McLean Tecnic v Digi-Tech - [2005] NSWSC 386

No judgment structure available for this case.

CITATION:
McLean Tecnic & Anor v Digi-Tech & Ors [2005] NSWSC 386

HEARING DATE(S): 5, 6, 7, 8 and 11 April 2005

JUDGMENT DATE :

2 May 2005

JUDGMENT OF:
McDougall J at 1

DECISION:
See paras [147]-[150] of judgment

CATCHWORDS:
TRADE AND COMMERCE - Trade practices - misleading or deceptive conduct - where "Profit Potential Representation" held in appeal proceedings to constitute misleading or deceptive conduct - causation - whether plaintiffs suffered loss by that representation - whether plaintiffs suffered loss by directly relying on representation - whether plaintiffs suffered loss by indirectly relying on representation - whether open to plaintiffs on pleadings to submit that loss suffered by indirectly relying on the representation - whether inference that plaintiffs relied on representation available on evidence - DAMAGES - Trade practices - Trade Practices Act - where conduct taken to be misleading or deceptive by operation of s51A - whether deeming provision inoperative when considering whether conduct caused loss or damage for purposes of ss 82 and 87 - DAMAGES - Trade practices - whether correct method for assessment of damage involves consideration of value of benefits to plaintiffs at trial - whether benefits acquired by plaintiffs had value at trial - TRADE AND COMMERCE - Trade practices - causation - where plaintiffs liable for certain balloon payments - whether that liability caused by misleading or deceptive conduct or by plaintiffs' failure to exercise options to avoid liability - whether misleading or deceptive conduct materially contributed to loss or damage - whether plaintiffs' conduct constituted fresh and independent cause of loss or damage

LEGISLATION CITED:
Evidence Act 1995
Trade Practices Act 1974

CASES CITED:
Butcher v Lachlan Elder Realty Pty Ltd (2004) 79 ALJR 308
Gentry Brothers Pty Ltd v Wilson Brown & Associates Pty Ltd (1996) ATPR 41-460
Gould v Vaggelas (1983) 157 CLR 215
Henville v Walker (2001) 206 CLR 459
HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [2004] HCA 54
Hunter Douglas Australia Pty Ltd v Perma Blinds (1970) 122 CLR 49
I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109
Macquarie Bank Ltd v Fociri Pty Ltd (1992) 27 NSWLR 203
MGICA (1992) Ltd v Kenny & Good Pty Ltd (1996) 70 FCR 236
Monroe Schneider Association (Inc) v No 1 Raberem Pty Ltd (1991) 33 FCR 1
Mutual Pools & Staff Pty Ltd v Federal Commissioner of Taxation (1992) 173 CLR 450
Pavich v Bobra Nominees Pty Ltd [1988] ATPR (Digest) 46-039
Ricochet Pty Ltd v Equity Trustees Executors & Agency Company Ltd (1993) 41 FCR 229
Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254
Watson v Foxman (2000) 49 NSWLR 315

PARTIES:
McLean Tecnic Pty Limited & Anor (Plaintiffs)
Digi-Tech (Australia) Limited & Ors (Defendants)

FILE NUMBER(S):
SC 50169/99; 50087/00

COUNSEL:
A J Sullivan QC/H W D Stowe (for McLean parties)
J C Sheahan SC/B F Katekar (for Digi-Tech parties)

SOLICITORS:
Atanaskovic Hartnell (for McLean parties)
Blake Dawson Waldron (for Digi-Tech parties)

LOWER COURT JURISDICTION:

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

McDOUGALL J

2 May 2005

50169/99 McLEAN TECNIC PTY LIMITED & ANOR v
50087/00 DIGI-TECH (AUSTRALIA) LIMITED & ORS

JUDGMENT

1 HIS HONOUR: The defendants, to whom I will refer as “Digi-Tech” unless it is necessary to distinguish between them, developed products known as the “Terminal Adapter” and the “Freerider”. They wished to exploit those products in Australia. The remaining plaintiffs, to whom I will refer as “the McLean parties” unless it is necessary to distinguish between them, invested through McLean Tecnic in partnerships designed to exploit those products in New South Wales. Digi-Tech has been found to have engaged in conduct that was misleading or deceptive, or likely to mislead to deceive, in relation to representations made by it as to the profit potential of those products. The question for decision is whether the McLean parties suffered loss or damage by that misleading or deceptive conduct. That resolves into two issues:

(1) Whether the McLean parties relied on, or were induced by, the misleading or deceptive representations as to profitability in deciding to enter into the relevant agreements.

Background

2 The dispute that I have very briefly described originally involved many more parties as plaintiffs, and some multiplicity of proceedings. The proceedings were heard by Einstein J over 26 days in May and June 2002. His Honour gave reasons on 13 August 2002 under the name Brand & Ors v Digi-Tech (Australia) Ltd & Ors, Kelliher & Ors v Digi-Tech (Australia) Ltd & Ors: [2002] NSWSC 416.

3 Appeals were brought from his Honour’s decision. The Court of Appeal gave judgment on 23 March 2004, under the name Digi-Tech v Brand: [2004] NSWCA 58. Because of the way in which their Honours dealt with the issues that were argued, it was necessary for there to be a further hearing, on limited issues, at first instance. Those issues were issues 5, 6 and 8:

(1) Issue 5: Would the investors have entered into the relevant transactions if they had been told that Digi-Tech did not have reasonable grounds for the revenue and profit projections upon which the Deloitte Indicative Valuation was based?

(2) Issue 6: were the investors entitled to relief by way of orders under s 87(2)(ba) and damages under s 82 of the Trade Practices Act 1974?

4 The Deloitte Indicative Valuation was one of the documents provided by Digi-Tech to prospective investors.

5 Issue 8 was not pursued on the further hearing. Nor was the question of reliance dealt with in the way suggested by issue 5.

The facts

6 The parties (ie the remaining parties – the McLean parties and Digi-Tech) prepared an agreed narrative of facts. I set them out:

Introduction

Products

DTSPL

McLean Parties

Digi-tech Parties

6 Since the appeal, the Digi-tech Parties have settled with (and the relevant plaintiffs have discontinued their proceedings against the Digi-Tech parties) all investors/plaintiffs except the McLean Parties. Therefore, the only parties remaining in this hearing are the McLean Parties and the Digi-Tech Parties.

B The Products
7 The Products comprise two telecommunications products known as the Terminal Adapter and the Freerider.
8 The Terminal Adapter was a product which enabled the logging on of a number of functions contemporaneously on a single ISDN (digital network) telephone line, for example, a facsimile, telephone, e-mail and EFTPOS.
9 The Freerider was a software system which allowed a particular type of data network (being a synchronous network) to be used simultaneously for multiple functions such as sending facsimiles and other secondary data, for example, telemetry or PC file transfers, between locations connected to the same network. The additional data was sent by capturing available but unused bandwidth in the computer network.

C The original investment scheme

Partnership Agreements

The Sale Agreements

The Licence Agreement

Option Agreements

22 The steps required for an Investor (partner) to exercise an option varied depending upon whether the Investor was a corporate body or a natural person.
23 If the Investor was a corporation, generally speaking the option was granted to its holding company. When the option was exercised, the holding company would remain as a shareholder with its existing shares and DTEL would subscribe for new share capital sufficient to pay the outstanding balloon payment due.
24 By clause cl 4(b), the investor warranted that, on the date on which the option was exercised, the "Company" would have no indebtedness other than the "Investor Debt" to any person.
25 "Investor Debt" was defined to mean "the proportion of the purchase price payable to DTAL pursuant to the Sale Agreement for which the Investor is severally liable less all amounts paid by or on behalf of the Investor to DTAL by way of instalment and the Instalment Debt". "Instalment Debt" was defined by reference to the outstanding proportions of the purchase price instalments payable to DTAL.

D Tax advantages and the Deloittes Valuations
26 An attraction of the scheme was the anticipation that the partners (the Investors) would obtain tax deductions for the full amount of the capital expenditure involved in the purchase by equal instalments spread over the period of the transaction (5 years), while the payments of the pauchase [sic] price were not spread equally, but were heavily weighted towards the end (the balloon payment). In the years until the balloon payment became due the structure permitted each of the investors to claim a $1 deduction for every 15 cents of actual expenditure. Payment of the balloon was effectively avoided by the exercise of the option.
27 An opinion had been obtained from senior counsel which confirmed (on the basis of certain assumptions) the tax deductibility, pursuant to Div 10B of Pt 3 of the Income Tax Assessment Act 1936 (Cth), of the capital expenditure on the intellectual property.
28 The key to the realisation of the expected taxation benefits, as expressed by senior counsel, was the need for the Investors to have "a reasonable expectation that the revenue generated from these products by the exploitation of the intellectual property would be sufficient to meet the installments of the price which they had to pay ...". The total installments of the purchase price payable by investors (including the balloon payment) was approximately $70 million. Were such an expectation to be held, according to senior counsel, "the dominant purpose will be the obtaining of the commercial return on investment and not the obtaining of an increased tax deduction".
29 Digi-tech carried out its own valuation of the Products, and additionally retained Deloitte Touche Tomatsu to provide an analysis of the gross profit margins that might be obtained from the exploitation of the intellectual property rights, and a valuation of those rights.
30 On 4 April 1997 Deloitte produced a gross margin review for the Terminal Adapter and Freerider (" Gross Margin Review ") and on 22 April 1997 produced an indicative valuation of these products (" Indicative Valuation ").
31 The Gross Margin Review contained gross margin projections based on the projections prepared by Digi-Tech (“ Digi-Tech Projections ”). The Digi-Tech Projections calculated projected “gross margins” in the Australian marketplace, by reference to a number of assumptions, including market size, market penetration, revenue per site.
32 On the basis of the projections of revenue and gross margin, Deloittes projected net revenues (before tax) of about $282 million, and valued the Products at between $67m and $74m.

E Involvement of the McLean Parties in the investment scheme

42 The total amount actually paid by the McLean Parties in connection with their participation in the transaction is as set out in paragraphs 67 and 68 of the Affidavit of Ian McLean sworn in these proceedings.

F Operation of DTSPL

The issues

7 The parties also prepared an agreed outline of issues. I set them out:

Trade Practices Act

TA Summons

FR Summons

(a) that causation can be established on either of those limbs;

(b) that reliance on either limb is to be addressed by reference to the Deloittes’ Indicative Valuation other than to the extent that that valuation was included in the particulars (ii) and (iii) to Paragraph 95(b) of the TA Summons, and in the particulars (ii) and (iii) of each of paragraphs 91(a) (the second) and 91(c) in the FR Summons;

(c) that the second limb is available on the pleadings.

The Profit Potential Representation

8 It is sufficient to set out para 95(b) of the statement of the plaintiffs’ contentions in the Terminal Adapter proceedings to understand how the McLean parties put their case both in relation to the Terminal Adapter partnership and in relation to the Freerider partnership. So far as is relevant to the McLean parties, para 95 alleged that before McLean Tecnic entered into the relevant documentation, the defendants represented to it (and others) that:

“(b) The Products had a high revenue and profit potential;

Particulars

· “The Licensee will attain an investment in the data communications field which can provide exciting returns” (section 2).

· “In particular, the Software used to drive two of the Products is believed to have some unique features and an extremely high revenue and profit potential. These two (sic) Products are:

“… the ISDN Multi-data DA” (section 5, page 1).

· “ … the total potential gross profit available from the market is calculated to be $184.2 million (increasing to $1.94 billion should Telstra offer ISDN to private homes)” (section 4, page 1).

· In assessing the gross profit margin which a Licensee may make from this market, Digi-Tech has assumed a market penetration of 50% and an average profit margin of AU$300 per TA. This shows a gross profit of $92.1 million. In the event that ISDN is offered to private homes and only 10% of private homes purchase an ISDN Multi-Data TA, then as gross profit increases to AU$267.7 million. It should be note[d] however that margins for large orders may be lower. Market forces will ultimately dictate” (section 5, page 2).

(ii) “Review of FreeRider and Terminal Adapter Gross Margins Digi-Tech Communications Limited April 1997” prepared by Deloittes Touche Tohmatsu:

· Table 4: Terminal Adapter Gross Margin Analysis Summary

Market size Projected gross margin AUSS Market Penetration Projected gross margin AUSS000

Transend users
19,000
300 50%
2,850

EFTPOS users
350,000
300 50%
52,500

Other businesses
240,000
300 50%
36,000

Sundry other networks
5,000
300 50%
750

Potential home users
5,852,518
300 10%
175,575

Total
267,675

Source: Digi-Tech projections
(Paragraph 3.2).
(iii) “Indicative Valuation of the FreeRider and Terminal
Adapter Products for the Australian Market” by Deloittes Touche Tohmatsu April 1997:

· “Terminal Adapter Sales and Gross Margin Analysis Summary

First Five Years Ended 31 December 2002

1998
$0001999
$0002000
$0002001
$0002002
$000

Sales54,05771,601263,550156,76578,601

Gross Margin25,09833,243122,36272,78336,493

Gross margin %46%46%46%46%46%

Second Five Years Ended 31 December 2007

2003
$0002004
$0002005
$0002006
$0002007
$000

Sales50,70039,11127,52315,9344,346

Gross Margin23,53918,15912,7787,3982,017

Gross margin %46%46%46%46%46%
Source: Digi-Tech projections

(Paragraph 6.6).”

9 The Court of Appeal characterised this case as follows:

“69 The pleading in the summons of the Profit Potential Representation is far more than a bald assertion that “the products had a high revenue and profit potential”. Some definite purpose has to be ascribed to the lengthy and detailed particulars given in support of this allegation. On the face of the pleading, that purpose is self-evident, namely, the particulars give colour, content and a degree of specificity to the generality of the representation alleged. The particular matters alleged in the particulars are not pleaded as individual representations separate from the allegation of the material representation (namely, that the Products had a high revenue and profit potential). This is manifest from the clear distinction made in the pleading between the material allegation made and the particulars to that allegation. The particulars particularised the high revenue and profit potential alleged in the material allegation that comprised the Profit Potential Representation. They did not constitute separate representations on which the appellants were relying for their cause of action, nor can they be divorced from the material allegation made.”

10 Thus, their Honours concluded:

“77 We conclude that the appellants conducted their case at trial on the basis that the Profit Potential Representation was constituted by the collective effect of the revenue and gross profit forecasts contained in the Indicative Valuation, based as it was upon the gross margin projections contained in the Gross Margin Review, which figures, in turn, were referred to in a document described as the Information Memorandum (see the particulars to para 95 of the summons). The appellants did not conduct the case upon the basis that the Profit Potential Representation was constituted solely by the material allegation in para 95, unaffected by the particulars thereto; nor did they conduct the case upon the basis that each particular projection particularised in para 95 constituted an independent and separate representation on which they separately relied.”

How the McLean parties put their case

11 The McLean parties relied on the affidavit and oral evidence of Mr (Alan) Ian McLean and of their former accountant, Mr Werner Bali, and on a substantial body of documentary evidence. However, none of their evidence suggested that they had relied directly on the Profit Potential Representation (ie upon the representation pleaded and particularised in para 95(b) of the summons in the Terminal Adapter proceedings). Mr McLean’s evidence was that he tried to read through the whole of the written material furnished by Digi-Tech, which included both the Indicative Valuation and the Gross Margin Review on which (among other things) the Indicative Valuation was based. However, Mr McLean gave no evidence that he had actually read or paid attention to, let alone relied upon, the material referred to in the particulars to para 95(b). Nor, except in the most general way, did Mr Bali.

12 Instead, Mr McLean’s evidence was that he noticed and relied upon the valuation of $70 million that, he said, was expressed in various places in the Indicative Valuation. The Indicative Valuation did indeed refer, in a number of places, to a valuation of the products falling within a range of $67 million to $74 million. Mr McLean’s evidence was that, consistent with his usual approach to figures, he selected a figure in the middle of the range: in this case, $70 million.

13 The McLean parties submitted that it was open to them to prove reliance on, or inducement by, the Profit Potential Representation in this way. The Indicative Valuation was on its face prepared by the discounted cash flow method. Thus, it was necessary for Deloittes to take into account the projected cash flows to be derived from the exploitation of the products over the 5 years’ life of the partnerships. This they purported to do, by referring to their Gross Margin Review. The Indicative Valuation made it clear that, on the assumption that the cash flows would be as summarised in the Gross Margin Review, then a valuation based on the discounted cash flow method over the relevant period of years would produce a figure within the range to which I have referred.

14 The McLean parties submitted that this approach to what may be called for convenience the question of reliance was supported by passages from the decision of the Court of Appeal. Digi-Tech submitted that it was not open to the McLean parties to put their case in this way, and that nothing in the Court of Appeal’s decision permitted them to do so.

15 If I were approaching the matter afresh, and uninstructed either, in general, by the previous history or, specifically, by what was said in the Court of Appeal, I would incline to the view that it was not open to the McLean parties to put their case in this way. However, I cannot approach the matter in that way. I must have regard to the history of the matter as it was summarised by the Court of Appeal and, specifically, to the way in which the Court of Appeal said the relevant issues were argued. I therefore turn to the decision of the Court of Appeal.

The Court of Appeal’s reasons

16 The parties, in their agreed narrative, set out in tabular form those of the 10 issues argued in the Court of Appeal that were relevant to the McLean parties; the way those issues were dealt with by Einstein J; and the way those issues were dealt with by the Court of Appeal. For convenience, I reproduce that table below:

Issue	Trial	Appeal
1.	Did the Investors plead (or were they otherwise entitled to press and have determined) a case that Digi-Tech had represented that the products had the high revenue and profit potential in the "Digi-Tech projections	Not considered to have been the pleaded case. Whether otherwise entitled to make that case not addressed. [962], [964], [986]-[988], [1065], [1070], [1086], [1104], [1133], [1134], [1136], [1138], [1144], [1155], [1160]	This issue is decided in the affirmative, that is, in favour of the appellants [64]-[79]
2.	Did Digi-Tech represent that the products had the revenue and profit potential in the "Digi-Tech projections" (i.e., that those forecasts of future revenues and profits could be achieved)?	No. [1086], [1104], [1133], [1134], [1136], [1138], [1144], [1155], [1160]	Digi-Tech made express representations that the Products had high revenue and profit potential. "High" is to be understood by reference to the particulars in paragraph 95 of the summons. Those particulars are based on documents that were not disputed. Accordingly, the answer to Issue 2 is in the affirmative. [80] – [88]
3.	Was the representation in relation to revenue and profit potential with respect to a future matter and therefore subject to the deeming provision in s 51A(2) of the Trade Practices Act 1974?	No. [1119]-[1128], [1158], esp. at [1128], [1158]	It is undesirable to apply past judicial pronouncements as to factors relevant in other cases as a code of conditions that must be satisfied for s 51A to apply. The ordinary meaning of the language of the section is plain enough to provide the key to whether it applies in a particular case. On that basis, the relevant representation was a representation with respect to a future matter. The trial judge erred in finding to the contrary [89] – [114]
4.	Was the Profit Potential Representation misleading and deceptive because Digi-Tech had not adduced evidence that it had reasonable grounds for making it?	Not clear whether addressed in relation to projections. [1101]-[1102], [1134], [1143], [1160]	The $72.5m purchase price depended substantially on the 50% market penetration estimate being correct. The evidence revealed at least three respects in which this estimate was defective. Moreover, Digi-Tech did not adduce evidence that it had reasonable grounds for making the representation. Digi-Tech therefore did not discharge the burden upon it to establish such reasonable grounds. The Profit Potential Representation was misleading and deceptive in material respects and the answer to this issue is in the affirmative. [115] – [131]
5.	Would the investors have entered into the relevant transactions if they had been told that Digi-Tech did not have reasonable grounds for the revenue and profit projections upon which the Deloitte Indicative Valuation was based?	No (although slightly narrower question addressed). For TA: [1136]-[1137] For FR: [1162]-[1173]	The finding of the trial judge that reliance was not established cannot stand, since both bases on which his Honour relied for his conclusions were erroneous. The Court is not in a position to determine the answer to Issue 5. Accordingly, Issue 5 should be remitted to the Commercial List Judge for allocation for re-trial according to law in the light of these reasons. [132] – [165]
6.	Were the investors entitled to relief by way of orders under s 87(2)(ba) and damages under s 82 of the Trade Practices Act 1974?	Not dealt with.	The resolution of this issue depends to a substantial degree on the answer to Issue 5. Issue 6 is remitted for re-trial on the same basis as Issue 5. [166] – [171]
7.	[Irrelevant to McLean Parties]
8.	Was the exercise of options for McLean Tecnic P/L invalid because: (a) at the time of exercise in relation to one partnership, it had an existing liability in relation to the other; and (b) it was indebted to DTSPL?	(a)Yes. [1379]-[1380] (b)Yes. [1379]-[1380]	McLean Tecnic could have assigned its rights and duties to two separate but related companies, each wholly owned by A I Mclean. If this had have been done, there would have been no breach of warranty. The trial judge was justified in preferring the submissions advanced on behalf of Digi-Tech on this issue. The failure to plead the existence of the two debts to DTSPL must have resulted in surprise and unfairness to the McLean appellants. The trial judge's findings regarding the debt are set aside. A re-trial is ordered on whether the indebtedness as now alleged existed at the relevant time. [199] – [230]
9.	Was the exercise of options for Kalifair P/L, Kalinick P/L, McLean Tecnic P/L, Brand, Chambers, Kelliher, Smith, O'Loughlin and Whiting invalid because on the day of exercise each was (or in the case of natural person investors, their nominee company became) liable for withholding tax?	No. [1343]-[1359], esp. at [1355], [1357]	Digi-Tech failed to establish that any part of the payments said to attract withholding tax was a royalty, in accordance with Stanton v Federal Commissioner of Taxation (1955) 92 CLR 630 and Federal Commissioner of Taxation v Sherritt Gordon Mines Limited (1977) 137 CLR 612. This was an essential element of both Digi-Tech's arguments on this issue. The trial judge was therefore correct in answering the question posed by Issue 9 in the negative. [231] – [258]
10.	[Irrelevant to McLean Parties]

17 As the parties noted, references to “the appellants” in the Court of Appeal’s reasons, and in the parties’ summary of those reasons, is a reference to, relevantly, the McLean parties.

18 In para [63], the Court of Appeal noted that, “Issues 1 to 6 concern only the appellants’ case in regard to the Profit Potential Representation to the extent that that representation was said to be as to future facts. The appellants’ contention in this regard was that Digi-Tech’s conduct was misleading because it had represented that each of the Terminal Adapter and Freerider had a high revenue and profit potential (with the term “high” being qualified or coloured as we explain below).”

19 I have already set out para [69] of their Honour’s reasons, in which they explain how the word “high” in the Profit Potential Representation was to be “qualified or coloured”; and para [77], in which their Honours summarised how the McLean parties conducted their case at trial in relation to that representation. Their Honours dealt with issue 5 at paras [132]-[165]. At para [139], in answering issue 5, they said that it is necessary to determine the purpose for which the appellants entered into the transaction. They then noted in para [140] that the focus at trial was on the intrinsic value of the business and its profitability. They said:

“140 Thirdly, the difficulties are compounded by the fact that at the trial the focus in regard to the reliance issue was on how the absence of reasonable grounds affected the intrinsic value of the business and its profitability. The appellants’ pleadings do not allege that, had they known that there was a serious risk that groundless assumptions had been made by senior counsel when advising that taxation deductions were likely to be allowed (because there was an absence of reasonable grounds for the revenue and profit projections and the represented value of the Intellectual Property Rights), they would not have entered into the transaction. This issue was not mentioned in the judge’s reasons. It seems that the case was not presented or investigated in this way before him.”

20 It appears from para [141] that, in oral argument in the appeal, the appellants put their case on the basis that the Profit Potential Representation caused them to believe that substantial tax benefits would be received. The McLean parties did not put their case this way before me.

21 In the course of considering issue 5, the Court of Appeal dealt with what was called “the indirect causation theory”. It appears that the appellants sought to argue that the misleading or deceptive conduct alleged against Digi-Tech had caused Deloittes to produce their Indicative Valuation supporting the price asked for the investment, and had caused the promoter of the scheme, Mr Gary Urwin, to propose it to the investors. The Court said at para [158], as to this formulation of the case:

“To complete the chain of causation, there must be something linking the appellants’ loss to their entry into the investment scheme. That link is the inducement of the appellants and their consequential act of entering into the transaction to their prejudice. Without that link there is no proof that the misleading conduct caused the loss.”

22 The McLean parties did not press this theory of causation before me. However, their case might be called one of “second hand” reliance; in that (so they submitted) they relied upon a representation that was itself founded upon the representation alleged and particularised in para 95(b) of their statement of contentions, as explained by the Court of Appeal.

23 In relation to issue 6, whether the McLean parties would have entered into the transaction had they not been misled, the Court of Appeal said at para [168] that it might also be necessary to see what other expectations motivated them to enter into the transaction. Their Honours said:

168 Issue 6 may also turn, at least to a degree, on whether the appellants were induced to enter into the transaction solely or partly by their expectation that they would receive the expected tax benefits, and whether the intrinsic value of the business had some part to play in inducing them. If the intrinsic value of the business was an inducing factor, the degree and extent of the overstatement may be relevant to the relief that is ordered. The latter aspect does not appear to have been an issue at the trial. It was not suggested that this Court would be in a position to make any findings on this question.

24 In the hearing before me, the McLean parties did not suggest that the expected tax benefits played no part in their decision to enter into the transaction. However, they said, the representation of value, based on the representation of cash flow (ie on the Profit Potential Representation) was material, because the expectation of tax benefits of itself would not have motivated them to enter into the transaction.

25 When one has regard to what was said by the Court of Appeal, it must follow, I think, that it is open to the McLean parties to put their case on causation as, before me, they did. In particular, what the Court said at para [140], where their Honours referred to the way that the case was put before Einstein J, suggests that this proceeded on the basis that reliance on the statement of value must necessarily involve reliance on its foundational element, namely the cash flows which were valued (and which were the subject of the Profit Potential Representation as particularised in para 95(b) of the statement of contentions).

26 Mr JC Sheahan SC, who appeared with Mr BF Katekar of counsel for Digi-Tech, submitted that a case based on a representation as to value was different, in one significant respect, to a case based on a representation as to future profits. He submitted that a representation of the former kind was as to a present matter, whereas a valuation of the latter kind was as to a future matter. Thus, he submitted, whilst the latter could invoke the operation of s 51A of the Trade Practices Act, the former could not.

27 Mr AJ Sullivan QC, who appeared with Mr HWD Stowe of counsel for the McLean parties, submitted that a representation of value conveyed two representations. First, it conveyed a representation that the opinion expressed in the valuation was held. Second, it conveyed a representation that the opinion of value was based on reasonable grounds. He relied on the decision of Lindgren J in MGICA (1992) Ltd v Kenny & Good Pty Ltd (1996) 70 FCR 236. Thus, he submitted, there was a sufficient relationship between the misleading or deceptive conduct that the Court of Appeal had found against the Digi-Tech parties and the material on which the McLean parties said they relied.

28 For the reasons that I have given, I think that I am required, by the decision of the Court of Appeal, to accept that it is open to the McLean parties to put their case in the way that they do. Thus, I do not think that I need to express a concluded view on this argument.

Reliance or inducement

29 I therefore consider the question of reliance or inducement on the basis that it is open to the McLean parties to put their case in the “second hand” way that I have described. I should, however, make it clear that if the McLean parties were to be confined strictly to the pleaded case – ie if they were required, to succeed, to show that they had relied directly (and not at second hand) on the Profit Potential Representation – then I would conclude that it failed. It would fail, on this basis, simply because there was no evidence that Mr McLean, or Mr Bali, had taken into account in any direct way the Profit Potential Representation.

30 Further, and regardless of the way in which the McLean parties put their case, I note that there was no evidence, either from Mr McLean or from Mr Bali, of reliance on the matters referred to in subparas (i) and (ii) of para 95(b) of the statement of contentions. That is to say, there was no evidence that either Mr McLean or Mr Bali had considered the DTAL Information Memorandum of May 1997 or the Gross Margins Review of April 1997. The case on reliance was based exclusively on subpara (iii) – the Indicative Valuation.

The applicable principles

31 Mr Sullivan referred to very many authorities dealing with the question of causation. Since the relevant principles were not disputed, I do not propose to refer in detail to what was said. It is sufficient to say that, for the purpose of showing an entitlement to damages under s 82 of the Trade Practices Act or relief under s 87, a plaintiff must demonstrate, where a contravention of s52 is relied upon, that the misleading or deceptive conduct that is proved was a material cause of the loss (Henville v Walker (2001) 206 CLR 459, 480 [61] (Gaudron J), 493 [106] (McHugh J)). It follows that it is not necessary to show that the contravening conduct was the sole, or even a dominant cause; and it may be sufficient that the conduct “played some part, even if only a minor part” in causing the loss or damage asserted (Butcher v Lachlan Elder Realty Pty Ltd (2004) 79 ALJR 308, 335 [150] (McHugh J)). The relatively low threshold of materiality is emphasised by descriptions such as “not neglible” (Monroe Schneider Association (Inc) v No 1 Raberem Pty Ltd (1991) 33 FCR 1, 5 or “non trivial” (Ricochet Pty Ltd v Equity Trustees Executors & Agency Company Ltd (1993) 41 FCR 229, 235).

32 In the present case, the McLean parties acknowledged that there were two effective causes of their decision to enter into the transaction. One was the availability of very substantial tax benefits (represented, and shown, to be a multiple of the sums actually invested leaving aside the balloon payment). The other, they submitted, was their reliance on the Profit Potential Representation. They sought to demonstrate this reliance in the “second hand” way that I have summarised.

Mr McLean’s evidence

33 Mr Sheahan submitted that, regardless of any considerations of honesty, Mr McLean’s evidence was too unreliable to support any finding.

34 It is clear that Mr McLean suffered from difficulties in reading, comprehension and memory. He said so himself, in paras 29 to 35 of his affidavit sworn 16 March 2005. He thinks that those problems are getting worse with age (he is now aged 76 years), but said that they have, to an extent, afflicted him all his life. However, he says, he had “an extremely good memory in relation to all matters concerning the operation of electrical motors” (see para 34(a) of his affidavit; his business, which had been very successful, involved the repair of electrical motors and included electrical sales and mechanical repairs); and that, more generally, he had better recall of “visual images, physical activities, and numbers”, much more readily than written text (affidavit, para 34(b)).

35 Mr McLean was assessed by a clinical psychologist, Professor Richard Mattick. Professor Mattick’s reports, which were tendered without objection, concluded, among other things, that Mr McLean had impaired verbal memory, and that the verbal memory problems that he reported appeared to be genuine, significant and impairing his function (see, for example, Professor Mattick’s report of 2 March 2005, exhibit PX1, at para 12.9.2). I should note that Professor Mattick’s reports were tendered by the McLean parties and that Digi-Tech did not object to their admission; thus, no question arose for my consideration of their admissibility – see, for example, s102 of the Evidence Act 1995.

36 Mr McLean’s assessment of the reliability of his memory, as recorded by Professor Mattick, was more succinct and, I think, more informative on this point than his affidavit. In para 5.10.2 of the report of 2 March 2005, Professor Mattick records that Mr McLean said that: “my memory is bloody rotten”; he forgets names and has to use notes to remind himself to whom he is talking; and forgets what he has read even though he understood what he was reading at the time he read it.

37 On reviewing Mr McLean’s testimony (written and oral), and my impressions of him in the witness box, I have no confidence whatsoever that his evidence reflects actual recollection rather than reconstruction. I have no sense of persuasion, based on his evidence, that the events he described did in fact occur. Human memory is notoriously both fallible and suggestible. Mr McLean is dealing with events that occurred in the second half of 1997 and the first half of 1998 – seven to eight years ago. His testimony is not based on any contemporaneous note or recollection. In an ordinary case, it may be accepted that, whilst a witness has forgotten the precise detail of events that occurred so long ago, he or she might, nonetheless, have an actual recall of events of particular significance. Thus – particularly where regarded objectively those events might be expected to have occurred – the witness’ recollection of them may be persuasive, to the point that it is accepted as providing a basis for a finding in fact that the events occurred.

38 In Watson v Foxman (2000) 49 NSWLR 315, McLelland CJ in Eq had occasion to discuss the fallibility of human memory, in the context of a representation case. Although his Honour was talking of recollection of words in a conversation (where the conversation, or the words in question, were said to be misleading or deceptive), I think that what he said may be applied with equal force to memory of events and matters other than conversations. His Honour pointed out at 319 that the degree of fallibility increases with the passage of time; and that, consciously or otherwise, the processes of memory may be affected by self interest. He said:

“Furthermore, human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the 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 considerations 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. This is a matter of ordinary human experience.”

39 In my view, what his Honour said may be transposed exactly to Mr McLean’s testimony concerning: his reading of the documents presented to him; that which he now recalls having focused on; and that which, he now says, was of significance to him. I think that the process of reconstruction is particularly acute in his case, because I think that the starting “impression” is one based on a perception of his position rather than on some – even dim – actual spark of remembrance. I do not, however, find that this is because he is seeking to be dishonest, or seeking deliberately to colour his evidence.

40 Nonetheless, I think that the problem is acute for two reasons. The first is the fact that Mr McLean’s recollection is extremely poor, so that his capacity for recollection, as opposed to reconstruction, is at best very slight. The second is that the context in which he now gives evidence is one focusing entirely on the question of reliance, as a result of the decision of the Court of Appeal. These considerations reinforce my view that the persuasive character, or probative weight, of McLean’s evidence is at best negligible, and that, absent corroboration (either by other evidence or by concordance with the probabilities objectively ascertained), it is insufficient to discharge the probative burden resting upon the McLean parties to prove reliance, or inducement.

41 In a representation case, where it is clear that material is given to a person for the purpose of persuading him or her to enter into a transaction, where the material in context is capable of having that effect, and where the person considers that material, human experience suggests that a decision made thereafter to enter into the transaction will have been influenced, to a greater or lesser degree, by reliance upon the material provided. In other words, human experience suggests that, to some extent, the material will have induced the decision, or that the decision will have been made in reliance upon it. Thus, where the person testifies that he or she was induced by, or relied upon, the material, a tribunal of fact may feel justified in accepting this evidence because it accords with the objective probabilities.

42 There is no doubt that, in representation (or s 52) cases, the Court may proceed on the basis of a presumption or inference of reliance in the circumstances to which I have referred. See, for example, Gould v Vaggelas (1983) 157 CLR 215. However, as the Court of Appeal pointed out in this case at para [143], factual findings made on the basis of credibility rather than inferences or presumptions “must override any inference or rebuttable presumption”. Thus, their Honours concluded at para [144], the matter could not automatically be “determined on a Gould v Vaggelas presumptive basis. Where the credibility of the witnesses who testified on the issue is seriously called into question – and on reasonable grounds … - it would not be just to decide the matter by resort to a presumption”.

43 It was for that reason that their Honours remitted issue 5 for further hearing; and they did so acknowledging (at para [146]) that the McLean parties “stand in a different position to the other appellants as they entered into the transaction at a relatively late stage … and different considerations apply to them”. Even so, their Honours concluded, “the question of reliance as it affects the McLean appellants would also be best resolved after a re-trial … the question raised by the McLean appellants’ appeal in respect of Issue 5 should not be determined in isolation but after a full consideration of all the contextual circumstances once they have been ventilated fully in evidence”.

44 There were a number of other aspects of Mr McLean’s evidence, apart from his acknowledgements to the Court and Professor Mattick of the fallibility of his memory, that have affected my assessment of his credibility. He had almost no recall of any of the salient, and important, aspects of the transaction, and in some respects, the recollection that he had was either inconsistent with the transaction as presented to him or, more plainly, wrong. Thus, he thought, he was buying a 40% interest in the two partnerships, for a figure of $1.2 million. The interest (as he ultimately accepted) was 31.6% (or perhaps 31.7%). The purchase price included not just the first two years’ instalments totalling approximately $1.2 million (the figure on which Mr McLean seized), but also the balloon payment of (in round figures) $22 million. It is clear, both from the documents and Mr Bali’s evidence, that Mr Bali explained to Mr McLean in May 1998 that the total purchase price was the sum of those amounts. Further, Mr McLean said that he had no understanding that he was acquiring interests in partnerships, for a limited period of time. He said that he had understood that he was buying an interest in an ongoing business (presumably, one that would continue for as long as the proprietors wished). (I have not overlooked that the investment was made not by Mr McLean personally, but by his special purpose company McLean Tecnic; in this context, nothing turns on the lifting of the corporate veil.)

45 Nor, in this respect, did Mr McLean’s evidence receive any corroboration from Mr Bali. The only evidence of any explanation given by Mr Bali to Mr McLean was that, as mentioned, Mr Bali explained that the purchase price included not only the first two years’ payments, totalling about $1.2 million, but also the balloon payment of $22 million. (Mr Bali gave some further advice on this topic, to which I shall return.) That evidence, which I accept, does not assist in accepting Mr McLean’s evidence; indeed, I think, it tells against it. Nor is there anything in the documents to corroborate Mr McLean’s testimony.

“Nothing in the words of ss 82 or 87 requires or permits a court to make orders which will compensate a person who has suffered loss or damage by conduct in contravention of a relevant provision of the Act for only part of the loss or damage which has been suffered by that person by that conduct and which will not be, or has not been, remedied by the making of some other order under s 87.”

140 A plaintiff’s conduct will only become relevant in the causation enquiry where it is so dominant that it constitutes a fresh and independent cause. As Gleeson CJ put it in Henville at 468 [13], “[n]egligence on the part of a victim of a contravention is not a bar to an action under s 82 unless the conduct of the victim is such as to destroy the causal connection between contravention and loss or damage”. (I do not regard his Honour’s dissent in the result of that case as detracting from the force of that observation.) McHugh J expressed a similar view in I&L Securities at 136 [85] where he approved the approach of French J in Pavich v Bobra Nominees Pty Ltd [1988] ATPR (Digest) ¶46-039: “contributory negligence was irrelevant unless it could be shown that the applicant’s carelessness or disregard for their interest was the cause of or or some part of a claimed loss” (his Honour’s emphasis); and that “although the contravening conduct may be the sine qua non of the loss claimed, there may come a point where the applicant’s own conduct was “so dominant” in the causal chain as to constitute a novus actus interveniens”.

141 The facts relating to the failure of the McLean parties to exercise their options are relatively simple. The McLean partner in each of the partnerships was McLean Tecnic. Thus, McLean Tecnic had a liability to Digi-Tech under the Terminal Adapter partnership documents for the balloon payment relating to that partnership; and a separate liability to Digi-Tech under the Freerider partnership documents for the balloon liability to Digi-Tech in respect of that partnership.

142 Clause 2.2 of each of the option agreements provided that the options could be exercised by AI McLean “provided that there is no outstanding breach of any of the warranties and undertakings” set out in clause 4. By clause 4.1(b), AI McLean warranted that, on the date of exercise of the option, McLean Tecnic would have no indebtedness to any person other than the debt in respect of which the option was exercised.

143 Einstein J held, and the Court of Appeal agreed, that for each option, the existence of indebtedness under the other partnership agreement meant that there was a breach of clause 4.1(b). Thus, in neither case was the exercise of option effective.

144 Digi-Tech submitted in the Court of Appeal, and the Court of Appeal appeared to accept, that AI McLean could have escaped this problem simply by incorporating two wholly owned sole purpose companies: one to be the partner in each partnership (see paras [216], [217] and [221]).

145 This is not a case where the McLean parties did not seek at all to exercise the options – either because of negligence or otherwise. They sought to exercise them, but were thwarted because they had not understood or applied the terms of the relevant agreements. That may amount to negligence; but it is hard to see it as amounting to negligence of such magnitude as to displace entirely, in the consideration of causation of loss, the hypothetical effect of Digi-Tech’s misleading or deceptive conduct.

146 Because I have concluded that the question of reliance must be answered against the McLean parties, it is impossible for me to express a concluded view on this aspect of the case. It only arises if, contrary to my findings, there are two separate causes of this loss. If it arose, it would require an analysis of the relevant significance, or dominance, of those causes, and an analysis of whether one was, in relation to the loss relating to the balloon payments, so dominant as in effect to demonstrate the absence, in the exercise of common sense, of any causal effect to the other. That having been said, on the hypothetical assumption that the transaction (involving the complexities that led to the failure of the attempts to exercise the options) had been induced by reliance on misleading or deceptive conduct, it is difficult to see how the ineffective exercise of the options, flowing from the very complexity of the transaction hypothetically induced, could be said to constitute a fresh cause, or novus actus interveniens .

Conclusions and order

147 I return to the issues that were remitted by the Court of Appeal and answer them as follows:

Issue 5:

Answer:

Issue 6:

Trade Practices Act

Answer:

Issue 8:

Answer:

148 In turn, the causation issues posed by the parties – whether the McLean parties suffered loss and damage by reason of Digi-Tech making the Profit Potential Representation (as explained by the Court of Appeal) – must be answered “No”.

149 It follows, as the parties agreed, that the substantive orders made by Einstein J should be affirmed.

150 I direct the parties within seven days of the publication of these reasons to bring in short minutes of order to give effect to them. If there is no agreement on the costs orders to be made, I will hear the parties on costs.

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Citations

McLean Tecnic v Digi-Tech [2005] NSWSC 386

Most Recent Citation

Azzi v Phillips [2016] NSWDC 40

Cases Citing This Decision

3

AI Mclean Pty Ltd v Hayson [2008] NSWSC 927

Storm Industries Pty Ltd trading as trustee of the T&L Trust v Unicar Australia Pty Ltd [2020] NSWDC 51

Azzi v Phillips [2016] NSWDC 40

Cases Cited

13

Statutory Material Cited

2

HTW Valuers (Central QLD) Pty Ltd v Astonland Pty Ltd [2004] HCA 54

Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60

HTW Valuers (Central QLD) Pty Ltd v Astonland Pty Ltd [2004] HCA 54

CITATION:	McLean Tecnic & Anor v Digi-Tech & Ors [2005] NSWSC 386
HEARING DATE(S):	5, 6, 7, 8 and 11 April 2005
JUDGMENT DATE :	2 May 2005
JUDGMENT OF:	McDougall J at 1
DECISION:	See paras [147]-[150] of judgment

CATCHWORDS:	TRADE AND COMMERCE - Trade practices - misleading or deceptive conduct - where "Profit Potential Representation" held in appeal proceedings to constitute misleading or deceptive conduct - causation - whether plaintiffs suffered loss by that representation - whether plaintiffs suffered loss by directly relying on representation - whether plaintiffs suffered loss by indirectly relying on representation - whether open to plaintiffs on pleadings to submit that loss suffered by indirectly relying on the representation - whether inference that plaintiffs relied on representation available on evidence - DAMAGES - Trade practices - Trade Practices Act - where conduct taken to be misleading or deceptive by operation of s51A - whether deeming provision inoperative when considering whether conduct caused loss or damage for purposes of ss 82 and 87 - DAMAGES - Trade practices - whether correct method for assessment of damage involves consideration of value of benefits to plaintiffs at trial - whether benefits acquired by plaintiffs had value at trial - TRADE AND COMMERCE - Trade practices - causation - where plaintiffs liable for certain balloon payments - whether that liability caused by misleading or deceptive conduct or by plaintiffs' failure to exercise options to avoid liability - whether misleading or deceptive conduct materially contributed to loss or damage - whether plaintiffs' conduct constituted fresh and independent cause of loss or damage
LEGISLATION CITED:	Evidence Act 1995 Trade Practices Act 1974
CASES CITED:	Butcher v Lachlan Elder Realty Pty Ltd (2004) 79 ALJR 308 Gentry Brothers Pty Ltd v Wilson Brown & Associates Pty Ltd (1996) ATPR 41-460 Gould v Vaggelas (1983) 157 CLR 215 Henville v Walker (2001) 206 CLR 459 HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [2004] HCA 54 Hunter Douglas Australia Pty Ltd v Perma Blinds (1970) 122 CLR 49 I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109 Macquarie Bank Ltd v Fociri Pty Ltd (1992) 27 NSWLR 203 MGICA (1992) Ltd v Kenny & Good Pty Ltd (1996) 70 FCR 236 Monroe Schneider Association (Inc) v No 1 Raberem Pty Ltd (1991) 33 FCR 1 Mutual Pools & Staff Pty Ltd v Federal Commissioner of Taxation (1992) 173 CLR 450 Pavich v Bobra Nominees Pty Ltd [1988] ATPR (Digest) 46-039 Ricochet Pty Ltd v Equity Trustees Executors & Agency Company Ltd (1993) 41 FCR 229 Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254 Watson v Foxman (2000) 49 NSWLR 315
PARTIES:	McLean Tecnic Pty Limited & Anor (Plaintiffs) Digi-Tech (Australia) Limited & Ors (Defendants)
FILE NUMBER(S):	SC 50169/99; 50087/00
COUNSEL:	A J Sullivan QC/H W D Stowe (for McLean parties) J C Sheahan SC/B F Katekar (for Digi-Tech parties)
SOLICITORS:	Atanaskovic Hartnell (for McLean parties) Blake Dawson Waldron (for Digi-Tech parties)

Market size	Projected gross margin AUSS	Market Penetration	Projected gross margin AUSS000
Transend users	19,000	300	50%	2,850
EFTPOS users	350,000	300	50%	52,500
Other businesses	240,000	300	50%	36,000
Sundry other networks	5,000	300	50%	750
Potential home users	5,852,518	300	10%	175,575
Total	267,675