Krakowski & Anor v Eurolynx Properties Ltd

[1993] HCATrans 309

Ss,

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-...	~·~

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Melbourne No Ml0l of 1993

B e t w e e n -

DAVID KRAKOWSKI and

HENIA KRAKOWSKI

Applicants

and

EUROLYNX PROPERTIES LTD and

MALLESONS STEPHEN JAQUES

(a firm)

Respondents

Application for special leave

to appeal

BRENNAN J
DEANE J

Krakowski 1 15/10/93

McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 15 OCTOBER 1993, AT 3.18 PM

Copyright in the High Court of Australia

MR E.W. GILLARD. OC:  May it please the Court, I appear with

my learned friend, MR A.K. PANNA, for the

applicants. (instructed by Peter Lustig)

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

learned friend, MR A.J. KELLY, for the first-named

respondent. (instructed by Arnold Bloch Liebler)

MR W.F. LALLY: If the Court pleases, I appear for the

second respondent. (instructed by Phillips Fox)

BRENNAN J: Mr Gillard, we will hear what Mr Merkel has to

say.

MR GILLARD: If Your Honour pleases.

MR MERKEL:  If the Court pleases, there are three or four

grounds we would put why special leave should not

be granted on the question of raising the case of

fraud in this Court. The first is that the

question does not raise any issue of principle and

that the principles in relation to fraud claims

have been well established since Derry v Peek.

BRENNAN J:  One would have thought so if it were not for the

judgments in this case.

MR MERKEL:  What we were going to say is that the second

point is that the case is very much one which has

turned on its own special facts and that unless the

Court concluded that there was some injustice

inherent in the result, what we would say is that
the issues raised do not raise any matter of

general importance.

Can I go directly then to the last two points

which are what I would call the injustice points.

We would submit, if the Court pleases, that certain

anomalies have arisen in respect of the running of

this case, which have come about entirely by reason

of the conduct of the case by the plaintiff, and it

is a matter of some importance that the Court

appreciate how that has arisen. This Court in

Banque Commerciale SA v Akhil emphasized the

importance of how fraud must be pleaded and that

ultimately the Court will look at the pleadings and

the conduct of the case to determine whether the

findings of the court below were open to it.	Can I
just take Your Honours to that issue - - -

DEANE J: But do we not start with a general problem here,

and that is the Full Court has, in effect, said the

trial judge misconceived the question and on the

basis of that misconception found there had been no

misrepresentation and held that he should have found

there was misrepresentation. Now, having said

Krakowski 15/10/93

that, and said that the trial judge's whole

approach was necessarily coloured by that mistake

and that failure to find misrepresentation where

there was misrepresentation, based their decision

as to fraud on the trial judge's findings, as if

they were completely unaffected by that.

MR MERKEL:  Your Honour, we would say, with respect, that is

not what occurred and I need to make that good.

DEANE J:  I was putting it by way of question, only to

direct your attention to what I see as one of the

problems.

MR MERKEL:  Your Honours, what I will seek to demonstrate to

the Court is that the trial judge answered the

question on the pleadings and case as raised by the

plaintiffs, which was one of fraudulent

concealment. The plaintiffs put a totally

different case, one that it had disavowed before

the trial judge, on appeal, which is one of
positive misrepresentation. It now seeks, having

travelled along those two paths and still not got

what it wants, to raise yet a third and different

case before this Court. We say that by moving in

the way it has between the trial judge and the

Court of Appeal, and now the way it wishes to go in

this Court, it has totally departed, not only from
the case as pleaded, but from the case as

conducted. That is why what Your Honour

Justice Deane puts to me appears to be a possibly

anomaly has arisen. It is not because the trial

judge addressed the wrong question; it is

ultimately because the Court of Appeal was asked to address a different question and, with the greatest

of respect, when one analyses what the Court of

Appeal did, it reviewed the facts on its own by

reference to the facts, not just as found by

His Honour but on the evidence before His Honour.

Can I take it in stages. Can I take

Your Honours firstly to the pleading point. The

pleading started out with the fraud pleading only

in paragraphs paragraphs 4(a) and (b) at page 2.

The representation was stated as a lease with the

payment as provided by the lease. That was
particularized at page 15 and what was said was

that the totality of the contractual arrangements were not as there represented. Now, importantly,

prior to trial paragraph 8A was sought to be added,

which is at page 5 of the application book which

was, if I can describe it, because I will be coming

back to that, that is the positive

misrepresentation which ultimately, in substance, the plaintiffs won on before the Court of Appeal.

Krakowski 3 15/10/93

Now, when paragraph BA was added prior to

trial it was added without an allegation of fraud

being made concerning that representation and at

trial, application was made to add it as a

fraudulent misrepresentation and that was not granted and, in fact, that was withdrawn from.

Now, this is the important element and one commented upon by Your Honours in Akhil's case,

that one looks at the carriage of the case. Now,

what was put to Justice O'Bryan at the outset of

the trial that these pleadings raised an

embarrassment as such for a fraud pleading, and

His Honour dealt with it at page 36. What

His Honour said at page 36 is:

Mr. Jolson, senior counsel for the

defendant, submitted that the pleading was
defective in that it did not inform the

defendant of the case it had to meet or was

embarrassing because it did not properly

disclose a cause of action ..... .

After discussion Mr. Watkins, counsel for the plaintiffs, clarified the position when he

stated:

"What we say is that Mr. Jolson's client (the

defendant) by virtue of the actions of its

employees and agents has deceived us, and we

are suing in deceit. We say that deception

arose insofar as Mr. Lally's client

(Mallesons) is concerned by the preparation of

contractual documents, including the S.32

statement with the lease and other documents

annexed -

and these are the critical words -

which did not disclose the true position and

secondly, by the answering of specific

requisitions which did not disclose the
correct position.

Then His Honour then discussed the amendment to

paragraph BA and at the bottom of the page said:

However, the amendment did not plead an action of deceit based upon the answer to Requisition

8 ( C) .

Then His Honour indicated that the matter proceeded

on that basis. Now, as there raised, and I should

indicate at page 37 His Honour at line 7 says:

After discussion, Mr. Watkins stated that he would not press his application to further

amend the Statement of Claim but would rely

Krakowski 15/10/93

upon the alternative cause of action pleaded

in paragraph 8D based upon the Trade Practices

Act.

So the case at trial was one where the plaintiffs

disavowed the positive misrepresentation in

paragraph 8A and chose to proceed upon the basis as

stated by His Honour at page 36 on a case of

fraudulent concealment. Now, that case was dealt

with by His Honour as pleaded and as put, and this

was clarified at the outset. I should also add

that the case was conducted on the basis that the
plaintiffs carried the onus of establishing all the

elements of fraud, a case it now seeks to depart

from in this Court, but I will come back to that

later because that is the second substantial

departure. What His Honour found, based upon that

case as pleaded, that he would not infer the

dishonesty sought to be raised and His Honour said,

at pages 40 to 41 - and I will not read the

passages to Your Honours - that in substance he was

not satisfied that there was any deceptive conduct,

any intention to mislead or any of the elements of

dishonesty required to establish fraud. He made

that clear between pages 40, 41 and also concluded

at page 43, at the bottom, lines 22 through to 30,

that the relevant intent was lacking.

BRENNAN J:	Mr Merkel, I am at a loss to understand this. If you go back to paragraph 4 of the statement of
claim and the following paragraphs, did that raise
a case of fraud?
MR MERKEL:	It raised a case of fraud, Your Honour, but it

was not able to be ascertained, and that is why the
pleading issue was raised as to precisely what the

misrepresentation was. It was a case of fraud,

Your Honour, but as explained by counsel at

page 36, was based upon fraudulent concealment,

which is the case as dealt with by His Honour.

Paragraph 8A at page 5 was based upon positive

representation that there were no collateral

agreements.

BRENNAN J:  How did paragraphs 4, S, 6 and 7 disappear from

the action?

MR MERKEL: Sorry, they have not disappeared from the

action, Your Honour. They were -

BRENNAN J:	Was there an issue of fraud to be decided by His Honour?
MR MERKEL:	There was an issue of fraud to be decided by His Honour.
Krakowski	15/10/93
BRENNAN J:	And was he to find whether or not the

representations alleged in paragraph 4 were made?

MR MERKEL:  He was to find as to whether those

representations were made, Your Honour.

BRENNAN J:	Did he so find?
MR MERKEL:	He found that those representations were made

and as made, Your Honour, were true, that there was

a lease of the premises in terms of paragraph 4(a)

and 4(b), and what he said, and what he said the

case that he was asked to deal with amounted to,

was that by not disclosing the collateral agreement

that there was a fraudulent concealment and that
that was how counsel had put it at page 36. That

is how His Honour disposed of, in effect, the

pleading issue and the case was conducted before

His Honour as one of fraudulent concealment. and there was no dishonesty in respect of the non-

disclosure of the collateral agreement. So

His Honour then found that there was not a case as made out, either in fraud or in misleading conduct, on the basis that there was absent a duty to

disclose the collateral agreement.

BRENNAN J:  On the facts as found, however His Honour may

have put it, were those facts as alleged on page 2

not found to be false? Did the lease provide that

the rent payable by Swaeder Sales for the initial

two years of the term was $156,000?

MR MERKEL:  Yes, Your Honour.

BRENNAN J: Well, was that the fact?

MR MERKEL:	Yes, it was, Your Honour.
BRENNAN J: Despite the collateral agreement.
MR MERKEL:	Your Honour, the collateral agreement

BRENNAN J: It was the collateral agreement that made that

statement false, is it not?

MR MERKEL:  It was put, Your Honour, that the collateral

agreement made that - in the Full Court, the

collateral agreement made that statement a

misrepresentation viewed as a whole.

BRENNAN J:	Made it a misrepresentation.
MR MERKEL:	And they won on that point, Your Honour.

BRENNAN J: And it was made with intention to induce and it

was known that there was a collateral agreement.

Krakowski 6 15/10/93

What more do you need? Dress it up in whatever form you like, the facts have been found which,

unless I misunderstand it, establish fraud.

MR MERKEL:  Your Honour, we say, with respect, that misses a

middle step which the courts always take.

DEANE J: But the collateral agreement varied, as you cal' it, the lease. If you look at page 64, the first paragraph of what you call the collateral agreement

was a variation of the lease. The lease no longer

provided for a payment because the collateral

agreement said that that payment does not have to

be made.

MR MERKEL:  I accept what Your Honour puts that the

collateral agreement made the lease, if looked at

as constituting a legal relationship between the

parties, a false representation. I accept that

that was so, but what I am indicating to Your

Honours is that paragraph 8A raises the basis upon

which the plaintiffs succeeded in the Full Court,

namely that the non-disclosure of the collateral

agreement made the representation a positive

misrepresentation and that that was fraudulent, as

opposed to the case that had been put before

His Honour.

But can I go on to the case on appeal, because

on appeal it was a different case. All I am saying

is that the case as initially run before His Honour

was one of fraudulent concealment based upon what

was said by counsel at page 36.

BRENNAN J: Could I just delay you there because I want to

understand what you mean by the case run was one of

fraudulent concealment. If His Honour had to

address as issues of fact issues which, when found,

established a case of fraud, what was it about the

pleadings which precluded him giving effect to

those findings and giving the relief appropriate in

an action of deceit?

MR MERKEL:  Your Honour, the absence of dishonesty in

respect of the conduct of the defendants precluded

him from finding fraud.

BRENNAN J:	What do you mean "absence of dishonesty"?
MR MERKEL:	The absence of dishonesty, Your Honour, was that there was no evidence that the failure to disclose
was intentional, was calculated to mislead or
deceive or was calculated to cause or induce the
plaintiffs to enter into the contract under a
misrepresentation or on the faith of a
misrepresentation.  The superficial simplicity of
saying that when someone makes a statement which
Krakowski	15/10/93

the court deems to be X, but which is known by the

maker of the statement not to be X, equals fraud is

wrong. The element that is missing, and it has

been long established by the courts to be missing,

is that the element of dishonesty requires that the

maker of the statement intended it to have the

meaning that the court gave it, or alternatively,

was dishonest in making the statement in the form

he or she did. But if the maker of the statement

believed, stupidly, clumsily, without proper care,

that the meaning as intended by them was not

misleading or deceptive, then no fraud is made out

because there is no element of dishonesty.

What His Honour found on the facts, and what

the Full Court found on its own examination of the

facts, was that that middle step, that the maker of

the statement by representing in the contract as it
did the lease to be as the court held not truly

represented, did not do so dishonestly. We say

that that is a fundamental principle which I want

to come to, but we say that it is that element that

the plaintiffs cannot, or ought not, to succeed

upon.

I have tried to endeavour to explain to

Your Honours how the case was initially put as one

of fraudulent concealment. In the Full Court there

were two fundamental changes. The first step was to

change the case and put it as one of positive

misrepresentation. The court found, at page 71 -

and I should say at the bottom of 69 and top of

page 70 - and it is easy to see how this occurred -

Their Honours appeared to view the matter as
turning on a reading of the pleadings and did not
take into account the explanation of counsel as to
how the fraudulent concealment case was put. That

is at the bottom of page 69, top of page 70, and it

was that elliptically that counsel for the

defendant sought to clarify at the outset and was

clarified by the comment of counsel for the

plaintiffs at page 36.

Then, Their Honours went on to view the matter as one of positive misrepresentation and then found

the representation at page 71, lines 15 through to

30, and what Their Honours said at line 18:

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 -

and these are the critical words, this is nowhere

pleaded -

Krakowski 8 15/10/93

to the effect that the rent reserved by the lease annexed to the contract of sale was a

market rent. The rent reserved of $156,000

was, on any view of the evidence, at least 25

per cent above the going market rent.

Can I just stop there. We find that the Full Court

is dealing with a totally different representation,

unlike that pleaded and unlike that disavowed in

paragraph 8A as being fraudulent, although we

wouldsay that the proper reading of lines 18 to 20

is to try and introduce through the back door fraud

in respect of paragraph 8A, when it had been

rejected as proper through the front door. Then

Their Honours said, at page 73 - and this makes it

absolutely clear how far the case had departed from

the pleadings at - line 27:

That term -

and I will come to this in a moment, because it was

the second fundamental term they took on appeal -

when taken with the surrounding circumstances,

including the manner in which the property was

offered ..... amounted in our judgment to a

positive representation that no collateral

agreement had been made between the defendant

and the tenant.

That is precisely the representation that was

disavowed as being relied upon in the cause of

action in fraud at trial. Now, the reason for that was the introduction on appeal of clause 9.8 of the lease which is set out above that passage.

Your Honours will not find in the pleading or in

the particulars any reliance at any time on

paragraph 9.8 which was the entire agreement. That
arose for the first time on appeal and was relied

upon, in effect, as a reargument of a new case put

on appeal which was different to that pleaded.

It does not stop there, because on that basis, then Their Honours went to consider the

whole of the evidence and Their Honours were asked

to infer dishonesty. Can I take Your Honours to

how it was put by counsel for the plaintiffs,

because they now complain about the court dealing

with the case on the basis that they put. That is

at page 77, line 12:

Counsel for the plaintiffs submitted -

not what they are putting in this Court -

in effect that the defendant or its agent, or

both, set out deliberately to induce the

Krakowski 9 15/10/93

plaintiffs to enter into the contract of sale

under the misapprehension that the lessee had

no collateral agreement with the defendant.

We cannot agree that the evidence supports

that conclusion.

Then Their Honour, in the succeeding pages, set out Their Honours' own analysis of the evidence in some

detail and then concluded, at page 80, the last

three lines:

The evidence does not, in our opinion,

compel the conclusion that the defendant
prepared or arranged for the preparation of
the lease and the collateral agreement with

only the plaintiffs in mind and as part of a

scheme designed to trick them. The evidence,

which the judge was entitled to accept and

evidently accepted, was consistent with the

view that the defendant entered into the lease

and the collateral agreement in order to

obtain a tenant and to effect a sale of the

tenanted property.

I should remind Your Honours that the collateral

agreement was requested as collateral by the

tenant, not the vendor/landlord.

Without the conclusions that all the defendant's efforts were directed only the

plaintiffs, the efforts wear no malign aspect

and the inference of fraud falls away.

Now, Their Honours were there in the previous pages dealing with fraud as put to them, namely one of

deliberate deceit by the plaintiffs, and rejected

it, based on Their Honours' own view of the

evidence, based upon His Honour the trial judge's

view of the facts and the demeanour of the

witnesses and their honesty.

BRENNAN J: Counsel overstated the case. The facts as found

were that there was a representation made; that

there was no collateral agreement, there was a

collateral agreement; there was known to be a
collateral agreement; and the statement of the

existing rental was made without mentioning the

collateral agreement and by mentioning the rental

that was provided for, there was an intention to

induce the purchaser to purchase.

MR MERKEL:  Your Honour, with the greatest of respect, I can

accept everything that Your Honour puts to me

except for the last step the plaintiffs must take,

and that is that that is the case they pleaded and

relied upon as a trade practices cause of action in

paragraph 8A of the pleading, and was not a case

Krakowski 10 15/10/93

which the defendant was required or ought to have

addressed as a fraud pleading. And decisions were

made in relation to the conduct of the case based

upon the pleadings.

Your Honours will notice that the solicitor

from Mallesons was not called to give evidence. So

that the manner in which this case was pleaded and

conducted led to fundamental decisions about how it

would be conducted by both sides and what

Your Honour put to me is a precise replication of

what they have disavowed in reliance upon fraud.

But can I say that what they are doing now, Your Honour, is seeking in this Court to put yet

another case.	And this is the third case that they
are seeking to put.	What they are saying in this

Court is they are not trying to rely upon the representation found by the Full Court. They have departed from that because they realize that there

is no evidence that the defendants intended to

represent that the rent was not truly a market

rent, because the fact that it may be less than

market in fact does not mean they did not believe

it was not market. So that faced with the problem

that they had lost on fraudulent concealment, lost

on the positive misrepresentation, what they now

come to this Court to do is to say two things:

firstly, for the first time in this litigation they

wish to introduce section 13(1) of the Sale of Land

Act, which is in their notice of appeal, which has

not been whispered prior to this hearing, which

changes the burden of proof. And yet they have
conducted the case entirely to date on the basis

that the plaintiffs carry the onus of all aspects

of the burden of proof. So what they are trying to

do is raise a new case in this Court that would

have, had it been raised at the outset, clearly

altered the way in which the case was conducted.

So we would say that if leave is granted, it

should be subject to a condition that section 13(1)

is not open to them as a matter of law, and

secondly - - -

BRENNAN J:  Mr Merkel, I wonder if we could interrupt your

argument for a moment to take the case we stood

down until half past 3.

MR MERKEL:  Yes, if Your Honour pleases.

AT 3.45 PM SHORT ADJOURNMENT

Krakowski 11 15/10/93

UPON RESUMING AT 3.47 PM:

MR MERKEL:  Your Honours, what I was indicating to

Your Honours, that section 13(1) should not be permitted to be raised as a ground of appeal, and

that itself, if that is correct, raises issues

about whether this matter could be regarded as one

of raising a question of principle because - - -

DEANE J:  Was that section ever mentioned anywhere below,

Mr Merkel?

MR MERKEL:  Your Honours, I only came into this matter on

the second judgment in the Court of Appeal, so I

would stand corrected, but - - -

BRENNAN J:  Mr Merkel, just a minute till Mr Lally returns.

I am afraid we - I do not think you have missed a

great deal, Mr Lally. Mr Merkel has been speaking

about section 13 in the meantime.

MR MERKEL:  Therefore I can stand to be corrected. I am

instructed that section 13(1) was first relied upon

in this Court in the affidavit in the notice of

appeal, not previously relied upon.

DEANE J:  My question was was it ever mentioned?

MR MERKEL:  I am told not, Your Honour. And significantly,

the case was conducted, and of course a failure to

call the solicitor as a witness, it was clearly

conducted on an assumption that the plaintiffs

carry the onus and there is no reversal of onus

which section 13(1) would require.	So that they
are my instructions.	I will no doubt stand

corrected if that is wrong, but we believe it is

correct.

But the other point that has changed in this

Court is they have disavowed the two representations or bases upon which they have

conducted it and failed to succeed on fraud to

date. They come to this Court and present what I

have said is the third case. The third case is

that you represented that there was no collateral

agreement; you knew there was a collateral
agreement, therefore your representation is false. That has an attractive simplicity about it but it

is wrong in principle because there needs to be an

intermediate step.

The representation that there was no

collateral agreement, if properly before the Court

on a fraud basis - and we say it is not, for the

reasons we have put forward - really amount to an

Krakowski 12 15/10/93

amalgam of many documents: the contract of sale, the lease, the section 32 statement; and it is a conclusion, correctly drawn if our other arguments

are rejected by the Court, as a question of law as
to the effect of each of the documents when

presented to a purchaser.

What the courts have always held - I will take

Your Honours to three decisions that make this

point clear - is that in establishing dishonesty, the question is not whether you honestly intended the representation as objectively determined by the

court to have been made, but whether you were
dishonest in making the statements that you made
that ultimately constituted the foundation for the

interpretation the court has placed upon your

conduct. Can I just very briefly take Your Honours

to the three cases that make that point clear,

because it is our submission - - -

McHUGH J: There is a decision of this Court. You need not

go beyond that. It is fairly obvious, as far as I

am concerned, anyway.

MR MERKEL:	Your Honours, that means that one cannot take the simplicity of the case they now put it, and it
comes back to the question, was their conduct in
not disclosing the collateral agreement dishonest?
Both the trial judge and the Court of Appeal have
found that there was no element of dishonesty, notwithstanding that the plaintiffs have had two ssparate goes at the totality of the facts to try
and draw out or glean therefrom an interest of
dishonesty. We say that it is that link which means that this Court, if called upon to review
this case on the grant of special leave, will
really be asked to go back to the same facts, on a
third representation, and try and infer, as if it
were the trial court, whether the facts amount to
dishonesty, notwithstanding positive findings by
the trial judge that the conduct did not disclose
any of the elements contended for, until now, to be
dishonest.

Now, we would submit that it is singularly

inapposite for this Court to be confronted with

that task, given the way in which the case has been

pleaded and conducted to date. So we would submit

that this Court may never ever get to the question

of the representation if our complaint about the

pleading point and the conduct of the case is a

correct one. So that there is, in effect, a

threshold question on any appeal as to whether it

is open really to put the case that is now

contended for.

Krakowski 13 15/10/93

So that, for those reasons, it is our submission that this Court should not treat this as

a case where a principle is raised, where an

injustice in the result has occurred, or where for

any other reason special leave ought to be granted.

This Court will, in effect, be asked to overrule

both a trial court and an appellate court looking

at all the facts, and not finding any of the

requisite elements of dishonesty. That is what I

have called the third ground why Your Honours

should refuse special leave, that any anomaly that

may have been perceived by Your Honours has been

brought about solely by the way in which the

plaintiffs have conducted the case.

But there is a fourth ground which we put just

as strongly, and that is that it would be futile to

grant special leave, because even if Your Honours

found fraud, it would not lead to Your Honours

arriving at any result different to that which the

court below arrived at because the court below
applied the same test as to, in effect, practical

injustice under section 87 of the Trade Practices

Act in declining rescission as this Court would

apply if it found fraud. Because it is not

possible to avail the plaintiffs of the common law

right of rescission because there has been

conveyance - and I should ask if Your Honours got

an affidavit filed by us last night, to show how

the parties have fundamentally altered their

position since 1989. I do not need to take

Your Honours any more than to the fact that common

law rescission is not available because the state

of the property and the state of the legal

relationships embodied prior to conveyance cannot

be restored after conveyance. That has the

consequence that if this Court found fraud, it

would then act on the principles in Alati v Kruger which say that the plaintiffs would be required to

resort to the court's equitable jurisdiction to try

and, in effect, unscramble the egg. And the test

in Alati v Kruger, once the court in its equitable
jurisdiction is asked to grant relief, is whether

it is in the circumstances practically just between

the parties to restore them substantially to the

status quo.

Now, in essence, that is precisely the test

that the Full Court applied and the Federal Court

has applied in Henjo's case. So that once one gets

to the establishment of fraud, one only gets to the

very circumstances which the court itself

considered, based upon whether it is practically

just to restore the parties to their original position by rescission or practically just to

compensate the plaintiffs by reference to their

entitlement to damages. And the court considered

Krakowski 14 15/10/93

those matters, stated the principles at pages 87 to

88. Their Honours referred to Spencer Bower at

page 87 on Misrepresentation, at pages 87 to 88

applied principles of this Court, and then, at

page 89, stated the question that would have to be

answered by this Court if it found fraud:

In the present case we have concluded

that an order declaring the contract of sale

void ab initio should not be made.	We
are ..... influenced by a number of considerations.

The first was there was no fraud. May I say this,

that clearly, if Your Honours found fraud, that
factor would change, but it is important that the

element that Their Honours are there referring to

is no element of dishonesty, and if Your Honours
found that there was something akin to constructive

fraud, that would not, as a matter of discretion,

affect how Your Honours would approach relief if

the element of dishonesty were missing.

But the substantive reasons were set out by

Their Honours: that the misleading conduct did not

go to title or the subject-matter of the property.

Three:

The plaintiffs' claimed loss - essentially a

capital loss ..... would appear to be

appropriately compensable by an award of

damages rather than by an attempted

restitution.

Then in four:

Moreover, the plaintiffs, through Mermelstein,

knew as early as February 1990 that the

representation that had been made to them by

paragraph 9.8 of the lease was untrue. They

knew by then that there had been a collateral

agreement between the defendant and the

lessee, including a rent-free period of three

months. The tenant defaulted in February and

vacated the premised in April 1990. The

plaintiffs, with that knowledge, took no step

to have the contract of sale set aside but

sought a new tenant and obtained further rent.

By June 1990 the plaintiffs knew that a

substantial payment had been made by the

defendant to the tenant but did not know the

amount. Still they took no proceedings until

12th December 1990. It is unnecessary to

consider whether the plaintiffs by their

conduct affirmed the contract of sale or made

a relevant election.

Krakowski 15 15/10/93

A matter Your Honours would have to consider.

They did, in any event, delay very

substantially commencing their proceedings;

and this is a case, we think, of the kind

mentioned by Lockhart, J. in Henjo -

based on Alati v Kruger - Can I just indicate His Honour's principles were

in which the delay makes it the more difficult

to secure any restitution in a manner that

might do "practical justice".

And then Their Honours conclude that:

That is a consideration which weighs against the plaintiffs in our declining to declare the

contract of sale void ab initio. 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.

Now, before this Court would grant special leave,

we would submit that it should have to be

demonstrated that the argument of fraud or not

fraud somehow should affect that pleading, that

conclusion in a way that made it more likely that

this Court would give restitutio some five years

after the event of a property subject to a mortgage

which is now the subject of its own proceedings in

the supreme court, with the mortgagee not being

joined as a party, or whether in the likely result,

this Court would come and arrive at exactly the

same conclusion that Their Honours arrived at by

applying the same principles that this Court would

apply if it got to the point that my learned

friends would have it arrive at, namely succeeding

on fraud.

So we would say that those factors, and the

fact that the court on considering all the

evidence - I think the case went for some seven

days and it was fully argued for some four days or

thereabouts in the Full Court - came to the

conclusion that the result was not unjust. Now,

nothing has appeared in the affidavit material or

elsewhere that would suggest that it is practically

unjust for the plaintiffs to be left to its

remedies, truly compensatory, in damages.

We would submit that even if we were wrong on

our first three grounds, the fourth would show that

this Court would, by granting special leave, be

encumbering itself with an inquiry which, in all

the events that have occurred, would be unlikely to

produce a result any different from that arrived at

Krakowski 16 15/10/93

by the Full Court after a careful consideration of

the discretionary factors that arise. We would say

that, for those reasons, there is no basis for

special leave being granted in respect of the fraud

matter.

Ancillary to that, as we understood it, was

the aspect of it being suggested that section 87

and the relief capable of being granted under the

Trade Practices Act would raise a question of

importance. I am not sure whether I should address

that. I will be very brief about it. Section 87

is a general provision of the Act which establishes

a broad discretion which is designed to deal with a

vast range of cases in circumstances arising from

time to time for decision. There is no doubt that
the question is one of discretion, a question of

fact, and that the elucidation of any general

principle to try and cover all cases would probably

run counter to how this Court approached that

problem in Norbis v Norbis. So we would submit

that there is no general principle arising under

section 87.

The other ground on which special leave was

sought was that there was some inconsistency in

refusing rescission and ordering an inquiry as to

damages, and that was dealt with by Their Honours

at page 90 where Their Honours, at line 10 through

to line 18, said:

We heard little argument, if any, on the

appeal on behalf of the plaintiffs 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.

So Their Honours, on finding on the question of

liability and the inappropriateness of rescission,

ordered an inquiry into damages in the interests of

justice.	We would say that is a matter of
discretion for Their Honours.	It was open to them
to approach it in that way.	No one had suggested,

as I am instructed, that it not be approached in

that way and that there is no injustice in the

court proceeding to now compensate by damages for the events that have occurred. We do submit that

there is certainly nothing unusual about splitting

the question of liability and an inquiry as to

damages if ultimate liability does not result in

rescission but leads one to recourse to damages.

Krakowski 17 15/10/93

So it is, in our submission, for those reasons

that special leave should be refused. I should add

that if special leave is granted, there is one

matter I need to raise with the Court about an

admission made by the third party, which will be

picked up under the rules, but we would submit that

if the matter does come on for hearing in this

Court, it would ultimately require the Court to

consider the third party's liability to the

defendant in the light of the Court's decision.	I
only mention that at this stage and say that that
would be a matter that would, in effect, come up before this Court because it would be part and
parcel of the matter that would be raised on the
appeal.	But if I could deal with that very briefly

if special leave is granted.

So it is for those reasons we would submit

that this is not a case appropriate for special

leave.

BRENNAN J: Perhaps you might mention what the nature of

that problem is, Mr Merkel.

MR MERKEL:  Your Honours, what occurred at trial - it was

the subject of the second judgment of the Full

Court which is in the appeal book, and what

occurred - can I hand up to Your Honours three

copies of a passage from the transcript.

Your Honours, the trial was conducted on the basis

of that admission between the third party and the

defendant. When this matter came on before the

Full Court, the Full Court initially dismissed the

third party proceedings and that led to the second

judgment where Their Honours were informed that the

parties never intended that those proceedings be

before Their Honours. Their Honours then allowed

an appeal from the dismissal of the third party

proceedings by the trial judge, not on the merits
but by reason of the plaintiffs' failure to

succeed, and when they ordered a new trial on the

question of damages the issue arose as to the

status of that admission. What Their Honours said

at page 108, in essence, at the top paragraph, was

Their Honours regarded that if evidence was not to

be the same as that below, but may be supplemented

in such way as the trial judge may permit on the

question of damages, the admission made would be

the subject of a release.

Now, the point I raised with Your Honours is

that if leave is granted to the plaintiffs to

succeed on the faith of the evidence below, then we

would be seeking to cross appeal to seek judgment

on the third party proceedings against the

solicitors, the entirety of the case against whom

were conducted on the faith of the evidence below.

Krakowski 18 15/10/93

I mention it at this stage because the rules of the

Court do specifically deal with that situation

under Order 70 rule 6 which permits us to raise by

cross appeal, as we understand the rule, that

particular issue. But I did not want, in effect,

the hearing on the special leave application to

proceed on the basis that the only issue before the

Court would necessarily be the issue between the

plaintiffs and defendant, because that is

inextricably bound up with the issue between the

defendant and the third party.

BRENNAN J: What you are saying is that if special leave

were granted, you want leave to cross appeal

against the third party?

MR MERKEL:  That would be what we will be seeking,

Your Honours, and under Order 70 rule 6 provision

is made in effect for that to occur.

BRENNAN J:  Mr Lally can respond to that application as it

were, contingent application when he makes his

submissions.

MR MERKEL:  Yes. And the reason we say that it should be

dealt with at this time is because if the matter is

to proceed to judgment in any way, or possible

judgment on the evidence as it was before the trial

judge, it would be unjust if the defendant who had

conducted its case on the faith of that evidence

were in effect precluded from relying on the whole

of the evidence in its third party claim against

the solicitors, so it could in effect get the

inconsistent results which third party proceedings

were designed to avoid and the admission was

designed to avoid. If the Court pleases.

BRENNAN J:  Mr Lally.

MR LALLY:  If the Court pleases. I support the general

submissions made by Mr Merkel, but it might be

helpful if I move to deal with the question of

fraud, particularly in the light of that last
aspect because, from the passage that was read to

the Court at page 36, where the position was

clarified, it is clear that the matter of concern

particularly for my client was the opening that had
been made by counsel for the plaintiffs that sought

to assert that there had been, as it were, some

deception by the solicitors. The particulars of

the fraud as pleaded up to that point of time were

completely silent on that aspect.	The solicitors
were not mentioned at all.

What was put was the fact that the documents

referred to the rent payable for the year at

$156,000 and the complaint was, well, we did not

Krakowski 19 15/10/93

know that there had been a lease inducement paid

to have the tenant go into those premises at a time

before the sale occurred. There was no suggestion,

on the face of the pleadings, that the solicitors

were involved in any way. That was why it was

essential that this matter be clarified and that
clear distinction appears at page 36, where by the

reference to Mallesons it was said:

We say that the deception arose insofar as

Mr. Lally's client (Mallesons) is concerned by

the preparation of contractual documents,

including the S.32 statement with the lease

and other documents annexed which did not

disclose the true position -

Just stopping there. That is an allegation that

the solicitors in that capacity prepared the

contractual documents. So that is the contractual

documents for the sale of the property. What is in

those documents is correct. There is no evidence

in this case, and nor was it pleaded, that

Mallesons were in any way involved in dealing with

the prospective purchasers. What occurred is that
the vendor, Eurolynx, treats with the prospective
purchasers who do not make it part of their case

that they wanted a tenant who was financially able

to pay the rent, nor that the market value be what

they proposed to pay. There were no issues put in
the case that that was a requirement.

But what the Full Court found was that once you consider this case as a trade practices case,

and leave aside intention, you can extract out of

this case that if you leave the solicitor back in property and then dealing with a prospective purchaser, if you had a case of conspiracy of where
the office drawing the documents, and you have got

there had been some deliberate decision where the

solicitors get with the vendor/landlord and seek to

entrap people, you would then have some case where

the question of intention to deceive would be

raised. That is the significance of the two pages

in the judgment that the Full Court spent, at

pages 80 to 81, considering this very question.

It is not simply enough to say, "I have a

document that, on the face of it, is correct"; that

if in the conveyancing documents that are handed

over there is some aspect that was in the

purchaser's mind that he wanted perhaps to buy a
property that he thought was going to be at market
rent or it was going to represent 10 per cent, the

purchase price was going to be calculated by

reference to what the market rent, and then go back

and say, "Well, if we put all that together it

Krakowski 20 15/10/93

seems here that what has occurred is that not the

whole picture has been put before those

purchasers."

BRENNAN J:  What is a section 32 statement?

MR LALLY:  The section 32 statement is a statement that

provides details of leases	and mortgages. It goes
with the contract of sale.	Section 32 of the Sale
of Land Act in Victoria -

BRENNAN J:	Was it provided by the solicitors in this case?
MR LALLY:	Yes.
BRENNAN J:	And I presume it referred to the lease but not

to the collateral arrangement?

MR LALLY:  Yes, because the collateral arrangement had come

into existence for the purpose of having a tenant

commit himself to pay the rent of $156,000 a year,

which the purchasers, whoever they be in the

future, would be entitled to receive. The

purchaser as the new landlord was still going to be

entitled to receive that $156,000. This was not a

case where the prospective purchaser said, "What I

want is a person who is capable of paying the top

rent, the best rent that can be obtained.	And I am
only prepared to buy a property if I can be

satisfied that I have got a tenant who is in that

position." Now, that is completely silent, but

that is the sort of case that this is sought to be

turned into be the back door. Because once you

take away the intention to deceive, you can put
together so many links by saying, well, you were
dealing, of course, with a tenant, Eurolynx -

Eurolynx, the landlord, was dealing with a tenant -

so he enters into an arrangement to give it three

months rent free period and it gives it an

incentive to fit out, and it was $156,000.

Now, when the purchasers come along and the

evidence that the trial judge found credible, and

no reason to disbelieve, that Mr Gilbert gave

evidence, he said, well, we did not know at what

time any purchaser was going to come along, and

these two events were not connected together, and

there was a finding by the trial judge that they

were not so connected and that it was wrong to make
any assumptions on the basis of some nearness in

time, proximity of dates; you just do not have that

intention to deceive.

The vice that then follows is that if you look

at the top of page 37 of the application book, it

will be seen that this passage appears:

Krakowski 21 15/10/93

After all of the evidence was in and

after Mr. Jolson and Mr. Lally had addressed

the Court, Mr. Watkins sought to amend the

Amended Statement of Claim further to include

an action of deceit -

and so the very issues that were going to be of

particular concern to my position in this trial

were being raised at the forefront and counsel

chose to put the position, as he did at page 36.

The decision not to call the solicitor was made at

the end of the case for the plaintiffs and, of
course, when the Full Court had to deal with the

question of then allowing a retrial, limited to the

proof of the loss, if any, remembering that the

claim could only be a claim for a capital loss, and

the Full Court in its judgment has certainly not

expressed any view that there was in fact any such

loss in this case. At page 108 express reference

was made to my position - my client's position - of

releasing me from an admission that had been made

during the running of the case and that admission

was made after the plaintiffs' case had closed.

DEANE J: But what has this got to do with the plaintiffs?

I mean the plaintiffs do not have to go into the

relations between the defendant and its solicitor.

MR LALLY:  No, but what it has to do, Your Honour, is that

it is the way the case is put, and the case on

that - - -

DEANE J: But you can go uphill and down dale on pleadings.

What was put was that the plaintiffs bought the

premises on the basis of representations of the

lease. The representation was false. The

documents produced were essentially phony and the

question was whether there was fraud. Now, really,

the whole thing has already got out of hand. It

seems to me to be getting absolutely out of hand

once again as the points of a very simple case have

been absolutely obscured.

MR LALLY: With respect, if it not a simple case.

DEANE J:  It may not be between you and Mr Merkel's client,

when you start dividing things up and so on, but

the essential facts of the plaintiffs' case were

clear and obvious.

MR LALLY: With respect, the trial judge viewed it as a case

of concealment and in so far as the Full Court

viewed it as one of positive misrepresentation, you

still have to consider the question -

DEANE J:  The Full Court found the trial judge was wrong.

Krakowski 22 15/10/93

MR LALLY:	Yes.
DEANE J:	Do you challenge that?
MR LALLY:	No, but I want to, if I may, Mr Justice Deane, go

to the aspect that is relevant, and that is the

question of concealment, because that is where you

have to look at the intention. You do not simply

say, well, the sale documentation, when viewed with

a document that related to the tenant, had some

difference; you have to have a look at the question
of was there a deliberate or a reckless decision

made to conceal that side agreement from the

prospective purchaser.

BRENNAN J: But this is on the basis of a duty to reveal

arising from some complex situation, some factual

situation which gives rise to a duty to reveal

something. But what has that got to do with a case

where the inducement which is offered is the

inducement of saying, here are the terms of the

relevant lease, and it is not. I mean, where does

one get to a concealment point there?

MR LALLY:	Because - and if I may take the Court to the reference at pages 68 and 69 to the decision of
Curwen where this aspect of the concealment and its
relationship to the case as one of positive
misrepresentation is clearly put.  The lease
documents are true on their face and they remain
true.  They only - - -

BRENNAN J: They are only true on their face in the sense

that those are the words written on the paper.

MR LALLY:  Yes, and they remain true. The tenant has to pay

$156.000 a year to the landlord.

BRENNAN J: But that is exactly what, as Justice Deane has

already pointed out, is abrogated by the collateral

agreement.

MR LALLY:  No, no -

BRENNAN J: That obligation to pay is abrogated by the

opening words of the collateral agreement.

MR LALLY:  The collateral agreement was made between

Eurolynx as the owner of the building procuring a tenant. But once that tenant is in possession,

that tenant is contractually obliged to pay

$156,000 per year - - -

DEANE J: But that is what the first paragraph said it was

not obliged to do.

MR LALLY:  But it is, if I may, with respect - - -

Krakowski 23 15/10/93

DEANE J: Just have a look at the first paragraph. It says

it does not have to pay it.

MR LALLY:  I am familiar with it. It does not have to pay it

to Eurolynx.

DEANE J: And if the owner sued on the lease, the answer

would be the lease was varied by an agreement that

said the rent reserved by the lease did not have to

be paid.

MR LALLY: That is for three months.

BRENNAN J: And the lease between Eurolynx and Swaeder was

8 September and the collateral agreement was on the

12th.

MR LALLY:	Yes.
BRENNAN J:	So how do you say the $156,000 obligation

entered into on the 8th survived the 12th?

MR LALLY:  It is not a releasing from the obligation to pay

$156,000.

DEANE J:	It was an agreement they did not have to pay it.
MR LALLY:	No, with respect, there was an agreement that

they did not have to pay three month's rental, but

the $156,000 - - -

DEANE J: If you take three months from 12 months, you will

subtract a quarter of $156,000 and you have the

rent for the first year. But I am taking you into

details that we should not be troubling about.

MR LALLY:  If I might go to line 16 on page 69 where the court says:

A true representation, coupled with

concealment, thus became a positive

misrepresentation calculated to deceive, and
which did in fact deceive the plaintiffs to
his detriment.

There is reference to Kerr on Fraud.

A case based simply upon fraudulent

concealment of what is material can be a very

different from a case based upon
misrepresentation where what was communicated
is said to be untrue because of what was

omitted. It seems from what we were told that

at trial the plaintiffs did seek to present a
case of positive misrepresentation in the
latter sense, rather than one only of

fraudulent concealment.

Krakowski 24 15/10/93

Now, it is that concealment, and one has to look at

what occurs at the time of the sale. Was there

some intention to deceive when that occurred?

Because the misrepresentation that is relied upon

in this case is a representation as to facts that

are true, but because the side agreement was not

made available, it colours what was made available.

But was there an intent to deceive?

Section 13 of the Sale of Land Act was not

relied upon at trial. It should have been pleaded

under the pleading rules because it is reliance

upon an Act but, in any event, that legislation

only goes as to knowledge; it does not take them

over the hurdle of intent. It is accepted law from

Mr Justice Dixon as he then was in Potts v Miller

since 1940 that where you have got a

misrepresentation made, that there has to be the

intent to deceive. So that this misrepresentation

only becomes actionable once there was the
decision, either deliberately made, recklessly

made, or was it one of inadvertence or is it a

matter of where you have got a solicitor in a

solicitor's office drawing documentation and you
have got a vendor dealing with a prospective tenant

and then later dealing in a separate capacity with

a prospective purchaser. Where does one distil out

of that an intention to deceive, unless you have

got, as the Full Court said at pages 80 to 81, some concoction and some entrapping of a person with the

knowledge that that person was unlikely to have

made any inquiries of its own as to whether the

price that was being paid was to be a market price

or not.

It is only when one gets to the stage of

having that concoction and having a deliberate

setting up and entrapping of somebody, that you

would find evidence of intention.	The case fails,
in my submission, for that reason, to establish	fraud and that the findings of the trial judge,
because he had to deal with one of concealment and because the Full Court, for the reasons that I have
said, also has to consider what it is that makes it
misleading, it is the tailure to conceal, so that
they are entitled, in my submission, to look back
and rely upon the findings that were made, and
those findings were that this was not a matter of intention; it was a matter, if anything, of inadvertence.

And in my submission, it is inappropriate now

to say, "Well, we said we were running the case

that way; that was the evidence that was given; we

want to put it in a different aspect."

Krakowski 25 15/10/93

BRENNAN J: What do you have to say about the contingent

application for special leave to appeal against you

by your co-defendant?

MR LALLY:  It does raise the practical difficulty that the

appeal would proceed where the solicitor had not

been called and what the Full Court did in the

similar position was to relieve the third party

from the effect of that admission. Now, of course,

if this appeal is to proceed in this Court, you

cannot effectively overcome that prejudice. And it

is a reason, in my submission, as to why there

should not be special leave granted. It is not
simply a matter of saying, well, then, Mr Merkel

can cross appeal -

BRENNAN J: That is special leave so far as the plaintiffs

are concerned.

MR LALLY:  Yes.

BRENNAN J: But the contingency on which special leave is

sought against you by Mr Merkel is that if special

is granted - that is the plaintiffs' application

for special leave is granted - now what do you say

about, on that contingency, Mr Merkel's application

for special leave to appeal against you?

MR LALLY: 

It must follow that he should be entitled to

agitate that, but it leaves the third party in the
position that the Full Court considered was

unsatisfactory and at page 108 released the third

party from the effect of the admission. But, of course, there is not a vehicle in procedure that

can accommodate, as it were, the hearing of the

special leave application in the same way, and it

is only on the basis that the special leave

application should be refused that I can put it.

BRENNAN J:  I do not quite follow that, Mr Lally.

MR LALLY:	This Court would be hearing an appeal on the findings of fact that had been made, without the
solicitor having been called.

DEANE J: But just for the sake of the question, suppose the

impossible and assume that the Court does grant

special leave to the applicant to appeal. What do

you then say about what Mr Merkel said in terms of

his contingent application which is what directly

affects your client?

MR LALLY:  It is my submission that he should not be allowed

to do it, because of the decisions that are made at

trial and it puts me in the predicament that the

Full Court recognized, but I accept as a matter of

principle that if special leave is granted to the

Krakowski 26 15/10/93

MR LALLY:  It is my submission that he should not be allowed

principle that if special leave is granted to the

to do it, because of the decisions that are made at

trial and it puts me in the predicament that the

appellant, that he should not be deprived of the

opportunity of then seeking special leave as

against my client. I accept that, but I am seeking

to rely upon the prejudice as a reason for the

refusal of special leave in the first instance. If

the Court pleases, they are the submissions I wish

to make.

BRENNAN J:  We need not trouble you, Mr Gillard, because

there will be a grant of special leave to the

plaintiffs to appeal in this matter.

As I understand Mr Lally's submission, that

contingency having been satisfied, the first

defendant's application for special leave to cross

appeal on the third party proceedings as between

the first and the second defendants is also

granted.

MR GILLARD:  Your Honour, I think the defendant and the

third party. There are no two defendants.

BRENNAN J: Yes, I am sorry.

MR GILLARD:	I would ask the Court to reserve the costs.
MR MERKEL:	Your Honours, there is one matter that

Your Honours have not dealt with, and that was the submission that we put that if leave is granted, it

should not be on a basis that allows section 13 to

be raised in effect as of right. I do not ask this

Court to determine that issue at this stage, but we

would say that the special leave should be granted,

reserving all rights in respect of any grounds and

any submissions, and we would submit, with respect, that section 13 being raised in this Court for the	first time, that particular issue should not be the
subject of a notice of appeal pursuant to
Your Honours' leave but should be the subject of a
special application to the Court, lest it be
thought that there was some prima facie position in
respect of it.

BRENNAN J:  Do you wish to say anything about that,

Mr Gillard?

MR GILLARD:	Your Honour, if we put it in our notice of appeal, my friend can put the argument to this
Court why it should not be a matter that should be debated before the Court. It is a question of law.
It states that the burden of proof is on the other
side when a false statement is made. So in the

Krakowski 27 15/10/93

end, my friend can put it to the Full Court and

persuade them that it would not be right for us to

rely upon it, though we feel strongly enough not to

rely upon it, but we do not want to throw it away.

BRENNAN J:  We will not make any order with respect to the

grounds of appeal and it will be a matter, of

course, for the Full Court to determine whether you

are entitled to rely upon section 13. The matter

has been raised here and I should think Mr Merkel's

rights have been fully protected in that respect.

MR MERKEL: If the Court pleases.

AT 4.34 PM THE MATTER WAS ADJOURNED SINE DIE

Krakowski 28 15/10/93