Warner v Elders Rural Finance Ltd

[1993] FCA 170

Re: ADRIAN ALLAN WARNER and JULIE FRANCES WARNER
And: ELDERS RURAL FINANCE LIMITED; KEITH RICHARDSON and QUEENSLAND INDUSTRY
DEVELOPMENT CORPORATION
No. Q G147 of 1992
FED No. 170
Number of pages - 14
Trade Practices
(1993) 113 ALR 517, (1993) ATPR 41-238
(1993) 41 FCR 399

COURT

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Foster(1), Hill(2) and Drummond(1) JJ.

CATCHWORDS

Trade Practices - misleading and deceptive conduct - silence - may be misleading or deceptive conduct if there is a "reasonable expectation" in the particular circumstances that information will be disclosed.

Trade Practices Act 1974 (Cth) - s. 52

Arnold v. State Bank of South Australia (Full Federal Court, unreported, 18 November, 1992)

David Securities Pty. Ltd. v. Commonwealth Bank of Australia (1990) 23 FCR 1

Demagogue Pty. Ltd. v. Nicholas Ramensky (1992) 110 ALR 608

General Newspapers Pty. Ltd. v. Australian and Overseas Telecommunications Corporation Limited (Federal Court, Wilcox J., unreported, 15 January, 1993)

Henjo Investments Pty. Ltd. v. Collins Marrickville Pty. Ltd. (1988) 79 ALR 83

Kabwand v. National Australia Bank Ltd. (1989) 11 ATPR 40-950

Kimberley NZI Finance Ltd. v. Torero Pty. Ltd. (1989) ATPR (Digest) 46-054

Rhone-Poulenc Agrochimic SA v. UIM Chemical Services Pty. Ltd. (1986 ) 12 FCR 477

Quade v. Commonwealth Bank of Australia (1991) 99 ALR 567

Winterton Constructions Pty. Limited v. Hambros Australia Ltd. (1993) 15 ATPR 41-205

HEARING

BRISBANE, 18 November 1992

#DATE 26:3:1993

Counsel for the appellants: Mr. T. Schulze

Solicitor for the appellants: Jennifer E. Darin

Counsel for the first and Mr. P.D.T. Applegarth

second respondents:

Solicitors for the first and Corrs Chambers

second respondents: Westgarth

Counsel for the third respondent: Mr. A.J.H. Morris and

Mr. L.J.A.T. Hampson

Solicitors for the third respondent: Feez Ruthning

ORDER

THE COURT ORDERS THAT:

1. The appeal is dismissed.

2. The cross appeal of the first, second and third respondents is allowed.

3. The order of the Honourable Mr Justice Beaumont of 7 October, 1992, whereby the appellants were granted leave to replead against the first, second and third respondents, be set aside.

4. The action against the first, second and third respondents is dismissed.

5. The appellants pay the costs of the first, second and third respondents of and incidental to:

(a) the appeal;

(b) the cross appeal; and

(c) the action;

including reserved costs, to be taxed.

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

JUDGE1

FOSTER AND DRUMMOND JJ. The appellants, husband and wife, operate a grazing property. The first and third respondents hold securities over the appellants' property which were granted to them in respect of financial accommodation made available to the appellants. The second respondent is an officer of the first respondent.

1. On 23 September, 1992, on the ground that the appellants had failed to make out a serious question to be tried, Cooper J. dismissed the appellants' application for interlocutory orders which, if granted, would have prevented the first respondent exercising its rights under its security. In reaching that conclusion, his Honour had regard to a proposed amended statement of claim put before him by the appellants. On 7 October, 1992 Beaumont J. ordered that an amended statement of claim filed by the appellants subsequent to the hearing before Cooper J., but in the form of the proposed pleading which had been put before him, should be struck out on the basis that it disclosed no reasonable cause of action. He did so for the same reasons that Cooper J. had relied on when refusing the appellants interlocutory relief. Beaumont J. granted the appellants leave to appeal from both the order of Cooper J. refusing to grant interlocutory relief and from his own order striking out their amended statement of claim. He also gave the appellants leave to re-plead. The respondents have cross-appealed against Beaumont J.'s order giving the appellants leave to re-plead.

2. At the outset of the hearing, counsel for the appellants conceded that the amended statement of claim struck out by order of Beaumont J. was defective. The issue for determination in the appeal thus became whether the order that the appellants should have leave to re-plead was to stand.

3. Counsel for the appellants argued in detailed written submissions, which he supplemented orally, that the appellants should be allowed to re-plead to set up a case that the dangers to which borrowers (including the appellants) became exposed by taking out a loan facility with a financial institution flowed from the fact that the lending institution did not lend cash or legal tender, but rather made available a facility in the form of credit in circumstances in which the credit thereby created, together with the credit created by all the other loan facilities made available by the particular institution, exceeded the capital reserves of the institution. In both written submissions and the amended statement of claim, it was asserted that from these core propositions consequences detrimental to the borrowers' capacity to repay necessarily flowed. This appeared to be basically the same case that was set-up in the pleading struck out by Beaumont J.

4. Counsel argued that the respondents' failure to inform the appellants of these matters was both in breach of a duty of care and misleading and deceptive and therefore in breach of s. 52 of the Trade Practices Act 1974 (Cth).

5. Counsel was, however, unable to identify any facts which, if proved, might give rise to a duty on the part of the respondents to convey this information to the appellants prior to their taking up the loan facilities, or which might oblige the respondents, on pain of being held to be in breach of s. 52, to give the appellants that same information prior to committing themselves to these facilities. This difficulty leaves the appellants with an insuperable problem in these proceedings.

6. Even if it be assumed for present purposes that the nature of the financial system in which the first and third respondents, along with all other lending institutions in Australia operate, is one which necessarily throws on to borrowers detrimental consequences of the kind referred to in oral argument and pleaded in the amended statement of claim (an assumption which we should not be taken to accept as well-founded), the appellants are still confronted with the difficulty of showing how conduct of the first and third respondents consisting entirely of silence in failing to explain to the appellants the nature of the financial system within which they operated might give rise to any liability either under the general law or under the Trade Practices Act. Unless the appellants can set up a case sufficient to show that the respondents were bound to warn or advise them, they are not entitled to the opportunity to litigate the validity of the theories which they seek to vindicate in this action.

7. In a recent decision of this Court, Demagogue Pty. Ltd. v. Nicholas Ramensky (1992) 110 ALR 608 the circumstances in which silence may amount to conduct in contravention of s. 52 of the Trade Practices Act were examined in detail by Gummow J., with whom Black C.J. and Cooper J. agreed. His Honour identified the proper approach to be taken in determining the issue of liability when silence on the part of the respondent is central to the applicant's case in the following way, at 618:
   

"But consistently with regard to the natural meaning of the terms of s. 52, the question is whether in the light of all relevant circumstances constituted by acts, omissions, statements or silence, there has been conduct which is or is likely to be misleading or deceptive. Conduct answering that description may not always involve misrepresentation ..."

1. His Honour approved the statement of French J. in Kimberley NZI Finance Ltd. v. Torero Pty. Ltd. (1989) ATPR (Digest) 46-054 at 53,195:
   

"The cases in which silence may be so characterised (as conduct in contravention of s. 52) are no doubt many and various and it would be dangerous to essay any principle by which they might be exhaustively defined. However, unless the circumstances are such as to give rise to the reasonable expectation that if some relevant fact exists it would be disclosed, it is difficult to see how mere silence could support the inference that the fact does not exist."

1. In addition to expressing general agreement with Gummow J., the Chief Justice observed, at 609-10:
   

"Silence is to be assessed as a circumstance like any other. To say this is certainly not to impose any general duty of disclosure; the question is simply whether, having regard to all the relevant circumstances, there has been conduct that is misleading or deceptive or that is likely to mislead or deceive. To speak of "mere silence" or of a duty of disclosure can divert attention from that primary question. Although "mere silence" is a convenient way of describing some fact situations, there is in truth no such thing as "mere silence" because the significance of silence always falls to be considered in the context in which it occurs. That context may or may not include facts giving rise to a reasonable expectation, in the circumstances of the case, that if particular matters exist they will be disclosed."

1. It may be granted that the appellants lacked knowledge of the nature of the Australian financial system and also lacked knowledge of what they claim to be a risk of detriment inherent in the way that system operates to which they would be exposed, along with all other borrowers, by obtaining financial accommodation from a lending institution operating within that system. This, however, in our view, is not a situation that can give rise to a reasonable expectation that the lending institution will give them an explanation of how the Australian financial system works and how that will, so it is said, necessarily expose them to risk of loss should they borrow from the lending institution. There is no foundation for the appellants' contention that the respondents' silence amounted to conduct in breach of s. 52 of the Trade Practices Act.

2. The circumstances in which silence can found a common law action for deceit are more narrowly confined than those in which it can provide the basis for an action under the Trade Practices Act in respect of conduct that infringes s. 52. Fleming, in The Law of Torts, 8th Ed., summarises the position at common law at pages 630-631 as follows:
   

"Ordinarily mere silence or passive failure to disclose the truth are not actionable, however deceptive in fact ... Several qualifications are in any event recognised. In the first place, a half-truth may just as much be a false representation as a complete lie: for example, setting out favourable passages of a report without the qualifications. Secondly, one who makes a false statement honestly believing it to be true but later discovers it was false, or one who makes a true statement which later events falsify, must correct it at any time before the deal is actually closed. Finally a duty of disclosure is demanded when the parties stand in some fiduciary relation to each other, like principal and agent or trustee and beneficiary or where a special need for public protection has been recognised by legislation, as under company law which now requires directors to include specified information in a prospectus." (pages 630-631)

1. The appellants were unable to point to any facts which they wished to assert and which, if proven, would make the silence of the first and third respondents with respect to the ramifications of the lending system actionable at common law.

2. Moreover, the appellants' case that persons who borrow from lending institutions are exposed to the risk of large losses, which risk is inherent in the way lending institutions carry on business and are for that reason entitled to a warning, is inconsistent with the decision of this Court in David Securities Pty. Ltd. v. Commonwealth Bank of Australia (1990) 23 FCR 1 at 21-22. See also Quade v. Commonwealth Bank of Australia (1991) 99 ALR 567 at 579 per Burchett J., Neaves J. agreeing. These decisions show that a failure by a lender of foreign currency to explain to a potential borrower the risks of loss inherent in such a transaction will not give the borrower any right to claim recoupment from the lender of losses he suffers, unless there is something more in the circumstances attending the transaction than the lender's mere failure to inform of those risks.

3. We mention that counsel for the appellants disclaimed any suggestion that the way in which the respondents carried on their loan business was unlawful, a disclaimer that was entirely proper, in view of the decision of this Court in Arnold v. State Bank of South Australia (SG 58 of 1992, Burchett, Hill and Drummond JJ., judgment delivered 18 November, 1992), which upheld an order dismissing an action by a borrower in which the borrower attacked the enforceability of a mortgage granted to a bank on the ground that the practice of credit creation engaged in by lending institutions was unlawful.

4. Reliance on grounds numbered 5, 6 and 8 in the notice of appeal was expressly abandoned, either in the appellants' written submissions or in the course of oral argument. Ground 7 in the notice of appeal, as explained in the appellants' written submissions, is a complaint that Cooper J. struck out paragraph 20 of the statement of claim in circumstances where his Honour failed to understand the point there raised. It was submitted that paragraph 20 sets up a cause of action based upon the notion that the first respondent was lawfully entitled to interest only on so much of the accommodation provided by it to the appellants under the agreement between them as represents the amount of "legal tender money", as opposed to "credit", which the first respondent is said to have risked by making the accommodation available to the appellants. Cooper J. said:
   

"The applicants argue that no money in the form of legal tender of the Commonwealth of Australia was paid to them by Elders and that all that occurred was the granting of a credit book entry in the circumstances pleaded. On the material, I am satisfied that money was paid by Elders for and on behalf of the applicants to discharge their debts and that such payment was an advance for the purposes of the stock mortgage. Such advance having been made the security interest attached to the livestock the subject of the mortgage.

...

Insofar as the allegations in paragraphs 18, 19 and 20 assert that the advances were not made because legal tender was not paid directly to the applicants, I consider that the assertion is misconceived and ignores the payments made on behalf of the applicants and which they received the material benefit of."

1. In holding that what the appellants received from the first respondent pursuant to their agreement was "an advance for the purposes of the stock mortgage" and that, upon the advance being made, the first respondent acquired a security interest in the livestock the subject of the mortgage, his Honour accurately summarised the effect of the agreement between the appellants and the first respondent in this regard. The stock mortgage takes the form of an assignment to the first respondent of the appellants' livestock in consideration of the first respondent agreeing, among other things, to make further advances to the appellants; there is a proviso for redemption or re-assignment of the mortgaged livestock back to the appellants upon them paying, on demand by the first respondent, all moneys which the appellants are liable to pay to the first respondent or to Elders IXL Limited. The appellants' covenant to pay interest on all such advances is contained in Clause 4(i) of the stock mortgage. The allegation said in the appellants' written submissions to be formulated in paragraph 20 of the statement of claim is without foundation: apart from any other deficiencies, it is in conflict with Clause 4(i) of the stock mortgage under which the appellants obtained the financial accommodation from which they benefited.

2. In our view the appeal should be dismissed with costs.

JUDGE2

HILL J. In this matter I have had the opportunity of reading in draft the judgment of Foster and Drummond JJ. I agree with their Honours and for the reasons they have given that the appeal should be dismissed. I should, however, like to add some remarks on the important question of liability under s.52 of the Trade Practices Act 1974, in circumstances where a failure to speak is alleged to constitute misleading or deceptive conduct.

1. In Winterton Constructions Pty Limited v. Hambros Australia Ltd (1993) 15 ATPR 41-205, in a discussion subsequently cited with approval by Wilcox J. in General Newspapers Pty Ltd v. Australian and Overseas Telecommunications Corporation Limited (unreported, 15 January 1993), I discussed circumstances where a failure to speak, sometimes referred to as "silence", might attract the operation of s.52 and warned against attempts to categorise the so-called "silence" cases when so to do would divert attention from the statutory test of misleading and deceptive conduct.

2. I illustrated, however, by way of example, the case where the false or misleading conduct consisted of telling a "half-truth", so that what was said, while true, was nonetheless, in the circumstances, misleading. I referred also to the case where the false or misleading conduct consisted of telling the truth, but when circumstances changed, not revealing that change. The misleading or deceptive conduct there would arise in circumstances where the person to whom the truth was originally told (for example, by way of a representation) was entitled to expect to be informed of any change.

3. Referring to what I called the so-called 'duty to advise' cases, I suggested that these rested upon the same principle. I said (at 40,887):
   

"Obviously, it is difficult to see how a mere silence could, of itself, constitute conduct which is misleading or deceptive or likely to mislead or deceive. However, if the circumstances are such that a person is entitled to believe that a relevant matter affecting him or her adversely would, if it existed, be communicated, then the failure to so communicate it may constitute conduct which is misleading or deceptive because the person who ultimately may act to his or her detriment is entitled to infer from the silence that no danger of detriment existed. Thus, where a duty to speak is imposed, silence may constitute misleading and deceptive conduct."

1. Of course, where a duty to speak is imposed by the general law, the circumstances will obviously be such that the person to whom that duty is owed will be entitled to infer from the silence that no danger of detriment exists. Failure to speak will thus easily be seen to constitute misleading or deceptive conduct. The converse is clearly not true. The fact that no duty to speak is imposed by the general law will not conclude the inquiry whether that failure to speak is to be characterised as conduct which is misleading or deceptive.

2. To that extent, therefore, I would agree with Gummow J. in Demagogue Pty Ltd v. Nicholas Ramensky (1993) 15 ATPR 41-203, 110 ALR 608, that the search for a "duty to disclose" might be to digress from the application of the terms of s.52. Certainly I agree, with respect to his Honour, that neither Henjo Investments Pty Ltd v. Collins Marrickville Pty Ltd (1988) 79 ALR 83 nor Rhone-Poulenc Agrochimie SA v. UIM Chemical Services Pty Ltd (1986) 12 FCR 477, ultimately depended upon the existence of a duty and my analysis in Winterton in fact points to the fact that Henjo, in which the applicant was successful, was what I have labelled "a half-truth case". I would not understand what his Honour said in Demagogue, however, to mean that it was irrelevant that a duty to speak arose, for so to say would be to disapprove the language of Bowen C.J. in Rhone-Poulenc (at 489-90) and of Lockhart J. in Henjo (at 95), both of which passages have been often cited with approval, including by Full Courts of this Court (see, for example, Kabwand Pty Ltd v. National Australia Bank Ltd (1989) 11 ATPR 40-950).

1. The test adopted by Black C.J., in separate comments, and by Gummow J., with whom Cooper J. agreed, in Demagogue, of the need to find a reasonable expectation that silence would be broken before failure to speak is misleading or deceptive, differs little, if at all, from the test I suggested in Winterton when I spoke of "entitlement to expect" or "entitlement to infer".

2. I would not have entered into further discussion of the matter but for the "Editorial Comment" with which Demagogue was published in the CCH report of the judgment. That comment suggested that there was some conflict between the judgment of Gummow J. in Demagogue and my discussion in Winterton. With respect, I think that the learned authors place too great an emphasis upon the comments made by Gummow J., with respect to the existence of a "duty to disclose". If one accepts the formulation of "reasonable expectation" in Demagogue as a test to be applied, either universally, or, at least, in most cases, the existence of a duty to disclose will still have significance. For where there is a duty to disclose, a fortiori there will exist in the person who suffers damage the necessary reasonable expectation of disclosure. That is to say, a person in that person's position would reasonably expect the making of a disclosure, where the law imposes a duty of disclosure. Where no such duty is imposed, but, as in Kabwand, is in fact excluded such as by virtue of a duty of confidence owed to another, there could be no reasonable expectation that a disclosure would be made.

3. Cases outside the categories of duty to disclose and the half-truth cases are likely to be rare, but their existence can not be discounted. At the very least, in such cases there would need to be a reasonable expectation that silence be broken before there could be found misleading and deceptive conduct. Whether reasonable expectation should be the sole test in every case need not be explored here.

4. The present is not a case where there existed in the first respondent any duty to warn the appellants. Nor can it be said that, on the facts of the present case, a person in the position of the appellants could reasonably expect that the first respondent would warn them of the dangers to which they might be exposed by virtue of the circumstance that the lending institution made available a facility, in the form of credit, in an environment where all other loan facilities of that institution were similarly in the form of credit and the total credit so made available was in excess of the capital reserves of the institution. In those circumstances, there could be no conduct on the part of the first respondent which was misleading and deceptive, or likely to mislead or deceive the appellants and the appeal must accordingly fail.