McKrill v Ashley Thomas Francis Black also known as Ashley Thomas Black
[2021] WADC 62
•25 JUNE 2021
JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CIVIL
LOCATION: PERTH
CITATION: MCKRILL -v- ASHLEY THOMAS FRANCIS BLACK also known as ASHLEY THOMAS BLACK [2021] WADC 62
CORAM: LONSDALE DCJ
HEARD: 30 NOVEMBER - 4 DECEMBER 2020
DELIVERED : 25 JUNE 2021
FILE NO/S: CIV 1079 of 2017
BETWEEN: MARK GREGORY MCKRILL
Plaintiff
AND
ASHLEY THOMAS FRANCIS BLACK also known as ASHLEY THOMAS BLACK
Defendant
Catchwords:
Trade practices - Misleading or deceptive conduct - Tort - Negligent misstatement - Accountant/client - Whether known reliance in relation to the investment of money - Whether defendant breached duty to exercise reasonable care, skill and diligence - Turns on own facts
Legislation:
Australian Consumer Law (Cth), s 18(1)
Australian Securities and Investment Commission Act 2001 (Cth), s12BAA(1)(a), s 12BAA(2), s 12BAA(4), s BAB, s 12BAB(5), s 12DA
Competition and Consumer Act 2010 (Cth), s 131A
Fair Trading Act 2010 (WA), s 19(2)
Result:
Plaintiff's claim dismissed
Representation:
Counsel:
| Plaintiff | : | Mr P MacMillan |
| Defendant | : | Mr B Hanbury |
Solicitors:
| Plaintiff | : | Armstrong Legal |
| Defendant | : | Hale Legal |
Case(s) referred to in decision(s):
Australia & New Zealand Banking Group Ltd v Larcos (1987) 13 NSWLR 286
Bill Acceptance Corporation Ltd v GWA Ltd (1983) 78 FLR 171
Cackett v Keswick [1902] 2 Ch 456
Caffey v Leatt-Hayter [No 3] [2013] WASC 348
Chappel v Hart (1998) 195 CLR 232
Conlon v Simms [2006] EWCA Civ 1749; [2007] 3 All ER 802
Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31, (1992) 110 ALR 608
Fraser v NRMA Holdings Ltd (1995) 55 FCR 452
Girgis v Poliwka [No 6] [2019] WASC 230
Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82
Nolan v Westpac Banking Corporation (1989) 51 SASR 496
Rosenberg v Percival [2001] HCA 18; (2001) 205 CLR 434
The Mutual Life & Citizens' Assurance Co Ltd v Evatt (1968) 122 CLR 556
Watson v Foxman (1995) 49 NSWLR 315
LONSDALE DCJ:
Introduction
The plaintiff was the proprietor of a roof tiling business. By the year 2011 he had been a roof tiler for about 30 years.[1] Owing to emerging challenges in the roof tiling industry, the plaintiff decided he wanted to change his line of work.[2]
[1] ts 44 - ts 45.
[2] ts 45.
The defendant, who was the plaintiff's accountant, introduced the plaintiff to the idea of investing in a business in which the defendant himself had an interest.[3] The business, which had operated through a proprietary limited company Beacon Capital Pty Ltd (Beacon Capital) since late 2010 was an importer and seller of wood‑based heating and cooking products manufactured by an Indonesian‑based company. These products, which were branded 'Hotrox' had been supplied to Bunnings for over 10 years.
[3] ts 46, ts 47.
On 7 April 2011, the plaintiff decided to invest $100,000 in the business.[4]
[4] ts 51, ts 52.
On 15 April 2011, not long after the plaintiff made his investment, Beacon Capital's fortunes began to take a turn for the worse: Bunnings decided to 'de‑range'[5] (discontinue) one of the Hotrox products.[6] This caused a significant decline in Beacon Capital's sales.
[5] This is the terminology used by Bunnings and the term used by the witnesses.
[6] Agreed bundle of documents (ABD) - tab 14.
Although Bunnings had never had any contractual obligation to purchase stock from Beacon Capital, Bunnings' decision to 'de-range' one of the Hotrox products came as a surprise to the defendant: Bunnings had been buying Hotrox products for over a decade and Bunnings had not given any prior indication of its intention to discontinue the product.[7]
[7] ts 223.
In late 2012 Bunnings decided to 'de‑range' another Hotrox product.[8] This caused a further decline in Beacon Capital's sales. Although the company remained solvent,[9] it was eventually wound up.
[8] ts 213.
[9] ts 215, ts 216.
The plaintiff received only one dividend of $10,000[10] which was paid in June 2011.
[10] ABD - tab 27.
The plaintiff claims that he invested in the business in reliance on the misleading and deceptive conduct of the defendant, or alternatively, the defendant's negligent advice. The plaintiff claims that the misleading and deceptive conduct and/or negligent advice was made by way of a combination of representations made orally and/or by omission.
The plaintiff claims the loss of his $100,000 investment less $10,000 for the dividend he received, plus interest.
The plaintiff's claim for misleading and deceptive conduct is made pursuant to s 18(1) of the Australian Consumer Law (ACL) (which has application pursuant to pt X of the Competition and Consumer Act 2010 (Cth) and s 19(2) of the Fair Trading Act 2010 (WA)) and which provides:
A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
The issue of whether the claim for relief pursuant to s 19(2) of the Fair Trading Act is subject to limitation was raised as a preliminary issue because of an amendment to the statement of claim dated 4 November 2020. However, although the amendment introduced a plea based on the ACL, it did not plead any new facts: See Nolan v Westpac Banking Corporation (1989) 51 SASR 496 and Australia & New Zealand Banking Group Ltd v Larcos (1987) 13 NSWLR 286, 295. Therefore the issue of whether the three year limitation period under the Fair Trading Act applied was not in serious contention.
The plaintiff's pleaded case
The claim for negligent misstatement is pleaded in similar terms to the claim for misleading and deceptive conduct.
The plaintiff claims he was induced to make the investment by the misrepresentations pleaded at par 5 of the plaintiff's statement of claim[11] which reads as follows:
[11] The further further re‑amended statement of claim (amended pursuant to order made 20 July 2020).
5.The Defendant orally informed the Plaintiff further that:
(a)the business had a long-term contract with Bunnings Group Ltd to retail the product of the business in Australia (the First Representation);
(b)the Business manufactured its own product (the Second Representation); and
(c)the turnover of the Business was good and the Plaintiff's income from the Business would be sufficient to service a loan to finance investment in the Business (the Third Representation).
Particulars
(i)the First Representation was oral alternatively partly oral and partly by omission;
(ii)insofar as by omission it was by the Defendant's failure to inform the Plaintiff that the Bunnings Contract was subject to short-term renewal; and
(iii)the Second and Third Representations were oral.
I will refer to the three pleaded representations as the 'long-term contract representation', 'the manufacturing representation' and the 'financial performance representation'.
The plaintiff pleads that each of the representations is misleading and deceptive or likely to mislead or deceive - or alternatively amount to a negligent misstatement for the reasons pleaded at par 11 and par 16 respectively of the statement of claim. Paragraphs 11 and 16 are in identical terms and read as follows:
(a)the Business did not manufacture its own product;
(b)the Business was wholly dependent on the Bunnings Contract which expired 30 June 2012; if the Bunnings Contract was not renewed the Business was likely to fail;
(c)on or about 15 April 2011 the Bunnings Group Ltd notified the Business in writing that the business had pursuant to the Bunnings Contract oversupplied the Bunnings Group Ltd with stock and that the Bunnings Group Ltd consequently did not require further stock from the Business;
(d)the Bunnings Contract was not renewed with effect 1 July 2012;
(e)the Business subsequently failed;
(f)the financial position of the Business as of April 2011 was precarious;
(g)the Plaintiff's income from the Business was not sufficient to service the loan he took out to finance his investment in the Business.
The particulars of misleading and deceptive conduct and negligent advice pleaded in pars 11(c) ‑ 11(g) and 16(c) - 16(g) respectively, all relate to events or circumstances which came into existence after the plaintiff's decision to invest in the business. Those particulars therefore are not determinative of whether the defendant engaged in the impugned conduct. If I were to conclude that the defendant did engage in the impugned conduct, then those events and circumstances would be relevant to an assessment of damages.
The defendant's position
The defendant denies having made the impugned oral representations. He denies informing the plaintiff that the business (in which the plaintiff was invited to invest) had a long-term contract with Bunnings to retail Hotrox products. The defendant's position is that, although he informed the plaintiff that the previous distributor of the products had had a contractual relationship with Bunnings over many years, he had never made any representation that the business in which the plaintiff was being invited to invest, had a 'long‑term contract' with Bunnings.
The defendant does not deny that he did not specifically draw the plaintiff's attention to the fact that Bunnings had no contractual obligation to purchase Hotrox products.
The defendant further denies having told the plaintiff that the business manufactured its own product.
The defendant does not dispute telling the plaintiff that the business was predicted to be profitable. However, the defendant denies having told the plaintiff that the turnover was 'good … and sufficient to service a loan to finance [the plaintiff's] investment'.
Insofar as the defendant admits to some of the conduct pleaded by the plaintiff, he denies that it amounted to either misleading or deceptive conduct or negligent misstatement.
The issues for determination
There are five main questions for my determination:
1.Has the plaintiff proved that the defendant engaged in the impugned conduct by making any of the three representations and/or omissions?
2.Insofar as I find any representations were made orally, were they misleading or deceptive or likely to mislead or deceive?
3.Insofar as I may find any representations were made orally (but were not misleading and deceptive or likely to mislead or deceive) did the making of those representations amount to the making of a negligent misstatement and the giving of negligent advice?
4.Insofar as the plaintiff's claim is partly based on omission, did the omission amount to misleading and deceptive conduct or conduct likely to mislead or deceive?
5.Alternatively, if the omission was not misleading or deceptive, did the omission (in the context of what the defendant did say to the plaintiff) amount to a negligent misstatement and breach of a duty of care owed to the plaintiff?
The evidence called at trial
The plaintiff gave evidence at trial and called two witnesses ‑ Suzanne Craik (the defendant's personal assistant) and Ms Craik's husband Gary Craik.
The defendant also gave evidence. Numerous documents were tendered by the parties.
Many facts were not in dispute.
The facts that are in dispute concern what the defendant told the plaintiff prior to him making his investment.
Findings of fact
I have made the following findings of fact based on the evidence at the trial.
The defendant had a Bachelor of Accounting and Taxation from Curtin University which he obtained in 1990. He was, at all relevant times, a fellow of the National Tax and Accountants' Association and the proprietor of Quest Taxation and Management Services Pty Ltd (Quest Taxation).[12]
[12] ts 193.
The defendant had carried out accounting services for the plaintiff since 2008. He had also prepared the financial accounts and tax returns for a number of entities associated with the plaintiff including McKrill's Tiling and two other proprietary limited companies.[13]
[13] ts 195.
The defendant had known Gerhard (Gerry) Cole, the proprietor of PT Hotrox Indonesia, since 2002.[14] PT Hotrox Indonesia manufactured wood, charcoal and sawdust logs to be used for cooking.[15] PT Hotrox traded in Australia through the entity The Larkent Trust.[16] The defendant provided accounting services to The Larkent Trust and had done so since 2008.[17]
[14] ts 198.
[15] ts 218.
[16] ts 198.
[17] ts 198.
Sometime in 2010 Gerhard Cole suggested to the defendant he might like to take over the distribution and importation of Hotrox products into Australia so that he (Gerhard Cole) could focus on the manufacturing aspect of PT Hotrox's business in Indonesia.[18]
[18] ts 200.
The defendant had become familiar with the sales history of Hotrox products to Bunnings because since 2001 he had prepared the accounts for The Larkent Trust. He decided to set up a business through the corporate entity Beacon Capital in order to take up Gerhard Cole's invitation to take over the business of importing and distributing Hotrox products.[19]
[19] ts 200: ABD - tab 7.
Gerhard Cole appointed Beacon Capital to be the importer and distributor of Hotrox products in late 2010.[20]
[20] ts 201.
The defendant knew Bunnings to have a standard relationship in relation to their suppliers based on a 12 month contract called the 'Bunnings Supplier Trading Package'. The defendant described this as more of a 'come and go agreement'.[21]
[21] ts 200.
The defendant had signed the Bunnings Supplier Trading Package on behalf of Beacon Capital for 2010 and 2011.[22] There was a term in the Bunnings Supplier Trading Package which reads:[23]
As part of Bunnings' commitment to delivering the latest and most innovative products … Bunnings does not make any representation that it will continue to buy any particular quantity of product.
[22] ts 209.
[23] ABD - tab 2, page 3.
The Supplier Trading Package set a minimum quantity for the purchase of products. In the case of the Hotrox products, it was one pallet minimum.[24] However, the agreement did not mandate Bunnings purchasing any quantity of Hotrox products.
[24] ts 200.
Beacon Capital received its first shipment of Hotrox charcoal products from PT Hotrox in December 2010 to fulfil an order by Bunnings and which was to be dispatched in January 2011.[25]
[25] ts 204.
In early 2011, the plaintiff approached the defendant about the possibility of investing in a business unrelated to the tiling industry. The plaintiff asked the defendant to look at some figures for a particular party hire business. The defendant examined the figures and advised the plaintiff against the investment.[26]
[26] ts 45 - ts 46.
Sometime in early 2011 the plaintiff had also expressed interest in a display of Hotrox products which the defendant had set up in his office.[27]
[27] ts 48, ts 253, ts 254, ts 255.
On a number of occasions between January 2011 and April 2011 the defendant and the plaintiff discussed the possibility of the plaintiff investing in the business.[28]
[28] ts 206.
On one such occasion the defendant made a presentation to the plaintiff and other prospective investors including Craig Allen and the defendant's personal assistant, Suzanne Craik.[29]
[29] ts 265.
In late March or early April 2011, the plaintiff, having decided he wished to invest in the business, approached his bank and applied for a loan for $100,000. At the plaintiff's request, the defendant provided the plaintiff's bank with detailed financial information for the entity in which the investment was to be made (Beacon Capital). The defendant sent an email to the plaintiff and the plaintiff's business banker attaching various financial reports for Beacon Capital. The reports included a profit and loss statement, a budget and future projections.[30]
[30] ABD - tab 10.
Shortly thereafter, the bank granted the plaintiff's application for a loan.[31] On or about 7 April 2011 the plaintiff paid $100,000 to Beacon Capital.[32] The plaintiff then became a shareholder of Beacon Capital together with the defendant, Suzanne Craik and Janelle and Craig Allen.[33] Sometime later the plaintiff also signed a consent to be a director of Beacon Capital effective from 9 April 2011.[34]
[31] ABD - tab 12.
[32] ts 51.
[33] ABD - tab 13.
[34] ts 54; ABD - tab 26.
On 15 April 2011 the defendant received a phone call from Bunnings advising that it intended to discontinue the Hotrox 3 kg bags of charcoal product.[35] The defendant, who had had no prior notice of Bunnings' intention to 'de‑range' the 3 kg bag of charcoal product, was shocked by Bunnings' decision.[36]
[35] ts 208, ts 209.
[36] ts 223; ABD - tab 14.
The defendant hoped to persuade Bunnings to change its mind. On 20 April 2011 the defendant wrote to Bunnings requesting it reconsider its decision to 'de-range' the 3 kg bags of charcoal.[37] A month or so later, the defendant, together with Gerhard Cole, travelled to Melbourne to meet with Bunnings in an attempt to persuade it to reverse its decision. Bunnings was not to be persuaded.[38]
[37] ts 210; ABD - tab 14.
[38] ts 210 - ts 211.
On 3 June 2011 the defendant attended the inaugural shareholder meeting of Beacon Capital together with the plaintiff and the other shareholders and directors.[39]
[39] ts 211.
The managing director's report, which was provided in writing[40] recorded the history of Beacon Capital and how the shareholders had been invited to apply for shares. The report specifically mentioned Bunnings' decision to 'de-range' the 3 kg bags of charcoal and detailed sales for Hotrox products until the end of May 2011.
[40] ABD - tab 22.
The minutes of the meeting record the defendant having presented the managing director's report and making an (oral) presentation outlining the history and background of Beacon Capital.[41]
[41] ABD - tab 24.
Relevantly, the minutes state that:
Ashley Black reviewed the agenda and welcomed everyone to the meeting. Next Ashley discussed the history and background of Beacon Capital Pty Ltd. Topics covered in the report (Copies given to all directors) included information on the guaranteed return of 28 ‑ 30% before tax on each Shareholder's Investment, description of the Hotrox products, shareholding details, list of Agreements and Contracts, details of administration and that the Company is the sole distributor of Hotrox BBQ Charcoal and Hotrox Woodlogs for Pt Hotrox (the manufacturer).
Ashley explained in detail how the company distributes the Hotrox products. He next explained how everybody has to submit their product for a product review and Bunnings decides which products to stock in stores. The details of the pricing structure for Woodlogs were detailed.
The minutes record that a number of issues relating to the operation of the business were discussed and that the defendant had provided a comprehensive update on Beacon Capital's financial plan and forecast.
The minutes further record that the directors read their copy of the report of the inventory and orders and had a discussion about expanding Hotrox's product range and expanding supply to other customers such as Woolworths and Big W.
The minutes of the meeting reveal that the plaintiff actively participated in the meeting: under the heading 'general business' the plaintiff is recorded as having raised his concerns about there being only one manufacturer of Hotrox's products and making the suggestion that there be quarterly meetings of the board.
On 19 March 2012 Beacon Capital held a shareholders' meeting attended by all directors and shareholders except Janelle Allen.
The managing director's report (which was again tabled in writing) contained details of various aspects of the business including the fact that Beacon Capital had received approval to extend the Supplier Trading Terms and Conditions until the end of June 2013.
The minutes of the March meeting reveal that various aspects of the business were discussed.
Again, the minutes reveal the plaintiff having actively participated in discussions. Relevantly, the minutes contain the following:[42]
[The plaintiff] pointed out that Beacon Capital is now running smoothly and far more attractive to any prospective clients.
[The plaintiff] reminded the meeting that the Manufacturer is still in the same circumstances as last year. He is the only person running the Manufacturing side. It would be preferable if somebody else that could speak Bahasa Indonesian was also involved.
A discussion ensued regarding the proposal that was put forward to an investment increase of $150,000. This was accepted by [the plaintiff] and The C & J Allen Family Trust.
[42] ABD - tab 35.
In 2012, the defendant continued to make attempts to improve Beacon Capital's fortunes. On 23 March 2012 the defendant (through his family trust) made a further contribution to Beacon Capital of $50,000 in order to improve cash flow and to allow Beacon Capital to meet its obligations for stock orders. The defendant was the only shareholder to make additional contributions.[43] On 30 April 2012 the defendant and Suzanne Craik travelled to Melbourne to meet merchandisers and to discuss sales performance and projections and to discuss ranging the products through the Woolworths Group.[44]
[43] ts 212.
[44] ts 212.
Beacon Capital's fortunes continued to decline. In late 2012 Bunnings advised Beacon Capital that it had also decided to 'de‑range' another of Hotrox's products, namely Hotrox 'woodlogs'.[45] Shortly thereafter Bunnings stopped buying Hotrox products altogether.[46]
[45] ts 214.
[46] ts 214.
Between 16 November 2012 and April 2014 the defendant tried to find new customers for Beacon Capital by approaching Woolworths, Barbeques Galore and Mitre 10, but his efforts were not successful.[47]
[47] ts 215.
By 2014, Beacon Capital was left with considerable stock on hand and was incurring substantial storage charges. The defendant brokered an agreement with the warehouses storing the stock to accept payment for consideration of any debt in exchange for products.[48]
[48] ts 216.
Sometime after March 2015 (although Beacon Capital was still solvent) it became apparent to the defendant that it could no longer trade and was eventually wound up.
The defendant suffered a loss of $242,000, which crystallised at 31 December 2015.[49] The plaintiff and the other shareholders also lost their investments.
[49] ts 194 - ts 195.
The defendant remained as the plaintiff's accountant until 2017 when the plaintiff issued a writ against the defendant's accounting practice.[50]
[50] ts 196 - ts 197.
The plaintiff's evidence as to the impugned conduct
The plaintiff gave evidence that he had had a number of discussions with the defendant about the business in early 2011 which induced him to invest in the business. There were three significant investment meetings.
The first investment meeting
The plaintiff recalls the first discussion he had with the defendant about the business was in the defendant's conference room at his office in Cannington. The plaintiff recalls a general discussion with the defendant about a 'business they had coming up with woodlogs in Indonesia, supplying to Bunnings'.[51] The plaintiff claims that the defendant told him that the business had a 'long-term contract with Bunnings' and was 'quite profitable'. The plaintiff's evidence of what was said at that meeting was:[52]
[the defendant] … went through the general - they had a long-term contract with Bunnings and it was quite profitable, and if I was interested, there was another meeting with the other - some other interested parties.
[51] ts 47.
[52] ts 47.
The plaintiff said that the defendant advised him that:[53]
… the business produced wood logs, charcoal, that was made in Indonesia and then was shipped and supplied to Bunnings stores all over Australia.
[53] ts 47.
The plaintiff said the defendant informed him that the product was 'compressed sawdust made into the shape of a log that was supplied in packages'.[54]
[54] ts 47.
The plaintiff recalled the defendant showing him a display box containing a sample of a 'woodlog' and advising him that the products were manufactured in Indonesia from sawdust and trees. The defendant did not mention Gerhard Cole or say who the manufacturer was.[55]
[55] ts 48.
The plaintiff was not sure of the date of the first meeting at which the investment opportunity was discussed and had not made a written note of what he and the defendant had discussed on that occasion.[56]
[56] ts 83.
The plaintiff could not recall the defendant mentioning the name Beacon Capital at the first investment meeting.[57] The plaintiff said he had not asked the defendant the name of the business or where the product was manufactured.[58] The plaintiff claimed not to be aware that Gerhard Cole (the proprietor of the manufacturing company PT Hotrox) was 'a separate entity' until later on.[59]
[57] ts 85.
[58] ts 86.
[59] ts 86.
When asked in cross-examination what words the defendant had used when he told the plaintiff about the long-term contract, the plaintiff said 'I can't remember exactly what words were spoken. We're talking nine years ago'.[60] The plaintiff said he was under the impression the business he thought he was going to invest in both manufactured and distributed the products through Bunnings.[61]
[60] ts 83.
[61] ts 84.
The plaintiff denied knowing that Beacon Capital had only commenced distribution of the products in 2010 until he had 'read all the documents'.[62]
The second investment meeting
[62] ts 85.
The plaintiff recalled a subsequent investment meeting in the defendant's conference room with other interested investors - Suzanne Craik (who the plaintiff knew as the defendant's personal assistant) and two other investors by the name of Janelle and Craig Allen.[63]
[63] ts 48.
The plaintiff recalled that on this occasion the defendant had given them the same information he had given the plaintiff at the first meeting. The defendant did not say anything about who had control of the manufacturing in Indonesia; nor did he mention the name Gerhard Cole. The defendant had told them that the product was manufactured in Indonesia and sent to Australia for Bunnings. The defendant showed them some financials: the profit and loss (statement), the long‑term history 'they' had with Bunnings and the projected and previous sales.[64]
[64] ts 49.
The plaintiff recalled the defendant offering the plaintiff and the others at the meeting the opportunity to 'buy a percentage' in the business for $50,000 or $100,000 and displaying some figures showing the return they would get on their investment.[65]
The third investment meeting
[65] ts 50.
Subsequent to the second investment meeting, the plaintiff made an appointment to see the defendant to tell him that he was interested in participating in the business and to see if he could get help to apply for a loan.[66]
The plaintiff's evidence as to reliance on the defendant's representations
[66] ts 50.
The plaintiff said he decided to invest in the business because of the information the defendant had given him - namely, that there was a 'long‑term contract' with Bunnings, that the product was manufactured in Indonesia and that the projected profit would be enough to service a loan.[67]
[67] ts 52.
The plaintiff agreed that his bank had agreed to finance the investment on the basis of the financial documentation that the defendant had provided.[68]
[68] ts 89.
The plaintiff did not obtain any independent advice about the investment because the defendant was his accountant (with whom he had a good relationship). Also, he believed that there were 'long-term contracts' with Bunnings.[69]
[69] ts 112.
The plaintiff said he got legal advice (in about 2016) when things 'went pear shaped'.[70] The plaintiff agreed that until he issued the writ in 2017 he had never accused the defendant of having misled him. The plaintiff said he recalled making phone calls to the defendant to 'find out the status of things' but he was not a person that 'makes threats or innuendos that I don't substantiate'.[71]
[70] ts 66.
[71] ts 65 - ts 66.
The plaintiff denied he had intended to become a director of Beacon Capital but agreed that he consented to be a director effective as at 7 April 2011.[72]
[72] ts 51; ABD - tab 26.
When challenged in cross-examination as to why he did not ask the name of the business he was investing in, the plaintiff said, 'It's pretty naïve, isn't it? Now we can look back in hindsight, it's a lovely thing'.[73]
[73] ts 114.
The plaintiff agreed that Beacon Capital appeared on the bank statements for the loan he had taken out with his bank. The plaintiff denied however knowing that his investment was being made in the entity Beacon Capital. He said that he 'pretty much didn't twig until later on, I just didn't take much notice'.[74]
[74] ts 115.
Under cross-examination, the plaintiff was asked whether the alleged representation that the projected income of the business would be sufficient to service a loan, was in the form of the defendant showing profit and loss statements, future projections and past earnings. The plaintiff agreed with that proposition. He recalled being presented with financial information at a meeting at which all other interested investors were present.[75] The plaintiff was asked whether by that stage he had been told of the company named Beacon Capital but the plaintiff was unsure. When asked who had told him about Beacon Capital, the plaintiff responded, 'It's on the minutes. I would have seen it in paperwork there at the meeting'.[76] (I understand the plaintiff's evidence in this regard to be that the first time he had become aware that his investment was in Beacon Capital was at the first shareholder meeting in June 2011.)
[75] ts 87 - ts 88.
[76] ts 88 - ts 89.
The plaintiff acknowledged that on 13 June 2011 the defendant had written a letter to him welcoming him to the board of Beacon Capital, and enclosing a consent for him to be a director, an application for 100,000 ordinary shares and a share certificate.[77]
[77] ABD - tab 26.
When asked as to what his reaction was on receiving the documentation inviting him to consent to be a director of Beacon Capital, the plaintiff said that he rang the defendant and made an appointment to see him. The plaintiff said he then discussed 'becoming a shareholder' with the defendant and 'signed the documents' (ie: the consent to be a director).[78]
[78] ts 54.
The plaintiff said that he was unaware that the 'business' in which he had invested was the corporate entity Beacon Capital until after he paid his money and when he was given a share document to sign.[79]
[79] ts 52.
The plaintiff said that until that point he had been unaware he was buying shares in a company rather than 'buying into a percentage of a business'. He denied there had been any discussion about him being a director before he signed the consent to be a director.[80]
The plaintiff's recollection of the meeting of shareholders on 3 June 2011
[80] ts 55.
The plaintiff initially denied attending the meeting of 3 June 2011 but conceded, after being shown the minutes, that he had in fact attended.[81]
[81] ts 69; ABD - tab 22 - tab 24.
The plaintiff agreed that at that meeting he was given a copy of the agenda and the managing director's report. He agreed there had been a discussion about expanding Hotrox products to potential customers such as (Woolworths, Big W and Big Box Hardware).[82]
[82] ts 79.
The plaintiff also agreed that he had expressed concern about Hotrox having only one manufacturer (which would leave the business vulnerable if something happened to the manufacturer).[83]
[83] ts 80 - ts 81.
The plaintiff could not remember other events detailed in the minutes such as the defendant having presented a comprehensive update on the company's financial plan and forecast or having explained the budget and company bank statements.[84]
[84] ts 78.
Under cross-examination, the plaintiff denied he would have seen the agenda of the meeting on 3 June 2011[85] until afterwards.[86] At first the plaintiff said that he was given the agenda after the meeting[87] but conceded he could not remember if he had the agenda when he walked into the meeting.[88]
[85] ts 66; ABD - tab 23.
[86] ts 67.
[87] ts 68.
[88] ts 69.
The plaintiff agreed he had never challenged the accuracy of the minutes of the meeting on 3 June 2011 because he was 'probably too blasé about it all'.[89]
[89] ts 75.
In cross-examination counsel for the defendant drew the plaintiff's attention to the heading 'Managing Director Report' in the minutes of the meeting on 3 June 2011. The plaintiff agreed that the managing director's report contained information about the Bunnings' range review process, but denied that this was discussed at the meeting.[90]
The meeting of shareholders on 19 March 2012
[90] ts 74.
Under cross-examination the plaintiff said he did not recall receiving an agenda for the meeting of shareholders in March 2012; nor did he recall getting it at the meeting.[91] He could not recall the first time he saw the minutes of the meeting but agreed the minutes recorded him and other shareholders having been present.[92] He could not remember receiving a copy of the meeting's agenda but concedes that he could have.[93]
[91] ts 102.
[92] ts 102.
[93] ts 103.
The plaintiff could not recollect being handed the reports (including the sales performance report) at the meeting. He said he 'presumed' that he participated in the meeting and conceded that he could have received the reports prior to the meeting.[94]
[94] ts 104 - ts 105.
The plaintiff could not recall whether Beacon Capital's sales performance was studied in detail at the meeting. He conceded that the minutes recorded the budget report being put up on a screen and the sales performance being studied in detail.[95]
[95] ts 105.
The plaintiff could not remember receiving the managing director's report or a discussion showing that the Bunnings Supply Trading Agreement had been extended until 30 June 2013 (as reflected in the minutes).[96]
[96] ts 105.
The plaintiff did however recall discussion about other matters recorded in the minutes (such as a discussion concerning expanding the business to include an e‑parcel service using Australia Post).[97]
[97] ts 107.
The plaintiff was shown the minutes which recorded the board papers having been submitted to him for signing. The plaintiff could not remember signing the papers but said he presumed that he did so because his signature appeared on the minutes.[98]
[98] ts 107 - ts 108.
The plaintiff was asked whether the minutes (which recorded him pointing out that Beacon Capital was 'running smoothly and far more attractive to prospective clients') accurately reflected what he had said at the meeting. The plaintiff denied having said anything along those lines because he could not remember having said so.[99] The plaintiff could also not recall having said that it would be preferable to have somebody who could speak Bahasa Indonesian, as reflected in the minutes.[100]
[99] ts 108.
[100] ts 108.
The plaintiff recalled a discussion regarding a proposal that his investment be increased to $150,000 (which the minutes record the plaintiff having approved). The plaintiff could not recall agreeing to increase his investment but conceded that one possible reason for him accepting an increase was that (the business was) 'probably a good business on the basis of the information we had'. However, the plaintiff claimed that with the information he had now he 'wouldn't have touched [the business] with a ten foot pole'.[101]
[101] ts 110.
The plaintiff agreed that the minutes of 19 March 2012 reflect no objection or complaint by him that he had been misled or deceived.[102]
[102] ts 111.
The plaintiff was cross-examined about his experience in business. He agreed that, in addition to running a tiling business for the past 30 years, he had run a truck business moving general freight. The plaintiff denied having control of the day-to-day operations of the tiling business. He described himself as a 'glorified wage earner'. However, the plaintiff agreed that at one stage he had had about 12 employees. He further agreed he was the sole shareholder and director of that company.[103]
[103] ts 62 - ts 63.
The plaintiff agreed that he ran his trucking business under a company structure (of which he was the sole shareholder and director).[104]
The plaintiff's evidence as to what happened after March 2012
[104] ts 64.
The plaintiff said that he had regularly called the defendant to find out what was going on with the business and had become concerned about Bunnings' 'de-ranging' of Hotrox products. He contacted the defendant by telephone and made appointments to see him to discuss the matter.[105]
[105] ts 58.
The plaintiff claims the defendant had reassured him that his investment was 'alright' and that there were tax credits attached to the company which would enable him to get a percentage of his money back. The plaintiff said he would have been happy with that but the defendant then advised him that in order to do that, he would have to invest in another business and transfer the tax credits to another entity. The defendant researched two other businesses for the plaintiff to invest in but the plaintiff decided against that course of action.[106]
[106] ts 59.
Evidence of Suzanne Rosalind Craik
Suzanne Rosalind Craik was employed by Quest Taxation in 2011 as the defendant's personal assistant.
Ms Craik knew the proprietor of Hotrox, Gerhard Cole as he was a client of Quest Taxation. Ms Craik understood that Hotrox manufactured its products in Surabaya and sent them to Australia to be sold by Bunnings. In 2010 Ms Craik became aware that Gerhard Cole was bankrupt[107] but knew him to be continuing with the Hotrox business.
[107] ts 149.
In early 2011 Ms Craik came to know that Beacon Capital was distributing Hotrox products to Bunnings. Ms Craik recalled the defendant had asked her if she wanted to invest in Beacon Capital and offered her a 7% share for the sum of $50,000.
Ms Craik understood the defendant to have told her that there was 'no risk' for her. She informed her husband (Gary Craik) of the proposal and they borrowed $50,000 from Westpac which they then invested.[108]
[108] ts 152.
Ms Craik recalled a couple of meetings at the Quest Taxation offices in early 2011 at which Janelle and Craig Allen were present.[109]
[109] ts 152.
Ms Craik recalls that at the first meeting she attended (the second investment meeting attended by the plaintiff) the defendant informed them that there was a contract with Bunnings. The defendant presented a spreadsheet with the projected earnings which Ms Craik thought looked really favourable. Ms Craik decided to invest in the business because it looked like it was 'definitely going to make a profit'. Ms Craik based her decision on what was in the spreadsheet as well as the fact that he had been her boss for a long time and she trusted him implicitly.[110]
[110] ts 153.
Ms Craik was shown a letter to Bunnings dated 18 April 2011 signed by the defendant on behalf of Beacon Capital in which the defendant expressed concern that on Friday 15 April 2011 Bunnings had advised it had decided to 'de‑range' one of Hotrox's products namely the 3 kg bags of charcoal.[111]
[111] ts 153; ABD - tab 15.
Ms Craik agreed that the defendant had signed the letter but she could not recall having seen the letter herself. She was not aware of the letter at the time she handed a $50,000 cheque (dated 20 April 2011) to the defendant for her investment.[112]
[112] ts 154 - ts 155.
Ms Craik agreed she received a dividend of $5,000 in June 2011 for her investment.[113]
[113] ts 159.
Ms Craik thought that the business was 'all fine' in the beginning. However, sometime after she had made the investment, the defendant told her that Bunnings do a yearly review and had decided that this year they were not going to stock Hotrox woodlogs. He had told her not to worry about it and he would fix it.[114]
[114] ts 159.
Ms Craik remained a director of Beacon Capital[115] after finding out about Bunnings' decision but she became worried and asked if she could resign as a director. The defendant said she could not because she would need the approval of the other directors.[116]
[115] ts 112, ts 159 - ts 160.
[116] ts 160.
Under cross-examination Ms Craik said that she had worked for the defendant from September 2008 until November 2019 - first as a receptionist but later as his personal assistant. She had a close working relationship with him. Her tasks included answering the phone, doing the banking, writing emails and dealing with queries from clients.[117] Her duties also included taking notes of meetings and typing reports for Beacon Capital such as the profit and loss statements and balance sheets. Ms Craik's evidence was that she had prepared all of the papers for the meetings of Beacon Capital.[118]
[117] ts 163 - ts 164.
[118] ts 164.
Ms Craik agreed she had prepared the agenda for the meeting of Friday 3 June 2011[119] and had later signed it as the recording secretary. She typed the minutes of the board meeting of 3 June 2011 with the defendant's input.[120] She presumed that she signed the minutes because they were true and correct.[121]
[119] ts 166.
[120] ts 165.
[121] ts 166.
Ms Craik confirmed that the plaintiff was present at the first meeting of directors on 3 June 2011.[122] She recalled making copies of the papers for every director and writing the name of each director in pencil on the copies.[123] She recorded the directors as having read their copy of the report of inventory and orders in the minutes.[124]
[122] ts 172; ABD - tab 24.
[123] ts 168.
[124] ts 172.
Ms Craik agreed that she had prepared an agenda for the shareholder meeting in March 2012[125] which was sent to the directors. She recalled that the meeting in March 2012 was the meeting where the shareholders were asked to contribute more money.[126]
[125] ts 46.
[126] ts 173.
Ms Craik agreed that she did not take legal action concerning recovery of the money because she trusted the defendant would pay it back.[127]
[127] ts 182.
Mrs Craik's truthfulness was not challenged. Her evidence was largely consistent with the documentary evidence. I find she was truthful and reliable and I accept her evidence.
Evidence of Gary Craik
Gary Craik also gave evidence but his evidence was largely irrelevant as he was not a party to any conversations between the plaintiff and the defendant. Nor was he present at any of the shareholder meetings.
His evidence corroborates his wife's account of what the defendant said about the business prior to them making their investment.
The defendant's evidence
The defendant said he had had discussions with the plaintiff in early 2011 in which he had told him that Hotrox products had been sold to Bunnings since 1998. However, the defendant denied having told the plaintiff that the business (in which the investment was being offered) was the manufacturer of the products. The defendant denied Beacon Capital had a 'long‑term contract' with Bunnings or that he had told the plaintiff that.[128]
[128] ts 218.
The defendant was asked in cross-examination whether he had told the plaintiff that 'the business' had a long-term contract with Bunnings to supply charcoal products Australia wide. The defendant said it was possible: the defendant agreed that he had orally informed the plaintiff that the previous distributor PT Hotrox Indonesia had had a contractual relationship with the Bunnings Group as the exclusive provider of charcoal products for at least the previous 11 years (as pleaded in par 9 of his defence).[129]
[129] ts 251 - ts 252.
The defendant denied telling the plaintiff that Beacon Capital had a good turnover because Beacon Capital had only existed since October 2010 and its first sales were not until January 2011.[130] However, the defendant said he had told the plaintiff that it was planned and anticipated that Beacon Capital, with the consent of Hotrox, would become the exclusive importer of Hotrox charcoal products.[131] The defendant said Beacon Capital was the only entity that was ever offered to the plaintiff to invest in.[132]
[130] ts 219.
[131] ts 252.
[132] ts 219.
The defendant denied telling the plaintiff that the income that would be generated from the plaintiff's investment would be sufficient to finance a loan for his investment. The defendant said the plaintiff had not given him any details about the term of any loan or interest rates which would enable him to do such a calculation.[133]
[133] ts 219.
The defendant said he provided Beacon Capital's trading results to the plaintiff's bank for the first two months of 2011, a budget for the remainder of the year to June 2011 and a further forecast for the 12 months to the end of 30 June 2012.[134] The defendant recalls also giving that document to the plaintiff fairly close to 22 February 2011 (although he could not recall whether he provided the plaintiff with just the first page or the entire document).[135]
[134] ts 207.
[135] ts 261.
The defendant could not recall specifically what information he had provided to the plaintiff in the various discussions they had in the lead up to 7 April 2011 but he recalls giving him information based on Beacon Capital's sales history to date and projected financial information.[136]
[136] ts 263.
The defendant said he was of the view that the business of importing and distributing charcoal and woodlogs would be profitable. He had built up a 'delicate spreadsheet' which took account of the costs and had made projections having regard to the Bunnings' margin requirement.[137]
[137] ts 202.
Under cross-examination the defendant was asked about an entry in the minutes of the meeting dated 3 June 2011 which contained a reference to a 'guaranteed return of 28 ‑ 30% before tax on each shareholder's investment'.[138] The defendant said that the reference to the guaranteed return of 28 ‑ 30% was intended to refer to the gross margin in relation to the return the business would generate on its sales less its direct costs rather than on the shareholder investment.[139]
[138] ts 271.
[139] ts 271 - ts 272.
In cross-examination, the defendant agreed with the proposition that the business was effectively dependent on Bunnings. Although there were other smaller customers, they represented only 1% or 2% of sales.[140] The defendant said that, given the history of Hotrox sales to Bunnings and, because Bunnings had signed the Supplier Trading Agreement (for 2011/2012), he thought it was unlikely Bunnings would not have continued to place orders for Hotrox products.[141]
[140] ts 279.
[141] ts 280, ts 281; ABD - tab 3.
Approach to the evidence
Given there are significant discrepancies between what the plaintiff and defendant have identified as to what was said over 10 years ago in oral conversations, I am mindful of what was said in Watson v Foxman (1995) 49 NSWLR 315, 318 - 319:
… Where the conduct is the speaking of words in the course of a conversation, it is necessary that the words spoken be proved with a degree of precision sufficient to enable the court to be reasonably satisfied that they were in fact misleading in the proved circumstances. In many cases (but not all) the question whether spoken words were misleading may depend upon what, if examined at the time, may have been seen to be relatively subtle nuances flowing from the use of one word, phrase or grammatical construction rather than another, or the presence or absence of some qualifying word or phrase, or condition. Furthermore, human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience. …
Therefore, in assessing the credibility and reliability of the plaintiff's evidence, I have relied to a significant extent, on whether his testimony is consistent with objectively proven facts recorded in contemporaneous documentation such as the minutes of the shareholder meetings. As was observed in Watson v Foxman, reference to contemporaneous documents is preferable in cases involving events long before litigation and are more likely to be an accurate representation of events than later statements where false memories can intrude: Girgis v Poliwka [No 6] [2019] WASC 230 [127] (Vaughan J); Belgravia Nominees Pty Ltd v Lowe Pty Ltd [No 6] [2019] WASC 5 [26(f)], [26(g)].
Findings as to the plaintiff's credibility and reliability
I found the plaintiff's recollection of critical events to be vague, lacking credibility and inconsistent with the documentary evidence such as the minutes of the shareholder meetings.
The plaintiff was unable to give detailed particulars of the occasions on which the impugned representations were said to have been made. He was at times unsure in his evidence as to when and where the relevant conversations took place or who else was present. He was vague as to the words he claims the defendant had used to convey the impression there was a 'long-term contract' with Bunnings.
The plaintiff's evidence concerning his recollection of the meeting on 3 June 2011 was unsatisfactory. He claimed he had not seen the managing director's report either at or subsequent to the meeting on 3 June 2011.[142] However, the minutes of that meeting reveal that copies of the papers for the meeting were given to all of the directors.[143] Suzanne Craik, whose evidence was consistent with the documentary evidence and was not subjected to serious challenge, said she had prepared the papers for the meetings and that the plaintiff had received copies.
[142] ts 71.
[143] ts 72 - ts 73.
The plaintiff was unable to remember other events detailed in the minutes of that meeting, such as whether the defendant had provided a comprehensive update on the company's financial plan and forecast or explained the budget and company bank statements. He could not remember whether, as the minutes suggested, new developments and opportunities were discussed.[144]
[144] ts 78.
The plaintiff did not accept that the minutes accurately reflected what the defendant had said at the meeting.[145] However, he had not ever challenged the accuracy of the minutes prior to giving evidence.[146]
[145] ts 74.
[146] ts 75.
The plaintiff claimed not to have known that he was investing in a company. This is difficult to accept given the financial statements provided to the plaintiff's bank in March 2011 (prior to the plaintiff deciding to invest in the business) made it manifestly apparent that the business ie: Beacon Capital was a proprietary limited company.
The plaintiff's claim that the defendant had told him that the business manufactured its own product lacks plausibility. A cursory glance at the ledgers contained within the financial documentation provided to the plaintiff and his bank could not reasonably have conveyed an impression that Beacon Capital was involved in the business of manufacturing.
It is not surprising that the plaintiff had difficulty recalling the events of so long ago in detail. No doubt aspects of the plaintiff's recollection were true. However, in the absence of the plaintiff having given clear, coherent and cogent account of what the defendant said and when, I cannot discount the very real prospect that the plaintiff has conflated different pieces of information and reconstructed an account (either consciously or subconsciously) to support his recent assertions about what the defendant said.
The defendant's evidence - findings
I found the defendant to have been a more credible witness than the plaintiff. The defendant was frank and forthright. His evidence was consistent with the documentary evidence and made sense. He was firm in his denials of the pleaded representations and I accept his evidence.
Findings as to the long-term contract representation
When the plaintiff was asked in cross-examination what words the defendant had used when he told the plaintiff about the 'long‑term contract', the plaintiff's evidence was vague: he could not remember precisely what words the defendant had spoken.[147]
[147] ts 83.
The plaintiff's evidence that the defendant had at some point told him there was a long-term contract with Bunnings was not corroborated by the evidence of either Suzanne or Gary Craik.
Ms Craik recalls that when she attended the second investment meeting which was attended by the plaintiff, the defendant had informed them that there was a contract with Bunnings. Ms Craik did not say however that the defendant had said anything about a long-term contract.
Ms Craik's husband Gary Craik gave evidence that he had queried the defendant about the investment. He recalls the defendant telling him that they were looking to supply Hotrox to Bunnings and they had contracts with Bunnings to supply Hotrox.[148] Mr Craik did not claim that the defendant had said anything about a 'long-term contract'.
[148] ts 186.
I accept the evidence of Mr Craik although he was aggrieved by the loss of the investment and his demeanour was unmistakably hostile towards the defendant. In any event, Mr Craik did not suggest that the defendant had ever used the expression 'long-term contract'.
I am not satisfied that the defendant told the plaintiff the business had a long-term contract with Bunnings.
Findings as to the manufacturing representation
Given the reservations about the credibility and reliability of the plaintiff's evidence I have expressed so far, I am also not satisfied that the defendant said anything which was likely to have misled or deceived the plaintiff into believing that the business he was investing in was a manufacturing business.
The plaintiff's claim in this regard is in any event implausible: It is unlikely the defendant would have told the plaintiff that Beacon Capital was the manufacturer of the product. The falsity of such a statement, had it been made, would have been easily uncovered by the documentation the defendant had provided to the plaintiff's bank.
Findings as to the financial performance representation
The defendant accepted that he had conveyed positive predictions for Beacon Capital's financial performance to the plaintiff. However, as I prefer the evidence of the defendant, I am not persuaded that he also told the plaintiff that the income from the investment would be sufficient to service a loan. It is not in dispute that the plaintiff's bank granted the plaintiff a loan on the basis of the financial projections provided by the defendant. It is important to note that the bank did not question the underlying assumptions contained in that documentation. The documentation contained no information which suggested the existence of a long‑term contract with Bunnings. It is a reasonable assumption that the bank considered the projected returns would be sufficient to service a loan. However, I am not satisfied that the defendant himself made a representation to that effect.
Findings as to the long-term contract omission
The defendant does not deny he did not specifically tell the plaintiff that Bunnings had no binding obligation to purchase Hotrox's products. The impugned conduct, insofar as it asserts an omission to draw the plaintiff's attention to the terms of what the plaintiff has called the 'Bunnings Contract' (a reference to the Bunnings Supplier Trading Agreement) is established.
Summary of critical findings of fact
My findings in summary are as follows.
The plaintiff has not proven on the balance of probabilities that the three oral representations pleaded at par 5 of the plaintiff's statement of claim were made. I do not accept that the defendant told the plaintiff either that the business had a long-term contract with Bunnings to retail the product in Australia or that the business manufactured its own product.
Although I am satisfied that the defendant informed the plaintiff that Beacon Capital was expected to be very profitable, I am not satisfied that he told the plaintiff that the turnover of the business was 'good … and sufficient to service a loan to finance [the] plaintiff's investment' as was pleaded.
Insofar as the plaintiff pleads that the defendant made a representation partly by omission (in that the defendant failed to inform the plaintiff that the 'Bunnings Contract' was subject to short‑term renewal) I find that, to the extent that the defendant did not specifically draw the plaintiff's attention to the Bunnings Supplier Trading Agreement, this conduct is also proven.
I turn now to consider whether the defendant's omission in this regard was misleading and deceptive or likely to mislead and deceive.
Legal principles - misleading and deceptive conduct under s 18 of the ACL
Threshold issue - does the ACL apply?
In written submissions the defendant raised the threshold issue of whether s 18(1) of the ACL has application because the operation of that section is excluded by s 131A of the Competition and Consumer Act 2010 (Cth) where the conduct in question is in relation to the supply or possible supply of financial services.
Section 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) governs conduct by a person in relation to misleading and deceptive conduct in the provision of financial services.
The term 'financial services' is defined in s 12BAB of the ASIC Act which relevantly provides:
(1)For the purposes of this Division, subject to paragraph (2)(b), a person provides a financial service if they:
(a)provide financial product advice (see subsection (5)); or
…
(1AA)Without limiting subsection (1), for the purposes of this Division, a financial product is a financial service.
Section 12BAB(5) of the ASIC Act defines 'financial product advice' as:
(5)For the purposes of this section, financial product advice means a recommendation or a statement of opinion, or a report of either of those things, that:
(a)is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or
(b)could reasonably be regarded as being intended to have such an influence;
…
(emphasis added)
It is not in dispute that the defendant made a recommendation or statement of opinion to the plaintiff that was intended to influence the plaintiff in making a decision to invest in Beacon Capital. There is a question however, as to whether the defendant's conduct amounted to the provision of 'financial services' by providing financial product advice within the meaning of s 12BAB of the ASIC Act.
Relevantly, s 12BAA(1)(a) of the ASIC Act defines a 'financial product' as follows:
…
(1)Subject to subsection (8), for the purposes of this Division, a financial product is a facility through which, or through the acquisition of which, a person does one or more of the following:
(a)makes a financial investment (see subsection (4)).
(emphasis added)
The term 'financial product' includes a 'facility' of a kind described in s 12BAA(2) of the ASIC Act which provides:
(2)Subject to subsection (8), for the purposes of this Division, a particular facility that is of a kind through which people commonly make financial investments, manage financial risks or make non‑cash payments is a financial product even if that facility is acquired by a particular person for some other purpose.
Section 12BAA(4) of the ASIC Act relevantly defines 'makes a financial investment' by providing:
(4)For the purposes of this section, a person (the investor) makes a financial investment if:
(a)the investor gives money or money's worth (the contribution) to another person and any of the following apply:
(i)the other person uses the contribution to generate a financial return, or other benefit, for the investor;
(ii)the investor intends that the other person will use the contribution to generate a financial return, or other benefit, for the investor (even if no return or benefit is in fact generated);
(iii)the other person intends that the contribution will be used to generate a financial return, or other benefit, for the investor; and
(b)the investor has no day‑to‑day control over the use of the contribution to generate the return or benefit.
(emphasis added)
The plaintiff's case was not that the defendant's advice was directed to a facility through which the plaintiff was to make a financial investment. Rather, the impugned conduct is said to have been directed to the plaintiff purchasing an interest in a business. On the plaintiff's case, therefore s 131A of the Competition and Consumer Act has no application and the defendant's conduct is otherwise in relation to trade or commerce. I accept the plaintiff's submission that on his case as pleaded, the relevant provision is s 18 of the ACL.
In any event, regardless of whether the plaintiff was correct to plead misleading and deceptive conduct based on s 18 the ACL or under the ASIC Act does not matter. That is because, for the reasons that follow, I have concluded that the plaintiff's claim of misleading and deceptive conduct has no merit.
The legal test for misleading and deceptive conduct
In order to succeed in a claim for misleading and deceptive conduct the plaintiff must prove not only that there was misleading and deceptive conduct or conduct likely to mislead or deceive but also that it was causative of the loss suffered.
In the present case the plaintiff pleads that the misleading and deceptive conduct was by a combination of representation and omission. However, as I have already found that the oral representations as pleaded were not made, then the only relevant conduct that remains to be considered is what I have referred to as the 'long-term contract omission'.
As to the situation where silence (an omission) is pleaded as an element of misleading conduct in the content of the former statutory equivalent of s 18 of the ACL ie: s 52 of the Trade Practices Act I would respectfully adopt the helpful summary of principles by his Honour Justice Beech in Caffey v Leatt-Hayter [No 3] [2013] WASC 348:
263In pleading a misleading conduct claim of which silence is an element, the pleading should identify whether the silence or non‑disclosure is alleged of itself to be misleading or deceptive conduct, or whether it is an element of conduct, including other acts or omissions, said to be misleading or deceptive.
…
265The overall task is to examine, by reference to all the circumstances, the conduct said to be misleading or deceptive, including any alleged misleading or deceptive conduct by omission or silence.
266Unless the circumstances are such as to give rise to the reasonable expectation that if some relevant fact exists it would be disclosed, it is difficult to see how mere silence could support the inference that the fact does not exist. The language of reasonable expectation is not statutory, but it is an approach which can be taken to the characterisation, for the purposes of s 52, of conduct consisting of, or including, the non-disclosure of information.
267The approach to be taken may differ in its application according to whether allegedly misleading conduct is conduct to members of the public or arising between specific persons or entities in commercial negotiations. In commercial dealings between individuals or individual entities, characterisation of conduct will be undertaken by reference to its circumstances and context. Silence may be a circumstance to be considered. The knowledge of the person to whom the conduct is directed may also be relevant.
(citations omitted)
It follows that I must examine the fact that the defendant did not tell the plaintiff that Bunnings had no obligation to purchase Hotrox products in the future, in the context of what the defendant did say to the plaintiff. The question I must ask is: Was there a reasonable expectation that the defendant would mention this fact?
The scenario to be examined here is the second of the two scenarios that Vaughan J identified, as being present in non-disclosure cases in Girgis v Poliwka. His Honour said:
937The many non-disclosure authorities highlight that there are two different scenarios. The first is where there are circumstances leading to an expectation that undisclosed matters would, if they existed, have been disclosed. This includes, for example, where there is an express representation and later undisclosed information would have shown the representation to be wrong. The second is non-disclosure absent any such circumstances or express representation.
938In Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd French CJ and Kiefel J noted that the statutory claim for misleading or deceptive conduct requires:
[A] clear identification of the conduct said to be misleading or deceptive. Where silence or non‑disclosure is relied upon, the pleading should identify whether it is alleged of itself to be, in the circumstances of the case, misleading or deceptive conduct or whether it is an element of conduct, including other acts or omissions, said to be misleading or deceptive.
…
In this case, the plaintiff in effect asserts that the defendant's conduct in not telling the plaintiff that there was no long-term contract between Bunnings and Beacon Capital was conduct which was misleading and deceptive. In this case, the plaintiff would need to establish (as Vaughan J had suggested in Girgis) that there was a reasonable expectation that the absence of a long‑term contract would be disclosed.
Vaughan J recognised by reference to established authority that mere silence cannot give rise to a reasonable expectation of disclosure unless the circumstances give rise to a reasonable expectation of disclosure. His Honour relevantly said in that case:
941In Miller French CJ and Kiefel J referred to Demagogue Pty Ltd v Ramensky and Gummow J's observation that it is difficult to see how mere silence could support an inference that a relevant fact does not exist unless the circumstances gives rise to the reasonable expectation that if some fact exists it would be disclosed. The joint judgment went on to state:
The language of reasonable expectation is not statutory. It indicates an approach which can be taken to the characterisation, for the purposes of s 52, of conduct consisting of, or including, non-disclosure of information. That approach may differ in its application according to whether the conduct is said to be misleading or deceptive to members of the public, or whether it arises between entities in commercial negotiations …
In commercial dealings between individuals or individual entities, characterisation of conduct will be undertaken by reference to its circumstances and context. Silence may be a circumstance to be considered. The knowledge of the person to whom the conduct is directed may be relevant. Also relevant, as in the present case, may be the existence of common assumptions and practices established between the parties or prevailing in the particular profession, trade or industry in which they carry on business. The judgment which looks to a reasonable expectation of disclosure as an aid to characterising non-disclosure as misleading or deceptive is objective. It is a practical approach to the application of the prohibition in s 52.
To invoke the existence of a reasonable expectation that if a fact exists it will be disclosed is to do no more than direct attention to the effect or likely effect of non‑disclosure unmediated by antecedent erroneous assumptions or beliefs or high moral expectations held by one person of another which exceed the requirements of the general law and the prohibition imposed by the statute …
942Those passages, among others, were considered by Gilmour and White JJ in Addenbrooke Pty Ltd v Duncan (No 2). Their Honours then stated:
On our understanding, the principles concerning misleading or deceptive conduct by non-disclosure or silence which emerge from the authorities and which are pertinent in the present appeal may be summarised as follows:
(a)conduct involving silence or non-disclosure may, in some circumstances, constitute misleading or deceptive conduct;
(b)in considering whether conduct is misleading or deceptive, silence or non-disclosure is to be assessed as a circumstance like any other;
(c)mere silence without more is unlikely to constitute misleading or deceptive conduct. However, remaining silent will constitute misleading or deceptive conduct if the circumstances are such as to give rise to a reasonable expectation that, if some relevant fact does exist, it will be disclosed;
(d)the existence or otherwise of such a reasonable expectation is to be determined objectively;
(e)it is not possible to categorise all of the circumstances in which a reasonable expectation of disclosure may arise. Such circumstances may exist when either the law or equity imposes a duty of disclosure, when a statement conveying a half-truth only is made when the representor has undertaken a duty to advise, when a representation with continuing effect, although correct at the time it was made, has subsequently become incorrect, and when the representor has made an implied representation;
(f)in considering whether a party engaged in commercial dealing may have a reasonable expectation that a fact, if it exists, will be disclosed, it is to be remembered that it will often be the case that one party to a commercial dealing has more knowledge about a relevant matter than the other and yet will not, in accordance with ordinary commercial expectations, be guilty of misleading or deceptive conduct in failing to make that knowledge known to the other.
Ultimately, as indicated at the commencement of this reference to the principles, the determination of whether a failure to disclose a matter is misleading or deceptive requires an examination of all the circumstances. If in the circumstances, assessed objectively, a representee would have been entitled to expect or infer (have a reasonable expectation) that an undisclosed matter would be disclosed, that may well constitute misleading or deceptive conduct.
(emphasis added)
(citations omitted)
Were the circumstances here such as to give rise to a reasonable expectation of disclosure?
In order to answer the question of whether the failure to tell the plaintiff about the absence of a long-term contract was misleading or deceptive having regard to legal principles just referred to, I would ask the question this way: Was there a reasonable expectation that the defendant would specifically mention the fact that Bunnings did not have a long-term contract to purchase Hotrox products and/or that Beacon Capital was not the manufacturer of the products?
As Black CJ said in Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31, (1992) 110 ALR 608, 610 and as Vaughan J pointed out in Girgis [961] ‑ [962] in deciding whether there is a reasonable expectation of disclosure, context is important. The test is whether the omission is material in the sense that the non‑disclosure was of such a nature that it might reasonably deter or tend to deter the ordinary investor from entering into the investment? The plaintiff's assertion, that there was a reasonable expectation of disclosure in part depends on the defendant having conveyed positive predictions for Beacon Capital's success in early 2011.
As a matter of common sense, the factual circumstance of the existence or absence of a contract obliging Bunnings to purchase a certain amount of Hotrox products might well be one which is material and would give rise to a reasonable expectation of disclosure. However, whether it would in fact do so depends on all of the circumstances in existence at the time. If, for argument's sake, Hotrox had no history of sales to Bunnings and the defendant had made future sales projections based on mere hope, then the absence of a contract obliging Bunnings to purchase a certain quantity of Hotrox products would almost certainly be a material fact giving rise to a reasonable expectation of disclosure. One would expect the person proposing the investment to tell the prospective investor that such a business was, by its very nature, necessarily speculative. It would be reasonable to conclude in that scenario that a prospective investor, armed with the knowledge that the business had no history of sales of its product, would be unlikely to have made the investment in the absence of contracts for future sales of the products. However, that was not the factual scenario here.
Here, the facts are that Bunnings had had an established history of purchasing Hotrox products. Bunnings had not, prior to 15 April 2011 given any indication that it intended to discontinue any of Hotrox products. The fact that the distributorship of Hotrox changed from The Larkent Trust to Beacon Capital was not something which the plaintiff has shown to have had any material bearing on Bunnings' decision to reduce its purchase of Hotrox products. Also, Bunnings and Beacon Capital had signed the Supplier Trading Agreement for the year ending 20 June 2012. It is therefore reasonable to infer that Bunnings had at one time intended to make future purchases of Hotrox product from Beacon Capital.
The combination of the foregoing circumstances grounded a proper and reasonable basis for the defendant to make the positive financial projections for Beacon Capital that he made in early 2011. Further, it has not been suggested that the defendant's projections, at the time he made them, were based on any wrong assumptions or false information or were otherwise fraudulent.
In any event, the plaintiff's pleaded case is based on an erroneous assumption that the so‑called 'Bunnings Contract' contained an obligation for Bunnings to purchase a certain amount of Hotrox products. The 'contract' in fact contained no such obligation: it merely defined the terms of trade in the event that Bunnings decided to place an order. Whilst Beacon Capital's success was dependent on Bunnings continuing to purchase Hotrox products, its success was never dependent on renewal of the so-called 'Bunnings Contract'.
The defendant had been optimistic in his predictions for Beacon Capital's future performance. The defendant had held that optimism even though Bunnings had no binding obligation to purchase Hotrox products. The defendant's optimism had a proper basis being founded on Bunnings' history of purchasing Hotrox products rather than any (erroneous) assumptions about Bunnings having a binding obligation to purchase a certain quantity of Hotrox products. I consider that an ordinary investor would likely to have been encouraged by the positive predictions that the defendant had made without needing to be reassured that there was a 'long‑term contract' obliging Bunnings to purchase a certain quantity of Hotrox products in the future.
Unfortunately, the defendant's expectation that Bunnings would continue to purchase Hotrox at the levels it had done in the past was not met. However, the fact that some future occurrence did not come to pass does not provide an adequate foundation for saying that the defendant engaged in misleading or deceptive conduct - or conduct that is likely to mislead or deceive: see Bill Acceptance Corporation Ltd v GWA Ltd (1983) 78 FLR 171, 172 (Lockhart J) and Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82, 88.
Whilst the materiality of the non‑disclosure is of particular importance in answering the question of whether there is a reasonable expectation of disclosure, the relationship between the parties is also a relevant consideration. The existence of a fiduciary duty may be relevant to whether there was a reasonable expectation of disclosure: see Fraser v NRMA Holdings Ltd (1995) 55 FCR 452, 467.
The defendant was the plaintiff's accountant and was, by comparison, more sophisticated and experienced in matters of finance: see Fraser v NRMA Holdings Ltd (467). Whilst that is a factor to be considered, it is important to note that the plaintiff was not inexperienced in the running of businesses. He had run his own businesses and knew that running them involved a certain amount of risk. He had had his own experience in that regard with his tiling business (which had declined over time apparently due to external factors).
Having regard to the facts I have found, I am not satisfied that the alleged omissions were of such a nature as might reasonably deter or tend to deter the ordinary investor from entering into the investment.
Accepting that the test for whether there is a reasonable expectation of disclosure is an objective one, the plaintiff's conduct after he made his investment provides important context. It is plain (from at least as early as June 2011) that the plaintiff was aware that Bunnings regularly conducted range reviews of its products and had 'de-ranged' the 3 kg bags of charcoal. The minutes of the meeting on 3 June 2011 show that the plaintiff actively participated in the meeting and registered no concern or complaint about the 'de‑ranging' decision. This can be contrasted with the plaintiff having expressed concern about other risks of the business (such as whether there was only one manufacturer of the product or whether there was somebody who could speak Indonesian).
Also, the plaintiff actively participated in the shareholder meeting in March 2012. Again, the plaintiff registered no concern or query that Bunnings had the right to conduct regular range reviews or that the Bunnings Supplier Trading Agreement was subject to yearly renewal. On the contrary, the minutes reveal that the plaintiff had said that he thought that the business was 'running smoothly and was therefore far more attractive to prospective customers'.
It follows from a combination of the forgoing that the alleged omissions were not material and were not such that would give rise to a reasonable expectation of disclosure.
Even if I am wrong about whether the defendant's conduct was misleading, I am not satisfied, based on the foregoing, that the plaintiff would have acted any differently. The plaintiff has failed to establish that the conduct was causative of the loss claimed.
The plaintiff's claim for misleading and deceptive conduct fails.
Legal principles - actions for negligent misstatement
I now turn to consider the omission amounted to a negligent misstatement and a failure to advise with reasonable skill, care and diligence.
I respectfully adopt what Vaughan J said in Girgis [888] - [889] concerning the principles to be applied in considering an action based on negligent misstatement and the question of whether a duty of care exists:
888On the imposition of a duty of care in an action based on negligent mis-statement the parties agreed that the key consideration to whether a duty of care arose involved known reliance (or dependence) or the assumption of responsibility or a combination of the two. That acceptance was consistent with the reasons of Gaudron J in Tepko Pty Ltd v Water Board as approved by the Court of Appeal in Middleton v Aon Risk Services Australia Ltd. In Tepko Gaudron J stated:
So far as concerns negligent misstatement, the circumstances which attract a duty of care have been identified as 'known reliance (or dependence) or the assumption of responsibility or a combination of the two'. In that context, the word 'known' includes circumstances in which reliance or dependence ought to be known. Moreover, it is not essential that the person making the statement know the precise use to which the information will be put, so long as he or she knows or ought to know that it will be used for a serious purpose.
In Mutual Life & Citizens' Assurance Co Ltd v Evatt, Barwick CJ referred to the need for there to be knowledge of a serious purpose in these terms:
'[t]he speaker must realise or the circumstances be such that he ought to have realised that the recipient intends to act upon the information or advice in respect of his property or of himself in connection with some matter of business or serious consequence.'
That approach … should, in my view, now be accepted as the test to be applied with respect to the knowledge of a person making a statement which is said to constitute a negligent misstatement.
'Reliance' as the test for the existence of a relationship that will call a duty of care into existence is not actual reliance, but reasonable reliance. In this regard, Barwick CJ observed in Mutual Life & Citizens' Assurance Co Ltd that:
'[t]he circumstances must be such that it is reasonable in all the circumstances for the recipient to seek, or to accept, and to rely upon the utterance of the speaker. The nature of the subject matter, the occasion of the interchange, and the identity and relative position of the parties as regards knowledge actual or potential and relevant capacity to form or exercise judgment will all be included in the factors which will determine the reasonableness of the acceptance of, and of the reliance by the recipient upon, the words of the speaker.'
889In Middleton v Aon Risk Services Australia Ltd McLure JA (as her Honour then was) noted that, in claims for economic loss, the matters upon which a duty of care depend include, among other things, knowledge or means of knowledge of an ascertainable class of vulnerable persons who are unable to protect themselves from harm. Reasonable reliance and assumption of responsibility are indicators of vulnerability.
In the present case, the defendant owed the plaintiff a duty of care in broad terms based on the relationship between an accountant and a client.
However, the question to be considered here is whether the defendant owed a duty to exercise reasonable care, skill and diligence in advising the plaintiff about the investment in Beacon Capital. Whether there was a relevant breach of duty must be considered in that context and the known reliance and/or dependence the plaintiff had on the defendant's advice about the investment.
In my view, the defendant did have a duty to exercise reasonable care, skill and diligence because of a combination of circumstances; their existing relationship as accountant/client, the fact that the defendant had some expertise in the financial management of companies, the imbalance in the relationship and the fact that the defendant had brought the investment to the plaintiff's attention.
If the defendant ought to have realised that the plaintiff was relying on him to provide more information than the information he actually imparted then he could be liable for negligent misstatement for failing to speak: see The Mutual Life & Citizens' Assurance Co Ltd v Evatt (1968) 122 CLR 556, 571 (Barwick CJ). Also, given that the defendant and the plaintiff were to become partners, the defendant had an obligation to disclose all material facts of which he was aware and which the plaintiff was not aware: Conlon v Simms [2006] EWCA Civ 1749; [2007] 3 All ER 802.
Before turning to consider whether the defendant breached that duty of care, it is important to reflect on how the case for negligent misstatement is pleaded and my findings of fact.
I have found that the impugned oral representations were not made and therefore a significant part of the plaintiff's case for negligence has fallen away. The only conduct that remains to be considered is the conduct by omission. I would ask the question in this way: 'Did the failure of the defendant to draw the plaintiff's attention to the absence of a binding contract obliging Bunnings to purchase Hotrox or the fact that Beacon Capital was not the manufacturer of Hotrox amount to a breach of his duty to exercise reasonable skill, care and diligence in advising the plaintiff about the investment?' This must be answered having regard to what it is said the defendant both did and did not say about the investment.
I have no doubt that the plaintiff trusted the defendant and relied upon the defendant's representations concerning the past and projected future of the financial performance of Beacon Capital. The plaintiff seems to have adopted the view that, having been reassured that the investment was sound, then that was good enough for him. It is reasonable to conclude that the defendant's positive projections for Beacon Capital's financial performance together with the plaintiff's knowledge that the defendant was also a substantial investor would have made the plaintiff feel confident that the investment was worthwhile.
Although the plaintiff was a tradesperson, he had conducted two businesses (one with 12 or 15 employees) for well over a decade and for the previous three years under the auspices of proprietary limited companies in which he held office. He was not therefore, as he tried to suggest in his evidence, merely just a glorified wage earner. Also, the plaintiff's consent to be a director of Beacon Capital (without any complaint or objection) and then his active participation in the shareholder meetings, belies the characterisation of someone who intended to take no active interest in the business. He was not someone who was in a particular class of vulnerable persons.
The plaintiff's case was not pleaded on the basis that the defendant had a duty to explain or advise the plaintiff about all possible contingencies or warn him about every risk that might eventuate. The case was really confined to the question of whether the defendant should have advised the plaintiff that the so-called 'Bunnings Contract' was subject to short‑term renewal (and if it was not, the business was likely to fail).
The alleged failure to disclose that Beacon Capital was not the manufacturer of Hotrox was not material to Beacon Capital's success or failure. The plaintiff has not established how this fact was material to Beacon Capital's success or would have deterred the ordinary investor from making the investment.
For the reasons I have expressed previously in relation to whether there was a reasonable expectation of disclosure, I do not consider that the plaintiff has established that the defendant was negligent in the advice he gave.
Causation
If I am wrong on the issue of reasonable reliance, I am not persuaded that the plaintiff's loss was caused by the defendant's conduct.
It is understandable that, with the benefit of hindsight, the plaintiff has arrived at a belief that, had he known differently, he would not have made the investment. This is analogous to what McHugh J said about causation in the context of medical negligence cases. His Honour said in Chappel v Hart (1998) 195 CLR 232, 246:
Furthermore, a defendant is not causally liable, and therefore legally responsible, for wrongful acts or omissions if those acts or omissions would not have caused the plaintiff to alter his or her course of action. Australian law has adopted a subjective theory of causation in determining whether the failure to warn would have avoided the injury suffered. The inquiry as to what the plaintiff would have done if warned is necessarily hypothetical. But if the evidence suggests that the acts or omissions of the defendant would have made no difference to the plaintiff's course of action, the defendant has not caused the harm which the plaintiff has suffered. (footnote omitted)
Also in Rosenberg v Percival [2001] HCA 18; (2001) 205 CLR 434, 449 his Honour made similar observations about causative theory:
45In terms of causation theory, the critical fact is whether the patient would have taken action - refusing to have the operation - that would have avoided the harm suffered. But that fact can only be determined by making an anterior finding as to what the patient would have decided to do, if given the relevant warning. It is not possible to find what the patient would have done without deciding, expressly or by necessary implication, what decision the patient would have made, if the proper warning had been given. If the court finds that the patient would have decided not to have the operation, it concludes that he or she would not have had the operation. What the patient would have decided and what the patient would have done are hypothetical questions. But one relates to a hypothetical mental state and the other to a hypothetical course of action. The answer concerning the hypothetical mental state provides the answer to the hypothetical course of action. The onus is on the patient to prove that he or she would have decided not to have the operation if given a warning of the risk of harm. That means that the patient must prove what he or she would have decided to do. When the direct testimony of that person on the causation issue has been rejected, it is unlikely, as a matter of fact, that the patient will succeed on that issue unless the objective evidence in favour of the patient is very strong.
I have examined the question of causation by reference to what the defendant would have done had the defendant specifically mentioned the matters the subject the alleged omissions.
The plaintiff (and indeed the two witnesses called by him) were undoubtedly upset. They have each lost a substantial amount of money to what turned out to be a bad investment. Such reactions are understandable. The plaintiff's recollection of what the defendant told him at the time prior to his decision to invest and how he felt about what the defendant said, have no doubt been influenced by the subsequent failure of the business. It is easy for the plaintiff to be wise after the event and think of risks about which the defendant could have warned him.
I am not persuaded that the plaintiff would have acted any differently. As Farwell J said in in Cackett v Keswick [1902] 2 Ch 456, 463 - 464:
It is easy to be wise after the event, and many men can honestly persuade themselves when a company has failed that they would have been influenced by a circumstance which in all probability would have made no impression whatever on their mind when considering an investment …
It was unfortunate for the plaintiff and the defendant alike that business conditions changed and they lost money as a consequence. However, I am not satisfied that the plaintiff's losses were caused by any negligence on the part of the defendant in breach of a duty owed to the plaintiff.
The plaintiff's claim in negligence also fails.
Conclusion
There will be judgment for the defendant.
I will hear the parties as to costs.
I certify that the preceding paragraph(s) comprise the reasons for decision of the District Court of Western Australia.
PH
Court Officer
24 JUNE 2021
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