MANDIE:  Yes, it deems the representations have been made

with knowledge of its falsity unless certain

matters are proved.

DEANE J:  Which means it may operate to create a false

situation.

MR MANDIE:  And if it is not pleaded it does not perhaps

invite the question from the defendant, "Well, are

you going to plead that you had reasonable ground

to believe, and did believe that it was true, or

had no reason to suspect it was false, and

otherwise acted innocently?" But, what we say is

that they have not been prejudiced by it not being

relied on or mentioned, because it is impossible to

think that there could be a reasonable ground to

believe that this representation was true. I mean,

it was patently false. The lease did not contain

all the terms of the agreement between the lessor

and the lessee.

There could not be any reasonable ground to believe the contrary, and it would, in our

respectful submission, have been impossible to show

that somebody had no reason to suspect that the

representation was false, let alone that they had

otherwise acted innocently. It is an objective

test and, in our submission, as it is an objective
test, one can look at it and see that, given that

that is the representation, it would be impossible

to show that there were reasonable grounds to

believe that it was true, or that there was no

reason to suspect that it was false.

BRENNAN J: Well, if that is so, you do not need it.

MR MANDIE:  We say we do not need it, but if it is said that

a court could not infer the absence of an honest

belief on the evidence without this section, then

we seek to rely on it.

DEANE J: But then you cannot rely on it.
MR MANDIE:	That may be right if what we say about the way

you draw the inference is really put in much the

same terms. That is true, yes.

DEANE J:  Of course, the subsection could conceivably be

relevant on what seems to be an underlying issue

between you as to what is involved in an action in

fraud or deceit, in this particular area of

transaction.

MR MANDIE:  Yes, and if the test is not what I have

submitted and what the respondent seems to be

saying from time to time, but not always, that

somehow there has to be an intent to deceive; that

Krakowski(2) 14 5/5/94

it is not just simply an absence of actual and

honest belief, but something more than that, then

perhaps the section comes in that way, as well.	In
our submission, if the respondent is saying that,
and it is not always clear whether it is saying
that or saying what we are saying about the test,

and if some positive intent to deceive is required,
and that is, we say, it is contrary to the

authorities, then this section we would seek to

avail of. The Full Court seemed to think that

there needed to be an intent to deceive, but we say

that that was wrong; that motive is irrelevant. It

is just simply a question of whether there was a

belief and an honest belief in the truth of the

representation.

Now, if we are right that fraud should have been found, then the second issue arises, can we

get rescission for fraudulent misrepresentation?

And, as we understand it, the only matter perhaps

advanced against our entitlement is that

restitutio in integrum is not possible, but there

does not seem to be any evidence to that effect

and, in our submission, there is no material on the

record which would support such a contention.

BRENNAN J: There is some reference - I do not know whether

it is supported in the appeal books, but there is

some reference, I think, in one of the respondents'

notes that suggests that there is not only the

initial mortgage, but that there is a lease and a

renewal of a lease. Is that right?

MR MANDIE: That is right, there is reference to that and

the fact of the matter is - and I think that there

is an affidavit which the respondent may seek to

tender about that issue, but which one of those

exhibits to that very affidavit discloses that the

lease is a monthly tenancy and that the rent is

being paid into a trust account and, in fact, it

provides no impediment to rescission, we would say.

BRENNAN J: Is there any reason why, if you succeed on the

first point, that this Court should deal with the

question of restitutio as distinct from sending it

back to either the trial judge or the Full Court?

MR MANDIE:  We would not be troubled by that if that answers

the question. We consider there is no bar to

restitutio, and if this Court does not or cannot

determine that then we have got no problem with

that being investigated. I know that that perhaps

is the position of the respondents, but it ought to

be investigated because they say, "Well, facts

might have arisen since judgment," but we are not

troubled by that at all.

Krakowski(2) 15 5/5/94

So that is all, at this stage, we wish to say

about rescission for fraud. And if I could then go

to section 87 of the Trade Practices Act.

TOOHEY J: Are you going to section 87 on the basis that

there was a misrepresentation, or to use the

language of the Act, "misleading or deceptive
conduct", whether that be fraudulent or merely

misleading or deceptive?

MR MANDIE:	Yes.
TOOHEY J:	Or are you drawing some distinction?
MR MANDIE:	We are going to it primarily on the basis that

if we fail to establish fraud and an entitlement to
rescind for fraudulent misrepresentation, or for
some other reason we are not entitled to rescind
for fraud, then we say that the question of setting

aside the transaction under section 87 is a matter

that should have been handled in a different way by

the Full Court than the way it was handled. If we get rescission for fraud we do not need to look at

th~ point but, if there is no fraud or if we cannot

get rescission for fraud, we say that section 87

comes into play as the section which empowers the

Court to grant relief for the misleading conduct

which the Full Court found to have existed.

Now, section 87 comes in in another way in

relation to the answer to requisition, or at least

it comes in in the same way but it comes in

separately, we say. At this stage I am seeking
simply to deal with the matter on the basis that
the Full Court said that, notwithstanding that

there was misleading conduct, the transaction

should not be set aside for a number of reasons

which they advanced in exercise of the discretion

granted by section 87. Section 87 provides that

where:

the Court finds that a person who is a party

to the proceeding has suffered, or is likely
to suffer, loss or damage by conduct of

another person that was engaged ..... in

contravention of a provision of Part IV, IVA
or V, the Court may -

and then it goes on to say -

make such order or orders as it thinks

appropriate against the person who engaged in
the conduct ..... if the Court considers that
the order or orders will compensate the
first-mentioned person in whole or in part for
the loss or damage or will prevent or reduce

the loss or damage -

Krakowski(2) 16 5/5/94

and then subsection (2) lists a number of kinds of

orders that might be made under that power,

including -

(a) an order declaring the whole or any part

of a contract made between the person who

suffered, or is likely to suffer, the loss or

damage and the person who engaged in the

conduct or a person who was involved in the

contravention constituted by the conduct, or
of a collateral arrangement relating to such a
contract, to be void and, if the Court thinks

fit, to have been void ab initio or at all

times on and after such date ....

(b) an order varying such a contract or

arrangement in such manner as is

specified .....

(g) an order, in relation to an instrument

creating or transferring an interest in land,

directing the person who engaged in the

conduct or a person who was involved in the

contravention constituted by the conduct to

execute an instrument that:

(i) varies, or has the effect of varying, the

first-mentioned instrument; or

(ii) terminates or otherwise affects, or has

the effect of terminating or otherwise

affecting, the operation or effect of the

first-mentioned instrument.

The Full Court, in essence, said that the appellants should be limited to their remedy in

damages because of a number of factors which they

thought made it inappropriate for any other order
to be granted under section 87 and the principle of
those matters was the delay by the appellants in

bringing proceedings for rescission and setting

aside of the transaction. That relates to the

dates because it occurred over a period of time

that the information about this side agreement came

to the knowledge of the appellants. They first

learnt that there was a rent-free period of three

months and then they later learnt that perhaps some

incentive had been paid; and then they later got a

glimpse of part of the side agreement; and then

they later found that 156,000 had been paid; and

finally, in December 1990 they got a full copy of

the side agreement.

The Full Court seems to be saying, "Well, they should have acted earlier on", we would say "on

insufficient information". Really, it was when

they got the full story they acted very promptly,

Krakowski(2) 17 5/5/94

as the letter of demand demonstrates. The Full

Court said it took too long and they also said that

the practicalities of the matter dictated that

there should not be a reversal of the transaction.

We do not know what that refers to or what evidence

there was to justify that finding.

Our submission is more fundamental than that.

We say that the court was premature in determining

that this remedy should be available. It is not

simply a question of saying that they exercised

their discretion wrongly; but saying, firstly, that

they should not have exercised it at all at the
stage they were at or, alternatively, that no

reasonable court would have exercised it in the way

that they did.

We say that because the court had not

considered any of the evidence about damages or

loss and damage, had not looked at the evidence at

all about that and, really, had only decided the

question of liability. In our submission, the Full

Court should not have considered the question of whether the transaction should be reversed until it

had heard all the evidence about relief and remedy,

or considered it, and the court did not look at the
valuation evidence that was in the transcript but
referred that for a rehearing. We say they should
have referred the question of relief generally for
a rehearing and not decided one part of the

question of relief.

TOOHEY J:  I am not clear, Mr Mandie, whether you are saying

that the matter went before the trial judge on some

limited footing.

MR MANDIE:	No, it did not.
TOOHEY J:	Or that there was enough material before the

trial judge, had deceit been found or misleading or

deceptive conduct, to dispose of the matter

completely.

MR MANDIE:  Yes, the case went before the trial judge on all

aspects. It was not limited to liability.

Substantial evidence was called and it is in the

current appeal books from three valuers. They were

cross-examined; their reports were put in evidence said that - perhaps I should refer to what they

said. At page 841 in volume 4, line 8:

The trial judge heard evidence from three valuers but in the event made no findings

about valuation because it was unnecessary for

him to do so. We heard little argument, if

any, on the appeal on behalf of the plaintiffs

Krakowski(2) 18 5/5/94

or the defendant upon the question of damages

on the assumption that fraud was not to be

found and there was to be no rescission. In

the circumstances we find it quite impossible
to make any sensible assessment of damages

upon such material as there is and the

argument we received. On balance, we think

the interests of justice require an assessment

of damages to be made. There should be an
order that the matter of damages be the

subject of a further trial if that becomes

necessary -

and a few lines down:

Before any further trial on the question of damages is had, however, the case should be

sent for mediation.

TOOHEY J: Could I just ask you this: on the page that you

have taken us to, page 841, line 5, the court says,

after having looked at the question of delay on the

previous page and having said that was a

consideration which weighs against the plaintiffs,

went on to say:

Our chief reason for so declining, however, is that the justice of the case does not require

it as a matter of compensation to the

plaintiffs.

What does that mean?

MR MANDIE:	We do not know, Your Honour.
TOOHEY J:	What do you think it means?

MR MANDIE: It means what ~t says, but what the reasons for

it are, if they are other than what they have

already set out, we do not know. What we submit is

that it misconceives the task under section 87.

TOOHEY J: But it seems to be saying on one view of it, "We

won't set aside the contract because it may be that

the plaintiffs can be adequately compensated by

damages".

MR MANDIE:	Yes, and that is what we say is wrong because they had not considered the evidence about damages
and they had not considered the question of whether
the plaintiffs could be adequately compensated for
by damages.  What section 87, in our submission,
requires is that the Court has to consider whether the order or orders concerned will compensate the first-mentioned person in whole or in part for the loss or damage or will prevent or reduce the loss
or damage. In our submission, it was premature to

Krakowski(2) 19 5/5/94

consider what order or orders would compensate,

damages, without considering all of that evidence.	given that they were ordering a rehearing about sense that they did not consider it but determined
that a certain kind of order was not necessary to
compensate without really being in a position to
say that the order that they were making was
necessary to compensate or adequate to compensate.

BRENNAN J:  May Their Honours not have been saying, "The

bottom has dropped out of the market in the

meantime. It's therefore not fair to throw the
property back on the vendor and, although the

misrepresentation probably resulted or may well

have resulted according to the valuation evidence

in the acquisition of a property worth less than

the purchase price, that's something that a trial

judge can find out"?

MR MANDIE:  They may have been saying that. They did not

say that but they might have had that in mind.	If
that is what they had in mind, then it is very significant, we would say, on the next branch of
our argument in relation to the answers to
requisitions. But, in our submission, the Full Court determined the matter prematurely. That is
the essence of our submission.

That would, if we were right, only lead to

that question being referred to the same hearing

which assesses damages. In other words, we are

not, under this head, saying that this Court should

order a reversal of the transaction. What we are

saying is that there should be a hearing about

relief in which the whole question of reversal of

the transaction and damages is canvassed at the one

time.

DEANE J:  Can I just try and follow the various paths that

you are leading us down.

that you were to succeed on fraud, and that we then Assume, for the moment,

were to remit the matter to deal with restitutio,

or whatever other matter might be raised, as you

put it, is that the end of it here?

MR MANDIE:  Not necessarily, because if, for some reason

which we cannot think of at the moment, we could
not give restitutio, it still might be arguable

that we could get orders under section 87, although

it is a fairly theoretical position.

DEANE J: What, that you would do better under section 87

than you would as a result of fraud?	I am not
suggesting the contrary -

MR MANDIE:  No, it is simply a possibility.

Krakowski(2) 20 5/5/94

DEANE J: Well then, if we reach that stage, should we go

ahead and deal with the trade practices matter

because of some possibility you cannot really think

of?

MR MANDIE: Probably not.

DEANE J:  I am just asking.

MR MANDIE: Well, I am reluctant to shut the appellants out

from that if the possibility is to remain open, but

I can see what Your Honour says.

DEANE J: Because if that be the approach, we would only

come to the Trade Practices Act in a situation

where there was no fraud and we would be dealing
with the Trade Practices Act on the basis that the

Full Court dealt with it, that is, that any

misrepresentation was innocent, which would be

significant as Their Honours saw it.

MR MANDIE:  Yes, it would certainly be relevant, we would

concede, but not determinative.

TOOHEY J:  Your argument about prematureness would still

operate, would it not?

MR MANDIE:	Yes, we would maintain that submission.
BRENNAN J:	I suppose the remedy provision in section 87

contemplates orders that might be more flexible in

their formation than the orders that might be made

by way of a rescission order consequent upon

rescission for fraud.

MR MANDIE:  Yes, although Alati v Kruger suggest that equity

has some ability to fashion appropriate laws.

BRENNAN J: It does not do badly.

We say that there is a very powerful

alternative, an extremely powerful alternative,

reason why, in any event, the section 87 order

should have been made to reverse the transaction

based on the misleading answer to requisition, and

the Full Court dealt with that at page 844 - - -

BRENNAN J: Before you come to that, there is a question I

wanted to ask you. What was, precisely, the

representation that was made in the sense of, was
it made verbally or in writing? If verbally, by

whom? If in writing, identify the document.

MR MANDIE:	It was made by conduct and in writing; it was made by a production to the - this relates to the
pre-contractual representation - appellants of the
proposed contract with section 32 statement and

Krakowski(2) 21 5/5/94

copy lease attached. It was the conveyance of that

document, with the expectation that it would be

read, that constituted the representation.

BRENNAN J: In the context of the inquiries previously made

by the appellants' agent?

MR MANDIE:	Yes, including the telephone call from Mr Cini, the estate agent for Eurolynx, we have now got a
tenant at $156,000.  The process then goes on and
the lease itself is produced for perusal by the
appellants.  And I might add that this is in the
context where the contract itself contained a special condition which required such a lease.

BRENNAN J: Well, that is clause 19?

MR MANDIE:  Yes.

BRENNAN J: Yes.

MR MANDIE:  And, I might add, that it is not, on our

contention, common ground and never was that
special condition 19 was satisfied by the
production of a lease which literally complied with

the terms but which was contradicted by a side

agreement which was not produced.

McHUGH J:  I thought it was said in the judgments that it

was common ground that clause 19 had been complied

with special condition 19.

MR MANDIE: Sorry, Your Honour, that it was?

McHUGH J: Yes.

MR MANDIE:  Yes, we do not agree with that, and say it was

not common ground and in any event was not the

case.

BRENNAN J:

I suppose it was common ground that the piece of

paper which is called a lease contained what

clause 19 required, but the meaning of "lease" is subject of some controversy in the sense that you

say that the lease is not simply the piece of

paper.

MR MANDIE:	Yes.
McHUGH J:	The trial judge said it at page 779.

MR MANDIE:  Yes, he did. I was going to take the Court to

page 843, line 14:

The answer to the enquiry that was given was

wrong or incomplete because the collateral

agreement was one "relating to the tenancy or

Krakowski(2) 22 5/5/94

occupation of the property" and the enquiry

was answered as though the collateral

agreement did not exist. The answer was,

therefore, at least misleading but we think it

was capable of having no effect relevant to

this case. The enquiry made was of a kind

that might, and perhaps properly should, have

been made before the contract of sale was

executed - and this whether or not it was

later made the subject of a so-called

requisition. Had it been made and answered

before contract, the answer could have

operated as a representation and, if false,

could have justified rescission, at any time

before completion, of any contract induced by

and made in reliance upon it. As it was, the
answer given to requisition 8(c) did not

induce the making of the contract of sale.

Even if, contrary to our opinion, the answer

were treated as touching title, and assuming

that it induced the plaintiffs to complete by

accepting title, it would at best have

operated as a warranty of the truth of the

answer. No right to rescission would thereby

be conferred, for a breach of warranty carries

no such right. Apart from statute, therefore,

we think the plaintiffs could have obtained no

relief in this action by reason of the answer

to requisition 8(c). Any loss or damage

suffered by the plaintiffs by reason of an
infringement of the Trade Practices Act, and

for which the defendant is liable in damages,

was not occasioned by the answer to

requisition 8(c): it arose, if at all, by

reason of the misrepresentation made by

clause 9.8 of the lease which induced the

contract.

In our submission the answer to requisition

clearly constituted misleading conduct and, but for
that misleading conduct, the appellants would have

misrepresentation. They would have found out the	been enabled to rescind the agreement for innocent	true facts, which had not been disclosed when the
contract and section 32 statement was first proffered, and they would also, in our submission, have been entitled to avoid the contract under special condition 19, which was said to be
fundamental to the contract.

I might say, at page 20 of our written

submissions, that we advanced another argument for

saying that there had been damage caused by this

misleading answer to requisition. We said that the

appellants would have been entitled to rescind the
contract pursuant to section 32(5) of the Sale of

Land Act, on the basis of the supply of false

Krakowski(2) 23 5/5/94

information within the meaning of that section.	I
do not propose to rely on that.

TOOHEY J:  But how did you approach the question of

requisition in the statement of claim?

MR MANDIE:  It was approached as misleading conduct. The

appellants sought to amend their statement of claim

to rely on it as fraudulent misrepresentation but

that leave was refused. So, the case on the answer

to requisition advanced only under the Trade

Practices Act.

TOOHEY J: But, does that exhaust all the possibilities? I

mean could it not have been grounded an action for

breach of warranty, for instance?	I am just asking
you at this stage.

MR MANDIE: It had not considered it.

TOOHEY J:  I just do not quite understand why a requisition

shown to have been wrong necessarily has to be tied

to fraud or to misleading or deceptive conduct

under the Trade Practices Act?

MR MANDIE: Well, it does not necessarily. The trial judge

in the Full Court considered that the requisition

did not go to title, which may have some bearing on

that question. We would submit that that was

wrong, although it is not clear that it really

matters.

In our submission, under the

Victorian Transfer of Land Act, section 42, the title is subject to the rights of a tenant in possession, and that the rights of this tenant in possession were governed not only by the lease but

also by the collateral agreement. So that, we say,

the requisition probably did go to title but, in

our respectful submission, that does not matter.

misleading answer was given, and but for that	The fact is that the inquiry was made and the
misleading answer, according to the evidence, the
appellants would have gone straight to their
lawyers and taken appropriate steps because they
would have known of the side agreement. They were
denied that opportunity and, in our respectful
submission, that denial of an opportunity to
exercise the rights to rescind for innocent misrepresentation, or to avoid under special condition 19 of the contract, was all loss and
damage caused by the misleading conduct.

The Full Court was wrong in considering that

because the plaintiffs had already entered the
contract and, therefore, presumably suffered the

loss of buying a property for more than it was

Krakowski(2) 24 5/5/94

worth, that there was no other loss or damage as a

result of this answer to requisition. We say that

was wrong, and that when the question then arises,

if we are right about that, "What is the remedy?",

we say there is a very logical remedy that the

appellant should be granted an order reversing the

transaction, the opportunity to do which they lost

as a result of this misleading answer to

requisition.

TOOHEY J:  I understood you to say that the plaintiffs were

refused leave to amend the statement of claim to

make the answer to requisition the basis of a claim

in deceit. But looking at page 17 - perhaps I have

misunderstood something - of the appeal books,
volume 1, there is a paragraph that actually begins

at the foot of page 16, but it is probably enough

to start at the top of page 17 where, under

"Particulars", there is reference to a

representation contained in answer to requisition.

Then paragraph 8C says that that representation was

at all material times false and untrue.

MR MANDIE: ·Yes, and 8D says that it was mis leading and

deceptive, but there is no allegation that it was

fraudulent.

TOOHEY J:  I see, yes. Yes, thank you.

MR MANDIE:  Now, in our submission, it springs out the

minute that it is stated that the appropriate

relief, for somebody who has been deprived by

misleading conduct of a right to rescind, is to

grant that very right and that the appropriate

remedy under section 87 is to restore to the

appellants that very right which they would have

been able to exercise had they received a true

answer to their requisition.

They are the submissions for the appellants.

I have not attempted to deal with all kinds of

cross appeals and the like and matters that are	foreshadowed applications about contentions and
raised of that kind, and perhaps I might be
granted, if that is appropriate, time later to deal
with that if it should become necessary.

BRENNAN J:  When the applications are made you will be

responding to those applications.

MR MANDIE: If the Court pleases.

BRENNAN J:  Thank you, Mr Mandie. Mr Merkel.

MR MERKEL:  If the Court pleases, if we could firstly

address the case put by my learned friend on the

fraud cause of action. We will be putting two

Krakowski(2) 25 5/5/94

alternative submissions to Your Honours.	The first
is that the appeal should be dismissed.	The

alternative submission is that if Your Honours are

not inclined to dismiss the appeal, the justice of

the present case would require that the matter be

referred back for retrial. We say that when one

looks at the pleadings and the conduct of the trial
and the case now being put before this Court, the

justice will require a rehearing because the issues

that have been ventilated and relied upon by my

learned friend were never put to the witnesses, the

scenarios were never really put before the trial

judge, and we would submit that if Your Honours

reject our submissions on dismissal of the appeal,

a new trial is the only just alternative.

Could I indicate to Your Honours our submissions on fraud are divided into three

segments; the first is to identify the nature of

the representation relied upon, and say that what

my learned friend is putting to Your Honours is not
the representation pleaded and relied upon before

the trial judge. That will be closely linked to

whether the representation pleaded was false. That

is the first aspect of our submission.

The second aspect will deal with what we have

referred to in our submissions as the requisite

subjective aspect of the representation relied

upon. The third will be whether the representation relied upon has been established to be material and

actually inducing of the appellants, in respect of

the contract. The fourth aspect will go to the

question of rescission, although ultimately there

may be no difference between us on that point in

view of what my learned friend has said, because it

is our submission that if Your Honours uphold the

cause of action in fraud, the proper manner of

dealing with that is to refer the question of

remedy back to a trial judge. Can I go firstly to the representation? The

sole basis of the representation was the delivery of the section 32 statement. What we have sought to do in our written submissions is to set out in full the pleadings as they were before the learned

trial judge. Could I take Your Honours to page 2

of our written submissions. I should indicate that

if ever there was a case which was conducted

strictly according to the pleadings, it was this

case, and in the transcript, when leave was sought

to amend, even after closing addresses on the fraud

cause of action, His Honour made it clear that he

will be deciding the issue strictly in accordance

with the pleadings and not otherwise.

Krakowski(2) 26 5/5/94

The sole pleading of misrepresentation is in

paragraph 4(a) and (b), and the pleading there is

of a representation which is wholly in writing and
contained in the contract of sale and in the copy

of the lease delivered to section 32 of the Sale of

Land Act. So that, can I just emphasize at the

outset, no conduct is relied upon, no anterior

representation was raised and the sole focus
therefore of the representation was the conduct of

the solicitors, that is Mallesons and in

particular, a Mrs Samuel, who prepared the contract
and the section 32 statement. So that was the sole

basis of the representation and the case was so

conducted and decisions were made as to whether

Mrs Samuel should or should not be called on that

basis. So that we, at the outset, point out that

when my learned friend travels to questions of why

Mr Cini or Mr Ryan, who was not employed by

Eurolynx at the time, were not called, he really is

travelling outside of the representation as

pleaded.

BRENNAN J: Well, that may or may not be so, but if I

understand you correctly, are you saying that as it

was taken for trial, the representation consisted

solely of the proffering of the draft document?

That is, the draft agreement, section 32 statement

and the lease which was annexed to the draft

agreement.

MR MERKEL:  Yes, Your Honour, just in the written documents.

That is so, Your Honour.

BRENNAN J: But is it accepted that those were

representations?

MR MERKEL:  What we say, Your Honour, is we accept that

there was contained in those documents the proposed

contract of sale and the proposed lease.

BRENNAN J:  Of course, but the question is whether there was

any contest at the trial as to whether the
proffering of those documents represented what they

purported to state to be the fact?

MR MERKEL:	Your Honour, can I think about that answer, because I was not present at the trial and it is
rather difficult to appreciate what was in contest
and what was not. But what I can say, Your Honour,
from the passage handed up to Your Honours from the
transcript of the opening, that what, in fact,
occurred - and this is one of the reasons why it appears that if our submissions are wrong, retrial is necessary - is that the end of counsel's opening
for the plaintiffs he had opened it in a way that indicated that there was no issue that the lease was, in fact, as stipulated, in effect, in

Krakowski(2) 27 5/5/94

clause 4(a), and it is at that point that counsel

for the first respondent, that is my client, raised

an issue about the pleadings and what was really

said is that the complaint was not so much on what

was said, but what was not stated.

And that is why His Honour was, in effect, led

into the statement His Honour made in his decision

that this uLtirnately is really a case of fraudulent

concealment. And I need to take Your Honours to

the documents and to the passages, because we say

that the way in which the case is now put, it does

appear as if His Honour was on some uninvited

frolic of his own, which was not the case.

The same happened again in the Full Court.

The case on fraud was essentially put in the Full

Court on the basis that to show the requisite dishonesty, it was incumbent upon the appellants to

demonstrate something dishonest about the
concealment, whether it be a concoction or

otherwise. That is why Their Honours dealt with it

in that way. It may be that what was put by the

appellant to Their Honours was not correct or sound

in principle, but we say, when properly understood,

the whole problem that has beset this case from the
outset is the failure to plead in paragraphs 4(a)

and (b) the representation that my learned friend

properly concedes is inferential. He is not even
before Your Honours this morning complaining about

what was stated. He is complaining about a

representation made by inference that there are no

other agreements relating to the tenancy.

GAUDRON J:	But that is really the same thing, is it not?
MR MERKEL:	We would say, Your Honour, that there is a

difference between the representation in

paragraphs 4(a) and (b) that the lease - and I will

be corning to this shortly. That is the lease, the

benefit of which the tenant would be taking over

under the contract was in terms as there set out.

That is a vast difference, Your Honour, from saying

there are no other agreements of any kind that

touch upon or concern the relationship between the

vendor and the tenant which may involve personal
covenants which have no bearing on the land and do

not pass with the land.

McHUGH J:  But when the relevant paragraph 4 is read with

the particulars, surely the case was that there was

a representation made which might have been

literally true but which was in fact false.

MR MERKEL:  Your Honour, it is clear that what they were

saying was that the lease did not provide that the

rent payable for the initial two years was $156,000

Krakowski(2) 28 5/5/94

a year, and that is clearly what the case was

contested on. I should indicate that - - -

McHUGH J: That is what the paper said, it was $156,000 but

the reality was it was not. It had, in effect,

given Schweda the $156,000.

MR MERKEL:  Your Honour, with respect, one needs to

distinguish between the two aspects of so-called

misrepresentation. One was the three months rent

and the other was $156,000. There is no basis,

Your Honour, for finding in the evidence that the

$156,000 was a gift to Mr Schweda. What it was was

a payment by the lessor to Schweda for the purpose

of fitting out and stocking up the premises so that

he could commence business, and the rent was

increased accordingly.

McHUGH J: And what if there was any money left over? It

was to go to Schweda, was it?

MR MERKEL:  Your Honour, that was the way in which the

agreement worked, but Mr Schweda was called as a

witness by the appellants and it was not suggested

in any way, shape or form to him in evidence, nor

was it put in opening, that there was anything in

the nature of a sham or that the agreement was

intended to be anything other than an agreement to

finance him for the fitting out and stocking of the

premises, and that is the way it was put. It was

not suggested, Your Honour, it was a gift for the

purpose of artificially increasing the rent.

DEANE J: But if it was for stocking the premises, it was a

gift.

MR MERKEL: Well, Your Honour, it was not a gift because the

way in which it was approached by the valuers is

that the rent for these premises, as bare premises,

would have been significantly less than the rent of

the premises with the benefit of the co-lateral

agreement. In other words, Mr Schweda was paying	for the benefit of the co-lateral agreement in an
increased rent.

DEANE J:  But to the extent it went to stocking the

premises, it was a gift, unless the words "stocking

the premises" is used in a non-natural way, in

which case it was for your client to tell the court

about it.

MR MERKEL:  Your Honour, I am not suggesting it was in a

non-natural way. What we are saying to Your Honour

simply was that Mr Schweda gave evidence and said,
"I would not have taken a lease of these premises

as bare premises in the condition and state that

they were in. I needed to have premises which I

Krakowski(2) 29 5/5/94

could set business up in. To do that I negotiated

a payment for fitting and stocking of the premises

so I could start and commence to carry on

business". On that basis, he negotiated a rent,

the benefit of which the tenant would get, which on

the evidence would have been higher than rent,
market rent if one wishes to call it that, for the

premises in an unfitted-out situation and without

the benefit of assisting with stock, but he did not

get, Your Honour, a payment of $156,000 for nothing

in return. And that is why I say, Your Honour,

that the so-called inferences that are sought to be

drawn were simply never put to Mr Schweda, that

namely, this was a way of artificially bumping up

the rent. When one looks at the evidence given

below, it was quite to the contrary.

The point we want to make is that in answer to

Your Honour's question to me, it was not put, as I

understand the case, that the $156,000 meant no

rent was payable for the first year of the lease.

In fact, what happened was the rent was payable and

what I will be corning to - - -

McHUGH J: But the case is put, it is just as though I say

to you, "I have already had an offer for this place

for $100,000" and I have said to the offerer,

"Look, if you offer $100,000 I will slip you

$30,000 back".	Would my statement be a fraudulant
misrepresentation?	Of course it would.

MR MERKEL:  Yes, of course it is, Your Honour, and that is

why in our written submissions we said that if what

was said was that the rent was X and in fact it was

Y, then that is a misrepresentation. If it was

known to be Y it would be fraudulant. But, what we

say here, Your Honour, is that the real context in

which this lease operated was according to its

terms as far as the purchaser was concerned and he

got the entire benefit of the lease as written, and

of a personal agreement, covenants which did not the agreement which related to Schweda was a matter bind the land and did not affect the tenancy of the
premises.

McHUGH J: That may be so, but the reality is, is that

although there is a legal obligation on Schweda to

pay a rent of $156,000, Eurolynx game him $156,000

to spend on fittings, to spend on stock and if

there was anything left over, to spend as he wanted

to.

BRENNAN J: Well, that can be pursued after lunch. How long

do you expect to be?

MR MERKEL:  I think I anticipate of the order of about two

hours, Your Honour.

Krakowski(2) 30 5/5/94

BRENNAN J:	How long do you expect to take, Mr Lally?
MR LALLY:	It depends on very much the matters covered by

Mr Merkel. As the Court will be aware in our

written submissions, we have covered particularly

the elements necessary, fraud particularly that of

knowledge or consciousness and as I anticipate,

Mr Merkel will go into those matters. I certainly

will not be wanting to go over ..... ground.

I would expect ..... leaving only the questions of the prosecution against ourselves, which will

not take very long on that aspect.

BRENNAN J:  The Court will adjourn until 2 p.m.

AT 12.54 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.00 PM:

BRENNAN J: Yes, Mr Merkel.

MR MERKEL: If Your Honour pleases. Just before the

adjournment, Your Honour asked me if the question

of whether what was pleaded was a representation

was put in issue. I think the answer I can give to

that, Your Honour, is at pages 20 and 21 of the

appeal book the pleading to paragraph 4 admitted

the contract and the lease, and in paragraph 4(e)
at the bottom of page 21, admitted the fact that
the premises had been so leased was disclosed in
the contract in the statement. Just pursuing that,

what was put then is that that disclosure could

amount to a representation but that the

representation so made, namely that the premises

were leased in accordance with the provisions of the lease, was true.

Then the next step in which the case was

conducted was that the purchaser did get the

benefit on settlement of the lease in the manner in

which the contract provided and succeeded to the

full benefit of the terms and conditions of the

lease and the obligations of the tenant which

passed with the land.	So that the representation
was true.

BRENNAN J: But it was not.

MR MERKEL:  Your Honour, that is how it was put, in the

sense that the rent payable under the lease was

Krakowski(2) 31 5/5/94

$156,000 a year, that whatever the collateral

agreement may have provided between the vendor and

the tenant did not impinge upon the tenant's

obligations under the lease.

BRENNAN J: But it did. It abrogated the obligation to pay

rent.

MR MERKEL:  What we say, it only abrogated, Your Honour, as

between the owner, namely Eurolynx, and the tenant

but did not carry with the land - - -

BRENNAN J:  No, it did not. It said, "Notwithstanding what

is in the lease, the first three months will be

rent free."

MR MERKEL:  I understand that, Your Honour, and what we

say - and this is how the matter appears to have

been conducted below, and that is the problem which

really I am seeking to address - is notwithstanding

the different ways it could have been put, it
appears to us that all the parties acted on the

basis that the lease was truly collateral and did

not impinge upon the obligations as far as the

purchaser was concerned as purchasing the equitable

and legal estate in the land and that, in fact,

Your Honour, the purchaser was paid rent under the

lease, and all I can say is that the parties

appeared to act on the basis that the collateral

agreement contained merely personal covenants which

did not impinge upon the rights of the purchaser.

That is how, in effect, it was put, and the

problem with what has arisen since is that each

representation found since - including that which

my learned friend now seeks to rely upon - we say,

departs from the pleading, and whilst I can
understand the force of what Your Honours may put

to me that the pleading, in fact, could have been that there was an agreement that had been arrived

at, and the non-disclosure of that agreement, in

effect, was misleading and constituted some

representation other than that in 4(b), that is not
really what was being put, and what happened in

the -

TOOHEY J: But it was, was it not? I mean, if you look at

page 11 of volume 1, it said that, "The true value

of the said premises ..... as affected by the

agreement - - -"

MR MERKEL:	I understand that, Your Honour, but
TOOHEY J:	I can see some force in what you say as far as

the statement of claim itself is concerned. It is

certainly not particularly illuminating but in

Krakowski(2) 32 5/5/94

response to a request for particulars, I would have

thought the plaintiffs made their position clear.

MR MERKEL:	They made their position clear, Your Honour, not as to the form of representation, but as to what
they were contended made the representation false,
and what we say, Your Honour, is that if one goes
to the starting point for us, which is the the true representation made was that the market
rent was $156,000 a year. That is not what was
pleaded in clause 4(b).  The stepping stone to that
was that there was a representation there were no
other agreements, and they said the combined effect, in effect, of what was disclosed, the side agreement, the representation there were no other
agreements, was to produce a final representation,
an operative, for the purpose of the cause of
action, both in fraud and section 52, that this was
a representation as to market rent.

My learned friend in this Court seeks to

disavow that last step, presumably because it was

not pleaded, and really say the inferential

representation he relies upon is that there were no

other agreements or, alternatively, that this was

the whole or only agreement relevant to the

question of occupancy. Now, we do not have a

problem with saying that it would have been open

for the case to have been so pleaded and conducted,

but what I wanted to take Your Honours to, very
briefly if I might, was the contrast between what

was said in clause 4 of the statement of claim and

paragraph BA, and this is why the manner in which

the case was conducted is so important. The

representation that really is now sought to be made

the basis of fraud, is the representation in

paragraph BA.

TOOHEY J: Relying on your written submissions, Mr Merkel,

when I say relying on, is it enough to take us to

the paragraphs as you have reproduced them in your

submissions?

MR MERKEL:  Yes, Your Honour, it is more helpful to do that.

Your Honour, it is at page 3 of our written

submissions.

TOOHEY J: Incidently, is the underlining intended to

emphasize or to refer to amended - - -

MR MERKEL:  Amendments, Your Honour. And what had happened

is, just before the hearing, as I understand it,

paragraph BA was added, and that is at the bottom

of page 3, and that, in effect, presents the

representation which my learned friend is putting

to Your Honours as that which he founds his case in

Krakowski(2) 33 5/5/94

fraud on. Now after evidence had closed and after

submissions had concluded, an application was then

made to amend that pleading so that that

representation could form the basis of the fraud

claim, and His Honour refused that application.

Now, we would submit that this case was

conducted very much on the distinctions drawn

between the two different forms of representation

in the pleadings and that the effect of what is

sought to be done in this Court and the effect of the stepping stone in the Full Court is really to

treat paragraph 8A as if it is part of the fraud

cause of action, and we say that the parties did not conduct the case, at first instance, on that

premise. And, can I just take Your Honours briefly

to the - - -

BRENNAN J:  What was the issue for determination at first

instance?

MR MERKEL:  I think the issue for determination,

Your Honour, was: one, was the representation in paragraph 4(b) made; two, was it false; three, was

it material; and four, was it inducing.

BRENNAN J: 

Now, representation 4(b); what was the

representation which, at the trial, was taken to be
the representation in 4(b)?

MR MERKEL: 

Your Honour, we say the representation that was

put forward was that the lease, that is the - - -

BRENNAN J: Meaning thereby - - -?

MR MERKEL:  The written document, Your Honour?

BRENNAN J: Yes.

MR MERKEL: Provided that the rent payable was $156,000 per

year.

BRENNAN J:	I cannot understand how that could have been the issue when His Honour the trial judge said that it
was common ground that clause 19 was complied with.
MR MERKEL:	Can I take Your Honour to the transcript because

I think I can only explain it by reference to what

happened and we say that the trial judge has

suffered a fairly considerable injustice in what

has happened to this. case since it has left him

because it can only be really understood in terms

of the transcript because, because of the nature of

the allegation of fraud and the distinction that I

have drawn to Your Honours' attention between 8A,

which is the real case in fraud, and clause 4(b)

which was accepted as true, that this case took a

Krakowski(2) 34 5/5/94

particular turn in opening and in closing, which we

say is very important.	Can I first of all
take -

GAUDRON J:  You point to a distinction that involves no

difference really, do you not?

MR MERKEL: Well, Your Honour, I understand - - -

GAUDRON J: It is a semantic distinction only.

MR MERKEL:  Your Honour, can I only say this: Your Honour

may find it a semantic distinction but, rightly or

wrongly, the parties accepted it below and

His Honour acted upon it below as not a semantic

distinction. Can I just indicate this: in closing

- just so that I am not heading into a void - when

this question of amending 8A to remove what Your

Honour puts to me is a semantic distinction was

put, it was put by counsel for Eurolynx that if

this amendment was to be made or the case was to be

determined on the basis that 8A was really what

clause 4(b) was about, he had not conducted the
case on that basis, and he asked for leave to

reopen his evidence to call Mrs Samuel to indicate
that she would give evidence that that is not how

she appreciated the representation that she was

making by preparation of the documents.

His Honour both refused the application for leave to amend and to reopen the case. That is why

we said that if what has happened here is a

misconception at trial of what really was properly

open and the case that could properly be put on the

pleadings, and it is a distinction without a

difference, that may result in not that the appeal

be allowed and a rescission order being made, but

the case being remitted back so it can properly be

conducted at trial.

DEANE J: But the trial judge spelt out the plaintiff's case

at page 786 of his judgment, where he referred to

the pleadings, amended statement of claim including

particulars, which makes quite clear what the
plaintiff's case was. True it is His Honour then

sees that somewhat differently than one would have

thought was correct, as being a case of active

concealment rather than an untrue representation by

non-disclosure.	But he spells out what the case
was.

MR MERKEL:  Yes. Your Honour, there are two different

questions. One is whether the case was contested

on the pleadings and two, whether the parties chose

to contest the case on a basis other than the

pleadings. What I wanted to demonstrate to

Your Honours, just by very brief references to the

Krakowski(2) 35 5/5/94

transcript, is that the parties conducted this case

strictly on the pleadings and the fraud by

non-disclosure, we say, would have required a
representation in paragraph 4(b) to be something

other than it is, and if we are wrong on that I can

only say that the parties acted on the basis that

it did so require some different form of pleading,

and that the distinction between 4(b) and

paragraph 8A was real. Can I just direct

Your Honour's attention very briefly to what - - -

DEANE J:  Do you contest that what His Honour set out from

the pleadings and what he saw as the basis of the

plaintiffs' case is the same, in essence, as is now

put?

MR MERKEL:  No, we say it is different, Your Honour, in this

sense because what is now put is that the

representation relied upon was that the lease

constituted the whole agreement between the parties

and there was no other agreement.

DEANE J: But that is exactly what is put in 786 to 787.

BRENNAN J: Exactly.

MR MERKEL:	Your Honour, we would say that what His Honour saw as being put and it being incumbent upon the
plaintiffs to establish was that, having accepted
that the representation made in terms of 4(b) was true, to succeed they needed to show there was fraudulent concealment rather than to say that the representation was untrue because the lease did
provide for the rent to be payable exactly as
pleaded.  We say that the problem that has beset
this case was that the pleading in paragraph 8A was
not the pleading in paragraph 4.

BRENNAN J:  We are not talking about 8A. Look at the

passage that His Honour has just drawn your
attention to.	What could be clearer than the

proposition that the contractual arrangement
between the defendant and Schweda were not as

represented to the plaintiffs? The proposition is that the representation was that the lease was for

a period at $156,000 a year. You say, "That is

true, look at the lease and you can see that it's true. Nobody doubts that. Here's the allegation

that the contractual arrangements are different.".

Where is the problem?

MR MERKEL:  The problem, Your Honour, is that the view -

rightly or wrongly I do not wish to really say -

taken was that the lease was the operative

arrangement in relation to the land which would be

binding on the land and the benefit of which would

pass to the purchaser. The fact that there were

Krakowski(2) 5/5/94

contractual arrangements which impinged upon that but operated as between the vendor and the tenant but did not pass with the land was not to the

point, and that ultimately - and this is the real

contest that occurred at trial - what was really

being put by counsel for the respondents in

cross-examination was that the plaintiffs were

seeking a lease which would give them the return on

their investment of the 10 per cent. That was the

matter that was their sole concern and His Honour

so found, and that that was what they sought and

that is what they got.

I should say that there were contested issues before His Honour on that and evidence was given to

the contrary by the two witnesses of the plaintiffs

which were relevant to that issue. We say,

properly understood, His Honour found that the

non-disclosure, whatever representation that may

amount to, did not induce. What induced the

plaintiffs was the 10 per cent return provided for

under the lease which they bargained for and got

the benefit of. I do not wish to try and labour

the point on the semantic distinctions or otherwise

that may exist in the pleadings.

-All I was going to try and demonstrate to

Your Honour is that the parties, rightly again or

wrongly, conducted the case on there being a

difference that was more than semantic. All I was

going to indicate - if I can only give Your Honours

the references and I will not delay Your Honours

any further on it. At page 45b at the conclusion

of the opening - because this problem of what was

really intended to be conveyed by clause 4(b) was

something that was at the forefront in the opening.

After counsel had opened for the plaintiffs,

counsel for Eurolynx raised the problem about the

acts that were to be relied upon as to deceit, and

at about point 6 he said:

So so far as the allegation of fraud is

concerned, there is no allegation of fraud

made against us other than the work or acts of
the solicitor.

HIS HONOUR:  Yes, there is no representation

suggested was made by Mr Ceni or .....

HIS HONOUR:  Or Mr Ryan.

MR JOLSON:  And we are content to meet the

case on that basis.

At the top of 46b he said that he had to make a

decision on calling the solicitor depending upon

whether it is suggested that she deliberately

Krakowski(2) 37 5/5/94

concealed or was dishonest. Then, picking it up in

the appeal books, the matter went - - -

BRENNAN J:  What was the response to that observation by

counsel for your party?

MR MERKEL:  I think, Your Honour, this was a discussion

which led to Mr Watkins, who was counsel at that

stage for the plaintiffs, and that is picked up,

Your Honours, at page 48 of the appeal book.

Counsel for Eurolynx, at the top of 48, Mr Jolson raised the very question as to whether there is a suggestion the lease was a sham and that the tenant

was never intending to pay the rent, and then

Mr Watkins, at the top of page 49 said:

I did not mean ..... that the tag of sham was to

be attached to the -

This is in the appeal book. Sorry, Your Honour, I thought that the passages were complete.

DEANE J:  We have got Mr Watkins' response to the passage

you pointed us to at the bottom of 47(b), where he

says it is a bit too late for you to be trying to

confine it to the solicitor - - -

MR MERKEL:	Yes, I follow that.
DEANE J:	- - - because you should have asked for

particulars and you did not.

MR MERKEL: Well, Your Honour, there were particulars. The

particulars were that it was constituted

solely - - -

DEANE J:  I am just saying what he said.

MR MERKEL: Sorry, Your Honour. That is correct. Can I

just go to the conclusion of that discussion before

disavowed any - this is in the appeal book - tag of His Honour. It is at page 49, where the plaintiff sham to the lease, and then at line 11 said:

It is not suggested that he did not contract

to pay the rent of $156,000, and indeed that

he would not have, as far as the vendor was

concerned and the defendant was concerned,

have remained as a tenant for years.

And then at the top of page 50 -

TOOHEY J: Just before you go over to 50, Mr Merkel, what

about the balance of 49:

Your contention is, therefore, that if your

client had been appraised of the true state of

Krakowski(2) 38 5/5/94

affairs, namely that the vendor was really

funding the rental -

"Underwriting", is the answer:

that would have had a significant effect upon

the market price of the property -

And then there is the second matter to which we

were referred this morning:

And his assessment of the tenant as a secure

and worthwhile tenant.

MR MERKEL:  Yes, Your Honour, I accept that, and then, what

Mr Watkins then said when one looks at the capital

value, which is another consideration from my

client's perspective, in so far as that is hinged
to the rental as being paid, there is an assumption

that indeed the rental reflects what in fact is

being paid, or as it has turned out, it does not,

because it does not take into account the

incentives. Then His Honour said, "Well you are

putting your case so much as a subterfuge as a

non-disclosure case, are you not?" Then at page 52

in the appeal book, Mr Watkins said:

What we say is that Mr Jolson's client by

virtue of the actions of its employees and

agents has deceived us, and we are suing in

deceit. We say that deception arose in so far

as Mr Lally's client is concerned by the

preparation of contractual documents,
including the section 32 Statement with the

lease and other documents annexed which did

not disclose the true position and secondly,

by the answering of specific requisition -

The true position being the whole of the

contractual arrangement, rather than just the terms

of the lease as they were to operate in so far as

the purchaser was concerned. But I did not want to
stop there.	What happened at the end of the case,

and this goes to the second passage of transcript

that I handed up to Your Honours, is that, in the

course of submissions - and this starts at

page 518 - each party had put their respective

submissions and - - -

BRENNAN J: Page 518 of the volume 3?

MR MERKEL:  No, sorry, Your Honour; it is in the transcript

my learned friend, Mr Mandie, handed up this

morning.

BRENNAN J:	No, we have got pages lB to 48B.	Yes, I see.
Krakowski(2)	39	5/5/94

MR MERKEL:  These are the last pages of the trial before

His Honour. At page 523 towards the bottom of the

page, His Honour - and I should say, this is when
Mr Watkins had sought to amend to include

paragraph 8A as part of the fraud case - indicated

towards the bottom of the page that:

A finding of fraud cannot be made in the absence of an allegation made in the pleadings -

And, at the top of page 524, His Honour indicated

that Eurolynx had come to fight that claim on the

basis of the pleadings. Then, at page 525,

Mr Watkins had been saying to His Honour, in

substance, I think, what Your Honour

Justice Gaudron put to me, that, look, the

amendment to paragraph 8A was really another

variant on 4(b) and therefore it was the same

issue. Mr Jolson then said:

If Your Honour pleases. Your Honour, I

would seek leave then to reopen my case to

call Mrs Samuel on the question of the

allegation constituted by the first cause of
action alleged, that is the documentation
prepared.

In the event that Your Honour does not uphold an application or does not find that the cause of action pleaded has not been made

out, and Your Honour determines the real gist of the action lies in the allegation that the documents do not disclose the entirety of the contractual relationship between landlord and tenant and that because there is no evidence

from the draftsman of the documents -

and then he went on.	And then the last four lines
at page 526 he said:

If there is now a possibility that the

technical problem with the pleadings will be
cured, and again I remind you there is no
application for it to be done, but if

Your Honour proceeds to take a broad view of

the plaintiffs' case and say that it is open

to accept that the true allegation is - the

misrepresentation is contained is proffering
documents which do not truly record all of the
contractual relationships between the parties

then I would be prejudiced because I have made
the decision based upon, perhaps Your Honour

may find, an incorrect reading of the way the
plaintiff was putting the case in deciding not
to call a particular witness.

Krakowski(2) 40 5/5/94

And it goes to that issue alone and I

would propose to call Mrs Samuel to tell

Your Honour what her involvement was with the

transaction and what appreciation she had with

respect to the documents and the side

agreement -

and then His Honour, the application to amend not

having been persisted with, at page 530 just down

the middle of the page, indicated he would not

allow the reopening the case.

Now, when His Honour came to write his reasons

it is clear that His Honour treated the

representation in 4(b) as satisfied in the sense

that the parties had conceded that clause 19 in the

contract was fulfilled. It was common ground that

the lease provided, and the tenants' obligation
under the lease was to pay the rent, and His Honour

then treated the case, in effect, as concealment.

Now, we would say there is a distinction drawn

in the trial between the substance of BA and 4(b)

and His Honour, and indeed Eurolynx, had contested

it on there being a distinction. If that was

wrong, and we say with respect it is not because of

the way in which the 4(b) case was put, then we

would say that there has not been a trial of the

relevant issues, including issues of credit and

reliance, but I will have to develop that.

BRENNAN J: This passage was at the end of the trial, you

say, after the close of evidence.

MR MERKEL:  Your Honour, we say it was after the close of

evidence and it was on the basis, Your Honour, that

BA was not a representation being relied upon.

BRENNAN J: That is right.

MR MERKEL:  And we say that in this Court and in the

Full Court that substance of the representation my learned friend has put is that in BA.

BRENNAN J:  You may say that, but what can be put against

you is that the case that was made at first

instance, right through the trial and up to this

page was 4(b), with the particulars that went with

4(b) and that is what is being put in this case in

this court. And that if Mr Jolson chose to

misunderstand it and not call a witness because he thought that witness would not be relevant to that

issue, so be it.

MR MERKEL:  I understand that, Your Honour, that, with

respect requires the question as to whether 4(b)

Krakowski(2) 41 5/5/94

and BA are identical pleadings, and we say they are

not.

McHUGH J: But, they have different dates, do they not? One

representation was for September; the other one in

October?

MR MERKEL:  Your Honour, I do not think there is any

difference in substance because they both relate to

the non-disclosure of the contractual agreement as

opposed to the disclosure of the lease. There is

no different distinction between the point that

they deal with, otherwise, what Your Honour says is

correct. But, as a matter of substance, we say

there is no difference. But, I will move on if I

might, I do not want to delay on this, but in our

submissions we have indicated to Your Honours that

decisions of this Court, such as in Dare v Pulham

and Banque Commerciale, make it quite clear that

the manner in which the case is pleaded is a matter

of some importance.

But, can I go one stage further? I accept

that there is a distinction between the three month

rent-free period and the $156,000 payment in

respect of the fitting and stocking. The three

months' rent-free period arguably or does - it may

not matter ultimately for our case - impinge upon

the provisions of the lease, but it was not put
that the $156,000 impinged upon the obligations

under the lease or the description of the

obligations under the lease and we say there is a

significant difference between the nature of the

two representations that may be embodied by that

concealment and what, in fact, was pleaded. We say

that it was nowhere put that, in effect, or in law,
there was no rent for the first period because of

the $156,000 payment.

We would go further and say that the parties

conducted the case on the basis that the

contractual obligation by the tenant was that set

out under the lease, and that is what His Honour

said when His Honour said, "It was common ground,"

and, indeed, in evidence - - -

BRENNAN J:  No, it was not. What His Honour said was that

"It was common ground that the lease", meaning

thereby the document, "contained those terms."

MR MERKEL:  I think His Honour was going one step further

and he is saying that as a matter of law the lease

operated to provide that the obligations under the

lease in the relevant respect, being those that the

purchaser would enjoy, bound the tenant to pay that

rent, notwithstanding any side agreement.

Krakowski(2) 42 5/5/94

BRENNAN J: If His Honour said that then His Honour must

have been wrong, must he not?

MR MERKEL:  We say that the proper view to be taken of the

contractual obligations is that the side agreement constituted personal covenants and did not bind or

run with the land and, indeed, what bound and ran

with the land were the terms of the lease, so that

the purchaser did succeed to the benefit of the

lease - - -

DEANE J:  What happened as to the first three months' rent?

Did the tenant pay it?

MR MERKEL:  Your Honour, what happened, as I understand the

evidence, is that I think for the 20 days that

overlapped, I think the settlement was on

20 November and the 3 months ran out on
10 December. For those 20 days it appears that the

rent was paid in part and adjusted on the statement of adjustments by Mr Mermelstein who was acting as,

in effect, the legal assistant for his uncle, the

plaintiff.

BRENNAN J: Paid by whom?

MR MERKEL: His Honour said he presumed the tenant, because

a payment was received, but the tenant gave

evidence and no issue was raised at trial - - -

DEANE J: That would be obvious because the tenant was not

liable to pay anything. Your client knew whether

the tenant had paid the rent or not, having agreed

with it that it did not have to. The only sensible

assumption would be that it had not, because if it

had paid it to the appellant, your client would

have been liable to refund the amount. This is all

getting rather silly, is it not, Mr Merkel?

MR MERKEL:  Your Honour, I will move on. Can I just say we

have set out, in our outline pages 12 to 14, the

evidence, particularly at the middle of page 13,

concerning how the matter was conducted, both in

evidence and by the parties, before His Honour. In

the middle of page 13, His Honour said:

The legal advisers to the parties apparently

regarded Ex Bas a ''collateral agreement"

additional but not subordinate to the lease".

It was not asserted that the lease was not a

legally binding and enforceable agreement when

it was executed and became binding and

enforceable between the Plaintiffs and Swaeder

Sales Pty Ltd on and after 20th November 1989.

Then His Honour concluded that:

Krakowski(2) 43 5/5/94

The "collateral agreement" -

in that context -

did not qualify in any material sense the

covenants of the lessee contained in the

lease -

We make the point, at the bottom of page 13, it was not put in issues before His Honour that the appellants were not entitled to receive the rent

provided, to be paid under the lease. If I can

give Your Honour a judgment reference in the appeal

book at pages 784 to 785, His Honour makes the

comment that the rent was presumably paid in

accordance with that.

BRENNAN J: It could not have been paid, that is the whole

point. His Honour continually refers to, "They

weren't out of pocket", as though that is

tantamount to saying that the rent was paid. The

transparently obvious fact is that no rent was paid

at this time nor was any payable. How do you avoid

the consequence, given once the meaning of the

representation which is put against you, that

everybody who is concerned on your side of the

record knew of that fact?

MR MERKEL:  Your Honour, I do not seek to avoid the

consequence that the relevant persons were aware of

the collateral agreement.

BRENNAN J:	And of the fact of non-payment of the rent?
MR MERKEL:	Your Honour, I can only say this:  Mr Schweda

was called by the plaintiffs and it was not

suggested he did not pay the rent.	Mr Gilbert was
called on behalf of Eurolynx - - -

DEANE J:  But why would they ask him when your documents

establish that he was not liable to pay the rent?

It would have been for you to say, "Even though you

weren't liable and there was a collateral agreement

you didn't have to pay the rent, out of your public
spirit you paid it and held the person who had

agreed you wouldn't have to pay it free of any

liability. ".

MR MERKEL:  I appreciate what Your Honour is putting to me.

All I can say is what occurred below, and may I say

that the real contest below was that the plaintiffs

really bargained for a return on their investment

and were not bargaining for something based upon

market rent or market value and that that really

was the foundation upon which this case was

contested on an issue of fact. The parties may

have ignored issues that now, with the benefit of

Krakowski(2) 44 5/5/94

hindsight, should have been explored or treated

differently.	I can only go on what was set out in
the evidence.

DEANE J: Yes, I was beginning to argue with you, Mr Merkel,

rather than seek assistance, and I will desist.

MR MERKEL:	I appreciate that, Your Honour. Really I think the true battle, however it may be formulated now,
or should have been formulated, was that the
plaintiffs were saying that what was represented
was what would pass to the purchaser. What the
purchaser was saying was what was being represented
was the overall contractual relationship, not what
was passing to the purchaser.
BRENNAN J:	So that really comes down to the question of

what was the representation that was made.

MR MERKEL:  Yes, Your Honour, it comes down to what was the representation which was made. It is pretty

important to this case, and it is unfortunate it

took the course it did in this respect, because it

is important, given that materiality and inducement

were contested issues, that impinges upon how the

plaintiffs themselves saw the representation.

There are three steps. There is what the Court may

objectively say was the representation; two is

whether the plaintiffs saw it in that way; and

thirdly, whether the defendants made it intending

it to have that meaning and knowing the meaning

they intended it to have was false.

We say that if Your Honours do not accept my

submissions on the pleadings, those issues have

never been properly tried in the·court below. The

best example of it is how this was developed in the

Full Court. Can I take Your Honours to page - - -

BRENNAN J:  Mr Merkel, can I just interrupt you once more

and then I promise not to do so for some time to

come? Could I just take you back to the

particulars at the bottom of 786? If it be right

to say, and I appreciate that you by no means

accept this, but if it be right to say that the
case that was made against you was that the

representation was these are the contractual

arrangements between the defendant and Schweda, if

that is the true nature of the representation, can

there be any doubt as to, (a) its falsity, (b)

knowledge of its falsity, (c) its materiality, (d)

that it induced?

MR MERKEL:  Your Honour, at the bottom of page 786 it is not

quite an accurate statement of what is set out in

the pleading. Can I take Your Honours back to

page 2 of my outline because what was pleaded was

Krakowski(2) 45 5/5/94

not that the contractual arrangements in totality

had that effect and these are distinctions that now

become important. Your Honour, what was pleaded,

and we have set it out we hope accurately in our

outline, was that the defendant had leased the said

premises for a term of 6 years; (b) that the said
lease provided that the rent payable for the

initial 2 years was $156,000 per annum.

Your Honour's question to me contained two

steps which we say transcend what is set out there,

and if I can defend myself and say, literally set

out, the first step is that the implication that

that is the only contractual arrangement relevant

to the occupancy of the tenant, and we say that is

somewhat broad, but that is what the Full Court

found was implicit or by inference in what my

learned friend seeks to put now. And second, we

say that there is a difference between what the
said lease which, under section 141 of the

Victorian Property Law Act passes with the land,

and what may be the totality of the contractual

arrangements between the parties.

But there is a third answer I would seek to

give, even if Your Honours were against me on that

answer. There is a difference between the 3 months

rent-free period and the $156,000 which is a

contractual arrangement but was not relevant to the

terms of the lease. It was anterior or antecedent
to the lease and did not give rise to obligations
between landlord as landlord and tenant as tenant.

We say an important distinction is to be drawn because if nothing else, His Honour did find that

the 3 months rent-free period, if that had been

disclosed, it would have made no difference to the

transaction. We say there is an important

distinction between the two which has not really

been drawn by the Full Court. That is the answer

we would give Your Honour, but we say the form of

the pleading was very important, particularly

having regard to the way in which that form was

acted upon and relied upon.

Can I take Your Honours to what the Full Court

found to show how this is a problem that has beset

the case throughout. At page 822 the Full Court,

at line 18 said - and we say that this is a

composite representation, it is not to be severed

into two parts:

The representation was that the lease

contained the whole of the agreement between

the defendant and the tenant. In all the

particular circumstances, that amounted to a

representation to the effect that the rent

Krakowski(2) 46 5/5/94

reserved by the lease annexed to the contract

of sale was a market rent.

And my learned friend succeeded on section 52, and

he now seeks to succeed in fraud on the basis of

that finding.

Now, I do not say it was not open to the

plaintiffs to have conducted a case pleading market

rent or some such representation but, we say it is,

with respect, a different case to that that finds

itself in paragraph 4(b). But, we do say that the
first representation, namely, that the lease

contained the whole of the agreement between the

defendant and the tenant - we say that that only

really begs the question because the agreement as

to what? What they have got to say is agreement as

to rental, or as to inducements, or as to

incentives, but once one descends into the

specificity one then can find that this was not the

case and not the scenarios which was the case as

pleaded or contested. That points out, in our
submission, the difficulties that have arisen with

the pleading because what Their Honours found was

for the representation was exactly that which, we

say, is a matter of substance. If not technically

in form, His Honour would not allow it to be made

part of the fraud case in paragraph 8A.

So we say that there is an injustice involved

in the case as it has moved, and if the Court finds

that it may have been open, or it was open, to have
the representation as pleaded, we say that is not

the basis upon which it has been conducted.	We
have tried at pages 25 to 27 of our outline,

particularly at paragraph 45 - I will not read it

to Your Honours - but we have tried to put three

different ways in which the case has moved.

Firstly, at trial in paragraph 45(a); before the

Full Court in paragraph 45(b); and now, we say,

that our learned friend seeks to disavow the market

rent as found in his favour by the Full Court and
just rest, in effect, on paragraph 45(c).	To say

there was no collateral agreement, we say, raises a

plethora of problems about insurance, about other
matters that may have had the effect of the tenant

agreeing to pay more.

So, we say that there is a problem about that.

I do not wish to say anything more than that we say the representation being relied upon being admitted

to be in substance true, the case was fought as in

effect a concealment case before His Honour, and
that is why His Honour followed it in the direction

that he did.

Krakowski(2) 47 5/5/94

But, can I move on to the second branch of our

submissions, which is, assuming the case was, as my

learned friend puts it, that 4(b) carried with it -

there was no collateral agreement, that raises

critically whether the solicitor, who was the only

person involved in making the representation in any

meaningful sense, because she prepared the document

and the document, being a legal document, being the

section 32 statement and the contract, was based
upon her sense of what her obligation was as a

solicitor to prepare it, whether she intended it to

have the meaning conveyed to the purchasers that

they now say it has. And, we say that there is

simply no basis to conclude - - -

GAUDRON J: But why would that - I mean, so far as the

purchaser is concerned, the representation is

Eurolynx' representation. How would it be answered

by looking to the mind of Mrs Samuels alone?

MR MERKEL:  Because Mr Gilbert gave evidence, and His Honour

the trial judge accepted Mr Gilbert's evidence as correct, and I can accept Your Honour's question,

there is simply no evidence at all that Mr Gilbert

intended to convey, by the delivery of the contract and the documents, the representation that the Full

Court found; it was never put to him.

GAUDRON J:  Somebody clearly, somebodies, being servants or

agents of Eurolynx, knew the true position.

MR MERKEL:  I have no quarrel with that at all, Your Honour.

That is clear correct.

GAUDRON J:	Now, how is it relevant that some others, including those who actually perhaps created the
document and those who delivered it, did not? It
surely is of no relevance.
MR MERKEL:	Your Honour, what we are saying is that there are two parties whose intent could be relevant.
One is Mr Gilbert, who was the person responsible
for the transaction within Eurolynx -

GAUDRON J:  Why is intent relevant at this stage? We are

looking at knowledge.

MR MERKEL:  Not intent, Your Honour. The cases that I rely

upon are really what was said in - the test is in

Akerhielm, (1959) AC 789. If I can just take

Your Honours briefly to these three cases.

This is a test acted upon and adopted in this

Court. This is in the judgment of Lord Jenkins at

page 805 at point 6. His Lordship said:

Krakowski(2) 48 5/5/94

The question is not whether the defendant in

any given case honestly believed the

representation to be true in the sense
assigned to it by the court on an objective

consideration of its truth or falsity, but

whether he honestly believed the

representation to be true in the sense in

which he understood it albeit erroneously when

it was made -

Now, can I just pursue that for a moment? The next

case is John McGrath Motors (Canberra) Pty Ltd

v Applebee, (1963) 110 CLR 656, at 659 to 660, in

the joint judgment of Justices Kitto, Taylor and

Owen. At about point 8 what Their Honours said:

What had to be determined on this aspect of

the case was the meaning with which Aurousseau

used the words and, in the light of that

meaning, whether his statement was, to his

knowledge, false or made with reckless

indifference as to its truth or falsity. He

may well have used them to mean "not second-

hand". The evidence suggests that he did and

there is no evidence that he did not. In these circumstances a finding that he was

fraudulent cannot be supported.	"The
question -

and then Their Honours pick up the Akerhielm test,

and then it was put again in this - - -

TOOHEY J: That is all very well, if the defendant goes into

the witness box and says, "Well, yes I did say

that. But I thought it was true for this reason or

that reason".

MR MERKEL: But, Your Honour, that is what happened with

Mr Gilbert. Mr Gilbert said in his evidence -

first of all, he left to the solicitors what was to

be prepared as a matter of law but he thought what

was being given reflected the proper contractual

basis for which the purchaser was acquiring the property. His Honour made a number of findings

about him which would in no way suggest that the

burden which is on the plaintiff, putting aside

section 13, to show that there was this subjective

element of dishonesty had been discharged. The

plaintiff had Mr Gilbert in the box and did not put

to him the scenario that is now being relied upon.

Indeed, I think Your Honour in Neat's case

said that in that very situation the matter would

have to go back for retrial if the appeal would

otherwise be allowed, because the very scenario now

being relied upon, or relied upon in the Full

Krakowski(2) 49 5/5/94

Court, was never really put to Mr Gilbert, and that

is a burden or an onus on the plaintiffs.

TOOHEY J: Yes, it is, but it is an onus that might be

discharged in various ways. It might be discharged

through the mouth of a witness or by inference if

appropriate.

MR MERKEL:  I appreciate that, Your Honour, but the Full

Court dealt with it by inference as if there were

no questions of credit involved in the evidence

below, and yet there were. There is no finding

against Mr Gilbert who gave evidence and was

cross-examined, not on the scenario that is now

relied upon, to show that he, in the terms of these

cases, had no belief in the truth of the

representation he believed he was making. That is

the problem: where, as my learned friend accurately points out, he is relying on a representation created by inference, not a

statement of fact that appears in a document.

Therefore, necessarily the question arises as to

what was intended to be conveyed and communicated

by the defendant or on its behalf through its

solicitors.

The other case I think I was going to take

Your Honours to was just Sargent v Campbell which

is on our list of authorities but which is to the

same effect. So the subjective element is part of

the onus which the plaintiff carries. In a case

where the representation is made and it is a simple

representation where it contains a statement of

fact and it is knowingly false, then the onus may

be discharged. This is very much the problem that

members of this Court were considering in

Vaggelas's case. But as was pointed out by

Justice Wilson and Your Honour Justice Brennan in

Vaggelas, the question of what was the subjective intent and the inferences that one may draw are

where we sought to rebut it by evidence. able to be rebutted by evidence. It was a case We say that we have never had a trial on the

issues of fact that are now sought to be determined

as if it were a trial in this Court. That is why

we put in our alternative submission that there are

two aspects to which we address this submission on

the subjective aspect of the fraud as alleged. One

is that there is no evidence, which would suggest

that Mr Gilbert and the courts below found no
dishonesty could be inferred in respect of

Mrs Samuel, had the intent to convey the meaning, or meant what they were conveying by the delivery

of the documents to be as contended for by my learned friend. And that subjective element,

albeit it may be erroneous as to what was

Krakowski(2) 50 5/5/94

objectively conveyed, is an essential part of the

proof of the cause of action.

So, it is in that sense that we say the

plaintiff has failed to discharge the onus or,

alternatively, we have never had a trial on that

particular issue, and it falls very much within the

kind of situation that this Court has referred to

as warranting a retrial. There are two cases that

I would refer to. The first is Neat Holdings v

Karajan Holdings, (1992) 67 ALJR 170, and I had in
mind, particularly, a passage at 175 by Your Honour

Justice Toohey where, in the second column at

point 2, Your Honour said:

In that event, to make a finding of deceit against the respondents, it would be necessary to conclude that the respondents deliberately

exaggerated the figure in the weekly takings

book each time they made an entry;

alternatively that the weekly takings book was

simply a concoction. Neither of these

scenarios was put to the respondents in

cross-examination.

And we have that very situation here. That

scenario was not put to Mr Gilbert in

cross-examination.

The second case, which we say this bears some

parallel with is Carpenter v Atkins, (1992)

31 CLR 286. That case factually is quite

different, but there - I do not think Your Honours

have that on the list, but can I just indicate to

Your Honours what was said in the joint judgment of

Justices Isaacs, Gavan Duffy and His Honour

Justice Starke. Their Honours said:

After very careful consideration we do

not think any safe or just conclusion can be arrived at for either party on the materials

as they stand, and we are of opinion that

there should be a new trial.

And Their Honours directed it back to be heard on

the evidence as it stood at trial because the

matters that really were in issue had not been

contested in the courts below, and we say that that

is the substance of what has happened on this

subjective aspect. We have not been - - -

DEANE J: But it would only go back for a new trial if you

failed here on the question whether there was a

false representation.

MR MERKEL:  Yes, Your Honour.

Krakowski(2) 51 5/5/94

DEANE J: Well then, if it went back for a new trial, how

could you succeed in the face of section 13 of the

Sale of Land Act?

MR MERKEL:  Your Honour, that raises a number of difficult

issues. I am not sure whether that section has

been the subject of judicial consideration. If it

has removed, if it is sought to be relied upon, the

subjective element, then it would - - -

DEANE J: Well it obviously could be relied upon if it went

back for a new trial.

MR MERKEL:  Yes, it could be, Your Honour. would then be, if this Court determined objectively The question

what the representation was and whether it was as

pleaded and it was - - -

DEANE J: Well, assume it is the false representation that

is put against you.

MR MERKEL:	Yes, Your Honour.
DEANE J:	Which means the section says there is fraud or

deemed fraud unless you establish that you had

reasonable ground to believe that that false

representation was true, when you knew it was not.

MR MERKEL:  We would say, Your Honour, and again, I cannot

profess to give Your Honour a complete answer on

the evidence available, but we would say that what

would obviously be open to be called would be

evidence of solicitors and as to conveyancing
practice and as to whether there was a

misconception about the effect of such agreements

and their nondisclosure.

DEANE J: No, but that is not what it says, you see. Where,

on the basis that there is an identified

representation which this Court has held to be

false, you would have to say, we believe that that

representation, namely that these were the only

relevant lease documents, was true.

MR MERKEL:	Yes, I see what Your Honour puts.
DEANE J:	I just do not see how you would get to first base.
MR MERKEL:	I understand the force of what Your Honour puts

under section 13.

DEANE J: Whether it is an unsatisfactory answer to what you

are putting if one reaches that stage, to say,

assuming this is the view taken, that while the

appellant cannot rely on section 13(1) in this

Court, if it goes back section 13(1) is going to be

decisive for him.

Krakowski(2) 52 5/5/94

MR MERKEL:  I would say unjust, Your Honour, but I

understand the force of what Your Honour puts. I

should say it really does take me very directly to

the next submission that we make and that is that
that injustice is even exacerbated because we say,

on a proper understanding of His Honour's judgment,

His Honour found against the plaintiffs on the two

issues of fact, being materiality and inducement,

and that is on the non-disclosure of the contents

of the side agreement, because His Honour had to

deal with that directly in respect of the answer to

requisition but His Honour also dealt with it in

the alternative on the main case of fraud.

His Honour warned - I do not want to travel

through His Honour's judgment - about two things in

his judgment which were quite important. One is

that the property market was very buoyant at that

time. The background to that was that people were

seeking to buy on the basis that values were just

going up and up. Secondly, that upon the collapse

of the tenant, through no fault of the
misrepresentation as it may be found to be or

otherwise, the plaintiffs were searching to find a

guilty party.

His Honour then came to look at the evidence with some care and I had mentioned earlier

Vaggelas' case in this Court where Mr Justice

Wilson and Your Honour Justice Brennan indicated

that there may be inferences of fact on the

question of materiality and inducement but they are

rebuttable and the true and ultimate contest at

trial was on that issue. Can I now address that.

In volume 1 - maybe if I could take

Your Honours to the outline it is more convenient.

In the outline, at page 4, we set out the origin of

that contest in the defence that inducement and

whether the plaintiffs were misled, as well as

reliance in their materiality, was a very hotly
contested issue.	The case being put by the

defendants was that the primary concern, indeed the

sole concern, was to get the rent stream or an

entitlement to the rent stream that produced a

10 per cent return.

We have set out at pages 6 through to 11 of

our submissions the evidence and our discussion of

those matters which we do not wish to repeat, but

at page 6 in paragraph 6 we set out the four

factual issues that we say were being addressed and

were contested, and hotly contested, issues of fact

based upon the evidence given but also the

demeanour of the witnesses. At page 7 we set out

the transcript references which I would ask

Your Honours to look at because time and again

Krakowski(2) 53 5/5/94

through Mr Krakowski's evidence in-chief and in

cross-examination, he indicated that what he was

after was his 10 per cent return. We then put in

emphasis the answer at page 84 which His Honour

made certain findings about but, in effect, that

the concern and sole concern, which was what was

really being put to Mr Krakowski as set out at the

end of that paragraph of the evidence, is that that

was the return he was looking for.

Mr Mermelstein's evidence was to the same

effect. I particularly draw Your Honours'

attention to the last five lines of the evidence he

gave at page 122, that the information he conveyed

to his uncle was the 10 per cent return was secured

in respect of the property and the instructions

were to go ahead.	I am not picking out passages
selectively.	We say that was the gravamen of what
was put.	Then a matter that became the basis of

His Honour's evidentiary findings is set out at the top of page 8, particularly the last three lines,

at page 233:

Your only concern, I suggest, was that the

return on the money that was invested equalled

10 per cent -

The other matter of concern was the tenant. Just

by way of background and as set out in the

judgments, Mr Mermelstein did own other units at

the shopping centre and was involved in it, and
that the inference clearly is that he and his uncle

were forming their own judgment as to the viability

and suitability of shops at the premises as an

investment. What we say is that the

cross-examination put on evidence that the sole

concern as far as inducement was concerned was the

rent stream, the viability of the tenant. The

viability of the tenant was a matter in respect of

which the plaintiffs satisfied themselves and did

not rely on any representation from Eurolynx and

that the rent stream was accepted and acted upon by

Mr Mermelstein and his uncle as being secured and

achieved. Paragraph 11 sets out and refers to

evidence to that effect.

McHUGH J: But, Mr Merkel, do you think they would have gone

ahead if they had known what the true situation

was?

MR MERKEL:  Your Honour, His Honour, we say, made findings

to the effect that the non-disclosure was not

inducing. The reverse of that, Your Honour, is in

the atmosphere at that time, and not with

hindsight, yes. Do I think whether they would have

gone ahead, unfortunately is not the issue,

Your Honour. The question really before His Honour

Krakowski(2) 54 5/5/94

is having regard to the demeanour of the witnesses

His Honour performed a conclusion that they were determined to buy that premises if they got that

return which they did get.

Now, Your Honour, that embraces findings against the witnesses' credit, which I refer to at

paragraph 14, because both Mr Krakowski and

Mr Mermelstein gave evidence which gives

Your Honour the answer. At paragraph 14 they said

they would not have gone on had they known about

it, and we have given references. So that the

issue before His Honour was whether to accept, on

the issues of credit, the case being put by

Eurolynx or the contrary case being put by

Mr Mermelstein and Mr Krakowski that this was a

critical factor. We wish to give that a little

background, and we have set that out in

paragraph 13, that the fact of the matter is that

they found out about the three months rent-free

period which may, if what Your Honours are putting

to me, be a critical part of the representation,

but did nothing on it.

I have set out in paragraph 15 and 16 evidence

of the tenant and the valuers which goes to the

question of value. The point, and the only point I

want to make on the valuation evidence was that if

all that was being let were the bare premises then

the whole arithmetical equation would be quite

different. There would be a lower rent for the

premises alone, but a higher capitalization. A

lower rent but a higher capitalization rate, which

would mean an increased price.

So that in that context what we say is that

His Honour - and we have set this out at page 12 of

our outline - made findings, we would with respect

submit, that reject both the case on inducement and

the case on materiality. Just summarizing it, the

evidence we have referred to on those issues are in

our outline at pages 15 to 19, but particularly
pages 17 to 18.	Your Honours are familiar with the

judgments, but can I just briefly say that at

page 16 His Honour set out in some detail the

factual background, and the only purpose of that

would be for determining questions of inducement
and materiality.

At page 795, which is at point 8 at page 16, His Honour said:

The clear picture which emerged from the

evidence of Mermelstein is that his sole

concern was whether the lease conformed to

Special Condition 19.4.

Krakowski(2) 55 5/5/94

Which was the point that was common ground between

the parties. Then over at page 17, His Honour made

the point in the middle of the page:

In judging the conduct of the Defendant in the present case, it is very important not to do

so with hindsight. When the current recession

took its tool upon Swaeder early in 1990 the

Plaintiffs and Mermelstein immediately began

an investigation to find a guilty party. If

Swaeder had not defaulted, one may suppose

that the terms of the "collateral agreement"

would not have been of concern to the

Plaintiffs.

And can I now read this last passage because that,

we say, is critical to His Honour's conclusions:

A Lease in the terms specified by Mermelstein

to the defendant in Special Condition 19 had

been executed by the tenant Swaeder prior to

the signing of the Contract of Sale. The

"collateral agreement" did not qualify in any

material sense the covenants of the lessee

contained in the lease which were required by

Mermelstein.

And could I draw Your Honours' attention to the word "material" .

In the absence of a legal duty on the

Defendant to disclose the "collateral

agreement", I am of the opinion that the

Plaintiffs have failed to prove misleading or
deceptive conduct under section 52 or
section 53A which induced the Plaintiffs to

enter into the contract or to complete the

contract. No relevant information was

withheld from or communicated to Mermelstein

in the form of the Contract of Sale or in the

deceived him.

answer to Requisition 8 which misled or

Sections 52 and 53A are concerned with conduct which leads or is likely to lead a person into

error. Mr Mermelstein did not request

information about an inducement paid to the
lessee or comparable rental information before
the contract was signed. All he required was
confirmation of the lease to satisfy the male

Plaintiff's requirement of 10 per cent income

from the investment. The information provided

by the Defendant was neither misleading nor

deceitful in that regard.

Krakowski(2) 56 5/5/94

Then over the page at pages 799 to 800, on the

issue of materiality and the answer to requisition,

which raises the very issue of fact:

Further, I consider that Mermelstein and the

Plaintiffs were not induced to purchase the

property by the answer to Requisition 8.	The
strict requirements of Mermelstein and the
Plaintiffs were that the property would

generate an income of ten per cent per annum

on the purchase price paid for the property

from a legally binding lease for a term of six

years. The "collateral agreement" did not touch either the term of the demise or the

annual rent.

Now, His Honour is stating that in a context of

inducement and materiality and we would say, very

much, that His Honour is necessarily rejecting the

evidence that was being put by Mr Mermelstein and

Mr Krakowski that they were induced. If the point

be taken that the requisition somehow was a

discrete matter, can I just draw Your Honours'

attention briefly to page 793 in volume 4 to show

that this argument is certainly not one of

semantics, it is one of substance, because, at the

bottom of page 793, His Honour says, in the last

four lines:

In effect, the plaintiffs assert that when

they read the lease attached to the Contract
of Sale they believed it contained the entire
agreement relating to the tenancy of the

property whereas in truth the lease and the

"collateral agreement" read together contained

the agreement relating to the tenancy of the

property.

That is exactly the case that is being put here.

His Honour dealt with that assertion at the bottom

of 799 to 800, starting at the very bottom of 799,

and it is the passage I read to Your Honours, but

in the context of the assertion, what His Honour at

the very bottom of 799 said:

Further, I consider that Mermelstein and the

plaintiffs were not induced to purchase the

property by the answer to Requisition 8.	The
strict -

and then His Honour went on to talk about the

10 per cent return which - it is in that context we

say that His Honour's finding the case of

inducement had failed and for the same reason, very

directly and closely connected to it, the case on

materiality had failed.

Krakowski(2) 57 5/5/94

We say that those are the findings by His Honour. If one goes to the Full Court at 824

to 828 Their Honours retry this issue but as if it

were never a contested issue of fact, as we say it
was. Their Honours at 822 state the critical

representation in the middle of the page and then

go to discuss the basis for it at 823, but that at

824 to 8 set out why it was both inducing and

material. Their Honours, at 824, and I need to

return to this briefly, but the entire agreement

clause was a matter that had never been whispered
in the trial. No evidence was ever given of it and

was elevated into a matter of great significance in

the appeal court. When one considers questions of

fact involved, we say that there was something

unrealistic about a clause taken out of a lengthy

agreement as if it were in fact relied upon. No

question was ever asked of Mr Mermelstein whether

he ever read clause 9.8 or when he first became

aware of its existence.

What Their Honours said at 824 to 828 is, we

say, a factual reconstruction based upon part of

the evidence. Their Honours go on and make

findings, for example at line 32 at 824, that the

representation:

inevitably deterred the plaintiffs ..... from

making their own enquiries -

At the bottom of the page it:

diverted the plaintiffs and Mermelstein from

adverting to, or deterred them from pursuing,

the question whether any collateral agreement

had been made.

Then Their Honours said the materiality is

therefore evident. I should say that there was

other than what I have taken Your Honours to, we do

not believe there was any evidence to that effect,

other than they said, "We would not have brought it

had we known of the agreement" which we say

His Honour did not accept.

Then at 825 Their Honours refer to valuation

evidence which was given purely in the context of

trying to ascertain what the loss and damage was.

Then Their Honours, at 827, say that it makes sense

to accept that evidence, and I should say that that

evidence raises the question, the market rent of

what? Unfitted out premises or fitted out

premises, premises which have certain benefits

offered to a tenant and so forth.

But, then Their Honours deal with 9 point 8

and make the point at the bottom of the page that

Krakowski(2) 58 5/5/94

Mermelstein indicated he did read the lease but, we say with respect, that is putting it a little

highly. I think the evidence they rely upon is he

"perused" the lease that was attached to the form

of contract.	And then Their Honours conclude at
page 828:

The lease being calculated to induce the

plaintiffs to enter into the contract of sale,

and the plaintiffs having done so the fair

inference arises that they were induced to do

so -

and, Their Honours referred to Gould v Vaggelas.

Now, we say it was open to the trial judge to

pursue the course Their Honours did in the absence

of any contested issues of fact, and Their Honours

then said:

So much for the matters of falsity,

materiality and inducement.

We say that Their Honours fell into fundamental error. One is that Gould's case makes it clear that the inferences are rebuttable and that the

rebutting of them still does not transfer the onus

of proof in respect of this aspect of a fraud case

to the defendant; it always remains with the

plaintiff. Secondly, Their Honours were making

findings of fact in disregard of the findings of

fact I have taken Your Honours to made by the trial

judge, and thirdly, we say that has the effect of

an appellate court, in effect, making its own

findings of fact as if it were a trial court

without any of the principles which are very well

established about limitations on an appellate court

interfering with findings of fact, particularly

those that depend upon the demeanour of witnesses

and on contested issues of evidence.

So that we submit that what Their Honours have done is reconstruct a case which may have been open

to be put at first instance but we say with grave

injustice to Eurolynx because effectively what is

now sought is not only to deny us the benefit of

the findings of fact, we say, we had made in our

favour in the trial, but also to prevent us from

ever having the ability to contest those issues.

We would say, just in answer to Your Honour

Justice Deane's question earlier on section 13,

that if there was a retrial it would not be a

matter of futility because there still would be the

same hotly contested issue of fact on inducement

and materiality, and so that is why we would say

not only would it be unjust in terms of them

getting the benefit of a section 13 defence, which

Krakowski(2) 59 5/5/94

they have not availed themselves in the past, but

we would be unjustly denied the right to put our

case of inducement and materiality.

So, it is for those reasons we would submit

that if Your Honours are satisfied that it was open

for the representation my learned friend contends

for, or the Full Court has found to be put on

clause 4(b) and that that was false, we would say

that for the reasons we have put on subjectivity,

or the subjective element, as we have called it,

materiality and inducement, then there has never

been a trial of the real issues and the scenarios

have never been put.

We would say there are two ways of approaching

that, even if we fail on our submissions on the

representation of falsity. We put as our primary

submission that the plaintiffs have failed to

establish as part of discharging the onus of the

fraud case of the subjective element, and they have

also failed, by reason of His Honour's findings, to

establish inducement. But, if we are wrong on

that, then - if we are right, we say the appeal

should be dismissed; if we are wrong we say there

should be a retrial.

Could I move next to the question of

rescission. It seems likely that, in view of what

my learned friend said this morning, there is

nothing really between us on that issue, that if

Your Honours reject all of our submissions to date, two questions would arise; one is whether there

could not be rescission because it cannot be

practically just, and the other is that is should
be remitted. So, the question of relief should be

reviewed, we would say, probably by a judge at

first instance but the precise detail of that may

not matter.

We have sought to file evidence as to events

since judgment. We are conscious of the problems

of this Court receiving fresh evidence, and the

principle would appear to be that if fresh evidence

may be relevant, the way to deal with a problem

like that is to remit it back for retrial, and we

would say that, at the end of the day, there is

probably nothing between us and our learned friend.

We have, in our outline at pages 29 to 34, sought

to set out the reasons why rescission does not

follow as of course.

Alati v Kruger and McDonald v Wells make it

clear that a condition of rescission is restitutio

or something less than restitutio which achieves

practical justice between the parties. I only

Krakowski(2) 5/5/94

wanted to refer Your Honours, in addition to what
we have set out in our submissions, to a passage of

Lord Wright in Spence v Crawford, (1939) 3 All ER

annotated at page 271. The passage of Lord Wright

I want to rely upon is at page 288 where His Honour

makes the point that the remedy, being equitable,

is discretionary. This is in the context of a

fraud case.

The point we want to make and we have made in

our written submissions is that we would say, as a

matter of discretion, Your Honours have sufficient

before you to disallow rescission. It may depend

on whether Your Honours in the final result treat

the representation as to the three month rent-free

period differently to the aspect about the $156,000

payment for fitting and stocking. We say that

until now there has been a tendency to treat them

as in effect one representation, but we say that

there are outcomes which could sever the two.	If
the only matter of relevance, materiality or otherwise that Your Honours were disposed to act upon were the three month rent-free period, we

would say that the submissions we have set out at

pages 29 to 34 would carry greater force than may
be the more substantive misrepresentation that
brings up both elements, if that is what

Your Honours find. But we have made the point that

those remedies are discretionary and that practical

justice is a matter that would have to be

determined at trial.

Could I deal briefly with the case on the

answer to requisition, which is now moving away
from the fraud case and dealing with the appeal on

the section 52 case on the answer to requisition. We deal with it in our outline at pages 36 to 37. It is important, we would submit, to look at the

way the requisitions were sent and how they came to

be answered. Can I just give Your Honours the

references; I do not think Your Honours need to go

to it. At page 657 Mr Mermelstein, acting for the	appellants, sent requisitions on title, certificate
and statement of adjustments. At page 659 he sent
the standard form, a complicated printed form of
requisitions, and at 671 the answers were received
in the form of a letter from Mallesons. Evidence
was given about these documents, and we say very
carefully.

Mr Krakowski gave evidence in volume 1 at

pages 87 to 88.	I do not need to take Your Honours
to it.	He basically did not know anything about
the answers.	But Mr Mermelstein gave evidence at

pages 124 to 128. I think it is accurate to say he did not say that he read them or understood them or gave any meaning to them or in any other way relied

Krakowski(2) 61 5/5/94

upon them. The totality of his evidence at 124 to

128 is to the effect that he sent the requisitions

out and received the answers back.	At the bottom
of 124 the questions started.	I should draw

Your Honours' attention to line 12 at 124 which

was, as I understand it, the totality of the evidence he gave on clause 9.6 as the entire

agreement clause:

Did you ..... peruse the lease that was attached to the form of contract?---I did.

which falls a long way short of proof of the kind

of case that is ultimately being put in fraud.	But
can I just return to the answers.	At page 124:

Did you subsequently receive answers to the

requisitions?

WITNESS:  I did.

MR WATKINS:  From Mallesons?---Yes.

They were then produced and tendered at pages 125

to 126. Mr Watkins resumes at the bottom of 126:

Apart from the answers to requisitions ..... or the copy of the lease in the contract, were you ever informed ..... that the side

agreement ..... ?---I was not.

At the bottom of page 127:

did you raise any objections to title .....

WITNESS:  I did not.

And that is it. I do not believe there was any

cross-examination on those answers.

We say that, in a situation where a case is

put of reliance and there is a desisting from

saying, "I in fact read them'', and issues of credit

were arising, we say there is just simply no basis
for the Court to infer that there was reliance, when the burden is required to be discharged in

that way. I should say it bears some similarity to

what was before the court in Smith v Chadwick, and

if I can just give Your Honours the reference. It

is 9 AC 187, and at page 195 point 1,

Their Lordships make the point that in similar circumstances, if a person seeking to make out a case of inducement - probably I should take Your

Honours to that. If Your Honours will just excuse

me for a moment. What is said by Lord Blackburn at

page 195, just three lines down:

Krakowski(2) 62 5/5/94

I have come to the conclusion that

whatever be the meaning of that statement the plaintiff has not sufficiently proved that it

did influence him.

I will not go into the detail of that, but it has

always been incumbent upon a plaintiff to indicate

that he read the representation and relied on it,

and we say the case on the answer to requisition

falls a long way short of any such evidence.	Can I
then say that the passages I have taken

Your Honours to, from Justice O'Brien's judgment at

page 798 to 800, make it clear that His Honour

found there was no inducement, in any event.

So that they failed both on reliance, in the

sense that they never got to see the answer, let

alone act on it, but, in any event, His Honour found it was not in any event inducing for the

reasons that I have taken Your Honours to. I will

not trouble Your Honours, but we say the analysis

of the Full Court at pages 842 to 844, in respect of the answer to requisition, we say, is correct,

and we would submit that the case on the answer to

requisition is a side issue; the real question

being the nondisclosure of the collateral agreement

prior to the entering into of the contract.

TOOHEY J: But what significance does inducement have in

relation to the requisitions? After all, the

contract had been entered into.

MR MERKEL: That is what their Honours said at 843 to 844,

Your Honour, but what my learned friend, Mr Mandie,

says is we acted upon it in failing to take steps

maybe prior to settlement. But we say it comes

back to the point that I started to have so much

trouble with Your Honours on, at the outset today:

whether the difference between the pleading in

paragraph 8A or 4(b) is a distinction without a

difference, or otherwise, but we say that the

that is sought to be agitated in the appeal, being	answer to requisition really raises the only issue
the non-disclosure of the collateral agreements. the case no further.

TOOHEY J:  To get away from the facts of this case, if a

party enters into a contract and then subsequently

requisitions are delivered and answered and later

is shown to be false, what part does inducement

play in the ability of the purchaser to either

avoid the contract or to recover damages by reason

of a false requisition?

MR MERKEL:  I think Their Honours were right in dealing with

the common law aspect by saying it gives no right

Krakowski(2) 63 5/5/94

to rescission. It gives a right to claim damages

for breach of warranty. They can refuse to settle

if the objection is to title and the title is not

able to be delivered as contracted but,

Your Honour, this case before this Court and before

the trial court was not put on the basis of the

common law right, it was put on the base of

section 52, and section 52 requires reliance. It

is a central element of the claim in section 52,

that when they pleaded it as such that they in fact

relied on that representation.

BRENNAN J:  Can inducement be inferred from materiality?

MR MERKEL: Well, I think, Your Honour, that is what was

discussed by the Court in Gould v Vaggelas. The

answer is, yes, but I am going back to an anterior

point. We are saying that you cannot get to the

stage of inferring inducement or inferring

materiality, unless a person actually saw it. That

is why I took Your Honours to Smith v Chadwick.

That without evidence that he actually read it and understood it, was conscious of it, he cannot say

that he got to the stage of reliance. It has been

long established that on a cause of action under

section 52, based upon a representation, that

reliance is an essential element to establish a

cause of action on the basis that you relied on a

representation, and I think it is so pleaded. I do

not want to say as a matter of law that you cannot
have a section 52 claim without reliance, but this

is a claim of the kind that you can only have with

reliance because it is so pleaded.

BRENNAN J: Well, that may well be right, but if, for

example, there is a representation made
precontractually and it is false but innocently
made, and on the answers to requisitions there is a
statement made which then exposes the falsity of

the innocent representation, the contracting party

would have a right of rescission.

MR MERKEL:	I think that is correct, Your Honour.
BRENNAN J:	So that the truth of the answers to the

requisitions is undoubtedly material.

MR MERKEL:  I probably should have qualified my answer to

Your Honour by saying what Your Honour said is

right but not because the answer to the requisition

exposed the falsity. That is no more than

evidentiary of the falsity. The cause of action

accrued upon the making of the innocent

misrepresentation.

BRENNAN J: Quite.

Krakowski(2) 64 5/5/94

MR MERKEL:  And therefore the admission of it is only

evidentiary.

BRENNAN J:  Yes. But if it is material in the circumstances

of a given case, the question then is, having

regard to the state of the evidence, is the

inference of inducement to be drawn?

MR MERKEL:  But the point, we apprehend, as made in

Smith v Chadwick, Your Honour, is that you do not

get to the question of inducement and inferring

inducement until you know that the person had a

consciousness, either in his own mind or through his agent, of the content of the representation.

It is only then you get to the next step and ask,

"Do we infer it was inducing?'', and that was

Gould v Vaggelas.

Our problem here is - I should not say ours.

I would say the appellants' problem is that

Mr Krakowski did not ever know anything about the

answers, and that is understandable, and

Mr Mermelstein did not ever give any evidence that

he read them. We say that, therefore, it fails at

the anterior hurdle. We would say that in a case

such as the present the failure to make that

statement should not be treated as accidental. It

may have become a very important issue on credit

had he gone to the next step and professed to have

an understanding and knowledge of answers to

requisitions and matters of title, but I do not

want to speculate. All I will say is that if

Jones v Dunkel has an application about facts in

the knowledge of the appellants, this Court should

not infer that which they were able to give from

the witness-box, and have not. But that is what we

would say on the answer to requisition.

I should say we put the same case on

clause 9.8 of the lease which was the statement

that it was entire agreement. Their Honours,

merely because Mr Mermelstein said, "I perused the

lease," but nothing more was said about it,

inferred that he would have known of clause 9.8

about the entire agreement, and that was a central

plank in Their Honours' reasoning. We say, again,

that suffers exactly the same vice, they may be

able to infer that from other matters, but

certainly not from clause 9.8 because there is

simply no evidence that he read it or had a

consciousness of it or its contents. So, we would

say that the last point we would make on that

question of the answer to requisition is that,

again we would say, the evidence just does not

sustain the cause of action relied upon.

Krakowski(2) 65 5/5/94

On section 13 of the Sale of Land Act we have

set out our submissions at pages 27 to 29. Under

-the rules of court it was a matter required to be

pleaded, and I do not think my learned friend has

suggested anything to the contrary, and we have set

out Order 13 rule 2(l)(c), but the important point

made by us at the bottom of page 28 is from the

decision in Banque Commerciale v Akhil Holdings. The question really is to raise a point, at this stage, is it possible that we may have been in a

worse position. I think the discussion I had with

Your Honour Justice Deane about the problems of a
retrial under section 13 show how the how

complexion of the case would change under
section 13. It is simply a different case and we
would say that the endeavour to rely on section 13;

at this stage, should be rejected by Your Honours

but we have set out our reasons for that at pages

27 to 29, and we do not want to go any further.

Could I go next to the reliance on section 87

of the Trade Practices Act. I think my learned

friend Mr Lally has set out fairly extensive

submissions about section 87. Can I just indicate

to Your Honours that we would say that the matters

set out at pages 33 to 35 which the Full Court

relied upon are all matters which are relevant,

which they properly can have regard to in taking

into account a broad discretion, and arrived at a

conclusion that the justice of the case does not require rescission to compensate the plaintiffs.

The particular conclusion at page 841 - I

think Your Honour Justice Toohey raised this with

my learned friend, Mr Mandie - at line 5, really is

a reference back to the commencement of the

discussion at page 839 at line 8 and what

Their Honours are really saying in the inquiry they are addressing is that section 87 is essentially

compensatory, which the section clearly states it

is, and is to be fashioned accordingly, and we say

that what Their Honours were dealing with was three

questions: one, of liability; two, of whether the

rescission was appropriate; and three, whether this

was a case where compensation, in the form of

damages, is appropriate and adequate.
Their Honours considered all relevant circumstances

set out and referred to by Their Honours and found

that the justice of the case makes this a case

where damages are an appropriate form of

compensation.

Now, what my learned friend did not say to

Your Honour, as I understood it directly anyway,

was that at trial and before the Full Court, the courts had the totality of the parties' case for

compensation, and Their Honours were in a position

Krakowski(2) 66 5/5/94

to conclude that the evidence before them, whilst not enabling them to quantify the loss or damage,

certainly enabled them to form the conclusion that

they did, but compensatory relief in the form of

damages, rather than rescission, was just in all

the circumstances.

TOOHEY J: That may well be right, Mr Merkel, but it does

not emerge with any great clarity in the judgment

of the Full Court.

MR MERKEL: Well, Your Honour, we would say in its context

Their Honours reference to the "valuers" was a reference to a contest over quantum. In our

schedule to our written submissions, we have

summarized the contest on valuation, but when

Your Honours - - -

TOOHEY J: Well, my point is a different one. It does not

go to the evidence of the valuers; it simply looks
to the reasons given by the Full Court for saying

that the justice of the case does not require

rescission as a matter of compensation, but it is

not at all clear why they say that.

MR MERKEL: 

Your Honour, I appreciate what Your Honour says,

taking that sentence literally, without giving it
the totality of the context it has, but the

totality of the context starts with Their Honours

saying that section 87 and relief under it is

essentially compensatory.  We have a claim that

there should be rescission; alternatively, damages
only. Their Honours set out a large number of
reasons, all of which are relevant and open to
Their Honours, and what has not been put to

Your Honours and what was not before Their Honours,

is any reason why it was unjust or any factor

Their Honours had failed to take into account, which they were obliged to, in considering the question before them. We say that it was a matter

properly open to them to conclude that recovery of

financial loss was an appropriate remedy in the

circumstances of the present case.  We would rather

put the converse; there was just simply no reason

before Their Honours that has been put to
Your Honours, on the evidence or otherwise, why

that was wrong.

I should add, at pages 30 to 32, we have set

out additional reasons why damages is an

appropriate remedy. The question for this Court is

not just whether Their Honours may have erred, but

looking at the discretion that this Court would

have to remit the matter back, we have set out a

series of reasons at pages 30 to 32 which we say

make Their Honours' decision clearly right,

although we do not have to go that far.

Krakowski(2) 67 5/5/94

But the real point we would make is that my

learned friend has not shown any error of principle

or error of law made by Their Honours. In the end,

what he really says is, "Look, they've sent back

the question of compensation for retrial; they
should've sent back the question of rescission for

retrial.", and we say there's simply no reason for saying that as a matter of law. Their Honours had

before them all the evidence and had no reason before them why financial compensation was not

adequate.

I understand Mr Lally may put his own

submissions on section 87 and I do not wish to

cover that ground any more than I have with

Your Honours. Can I go to the matter of extreme

importance for the first respondent, who we

represent, and that is the disposition of the third

party proceedings.

BRENNAN J: Before you go to that, could I ask you a

question which takes you back to Akerhielm v De

Mare. Is it correct to approach the matter on the

basis: did the defendant know or have no honest

belief in the truth of the representation as he

understood it? Has the question ever been

considered in the courts below as to whether the

conduct of the defendants in proffering the draft
agreement with the attachments could reasonably be
understood in the sense for which you contend or

has that matter simply not been considered?

MR MERKEL: Again, Your Honour, I do not believe it has been

considered in the judgments, which is the only

answer I can give to Your Honour's question. I

think that is the answer I can give Your Honour.

BRENNAN J: If it be right to say that the primary

interpretation that a court might place upon what

has happened is a representation in terms such as Mr Mandie has contended for and your response is,

"That wasn't the meaning that the representer

intended.", the next question that must arise is

whether or not the meaning for which you contend is

a reasonable meaning which your clients might

reasonably have regard as the true meaning of the

representation.

MR MERKEL:  Your Honour raises a difficult question, because

when you look at what was said in this Court in

John McGrath Motors and also in Sargent v Campbell,

the question of reasonableness is not part of the

equation of dishonesty. Indeed, we would say it is

not a correct test to say there are two

preconditions. One is whether your meaning is

reasonable and two, whether you had no honest

belief in your meaning.

Krakowski(2) 68 5/5/94

We would say the question is one of

dishonesty. To say reasonableness is a standard,

would fly in the face of a well-established and

entrenched authority, that if you honestly believed
it in the meaning you thought you were presenting

the representation no matter that you are wrong or,

I quote, "careless", it is not fraud. And we would

say that therefore it is not a step in that process

to say one, "My meaning was reasonable."

Reasonableness may be relevant to whether the court

believes the meaning you attributed to it.

I have in mind in John McGrath and Sargent v

Campbell, it is very much a subjective test.	I
appreciate in Akerheilm, Your Honour, that the question of reasonableness is raised.

BRENNAN J: It is put, perhaps, in a way that is not

accurately reflected by my question, but the

sentence is, "The meaning placed by the defendant

on the representation may be so far removed from the sense in which it would be understood by any

reasonable person as to make it impossible to hold

that the defendant honestly understood that the

representation to bear the meaning claimed by him,

and honestly believed it in that sense to be true."

MR MERKEL:  I certainly accept that, Your Honour. But that

is an issue of fact to be determined together with

other evidence, whatever that evidence may be.

BRENNAN J:	Now, assuming against you that the representation, which is to be found based upon the
proffering of the documents, is a representation that this is the entirety of the contractual
relationships between the vendor and Schweda, is
there any question which then arises as to the honesty of your belief in some other meaning which
has not been thus far addressed?
MR MERKEL:	We say it is a necessary precondition to the

cause of action that that be established.

BRENNAN J: That what be established?

MR MERKEL: That not only that the representation was false

and known to be false in the terms objectively the
court states it to have been made, but it is part

of the cause of action of a plaintiff in fraud to

establish either that the defendant intended and

knew it had that false meaning, therefore fraud is

established, or to negate any other meaning put

forward which the defendant may honestly have

believed it to have. All I am saying,

Your Honours, in the evidence before the court

below is that there was just simply no trial of

that second issue which is the critical issue.

Krakowski(2)	5/5/94
BRENNAN J:	Is that a problem which concerned your side of

the record? In other words, here is the primary

meaning of the representation as found by the

court. There is no doubt but that the defendant

knew that that representation was untrue. There
then arises the question of, is that the
representation which, by the conduct in question,

the defendant intended to make. Do you not then

have to adduce evidence to say, "We did not intend

to make that representation. All we meant to say

was that this is the terms of the lease as a

document, and so understanding our representation,

we believed it to be true."

MR MERKEL:	Your Honour, in one category of case where the representation is, in fact, clearly stated and does
not, on its face, permit of a meaning that would be
a meaning by inference, the answer would be - I
have forgotten how it was put - certainly the
defendant failing to call evidence would be at risk
of having inference drawn that he intended that
meaning, because it was the only obvious meaning because of the words stating that. But where you
get a case, Your Honour, where the representation
is inferential, which is the way in which it has always been put in the Full Court and in this
Court, we say these cases are authority for the
proposition that it is incumbent, as part of the case in fraud, to show that the defendants intended
it to have that inferential meaning and knew that
inferential was false. And they are two separate
questions. And we say the trial has never taken
place, or the element of proof that has not been
discharged, is that the defendants intended it to
have that meaning.

It was never put, as I understand the

evidence, to Mr Gilbert, that that was what he was

representing, and that was an onus which the

plaintiffs had and they had the witness there, and

we say, Your Honour, there is just simply no

evidence on which one could infer that it was

intended to have that meaning. And we say that is

one of the problems that arises from the difficulty

and the struggle, rightly or wrongly, that either

party have with the representation. We would say

the case is - - -

BRENNAN J: Like any respondent, I think you are using the

word "intended" to have that meaning, in a way

which does not find any foothold in the

authorities.

MR MERKEL: Sorry. I should not say "intended",

Your Honour: "meant it" - that they "meant it" -

they meant their conduct to constitute the

Krakowski(2) 5/5/94

representation said to be that which is inferred.

"Intend'' is a bad word, I accept that.

BRENNAN J: Yes.

MR MERKEL:  We say that that is the substance of the cases

that we have referred Your Honours to on that

subjective element, which has been an important

element. Could I go to the third party

proceedings, which is a matter of probably the most

importance, as far as the first defendant, or

first-named respondent to the-appeal is concerned.

We have set out in our notice of appeal, at

page 901 in volume 4, the references to the

admissions and the evidence on the third party

proceedings.

TOOHEY J:	I am sorry, Mr Merkel, I missed that reference.
MR MERKEL:	Page 901, Your Honour, is our notice of cross

appeal pursuant to the leave granted by the court,

and I should, just by way of cross reference, say

that our submissions on the third party proceedings

are set out at page 38 of our outline.

There is no issue of fact joined between the

first and second respondents on the third party

proceedings. The findings by His Honour at trial

indicate when His Honour accepted Mr Gilbert's

evidence that the representation in the present

case was made by the solicitor, and that the

liability of the plaintiffs for it is one of

vicarious liability. It was clear that His Honour

also found, again by reference to Mr Gilbert, that

there was no intent to conceal this information and

His Honour concluded that if it was requested or

someone suggested it should be disclosed he would

have disclosed it.

The sole decision, and the only decision, as

to the content of the documentation in question was
made by the solicitor.	She made it on the basis of

acting as solicitor for the leasor and vendor, and
the only representation alleged to have been made
in paragraph 4 was the presentation of documents

the solicitor drew, on the basis of the solicitor's

own knowledge because she drew and was responsible

for the collateral agreement, the section 32

statement, and the contract.

At trial answers to interrogatories were

tendered in evidence, and they are referred to in

our notice of cross appeal, and there are

admissions in the pleadings at page 903, and there

is an admission at trial at paragraph 2.1.7 and

that admission appears in the appeal book at

page 775. I should say there was a typographical

Krakowski(2) 71 5/5/94

error in the transcript, but the admission is

correctly recorded at page 904 of the appeal book.

The third party elected not to call any evidence at

trial and, after the admission as to negligence set

out in paragraph 2.1.7 at page 904 was made, no

further evidence was called in the case by the

first respondent.

The situation that then prevailed in the court

below was that it would follow on the third party

proceedings from the admission made that if there

was liability arising from the representation

pleaded in 4(b) or 8A, that the non-disclosure of
the matters that gave rise to the liability was
admitted to be due to the negligence on the part of
the solicitor, and that would complete the cause of

action for the first respondent to be entitled to

be indemnified in respect of any loss flowing from

the orders of the court made in these proceedings.

Because His Honour Justice O'Brien dismissed

the plaintiffs' claim, His Honour also dismissed
the third party proceedings, because there was no

basis for negligence because His Honour found there

was no breach of duty in non-disclosure.

Unfortunately, when the matter was before the
Full Court, there was not a cross appeal from the
dismissal of the third party proceedings and

Their Honours - I think there was some gap of some

nine months between when the matter was heard by

Their Honours and when judgment was delivered -

when judgment was finally delivered, Their Honours

had overlooked the admission as to negligence, and

in the passage that Your Honours have been taken to

in relation to the answers to requisition, which

are page 842 to 844 of the Full Court judgment,

Their Honours said there was no basis for a third

party claim in respect of the answer to requisition

and indicated that there was no third party

liability. That was the first judgment of

Their Honours. Application was then made to the Full Court

before Their Honours had finally made orders in the

matter, and that was by notice of appeal at

page 861, on the basis that Their Honours had

overlooked the admission, and as a result of that

Their Honours delivered a second judgment, which is

at page 863, in which Their Honours indicated that

it was inappropriate to dismiss the third party

proceedings. Their. Honours allowed leave to appeal

out of time and ordered that the order dismissing

the third party proceedings by His Honour

Mr Justice O'Brien be set aside, and then ordered

that the third party proceeding be remitted for

trial, together with the claim for damages by

Eurolynx. The form of order is set out at

Krakowski(2) 72 5/5/94

page 880, and the final order is at page 887, but

the critical paragraph was S(b) in each order,
which in effect ordered a retrial of the totality

of the third party proceeding.

What had been put to Their Honours was that

Their Honours ought not to retry the third party proceeding because the full issue of liability had

been agitated, evidence called and case closed on

those matters based upon the plaintiffs' claim, and to sever the third party proceedings from the trial was, in effect, to create the very inconsistency or risk of inconsistency that third party proceedings
were designed to avoid. Their Honours were

resistant to making any order on the third party

proceedings and indicated that they would not

depart from their intention to order that they be

retried.

It was then put that on the retrial the third

party should be bound by the admission it had made,

and leave was then sought by the third party to

withdraw the admission as to liability, which in

effect formed the basis for the conclusion of the

evidence and indeed the further conduct of the case

on the plaintiffs' proceedings at trial.

Their Honours found that it was appropriate to allow the third party to withdraw the admission,

and Their Honours dealt with that at page 876 of

the appeal book in volume 4.

Their Honours appeared to form the view that

it would be unjust to be bound by the admission as

to liability, and leave was then given because it

was sought to withdraw the admission.

TOOHEY J: Could I just ask you this: was it on the basis

that the third party would, if the matter went for

a retrial, deny liability?

MR MERKEL:  I do not think I could put it that highly,

Your Honour, but it was on the basis that it was

open to it to deny liability.

TOOHEY J: But presumably the third party offered some

reason why it should be allowed to withdraw its

earlier admission of liability.

MR MERKEL:  I think that one cannot go further than the

paragraph at page 876, Your Honour. I do not think

there was any reason put forward that was not in

existence at the time it gave the admission.

TOOHEY J:  Was it all to do with costs or did it go further

than that?

Krakowski(2) 73 5/5/94

MR MERKEL:  No, Your Honour, it was certainly far more than

that. I think one cannot go any further than say

that they wanted to reserve themselves the right to

contest the third party proceedings as they saw

fit, and that would include necessarily the right

to deny liability, otherwise one could not

understand on what possible basis they could ask

for leave to withdraw the admission. They did not give a reason, Your Honour. It was just in effect

as there set out, "Well, because there's going to

be a retrial on the question of loss, somehow the

third party proceeding retrial on liability should

follow". We say there is just no logical basis

upon which one can arrive at that conclusion.

We say that there are two injustices inherent in what has occurred. The first is that for no

reason whatsoever the liability established at
trial for the sole purpose of ensuring the third

party proceeding is bound by the result of the

plaintiffs' proceedings has been vitiated and,

secondly, the conduct by the first respondent of

the trial, which I should say in the affidavit material - and there was affidavit material in

support of this. That is at page 847. And at

page 851 the circumstances in which the admission

was sought and obtained are set out. Those

circumstances at line 16 indicate - and this was

not in issue between the parties - that:

The firstnamed respondent intended to call a

legal practitioner to give evidence -

a legal practitioner, and also was considering

calling Mrs Samuel. So that the point made there is

that the manner in which the defendant conducted
the trial and closed its case on liability to the
plaintiff was fundamentally influenced by the

admission made in resolution of the third party

proceedings. Those matters clearly could, and were

likely to, bear upon the disposition of the

plaintiffs' claim.

Now, the point we make is twofold. One is

that the order of the court, without reason, has

undermined the third party procedure, and two is

that they have granted leave to withdraw an

admission, again without any reason or basis in the

evidence that would warrant its withdrawal. So we

say that the injustice that flows from that, as far

as the defendant is concerned, is self-evident.

We submit that what should have happened - and

it may be that it was the time constraints that

gave rise to this problem because there was no

intention of the court to be dealing with this

matter after it delivered its primary judgment. We

Krakowski(2) 74 5/5/94

say the proper course, had this been considered in

the way it ought to have, was for the Full Court to

determine, on the basis of the matters we have set

out in our notice of cross appeal, that the
liability of the third party had been established,

that there was no basis upon which the third party

could resist an order that it be liable to

indemnify the defendant for such loss as is

occasioned to the defendant by the orders of the

court as made, and that the quantum of that

indemnity, as with the quantum of the plaintiffs'

loss and damage, be determined at trial again in

the same proceedings.

We say that there is simply no basis in

principle why that course should not have been

followed. Indeed - and again, if I can only give

Your Honours some references - in Shepherd v Felt &

Textiles, (1931) 45 CLR 359 at page 379 at the

bottom of the page, His Honour Justice Dixon, as he

then was, referred to a situation which is really

this case. His Honour said at the bottom of the

page:

But sometimes the facts from which a legal

conclusion arises in favour of the party who

has the onus of proof appear in a manner which

entitles or requires the Court to notice and

act upon them. This may be because facts are

admitted or undisputed -

and we would say that is precisely the situation

that was before the Full Court. The facts were

admitted and, in so far as they were not admitted,

they were undisputed.

Could I next go to what was said by several

members of this Court in Port of Melbourne

Authority v Anshun, 147 CLR 589. At page 595 in

the joint judgment of the Chief Justice

Sir Harry Gibbs and Justices Mason and Aickin, in

Their Honours said:	respect of the third party procedures, at point 8	It is accepted that under the so-called "third
party procedures" of the kind provided for by
O 16A, the claim to an indemnity may be
litigated in the plaintiff's action, notwithstanding that the payment creating the right to indemnity is not made until after the
amount of the plaintiff's verdict is
ascertained in that action. It has been repeatedly affirmed that one of the
peculiarities of third party procedure is that
it enables litigation on the indemnity to take
place before there is any liability.

Krakowski(2) 75 5/5/94

So we say that there is certainly nothing untoward

in principle in the course that we follow.

There are several other cases. I will not

take Your Honours to them but if I can just refer:

Voston v the Commonwealth, (1989) 1 Qd R 693, at page 700; AMP Fire and General Insurance v Dixon,

(1982) VR 833, at page 835 at lines 38 to 45.	The
principles of third party procedure are well

established and they are undermined by the course

taken by the Full Court in the present case where

the whole issue will have to be retried because
Their Honours would not even restrict the retrial

to the evidence below and the leave to withdraw the

admission meant that it was, in effect, as if there

were to be no third party proceedings.

Finally, can I refer Your Honours to Jackson &

Powell on Professional Negligence, third edition,

at paragraph 4-203, where there is reference to the

two courses open, one of which:

is to grant a declaration that the solicitors

are liable to indemnify the plaintiffs against

all sums which they may be held liable to pay

to the party in question.

And a decision of the Court of Appeal in

Transportation Agency Ltd v Jenkins, (1972) 223 EG,

is authority - I think I said the Court of Appeal;

it was before Mr Justice Kerr - for that course

being followed. So that there is no shortage of

authority to support the course that we say should

have been pursued.

What occurred in the court below was the

defendant, Eurolynx, by application, asked for a determination of liability by the Full Court. I think it is accurate to say Their Honours showed

that they were totally resistant to that course and

indicated that they would not be disposed to

granting it. That was then not taken any further.

I think Their Honours, in the judgment, said it was

not persisted in but we certainly sought it and

Their Honours indicated they would not grant it.

Then the question of leave to withdraw the

admission came up.

So that, we say, what has occurred in the

third party proceedings is an injustice, and that

we would submit that the appropriate order on the

third party proceedings is that there be a

declaration as to the liability of the third party

to indemnify the defendant as to the loss suffered

by the defendant by reasons of the orders made by

the Full Court of the Supreme Court, if they stand,

or by any orders made by this Court, if this Court

Krakowski(2) 76 5/5/94

makes any order on the matter or, if liability of

the plaintiff be remitted, we would say that we

have still sufficiently established the third party

liability.

The final matter we seek to raise is our

application under Order 70 rule 6, and I can be

very brief on that. We have dealt with it in our

outline at pages 44 to 46. Order 70 rule 6 does

provide for the Court to grant leave to file a

cross appeal or notice of contentions where grounds

are relied upon other than those on which the

defendant was successful below. We accept the

authority of this Court in the Director of Public

Prosecutions v United Telecasters that to get leave

to cross appeal it is not sufficient to just show

it is convenient, but something special in the

nature of the case or some injustice needs to be

demonstrated in the sense it would be unjust to not

grant the leave sought.

We would submit that the submissions which we

have put on the appeal are identical to the

submissions that we would put on the cross appeal

because they relate to exactly the matters which we

have addressed. We do not have any further or other submissions, and we have made that clear. So, we would submit that it would be unjust, for

the reasons we have indicated in our submissions,
for the starting point to, in effect, be the

Full Court decision in the light of the submissions

we have made, and we would say that this is a case
where the leave to file the contention should be
granted out of time, and likewise the notice of

cross appeal.

So we would submit that the leave out of time

and the leave we seek should be granted. They are

the submissions we wish to put to Your Honours.

Can I just indicate that I had meant to

refer Your Honours, not to read them though, but to

some authorities of the court in support of a

submission I had put earlier, that the collateral

agreement was a personal agreement solely between

the vendor and the lessee and did not carry

covenants that bound the land and that that was the

basis on which the case had been fought.	Can I
just give Your Honours some references.

TOOHEY J:	Was that in issue?
MR MERKEL:	I do not know whether it is or is not,

Your Honour. I had mentioned it in our written

submissions that the collateral agreement was

personal and did not bind the land and therefore

the tenant succeeded to the full benefit of the

Krakowski(2) 77 5/5/94

lease and that is how the matter had been conducted

and there was no evidence or suggestion to the

contrary. I think one or two of Your Honours had

put to me that the rent-free period operated
against the purchaser, and I had indicated that it
would not; it was a purely personal covenant as

were all the other covenants in this collateral

agreement. So if there was any contest as to that,

I was just going to give Your Honour some

authorities where personal covenants had been

distinguished from those that ran with the land.

Can I just give them to Your Honours: one is

Hua Ciao Commercial Bank v Chiaphua Industries Ltd,

(1987) 1 AC 99;, another is, Roberts v Tregaskis,

38 Law Times 176; the other is, Lang v Asemo

decision of the Full Court of the Supreme Court of

Victoria (1989) VR 773, and I should indicate in

reference, in Robinson, on the Property Law Act of

Victoria, under notes to section 141 there are

cases on covenants that bind the land. If

Your Honours please.

BRENNAN J:	Thank you, Mr Merkel.	Mr Lally.
BRENNAN J:	Thank you, Mr Merkel.	Mr Lally, how long do you

expect your submissions to take, Mr Lally?

MR LALLY:  About half an hour, Your Honour.

BRENNAN J: Half an hour.

MR LALLY:  I want to go into some authorities to deal with

the question of the knowledge and the subjective

element in so far as it is necessary to have regard

to, not the question of motive, not intention in

the sense that it is used as to what was the
motive, but rather what was the state of mind, this
subjective state of mind that is necessary to prove

fraud.

BRENNAN J: Perhaps I could just inquire from Mr Mandie how

long you would expect thus far to take in your

reply.

MR MANDIE:  About 15 minutes, Your Honour.

BRENNAN J: Court will adjourn until 9.45 am tomorrow

morning.

AT 4.19 PM THE MATTER WAS ADJOURNED

UNTIL FRIDAY, 6 MAY 1994

Krakowski(2) 78 5/5/94