Tassal Ltd v Russfal Pty Ltd
[2005] TASSC 92
•23 September 2005
[2005] TASSC 92
CITATION: Tassal Ltd v Russfal Pty Ltd [2005] TASSC 92
PARTIES: TASSAL LTD (ABN 64 009 548 770)
(RECEIVERS & MANAGERS APPOINTED)
AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED (ACN 005 357 522)
v
RUSSFAL PTY LTD (ABN 45 009 555 980)
DOEDENS, Richard John
RAADAS SALMON PTY LTD (ABN 39 083 124 565)
RUSSELL FALLS PTY LTD (ABN 13 009 495 470)
RAADAS HOLDINGS PTY LTD (ABN 41 083 124 510)
RAADAS PTY LTD (ABN 86 079 001 871)
TITLE OF COURT: SUPREME COURT OF TASMANIA
JURISDICTION: ORIGINAL
FILE NO/S: 183/2003
DELIVERED ON: 23 September 2005
DELIVERED AT: Launceston
HEARING DATES: 7, 8 April 2005
JUDGMENT OF: Crawford J
CATCHWORDS:
Procedure – Supreme Court procedure – Tasmania – Practice under rules of court – Amendments – Statement of claim – Whether claims made with bad faith – Whether claims untenable.
Aust Dig Procedure [276]
REPRESENTATION:
Counsel:
Plaintiffs/Applicants: J B R Beach QC and S Sharpley
Defendants/Respondents: S S W Couper QC and D A Bessell
Solicitors:
Plaintiffs/Applicants: Mallesons Stephen Jaques
Defendants/Respondents: Page Seager
Judgment Number: [2005] TASSC 92
Number of paragraphs: 80
Serial No 92/2005
File No 183/2003
TASSAL LTD (ABN 64 009 548 770)
(RECEIVERS & MANAGERS APPOINTED) and
AUSTRALIA AND NEW ZEALAND
BANKING GROUP LIMITED (ACN 005 357 522)
v RUSSFAL PTY LTD (ABN 45 009 555 980),
RICHARD JOHN DOEDENS,
RAADAS SALMON PTY LTD (ABN 39 083 124 565),
RUSSELL FALLS PTY LTD (ABN 13 009 495 470),
RAADAS HOLDINGS PTY LTD (ABN 41 083 124 510)
and RAADAS PTY LTD (ABN 86 079 001 871)
REASONS FOR JUDGMENT CRAWFORD J
23 September 2005
The plaintiffs sued the first to fifth defendants on 16 April 2003. A statement of claim was included in the writ. Subsequently, the sixth defendant was added. The statement of claim was amended on 1 March 2004. In October 2004 the plaintiffs changed their solicitors and different counsel were briefed to appear for the plaintiffs in the action. On 18 October 2004, the defendants' solicitors wrote to the plaintiffs' new solicitors, claiming that there were a number of deficiencies in substance and form in the amended statement of claim and referring to a number of paragraphs they considered were in that category. They invited the plaintiffs' solicitors to produce a further amended statement of claim.
Following a review of the pleadings and documents discovered by the parties, and a consideration of the matters raised in the letter from the defendants' solicitors, the plaintiffs determined to make further amendments. On 6 December 2004 it was ordered by consent that they serve a draft further amended statement of claim on the defendants on or before 24 January 2005. The plaintiffs did so on 25 January and they requested the defendants to consent to the plaintiffs being granted leave to file and serve the proposed amended pleading. The defendants refused to consent. On 1 February it was ordered by consent that the plaintiffs file and serve any application for leave to file and serve a further amended statement of claim within seven days. On 8 February the plaintiffs did so. It is that application I am determining.
The proposed further amended statement of claim ("the proposed pleading") contains 220 paragraphs. The pleading it is intended to replace contains 89 paragraphs. Some of the old claims have been repeated, although they have been expressed in far more detail. However, the defendants say that there are a number of new claims in the proposed pleading.
The defendants oppose most, but not all, of the amendments. Their counsel expressed much of their opposition as being based on an argument that the application to make the amendments was not made in good faith. I find such a description of the argument that was presented as misleading. It was not advanced by the defendants that the plaintiffs were acting fraudulently or with bad faith, knowing that there was no substance in what they were seeking to do. Instead, the substance of much of the opposition to the amendments was that it would be pointless to allow the amendments because the claims sought to be made by them are untenable and are doomed to fail at trial.
In support of much of the defendants' opposition to the amendments, a number of documents were tendered in evidence, but no reliance was placed on the testimony, oral or written, of witnesses. A problem arising out of such a method of opposition can be that documents only speak for what they say and there may be other documents available, as well as oral testimony, that might assist to prove or disprove a particular fact. The defendants presented no evidence that the documents they tendered were the only items of evidence available that might be cogent and relevant to a particular issue.
The exercise of the discretion whether to give leave for amendments to be made to a pleading is guided by an assessment of where the justice lies. Ketteman v Hansel Properties Ltd [1987] AC 189 at 220. The Supreme Court Rules 2000, r427(1), provides that leave may be granted to a party to amend a pleading "in such a manner and on such terms as may be just", and subr(2) provides that pleadings may be amended as necessary for the purpose of determining the real questions in controversy between the parties.
The plaintiffs did not seek to rely on evidence to support their application to amend so as to show that there was some merit in the claims raised by the proposed amendments. Affidavits in support are not normally required when an application to amend is made at an interlocutory stage. It is to the proposed amendments themselves that the judge must normally look and not to the merits of what is claimed. That point was made by Dawson J in The Commonwealth v Verwayen (1990) 170 CLR 394 at 456:
"In granting leave to amend, a court is concerned with the raising of issues and not with their merits. Of course, an amendment which is futile because it is obviously bad in law will not be allowed. But it is no ground for refusing an amendment that it raises a claim or defence which ought not to succeed. That will be an issue upon trial."
A judge does have power, in an appropriate case, to order to be struck out or amended any matter that may be unnecessary or scandalous or may tend to prejudice or delay the fair trial of the proceeding. Supreme Court Rules, r258(1). No doubt there is also power to strike out pleadings that are an abuse of process for some other reason. Counsel for the defendants submitted that the present case is an exceptional one, involving a proposed pleading that would be an abuse of process because the claims are untenable or are asserted on an entirely false factual basis. There is no reason why, in an appropriate case, a judge should not refuse leave to amend if circumstances are shown to exist which would justify the striking out of impugned material if it was already in the pleading. Nevertheless, striking out or refusing to give leave to amend because a claim is untenable should only occur in very clear cases. If there appears to be a reasonable cause of action, in the sense of there being some chance of success, that will normally determine the outcome in favour of the party seeking to uphold the pleading or proposed pleading which is attacked by the other party upon the basis of its lack of merit.
The action arises out of an agreement ("the sale agreement") dated 4 February 2003 by which the first defendant (then called Nortas Pty Ltd) agreed to sell its business to the first plaintiff. The sale was completed on 14 February 2003. Prior to the sale, they had each carried on the business of farming, processing and selling salmon. In mid-2002, the second plaintiff ("the bank") had appointed receivers and managers to the first plaintiff. It was the receivers and managers who, on behalf of the first plaintiff, conducted the negotiations which led to the sale. It was the strategy of the receivers and managers to purchase the business of the first defendant, combine it with the business of the first plaintiff and then on-sell the combined business. It was anticipated that the combined business would be sold for a substantially greater amount than the total of the values of the businesses of the first plaintiff and the first defendant if sold separately. Later, the combined business was in fact sold to Tassal Operations Pty Ltd, the sale being completed on 10 November 2003.
The claims by the first plaintiff are for damages for breach of warranties and other contractual terms in the sale agreement and for breaches of the Trade Practices Act 1974 (Cth), and the Fair Trading Act 1990 (Tas). The claims by the bank are not expressed to be alternatives to the first plaintiff's claims, and are for damages for breaches of those Acts and for equitable damages or compensation for unjust enrichment based on the bank's mistakes arising out of representations made to it. The first defendant has counterclaimed $6,873,000 for the purchase price of its business and monies which it claims have not been paid by the plaintiffs. They have not admitted that such amounts fell payable and in any event, they have claimed to set off their own claims.
The $500,000 warranty limit
The first plaintiff seeks to claim damages for breaches of a number of warranties in many paragraphs of the proposed pleading. The damages so claimed are considerable. For example, in par38, the damages claimed amount to many millions of dollars. In par154, the damages claimed are only $55,397. The total of all such damages claimed in the proposed pleading, is a great many millions of dollars. However, cl 16.5(c) of the sale agreement provided that the maximum aggregate liability of the first defendant for all claims for breaches of warranties would be limited to $500,000 "unless such Claim arises, directly or indirectly, as a result of fraud, misrepresentation or deliberate omission on the part" of the first or second defendants.
It was submitted for the first and second defendants that if the first plaintiff wishes to claim more than $500,000 damages for breaches of warranties, it must plead that the damages resulted from fraud, misrepresentation or deliberate omission and because it has not chosen to do so in the proposed pleading, it must follow that the claims for breaches of warranties must fail to the extent that they claim a sum that exceeds in total $500,000.
The submission is not a proper basis for refusing the proposed amendments. There is no reason why the defendants should not plead in their defence that the total of such damages must be limited to $500,000 by reason of cl 16.5(c). If it so pleads, it will be a matter for the first plaintiff to plead by way of reply, if it is its case, that it should not be so limited in its right to damages, stating why the limiting provisions of the clause do not apply.
Causation and the clause 5.1(k) claims
The warranties claimed to have been breached include warranties that the accounts of the first defendant gave a true and fair view of the financial position and state of affairs of the business (warranty 2.1); that the records of the business had been fully, properly and accurately kept and completed (warranty 3); that the plant and equipment agreed to be sold was in a good state of repair and condition and in good working order (warranty 5.2); that the fish being sold were not subject to any disease which would have a material adverse effect on their value to the business (warranty 6.4); and that the first plaintiff was not aware of any software which was not subject to a valid licence to be used in the business (warranty 13.2). It is unnecessary to state the effect of all of the warranties upon which the first plaintiff relies. It seeks to claim damages arising out of alleged breaches of many warranties.
Associated with alleged breaches of warranties, the first plaintiff also seeks to claim damages for breaches of cl 5.1(k) of the sale agreement. It provided that until completion of the sale (a 10 day period, as it turned out), the first and second defendants would ensure that the first defendant promptly notified the first plaintiff "of any fact which has or may have a prejudicial effect on the profitability of the Business or the use or value of any Asset or which requires action necessary to protect any Asset". The word "Business" meant the business that was being carried on by the first defendant and "Asset" extended to the tangible and intangible property and assets of the first defendant that were used in or relating to the Business. Reliance on a breach of cl 5.1(k) first appears in pars36 – 38 of the proposed amended pleading. To understand it, reference should be made to par24 and following paragraphs.
In summary, they include the following allegations. In the period of about two months preceding the sale agreement, that is in December 2002 and January 2003, the first defendant provided the first plaintiff with documents concerning the expected harvests of fish for the 2001 year class and 2002 year class salmon and trout then in the water ("the Fish Stocks Documentation") (par24). Those documents indicated that the harvest of the 2001 year class salmon from 1 January 2003 would be 1,047,638 hogg (heads off, gutted and gilled) kilograms, that the harvest of the 2002 year class salmon from 1 January 2003 would be 2,579,709 hogg kilograms and that the number of trout being purchased was 35,750 (par25). The fish harvests from 1 January 2003 were in fact for the 2001 year class salmon 770,780 hogg kilograms, for the 2002 year class salmon 1,720,405 hogg kilograms and for the trout 10,182 in number (par27). (I will ignore, at this point, mainly because no issue was raised concerning it, the different categorisation concerning trout, that is, the indication of the number of trout being purchased, on the one hand, and the trout harvest from 1 January 2003, on the other hand. Some amendment seems necessary so that the bases for par25(c) and par27(c) accord with each other.) The Fish Stocks Documentation were records and other materials that were inaccurate and contained material inaccuracies and discrepancies by reason of the matters referred to in paragraphs 24, 25 and 27 (pars28 and 30). As a consequence, the first defendant breached warranty 3, warranty 18.1 and warranty 18.3 (pars29, 34, and 31 respectively). At no time did the first defendant disclose to the first plaintiff that the harvest figures in par25 substantially overstated the harvest that could reasonably be expected (par32).
Paragraphs 36 – 37 state, in effect, that the matters referred to in par32 were facts which had a prejudicial effect on the profitability of the Business and/or the use and value of an asset of the Business, which were facts that were not notified by the first defendant to the first plaintiff prior to completion (par36) and as a result, the first defendant breached cl 5.1(k) (par37).
By par38 of the proposed amended pleading, it is stated that by reason of the breaches of warranties and cl 5.1(k), the first plaintiff suffered loss and damage that included an amount of $9,866,772, being $8,349,732 directly from a shortfall of fish and $1,517,040 indirectly from the first plaintiff having to prematurely harvest other fish that it owned in order to satisfy commitments to customers.
It was submitted for the first and second defendants that there can be no causal link between the alleged breach of cl 5.1(k) and the damages claimed, that is to say that the alleged failure to notify the first plaintiff of any deficiency in the expected fish harvest numbers in the 10 day period between the making of the sale agreement and its completion, could not as a matter of commonsense have caused the claimed loss and damage. On its face there seems to be merit in the submission. However, counsel for the first plaintiff countered by saying that the submission had taken it by surprise and that given a chance, it can provide particulars of the facts upon which reliance is placed to establish that the alleged breach caused the loss and damage in question.
Similar arguments in relation to cl 5.1(k) arose concerning pars56 and 57 (fish cataracts), pars75 and 76 (profitability representation), pars92 and 93 (defective plant and equipment), pars103 and 104 (missing assets) and pars152 and 153 (computer software licences). Prima facie, there was merit in the submissions of the defendants' counsel, but in view of the claim of the plaintiffs' counsel that facts can be stated to show a case for a causal link between the alleged breaches of cl 5.1(k) and the damages sought to be claimed, I will withhold refusing leave to include those claims in the proposed amended pleading until the plaintiffs have had a reasonable opportunity to draft further amendments for consideration. I will also defer further consideration of the allegations that Doedens is also liable for those breaches of cl 5.1(k) in pars190 and 191 upon the same basis.
The 12 month limitation period
Clause 16.5(d) of the sale agreement provided that despite any other provision of the agreement "the Buyer may not bring an action for breach of the Warranties unless such claim is notified within 12 months of the Completion Date". By definition cl 27.1 "notice means written notice and notify means notification in writing". It follows that the notice required by cl 16.5(d) must be written. The 12 month period ended on 14 February 2004. The action was commenced on 16 April 2003. The defendants tendered in evidence four written notices of claim from the first plaintiff. One dated 27 February 2003 was addressed to the second defendant. Two dated 5 March 2003 were addressed to the first defendant and the second defendant respectively and one dated 26 March 2003 was addressed to the first defendant. There was no evidence that no other written notices of claim were delivered. Counsel for the first plaintiff pointed out that there may well be other written notices and that it is possible that there was oral notice and for some reason the first defendant is estopped from relying on the defence of lack of notice within cl 16.5(d).
In the absence of cogent evidence that particular claims would be barred by the clause because they were not preceded with the required notice, I hold that leave to amend should not be refused on that basis.
Fish harvest claims
Paragraphs 24 – 43 of the proposed amended pleading fall under this heading. I pointed out earlier that some further amendment seems necessary so that pars25(c) and 27(c) accord with each other in terms of trout purchased or trout harvested.
By the existing amended statement of claim par34, the relevant allegation is that the number of fish delivered by the first defendant was less than the number disclosed at the time of completing the sale agreement. In the proposed pleading pars25(a) and (b) and 27(a) and (b), the allegation is instead that the weight of fish harvested after 1 January 2003 was less than what documents, provided by the first defendant to the first plaintiff prior to the sale agreement, stated was expected by way of fish harvest after that date.
By par28 in the proposed pleading it is stated in effect that because the actual harvests were less than the statements of what had been expected would be harvested, "the Fish Stocks Documents must have been inaccurate and must have contained material inaccuracies and discrepancies". By par29 it is asserted that in the premises, the first defendant breached warranty 3, which warranted in effect that the relevant documents did not contain material inaccuracies or discrepancies of any kind. Breaches of other warranties are also sought to be raised.
Counsel for the first defendant accepted that whether or not warranty 3 applied to predictions is a matter for determination at the trial. I note that only the predictions are attacked as inaccurate and not the factual assumptions upon which the predictions may have been stated to be based. Unseen events may have occurred subsequently to change the predicted outcomes. If that turns out to be so it will be a question for determination at the trial as to whether the warranties were breached.
It was pointed out by counsel for the first defendant that the predictions were of the harvest of the 2001 and 2002 year classes of salmon respectively from 1 January 2003. Counsel pointed to hearsay evidence in par4 of an affidavit of David Archibald Bessell sworn on 17 February 2005, that the first defendant proposed to commence harvesting the 2002 year class fish in or about June or July 2003 and to continue harvesting until about June or July 2004 in accordance with a document entitled "MONTHLY HARVEST SUMMARY – SALMON" that was part of annexure DAB 31 to that affidavit. I have not been able to understand that document so as to relate it to the first plaintiff's claim.
It was also submitted for the first defendant that the combined businesses were on-sold by the first plaintiff on 7 October 2003, at a time when the 2003 harvest was not finished and that it followed that the first plaintiff had not lost the predicted harvest. That is a matter that will need to be considered at trial. I am unable to reject the proposed paragraphs at this point because of the submission.
In the sale agreement a preamble to the warranties applied to warranty 3 and some other warranties. It provided that some of the warranties did not extend to any situation, matter or thing of which the buyer was otherwise aware. Counsel for the first defendant pointed to evidence, in the form of a number of documents, that suggested that the first plaintiff, through its receivers, was aware that the indicated harvests were inaccurate. In those documents concern was expressed as to whether the harvests would be as great as the first defendant had predicted and views were expressed that harvests were likely to be of a lower order. The evidence was referred to in an effort to persuade me that the first plaintiff's claim was untenable and would fail at trial.
Counsel for the first plaintiff submitted that at the trial the first defendant will bear the burden of proving that the first plaintiff was aware that the predictions were inaccurate. He accepted that the documents in evidence reveal that for the 2002 year class, for example, in making an assessment of the viability of the business, the receivers had "sensitised" the first defendant's figure down by 230 tonnes. But it is the first plaintiff's case that in fact the deficiency turned out to be about 850 tonnes, far worse, and counsel pointed to documents that suggested that material information was withheld from the first plaintiff. It is the first plaintiff's case that even if it was aware that a prediction was not totally accurate, it is not prevented from relying upon the warranties. Its case is that it had no idea of the extent to which the predictions were substantially overstated.
The conclusion I have come to is that the outcome of the trial will depend very much on what the evidence establishes. It may be that because the first plaintiff was aware of some inaccuracies in the predictions the damages it will recover will be limited, rather than extinguished.
Paragraphs 39 – 43 of the proposed amended statement of claim assert that by providing the Fish Stocks Documentation, with inaccurate statements of future harvest, and by making other similarly inaccurate statements, the first defendant made representations in trade or commerce (referred to as "the Fish Stocks Representations") and thereby engaged in conduct that was misleading or deceptive, or that was likely to mislead or deceive, contrary to the Trade Practices Act, s52, and the Fair Trading Act, s14. The first plaintiff seeks to claim that it agreed to purchase the business and its assets from the first defendant in reliance on those representations. Counsel for the first defendant submitted that the documents it put before me made it clear that the first plaintiff did not rely on the predictions and that consequently, the claims under the Acts are untenable. Counsel for the first plaintiff countered by submitting that even if the first plaintiff thought that the predictions were high it did not mean that the first plaintiff did not rely on them. Its case is that it did rely on them but reworked them for a more conservative estimate, which was still far greater than the eventual outcomes. In other words, the first plaintiff claims that it relied on the first defendant's representations as a starting point for its own estimates, and that so long as reliance was one of the inducements to enter into the sale agreement, that is sufficient. Reliance on representations need not be the only inducement. A minor role may be sufficient. Gould v Vaggelas (1985) 157 CLR 215 at 236; I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109 at 121. I accept these submissions.
Fish cataracts claim
In pars44 – 61 of the proposed amended statement of claim it is sought to recover damages from the first defendant because 71,110 of the year 2002 class fish were affected by cataracts. Blind fish cannot see to feed and the fish in question had to be culled. A number of warranties and other terms of the sale agreement are claimed to have been breached. An example is warranty 6.4, by which is was warranted that the fish were not subject to any disease or other form of harm, other than normal diseases found in the Tasmanian salmon industry, which would have a material adverse affect on their value to the business.
Once again, the first defendant relies on the preamble to the warranties which provided that they did not extend to any situation, matter or thing of which the first plaintiff was otherwise aware. Counsel for the first defendant pointed to some documents which suggest that the first plaintiff was aware, prior to entering into the sale agreement, that some fish had cataracts. For example, on the day before the agreement was made, the second defendant wrote to the receiver for the first plaintiff in which it was disclosed that "cataracts have emerged in some fish as another potential issue", adding "however I believe we are managing our way through such problems in a way that minimizes their profit impact". Another document, referred to as a Project Gateway report, which was sent to the first plaintiff on 7 January 2003, advised that "Nortas report cataracts amongst the 2002 stock" and that "whilst observations on fish feeding would suggest a low incidence, the condition is present and requires quantifying". There is no need to refer to all of the relevant documents.
It will be the first plaintiff's case at trial that the first and second defendants were well aware that cataracts in fish were a serious problem and that the second defendant in particular played down the extent of it. Counsel for the plaintiffs pointed to documents that raise a foundation for that. The first plaintiff may have been made aware that some fish had cataracts but nowhere near the number that in fact suffered from the disease. The amount of damages claimed under this head of claim is over $2,200,000. Counsel for the first plaintiff submitted that to state that it was aware of cataracts in some fish begs the question of what it was made aware of and what the first defendant was itself aware of but did not disclose. It was further submitted that there were material inaccuracies in records and material misrepresentations.
I am satisfied that the first plaintiff has a prima facie case for relevant breaches of some of the warranties. I refer in particular to warranty 18.1 by which it was warranted that the first defendant had disclosed to the first plaintiff all information relating to the assets and the business which was material for disclosure to an intending purchaser, and to warranty 18.3, by which it was warranted that all written information provided by the first defendant before completion was complete and inaccurate in all respects.
By pars59 – 61 of the proposed pleading, the first plaintiff seeks to claim damages for breaches of the Trade Practices Act, s52, and the Fair Trading Act, s14. It asserts that the making of warranties 2.3(a), 6.4, 6.5, 17 and 18.1 amounted to conduct that was misleading or deceptive, or which was likely to mislead or deceive, and that in reliance on those warranties the first plaintiff agreed to purchase the business and its assets. Those warranties were, in summary form, that since 30 June 2002 there had been no material adverse change in the assets or profitability of the business except as disclosed (warranty 2.3(a)); that the fish were not subject to any disease which would have a material affect on their value to the business (warranty 6.4); that except as disclosed the first defendant had carried on, and would up until completion carry on, its farming activities in a good and husbandlike manner (warranty 6.5); that the first defendant had not committed or omitted anything which amounted to a contravention of either Act (warranty 17); and that the first defendant had disclosed to the first plaintiff all information relating to the assets and the business which was material for disclosure to an intending purchaser (warranty 18.1). It was submitted for the first defendant that the claim under the Acts is untenable because the first plaintiff did not rely on those warranties so far as they related to fish cataracts. The documents referred to by counsel do not persuade me that is so. The first plaintiff certainly appears to have a case that the first and second defendants played down the extent of the cataracts' problem and failed to fully and materially disclose it. The extent to which the first plaintiff relied on those warranties should be left for determination at trial.
The first plaintiff seeks to rely on misinformation and failures to disclose with regard to cataracts in support of claims for breaches of warranty 2.3(a) and cll 5.1(g) and (k). Warranty 2.3(a) is expressed in absolute terms so that the preamble to the warranties concerning awareness of the first plaintiff does not apply to it. Awareness with regard to breaches of cll 5.1(g) and (k) is arguably immaterial also.
The first defendant has failed to persuade me that the fish cataracts claims should not be allowed by way of amendment.
Profitability representations claim
The claims for this are in pars62 – 82 of the proposed amended statement of claim. The first plaintiff seeks to allege that prior to sale the first defendant supplied it with projections for the 2003/2004 financial year that stated that the expected earnings before interest and tax ("EBIT") amounted to $3,600,000 and that representations to that effect were also made by the second defendant and another as agents of the first defendant. It is alleged that there were no reasonable grounds for projecting the EBIT at that figure and that the profit and loss statement expressing it contained material inaccuracies and discrepancies and was incomplete in material respects. The first plaintiff's case is that if the warranties and terms had not been breached as alleged in the proposed pleading, there would have been disclosed an expected EBIT loss of about $4,000,000, a figure $7,600,000 worse than was represented.
In defence of some of the breaches of warranty sought to be alleged by the first plaintiff, the first defendant once again seeks to rely on the preamble applying to some of the warranties that they did not extend to any situation, matter or thing of which the first plaintiff was otherwise aware. Counsel for the first defendant pointed to documents which, it was asserted, established that the first plaintiff was aware that the EBIT projection was inaccurate and did not rely on it, but instead made its own assessment of an EBIT profit of $2,100,000 for 2004, a figure of $1,500,000 less than the pre‑contract statements of the first defendant.
Counsel for the first plaintiff countered that argument by maintaining that the $2,100,000 figure was a more conservative estimate for the purpose of considering whether to buy, and which was reached by using the first defendant's figure and "sensitising" it down to the lower figure. He argued that it had not been established that the first plaintiff was aware that the first defendant's figure was in fact inaccurate in a material amount or that the first plaintiff has not relied on it. Further, it was pointed out that a different asset base was used for the two calculations and that because certain lands, that were used by the first defendant and owned by one of its associated companies, were not to be sold to the first plaintiff, for comparative purposes an adjustment upwards by $745,000, to eliminate a provision for rent, should be made to the first plaintiff's figure, increasing it to $2,845,000, the adjusted figure being not so materially different to the first defendant's $3,600,000 when compared to the actual loss that transpired in the amount of $4,000,000. It was further submitted that the basis for the defendant's EBIT was the 2003/2004 financial year, whereas the basis for the first plaintiff's figure was that it was to be used to calculate the value of the business.
I find it inappropriate to resolve these questions now. Whether the first plaintiff was aware of the inaccuracy of the first defendant's figure, and the extent and materiality of the inaccuracies of which it was aware, are issues that should await determination at the trial. Insofar as the first plaintiff claims to have relied on the representations as to the EBIT for the purposes of a claim under the Acts, that also is a question more appropriately left for trial.
Defective plant and equipment
The first plaintiff's claims under this heading are in pars83 – 97 of the proposed amended statement of claim. It is sought to claim that the first defendant breached warranties 5.2(a)(b) and (c) respectively because there was plant and equipment sold that was (a) not in a good and safe state of repair and condition, (b) not in good working order, and (c) not capable of doing the work for which it was designed or purchased, and which was in need of replacement. Associated with those matters are claimed breaches of warranties 17 and 18.1 and cll 5.1(g) and (k). Damages are sought to be claimed for those breaches and for misleading or deceptive conduct under the Acts arising out of the making of those warranties.
In paragraph 94, $542,500 damages are sought to be recovered for the breaches of the warranties and clauses. Counsel for the first defendant stated, without evidence, that nothing had been spent by the first plaintiff on replacing the items before the combined businesses were on-sold and that it followed that no cost of replacement was incurred. Counsel for the first defendant submitted as a consequence that there was no loss because the combined business was on-sold for a price based on a multiplier of estimated EBIT, and not on the value of the plant and equipment. Counsel cited Bence Graphics International Ltd v Fasson UK Ltd [1998] QB 87 at 98 – 100, 105 – 106 and Wertheim v Chicoutimi Pulp Co [1911] AC 301 as authorities for the proposition that if the parties to an agreement for sale contemplated a further sale by the buyer, the result of the later transaction can be looked at to see if there was in fact any loss and if not, damages will not be awarded.
Counsel for the first plaintiff countered by stating, also without evidence, that $36,000 was spent by the first plaintiff on replacing some of the defective plant and equipment and that, in any event, the first plaintiff will be entitled to recover damages commensurate to the difference in value between the items as warranted and the items in their defective condition. Faced with that assertion and without evidence to the contrary, the amendment should be allowed.
The first plaintiff also claims damages for deceptive or misleading conduct under the Acts, based on its claimed reliance on the warranties as representations. Counsel for the first defendant raised an argument that because cl 16.5(c) limited the maximum aggregate liability of the first defendant for all claims for breach of warranty to be $500,000 (except in the case of fraud, misrepresentation or deliberate omission) it could not be rationally said that the first plaintiff would not have entered into the agreement if the representations had not been made. On the other hand, counsel for the first plaintiff submitted that the $500,000 limit does not apply to liability for breaches of the Acts. Plainly, these arguments should be resolved at trial and not at this point in the proceedings.
Missing assets claim
The first plaintiff's claims under this heading are in pars98 – 108 of the proposed amended statement of claim. By pars98 and 99, the first plaintiff seeks to claim that at completion there were missing assets that were required for the successful conduct of the business and that as a consequence, the first defendant breached warranty 4.3(d). The terms of the warranty are not pleaded and they should be included. Evidence established that it provided in effect that the assets being sold were the only assets required for the successful conduct of the business. In association with this aspect of the proposed pleading, the first plaintiff also claims damages for breaches of warranties 17 and 18.1 and cl 5.1(k). By par105, damages totalling $473,920 are claimed with respect to 14 items said to have fallen within this category of missing assets.
Counsel for the first defendant asserted, once again without evidence in support, that the first plaintiff had spent nothing on replacing the items, and that because the first plaintiff on-sold the combined business it had suffered no relevant loss. It is inappropriate to reject the amendments because of such unverified assertions. I dealt with a similar argument concerning the defective plant and equipment claims. At the trial the parties will have the opportunity to call evidence for and against the assertions. I note, in any event, that counsel for the first plaintiff asserted that $34,200 was spent by his client on replacing some of the missing items.
Objection was also made for the first defendant because the first plaintiff has not pleaded the factual basis for the allegation that the assets in question were necessary for the conduct of the business. I reject that as a basis for disallowing the amendments. At trial a question may arise as to the meaning of "necessary" in its context and as to whether it should be interpreted as "reasonably necessary" or in some other way. No doubt evidence will be called to establish whether or not the assets in question were necessary for the successful conduct of the business. It may well be that if the first defendant adequately drafts an application for particulars of the allegation they may be ordered.
I also reject the submission for the first defendant that because the cost of replacing some of the items has been particularised at a figure as low as $7,500 in one case and $8,620 in another, it should be concluded that the claims are lacking in good faith. Such a conclusion is not open for that reason alone.
Computer software licence claim
By pars144 – 157 the first plaintiff seeks to claim damages for breaches of warranties 12.1(b), 12.3, 13.2, 17 and 19.1 and cl 5.1(k). The terms of warranties 12.1(b) and 12.3 are not pleaded and should be included. Central are the first plaintiff's claims that the warranties and clause were breached because among the assets purchased by it were computer systems with accompanying software and not all of the software was the subject of a valid licence from its owner for use by the business. Damages amounting to $55,397 are claimed, particularised as "the cost of obtaining valid software licences for the Unlicensed Software".
Counsel for the first defendant submitted that the claims must fail for the same reasons submitted concerning the defective plant and equipment claims. However, once again, there was no evidence that enables me to conclude that any of the claimed cost was not incurred. Further, counsel for the first plaintiff argued that even if nothing was spent, the first plaintiff would be entitled to recover damages commensurate to the difference in value between the software with the licences and the software without the licences. Resolution of these issues must await the trial.
Further loss and damage claim
By pars180 – 182, the first plaintiff seeks to plead that as was known by the first defendant, it was already the intention of the receivers and managers of the first plaintiff to combine the business being purchased with the first plaintiff's business and to sell the combined business as one. Such an on-sale occurred on 10 November 2003. The first plaintiff seeks to claim as damages, further to those already claimed, the losses suffered as a consequence of the price received on the sale of the combined business being less than the price that would have been received had there been no breaches of contract. Particulars of the further damages are, in summary, that if the breaches of contract had not occurred, including the breaches of warranty, the likely sale price of the combined business would have been $86,000,000 and that the loss on that sale was $38,000,000.
Counsel for the first defendant submitted that there was a lack of good faith and that what is claimed is extraordinary and fanciful. Counsel pointed to some documents which demonstrated that the first plaintiff may not be able to sustain that the price obtainable would have been as high as $86,000,000. However, it seemed to me that even on the figures in the documents that were referred to by counsel there may still have been a loss, although not as great as the one claimed, and that once again, the issue of damages must await the trial for resolution. I regard it as inappropriate to reject the claim on the limited evidence put before me. It has not persuaded me that the claim is untenable.
Claims under the Acts for damages
Paragraph 183 of the proposed pleading merely asserts that the first plaintiff suffered loss and damage as a consequence of the various breaches of the Trade Practices Act and the Fair Trading Act that are pleaded earlier and it includes particulars of the damages that are claimed.
A somewhat similar attack on the damages was made to the attack on the damages referred to under the previous heading. Once again, having regard to the limited material placed before me, I am unable to conclude that the first plaintiff will totally fail at trial.
Liability of Mr Doedens to Tassal
By pars184 – 201 the first plaintiff seeks to recover damages from the second defendant, Mr Doedens.
By pars184 – 188 it is claimed that Mr Doedens is liable as a principal for each of the breaches of warranty pleaded earlier in the proposed pleading against the first defendant for the following reasons. Recital C to the sale agreement stated that he was a director of the seller (the first defendant) and he "acknowledges giving the covenants and undertakings in this document in consideration for, and as an inducement to, the Buyer entering into this document". Clause 1 of the sale agreement provided that the words used in the document and the rules of interpretation that applied were set out and explained in cl 27, but it did not explain the meaning of either "covenants" or "undertakings". There were a number of clauses in the agreement that plainly applied to Mr Doedens. For example, it was expressly provided by cl 4.5(b) that in a certain event he agreed to enter into a management agreement of a certain kind and by cl 5.1 he expressly undertook to ensure, along with the first defendant, that until completion the first defendant would do certain things. There were other express covenants and undertakings by Mr Doedens in cll 5.2, 21 and 22.
Liability for warranties was provided for in cl 16. It was stated by that clause that "the Seller represents and warrants to the Buyer that each of the Warranties is true and accurate and not misleading at the date of this document and will be true and accurate on the Completion Date". By cl 16.4 the first defendant agreed to indemnify and keep the first plaintiff indemnified from all liabilities which the first plaintiff suffered or incurred by any of the warranties being untrue or inaccurate. There was nothing in the other provisions of cl 16 to suggest that Mr Doedens also gave the warranties.
The warranties themselves are to be found in Annexure 2 of the sale agreement. There are many of them in numbered paragraphs. They were not expressed in the form of personal undertakings or promises. For example, warranty 18.1 stated that the first defendant had disclosed to the first plaintiff certain information, but it was not, in its own terms, expressed as a warranty given by any particular party to the agreement.
The preamble to Annexure 2 and its warranties provided that except as expressly stated in the annexure as being absolute, all the warranties "have been given honestly and after reasonable enquiry and are to the best of the Seller's knowledge, information and belief".
There is no reason to think from any of the provisions of the sale agreement to which I have referred that Mr Doedens gave any of the warranties. All of those provisions made only the first defendant responsible for them.
The only provision in the agreement upon which the first plaintiff relies for making Mr Doedens liable for the warranties is to be found in the definition and interpretation cl 27. It provided (inter alia) that "in this document unless the context otherwise requires ... Warranties mean each of the representations and warranties made by the Seller and the Covenantor listed in Annexure 2". Mr Doedens was the Covenantor. It was submitted by counsel for the first plaintiff that notwithstanding that cl 16 and the preamble to the warranties in Annexure 2 purported only to provide that the first defendant gave the warranties, the definition of the word made Mr Doedens liable for them also. On the other hand, it was submitted by counsel for Mr Doedens that the definition clause should not be interpreted as overriding substantive provisions which clearly stated, so it was submitted, that only the first defendant gave the warranties. In reply, counsel for the first plaintiff submitted that it is a matter of construction that should be decided at the trial and not at this point in the action.
I conclude that the first plaintiff has no case against Mr Doedens for breach of the warranties. I have no doubt about that. Clause 16 made it clear that the representations and warranties in Annexure 2 were only made or given by the first defendant as the seller. The preamble to Annexure 2 supports that conclusion. The definition of warranties in cl 27.1 was merely a definition of a word "unless the context otherwise requires". It so required with regard to Mr Doedens' liability for the warranties. The reference to the Covenantor in the definition must be regarded as ineffective and erroneous. Leave to include pars186 – 188 by way of amendment will not be granted.
I deal next with pars189 – 191 which seek to rely on cl 5.1 against Mr Doedens. By cl 5.1 both the first defendant and Mr Doedens undertook to ensure that until completion the first defendant did certain things. Breaches of the first defendant's obligations in that regard are pleaded earlier in pars36 – 37, 54 – 57, 75 – 76, 90 – 93, 103 – 104, 126 – 131, 152 – 153 and 171 – 174. No objection was made to pars126 – 131 or to pars171 – 174 (and as a consequence, leave to include them by way of amendment, against the first defendant will be granted). I have given reasons for allowing the pleading of the other paragraphs against the first defendant. By pars189 –191 the first plaintiff seeks to make identical claims under cl 5.1 against Mr Doedens because it bound him in the same way as it bound the first defendant. On that basis it must follow that leave to amend by the inclusion of those three paragraphs should be granted.
Paragraphs 192 – 201 make claims against Mr Doedens under the Fair Trading Act, s14 and s41 (pars192 – 197) and under the Trade Practices Act, ss52, 82 and 87 and the Fair Trading Act, ss14, 37 and 41 (pars198 – 201). The only objection to them, that was raised by Mr Doedens' counsel, was expressed that they "are the subject of all the same difficulties as the equivalent claims made against the first defendant". As I decline to accept what was submitted for the first defendant in those respects it follows that leave will be given to the first plaintiff to include those paragraphs by way of amendment.
Claim by ANZ Bank
By pars202 – 220 the second plaintiff seeks to make claims against the defendants. It seeks to plead the following matters.
From time to time between January 2000 and 14 February 2003, which was the date for completion of the sale agreement, the bank provided financial accommodation to the first, third and fourth defendants (referred to as "the Doedens Group") (par202), particulars of which facilities appear in par203. (I infer that the financial accommodation was in the form of loans and advances.) All of the defendants provided the bank with mortgages, guarantees or other forms of security in respect of the financial accommodation (par204). As at the date of completion, the Doedens Group was indebted to the bank in respect of the financial accommodation for $7,927,860.50 (referred to as "the Doedens Group Debt") (par205). By cl 2.1 of the sale agreement, conditions precedent for the sale were, for the benefit of the first plaintiff, that the bank, in its capacity as the appointor of the receivers and managers of the first plaintiff, approved of the sale and its terms, and for the benefit of the first defendant, that the first plaintiff arranged for the bank to release and discharge the first defendant from its indebtedness to the bank and released and discharged the providers of the securities (par206).
The warranties by the first defendant are claimed by par22 to constitute representations by the first defendant as to the truth of the matters warranted (referred to as "the Warranty Representations").
Central to the bank's claims is par207. It states that acting in reliance on the Warranty Representations, the Fish Stocks Representations (see par39 of the proposed pleading and par32 hereof) and the Business Profitability Representations (described in par78 of the proposed pleading as being the representations made by the first defendant as to the profitability of the business), the bank approved of the sale, released and discharged the first defendant from its indebtedness to the bank and released and discharged all of the providers of the securities, and lent $7,927,865.60 to the first plaintiff in order that it would be able to complete the purchase. As a result, the first plaintiff replaced the first defendant as the bank's debtor and the bank gave up the securities for the debt that had been provided by all of the defendants.
The bank claims that it suffered loss and damage as a consequence and claims it (par208), limiting its claim to its ultimate shortfall following final determination of these proceedings. It claims damages as a consequence, basing its claim on alleged breaches of the Trade Practices Act, s52, and the Fair Trading Act, s14.
It was submitted by counsel for the defendants that for the same reasons that the first plaintiff's claims that are based on reliance must fail, the bank's claim must also fail. In other words, he submitted that there was no reliance on the representations. I rejected that submission earlier when dealing with the first plaintiff's claims, and I do so again for the same reasons.
It was also submitted by counsel for the defendants that there can be no valid basis for the loss and damage claimed to have been suffered by the bank because its claim is equal to or less than the first plaintiff's reliance-based claim and the first plaintiff and the bank cannot recover what would effectively be the same loss. To put it another way, it was submitted that whatever may be recovered by the first plaintiff will be for the ultimate benefit of the bank and it will have lost nothing. However, I accept the submissions in response of counsel for the bank. The claims of the first plaintiff and the bank are different ones and there is no chance of double recovery arising out of the same loss. It is possible that resolution of the first plaintiff's action in its favour will provide it with sufficient funds to discharge its indebtedness to the bank in full, in which case the bank will be bound to give credit to the defendants and make restitution to them. Matters of that kind will be capable of resolution at the time of judgment. They should not be regarded as an obstacle to the bank seeking to pursue its legal rights at this time.
Next it was submitted that the bank's claim is not made in good faith. Reference was made to a credit memorandum (DAB 62), which was prepared for the bank on 24 January 2003 and which, it was submitted, shows that the bank expected to be better off following the on-sale of the combined business. It was submitted that damages under the Acts can only be awarded to the extent that the deceived party is worse off as a consequence of relying on misleading conduct. In response, counsel for the bank submitted that the argument was fallacious, and that damages are to be assessed by comparing the bank's position it would have been in if the misleading conduct had not taken place with the position it came to be in. Counsel for the bank further submitted that there is no evidence upon which it can be found, at this point in the proceedings, that there was no loss. It was argued that if the misleading conduct had not occurred, a reduced purchase price or some other different terms may have been negotiated, and the ultimate loss may have been less, or the sale may have gone ahead without all of the securities being released and discharged. I conclude that it does not follow that the bank would have suffered the same losses, with or without its reliance on the misleading conduct, and that the issues concerning damages must be determined at trial and cannot be determined now with any confidence.
The bank seeks to claim on a different basis. It will plead that it approved the sale, released and discharged the first defendant from its indebtedness, released and discharged all of the providers of the securities, and lent the sum of $7,927,865.60 to the first plaintiff, under a mistake of fact or law (par217), the mistake being that each of the matters the subject of the Warranty Representations, the Fish Stocks Representations and the Business Profitability Representations was correct (par218). It will claim that to the extent that the defendants, other than the fifth defendant, benefited from what it did under that mistake they were unjustly enriched at the expense of the bank (par219). As a consequence, it will claim to be entitled to recover from those defendants equitable compensation or damages in respect of any benefit they unjustly gained at the bank's expense (par220).
It was submitted for the defendants that such a claim is not based on a cause of action known to law, because no money was paid by the bank to the defendants and it is not a claim that seeks to recover money paid to them under a mistake. My understanding of the submission is that a release and discharge of securities under a mistake does not give rise to a cause of action. In response, counsel for the bank submitted that by discharging the securities the bank notionally discharged and gave to the respective defendants an asset and that as a consequence of the mistake, those defendants were unjustly enriched and they are liable to pay equitable compensation or damages. Neither counsel referred to authority when making their submissions about the issue. They should refer to them at trial, in which case the trial judge will be in a better position than me to determine it.
It was submitted for the defendants that the bank's claim is inconsistent with the claim of the first plaintiff. Counsel argued that the first plaintiff seeks to treat the sale agreement as binding and enforceable, and seeks damages for breaches of it, whereas the bank seeks to recover damages upon the basis that if it had not been misled or mistaken it would not have permitted the sale agreement to proceed, and it seeks to be restored to its previous position. The proposition advanced was that different plaintiffs may not claim inconsistent alternative relief. Smith v Richardson (1878) 4 CPD 112.
I accept the submissions in response of counsel for the bank. The plaintiffs do not seek to claim on an inconsistent basis. They both base their claims on the same representations. Their claims accept that the business was sold by the first defendant to the first plaintiff. The measure and calculation of their damages may be different, but that is because of their different positions.
Conclusion
The application for leave to amend is substantially successful. The following orders will be made:
1Leave is granted to the plaintiffs to amend the statement of claim into the form of exhibit "DMG-2" to the affidavit of Domenic Mathew Gatto sworn on 8 February 2005 and filed herein with the exception of pars36 – 38, 56 – 58, 75 – 77, 92 – 94, 103 – 105, 152 – 154 and 186 – 191.
2That within 28 days the first plaintiff file and deliver to the defendants' solicitors particulars of the facts relied upon in support of its case that the breaches of cl 5.1(k) of the sale agreement alleged in pars37, 57, 76, 93, 104, 153 and 190 caused the damages claimed in pars38, 58, 77, 94, 105, 154 and 191 respectively.
3That the further hearing of the application so far as it concerns whether the first plaintiff should be given leave to amend by including pars36 – 38, 56 – 58, 75 – 77, 92 – 94, 103 – 105, 152 – 154 and 189 – 191 is adjourned to a date to be fixed upon the application of a party after 28 days from the date of this order or after the delivery of the particulars required by the previous order, whichever is the earlier.
4That within 14 days the plaintiffs amend the statement of claim so as to plead the terms of warranty 4.3(d) it is alleged in par99 was breached and warranties 12.1(b) and 12.3 it is alleged in par148 were breached.
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