Smith v FAI Leasing Finance Pty Ltd
[2002] QSC 270
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- Unreported Judgment
- Smith v FAI Leasing Finance Pty Ltd[2002] QSC 270
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Smith v FAI Leasing Finance Pty Ltd[2002] QSC 270
Smith v FAI Leasing Finance Pty Ltd[2002] QSC 270
SUPREME COURT OF QUEENSLAND
CITATION:Smith & Ors v FAI & Anor [2002] QSC270
PARTIES: LAWRENCE KEITH SMITH
(First Plaintiff)
and
LESLEY SMITH
(Second Plaintiff)
and
SHIPCAVE PTY LTD
(Third Plaintiff)
v
FAI LEASING FINANCE PTY LTD
(First Defendant)
and
FAI GENERAL INSURANCE CO LIMITED
(Second Defendant)
FILE NO:68/2002
DIVISION:Trial Division
DELIVERED ON:11 September 2002
DELIVERED AT:Rockhampton
HEARING DATE:27,28,29,30,31 May and 4 June 2002 in Mackay
JUDGE: Dutney J
ORDERS:Plaintiffs’ action dismissed. Judgment for the first defendant on the counterclaim against the plaintiffs in the sum of $4,193,414.40. Plaintiffs to pay the defendants’ costs of and incidental to the action to be assessed on the standard basis.
CATCHWORDS:MISREPRESENTATION – FRAUD - where non-disclosure of valuation –whether representations were made concerning a valuation of the resort - whether the plaintiffs relied on representations made by the defendant - whether plaintiffs formed their own view as to the value of the property
DAMAGES – TRADE PRACTICES ACT - BREACH SECTION 52 – whether deceptive and misleading conduct on the part of the defendant
EQUITY – FIDUCIARY RELATIONSHIP - UNCONSCIONABILITY – whether defendants owed a fiduciary duty to plaintiffs - whether their relationship more properly categorised as banker and customer – whether the plaintiffs were under under a “special disability”
Trade Practices Act 1975 (Cth), section 52
Cross on Evidence para [33540), approved
Hospital Products v United States Surgical Corp (1984) 156 CLR 41, followed
Phipps v Boardman [1967] 2 AC 46, followed
United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1, followed and distinguished
Bridgewater v Leahy (1998) 194 CLR 457, referred to
Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, referred to
Hart v O'Connor [1985] AC 1000, referred to
Louth v Diprose (1992) 175 CLR 621, applied
Blomley v Ryan (1956) 99 CLR 362, applied
COUNSEL:J.S. Douglas QC, with him P.O. Land for the Plaintiffs
H.B. Fraser QC, with him D O'Brien for the Defendants
SOLICITORS:Clewett Corser & Drummond for the Plaintiffs
WT Purcell Chadwick & Skelly for the Defendants
[1]The plaintiffs in this action are a Mr and Mrs Smith and a company formerly controlled by them but now in liquidation, Shipcave Pty Ltd (“Shipcave”).
[2]The action concerns the purchase of a resort just north of Mackay previously known as “Dolphin Heads Resort”. The plaintiffs purchased a 50% interest in the resort from the second defendant, FAI General Insurance Co Limited (“FAI General”) for $2,500,000. At the same time, Shipcave became the resort manager. The transfer of the interest in the resort and the take over of the management was achieved by means of a series of documents. These comprised a joint venture agreement between the plaintiffs and FAI General, a management agreement between the plaintiffs and FAI General, an agreement for the sale and purchase of a business between FAI General and Shipcave and a contract for sale of land between FAI General and the Smiths.
[3]The acquisition was financed by a loan to the plaintiffs from FAI Leasing Finance Pty Ltd, the first defendant (“FAI Leasing”). The loan consisted of an operating loan of $800,000, a purchase loan of $2,300,000 and a development loan of $275,000. The loan was secured over the resort land and business and over two properties owned by the Smiths at Tallai on the Gold Coast hinterland.
[4]The plaintiffs allege that they were induced to enter into these transactions as a result of representations made variously by a Mr Basil Klevansky and by Sir William Keys.
[5]The effect of the representations alleged against Mr Klevansky is that the resort (including some condominiums) was worth $6,000,000 and that FAI held a valuation to that effect. The reference to FAI does not distinguish between the various companies in the FAI Group. It was said and I accept that until the formal documentation was prepared there was never any differentiation between the FAI group companies. The transactions were presented to the Smiths by Mr Klevansky on the basis that FAI was the vendor and financier. Mr Klevansky, for example did not know what entity within the group would provide the loan.[1] The negotiations and consequently any representations took place in May 1992.
[6]The representations by Sir William Keys, a director of FAI followed the Smiths breaking off negotiations with FAI on 12 June 1992 because of the way in which the matter was being handled by a Mr Rubenstein of FAI. On about 13 June 1992, Sir William Keys is alleged to have telephoned Mr Smith and said that “FAI was a public company and that they would look after us. We would be an equal joint venture partner and that if we need any assistance not to hesitate in calling him and to feel free to open negotiations again and he would make sure that things were smoother”.[2]
[7]The representations relied on were oral. It is immediately apparent that the resolution of this case suffers from the fact that witnesses were talking of events that had occurred 10 years ago. I am not convinced that any of the witnesses now has any precise recollection of what was said so long ago.
[8]The resort was not ultimately a success in the hands of the plaintiffs. FAI Leasing eventually appointed receivers under its security over the resort in 1998. Along the way the Smiths were forced to sell the two Tallai properties and invested other money in the resort from which they derived no ultimate benefit.
[9]As at 31 May 2002 FAI Leasing claimed to be owed $4,040,012.39 including interest to that date.
[10]The plaintiffs allege that the representations on which they say they relied are actionable as constituting negligent misrepresentations, fraudulent misrepresentations, or contraventions of s 52 of the Trade Practices Act 1974 (Cth). It is also alleged that FAI in failing to disclose such valuations of the property as it had was guilty of a breach of fiduciary duty or unconscionable conduct.
Were the representations relied on?
[11]The representations are alleged to be false. The resort is alleged to have been worth less than $6,000,000 in May and June 1992. FAI did not hold and had never held a current valuation of the resort at $6,000,000. Such valuations as FAI held were neither current nor based upon assumptions consistent with the true state of the resort. FAI in fact held a valuation of the resort dated 1988 and prepared by Herron Todd White (“HTW”) which was prior to the construction and based upon assumptions which were no longer valid. This valuation was for a sum of $6,050,000 and was based upon an expected operating profit of $969,000. The resort was making a loss. FAI also held an HTW valuation of the resort as at 25 June 1991 valuing it as a going concern in its then condition at $3,990,000.00 plus a further $1,350,000 for 10 attached condominiums.
[12]The result of Sir William Keys’ statements was that the Smiths resumed the negotiations with FAI despite their dislike of Mr Rubenstein.
[13]The defendants deny the making of the representations or that the representations were a factor in the decision of the plaintiffs to enter into the arrangements. After considering all the evidence I am not persuaded that the representations on which each of the causes of action are based, whether made or not, were in fact relied on by the plaintiffs to any material extent in deciding to go ahead with the transactions.
[14]Looking at the evidence as a whole I am satisfied that the Smiths made their own assessment of the value of the resort to them based upon the profit they believed they could generate from its operation.
[15]In reaching this conclusion I have started from the position that Mr Klevansky at least expressed the opinion to Mr and Mrs smith that the resort, including the condominiums, was worth $6,000,000.[3] This price was the basis of the original figure of $3,000,000 for a half share in the resort. The price was later reduced to $2,500,000 when the condominiums were excluded from the transaction.
[16]In arriving at the end result I have endeavoured where possible to address the 10 year delay between the relevant conversations and the hearing by looking at the extent to which each sides’ evidence was consistent with their behaviour that can be independently verified.
[17]To my mind it would be unusual for a purchaser of a business to rely for the decision to purchase on the assurance of the vendor that it had an independent valuation supporting the sale price. It would, in my view, be extraordinary for a purchaser in such a situation not to insist on seeing the valuation. In this case there is no evidence that the valuation was ever requested in writing from FAI. This is despite Mr Smith writing to Mr Klevansky in July 1992 in anticipation of contracts being prepared stating:
“We still require a list of chattels, up to date Profit & Loss Statement and details of stock to be transferred”.[4]
[18]The absence of any request for the valuation needs to be considered in the light of Mr Smith’s evidence that Mr Klevansky had told him that a copy of the valuation would be in an envelope of information concerning the resort Mr Smith was to collect from the resort on 21 May 1992. There was such an envelope but it did not contain a copy of any valuation. Mr Smith says that he asked Mr Klevansky again for a copy on his return from the resort.[5]
[19]Despite this apparent and understandable concern about sighting the valuation no written request for it was ever made.
[20]That Mr Smith had some concept of his own regarding the value of the resort is borne out by figures which Mr Smith prepared in June 1992. Mr Smith caused these figures to be faxed to Mr Klevansky on 11 June 1992. They showed Mr Smith’s expectation of a profit for the proposed joint venture after interest on and repayment of the development loan of $268,000 in the first year, $324,000 in the second year, $532,000 in the third year and $660,000 in the fourth year.[6] In a facsimile from Mr Klevansky to FAI dated 27 May 1992, Mr Klevansky noted that Mr Smith believed that the resort could be worth $10,000,000 in 3 years. This estimate of value also appeared in one version of the plaintiffs’ statement of claim.[7]
[21]I find the most compelling explanation for the above evidence to be that whatever was said by Mr Klevansky concerning the value or any valuation of the resort, by June 1992 Mr Smith had formed his own assessment of what the resort would be worth in his hands. Undoubtedly Mr Smith started with the asking price of $3,000,000 for a half share (including the condominiums) but, as I would normally expect, he then carried out his own appraisal. The likelihood of this is increased by the fact that Mr Smith engaged both an accountant and solicitors in connection with the transaction. The only rational explanation for the solicitor in particular not referring to the valuation at any time during the currency of the transaction is that Mr Smith never mentioned to her that one had been promised or relied on. No complaint was made about the solicitor’s conduct of the transactions.
[22]It is worth setting out in detail some of the correspondence between the respective solicitors to demonstrate the thoroughness with which the transaction was conducted by the solicitor. I have done this in the Schedule appended this judgement.
[23]The allegation that the plaintiffs purchased the interest in the resort on the basis of a valuation they had not seen is made more remarkable where they knew they were embarking on a loss making venture. I am satisfied that the profit and loss statement was shown to the Smiths very early in the negotiations. The document was also annexed to the business contract. The suggestion that the plaintiffs accepted the statement that there was a valuation at face value because it was made on behalf of an apparently reputable public company imputes to Mr Smith a level of naivety I am not prepared to accept. Mr Smith had a lengthy history in the hospitality and resort industry as evidenced by his curriculum vitae.[8] While the evidence suggested that some of the history it recorded was overstated, the experience was sufficiently broad to suggest that Mr Smith had some understanding of commercial dealings.
[24]Finally, it is necessary to refer to a portion of the cross-examination of Mr Smith by Mr Fraser QC at page 82:
“Well based on the assessment of the profits you thought you’d earn it was well and truly worth your while to pay two and a half million dollars to get into the resort, wasn’t it? – Yes.
And that’s why you did it, wasn’t it, because you thought you were going to make a gold mine? – No, I didn’t think I was going to make a gold mine.
You thought you were going to make a lot of money out of it? – Thought I was going to make some sort of profit out of it, turn the resort around, yes.
Well you used your own judgement in looking at them as to how they could be improved, didn’t you? – Yes, with myself and Klevansky talking about the improvements that could be made, he agreed with what I’d said, yes.
And that’s why you decided to buy the resort, wasn’t it? – Yes”.
[25]No complaint was made in the action concerning the reliability of the profit and loss figures supplied by FAI in relation to the operation of the resort.
Were the representations made?
[26]The same evidence which persuades me that the plaintiffs did not rely on any representation concerning the value of the resort also persuades me that the references by Mr Klevansky to the amount the resort was worth did not include a representation that FAI held a valuation at $6,000,000. I accept Mr Klevansky’s evidence that he did not know of any valuation. It seems to me to be more likely that over time the Smiths’ recollection of Mr Klevansky’s expressed opinion as to the value of the resort has merged with their later discovery of a valuation showing the resort worth less than they paid.
[27]On the plaintiffs’ own case, in September 1997, Mr Smith discovered that the alleged representation by Klevansky was misleading or dishonest when he saw a copy of the July 1997 HTW valuation showing a going concern value of $3 million.[9] But despite the fact that FAI Leasing had been pressing for repayment of the loan,[10] that the Smiths had sold their properties to reduce the principal and that Mr Smith had already made accusations of misconduct, he did not once write accusing Klevansky of fraud.
[28]Mr Smith’s complaints in 1997 and 1998 suggest that his real grievance was that the HTW valuation indicated that he had paid more than what, in HTW’s opinion, was the value of half of the Resort in 1992.[11] Mr Smith’s oral evidence of a 10 September 1997 meeting with representatives of FAI in Sydney did not suggest that he then complained of an alleged misrepresentation that in 1992 FAI had an HTW valuation of $6 million. He said only[12] that he brought the HTW 1997 valuation of $3 million to Mr Rubinstein’s notice. He did not say that he complained to Mr Rubinstein of any representation about an HTW valuation, or anything else. That is consistent with Mr Smith’s subsequent letters and his failure to respond to Mr Rubinstein’s requests to explain his complaint.
[29]While all this is after the event, it is consistent with no representation concerning a valuation having been made at the time of the original negotiations. It is inconsistent, in my view with such a specific representation being made and relied upon in deciding to proceed with the transaction. I am not persuaded that there was in fact any representation by Mr Klevansky to the effect that FAI held a valuation of the resort (and condominiums) at $6,000,000.
[30]I accept that the words “FAI Liquidation Value – six million dollars” at the top of the early proposals prepared by Mrs Smith probably came from Mr Klevansky. Just what it means is open to conjecture. The figure of $6,000,000.00 is the figure Mr Croudace, the PRD agent, told Mr Smith the resort had cost to build.[13] It was the figure FAI expected to receive if it had to sell the resort.[14] It was also the asking price.[15] I do not regard it as being any more likely to be a reference to a valuation than to any of the other $6,000,000 figures including Mr Klevansky’s opinion of the value.
The Sir William Keys representations
[31]The representations attributed to Sir William Keys do not take the matter any further.
[32]Sir William Keys died before the trial. No formal statement appears to have been executed by him prior to his death. The substance of the allegations against Sir William Keys, was put to him when injunctive relief was originally sought by the Plaintiffs in 1998. He then stated that he did not make the statements alleged.[16]
[33]The effect of the plaintiffs’ evidence is merely that their breaking off the negotiations produced from FAI offers which were more to their liking. Sir William Keys, in an effort to persuade the Smiths to resume the negotiations which they had broken off, indicated that FAI would be less tough in their dealings with the Smiths.[17]
[34]There were further negotiations after that time, in which FAI did make offers which the plaintiffs found more palatable. I do not the consider the statements could be construed as representing that if an agreement was ultimately reached FAI would not rely on its rights under that agreement. In this context, seems to me not to be arguable that Sir William Keys’ unremarkable statement itself rendered the non-disclosure of the valuations misleading, or created a fiduciary duty to disclose confidential valuations or FAI’s internal view of the market value of the resort.
[35]It follows from my findings that the claims for misrepresentation, fraud or breach of s 52 of the Trade Practices Act must fail. It is critical to each of these causes of action that there be an operative misrepresentation and that it be relied on. This leaves claims based in fiduciary duty or unconscionable conduct.
Breach of fiduciary relationship
[36]For a fiduciary relationship to exist there must be a relationship of trust and confidence between the parties. The fiduciary must have undertaken or agreed to act for or on behalf of or in the interests of the other person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties must give the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position.[18]
[37]The plaintiffs submit that because FAI invited the plaintiffs into a partnership in circumstances where the plaintiffs had no information on the subject of the proposed partnership other than that which FAI chose to convey, FAI were under a duty of utmost candour and honesty in the provision of that information.[19]
[38]The principle that intending partners can owe fiduciary duties inter se is recognised by the authority relied on. My difficulty with the existence of such a relationship in this case is based on the facts. The facts on which the plaintiffs rely are set out by their counsel in their written submissions as follows:
- FAI paid too much for the resort;
- The resort had always run at a loss since opening in May 1990;
- The loss was in excess of $500,000.00 as at June 1992;
- FAI had listed the resort for sale at $6,000,000.00 with the Professionals at Mudgeeraba;
- FAI had caused valuations to be carried out of the Smiths’ properties;
- FAI formed the view that the Smiths were likely to be good operators;
- It should be inferred that once FAI formed this view and were aware of the Smiths’ equity in their properties they became anxious for the Smiths to become equal joint venturers with them in the resort;
- It should be inferred that FAI formed the view that the Smiths had sufficient equity to take a half share in the resort at its true market value;
- FAI through Mr Klevansky introduced the Smiths to the idea of a joint venture.
[39]I have difficulty in seeing how these facts can give rise to a fiduciary relationship affecting the negotiations for the sale of an interest in the land and buildings constituting the resort or the management rights for the resort. In the UDC case at p12 Mason, Brennan and Deane JJ outlined the circumstances in which a fiduciary relationship may exist in the course of the negotiations for a joint venture as follows:
"A fiduciary relationship can arise and fiduciary duties can exist between parties who have not reached, and who may never reach, agreement upon the consensual terms which are to govern the arrangement between them. In particular, a fiduciary relationship with attendant fiduciary obligations may, and ordinarily will, exist between prospective partners who have embarked upon the conduct of the partnership business or venture before the precise terms of any partnership agreement have been settled. Indeed, in such circumstances, the mutual confidence and trust which underlie most consensual fiduciary relationships are likely to be more readily apparent than in the case where mutual rights and obligations have been expressly defined in some formal agreement”.
[40]Here, neither of the parties had in fact embarked on conducting the joint venture at the time of the alleged breach of the fiduciary duty. The joint venture could not arise until the plaintiffs became the owners of a half interest in the Resort. That only occurred after the parties entered into the Sale Agreement on 11 July 1992. Unlike many cases, this was not a case where the parties buy a joint asset together for development through a joint venture. United Dominions Corp v Brian was such a case. The present case was one where no fiduciary relationship (indeed no relationship at all, other than that of parties negotiating towards a possible contract) was intended to begin until the plaintiffs purchased a half interest in the Resort. I can see no basis for treating the relationship between the plaintiffs and FAI General as other than one of vendor and purchaser prior to the transactions being completed. The relationship between the plaintiffs and FAI Leasing seems to me to be a conventional relationship of lender and borrower. I am strengthened in this view by the fact that the Smiths in fact received the information they sought, the profit and loss figures, and no complaint is made as to their accuracy. There is also nothing to suggest that the Plaintiffs were precluded from having the property valued themselves. There is nothing identified which would have precluded such a valuation exercise being undertaken. At its highest, Mr Smith was inhibited by FAI from asking questions at his initial visits to the resort which might have alerted the then operator to the fact that he was interested in taking it over. This was, however, before Mr Smith had seriously commenced to negotiate the transactions and was at a very preliminary stage of his inquiries. There is no suggestion of his being unable to carry out any due diligence once the negotiations became serious or that he would not have been given the necessary information to make his own assessment of value.
[41]It is not submitted by the plaintiffs that any conduct of the defendants post transaction is such as to lay the foundation for relief on the basis of a fiduciary relationship. The breach relied on is the non-disclosure of the existing valuations. In any event it seems to me that the conduct of the defendants after the transactions were completed is to be governed by the terms of the contractual arrangements between the parties. The contributions made by the plaintiffs to the resort after the transactions are relied upon only in relation to the quantum of the relief to which the plaintiffs say they are entitled. I am not satisfied that the plaintiffs have established any cause of action based upon breach of fiduciary duty.
Unconscionable conduct
[42]The plaintiffs separately claim relief based upon unconscionable conduct. In so doing they rely upon the same conduct which is said to both create and breach the fiduciary relationship. The features to which attention is drawn are the inequality of bargaining power and the withholding of access to relevant information. To the extent that the relevant information withheld includes trading figures up to June 1992 I am not satisfied that it was in fact withheld. It seems to me unarguable on the basis of the evidence set out above that the plaintiffs were not given a full set of figures. To the extent that the information withheld includes the valuations which FAI held at the time of the negotiations, in the absence of any representation as to their existence or content I am not satisfied that there was ever any obligation to reveal them. I do not regard any of the authorities to which I have been referred as denying the vendor of a property the right to obtain the best price it can for the property merely because it will enter into a partnership or joint venture with the purchaser in relation to the property after the sale. In this case on the findings I have made it was always open to the plaintiffs to obtain their own independent valuation of the resort or to form their own view as to its value. The latter is what I consider the plaintiffs did.
[43]Unconscionable conduct, as a ground for equitable relief, focuses on the conduct of the defendant. Equitable relief is available on this ground "whenever one party by reason of some condition or circumstance is placed at a special disadvantage vis a vis another, and unfair or unconscionable advantage is then taken of the opportunity thereby created".[20] Unconscionable conduct has also been described as "victimisation which can consist either of the active extortion of a benefit, or the passive acceptance of a benefit in unconscionable circumstances"[21]. In Commercial Bank of Australia Ltd v Amadio,[22] Mason J stated:
"Relief on the ground of unconscionable conduct ... will be granted when ... [unconscientious] advantage is taken of an innocent party who, though not deprived of an independent and voluntary will, is unable to make a worthwhile judgment as to what is in his best interest.”
[44]Deane J. in Louth v Diprose[23] stated:
"It has long been established that the jurisdiction of courts of equity to relieve against unconscionable dealing extends generally to circumstances in which (i) a party to a transaction was under a special disability in dealing with the other party to the transaction with the consequence that there was an absence of any reasonable degree of equality between them and (ii) that special disability was sufficiently evident to the other party to make it prima facie unfair or 'unconscionable' that that other party procure, accept or retain the benefit of, the disadvantaged party's assent to the impugned transaction in the circumstances in which he or she procured or accepted it. Where such circumstances are shown to have existed, an onus is cast upon the stronger party to show that the transaction was fair, just and reasonable: 'the burden of showing the fairness of the transaction is thrown on the person who seeks to obtain or retain the benefit of it…”
[45]The key to unconscionable conduct is that the plaintiff was under some special disadvantage which the defendant has taken unconscionable or unfair advantage of. The Courts have made it clear that the classes of “special disadvantage” are not closed. Fullagar J in Blomley v Ryan[24] put the matter this way:
‘The circumstances adversely affecting a party, which may induce a court of equity either to refuse its aid or to set a transaction aside, are of great variety and can hardly be satisfactorily classified. Among them are poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary. The common characteristic seems to be that they have the effect of placing one party at a serious disadvantage vis-a-vis the other.”
[46]Mason J in Amadio at 462 noted that in relation to “special” in the requirement of “special disadvantage”:
“I qualify the word `disadvantage' by the adjective `special' in order to disavow any suggestion that the principle applies whenever there is some difference in the bargaining power of the parties and in order to emphasise that the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party.”
[47]There is no basis to conclude that the plaintiffs were under some special disadvantage as against the defendants in relation to the entering into the agreements or, if there was such a special disadvantage, it was evident to the defendants when:
- In light of the “entire agreement” and “no representations” clauses in the agreements and the express refusal of the defendants to warrant the truth of any information provided to the plaintiffs during the course of the negotiations between the parties, there was no basis for the defendants to think that the plaintiffs would rely on the alleged representations, even if they were made;
- The plaintiffs knew the full extent of the trading loss of the Resort before entering into the transaction;
- The plaintiffs, to the defendants’ knowledge, had apparently competent solicitors acting for them throughout the negotiations of the agreements who were looking after the plaintiffs’ interests and who were providing advice in relation to the terms of the agreement;
- The plaintiffs, to the defendants’ knowledge, were receiving advice from their accountant in relation to the transaction;
- The plaintiffs indicated to the defendants that they had extensive experience in managing Resorts and businesses and that they had derived the value of the Resort based on their own assessment of the trading figures of the Resort;
- There is no suggestion that the plaintiffs did not understand the transactions they entered into;
- There is no suggestion that the plaintiffs were under some physical or educational disability which affected there ability to assess the appropriateness of them entering into the agreement;
- There is no claim or evidence that the plaintiffs were prevented in any way, by the defendants or otherwise, from obtaining their own valuation of the Resort before entering into the Agreements on 11 July 1992 - or that the defendants were aware that the plaintiffs had not obtained their own valuation.
[48]It follows from all of the above that the plaintiffs’ claims must fail.
Other matters
[49]A number of other issues were ventilated before me, but in view of the findings I have made it is not necessary to consider all of them.
[50]One matter which did occupy a level of debate beyond its real importance was whether Mr Skelly’s diary note of his conversation with the plaintiffs’ solicitor of 10 July 1992 (5:32pm) which is set out in the schedule is admissible as evidence of the true state of mind of the plaintiffs (or at least of Mr Smith) on the basis of its being an admission made by an agent. While on balance I am satisfied that it is admissible[25] it seems to me to be of such little weight as to be valueless. The evidence is a precis only of what one solicitor told another solicitor that her client had told her. It is double heresay and does not purport to be in the terms expressed by the plaintiffs’ solicitor. I would not in act on it for the purpose argued although it seems to me to have some relevance to the claims for unconscionable conduct and breach of fiduciary duty as contributing to the state of knowledge of the defendants. I have set it out as part of the narrative of the dealings between the solicitors only with a view to demonstrating that the contemporaneous records are more consistent with there being no representation in relation to a valuation or if there was that the representation was not relied upon.
[51]Having dismissed the plaintiffs’ claims it is not strictly necessary to determine what in fact the value of the property purchased by the plaintiffs was. Nor is it necessary to express any view in relation to the valuers’ evidence save that I considered the evidence of Mr Deacon the most persuasive. Mr Deacon had an obvious knowledge of the peculiarities of the Mackay resort market and the demand for property of this type. He had looked at the resort for the purpose of valuation on a number of occasions over a number of years including before and after the plaintiffs’ purchase. Although he was not asked to give a value for the resort as at June or July 1992 he had valued the resort “for mortgage purposes” as a going concern in June 1991. The resort was also valued by him as a going concern for the parties in 1997 after a conference facility had been added. Neither of these valuations was made in contemplation of any litigation. While Mr Deacon did not concede that a mortgage valuation was necessarily the same as a market valuation I consider his figures of between $3,990,000 in 1991 and $3,000,000 in 1997 to be the best guide. I gained the opinion from Mr Deacon that the security value represented by his 1991 valuation was higher than he would have assessed as market value although why this would be so is not clear to me. Bearing in mind the added conference facility I consider the market value in mid 1992 to be nearer $3,000,000. The price paid by the plaintiffs reflected a resort value of $5,000,000. I accept Mr Deacon’s valuation as a subdivision of $2,850,000 and conclude, as he did, that its highest and best use was as a going concern.
[52]I was not impressed by Mr Cox’ evidence. Although Mr Cox undoubtedly had considerable experience in valuing hotels and resorts he did not have experience which could be said to be directly relevant to Mackay. His knowledge of the Mackay market, unlike that of Mr Deacon was based on discussions with other real estate agents.[26] Mr Cox’s valuation on a subdivision basis at $3,620,000 in 1992 seemed to me to be unrealistic. Mr Cox appeared to me to give little heed to the finite nature of the Mackay strata title market and the competing projects for a share of that finite market.
[53]Mr Quinlan was more pessimistic in relation to valuation. I consider that his approach in discounting the number of rooms to eliminate rooms than could not reasonably be expected to be let at any given times was a proper one.[27] It seems to me to be artificial to make a direct comparison of price per room to determine a value for an establishment where the establishment being valued has rooms surplus to any reasonable requirement. Nonetheless it seemed to me to be inappropriate to be valuing the resort on a capitalised profit basis where there were substantial trading losses. While I consider Mr Quinlan’s capitalised profit method of valuation gives too low an outcome his evidence in relation to the rate of sales of this type of development in Mackay[28] assists me in rejecting Mr Cox’s estimate of the subdivision value. I find the resort was worth around $3,000.000 as it was at mid 1992.
[54]An issue arose as to whether the claim under the Trade Practices Act which was added by a relatively late amendment and further amended at trial was statue barred. Because of the way the case has been determined this is now academic. Having determined the case as if the amendments were allowed it seems to me that any costs issue outstanding as a result of the amendments should also be academic on the assumption that the defendants will be awarded those costs as successful parties.
[55]In view of my conclusion it is not appropriate that I assess damages. The relief to which the plaintiffs would be entitled would depend to an extent on the basis on which they succeeded. Without having found that basis the exercise is futile.
[56]The plaintiffs’ action is dismissed.
[57]The first defendant has counterclaimed for the outstanding balance of the loan. No challenge was made to the quantum of the debt claimed and the resistance to the obligation to repay was dependent on the success of the action. In view of my findings in the action it follows that the first defendant is entitled to judgment on the counterclaim in the sum of $4,040,012.39 together with interest since that date at the default rate of 15% provided under the Loan Agreement compounding at monthly rests. I calculate the interest at $50,500.15 to 30 June 2002, $51,131.40 to 31 July 2002 and $51,770.55 to 31 August 2002 making the total interest since 31 May 2002 an amount of $153,402.10. I therefore give judgment in favour of the first defendant on the counterclaim in the sum of $4,193,414.40.
SCHEDULE[29]
29/06/92 |
Draft Joint Venture Agreement sent by PCS (for FAI General) to HG (for Smiths)[30] |
"14. EFFECT OF AGREEMENT 14.1This Agreement: 14.1.1comprises the entire agreement between the participants and no earlier representation or agreement, whether oral or in writing, in relation to any matter dealt with in this Agreement shall have any effect from the date of this Agreement; and" |
03/07/92 |
Statement of Mr Skelly[31] |
Mrs Dixon informed Mr Skelly "that Mr Smith was reasonably happy with the documentation thus far prepared “There were a few areas of differences..." |
06/07/92 |
Facsimile HG to PCS[32] |
"We have now obtained our client’s instructions in relation to the draft joint venture agreement and management agreement, as follows:-" (HG then asked for 14 changes to the JVA and 5 changes to the Management Agreement – none concerned representations or the "no representation" clauses.) |
07/07/92, 08/07/92 |
Facsimiles from PCS to HG[33] |
(PCS sent to HG, for their and their client’s consideration, draft Contracts of Sale, revised Joint Venture Agreement and Business Contract.) |
09/07/92 |
Facsimile from HG to PCS[34] |
"We have perused the terms of the Land Sale Contract and the Business Contract and comment as follows:- Land Sale Contract Our client has some difficulty agreeing with the purchase price of $2,133,000.00 for the land and buildings. Your client indicated to our client in discussions relevant to the agreement that the value of the plant and equipment when purchased 2 years ago was $980,000.00.[35] |
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Allowing for depreciation our client’s accountant has advised that the appropriate value to be ascribed to the plant and equipment is an amount of $640,000.00 and accordingly the value of the land and the buildings to be included in the Land Sale Contract is $1,860,000.00 ...
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Business Agreement ... Our client does not agree with the purchase price contained in Part 10 of the Schedule. We reiterate that the appropriate value is $640,000.00. ... In addition to the warranties referred to in clause 6 our client requires warranties as follows: |
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That all information which has been given by the vendor or its accountants or officers of the vendor to the Purchaser or to the solicitors of the Purchaser in the course of negotiations leading to this agreement was when given and will at the Completion Date be true and accurate in all respects. |
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All forecasts and projections relating to the Business including in particular those relating to profits have been prepared with all due care and prudence and on a reasonable basis and that there are no facts or circumstances which are known to the Vendor or the accountants or officers of the Vendor or which ought to be known to any of them on reasonable enquiry which would lead a prudent manager to revise such forecasts and projections and the Vendor will forthwith inform the Purchaser if it becomes aware of any such facts or circumstances between the date hereof and the Completion Date. |
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As far as the Vendor is aware all facts concerning the Business, and affairs of the Vendor material for disclosure to an intending purchaser of the Business and the stock in trade of the Vendor have been disclosed to the Purchaser and any such facts arising prior to the Completion date shall forthwith be disclosed to the Purchaser and the Purchaser acknowledges that this warranty does not refer to annual balance sheets, profit and loss accounts and income tax returns of the Business. |
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... The reasonable accuracy of any books of account or other financial records relating to the Business or the stock of the Business presented to the Purchaser for inspection for the purposes of enabling the Purchaser to make an assessment of the said Business or a calculation of the purchase price payable hereunder. |
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... In addition our client requires an indemnity clause to be inserted. |
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... Our client has pointed out to us that in the financial statements provided to him by your client there is a figure akin to a "sinking fund" which is referred to as a replacement reserve in an amount of $16,035.00. This amount would have increased since that time. ... |
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We have also perused with our client the re-engrossed Joint Venture Agreement and comment as follows:- ...
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10/07/92 |
Letter PCS to HG[36] |
Regrettably, the information given to your client as to the value of the plant and equipment at purchase was mistaken. ... Business Agreement ... 2Our instructions are that the price is to remain as set out in the draft Agreement.... ... 9(a)Our client is not prepared to warrant in the broad terms requested. If there is any specific representation or warranty in this respect which is required, please let us have details. 9(b)Please identify the forecast and projections referred to. If same are contained in any document, please identify the document. 9(c)Our client is not prepared to warrant in the broad terms requested. As your client is aware, the day to day operation and control of the business and its management has been the responsibility of All Seasons Resorts Pty Ltd, and not our client. ... |
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9(e)Please identify the books of account and other financial records to which reference is made so that the request can be further considered.
Our client is not prepared to provide the indemnity requested. Your client should rely on its contractual rights in respect of the warranties concerned. |
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... Joint Venture Agreement 4Our client believes that it is in the best interests of the parties that they proceed with the preparation and registration of a Building Units Plan in the immediate future. Our client is confident that the approval of the local authority to such a plan will be readily available. It is concerned that such consent may not be so readily available in three years time. |
10/07/92 (3:30 pm) |
Mr Skelly attendance memorandum of conversation with Ms Dixon[37] |
FAI is not prepared to provide warranties in the terms requested. Your client regards this as important. I pointing out to you that FAI has not had the hands-on management of the business that all the financial data and reports have been prepared by its manager. It isn’t aware of anything to suggest that those statements are untrue or incorrect, but it is not able nor is it prepared to warrant that they are. |
10/07/92 |
Letter PCS to HG[38] |
We refer to our earlier letter today in response to your letter of 9 July, 1992. We now have further instructions in respect of the following items raised in your letter - Business Contract ... |
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9Our client is prepared to add the following warranty to Part 16 of the Schedule |
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"To the best of the Vendor’s knowledge the monthly report to May, 1992 and the month end and year to date trial balance (to May, 1992) prepared for and presented to the Vendor by All Seasons Resorts Pty Ltd, a true copy of which is reproduced in Part 17 of the Schedule, is in all respects true and correct." |
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Please take instructions and let us know your client’s attitude. |
10/07/92 |
Facsimile HG to PCS[39] |
Thank you for your letter delivered this afternoon. In relation to the matters raised therein we comment as follows: ... Not agreed. We require the warranty set out in our earlier facsimile be included. |
10/07/92 5:32 pm |
Mr Skelly attendance memorandum of conversation with Mrs Dixon[40] |
...She then raised the question of the warranties and said that she had instructions to insist upon the inclusion of warranties in accordance with those set out in paragraph 9 of her letter of today. He argues that he has made his decision to go into the venture based on the fact that those accounts are true and correct and he wants FAI to warrant that they are correct so that he has his remedy if he subsequently finds out they are not correct. I explained that FAI was just not in a position where it could give that warranty, that the accounts were not accounts that it itself had prepared. That if they were then there would be no difficulty at all. The fact of the matter is that they were accounts which had been prepared by a manager, he having had the responsibility for the day to day operation of this business, that FAI has no reason to doubt the accuracy of the financial statement, but can only warrant that they are correct to the best of its knowledge. She says that they are the crux of the matter, that he has made his decision on them. She thinks he will insist on them. |
10/07/92 |
Facsimile HG to PCS[41] |
We refer to the Deed of Loan and comment as follows:- The total amount of the loan which was to be provided by your client to our client was $M3.1 split as to $M2.5 for the purchase of the Resort and $600,000.00 for payment of our client’s existing Mortgages and for the Joint Venture expenses. Could you please amend the document. |
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Business Agreement ... |
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9Our client requires a specific undertaking that the All Seasons Monthly Report Sheets for the months of July 1991-May 1992 which were provided by your client to our client for the purposes of enabling the Purchaser to make an assessment of the Business and a calculation of the purchaser price payable, are true and correct. |
11/07/92 |
Statement of Mr Skelly[42] |
PCS delivered revised contracts to HG for execution by the Smiths. Those documents included the July 91 - May 92 accounts and the "no representation" clauses.[43] |
Footnotes
[1] Transcript page 356 line 30 and 357 line 10
[2] Transcript page 30, line 40-50
[3] See transcript page 334 line 45
[4] see paragraph 6 of the memo from L Smith to B Klevansky dated June 1992 which appears from the context to have been prepared about the first week in July. It appears at p.59 of ex 30.
[5] Transcript page 24 lines 10-20. Further oral requests for the valuation were said to have been made up to 25 May 1992: see transcript page 24 lines 25-35, 32 lines 50-55, 36 lines 35-55.
[6] See exhibit 4 pages 82 to 84.
[7] Further amended statement of claim 01/11/00; exhibit 30, para 15, page 93.
[8] Exhibit 4 pages 57-58.
[9] Exhibit 14
[10] FAI Leasing had demanded payment and served notices of power of sale in 1994-1995: Exhibit 32, pp.143, 301-360.
[11] L Smith memo 10/9/97, Exhibit 4, p.232, para 5; L Smith fax to Rubinstein 15/9/97, Exhibit 4, p.237, paras 6-7; L Smith letter to Rubinstein sent 13/2/98 in Exhibit 32, 9.333, fax Rubinstein to L Smith 20/2/98 in Exhibit 4, p.241; fax L Smith to Rubinstein 24/3/98, Exhibit 4, p.244; fax Rubinstein to Smith 24/2/98, Exhibit 32, p.341; fax L Smith to Rubinstein 24/2/98, Exhibit 32, p.342; fax Rubinstein to L Smith 26/2/98, Exhibit 32, p.343; letter L Smith to FAI 2/3/98, Exhibit 4, p.245.
[12] Transcript page 51 line 20 to page 52 line 10.
[13] Transcript page 23, line 25.
[14] Transcript page 116, line 3.
[15] Transcript page 115, line 55.
[16] Exhibit 25
[17] Mr Smith at 31/1-10, 32/10. The reference to “equal joint venture partners” at 30/48 was to what “would” be the case if agreement was reached. Mrs Smith did not hear the remarks:151/35.
[18] Mason J in Hospital Products v United States Surgical Corp (1984) 156 CLR 41 at 96-97. See also Phipps v Boardman [1967] 2 AC 46 at 127
[19] Reference is made to a number of authorities but particularly to United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 at 5-6 per Gibbs CJ.
[20] Bridgewater v Leahy (1998) 194 CLR 457 at 478-9 per Gaudron, Gummow and Kirby JJ citing from the judgement of Mason J in Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 462.
[21] The Privy Council in Hart v O'Connor [1985] AC 1000 at 1024 referred to with approval by the majority in Bridgewater v Leahy at 479.
[22] (1983) 151 CLR 447 at 461
[23] (1992) 175 CLR 621 at 637
[24] (1956) 99 CLR 362 at 405
[25] Cross on Evidence para [33540]
[26] Transcript page 264, line 15
[27] Exhibit 9, transcript page 182-183
[28] Transcript page 183, line 40
[29] PCS is a reference to Purcell Chadwick & Skelly, the Solicitors for FAI General and FAI Leasing. HG is a reference to Hopgood & Ganim, Solicitors for the Smiths and Shipcave Pty Ltd.
[30] Exhibit 32, pp 18, 36; Exhibit 26, para 13. The same words are in the draft management agreement, cl.1.13, at Exhibit 32, p.54. The no-representation clauses were in the contracts as executed.
[31] Exhibit 26, para 16.
[32] Exhibit 32, p.69; Exhibit 26, para 17.
[33] Exhibit 32, pp.72 and 76; Exhibit 26, paras 20,25.
[34] Exhibit 32, pp.77-79; Exhibit 26, para 27.
[35] No similar allegation was made about the value of the Resort.
[36] Exhibit 32, pp.84, 85; Exhibit 26, para 29.
[37] Exhibit 32, p.101; Exhibit 26, para 30.
[38] Exhibit 32, p.94; Exhibit 26, para 33.
[39] Exhibit 32, p.95; Exhibit 26, para 34.
[40] Exhibit 32, p.102; Exhibit 26, para 35.
[41] Exhibit 32, p.96; Exhibit 26, para 36.
[42] Exhibit 26, paras 38,39.
[43] Exhibit 1.