Raymag Securities Leisure P/L v All Seasons Hotels and Resorts P/L

RAYMAG SECURITIES LEISURE PTY. LTD. v. ALL SEASONS HOTELS AND RESORTS PTY.
LTD., DAVID CHARLES CONNERS and DAVID JOHN PRICE
No. QG141 of 1992
FED No. 295/94
Number of pages - 12
Negligence - Practice and Procedure

COURT

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
COOPER J

CATCHWORDS

Negligence - whether duty of care - extent of duty of care - negligent misstatement - provision of financial advice - opinions, advice and predictions as to future of resort by tourism resort manager to prospective purchaser - whether relationship of proximity - whether duty of care - extent of duty.

Practice and Procedure - application to strike out parts of statement of claim as embarrassing or disclosing no cause of action.

San Sebastian Pty. Ltd. v. The Minister (1986) 162 CLR 341

Hawkins v. Clayton (1988) 164 CLR 539

Rogers v. Whitaker (1993) 67 ALJR 47

L. Shaddock and Associates Pty. Ltd. v. The Council of the City of Parramatta (1981) 150 CLR 225

Norris v. Sibberas (1990) VR 161

General Steel Industries Inc. v. Commissioner for Railways (NSW) (1964) 112 CLR 125

HEARING

BRISBANE, 4 February 1993
#DATE 17:5:1994

Counsel for the Applicant: Mr. D.J.S. Jackson QC

Solicitor for the Applicant: Freehill Hollingdale and Page

Counsel for the Respondents: Mr. S. Couper

Solicitor for the Respondents: John M. O'Connor and Co.

ORDER

The Court orders that:

1. Paragraphs 24, 25, 26, 27 and so much of paragraph 36 as relates to the second and third respondents of the statement of claim be struck out.

2. The applicant has leave to replead paragraphs 26 and 27 of the statement of claim within fourteen (14) days.

3. The applicant has leave to amend paragraphs 42, 45, 46 and 68 of the statement of claim in accordance with these reasons within fourteen (14) days.

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

JUDGE1

Introduction
COOPER J The applicant in the within proceedings seeks relief against the respondents on a number of bases including damages for negligent misstatement. The applicant alleges in paragraph 23 of its statement of claim a duty of care owed by the first respondent to the applicant "to exercise the reasonable care and skill of an expert tourism resort manager of national experience and specialist expertise in advising the applicant with respect to the future performance of the Red Centre Resort". The Red Centre Resort was a hotel and tourist resort in Alice Springs in the Northern Territory. The applicant further alleges in paragraph 24 of its statement of claim that the second and third respondents held themselves out to the applicant as having skill and expertise "in the management of and projection of the future performance of tourist resorts generally and the Red Centre Resort in particular". In consequence it is pleaded in paragraph 25 that the second and third respondents each owed to the applicant a duty to exercise the reasonable care and skill of an expert tourist resort manager in advising with respect to the future performance of the Red Centre Resort.

The duty which it is alleged was owed to the applicant is alleged to have arisen out of:-

(a) The preparation of a brochure in 1989 to be made available to prospective purchasers of the resort (paragraph 4 of the statement of claim: All paragraph references hereafter are to the statement of claim unless otherwise indicated);

(b) Representations contained in the brochure as to the skill and experience of the first respondent in analysing tourist markets, strategies and opportunities and to profitably manage hotel and resort properties (paragraph 6);

(c) The preparation of a document containing projected budgets for the resort for the years 30 June, 1990 to 30 June, 1994

(inclusive) for supply to prospective purchasers of the resort (paragraph 7);

(d) Supply of the documents referred to in (a) and (c) above to the applicant by a real estate agent on 28 November, 1989 (paragraphs 5 and 8);

(e) Discussions in December, 1989 and January, 1990 whereby it was made known to the first and second respondents that the applicant had no experience in the management of a tourist resort of the nature of the Red Centre Resort and intended, if it purchased the resort, to rely upon a professional manager to operate it (paragraph 9(a));

(f) Advice given by the applicant at the time of the above discussion that the income that the resort was capable of earning would be the most relevant factor in the applicant's decision whether to purchase the resort (paragraph 9(b));

(g) Advice given by the applicant at the time of the above discussion that "the applicant would rely upon any profit projections made by the first respondent" (paragraph 9(c));

(h) In the same discussions "the applicant requested the first respondent to advise orally what the first respondent considered the operating profit for the financial years ending June, 1991 and June, 1992 for the resort would be" (paragraph 9(d));

(i) In the same discussions "The applicant requested the respondent to submit in writing up to date figures containing a reasonable expectation of what the surplus available to the owner of the operation of the resort would be for the next three years under the first respondent's management" (paragraph 9(e));

(j) The second respondent, on behalf of the first respondent, orally advised the applicant that the operating profit for the financial year ended 30 June, 1991 would be approximately $390,000.00 and for the financial year ended 30 June, 1992 would be approximately $600,000.00 (paragraph 10);

(j) The first respondent on 23 January, 1990 provided written projections and advised in writing the projected surpluses to the owner from the operation of the resort for four financial years (paragraphs 11 and 12) and provided further amendments to the documentation on 7 February, 1990 (paragraphs 15 and 16) together with further budget and profit forecasts (paragraph 15);

(l) The first respondent on 19 February, 1990 advised the applicant that the feasible real outcome for the year ended 30 June, 1991 was that referred to in the budget projection for that year provided by the first respondent on 7 February, 1990 (paragraph 17).

The applicant pleads (in paragraph 18) that in reliance on the representations pleaded in paragraphs 6, 12, 14, 16 and 17 of the statement of claim the applicant entered into a contract in writing to purchase the Red Centre Resort on 27 February, 1990.
The applicant alleges in paragraph 26 of the statement of claim that each respondent breached the duty of care owed by them to the applicant. Paragraph 26 provides:-

"26. The first, second and third respondents breached the said duty of care, particulars whereof are as follows:

(a) by making to the applicant the representations referred to in paragraph(s) 12, 14, 16 and 17 hereof when there was no reasonable basis for making such representations;

(b) failing to advise the applicant that there was a significant risk that the trading results of the Red Centre Resort would not recover quickly from the adverse effects of the airline pilots' dispute;

(c) failing to advise the applicant that a significant portion of the trade of the Red Centre Resort was the school coach camping trade which had an adverse effect upon the capacity of the resort to expand its revenue by procuring more lucrative trade;

(d) failing to advise the applicant that in order to increase the revenue of the Red Centre Resort from the figures then being achieved, it would be necessary to expend substantial sums on capital works in relation to computers, the bistro, kitchen, bar and rece(i)ption area;

(e) failing to advise the applicant that Alice Springs was a tourist destination which had a major problem in attracting custom because of its climate and location;

(f) failing to advise the applicant that the Red Centre Resort had a major problem in attracting custom caused by its location remote from the centre of Alice Springs and by its position in the midst of a light industrial area;

(g) failing to advise the applicant that the Alice Springs competitors of the Red Centre Resort were all situated in better locations;

(h) failing to advise the applicant that the mixed camping and hotel client base of the resort limited the possibilities of the resort to obtain more lucrative trade from the upper end of the market;

(i) failing to advise the applicant that the Red Centre Resort lacked necessary corporate facilities to attract a corporate client base;

(j) failing to advise the applicant that there was a significant over-supply of accommodation in Alice Springs;

(k) failing to advise the applicant that there were no short term steps which could be taken to cause the Red Centre Resort to overcome the trading problems which it was then experiencing in late 1989 and early 1990".

The applicant alleges that it would not have entered into the contract to purchase the resort "had it been properly advised of the matters referred to in paragraph 26" (paragraph 27).
By paragraph 38, the applicant pleads that the resort has not achieved the lowest of the projected owners' surpluses represented by the first respondent to the applicant.

The Attack on the Pleading
7. The respondents, by notice of motion, have sought the following relief:-

"1. Paragraphs 7, 23 to 36 inclusive, 38, 40 to 45 inclusive, 46, 47, 54, 55, 67 and 68 of the Statement of Claim be struck out on the ground that they are embarrassing.

2. The following words in paragraph 37 of the Statement of Claim be struck out on the ground that they are embarrassing: 'and as a consequence of the failure of the First, Second and Third Respondents to inform the Applicant of the trading results in paragraph 28'.

3. The Applicant to pay the Respondents' costs of this motion to be taxed".

On the hearing of the motion the attack was limited to paragraphs 24, 25, 26(a) so far as it relates to the second and third respondents, 26(b) to (k), 27, 36, 45 and 46, 54 and 55, 67 and 68.
The principal attack was against paragraphs 26(b) to (k). The respondents contend that on the material facts pleaded, the duty pleaded in paragraphs 23 and 25 was a positive duty to advise the applicant in terms of the specific matters pleaded in each of paragraphs 9(d) and (e) and not a duty to advise the applicant generally in respect of the future performance of the Red Centre Resort. It was submitted that in the circumstances pleaded there are no material facts which would establish proximity between the applicant and any of the respondents sufficient to give rise to a duty of care, the content of which would require the investigations contemplated by paragraphs 26(b) to (k) and the reporting of the results which the pleading assumes the investigation would have produced to the applicant. Thus it is said, the pleading, on the material facts pleaded, does not disclose a cause of action in terms of the duty of care alleged in paragraphs 26(b) to (k) to have been breached in the failures to advise there pleaded. Further, it was submitted that no material facts are pleaded against the second or third respondent which would give rise to a duty of care being owed by either of them to the applicant.
Counsel for the respondents conceded that paragraph 26(a) as pleaded was a sustainable pleading. He said:-

"We do not complain about 26(a). 26(a) is the allegation of breach of a duty of care because there was not (a) reasonable basis for making the express representations pleaded. We accept that in the communication of financial advice and the circumstances pleaded, it is clearly arguable that there was a duty of care owed, and that is all then to be tried, as to whether or not there was reliance and what the circumstances were in detail. But as pleaded, that is plainly a sustainable case. But when the pleader, in our submission, steps over that line and goes to the proposition that there are other things which you did not advise me about, that you should have positively advised me about, then we submit that he takes the case out of the simple formulation of negligent mistake and where the communication of the advice, and reliance upon it - or the circumstance of reliance upon it are simply sufficient to allege the basis of a duty of care".

The concession should be read as only going to the position of the first respondent.
Counsel for the applicant submitted that the circumstances pleaded in paragraphs 4 to 9 inclusive, if established, created such a degree of proximity between the applicant and the first respondent that when the first respondent put forward the profit projections "it had an obligation to disclose those matters which might cast doubt about the simple assertion that these are the figures that you will achieve". Counsel continued:-

"That is, it had an obligation which arose from its assumption of the obligation to give positive advice about future performance. It had an obligation arising from that to bring to the attention of the applicant matters relevant to that future performance which at least cast doubt upon the accuracy of the figures which were given".

The breach of the duty pleaded is a failure to advise of the facts assumed in paragraphs 26(b) to (k). The assumption in paragraphs 26(b) to (k) is that the facts pleaded in each paragraph, for example in 26(e) that Alice Springs was a tourist destination which had a major problem in attracting custom because of its climate and location, are correct. Further, the duty pleaded required the first respondent to have advised the applicant of those facts and thus assumes that the respondents knew or ought to have known the facts assumed. Implicit in the pleading, and in the submission of counsel, is a further duty to ascertain the correct facts which duty, if properly discharged, would have revealed each of the facts pleaded in paragraphs 26(b) to (k).
The duty contended for by the applicant is in its nature not simply a duty to be careful in doing something which in the absence of reasonable care might reasonably cause the applicant loss. Nor is it a duty to be careful in giving to the applicant opinions and predictions as to the future operating profits and surplus funds available to the owner for the nominated years; which opinions and predictions, to the knowledge of the first respondent, the applicant intended to rely upon in connection with a decision whether or not to purchase the Red Centre Resort. The duty contended for is a duty to ascertain all relevant information which may bear upon "the future performance of the Red Centre Resort" and advise the applicant of that information in order that the applicant may assess the worth of the opinions or predictions offered and the likelihood of the predictions coming to fruition.
Counsel for the applicant argued that on a striking out application:-

".....it is sufficient if it is an arguable proposition, in my submission it is, that the duty extends to advising of the material negative factors which impact upon the figures which are given. It is my submission that is arguably the case because it is a case in which it can otherwise be said that the negligence consisted of giving incomplete information by giving the bare figures. That the duty would have been fulfilled or the standard met by the giving of complete information which included not only the figures but the negative factors which impacted upon those figures".

Relevant Law
16. Liability for negligent misstatement is but one instance of liability for negligent acts and omissions. Consequently, the treatment of duty of care in the context of misstatement is but one instance of the application of the principles governing the duty of care in negligence generally (San Sebastian Pty. Ltd. v. The Minister (1986) 162 CLR 341 at 355).

In San Sebastian the majority (Gibbs CJ, Mason, Wilson and Dawson JJ) said (at 355):-

"The relationship of proximity is an integral constituent of the duty of care concept. We refer to that relationship in its broader sense, namely, as embracing a general limitation upon the test of reasonable foreseeability, this being the sense in which it has been discussed and applied in recent judgments in this Court (Caltex (1976) 136 CLR, at pp 574-576; Jaensch v. Coffey (1984) 155 CLR 549, at pp 552-553; Sutherland Shire Council v. Heyman

(1985) 157 CLR 424, at pp 461-462, 506-507; Stevens v. Brodribb Sawmilling Co. Pty. Ltd.

(1986) 160 CLR 16. The notion of proximity, because it limits the loss that would otherwise be recoverable if foreseeability were used as an exclusive criterion of the duty of care, is of vital importance when the plaintiff's claim is for pure economic loss. When the economic loss results from negligent misstatement, the element of reliance plays a prominent part in the ascertainment of a relationship of proximity between the plaintiff and the defendant, and therefore in the ascertainment of a duty of care".

It is the relationship of proximity which determines both the existence of the duty and the content of it. In Hawkins v. Clayton (1988) 164 CLR 539 Deane J said (at 579):-

"The content of the duty of care in a particular case is governed by the relationship of proximity from which it springs. It may, in some special categories of case, extend to require the taking of positive steps to avoid physical damage or economic loss being sustained by the person or persons to whom the duty is owed. Apart from cases involving the exercise of statutory powers or where the person under the duty has created the risk, the categories of case in which a relationship of proximity gives rise to a duty of care which may, according to circumstances, so extend are, like those in which there is a duty of care to avoid pure economic loss, commonly those involving the related elements of an assumption of responsibility and reliance.

See also Gaudron J in Rogers v. Whitaker (1993) 67 ALJR 47 at 54.

Reliance on information or advice by the recipient plays an important part in establishing a relationship of proximity and the content of the duty of care. The reliance must be reasonable, in that the provider of the information must know, or ought reasonably to know, that the other party relies on the provider to take reasonable care and may act in reliance on the information unless it would be unreasonable to do so (L. Shaddock and Associates Pty. Ltd. v. The Council of the City of Parramatta (1981) 150 CLR 225 at 231). It would be unreasonable to rely on information given by another unless the person giving the information professed to have some special skill which that person undertook to apply for the assistance of another, or was so placed that others could reasonably rely upon the provider's judgment or skill, or, upon the provider's ability to make careful inquiry (Norris v. Sibberas (1990) VR 161 at 172 FC). The duty of care only extends to those matters upon which the expertise of the provider of information is invoked and upon which reliance was had. The duty does not extend to matters upon which there was no reliance and no invocation of expertise (Norris v. Sibberas at 174 - 175).
In the instant case it becomes necessary to look at the terms of the pleading to ascertain what material circumstances are pleaded as giving rise to the relationship of proximity and whether or not those circumstances can arguably support a duty in terms of that which is pleaded in paragraphs 23, 25 and 26 of the statement of claim.
By paragraph 9 of the statement of claim, the applicant pleads facts which would establish, if proved, a relationship of proximity arising out of the request for information in the form of an opinion and prediction and the provision of information in response to that request in the circumstances pleaded in paragraphs 9(a), (b) and (c). The requests made of the first respondent as pleaded in paragraphs 9(d) and (e) were limited. The first was for the first applicant's opinion as to what the future operating profits for the financial years ending June, 1991 and June, 1992 would be. The second was for the first respondent's reasonable expectation of the surplus funds available to the owner from the operation of the resort for the three years in prospect under the management of the first respondent. Both requests involved the first respondent in being asked to make predictions as to approximate money amounts at future dates. By paragraphs 10, 11, 12, 13 and 14, it is pleaded that the first respondent provided the information sought. In paragraphs 15, 16 and 17 it is pleaded that additional information in the form of budget forecasts were provided by the first respondent.
The request of the applicant as pleaded was not to advise of the matters referred to in paragraph 26; of which it is pleaded in paragraph 27 that if the applicant had been so advised the applicant would not have contracted to purchase the resort. Nor was the request to advise the applicant "with respect to the future performance of the Red Centre Resort" as pleaded in paragraphs 23 and 25 of the statement of claim. What was sought was specific predictions as to net profits and surplus funds available at a future time. The request was made of a company holding itself out as having the skill and expertise to give a reasonable and reliable prediction of the figures sought. The first respondent, in making the predictions in the knowledge that the applicant would, on the pleadings, rely upon them in making a decision whether to purchase the resort, came under a duty of care to the applicant. That duty of care only extended to those matters upon which the expertise of the first respondent was invoked and upon which reliance was had and did not include matters which fell outside of the requests made.
Accordingly, in the circumstances pleaded in the statement of claim, the duty of the first respondent was to exercise reasonable care and skill as an expert tourism resort manager to ensure that the predictions were as reliable as the exercise of such reasonable care and skill would allow. Further, it was under a duty to exercise reasonable care in expressing the opinions and making the predictions to the applicant. To state the duty in positive terms, the first respondent was under a duty to refrain from giving the opinions and making the predictions requested by the applicant unless there was some reasonable basis to support them. The relevant breach of duty pleaded is that contained in paragraph 26(a), namely the making of the representations in paragraphs 12, 14, 16 and 17 of the statement of claim when there was no reasonable basis for making such representations.
The facts assumed in paragraphs 26(b) to (k) of the statement of claim, if proved on trial, may be such as to demonstrate that there was no reasonable basis to express the opinions or make the predictions which the first respondent is alleged to have done. The facts, if proved, may also show that relevant or sufficient inquiries were not made and in consequence there was a failure to exercise reasonable skill and care to ensure that the opinions and predictions were as reliable as reasonable skill and care would allow. However, the first respondent on the pleadings was not asked to ascertain and advise the applicant of the matters contained in paragraphs 26(b) to (k) and has not voluntarily assumed responsibility to do so. In consequence, if the applicant proves up the case as pleaded it will not prove up a duty and breach of the type pleaded in paragraphs 26(b) to (k) and it is not reasonably open to argument that it will do so. The applicant's case in this respect is, in my view, clearly untenable. In those circumstances the test for striking out as explained in General Steel Industries Inc. v. Commissioner for Railways (NSW) (1964) 112 CLR 125 at 129 - 130 is satisfied.
There is no allegation pleaded that either the second or third respondent personally undertook to provide to the applicant any advice or to express to it any opinion. The mere holding out by the second and third respondent that they had skill and expertise as alleged in paragraph 24 does not give rise to a relationship of proximity or to a duty of care to the applicant. Nor is there any allegation that the third respondent gave any advice or expressed any opinion in relation to any of the matters pleaded in paragraphs 12, 14, 16 and 17. Insofar as it is alleged that the second respondent did anything, it is alleged in paragraph 10 that he orally stated "on behalf of the first respondent" the prediction as to operating profit for the years ended 30 June, 1991 and 30 June, 1992. These statements are not however pleaded as having been relied upon by the applicant to enter into the contract to purchase the resort (see paragraph 19).
The applicant pleads no material facts against either of the second and third respondents which would create a relationship of proximity sufficient to give rise to a duty of care. The applicant does not plead as material facts that either of the second or third respondents voluntarily undertook to give to the applicant any advice and accept personal responsibility for that advice such as to create a relationship of proximity and give rise to a duty of care. Nor does it plead that it in any way relied upon anything done in the context of negligent misstatement by either of them whereby the applicant suffered loss or damage.
The pleading discloses no cause of action for negligent misstatement against either of the second and third respondents. There are therefore no material facts pleaded to support the allegations in paragraph 25 or the breaches of duty alleged against them in paragraph 26. The allegation in paragraph 24 by itself is irrelevant to any other cause of action pleaded. Paragraphs 24, 25 and 26, so far as it relates to the second and third respondent will be struck out. There being no basis to plead as against the second and third respondent a duty in terms of paragraph 25, so much of paragraph 36 as refers to the second and third respondent and any duty owed by them in terms of paragraph 25 (incorrectly typed as paragraph 24) will also be struck out.
The breach of duty pleaded in paragraph 26(a) against the first respondent is a different breach from any alleged failure to exercise reasonable skill and care to ensure that so far as reasonable care and skill would allow the opinions and predictions pleaded in paragraphs 12, 14, 16 and 17 of the statement of claim were reliable. The content of paragraphs 26(b) to (k) would suggest that the applicant wishes to allege such a breach of duty.
The most appropriate course is to strike out paragraph 26 and give to the applicant leave to replead against the first respondent only the breach of duty alleged against it in paragraph 26(a) and, if it wished to do so, a further breach of duty to exercise reasonable care and skill to ensure that the opinions and predictions alleged were as reliable as reasonable care and skill would allow, giving all necessary particulars of the alleged breach.
Paragraph 27 in its present form can only relate to the "matters" pleaded in paragraphs 26(b) to (k). Consequently the paragraph must fall with paragraphs 26(b) to (k). It may be that the applicant will wish to allege a causative link between the alleged negligence and the entering into the contract to purchase the resort. Therefore, the applicant shall have leave to replead paragraph 27.

Other Matters of Complaint
31. The respondents claim that paragraph 24 lacks particularity as to the holding out there alleged. As the paragraph is to be struck out as irrelevant, the complaint does not need to be further addressed. Likewise the reference in paragraph 36 to paragraph 24 of the statement of claim (which is a typographical error) being part of the paragraph which is to be struck out requires that no further order is necessary.

The pleading in paragraphs 42, 45 and 46 as to the material facts alleged to entitle the applicant to the relief claimed in paragraphs 45 and 46 is unclear and ambiguous. It is conceded by the applicant that it needs to be repleaded.
In paragraph 54 of the statement of claim it is alleged that the first respondent, as manager, regularly and persistently failed to pay superannuation contributions payable in respect of employees of the resort or to remit group tax. By paragraph 55 it is alleged that in failing to do so the first respondent thereby breached clauses 18 and 20.1.14 of the Management Agreement. Clause 18, as pleaded, provided:-

"18. PRESERVATION OF GOOD NAME OF THE OWNER ASR in carrying out its engagement hereunder shall act at all times to preserve the good name and repute of the Owner and will not do or cause anything to be done or suffered whereby such good name and repute shall be damaged or diminished".

Clause 20.1.14 as pleaded provided:-

"20.1.14 in accordance with good Hotel Industry standards to pay when due all invoices for all goods and services supplied to the Resort and to indemnify the Owner against any claims or demands or actions in respect of non- payment thereof".

The respondents submit that the pleading is deficient in that it does not identify whose employees the pleading refers to and that the clauses relied upon will not support an obligation to pay.
It is arguable that the question of who the employer was is irrelevant. Additionally, it cannot be said that it is unarguable that the obligations pleaded can in no circumstances mean that superannuation is required to be paid by the manager and group tax remitted by it. The paragraphs will not be struck out.
Paragraph 68 of the statement of claim requires amendment because of a typographical error. The paragraph should refer to clause 24 of the Management Agreement pleaded in paragraph 49(k) of the statement of claim and the applicant shall have leave to amend accordingly.
I will hear the parties on the question of costs.
The Court orders that:

1. Paragraphs 24, 25, 26, 27 and so much of paragraph 36 as relates to the second and third respondents of the statement of claim be struck out.

2. The applicant has leave to replead paragraphs 26 and 27 of the statement of claim within fourteen (14) days.

3. The applicant has leave to amend paragraphs 42, 45, 46 and 68 of the statement of claim in accordance with these reasons within fourteen (14) days.

[1994] FCA 295

17 MAY 1994