Milfull, Terence John v Terranora Lakes Country Club Ltd

[1998] FCA 685

FEDERAL COURT OF AUSTRALIA

PRACTICE AND PROCEDURE - representative action - whether to order discontinuance of proceeding as representative action - whether proceeding an efficient and effective means of dealing with claims of group members

Federal Court Act 1976  s 33N, 33C, 33Q, 33Z, 33ZB
Trade Practices Act 1976 s 52,53

Zhang v Minister for Immigration, Local Government and Ethnic Affairs (1993) 45 FCR 384 Appl
Connell and Others v Nevada Financial Group Pty Limited and Others (1996) 139 ALR 723 Refd
Wong v Silkfield Pty Ltd (1998) ATPR ¶41-613 Appl

Terence John Milfull v Terranora Lakes Country Club Limited and Ernest George Harris and Wilson Joseph Wilde and Thomas Evan Dooker, James George Evans, Daphne Peral Foster, James Kevin Lynch, John William Haddow, John Francis Makepeace, John William Chester, Harry Edmundson, Peter Thomas Jones, Stephen Amos, Alan McGregor, Leonard Johnston, James Railey Lawrie, Charles Ronald Swain, Lawrence James Kellett, Peter Martin McDowell and William Armitage Coe and Coopers & Lybrand (a Partnership) & Coopers & Lybrand (Securities) Limited
No QG 131 of 1995

Kiefel J
Brisbane
16 June 1998

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY	QG 131  OF   1995

BETWEEN:

TERENCE JOHN MILFULL
APPLICANT

AND:

TERRANORA LAKES COUNTRY CLUB LIMITED
FIRST RESPONDENT

ERNEST GEORGE HARRIS AND WILSON JOSEPH WILDE
SECOND RESPONDENTS

ALAN JACK PANTLIN, IAN KELLETT COOK AND BARBARA ECKHARDT
THIRD RESPONDENTS

THOMAS EVAN DOOKER, JAMES GEORGE EVANS, DAPHNE PERAL FOSTER, JAMES KEVIN LYNCH, JOHN WILLIAM HADDOW, JOHN FRANCIS MAKEPEACE, JOHN WILLIAM CHESHER, HARRY EDMUNDSON, PETER THOMAS JONES, STEPHEN AMOS, ALAN MCGREGOR, LEONARD JOHNSTON, JAMES RAILEY LAWRIE, CHARLES RONALD SWAIN, LAWRENCE JAMES KELLETT, PETER MARTIN MCDOWELL AND WILLIAM ARMITAGE COE
FOURTH RESPONDENTS

COOPERS & LYBRAND (A PARTNERSHIP) & COOPERS & LYBRAND (SECURITIES) LIMITED
FIFTH RESPONDENTS

JUDGE:

KIEFEL J

DATE OF ORDER:

16 JUNE 1998

WHERE MADE:

BRISBANE

THE COURT ORDERS THAT:

1. The application by the first respondent is dismissed.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY	QG 131 OF 1995

BETWEEN:

TERENCE JOHN MILFULL
APPLICANT

AND:

TERRANORA LAKES COUNTRY CLUB LIMITED
FIRST RESPONDENT

ERNEST GEORGE HARRIS AND WILSON JOSEPH WILDE
SECOND RESPONDENTS

ALAN JACK PANTLIN, IAN KELLETT COOK AND BARBARA ECKHARDT
THIRD RESPONDENTS

THOMAS EVAN DOOKER, JAMES GEORGE EVANS, DAPHNE PERAL FOSTER, JAMES KEVIN LYNCH, JOHN WILLIAM HADDOW, JOHN FRANCIS MAKEPEACE, JOHN WILLIAM CHESHER, HARRY EDMUNDSON, PETER THOMAS JONES, STEPHEN AMOS, ALAN MCGREGOR, LEONARD JOHNSTON, JAMES RAILEY LAWRIE, CHARLES RONALD SWAIN, LAWRENCE JAMES KELLETT, PETER MARTIN MCDOWELL AND WILLIAM ARMITAGE COE
FOURTH RESPONDENTS

COOPERS & LYBRAND (A PARTNERSHIP) & COOPERS & LYBRAND (SECURITIES) LIMITED
FIFTH RESPONDENTS

JUDGE:	KIEFEL J
DATE:	16 JUNE 1998
PLACE:	BRISBANE

REASONS FOR JUDGMENT

Mr Milfull brought these proceedings as the representative of a group of persons described as “all of the persons who acquired redeemable preference shares in the capital of Terranora Leisure Time Resort Management Limited” (“Management”).  The first respondent, Terranora Lakes Country Club Limited (“Club”), who is the applicant on this motion, was at the relevant time the lessor of land to Management.  A resort, to be managed on a time share basis, was to be constructed on the land by another associated company, Terranora Time Share Developments Pty Limited (“Developments”).  The terms of the agreement for bank finance to Developments permitted the bank to require a mortgage to be given over the lease.  It did not originally require this, but did later, in June 1992.  Club was also a guarantor of Developments’ obligations to the bank and in July 1992 demand was made upon it pursuant to that guarantee.  On payment, in full, of the debt Club took an assignment of the mortgage of the lease and subsequently appointed receivers to Management, which company was eventually wound up by order on 16 March 1994.  In June 1995 Club sold the land and the apartments to a third party.

The investors in the resort, of whom Mr Milfull was one, acquired an interest in it by purchasing redeemable preference shares which carried with them the right to occupy an apartment for a specified period of time each year.  Three prospectuses were published by Management, inviting subscription for the shares, between January 1988 and June 1992.  An advertising campaign was conducted and sales personnel on site dealt with potential investors.  It is said that the investors, whose money was ultimately lost, number over 1400.  Pursuant to directions, and for the purpose of this application, twenty statements of investors were filed by Mr Milfull.

Club now seeks an order pursuant to s 33N(1) Federal Court Act 1976 discontinuing the proceedings as representative proceedings, on the basis that they are not useful to determine the numerous claims.  The principal point made by it is that the claims, or some of them, require consideration of each investors’ state of mind.  The statements filed to date, it submits, confirm that some investors relied upon statements in the prospectuses, whilst others did not.  Despite the action now being limited to one which relies only upon representations made in those documents, an earlier reference to statements made by salespersons having being deleted by amendment, it is clear that some of the group members did rely on what was said by salespersons and may not have relied at all on the written representations.  It is also pointed out that reliance was had to varying degrees and by persons with disparate levels of experience in investments. 

As against that it was submitted by Counsel for Mr Milfull that the proceedings would permit findings to be made as to the wrongfulness of the conduct in question and that the reliance pointed to is merely a causal link to the claim for damages in each case.  It was submitted that it is not unusual in representative proceedings to determine questions of damages in each case separately and later, and that s 33C(2)(a)(iii) comprehends this.  It was also submitted that there was a claim which could be the subject of determination and which were not dependant upon any question relating to the individual’s reliance or representations made. 

Section 33N(1) provides:

[Court may order discontinuance of proceeding]  The Court may, on application by the respondent or of its own motion, order that a proceeding no longer continue under this Part where it is satisfied that it is in the interests of justice to do so because:

(a)      the costs that would be incurred if the proceeding were to continue as a representative proceeding are likely to exceed the costs that would be incurred if each group member conducted a separate proceeding;  or

(b)      all the relief sought can be obtained by means of a proceeding other than a representative proceeding under this Part;  or

(c)       the representative proceeding will not provide an efficient and effective means of dealing with the claims of group members;  or

(d)      it is otherwise inappropriate that the claims be pursued by means of a representative proceeding.

The first respondent’s application places emphasis on (c). 

The non-disclosure of the mortgage of the lease of the land, or the possibility that it would be required by the bank under the original financing arrangements, lies at the heart of the claims.  It is alleged, at an early point in the amended statement of claim, that Club ought to have realised that a mortgage would affect the financial success of the project and that disclosure of that fact, or possibility, would likely have deterred investors from purchasing shares. The omission of it from the prospectuses gave, it is alleged, the false impression that the project was very secure and that Club, which supported the project, itself had the financial resources to construct the apartments.  In these circumstances the purchasers of shares were, it is alleged, subject to what is described as the “inherent risks” in the investment. 

The first claim pleaded is that of breach of duty of care owed by Club and the directors of Management to investors.  It refers to the failure to warn or notify of the risks, including the risk that a mortgage of the lease would be required and that the scheme or project might fail in a particular circumstance. 

The second claim is for damages for breach of the contract said to arise between the Club, Management and the investors by providing the grant of the mortgage of the lease, obtaining the security later and not providing a release in favour of the investors. 

Misleading and deceptive conduct, in connexion with representations made in the prospectuses and by reason of the failure to disclose facts relating to the mortgage and the inherent risks is pleaded as giving rise to claims for loss and damage under both the Corporations Law and Companies Code and sections 52 and 53 Trade Practices Act 1976.

Other claims are made against the other respondents, the Directors of Club and the consulting accountants and receivers, but they are not presently relevant.

A claim not affected by the matters raised by Club is the claim in contract.  A conclusion that the agreement with investors was breached could be availed of by all investors.  Indeed there may be investors whose only claim lay in contract, where they had not been influenced by any statements made prior to entry into it.  The claims in negligence and those based upon alleged misrepresentations do however require consideration of the question of reliance.  In the case of negligence, it would be possible to determine the extent of any duty of care and whether it was breached by the failures alleged.   Whilst I am mindful of the possibility of the firstmentioned question being affected by individual circumstances, the case pleaded does not rely upon them but on a general duty to investors derived from the circumstances of, and information available concerning, the transactions.  Group members who might have a special claim not contemplated by these proceedings have had the opportunity to opt out.  I observe also that directions given under s 33Q, include those with respect to the creation of a sub-group.  It would not be possible to determine for all group members whether they were the effective cause of the loss in each case, that is to say the loss caused by reliance upon what was conveyed.  There would be a similar outcome founded upon the misrepresentations.  It would be possible to determine, with respect to all group members, what representations contravened the legislation in question, that is to say whether they were likely to mislead or deceive, leaving in each case the question whether the loss or damage claimed was suffered by reason of that conduct. 

Section 33C(1) of the Federal Court Act provides that a representative proceeding may be commenced by a person where there are more than seven persons having claims against the same person, the claims against them are in respect of or arise out of the same, similar or related circumstances and the claims give rise to a substantial common issue of law or fact.  The focus here is upon what common issue of law or fact  might be the subject of determination and what that would achieve towards a resolution of all the possible claims.

Sub-section 2 of that section then provides:

“33C(2)[Scope for commencement of proceeding] A representative proceeding may be commenced:

(a)whether or not the relief sought:

(i)is, or includes, equitable relief;  or

(ii)consists of, or includes, damages;  or

(iii)includes claims for damages that would require individual assessment;  or

(iv)is the same for each person represented;  and

(b)whether or not the proceeding:

(i)        is concerned with separate contracts or transactions between the respondent in the proceeding and individual group members;  or

(ii)       involves separate acts or omissions of the respondent done or omitted to be done in relation to individual group members.”

The Act apprehends that the determination of the common issues may not determine the claims of all group members and that in that circumstance the Court may give directions in relation to the determination of those issues and, if necessary, give directions for the establishment of a sub-group (see S 33Q).  Section 33Z provides for the scope of the Court’s powers to determine a proceeding:

“33Z(1) [Scope of Court powers to determine a proceeding] The Court may, in determining a matter in a representative proceeding, do any one or more of the following:

(a)      determine an issue of law;
(b)      determine an issue of fact;
(c)       make a declaration of liability;
(d)      grant any equitable relief;

(e)make an award of damages for group members, sub-group members or individual group members, being damages consisting of specified amounts or amounts worked out in such manner as the Court specifies;

(f)award damages in an aggregate amount without specifying amounts awarded in respect of individual group members;

(g)make such other order as the Court thinks just. “

Section 33ZB provides that a judgment given in a representative proceeding binds all persons other than those who have opted out;  and requires that the group members affected by it be described or identified.  I did not understand Counsel for the first respondent to submit that the proceedings did not qualify as representative proceedings under s 33C(1), which is to say that the similarities or relationships between the circumstances giving rise to each claim are sufficient to meet this grouping as a representative proceeding: see Zhang v Minister for Immigration, Local Government and Ethnic Affairs (1993) 45 FCR 384, 404. Reliance was also placed on the decision of Drummond J in Connell & Ors v Nevada Financial Group Pty Limited & Ors  (1996) 139 ALR 723, to which I later refer. The focus of the submissions then is upon the extent of similarities and the point where the claims might diverge as indicative of the lack of utility of these proceedings.

One purpose of the statutory provisions relating to representative proceedings, as Spender J pointed out in Wong v Silkfield Pty Ltd (1998) ATPR ¶41-613 by reference to the second reading speech, is to provide a procedure for groups of people, like investors or others pursuing consumer claims, to obtain redress from the Courts more cheaply and efficiently than would be the case with respect to individual actions. In that case reliance was one non-common issue, amongst others, but Spender J held that there were, nevertheless, sufficient similarities in the claims to satisfy s 33C(1)(a) and to suggest, at least at that point in the litigation, that the proceedings ought to be continued as representative and that questions of reliance and loss could be determined separately. That would be the case in many consumer actions involving large numbers of people.

In this case the first respondent listed the non-common issues which, it submitted, showed that the proceedings could not be said to be efficient in the sense that they would not resolve enough.  The question is one of evaluation.  In Connell v Nevada, Drummond J considered that the requirement of substantiality of the common issues in s 33C(1)(c) ought to be determined by considering the extent of the other non-common issues, the litigation of which would have a real impact on necessary interlocutory steps and the duration of the trial.  If the common issue of fact was the making of a representation, in his Honour’s view, it would not be capable of being a substantial common issue of fact “if, in addition to relying upon that representation, each claimant alleges reliance upon other representations or important matters, each of which is likely to involve a considerable amount of time and effort to prepare and litigate …” (at 732).  An approach which compares substantial common and substantial non-common issues, to determine whether a proceeding qualifies as a representative proceeding has received critical analysis by Wilcox J (see (1977) 8 APLR 77), and that article was noted by Spender J with apparent approval in Wong v Silkfield.  In the opinion of Wilcox J, whilst “substantial” is an imprecise word it does not seem necessary to undertake the comparison to determine the question posed by the paragraph, namely whether the common issues are themselves substantial.  His Honour added that to adopt such an approach would result in respondents raising artificial non-common issues.  His Honour went on to point out that, in a particular case, there may be both substantial common issues and substantial non-common issues and that the latter may be so significant as to “swamp” the common issue such that the Court must conclude that the proceeding was not an efficient and effective means of dealing with claims of group numbers or that it is otherwise inappropriate that the claims be pursued by means of a representative proceeding (s 33N(1)(c) and (d)).  If it did so it would terminate the proceeding as representative.  I respectfully agree with the views expressed by Wilcox J.  Viewed in that way the respondent’s submission must be understood as one that the resolution of the common issues, which are clearly substantial, will not however resolve much of what will need to be established in each investor’s case.

These proceedings are, as outlined above, capable of resolving whether and to what extent Club owed a duty of care to investors and whether it was breached in any of the respects alleged;  the terms of the contract with investors and whether they were breached;  whether statements in the prospectuses were misleading or deceptive or capable of having that effect within the meaning of the Trade Practices Act or the Companies Code.  These are substantial questions of mixed fact and law.  In my view, they would go a considerable distance towards resolving questions of liability with respect to those causes of action.  With respect to the claim in contract it may be possible, in the event of success on the part of the applicant, to pronounce judgment with damages to be assessed.  This would be binding on all group members, subject to the question of the identification of group members with respect to the various claims, which I discuss later.  And, as I have earlier noted, it may be that there are group members who have only this, and no other, claim.  As to claims based upon misrepresentations, it will be possible only to make the findings I have adverted to above, but this is contemplated by s 33Z(1) and is not, in my view, without utility.  Whilst it may not be necessary to adduce and test a great deal of evidence, and submissions may not be lengthy or necessarily complex, it is not suggested that individual claims will be large, justifying in each case the process necessary to be undertaken.

Club also sought, as an alternative, an order redefining the group on the basis that its present description was too wide and, in any event, erroneous.  There is some substance in this.

Purchasers of shares who were induced by representations made by salespersons have had the prospect of any such claim removed from these proceedings by the determination I have earlier mentioned.  It was no doubt considered that their claims could be quite different from each other and that they might jeopardise the proceedings being continued as representative proceedings.  It remains open to the respondent to pursue the question of where reliance was placed and that would include examining the prospect, in any given case, that influential statements were made by the salespersons.  If there are any claims which were founded only on such misrepresentations, they would now likely be statute-barred.  In a sense therefore the description of the group, which presently would extend to such persons may not have much practical effect.  It is however inaccurate and ought to be corrected.  Section 33ZB requires this to be done at least prior to any judgment, but I would think it should be attended to shortly.  I will hear further submissions as to the appropriate description at the next directions hearing.

I am not persuaded that the proceedings ought to be discontinued under s 33N.  Given that the Court retains that power and has the ability to make further directions in the proceedings, an applicant for such an order at an early stage in the proceedings would need to make their lack of utility plain, and this has not been done.  In this case it may be possible to make orders concluding the contract claim, making determinations of fact and law in connexion with the extent of a duty owed and whether it was breached and in connexion with the statements made in the prospectuses.  At that point, and perhaps earlier, consideration could be given to whether to establish a sub-group, or whether to discontinue the proceedings as representative as occurred in Zhang v Minister for Immigration, Local Government and Ethnic Affairs.

Subject only to the description of the group being corrected in the near future, the application by the first respondent will be dismissed.

I certify that this and the preceding eight (8) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Kiefel

Associate:

Dated:            16 June 1998

Counsel for the Applicant:	AJH Morris QC
Solicitor for the Applicant:	Russell & Co
Counsel for the First Respondent	G Brandis
Solicitor for the First Respondent:	Phillips Fox
Solicitor for the Second and Fifth Respondents:	Minter Ellison
Solicitors for the Third and Fourth Respondents	Dunhill Madden & Butler
Date of Hearing:	1 June 1998
Date of Judgment:	16 June 1998