Willett v Thomas
[2012] NSWCA 97
•19 April 2012
Court of Appeal
New South Wales
Case Title: Willett v Thomas Medium Neutral Citation: [2012] NSWCA 97 Hearing Date(s): 10, 11, 12 October 2011 (Written Submissions completed 25 November 2011) Decision Date: 19 April 2012 Jurisdiction: Before: Basten JA at [1]
Macfarlan JA at [74]
Young JA at [217]Decision: (1) In respect of the appeal by Gregory Paul Willett:
(a) Allow the appeal in so far as it concerns the order for payment of compound interest and set aside orders 1 and 2 made on 5 or 8 November 2010.
(b) Otherwise dismiss the appeal.
(c) Order the appellant to pay the costs of the first, second and third respondents in respect of the appeal.
(d) Direct that the parties file amended amounts in respect of orders 1 and 2 made on 6 October 2010, calculating interest on the constituent parts of those amounts from the dates on which the amounts were paid until 6 October 2010, in accordance with the rates prescribed by the rules from time to time.
(e) Direct the Registrar to amend the amounts referred to in orders 1 and 2 made on 6 October 2010, so as to include the amounts of interest payable in respect of each order.
(f) In the event of the relevant amounts not being agreed within 28 days of the date of this judgment, direct that the matter be relisted before a judge of the Court for further directions.(2) Dismiss the application for leave to cross-appeal of Softsand Design Investments Pty Ltd with no order as to costs.
(3) Dismiss Mr Thomas' cross-appeal with costs.
(4) In respect of the appeal of Deborah Willett:
(a) Allow the appeal and set aside order (5) made on 6 October 2010.
(b) In lieu thereof, order:
5. The plaintiffs to pay the costs of the fifth defendant.
(c) Order that the first, second and third respondents pay the appellant's costs of the appeal.[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]
Catchwords: EQUITY - fiduciary duty - accountant - whether fiduciary obligations owed - breach - whether loss suffered
TRADE AND COMMERCE - misleading and deceptive conduct - ss 51A, 52 Trade Practices Act 1974 - ss 41, 42 Fair Trading Act 1987 - representations as to future matters - whether reasonable grounds for making representations - whether loss suffered in reliance
COSTS - Sanderson order - principles and application
Legislation Cited: Civil Procedure Act 2005
Fair Trading Act 1987
Trade Practices Act 1974 (Cth)
Uniform Civil Procedure Rules 2005Cases Cited: Bullock v London General Omnibus Co [1907] 1 KB 264
City of Botany Bay Council v Jazabas Pty Ltd [2001] NSWCA 94; [2001] ATPR (Digest) 46-210
Council of the City of Liverpool v Turano (No 2) [2009] NSWCA 176
Cummings v Lewis (1993) 41 FCR 559; (1993) ATPR (Digest) 46-103
Dib Group Pty Ltd v Ventouris Enterprises Pty Ltd [2011] NSWCA 300
Digi-Tech (Australia) Ltd v Brand [2004] NSWCA 58; 62 IPR 184
Fox v Percy [2003] HCA 22; 214 CLR 118
Gould v Vaggelas [1985] HCA 75; 157 CLR 215
Hagan v Waterhouse (1992) 34 NSWLR 308
Houghton v Arms [2006] HCA 59; 225 CLR 553
Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44; 149 CLR 191
Pilmer v The Duke Group Ltd (In Liq) [2001] HCA 31; 207 CLR 165
Quinlivan v Australian Competition and Consumer Commission [2004] FCAFC 175; 160 FCR 1
Sanderson v Blyth Theatre Company [1903] 2 KB 533
Sykes v Reserve Bank of Australia (1998) 88 FCR 511
Watson v Foxman (1995) 49 NSWLR 315
Yorke v Lucas [1985] HCA 65; 158 CLR 661Texts Cited: Category: Principal judgment Parties: Gregory Paul Willett (Appellant)
Eric Clyde Thomas (First Respondent)
John Leslie Sullivan (Second Respondent)
Softsand Design Investments Pty Ltd (Third Respondent)
Deborah Willett (Fourth Respondent)Representation - Counsel: Counsel:
Mr R J Weber SC/Mr I R Pike SC (Appellant)
Mr B Coles QC/Mr P E King (First, Second and Third Respondents)
Mr R J Weber SC/Mr I R Pike SC (Fourth Respondent)- Solicitors: Solicitors:
Moray & Agnew (Appellant)
Hayes & Partners (First, Second and Third Respondents)
Moray & Agnew (Fourth Respondent)File number(s): CA 2003/85446 Decision Under Appeal - Court / Tribunal: - Before: Pembroke J - Date of Decision: - Citation: Thomas v SMP International (No 4) [2010] NSWSC 984Thomas v SMP (International) No 5 [2010] NSWSC 1263Thomas v SMP (International) No 6 [2010] NSWSC 1311 - Court File Number(s) SC 2003/85446 Publication Restriction:
HEADNOTE
[This headnote is not to be read as part of the judgment]
Mr Eric Thomas and Mr John Sullivan, the first and second respondents, were injured in accidents and received large amounts by way of compensation. On the recommendation of Mr Greg Willett, the appellant, they invested these amounts in a business conducted by SMP (International) Pty Ltd ("SMP"). After the business failed and the investments were lost, Messrs Thomas and Sullivan commenced the present proceedings against Mr Willett claiming that he had breached fiduciary obligations owed to them and had engaged in misleading and deceptive conduct. They also claimed that Mr Willett's wife, Mrs Deborah Willett, and a person associated with SMP, Mr Eugene King, had engaged in misleading and deceptive conduct. The primary judge found in favour of Messrs Thomas and Sullivan on their fiduciary claim but rejected their misleading and deceptive conduct claims. His Honour declined to order that Messrs Thomas and Sullivan pay Mrs Willett's costs. Instead he made a Sanderson order requiring Mr Willett to pay those costs.
On appeal the Court held (unanimously except where otherwise indicated) that:
(1) Mr Willett owed fiduciary obligations to Messrs Thomas and Sullivan.
(2) (By Macfarlan JA; Young JA contra and Basten JA not deciding) the primary judge's finding that Mr Willett breached those fiduciary obligations was flawed.
(3) Messrs Thomas and Sullivan did not prove that they suffered loss as a result of any breach of those fiduciary obligations.
(4) The fiduciary claims should accordingly be dismissed.
(5) Mr Willett made representations in trade and commerce concerning future matters. These representations induced Messrs Thomas and Sullivan to invest in the SMP business.
(6) Mr Willett did not show that he had reasonable grounds for making those representations.
(7) Mr Willett accordingly engaged in misleading and deceptive conduct.
(8) (By Basten JA; Young JA agreeing; Macfarlan JA contra) Messrs Thomas and Sullivan's investments were made directly in SMP and not through a company named Softsand Design Investments Pty Ltd ("SSDI"). As their investments in SMP were not recoverable, Messrs Thomas and Sullivan demonstrated that they suffered loss as a result of Mr Willett's misleading and deceptive conduct and were entitled to damages.
(9) (By Macfarlan JA dissenting on this point) Messrs Thomas and Sullivan did not establish that they suffered loss in reliance upon Mr Willett's representations as they did not prove that their investments were irrecoverable from SSDI.
(10) Messrs Thomas and Sullivan were entitled to simple interest only, and not to the compound interest awarded by the primary judge following his finding that Mr Willett was liable for breach of fiduciary obligations.
(11) Neither Mrs Willett nor Mr King were shown to have engaged in misleading and deceptive conduct.
(12) The primary judge erred in declining to order that Messrs Thomas and Sullivan pay Mrs Willett's costs of their unsuccessful claim against her.
JUDGMENT
BASTEN JA: At the heart of this case was the outlay of funds in an attempt to revive a failing business. The sources of the funds were two friends, Eric Clyde Thomas and John Leslie Sullivan. Each had, prior to 1998, suffered serious personal injuries, resulting in payment to them of large amounts of compensation. The failed business involved the distribution of recreational clothing by a company, SMP (International) Pty Ltd ("SMP"). The party from whom Messrs Thomas and Sullivan sought to recover their losses was, primarily, Gregory Paul Willett, their accountant between 1998 and 2002, who recommended putting money into SMP.
The primary causes of action involved alleged breaches of fiduciary duty owed by Mr Willett to Messrs Thomas and Sullivan and alleged misleading and deceptive representations made by Mr Willett to Messrs Thomas and Sullivan.
Before the provision of financial accommodation to SMP, Mr Willett had arranged for Messrs Thomas and Sullivan to purchase a number of properties through a corporate vehicle, Softsand Design Investments Pty Ltd, referred to in the course of the proceedings as "SSDI". Whether the funds paid to or for the benefit of SMP were provided directly by Messrs Thomas and Sullivan or through SSDI, will be discussed below. At all material times, there were four shares in SSDI, one being held by each of Messrs Thomas and Sullivan and two by Mr Willett. The relevant beneficial interests in the company were a matter of dispute.
The primary judge, Pembroke J, upheld the claims for breach of fiduciary duty, but rejected the claims in respect of the alleged misleading and deceptive representations.
The principal appeal was that of Mr Willett. He sought the following orders:
1. Appeal allowed.
2. Judgment and orders of the Court below be set aside and in lieu thereof:
(a) there be judgment for the appellant;
(b) the first to third respondents pay the appellant's costs of the proceedings.3. In the alternative to order 2, the proceedings be remitted to the Equity Division of the Supreme Court for rehearing by the Court differently constituted.
4. The first to third respondents pay the appellant's costs of the appeal.
The first, second and third respondents were, respectively, Mr Thomas, Mr Sullivan and SSDI. (The fourth respondent was Deborah Willett, the appellant's wife, who brought a separate appeal in respect of a costs order only.) Despite the suggestion that order 3 was by way of alternative to order 2, it should be inferred that the appellant sought to have the orders of the Court below set aside in any event. That claim for relief requires identification of the orders made below. However, the focus of attention on the appeal was on the "findings" of the primary judge, with little reference to the orders made.
Messrs Thomas and Sullivan and, following the hearing of the appeal, SSDI, challenged the rejection of their claims based on Mr Willett's misleading or deceptive conduct.
Orders made in the Equity Division
The principal judgment in the Equity Division was delivered on 22 September 2010: Thomas v SMP International (No 4) [2010] NSWSC 984 (the principal judgment). Although orders were foreshadowed, they were not made, further submissions being anticipated in respect of the calculation of interest and the proper orders as to costs.
In the principal judgment, the trial judge proposed making orders that Mr Willett pay equitable compensation to Mr Thomas and Mr Sullivan "in the amounts specified in paragraph [76]": at [110]. He further noted that compound interest should be calculated on those amounts, from the date of each payment. At [76] he had identified the losses in question as "the amounts specified in paragraphs [48], [50(o)] and [59 (b)-(f)]". At [48] the trial judge identified payments made by Mr Thomas totalling $1.4 million. He further stated that "[o]n 12 October 2000, Mr Thomas made a further payment of $75,000 for SMP's benefit at Mr Willett's request and direction". At [59(b)] there was reference to a payment of $73,000 on 12 October 2000, by Mr Thomas into SSDI's account. The separate reference to two payments on 12 October in similar but not identical amounts was curious and suggested double counting. A further payment by Mr Thomas, referred to at [59(f)] was in the amount of $92,000. The inclusion of that sum appeared to be erroneous: the amount claimed in (f) had been rejected as not recoverable from Mr Willett.
The accounting in respect of Mr Sullivan was also anomalous. The amount referred to at [50(o)] was an amount of $500,000 obtained by Mr Sullivan by way of loan from Perpetual Trustees Victoria (at [50(f)]) and paid to the bank account of SMP. Although this was said to have been included in the amounts of equitable compensation payable to Mr Sullivan, in fact it appears that this amount was dealt with separately in the orders. The further amounts referred to at [59(c)-(e)] were payments by Mr Sullivan totalling $214,373.
On 6 October 2010, further reasons were given in respect of the losses suffered: Thomas v SMP (International) No 5 [2010] NSWSC 1263 (the supplementary judgment). First, his Honour referred to a payment by Mr Thomas of "$1,306,588 to discharge the NAB overdraft", being an overdraft facility obtained by SSDI: at [22(a)]). The judge noted that he had referred to the overdraft "in paragraphs 53(a) and (f) of the principal judgment". He did, but had not identified the precise amount. At [53(a)], there was reference to an overdraft facility in an amount of $800,000, guaranteed by Mr Thomas and Mr Sullivan and secured by a mortgage over SSDI's assets. At [53(f)] it had been noted that the overdraft facility was increased in May 2001 to $1.2 million. Although it was said in the supplementary judgment that there was "no dispute that Mr Thomas paid that sum", when and in what circumstances he did so was not then explained.
Secondly, the supplementary judgment referred to a claim by Mr Thomas in respect of "the proceeds of sale of the Marlo Road properties": at [22(b)]. The reference to "properties" was obscure, only one having been purchased. Further, the property was not owned by Mr Thomas but by SSDI. It was apparently purchased partly with an amount of $547,000 deposited by Mr Thomas into the SSDI bank account. The loss asserted by Mr Thomas appears to have been a result of the proceeds of sale being transferred, at Mr Willett's direction, to SMP or its creditors. Unless the property had been transferred by SSDI to Mr Thomas, this must have been a payment by SSDI to SMP.
These two additional amounts total $1,853,588. The order in favour of Mr Thomas was in an amount of $3,326,588. A reconciliation of these figures suggests that the amount brought forward from the first (principal) judgment was $1,473,000. That appears to have been a calculation based on there being only one payment made on 12 October 2000, in an amount of $73,000, as identified in [59(b)], not the amount of $75,000 identified at [48]. The $92,000 figure was not referred to, but was evidently excluded, the error noted above having been identified.
Thirdly, the supplementary judgment addressed further the loan of $500,000 originally thought to have been made by Mr Sullivan by payment into the HSBC bank account of SMP on 4 September 2000. Taking into account further submissions by Mr Willett the judge said, at [22(c)]:
"The evidence did not go far enough to identify the real loss suffered by Mr Sullivan as a result of that loan. There was no evidence from which I could infer that the capital amount of that loan, as distinct from some of the interest, had been paid in reduction of the loan by SMP or SSDI. There was not even evidence as to whether the loan was an interest only, or principal and interest loan. Nor in fact was there evidence from Mr Sullivan that he actually repaid the loan."
One might have expected evidence from Mr Sullivan, who was claiming the loan as a loss, that he had actually not been repaid. In any event, that amount was removed from the quantification of the claim and referred to an Associate Justice for inquiry.
Leaving aside the costs orders and incidental orders, two substantive orders were made on 6 October 2010, namely:
(1) That [Mr Willett] pay to Mr Thomas $3,326,588.
(2) That [Mr Willett] pay to Mr Sullivan $214,373.
It was anticipated that compound interest would be calculated on each amount, but that interest was not then quantified: order (3) being a note to that effect. The orders were entered that day, as directed by the trial judge: order (10).
The orders of 6 October had anticipated that final orders would be made in respect of the claims against SMP and Mr Eugene King, the latter having not appeared, and in relation to the two shares in SSDI held by Mr Willett: order 11(a) and (b). Further, the orders of 6 October had anticipated that final orders would be made "in relation to compound interest": order 11(c).
On either 5 or 8 November 2010 (the Court records are unclear), the following substantive orders were entered:
"1. That the fourth defendant (Gregory Paul Willett) pay to the first plaintiff (Eric Clyde Thomas) pre-judgment interest on the judgment sum mentioned in Order 1 made 6 October 2010 ($3,326,538) in the sum of $4,382,291.
2. That the fourth defendant (Gregory Paul Willett) pay to the second plaintiff (John Leslie Sullivan) pre-judgment interest on the judgment sum mentioned in Orders made 6 October 2010 ($214,373) in the sum of $257,789.
3. That the third plaintiff (Softsand Design Investments Pty Ltd) buy back one of the shares recorded in the name of the fourth defendant (Gregory Paul Willett) at nominal value, pursuant to s 257A of the Corporations Act 2011 (Cth) and in accordance with the procedures set out in Division 2 of Part 21.1 of that Act.
4. The Court grants leave for the First Plaintiff [Thomas] and Second Plaintiff [Sullivan] to file a notice of motion and affidavit in support in relation to seeking judgment against the First and Second Defendants [SMP and Eugene King], such motion to be heard on 18 November 2010 at 10:15am."
Although Mr Willet sought an order in effect setting aside all orders made in the Court below, he did not identify what those orders were. He identified some 76 grounds (with some further sub-grounds) but none addressed order 3 above.
A further judgment was delivered on 16 November 2010, dealing with the question of compound interest, but no order appears to have resulted: Thomas v SMP (International) No 6 [2010] NSWSC 1311. There is, in this Court's papers, a document said in the index to have been dated 15 December 2010 (although no date appears on the document) with the following "declaration", signed by solicitor and counsel for Mr Thomas and Mr Willett respectively:
"That in addition to the orders made on 6 October 2010 and 16 November 2010, the amount payable by [Mr Willett] to [Mr Sullivan], inclusive of interest, is in the sum of $1,100,775.57."
Curiously, the declaration was purportedly signed by the solicitor for Mr Thomas, but not for Mr Sullivan. Reference to orders made on 16 November is unexplained. The order is ambiguous: was the figure additional to the amount in order 2 made on two separate occasions so far, or was it the total amount payable, to be substituted for the earlier figure? No order in that form has yet been entered.
On 18 November 2010, the trial judge refused an application for default judgment against SMP (International) Pty Ltd and Mr Eugene King.
For reasons which are obscure, on 20 April 2011, the judge made orders in chambers in accordance with an attachment, which included the 12 orders previously made and added two further orders dismissing the proceedings against the third and fifth defendants, being David Joseph King and Deborah Willett. Fourteen orders were purportedly made, some by then superfluous, 12 thus being entered twice.
Apart from the fact that an appeal is brought against orders, not reasons and that the Court must know what orders it is invited to set aside, the exercise set out above has significance in two respects. First, if, as Macfarlan JA concludes, Messrs Thomas and Sullivan are entitled to recover damages for misleading or deceptive conduct, but not for breach of fiduciary duty, it may not matter whether their payments were channelled through SSDI. Secondly, if Messrs Thomas and Sullivan are entitled to judgments against Mr Willett in their favour, it is inappropriate that the amounts be paid to SSDI.
Breach of fiduciary obligations
The trial judge made orders for payment of equitable compensation to each of Mr Thomas and Mr Sullivan for breach of the fiduciary duties owed by Mr Willett to each of them. He further ordered that the amounts, which were constituted by the various payments made by Messrs Thomas and Sullivan to or for the benefit of SMP, should bear interest at the rates prescribed under the Uniform Civil Procedure Rules 2005 (NSW), compounding, with annual pauses. Mr Willett's appeal is primarily directed to those orders.
Macfarlan JA, with the agreement of Young JA, has dismissed the appellant's challenge to the finding that he owed a fiduciary obligation to each of Messrs Thomas and Sullivan. I agree with that conclusion.
In respect of the findings of breach of duty, I am inclined to the view expressed by Macfarlan JA that the findings made by the trial judge on this question were inadequate. However, I am content to deal with this cause of action on the alternative basis accepted by the other members of the Court, namely that Messrs Thomas and Sullivan did not establish that the alleged failure to disclose Mr Willett's shareholding in SSDI resulted in compensable loss. (It will be necessary to add in due course some further remarks on the relevance of the shareholdings of each party in SSDI.) I agree with the reasons of Macfarlan JA in that respect.
Misleading or deceptive conduct
The plaintiffs alleged that Mr Willett made a number of representations to them. Some related to present circumstances, whilst others were with respect to future matters. The case based on such representations gave rise to the following issues:
(1) were the representations made?
(2) when were they made?
(3) in respect of those representations which were made, were they misleading or deceptive?
(4) to the extent that the representations were with respect to future matters, did Mr Willett have reasonable grounds to make them?
(5) in so far as they were made, did the plaintiffs rely on them?
(6) did the plaintiffs suffer loss as a result of such reliance?To the extent that the representations were made by Mr Willett on behalf of SMP, it was pleaded that the representations were misleading or deceptive, or likely to mislead to deceive, in contravention of s 52 of the Trade Practices Act 1974 (Cth), as then in force: third further amended statement of claim ("the statement of claim"), par 111. To the extent that Mr Willett was not acting as an agent of SMP, the representations were alleged to have been made by him in trade or commerce, contrary to s 42 of the Fair Trading Act 1987 (NSW). To the extent that statements made by Mr Willett were made on behalf of SMP, it was alleged that he was a person involved in the contraventions by the company, being knowingly concerned in the contraventions, contrary to s 75B(1)(c) of the Trade Practices Act: statement of claim, par 117.
This case was rejected by the trial judge, but was reagitated by Messrs Thomas and Sullivan, pursuant to a notice of contention filed in this Court. It is convenient to address relevant aspects of the statutory provisions in relation to the issues which have been identified.
(1) and (2) Making and timing of representations
The relevant representations are set out below at [100]. Those identified as (b), (e) and (f) may be disregarded, the trial judge not being satisfied that statements to similar effect had been made by Mr Willett: at [92]. Somewhat unhelpfully, the discussion of the statements in the principal judgment was not addressed by reference to the pleaded representations and in some respects the findings made must be inferred. Thus, although it appears that he rejected the proposition that Mr Willett had told Messrs Thomas and Sullivan that he would "personally guarantee" moneys which they outlaid, at [92], he expressly accepted the proposition that Mr Willett had agreed to repay Mr Sullivan personally for a debt incurred on his Mastercard account on 18 September 2001 in an amount of $14,060: [59(d)], and see [60].
Although the trial judge did not identify the representation in terms, the statements in the first half of [92] accept, in summary terms, that Mr Willett represented that "SMP required short term finance to overcome cash flow problems" as alleged at par 35(a) of the statement of claim. The first part of paragraph 35(g), alleging representations that SMP was a business "in fantastic order" and "is booming" were clearly accepted by the trial judge: at [43] and [93]. Although there appears to have been no specific discussion of the second part of the sub-paragraph, namely that "gross annual sales" exceeded $10 million, Mr Willett gave evidence that he thought the business ought to have been generating a gross annual profit of about $5.5 million, which would have been consistent with gross annual sales in excess of $10 million: at [41]. Although his Honour made no express finding as to a statement to that effect, the evidence which he did accept made it clear that the evidence of Mr Thomas and Mr Sullivan in this regard should be accepted, as it appears to have been implicitly. Further, it is clear that the trial judge accepted, the statements alleged at (m), (o) and (u): at [43]. Apart from sub-paragraphs (a) and (g), the representations made were all as to future matters.
(3) Were representations misleading?
The trial judge rejected the misleading and deceptive conduct case based on these representations on the basis that the "various acclamations and enthusiasms" set out at [43] were not false or misleading: at [93].
This conclusion lacks a sound basis in the relevant elements of s 52 of the Trade Practices Act or s 42 of the Fair Trading Act. To identify the factual issues, it is convenient to set out the key representations and the respects in which they were said to involve conduct that was misleading or deceptive or likely to mislead or deceive (statement of claim, pars 35 and 113 respectively):
"(a) SMP required short term finance to overcome cash flow problems;
- contrary to the representation set out at par 35(a) above, at the time the SMP representations were made SMP was under such financial pressure that an injection of short term finance would not have been sufficient for it to overcome its financial problems, which were not limited to liquidity concerns;
(g) That SMP was a business 'in fantastic order' and 'and is booming' with the Australian arm of SMP, SSS, generating over AUD$10,000,000 of gross annual sales in Australia;
- Contrary to the representation set out at par 35(g) above, at the time the SMP representations were made SMP was not in 'fantastic order' as a business and it was not 'booming', it then being unable to pay its debts as [and] when they fell due;
(m) That SMP would improve its business performance as a result of Willett & Associates becoming involved as financial consultants and advisors to SMP, and that in particular it would improve as a result of Willett's managerial skills and know-how;
(o) That SMP was in its global infancy as a business and 'was rocketing in the right direction';
(u) That SMP will be as big as Billabong one day
- in respect of the future SMP representations [(m)-(w)] the plaintiffs rely upon the deeming provisions of s 51A of [the Trade Practices Act and] s 41 of [the Fair Trading Act] in respect of deemed falsity."
The pleaded representations were not in terms as to Mr Willett's belief, but as to the matters asserted. Nor, in discussing what Mr Willett said, did the trial judge make findings in terms of his beliefs. Whether the statements were misleading or deceptive, or likely to mislead or deceive, does not depend upon the state of mind, intention or motivation of the representor, but on an objective assessment of the conduct in question: Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44; 149 CLR 191 at 197 (Gibbs CJ). Thus, at least in relation to representations (a) and (g), the question of whether they were misleading or not appears to have been approached on an incorrect premise.
In respect of representations (a) and (g), there was evidence to support the conclusion that Mr Willett had made statements reflecting a "business plan" prepared for SMP for the years 2000-2005, the financial standing of which was inconsistent with the picture of the company presented in a report dated 7 February 2002, prepared by Knights Insolvency Administration. That report identified the principal business of SMP, Surf Snow & Skate Pty Ltd (SSS), as having a deficiency in the realisable value of its assets of about $1.4 million: report, par 4.8. (A second version of the page contained in the same report, identified the deficit as a little over $1.5 million.)
The trial judge made no findings in this regard and this Court was not taken through the evidence to demonstrate the financial status of SMP at the time of the representations, namely, at least in respect of Mr Thomas, between July and September 2000. The major additional contributions made by Mr Sullivan occurred in September and December 2001.
(4) Were representations as to future matters misleading?
There remain the representations as to future matters. There was no finding that Mr Willett was acting on behalf of SMP in making the representations: indeed, the trial judge's findings were that Mr Willett was acting as a financial advisor to Messrs Sullivan and Thomas at [67] (and possibly implicitly SSDI) and treating SMP as a potential vehicle in which, relevantly, Messrs Sullivan and Thomas could invest: at [44]. Accordingly, the representations were made by Mr Willett on his own account. The relevant statutory cause of action must therefore arise under s 42 of the Fair Trading Act. The provisions in respect of future matters are as follows:
"41 Interpretation (TPA s 51A)
(1) For the purposes of this Part, where a person makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act) and the person does not have reasonable grounds for making the representation, the representation shall be taken to be misleading.
(2) The onus of establishing that a person had reasonable grounds for making a representation referred to in subsection (1) is on the person."
In his defence, Mr Willett did not plead reasonable grounds, presumably because he denied making the representations at all. That was the position he maintained at the hearing of the appeal. Further, on appeal, Mr Willett contended that representations (m), (o) and (u) did not constitute statements as to future matters, but were statements as to Mr Willett's beliefs, namely as to his then existing state of mind.
These submissions should not be accepted. In the terms accepted by the trial judge, they were not statements as to his state of mind, except in the general sense that all predictions of the future could be so characterised.
The next step is to address the apparent dilemma faced by a putative representor who seeks to deny making a representation but also to rely upon the defence of reasonable grounds. (That s 41(2) imposes a legal or persuasive onus on the representor is the accepted reading of the section in this Court: Dib Group Pty Ltd v Ventouris Enterprises Pty Ltd [2011] NSWCA 300 at [20] and [31] (Allsop P, Macfarlan JA and Handley AJA agreeing). The forensic difficulty is highlighted by the summary of the issues to be demonstrated by the representor, set out by Heerey J in Sykes v Reserve Bank of Australia (1998) 88 FCR 511 at 513, namely:
(1) some facts or circumstances;
(2) existing at the time of the representation;
(3) on which the representor in fact relied;
(4) which are objectively reasonable, and
(5) which support the representations made.The difficulty for the representor who denies making the representation is (3). In written submissions of 17 October 2011, filed after the hearing, Mr Willett sought to obtain support from the reasoning of Mason P in City of Botany Bay Council v Jazabas Pty Ltd [2001] NSWCA 94; [2001] ATPR (Digest) 46-210 at [83]-[85], in relation to the application of Sykes, in circumstances where the putative representor denied making the representation. However, there is a level of ambiguity about the legal proposition for which this aspect of Jazabas stands: Mason P appears to have accepted that the representor was the Council and that it could demonstrate that it had reasonable grounds, without relying on the testimony of the officer who made the representation: at [82]. That is not a point which will assist Mr Willett. Nor is it correct to say as Mr Willett submitted, that the approach he identified as available according to Jazabas, was approved by Allsop P in Dib. Dib acknowledged the potential difficulty raised by Jazabas but did not grant leave to reargue its correctness, because the issue was found not to require resolution: at [53]. Given that there was a challenge which was not resolved, it would be erroneous to infer some implicit approval of Jazabas.
The issue therefore remains: is it possible for a representor who denies making the representation otherwise to invite the Court to infer that, had he made the representation, he would have had reasonable grounds on which he would in fact have relied? The submission went no further than to assert that the injustice which supposedly arises in such a case "is ameliorated by the fact that the Court is not confined to the express evidence of the representor as to a reasonable basis for any representation which has been established to have been made": submissions, 17 October 2011, par 6. That amelioration was, it was submitted, to be found in Cummings v Lewis (1993) 41 FCR 559 at 566 (Sheppard and Neaves JJ).
The question raised by Sykes and Jazabas, expressly and clearly identified by Allsop P in Dib at [35]-[36], is not a matter as to the means by which a representor can demonstrate, objectively, that reasonable grounds existed, but as to the difficulty (which is not so much practical as legal) in demonstrating subjective reliance. The difficulty appears to constitute an insurmountable obstacle in cases where the representor is an individual and, for whatever reason, gives an unequivocal denial of making any relevant representation, which is rejected.
In fact, Mr Willett is in a somewhat more difficult position than a putative representor who merely denies making the representation. His evidence, as demonstrated at [161] below, was to the effect that he would not have made unqualified affirmative representations as to the future of SMP, because his own inquiries did not support such a belief. The written submissions of 17 October 2011 seek to steer an impossible course between the propositions that:
(a) no representation as to future matters was made;
(b) if some representation were made, it was qualified in its terms, despite the findings of the trial judge, and
(c) so long as the qualifications were taken into account, such a representation was based on reasonable grounds.Neither the content of the representations, nor Mr Willett's own evidence permit acceptance of this approach. In effect his evidence indicated those matters upon which he did rely, which would not have provided reasonable grounds for any unqualified representation.
(5) Reliance
In analysing the fiduciary relationship, the trial judge stated at [61]:
"61 What Mr Willett did was enthuse Mr Thomas and Mr Sullivan in order to advance his own financial interests. He encouraged them with the acclamations about SMP's prospects which I described in [43] and [44] above. He made clear that he was now in control. He sought and obtained their trust and confidence. He relied on his superior financial expertise, his long experience of accounting practice, his supposed business management credentials and his past connection with, and knowledge of, Eugene King and SMP. He built on his established relationship with Mr Thomas and Mr Sullivan .... He made clear that he was in a position, as the new Chairman of the SMP group, to exercise control over its direction.
62 The impression that Mr Willett made on Mr Thomas and Mr Sullivan was that, in a sense, he now represented and stood behind the SMP group. This was, of course, more metaphorical than real. In late July 2000, Mr Willett had not put, or promised to put, any of his own monies or assets on the line. But these circumstances and expressions explain why Mr Thomas and Mr Sullivan believed that Mr Willett was 'guaranteeing' their investment. They were following him, accepting his recommendations and taking him on trust. Mr Willett knew this."
In identifying the relevant legal principles to be applied in respect of the cause of action under the Fair Trading Act, the trial judge referred to the statement of McLelland CJ in Eq in Watson v Foxman (1995) 49 NSWLR 315 at 318 to the effect that, "[w]here the conduct is the speaking of words in the course of a conversation, it is necessary that the words spoken be proved with a degree of precision sufficient to enable the court to be reasonably satisfied that they were in fact misleading in the proved circumstances."
As a general statement, this proposition (and those which followed in the much cited passage) provides an elegant statement of an important principle. It does not follow that the principle will always have application. The statute refers to "conduct" which may, but need not, be and be only, a representation. The conduct by which Mr Willett "conveyed the impression" to which the trial judge referred at [93] involved a complex net of circumstances, trust and statements. If what was said was, as his Honour stated at [94], "interwoven with puffery, eagerness and undue optimism" that may all properly be understood to be part of the misleading conduct. That the eagerness and other characteristics were "transparent to Mr Thomas and Mr Sullivan" may demonstrate why they relied on Mr Willett's statements, rather than the contrary. The eagerness of a trusted advisor who is believed to have intimate knowledge of an investment opportunity, and to have assessed it carefully, may do more to induce reliance on a recommendation than the actual words of the recommendation.
It may be, as Macfarlan JA infers at [166] below, that the trial judge made a finding to the effect that there was no reliance. If he did, for the reasons given and for those given by Macfarlan JA at [166]-[168] that conclusion was not only inconsistent with other aspects of his reasoning but was erroneous. There should be an affirmative finding of reliance on the part of Messrs Thomas and Sullivan in relation to each of the representations which were made and have been shown to be misleading.
(6) Assessment of loss
There are a number of questions to be addressed under this heading. One, which is not in doubt, is that all of the moneys advanced by Messrs Thomas and Sullivan directly or indirectly for the benefit of SMP are unrecoverable.
Secondly, the quantification of those moneys, subject to a question of the proper way to assess interest, is not in dispute. The sums provided by Mr Thomas total $1,473,000, and the amounts provided by Mr Sullivan an additional $714,373, including the $500,000 which was the subject of the referral to Macready AsJ and accepted (in an unreported judgment of 15 December 2010) as the capital loss suffered by Mr Sullivan.
Thirdly, there is a question as to identification of the party making the loans to SMP. There is no unequivocal finding that the amounts were in each case paid to or at the direction of SSDI. Some of the evidence militates in favour of such a conclusion, some is equivocal and some tends in the other direction.
Favouring such a finding, the trial judge appears to have accepted that, when recommending investment by Messrs Thomas and Sullivan in SMP, Mr Willett made it clear that "the vehicle for the investment in SMP would be SSDI": at [44]. However, care must be taken with this finding. Mr Willett said in his affidavit of 22 June 2010 (par 187), after noting that SMP required approximately $1 million to keep it afloat, "Sullivan, Thomas and I came up with these funds which were invested in SMP through SSDI". First, the trial judge did not accept that Mr Willett came up with part of the funds: rather, Messrs Thomas and Sullivan came up with a little under $2 million. Secondly, the term "invest" has a variety of connotations. It may mean purchasing equity, as opposed to making a loan entitling the lender to some return, by way of interest. In any event, the next paragraph in the affidavit stated:
"At or about this time [early to mid-August 2000] Thomas, Sullivan and I had a conversation in which I said words to the following effect:
'Whatever we each put in will be recorded in our loan accounts with SSDI and reconciled at the end.'
Both Thomas and Sullivan said that they agreed."
The representations were clearly intended to enthuse Messrs Thomas and Sullivan as to the possible return available from "investing in" SMP. However, the precise nature of the transactions by which this was to be achieved was, at least at that stage, undefined.
There was evidence which supported the view that the contributions made by Messrs Thomas and Sullivan were channelled through SSDI, but which was rejected. In discussing the question of "loss and compensation", at [78], the trial judge stated:
"The monies which they outlaid at Mr Willett's request during 2000 and 2001 for the benefit of SMP, were used and dissipated in the business of the SMP group. The legal status of those payments was opaque at the time and remained so. It is clear however that these monies will never be recovered. ... In any event, the SMP losses were suffered by Mr Thomas and Mr Sullivan, not by SSDI. They paid the monies from their own resources or borrowings."
There was a set of financial statements prepared for SSDI for the period ending 31 December 2001. (These appear not to be in the appeal papers.) Of them, the trial judge stated at [81]:
"This was done under pressure from, and at the insistence of, Mr Frykberg or his accountant. I can have no confidence in those pieces of paper prepared by Mr Willett. I would not be prepared to act on the basis of the information recorded in them. No attempt was made during the hearing to verify, sustain or uphold them."
There was also a set of accounts for SSDI contained in the reports prepared by Knights Insolvency, dated 7 February 2002, apparently on the basis that SSDI constituted part of the "SMP group". The SSDI accounts bear a facsimile header, apparently emanating from Mr Thomas, and dated 8 February 2002. They purport to include trading, profit and loss figures for the year ended 30 June 2002. They identify the current liabilities of the company as including shareholders' loan accounts in the name of Messrs Frykberg, Sullivan, Willett and Thomas. Of these accounts, the trial judge stated at [81]:
"Knights' instructions were to investigate the financial affairs of the SMP group. It was not instructed to investigate SSDI. Further, the investigations were not undertaken as an audit and they were not exhaustive."
One might add that, absent some further explanation, the dates noted above suggest that the accounts were, at least in part, fictitious.
Having rejected, correctly, the material which might have supported the view that loans were in fact made through or at the direction of SSDI, it was necessary to consider the countervailing material, which may have supported the view that there was to be an investment in SMP.
On the letterhead of Willett & Associates, there is a minute of meeting of directors of SMP said to have been held on 24 July 2000, attended by Mr Sullivan, Mr Willett and Mr Eugene King, Mr Willett being chairman. The item of business concerned payment of royalties within the group. On the same letterhead, and dated the same day, is a document entitled "Minutes of Meeting of Directors" of SSDI. The meeting was attended by Mr Sullivan and Mr Willett, Mr Willett being the chair. The minute read as follows:
"It is agreed that we will take equity in [SMP] ... and that we will receive 50% of all the companies and all the international companies.
Our aim is to reduce the loans to the Honk [sic] Kong Bank by $500,000.00, injecting approximately $600,000.00 cash flow as well as if we develop Bando Road, Eugene is to get a share of profits, which is yet to be decided.
There is to be a wavering [sic] of all royalty payments as the company [sic] is in an insolvent position. This is the consideration for our entry into the SMP group.
A telephone linkup with our other director, Mr Clyde Thomas, who has conferred [sic] the agreement."
The "agreement" was confirmed by letter from Mr Willett to the directors of SSDI (including himself), the following day. There were further exchanges of letters between SSDI and SMP in September 2000, which identified the benefit to Mr Eugene King as being "25% of the profits made from the Bando Road property development operated by [SSDI]". Solicitors (who had a prior relationship with Mr Thomas) wrote to Mr Sullivan "care of SMP International" setting out the non-specific terms of the share transfers which were proposed and asking that he arrange to have Mr Eugene King "sign a copy of this letter of intent for our records and for taxation purposes of [SSDI]".
It is not necessary to record here the subsequent events between September 2000 and February 2002. It is sufficient to note, as set out by the trial judge at [56]:
"On 12 February 2002, an agreement was entered into for the transfer to Mr Frykberg, Mr Willett, Mr Thomas and Mr Sullivan of 85% of the remaining 50% of the SMP group still held by the King Family Trust. The agreement was predicated on SSDI having already acquired the other 50% of the SMP group in September 2001 - although no documentation relating to the transfer of shares to SSDI had ever been lodged with ASIC. The February 2002 agreement was never implemented and nothing eventuated."
It may be added that, although a selection of ASIC records were tendered, the evidence before the Court revealed no completed transfer of shares in SMP (or any of its associated companies) to SSDI or to any other person associated with SSDI. The shares in SMP may well have been worthless by February 2002 (at which point the principal company appears to have required an immediate injection of $3 million to continue trading) but it is clear that the "loans" made by Messrs Sullivan and Thomas, whether on their own behalf or on behalf of SSDI, were not identified at any stage as being payments for any equity in SMP. Further, it should be noted that the agreement of February 2002, as noted by the trial judge at [56], involved the transfer of shares to, amongst others, Messrs Sullivan, Thomas and Willett, SSDI not being a party to the agreement.
Interestingly, the purported balance sheet for SSDI as at 30 June 2002 recorded as an asset, "investment SMP group" - $5,520,656.39.
Finally, it is convenient to refer back to the specific payments made by each of Mr Thomas and Mr Sullivan. Each of the payments made by them after July 2000 was identified by the trial judge as being made to or for the benefit of SMP - at [48], [50(o)]: none (with the possible exception of $73,000) was made to SSDI: see [59(b)], but see [48]. There is no finding, nor basis for a finding, that Mr Willett was acting as agent for SSDI in requesting that Messrs Thomas and Sullivan make payments to SMP. That is not to say that SSDI did not make payments to SMP. In November 2000, Mr Willett organised an $800,000 overdraft facility for SSDI, secured over SSDI's properties at Bando and Marlo Roads: [53(a)]. In May 2001, Mr Willett caused the overdraft facility to be increased from $800,000 to $1.2 million: [53(f)]. Mr Willett drew cheques on the SSDI bank account for SMP's purposes: [54]. Voluntary administrators were appointed to the main trading company of SMP, SSS, on 27 May 2002. Two days later NAB appointed receivers of its assets: [57].
It appears that all of the payments to or for the benefit of SMP were organised and arranged by Mr Willett. The terms of the payments and documentation of the arrangements pursuant to which they were to be made and repaid, were apparently non-existent. There appear to have been no relevant minutes of meetings of SSDI suggesting its involvement with any of the arrangements, although it clearly was involved in providing funds through the overdraft facility secured over its properties.
In the circumstances set out above, there is an absence of evidence supporting the view that the payments from Messrs Thomas and Sullivan were made to or at the direction of SSDI. The alternative view, which should be accepted, was that the payments were made by Messrs Thomas and Sullivan directly in favour of SMP and constituted loans by them to SMP or its associated companies. Each payment was made in reliance on representations with respect to SMP (not SSDI) made by Mr Willett. Accordingly, the losses suffered through the failure of SMP were, on the probabilities, suffered by Messrs Thomas and Sullivan directly. The terms of the loans are otherwise immaterial; absent the misleading conduct of Mr Willett, they would not have been made.
That leaves open a question as to the possible claims of SSDI in respect of money advanced by it to SMP. However, its appeal appears to have been intended as supportive of the rights of Messrs Thomas and Sullivan against the possibility that they had made payments at the direction of SSDI.
Conclusion
On this approach, and subject to the question of interest, the judgments in favour of Mr Thomas and Mr Sullivan respectively, against Mr Willett, should stand. The appeal in respect of orders 1 and 2 made in the Equity Division on 6 October 2010 should be dismissed.
Compound interest
The trial judge made orders to the effect that pre-judgment interest should be compounding as part of "well established principles applicable to defaulting trustees and fiduciaries, where the breach of duty was deliberate and wilful": at [109]. The basis for such an order having been removed, interest should be awarded on the usual basis.
Other matters
In view of the conclusions reach above, it is not necessary to deal with the relief sought in respect of the shareholdings in SSDI. The cross-appeal of SSDI should be dismissed, although its claim below appears not to have been resolved.
In relation to the claim against Deborah Willett and the claims against Eugene King, I agree with Macfarlan JA. I also agree with him in respect of the Sanderson costs order made by the trial judge. The appeal by Mrs Willett was confined to the costs order, pursuant to which Mr Willett was required to pay her costs of the proceedings in the Equity Division: order (5) made on 6 October 2010. Because the appeal was limited to the question of costs, leave was required and was granted on 9 May 2011. This order should be set aside and an order made entitling Mrs Willett to recover her costs from the plaintiffs, including her costs of her appeal.
Orders
The following orders should be made:
(1) In respect of the appeal by Gregory Paul Willett:
(a) Allow the appeal in so far as it concerns the order for payment of compound interest and set aside orders 1 and 2 made on 5 or 8 November 2010.
(b) Otherwise dismiss the appeal.
(c) Order the appellant to pay the costs of the first, second and third respondents in respect of the appeal.
(d) Direct that the parties file amended amounts in respect of orders 1 and 2 made on 6 October 2010, calculating interest on the constituent parts of those amounts from the dates on which the amounts were paid until 6 October 2010, in accordance with the rates prescribed by the rules from time to time.
(e) Direct the Registrar to amend the amounts referred to in orders 1 and 2 made on 6 October 2010, so as to include the amounts of interest payable in respect of each order.
(f) In the event of the relevant amounts not being agreed within 28 days of the date of this judgment, direct that the matter be relisted before a judge of the Court for further directions.(2) Dismiss the application for leave to cross-appeal of Softsand Design Investments Pty Ltd with no order as to costs.
(3) Dismiss Mr Thomas' cross-appeal with costs.
(4) In respect of the appeal of Deborah Willett:
(a) Allow the appeal and set aside order (5) made on 6 October 2010.
(b) In lieu thereof, order:
5. The plaintiffs to pay the costs of the fifth defendant.
(c) Order that the first, second and third respondents pay the appellant's costs of the appeal.MACFARLAN JA:
| TABLE OF CONTENTS | |
| Summary of case and conclusions | [75] |
| SSDI's shareholding | [89] |
| The judgments at first instance | [94] |
| The issues on appeal | [113] |
| The fiduciary claim | [114] |
| Fiduciary obligations | [114] |
| Breach of fiduciary obligations | [124] |
| Whether loss caused | [136] |
| Conclusion on fiduciary claim | [152] |
| The misleading and deceptive conduct claim | [153] |
| Whether representations were made | [153] |
| Were the representations misleading and deceptive | [157] |
| Reliance upon the representations | [166] |
| Whether loss was suffered | [169] |
| SSDI's cross-appeal | [178] |
| SSDI's shareholding | [183] |
| The claim against Mrs Willett | [187] |
| The claims against Mr Eugene King | [194] |
| The Sanderson costs order | [208] |
| Orders | [214] |
SUMMARY OF CASE AND CONCLUSIONS
Mr John Sullivan, the second respondent, was a commercial diver. As a result of suffering injury in a diving accident he received compensation of about $316,000 in 1994 and $450,000 in 1995. Mr Greg Willett, the appellant, is an accountant whom Mr Sullivan first met at school in Cronulla. For many years Mr Willett's firm, Willett & Associates, prepared Mr Sullivan's tax returns. Between 1984 and 1997 Mr Sullivan made various loans on Mr Willett's recommendation, including to persons and businesses associated with Mr Willett.
Mr Eric Thomas, the first respondent, was a commercial fisherman when in 1989 he suffered a serious motor vehicle accident. He subsequently received in excess of $5,000,000 as compensation. Mr Thomas met both Mr Sullivan and Mr Willett whilst at school.
The primary judge referred to Mr Sullivan and Mr Thomas as "men of limited education with substantial monies at their disposal, who regarded Mr Willett as financially astute, materially successful and well positioned to assist them by advancing their financial interests" (Judgment [19]). Mr Willett contested the accuracy of these propositions.
In their Third Further Amended Statement of Claim (the "Statement of Claim") in the present proceedings, filed in its original form in 2003, Mr Sullivan and Mr Thomas alleged that:
"In or around mid 1998, Willett gave Sullivan and Thomas advice the substance of which was that it would be advisable for Thomas to set up a company through which to purchase properties he was considering buying, for the reason, amongst others, that it would offer Thomas certain taxation advantages" (at [29]).
On 24 September 1998 Mr Willett caused a shelf company that he named Softsand Design Investments Pty Ltd ("SSDI"), the third respondent, to issue one ordinary share to each of Mr Willett, Mr Sullivan, Mr Thomas and a builder, Mr Hankinson. On 1 October 1998 Mr Willett caused Mr Hankinson's share to be transferred to him. Mr Willett's entitlement to the two shares that he came to hold in SSDI was in issue in the present proceedings.
In the period September 1998 to June 1999 SSDI purchased three properties in Bando Road and one property in Marlo Road, all in Cronulla. Mr Thomas provided to SSDI just under $3,000,000 to enable it to effect those purchases.
Commencing in the period July to October 2000 Mr Thomas and Mr Sullivan provided significant sums of money to SSDI for the purpose of investment in a business of manufacturing surf, ski and skateboard clothing conducted by a subsidiary of SMP (International) Pty Ltd ("SMP"). SMP was at that time effectively controlled by Mr Eugene King whom Mr Willett had known for a number of years in both social and business contexts (Judgment [39], [100] - [101]).
In mid-2000 SMP had severe cash flow problems but, according to the primary judge's findings, Mr Willett regarded it as "an investment opportunity" and "recommended and encouraged" Mr Thomas and Mr Sullivan to invest in it (Judgment [40] and [1]). SMP's business collapsed in May 2002 when voluntary administrators and receivers were appointed.
Thereafter Mr Thomas, Mr Sullivan and SSDI (collectively, "the plaintiffs") commenced the present proceedings against, inter alia, SMP, Mr Eugene King, Mr Greg Willett and Mrs Deborah Willett (Mr Willett's wife).
The claims made in the Statement of Claim that have continuing relevance are in essence:
(a) That Mr Willett owed fiduciary obligations to the plaintiffs which he breached, first, in connection with the plaintiffs' provision of funds for investment in SMP, and secondly, by profiting at the plaintiffs' expense and allowing his interests to conflict with theirs.
(b) That SMP, Mr and Mrs Willett and Mr Eugene King made misleading and deceptive representations to the plaintiffs concerning the financial position and prospects of SMP (and/or were knowingly concerned in the making of such representations) and that these induced the plaintiffs to provide funds for investment in SMP.
The primary relief sought was equitable compensation or damages equivalent to the amounts that the plaintiffs provided for investment in SMP.
The proceedings were heard by Pembroke J, sitting in the Equity Division of the Court. The hearing lasted five weeks. References in this judgment to the judgment at first instance are to the principal judgment, delivered on 22 September 2010. Also relevant to the issues on appeal are judgments dated 6 October 2010 (the "Costs Judgment"), 16 November 2010 (the "Interest Judgment") and 18 November 2010. The primary judge's findings were in essence as follows:
(a) Mr Willett owed fiduciary obligations to Mr Thomas and Mr Sullivan which he breached by dishonestly concealing from them that he had caused two shares in SSDI to be allocated to him.
(b) If that breach had not occurred, Mr Thomas and Mr Sullivan would not have provided monies to SSDI for investment in SMP. As the investments in SMP were lost, Mr Thomas and Mr Sullivan were entitled to compensation in amounts equivalent to those monies (Judgment [76]). These amounts were $3,326,588 in the case of Mr Thomas and $214,373 in the case of Mr Sullivan (Orders (1) and (2) made on 6 October 2010). A further amount of $497,964.92 was awarded to Mr Sullivan pursuant to a consequential judgment of Macready AsJ dated 15 December 2010 (the "Macready AsJ Judgment") ([8]).
(c) Mr Thomas and Mr Sullivan were entitled to compound interest on the judgments in their favour (Interest Judgment).
(d) Mr Thomas and Mr Sullivan's misleading and deceptive conduct claims against Mr and Mrs Willett failed (Judgment [92] - [99]).
(e) Mr Thomas and Mr Sullivan's application for the entry of default judgment against Mr Eugene King and SMP should be dismissed (Judgment dated 18 November 2010).
(f) A Sanderson order (see Sanderson v Blyth Theatre Company [1903] 2 KB 533) should be made in relation to Mrs Willett's costs, with the result that she obtained an order for costs against Mr Willett but not against the plaintiffs (Costs Judgment).
The parties challenged these findings as follows:
(a) By Notice of Appeal Mr Willett challenged the findings against him concerning breach of fiduciary duty and the primary judge's decisions to award compound interest and to make a Sanderson order;
(b) By Notice of Cross Appeal Mr Thomas (but not Mr Sullivan or SSDI) appealed against the decision in favour of Mrs Willett and against the primary judge's decision not to enter judgment against Mr Eugene King;
(c) By Amended Notice of Contention the plaintiffs contended that the judgment in favour of Mr Thomas and Mr Sullivan against Mr Willett could be justified on the alternative basis that he had engaged in misleading and deceptive conduct;
(d) By an application made after the appeal hearing Mr Thomas and SSDI sought leave for SSDI to be added as a cross-appellant to enable it to contend that judgment should be entered in its favour against Mr Willett and Mr Eugene King on the basis that they had engaged in misleading and deceptive conduct; and
(e) By Notice of Appeal Mrs Willett challenged the Sanderson order made in relation to her costs.
My conclusions in relation to the matters that were in issue on the appeal are as follows:
(a) Mr Willett did not succeed in his challenge to the primary judge's finding that he owed fiduciary obligations to Mr Thomas and Mr Sullivan (see [114] - [123] below) but did demonstrate that the primary judge's finding that he breached those obligations was flawed (see [124] - [135] below).
(b) The primary judge's finding that Mr Thomas and Mr Sullivan suffered loss as a result of Mr Willett's breach of his fiduciary obligations was erroneous. As the proper conclusion on the evidence is that they did not prove that they suffered such loss, their claim against Mr Willett for breach of his fiduciary obligations fails (see [136] - [152] below).
(c) Representations that Mr Willett made to Mr Thomas and Mr Sullivan concerning the prospects of SMP's business were representations as to future matters and, as Mr Willett did not show that there were reasonable grounds for the making of those representations, they constituted misleading and deceptive conduct (see [153] - [165] below).
(d) In reliance on that conduct Mr Thomas and Mr Sullivan advanced money to SSDI for investment in SMP (see [166] - [168] below).
(e) Mr Thomas and Mr Sullivan did not establish that they thereby suffered loss because they did not demonstrate that the loans that they made to SSDI are wholly or partly irrecoverable (see [169] - [180] below). Their claims against Mr Willett therefore fail, as does (for the same reason) Mr Thomas' claim against Mr Eugene King. I note that Mr Sullivan did not seek to pursue his claim against Mr Eugene King on appeal.
(f) SSDI's application to be joined as a cross-appellant to enable it to contend that judgment should have been entered in its favour against Mr Willett on the basis of his misleading and deceptive conduct should be granted (see [178] - [181] below).
(g) Mr Willett's misleading and deceptive conduct caused loss to SSDI: if Mr Thomas and Mr Sullivan had not been induced to advance money to SSDI for investment in SMP, SSDI would not have invested that money in SMP and those investments are worthless (see [176] - [177] below).
(h) SSDI is therefore entitled to judgment against Mr Willett for the amount of those investments, which equates to the total of the sums that Mr Thomas and Mr Sullivan lent to SSDI to enable it to make those investments (see [177] below).
(i) The misleading and deceptive conduct claim against Mrs Willett fails as she was not proved to have made relevant representations (see [187] - [193] below).
(j) Leave should not be given to SSDI to join in the cross-appeal for the purpose of pursuing its pleaded claim against Mr Eugene King. That claim therefore fails (see [194] - [207] below).
(k) The Sanderson costs order that the primary judge made should be set aside (see [208] - [213] below).
YOUNG JA: I am indebted to Macfarlan JA for his thorough exposition of the basal facts relevant to this appeal and for his recitation of the material portions of the primary judge's reasons.
I agree with Macfarlan JA that Mr Willett owed fiduciary duties to each of Messrs Thomas and Sullivan.
However, I respectfully disagree with his Honour on the issue of breach of that duty. In my view it was within the mandate of the primary judge to use the inconsistent evidence given by Mr Willett in the District Court as a major step in rejecting Mr Willett's evidence. Particularly in the light of Mrs Liddlelow's evidence, even if one discounts this as Macfarlan JA did.
The primary judge at [34] shows he did give deep consideration to the factual issues before him and although he found Mr Willett's evidence unreliable, he did not accept the reconstruction of Messrs Sullivan and Thomas.
However, if Macfarlan JA's view on causation is correct, then, this difference of opinion is of no significance in the result. As noted below, I respectfully adopt that view.
It will be remembered as Macfarlan JA has set out in [98], that at the end of his [66], the primary judge found that the trust and confidence of Messrs Sullivan and Thomas in Mr Willett "would have evaporated, just as it did when they learned the true facts in January 2002."
The primary judge said at [76] which Macfarlan JA has quoted in his [98] that he did not perceive any causation problem for this reason.
For the present I will put aside the pleadings and consideration as to how the case was run below. The case now being argued by Messrs Sullivan and Thomas was that Mr Willett said that he would set up a corporate vehicle which would be theirs. Mr Willett claimed that from the inception the SSDI company was a corporate vehicle for mutual investment opportunities. The primary judge found the true facts somewhere in the middle. He found that up until January 2002 Messrs Sullivan and Thomas each believed that they were co-venturers with Mr Willett in equal shares and that SSDI was the joint venture's corporate vehicle ([95]). In reality Mr Willett treated SSDI as his own [79]-[80].
The principal thrust of the appellant's submissions was that the case which the primary judge found established:
(a) was not pleaded;
(b) was not advanced by the plaintiffs below;
(c) was unsupported by any evidence;
(d) was not put to Mr Willett in his oral evidence or to his counsel during the course of the hearing.Mr Willett's counsel put (Orange 161 para 37) that the primary judge rejected the plaintiffs' case, but notwithstanding this, found that Mr Thomas and Mr Sullivan did not understand the implications of that shareholding and that they assumed that their respective interests in the company were equivalent, at least initially, to the investment (if any) which each of them made.
Appellant's counsel continued at paras 38-39:
38. There are a number of fundamental problems with this finding, any one of which is sufficient to undermine the entirety of the findings on breach of fiduciary duty:-
(a) neither Mr Thomas or Mr Sullivan gave evidence to this effect and thus were open to be tested on the logic/or lack of logic of it;
(b) neither Mr Thomas or Mr Sullivan said that they did not understand what was meant by owning a share in a company and in particular that an interest in a company was not represented by shareholding;
(c) both Mr Thomas and Mr Sullivan said that only Mr Thomas had invested moneys in SSDI and therefore a finding that each "assumed" that their respective interests in SSDI were equivalent to what each had invested was fundamentally inconsistent with a finding that Mr Willett and Mr Sullivan were shareholders at all;
(d) neither Mr Thomas or Mr Sullivan said that they understood that the respective interests of Mr Willett, Mr Sullivan or Mr Thomas changed over time - their case was clear and simple, that they did not know that either Mr Willett or indeed Mr Sullivan owned any shares in SSDI until 2002;
(e) it is inherently illogical to conclude, on the one hand, that Mr Thomas and Mr Sullivan must have been aware that Mr Willett was a shareholder in SSDI but then, on the other hand, to conclude that Mr Willett deliberately concealed from Mr Thomas and Mr Sullivan that he owned 2 shares in SSDI. This is in circumstances where the shareholding of SSDI, and in particular Mr Willett's 2 shares, was readily ascertainable by performing a search with ASIC and where Mr Sullivan was responsible, as a director of SSDI, for signing documents that went to ASIC to notify it of SSDI's shareholding.
39. A further fundamental problem of his Honour's finding in this regard is that it was never put to Mr Willett that he had deliberately concealed from Mr Thomas and Mr Sullivan that he (Willett) owned 2 shares in SSDI (as opposed to one) and that this was because he wanted to bring about a financially advantageous position at the expense of Mr Thomas and Mr Sullivan. This omission is easily explained: such a contention was never part of the case advanced at trial.
At the commencement of Mr Cole's submissions Basten JA said:
BASTEN JA: The point that was made for most of the day I think really Mr Coles was that his Honour neither found at the case pleaded nor the case to which the plaintiff's evidence had been directed but constructed a case which was internally inconsistent.
COLES: Dealing with both parts of that proposition your Honour as I understood our friends they were putting that. Another view may be of course and I'm not answering your Honour's question otherwise than by way of preface but another view of course may be that he did, as he was entitled to do, select those features of the evidence that produced the outcome which generated his conclusion.
BASTEN JA: I'm really asking you how you're going to respond.
Mr Coles understandably took a considerable time to reply. When he did he referred to paras 130-131 of the final version of the statement of claim. These read:
130. In the circumstances there set out, in his capacity as investment adviser in respect of the moneys of Thomas, Sullivan and Softsand, or alternatively joint venturer or partner with Thomas, Sullivan and Softsand in respect of SMP, or alternatively by virtue of the trust and confidence reposed in him by Thomas, Sullivan and Softsand, in respect of the moneys of Thomas Sullivan and Softsand Willett was in a fiduciary relationship with Thomas, Sullivan and Softsand with respect to matters in connection with Softsand and SMP.
131. In the premises, Willett had fiduciary obligations to Thomas, Sullivan and Softsand as follows:
i. to not provide inaccurate financial information about SMP;
ii. to provide full and frank disclosure of material information in connection with SMP, including as to its level of indebtedness;
iii. to not make false representations in relation to SMP;
iv. to act with the utmost good faith in the provision of financial information in relation to SMP as plaintiffs;
v. to not make inaccurate and careless comments in respect of the future direction and prospects of SMP as a business;
vi. to properly account and lodge documentation concerning the plaintiff's interests in SMP;
vii. to not let his interests conflict with those of Thomas, Sullivan and Softsand; and
viii. to not profit at the expense of Thomas, Sullivan and Softsand.
Paragraph 132 then alleged breach by acting contrary to para 131(i)-(vii) and para 133 alleged loss being the sum total of the loans made plus loss of dividends from SMP.
Macfarlan JA's paras [143]-[149] correctly summarize the situation. The alternate case was not pleaded and the evidence, not being directed to it, did not support it. Thus I agree with Macfarlan JA's [152].
Accordingly, the breach of fiduciary duty claim did not result in provable loss.
I then turn to the alternate claim in respect of misleading and deceptive conduct.
I agree with the conclusion as to liability reached by both Macfarlan JA and Basten JA. However, my brethren disagree on the matter of whether Messrs Sullivan and Thomas suffered loss. Macfarlan JA's view that they did not meant that he had to consider the further matter of loss by SSDI.
Although my mind has wavered on this point, I have ultimately reached the view that Basten JA's opinion on this matter is the correct one and I respectfully agree with his Honour on this matter.
It follows that I respectfully agree with the orders proposed by Basten JA.
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