Pilecki & Turner P/L v Chen, P. (also known as Pao Chu Chen Yang)

Re: PILECKI AND TURNER PTY. LTD.; D AND F PLUMBING PTY. LTD.; VISION CABINETS
PTY. LTD.; FYLJED PTY. LTD. trading as QUEENSLAND RISK MANAGEMENT SERVICES;
JOLTMONT PTY. LTD. and OTHERS
And: PAMELA CHEN (also known as PAO CHU CHEN YANG); SHIH CHEH HUANG; MIRAMAR
AUSTRALIA LIMITED (formerly TRANSTATE AUSTRALIA LIMITED and DOBSON AND CORRY
PTY. LTD. (IN LIQUIDATION)
No. QG150 of 1991
FED No. 301
Number of pages - 21
Practice and Procedure

COURT

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Drummond J(1)

CATCHWORDS

Practice and Procedure - leave to cross-claim against third parties - misrepresentations by third parties claimed to give respondents reasonable grounds for belief in truth of representations made by respondents to applicants - quantum of respondents' claim against third parties dependent upon quantum of damages awarded against respondents in main proceeding - overlap between claims in main proceeding and cross-claim not complete but possibility of inconsistent findings in separate proceedings - leave granted but directions to restrict issues in cross-claim to be determined concurrently with hearing of main proceeding to those issues which are common to cross-claim and main proceeding.

Federal Court Act - s. 22

Federal Court Rules - O. 5, rr. 1 and 8

Obacelo Pty. Ltd. v Taveraft Pty. Ltd. (1985) 5 FCR 210

Pioneer Concrete (NT) Pty. Ltd. v Watkins Ltd. (1983) 48 ALR 365

HEARING

BRISBANE, 17 September 1992

#DATE 23:4:1993

Counsel for the applicants: H.B. Fraser

Solicitors for the applicants: Minter Ellison Morris

Fletcher

Counsel for the respondents: D.J.S. Jackson QC

M. Burnett

Solicitors for the respondents: Hillhouse Burrough

McKeown

Counsel for the first
cross-respondent: D.B. Fraser

Solicitors for the first
cross-respondent: Clayton Utz

Solicitors for the second
cross-respondent Crouch and Lyndon

Counsel the for third
cross-respondent B.D. O'Donnell

Solicitors for the third
cross-respondent McCullough Robertson

ORDER

The Court orders that:

1. The first, second and third respondents have leave to cross-claim against Messrs. Woodrow, Dobson and Corry on the basis of the issues set out in the proposed cross-claim which is exhibit A to the affidavit of Mr. R.G. Whitton filed on 31 August, 1992 and on the basis of the further issues raised in that affidavit.

2. The costs of the application and of today are reserved to the next directions hearing.

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

JUDGE1

DRUMMOND J I have before me an application by the first, second and third respondents in the action for leave to cross-claim against three directors and shareholders of the fourth respondent, Messrs. Woodrow, Dobson and Corry. The application is resisted by the applicants and by each of the proposed cross-respondents, who were served with the application at my direction. Leave is necessary since Messrs. Woodrow, Dobson and Corry are not parties to the proceeding: O. 5, r. 8(1).

Each of the 13 applicants was a sub-contractor, independent of the others, to the fourth respondent, a construction company, in respect of the Marquise project. That respondent failed and, by the end of May 1991, had been put into liquidation. Six of the applicants, generally with small claims only against the respondents, have decided not to pursue their claims and have filed notices of discontinuance.
Each applicant alleges that it entered into a sub-contract with the fourth respondent on a particular date in the period 8 May, 1990 to 15 April, 1991 and performed work under its sub-contract during a nominated period between May 1990 and April 1991. Each seeks to recover the balance of moneys unpaid in respect of its sub-contract.
The first ground upon which each applicant makes this claim is based on s. 592 of the Corporations Law. There are allegations that throughout the period from April 1990 to April 1991 there were reasonable grounds to expect that the fourth respondent would not be able to pay its debts as they became due, including the debts it incurred to each applicant under the relevant sub-contract; it is further alleged that the first, second and third respondents took part in the management of the fourth respondent during this 12 month period and are therefore personally liable for payment of all such debts.
This last allegation is in turn founded on an agreement which the third respondent is said to have entered into on 16 March, 1990 for the purchase of part of the share holdings in the fourth respondent of Messrs. Woodrow, Dobson and Corry. Under this agreement, the third respondent acquired voting control of the fourth respondent and the right to establish a three-person joint executive committee which the third respondent controlled by its nominees, the first and second respondents. The joint executive committee had the right to oversee operations of the fourth respondent and to veto all the decisions of the board of the fourth respondent. In fact (so the applicants allege) the first and second respondents involved themselves more directly in the fourth respondent's activities than by sitting on this committee: see paras. 17(d), (f), (g), (h), (j), (k), (l) and particularly (m) of their pleading.
In their defence to this claim, the first, second and third respondents deny the key allegations on which the claim is based and go on to assert, in the alternative, that if any of them did take part in the management of the fourth respondent at the time any debt alleged by any applicant was incurred, each of the first, second and third respondents:

"... had reasonable cause to expect that the Fourth Respondent would be able to pay all of its debts as and when they became due in that:

(i) The Respondents first became aware in March 1991 of financial difficulties being experienced by the Fourth Respondent."

In what follows in the defence here, the respondents refer to the action which they took to provide financial assistance to the fourth respondent from March 1991 until 22 April, 1991, when it is alleged that "the third respondent withdrew further funding of the fourth respondent". The allegation then made is that:

"In the premises the fourth respondent became unable to pay its debts as and when they fell due on 22 April, 1991."

Although the applicants allege that it was throughout the whole of the period from April 1990 to April 1991 that there were reasonable grounds to expect that the fourth respondent would not be able to pay its debts, these three respondents do not set up a positive case in the defence they have filed that they had reasonable cause to expect that the fourth respondent would be able to pay its debts in the period from April 1990 up to March 1991, when they allege they first became aware of the financial difficulties of the fourth respondent.
The applicants also seek recovery from the first, second and third respondents, pursuant to the Trade Practices Act, on a number of bases.
Firstly, they allege that the third respondent caused the fourth respondent to enter into each of the sub-contracts knowing that each applicant then believed:

(a) that the fourth respondent would be able to pay the debts incurred by it under that sub-contract; and

(b) that the third respondent "was providing and would continue to provide financial support to the fourth respondent" sufficient to justify that belief said to have then been held by his sub-contractor.

It is also alleged here that at no time prior to debts being incurred under each sub-contract did the third respondent tell any applicant that there were reasonable grounds to expect that the fourth respondent would not be able to pay those debts. This conduct by the third respondent is said to amount to a representation by it to each sub-contractor that the fourth respondent would be able to pay the sub-contract debts. It is then alleged, relying on s. 51A of the Trade Practices Act, that the third respondent had no reasonable grounds for making that representation and that the third respondent thereby engaged in conduct in contravention of s. 52 of the Trade Practices Act, conduct in which the first and second respondents were involved. The loss claimed by each sub-contractor is "the amount of the sub-contract debt that remains unpaid by the fourth respondent".
In their defence to this particular claim, the first, second and third respondents deny key allegations and go on to allege that there were reasonable grounds for making the representations in that:

"(i) The Fourth Respondent enjoyed the ongoing financial backing of the Third Respondent;

(ii) The Third Respondent was making progress claims to the Fourth Respondent pursuant to its head contract with the Fourth Respondent for the construction of the Marquise Project which head contract was the subject of sub-contracts alleged by the Applicants."

Secondly, in the case of each applicant other than the ninth applicant, it is alleged that after some work had been done by that applicant under its sub-contract, the fourth respondent by various of its officers including on one occasion Corry, and on another occasion Woodrow, made either one representation or a series of representations to each applicant that the fourth respondent would be able to pay for all work already done and for all work yet to be done under the sub-contract. As to the ninth applicant, the allegation is that, shortly prior to work commencing, one representation was made that the fourth respondent would be able to pay for all work to be done under that sub-contract. It is alleged that the fourth respondent had no reasonable grounds for making any of these representations and thus contravened s.52 of the Trade Practices Act. The first, second and third respondents are said to have been involved in each contravention. It is further alleged that each applicant relied on these representations and went on to perform work under its sub-contract. It is then alleged that when each representation was made, the third respondent owed the fourth respondent a sum in excess of the total of the sub-contract debts then due by the fourth respondent and that, but for the representations, each applicant (other than the ninth applicant) would not have done any further work after the time when that representation was made and would have also taken action under the Sub-contractors' Charges Act 1974 (Qld) to recover payment of moneys due under its sub-contract for work already then completed from the money then owing by the third respondent to the fourth respondent. It is also alleged that the third respondent paid to the fourth respondent what it owed under the head contract, but the fourth respondent did not pay any of the sub-contract debts here in issue with the consequence that each sub-contractor lost "the whole of the debt owing to the sub-contractor by the fourth respondent" or, alternatively, "so much of that debt as was incurred after the representation was made".
Thirdly, a claim similar to the second claim based on the Trade Practices Act is made by all of the applicants, except the ninth applicant, in reliance upon the fourth respondent repeating to each such applicant after 11 March, 1991 but prior to the end of April 1991 a representation alleged to have been made to the fourth respondent on 11 March, 1991 by the third respondent (in which the second respondent was also involved) in a notice given by the third respondent to the fourth respondent's staff. This notice is said to contain a representation by the third respondent that it would continue to provide financial support for the fourth respondent to ensure its continued profitability. It is alleged that the third respondent did not have reasonable grounds for making this representation and that in consequence it (and the second respondent) contravened s. 52 of the Trade Practices Act. It is further alleged that in reliance upon the representation made to them by the fourth respondent, the 11 applicants here suing incurred the same losses for the same reasons alleged in relation to the second claim which all the applicants have brought in reliance on the Trade Practices Act.
The defences mounted by the first, second and third respondents to the second and third claims based on the Trade Practices Act are similar to that set-up in answer to the first claim based on that Act.
As appears from their proposed pleading which is in evidence, the first, second and third respondents wish to cross-claim against Messrs. Woodrow, Dobson and Corry for damages on two bases. Firstly, they propose to claim for $925,796.00 (which is the total of the claims made in the action by the 12 applicants on the first, second and third respondents) and which is described in the proposed cross-claim as the amount of the liability to the applicants to which the first, second and third respondents have been exposed by the conduct of Messrs. Woodrow, Dobson and Corry. This claim is framed as a claim for damages pursuant to s. 82 of the Trade Practices Act or damages for fraud; in the alternative, it is proposed to seek an order under s. 87(1A) of the Trade Practices Act that Messrs. Woodrow, Dobson and Corry indemnify these three respondents against any sum they may be adjudged liable to pay to the applicants. Secondly, they propose to claim for $1,000,000.00 as the value of their share purchases in the first respondent "which have been lost". The third respondent also proposes to claim, apparently against all three of Messrs. Woodrow, Dobson and Corry, a further $568,904.00, being the amount that that respondent has been called on to pay to the fourth respondent's banker under a guarantee it gave that banker. These amounts are claimed as damages pursuant to s. 82 of the Trade Practices Act or as damages for fraud.
The first, second and third respondents, in seeking leave to cross-claim, rely on s. 22 of the Federal Court of Australia Act 1976 and O. 5, r. 1(2) of the Federal Court Rules.
The case set up in the proposed cross-claim is as follows: in the course of two meetings in February 1990 leading up to 16 March, 1990, when the agreement referred to in the applicants' statement of claim was entered into by the third respondent to purchase some of the shares of Messrs. Woodrow, Dobson and Corry in the fourth respondent, the fourth respondent, through those persons, fraudulently and in contravention of s. 52 of the Trade Practices Act, misrepresented the financial position of the fourth respondent as being significantly better than it in fact then was by misrepresenting the worth and recoverability of loans by it to associated companies and the worth of shares it held in three associated companies. These misrepresentations are limited to misrepresentations as to the worth of these loans and shares as at December 1989 and as at February 1990. In reliance on these misrepresentations, it is said that the third respondent "entered into the subscription contract and thereafter made advances to the Fourth Respondent and guaranteed its obligations" when, but for those misrepresentations, it would not have done any of those things and the first and second respondents "would not have become concerned in" the fourth respondent's affairs. The complaint in the cross-claim is that Messrs. Woodrow, Dobson and Corry fraudulently persuaded the third respondent to enter into an association with the fourth respondent, which in turn brought the three respondents into contact with the applicants to whom these respondents may now be liable, but for reasons unconnected with that initial fraud that Messrs. Woodrow, Dobson and Corry are said to have worked on them.
It can thus be seen that, while all the losses which the first, second and third respondents wish to claim, according to the proposed cross-claim, against Messrs. Woodrow, Dobson and Corry are said to have resulted from their entering into association with the fourth respondent, there is no link between any of the applicants' claims against those three respondents and their own proposed claims against Messrs. Woodrow, Dobson and Corry, other than in one respect: one consequence of the misrepresentations said to have been made by Messrs. Woodrow, Dobson and Corry to these three respondents is that the latter have suffered, among other losses, one particular loss which will be measured by the total of the amounts, if any, that are recovered against those respondents by the applicants. But even here, the facts that the three respondents rely on, as set out in their proposed cross-claim, to prove their entitlement to recoup from Messrs. Woodrow, Dobson and Corry this particular amount (whatever it may turn out to be) are entirely unconnected with the facts that will have to be proved by the applicants to fix the three respondents with liability to the applicants for this particular amount.
There is no reason in principle why a defrauded purchaser should not recover damages for all the loss that flows directly from the fraudulent inducement (unless the loss is not foreseeable). If the purchaser, besides paying more for a business than it is worth, suffers additional losses resulting directly from the fraud, he ought to be compensated for them: Gould v Vaggelas (1985) 157 CLR 215 at 221-2. But even accepting all this, it is apparent that there are substantial problems of causation that would confront the respondents in seeking to recover from Messrs. Woodrow, Dobson and Corry anything that those respondents are found liable to pay to the applicants, if they were to rely on the claim as presently formulated in their draft cross-claim.
It was no doubt because of this consideration that their solicitor, in an affidavit filed on 31 August, 1992, foreshadowed a significant refinement of the claim the respondents now wish to make against Messrs. Woodrow, Dobson and Corry and a significant extension to their defence to the applicants' claims.
Prior to giving judgment, I directed the three respondents to provide me with the proposed amended defence upon which those respondents wished to rely and also the proposed cross-claim, incorporating any amendments they may wish to make. This was not done. But it is clear from what is foreshadowed by their solicitor in his affidavit, that the respondents, in answer to the applicants' claims against them based on s. 592 of the Corporations Law, now intend to rely upon the representations they allege were made to them by Messrs. Woodrow, Dobson and Corry concerning the worth of loans to and shares held in associated companies by the fourth respondent, which representations they say fraudulently induced the third respondent to buy the shares in the fourth respondent. This will provide a further ground for asserting that throughout the whole of the period from April 1990 to at least March 1991 the three respondents had reasonable cause to expect that the fourth respondent would be able to pay all of its debts, including debts arising under the sub-contracts. It is also clear that, in relation to the claims made on those three respondents by the applicants in reliance on the Trade Practices Act, they now wish to rely on the same representations by Messrs. Woodrow, Dobson and Corry as providing additional reasonable grounds for them making any representations concerning the financial stability of the fourth respondent which may be sheeted home to them by the applicants.
In my opinion, insofar as the three respondents seek to recover from Messrs. Woodrow, Dobson and Corry anything that they may be found liable to pay to the applicants both on the basis set out in their original proposed cross-claim and as foreshadowed by their solicitor, those respondents will be claiming for "relief which is related to or connected with the subject of the proceeding" within O. 5, r. 1(2). Cf. Smithers J, the other members of the Court agreeing, in Pioneer Concrete (NT) Pty. Ltd. v Watkins Ltd. (1983) 48 ALR 365 at 372, lines 35-45. Order 5, r. 1, which governs, among other things, third party claims in this Court, is significantly wider than the traditional third party rules of the kind considered in that case. In view of the cross-vesting legislation, there can probably never be any doubt now that this Court will always have jurisdiction in every case to entertain a cross-claim. To that extent, the cross-vesting legislation has made much of what Wilcox J said in Obacelo Pty. Ltd. v Taveraft Pty. Ltd. (1985) 5 FCR 210 of historical interest only. Cf. the comments in Pioneer Concrete on NT O. 20, r. 8 at pp. 377, 379 and 381. However, it remains true, as Wilcox J said, that whether the Court should exercise the jurisdiction to grant leave to a party to bring a cross-claim against a third party will depend upon the application of O. 5, r. 1 and the exercise, in relevant cases, of the Court's discretion to grant leave under O. 5, r. 8. As his Honour indicates at page 215, merely because it is thought right as a matter of discretion to allow a party to bring a cross-claim within O. 5, r. 1 against a non-party, that still leaves open the question whether the cross-claim (or any question or issue in the cross-claim) should be tried with or separately from the principal proceeding.

But even though the respondents' cross-claim against Messrs. Woodrow, Dobson and Corry as originally proposed fell within the rule, I would not have been prepared to hold, as a matter of discretion, that there was such an overlap between the issues involving the applicants and the respondents, on the one hand, and those involving the respondents and Messrs. Woodrow, Dobson and Corry, on the other, as would make it appropriate to grant the leave sought by the respondents, in view of the general complexity of the main proceeding and the potential that cross-claim had for significantly widening the issues to be investigated beyond those of any relevance in the main proceeding.
There will be, however, a substantial overlap between the case the three respondents now wish to rely on to answer the applicants' claims against them based on both the Corporations Law and the Trade Practices Act and the case those respondents wish to rely on as against Messrs. Woodrow, Dobson and Corry to recover from the latter persons anything the respondents may be found liable to pay to the applicants.
If the third respondents can show that, for the reasons they now wish to rely on (which include the representations made to them by Messrs. Woodrow, Dobson and Corry) there were no reasonable grounds for thinking at any time in the period of concern to the applicants that the fourth respondent would be unable to pay its debts and that for whatever reason (including the making of those representations by Messrs. Woodrow, Dobson and Corry to them) those respondents had reasonable grounds for making representations to the applicants as to the capacity of the fourth respondent to pay the sub-contract debts, they will be under no liability to the applicants and there will be no question of them having a claim over against Messrs. Woodrow, Dobson and Corry in that regard (although they may still have a claim over in respect of the loss of the value of the share purchase in the fourth respondent). If these three respondents are held liable to the applicants in circumstances in which they fail to prove they were told any of the things they rely on concerning the worth of companies associated with the fourth respondent by Messrs. Woodrow, Dobson and Corry, they will not be able to recover from Messrs. Woodrow, Dobson and Corry anything in respect of what they have to pay to the applicants. But if they prove, in defending the applicants' claim, that Messrs. Woodrow, Dobson and Corry did make the representations in question, then whether or not they are able to show as between themselves and the applicants that those representations provided them with a reasonable basis for a belief as to the capacity of the fourth respondent to meet its debts, they may well have a claim over against Messrs. Woodrow, Dobson and Corry in fraud in respect of anything they may be held liable to pay to the applicants. If, for example, the respondents relied on those representations in making the statements they are said to have made to the applicants, then even though those representations did not give them reasonable ground for believing in the solvency of the fourth respondent, if they themselves believed them to be true they might still be able to recover from Messrs. Woodrow, Dobson and Corry the amount of any payment they have to make to the applicants.
It is therefore necessary, if the possibility of inconsistent findings in separate proceedings is to be avoided, to bind Messrs. Woodrow, Dobson and Corry at least to determinations made in the action between the applicants and the three respondents on the following issues:

(a) whether Messrs. Woodrow, Dobson and Corry made the representations to the respondents concerning the worth of the companies associated with the fourth respondent;

(b) if so, whether the respondents relied on those representations in conducting themselves in their dealings with the applicants in such respects as the applicants are able to prove they did so conduct themselves;

(c) if so, the quantum of the loss the applicants suffered because of such conduct on the part of the respondents.

The action, as presently constituted, is already quite complex, given the remaining number of applicants who have what are separate claims against the respondents. So far as quantum is concerned, the respondents have not sought to suggest that any of the applicants' claims for payment should be reduced because of incomplete or defective work. Considerable progress has in fact been made as between the applicants and the respondents in resolving the matter of the quantum of the claims that each applicant has made against the respondents: it is probable that these issues of quantum will be resolved by the report of an agreed expert. The action as between the applicants and the respondents is, moreover, close to being ready for hearing.
The applicants, despite earlier attempts, were only able to formulate their claims in a way they are prepared now to support in the amended statement of claim delivered on 30 April, 1992. Moreover, although the respondents have never had any cause to doubt that a number of the applicants would pursue major claims against them, it was only at the hearing before me that the respondents were told that decisions had finally been made on the applicants' side as to which of the applicants would not pursue their claims further. But there still has, in my view, been some delay on the part of the respondents in initiating proceedings to bring Messrs. Woodrow, Dobson and Corry into the action.
I think that, having regard to the Court's powers under O. 5, r. 12, O. 29 and to its inherent or implicit power I can, by appropriate directions, ensure that the already complex proceedings between the applicants and the respondents are not unduly further complicated and at the same time ensure that all three interests, applicants, respondents and Messrs. Woodrow, Dobson and Corry, are bound by findings on issues common to the two areas of dispute. I therefore propose to give leave to the respondents to cross-claim against Messrs. Woodrow, Dobson and Corry.
The Court has ample power under O. 5, r. 12 to ensure by appropriate directions that findings on issues or questions which will need to be made to resolve the dispute between the third respondents and Messrs. Woodrow, Dobson and Corry and which findings will also have to be made to resolve the proceedings between the applicants and the third respondents, will bind all three interests. It seems to me that it is this which it is appropriate to achieve even though the whole of the dispute between the third respondents and Messrs. Woodrow, Dobson and Corry is not determined at the same time as final judgment is given in the litigation between the applicants and the respondents. Depending on the matters Messrs. Woodrow, Dobson and Corry wish to raise in defence to the claims that the respondents intend to bring against them, it may be practicable to resolve all disputes between all three interests in the one judgment. But I do not think it is likely to be just to subject the applicants to delay in having the trial of their claims against the respondents determined until all the claims by the respondents against Messrs. Woodrow, Dobson and Corry are also ready for determination, to the extent that the latter group of claims involves issues that range more widely afield than issues common to the dispute between the applicants and the respondents. For example, the claim the respondents wish to make against Messrs. Woodrow, Dobson and Corry in respect of the loss of the value of the share purchase is separate from the claim they wish to make to recoup from those three persons anything they may have to pay to the applicants, although both claims are founded on the same set of alleged misrepresentations by them. It is likely that it will not be just to further complicate the action at this stage by allowing the respondents to litigate to finality this particular claim against Messrs. Woodrow, Dobson and Corry in the same phase of the litigation in which the applicants' claims against the respondents will be determined. I would expect that it will turn out to be appropriate to direct that the trial of any such issues between the respondents and Messrs. Woodrow, Corry and Dobson should take place after the determination of the applicants' claim against the respondents.
But I do not have any application before me for directions pursuant to O. 5, r. 12 or any application seeking orders that particular questions or issues as between the respondents and Messrs. Woodrow, Dobson and Corry which are not common to that dispute and the dispute between the applicants and the respondents should be determined after the litigation between the applicants and the respondents. Until Messrs. Woodrow, Dobson and Corry deliver their defences to the cross-claim, it is premature to consider such questions. However, I propose to require the parties at the appropriate time to apply for directions in both respects.
While I cannot deprive the respondents of the entitlement to seek to make amendments to their defence to the applicants' claim beyond those foreshadowed by their solicitor as a condition upon which leave to cross-claim against Messrs. Woodrow, Dobson and Corry is granted, I propose to grant leave to cross-claim upon the condition that the only substantial issues upon which the respondents will rely in answering the applicants' claims are those identified in their existing defence and in the amendments proposed to be made to their defence which are foreshadowed in their solicitor's affidavit filed 31 August, 1992 and upon the further condition that their cross-claim will be limited to the issues set out in their proposed cross-claim, exhibit "A" to their solicitor's affidavit and the further issues set out in that affidavit.

[1993] FCA 301

23 APRIL 1993