Ag-Exports (Australia) Pty Ltd & Anor v Export Finance and Insurance Group

Ag-Exports (Australia) Pty Ltd & Anor v Export Finance and Insurance Group - [2006] NSWSC 467 - NSWSC 2005 case summary — Zoe

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the deceit pleading 14 Although the claim of fraud is not directly relevant to the cause of action pleaded in contract, it will become relevant when, as foreshadowed, ss14 and 55 of the Limitation Act are pleaded. During the hearing it was expressly acknowledged that any s55(1)(b) issue would be advanced on a basis identical to that part of the claims in deceit that asserts that the misrepresentations were made fraudulently. 15 For the purposes of the claim in deceit, and the plea under s55 of the Limitation Act, falsity of the representations is not sufficient. As the draftsperson of the proposed pleading clearly recognised, for those purposes it is also necessary that the plaintiffs prove (and therefore plead) either that the maker of the representation knew that it was false and intended the plaintiffs to act upon it, or that some person in authority knew that the representation was made, knew that it was false, and intended that the plaintiffs would act upon it. This is the essence of a cause of action in deceit. The plaintiffs have pleaded only that "the defendant" made the representation, knowing that it was untrue (or made it recklessly, without caring whether it was true or false) and intending that the plaintiffs would rely upon it. They have stopped short of identifying any individual within EFIC who: (i) made the representation (or knew that it was made); and (ii) knew that it was false; and (iii) intended the plaintiffs to act upon it. 16 It is these claims that EFIC argues are not properly pleaded, and, for other, discretionary, reasons, should not be permitted to proceed. 17 It is therefore necessary to scrutinise with some care the manner in which that allegedly false representation is dealt with in the proposed pleading. It is particularised as having occurred on six separate occasions as follows: (a) orally, on 22 January 1992, by two employees of EFIC, identified as Ms Burrows and Mr Letton; the representation was specified as, over a period of four months, no declarations were received from Ag-Exports by EFIC; (b) in writing, on 28 January 1992, when EFIC declined liability in respect of any sales which had been made but not declared; (c) in writing, on 7 February 1992, when EFIC again declined liability in respect of the sales the subject of the invoices it said it had not received; (d) in writing, by letter dated 28 February 1992, by Ms Carol Flanagan, a solicitor acting on behalf of EFIC, to Ag-Exports, stating that EFIC had not received declarations in respect of the disputed invoices; (e) in writing, by letter dated 2 March 1999, from EFIC to Ag-Exports, asserting that EFIC had conducted "a bona fide investigation" into Ag-Exports' complaints, and found no basis to warrant any further action; (f) in writing, by letter dated 7 September 1999, from EFIC to Ag-Exports, stating that EFIC had conducted a physical search for the missing declarations and further stating that EFIC had not, in 1991, operated under a practice of withholding processing of declarations where premiums were unpaid. 18 The plaintiffs expressly assert that, in each case, the representation was false because EFIC had in fact received declarations in respect of the disputed invoices. 19 The plaintiffs then seek to plead that each representation was made (by EFIC) with knowledge that it was untrue, or recklessly, without caring whether it was true or false, and with the intention that the plaintiffs would rely upon it. It is this pleading that is the focus of the attack on behalf of EFIC. The plaintiffs have attempted to particularise this assertion in paragraph 25 of the proposed pleading. The particularisation of this claim shows that the plaintiffs will seek to prove the requisite knowledge or state of mind by inference from a series of identified facts and circumstances. I here interpolate that it is not at all easy, in many cases, to understand how an inference of knowledge of falsity could be drawn from the facts and circumstances identified. However, for present purposes, it is sufficient merely to set out the facts and circumstances the plaintiffs have particularised in order to prove this aspect of the claim. They include assertions that, or to the effect, that:

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(i) EFIC had in fact received the declarations; (ii) employees of EFIC had taken steps so that, when a policy holder's account was ninety days or more in arrears, the processing of declarations received from that policy holder was suspended; (iii) when Ag-Exports fell into arrears in payment of its premiums, EFIC's systems failed to record receipt of the declarations sent by Ag-Exports; (iv) EFIC implemented a practice of monitoring the accounts of its policy holders in order to observe their level of (business) activity, and, inter alia, to determine whether the policy holder might be insuring elsewhere; (v) Ag-Exports' pattern of making declarations in the years preceding 1991, followed by an absence of declarations, should have been immediately apparent to EFIC and have prompted it to make inquiries as to the reasons therefor; (vi) an employee of EFIC made a record of a visit to Ag-Exports on 14 November 1991 that falsely recorded that on that day Lawn was overseas when in fact he was in Sydney; and the record did not refer to any discussion with Ag-Exports' employees concerning the absence of any declarations provided by Ag-Exports between July and September 1991; (vii) on 23 November 1991 EFIC notified Ag-Exports of the cancellation of a credit limit on a policy in respect of Yoshikawa Oil and Fat of Japan (later said to be the parent company of Yoshikawa) because, but contrary to the fact, Ag-Exports had transacted no business with that company during the preceding twelve months; (viii) by reason of the foregoing, EFIC knew that its records of declarations received from Ag-Exports were incomplete; (ix) in late October 1991, at a time when Lawn was overseas, an officer of EFIC met an officer of Ag-Exports for the purpose of conducting an annual review of Ag-Exports' business at which meeting the EFIC officer made no mention of the absence of any declarations from Ag-Exports; (x) EFIC was influenced in its dealing with Ag-Exports by a false perception that Ag-Exports was a selective insurer of shipments, or was insuring elsewhere; (xi) by declining the plaintiffs' claims, EFIC avoided a liability of more than $460,000. 20 I find it quite impossible to comprehend how particulars (v), (vi), (vii) or (ix), either taken alone or in conjunction with all other particulars, could have the slightest bearing on the allegation that false statements were made knowingly or recklessly. Particulars (v) and (ix) appear to suggest that EFIC officers were under some obligation to monitor Ag-Exports' business activity. There is nothing in the proposed pleading to support any such inference. 21 On behalf of EFIC it was argued that this particularisation is inadequate to sustain the allegation of fraudulent misrepresentation. The essence of the argument was that, in order to establish fraud, it is necessary that the party making the allegation identify the person said to have knowingly made the untrue representations. That is because a plaintiff must identify at least one person in the defendant's organisation or structure who is responsible for making (or permitting to be made) an untrue representation, and who has the fraudulent state of mind - i.e. knowledge or recklessness as to untruth, and intention that the plaintiff will rely upon the untruth. It is insufficient to establish that an untrue representation was made by one person and that another person knew the true facts. Proof of deceit requires proof that one person either made the untrue representation, or knew that it was made, knew that it was untrue, and intended the plaintiff to rely upon it. Further, on EFIC's argument, that person must be identified in the pleading. The proposed pleading fails to identify such a person. I quote from the written submissions provided on behalf of EFIC: "5 ... Although some of these [particulars] name individuals ... it is not asserted that any of those particular individuals satisfied all of the elements alleged, namely that he or she knew of the representation, knew that it was untrue, or were reckless as to whether it was true or not, participated in the making of the representation and also with the intention the plaintiffs would rely on it. 6 It is conceded that to demonstrate fraud it is not necessary to establish that the person who made the representation on behalf of the defendant had knowledge that it was true [sic - ? not true] or was reckless as to whether it was true or not and that he or she had the requisite intention that the plaintiff rely on it. In the context of a corporation, it is also conceded that a corporation can be liable in fraud if one of its agents makes a representation innocently but only in circumstances where another of its servant, possessing a state of mind amounting to fraud, causes or authorises the agent to make it ... In other words, in order for fraud to be proved, some servant or agent of the corporation, must be shown to have a particular state of mind, variously described as 'wicked' or 'dishonest', that is to say, fraudulent ... The servant or agent must of course be someone with authority to bind the corporation. However, this only highlights the importance of identifying the person or persons who is (sic) alleged to have had the requisite state of mind. 7 It is submitted that in order to provide proper particulars of fraud the Plaintiffs must particularise who within the defendant had knowledge of the falsity of the representation or were reckless as to whether it was true or not, and participated in its being made." 22 As authority for the general propositions made, three specific authorities were cited. At least one of these can be quickly disposed of. In Spies v Commonwealth Bank of Australia (1991) 24 NSWLR 691, Handley JA, with whom Mahoney and Clarke JJA agreed, said: "In the result the appellant has never been required to identify and particularise the false and fraudulent representation relied upon, the person by whom it had been made, why the representation was false or the servants or agents of the Bank who were guilty of the fraud."

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Counsel who appeared for EFIC seized upon this as supporting the proposition that, in every case where fraud is alleged, at least within a corporate entity or organisation or institution, the party alleging the fraud must (and must in its pleading) identify the individual(s) alleged not only to have made the false representation, but also to have had knowledge of its falsity, and the requisite fraudulent state of mind - the person who is, to use the term used by senior counsel, the fraudster. While I accept that, in the trial , a plaintiff must go so far, what was said by Handley JA is a fragile foundation for the proposition that in the initial stages of pleading a plaintiff must also do that. In fact, the passage extracted appears in the judgment in a place which follows reasoning which led his Honour to the conclusion that the appeal in that case ought to be allowed. The passage appears in the context of his Honour's identifying procedural irregularities in the manner in which the claim in that case had been pleaded and conducted at first instance. It does not appear to have been the subject of argument. I do not read the passage as any statement of binding principle, or of irreducible minimum requirements of an initiating process, and certainly not of a fundamental and invariable requirement of an initiating pleading in fraud. 23 Spies does not assist in the resolution of the present argument. There are, however, more favourable (for EFIC) statements of what a party alleging fraud against a company needs to prove. In Brambles Holdings Ltd v Carey (1976) 15 SASR 270 at 279 Bright J said: "Always, when beliefs or opinions or states of mind are attributed to a company it is necessary to specify some person or persons so closely and relevantly connected with the company that the state of mind of that person or those persons can be treated as being identified with the company so that their state of mind can be treated as being a state of mind of the company. This process is often necessary in cases in which companies are charged with offences such as conspiracy to defraud." 24 The statement was endorsed by the majority (Brennan J (as he then was), Deane, Gaudron and McHugh JJ, in the High Court in Krakowski v Eurolynx Properties Ltd [1994] HCA 22; 183 CLR 563 at 582 - 3. While, at first blush, this passage may appear to be more helpful to EFIC, it still does not achieve for EFIC what is claimed. Neither Brambles nor Krakowski was a case concerned with the essentials of pleading a claim in fraud, as distinct from the evidence necessary to establish fraud. 25 EFIC also relied upon the decision of Perry J in the Supreme Court of Auckland in Awaroa Holdings Ltd v Commercial Securities and Finances Ltd [1976] 1 NZLR 19. Perry J cited with approval a passage from Cornfoot v Fowke (1840) 6 M & W 358; 151 ER 450, as follows: "And I think it impossible to sustain a charge of fraud, when neither principal nor agent has committed any: the principal, because, though he knew the fact, he was not cognisant of the misrepresentations being made, nor ever directed the agent to make it; and the agent, because, though he made a misrepresentation, yet he did not know it to be one at the time he made it, but gave his answer bona fide ..." 26 This, too, is concerned with matters of proof as distinct from matters of pleading. If the only point in EFIC's argument were that a plaintiff pleading fraud is obliged, at the initial pleading stage, to nominate a servant or agent or employee of EFIC said to have made (or permitted to be made) the fraudulent misrepresentation with the requisite knowledge and intent, I would consider that the proposition is too broadly stated. Justice requires that a plaintiff have the opportunity of identifying that person or those persons after processes of discovery and interrogation. It does not seem just to me, in cases where those processes are available after the initiating process has been filed, to require a plaintiff to plead matters that may at that time be peculiarly within the grasp of the defendant. But due regard must be had to the circumstances of this case. These proceedings have been on foot, on one form or another, for four and a half years (as at the date of hearing) and I was told that, in fact, the plaintiffs have administered interrogatories, and have had access to documents produced on subpoena. Notwithstanding that the plaintiffs have still not identified any person they claim to have made (or known of the making of) the representation with the requisite knowledge of falsity and intent. That casts a different light on EFIC's submission. And failure to nominate the person(s) responsible for the fraud is not here the only point made against the proposed pleading. 27 Examination of the particularisation of the plaintiffs' claim as to EFIC's state of mind shows that there is no allegation that any of the representations was made by any person (named or not named) with knowledge that they were untrue and with the intent that the plaintiffs would rely on them. The most that can be gleaned from the particulars is that what the plaintiffs will seek to do is to establish some general ill will towards them within EFIC, and otherwise, some ineptitude in the administration of EFIC's systems which resulted in the declarations that the plaintiffs claim to have sent not being recorded or processed. Nowhere is there an allegation that the asserted decision to suspend recordings of declarations by unfinancial policy holders was done for any dishonest reason; nor that those employees who acted upon the absence of any record of the declarations did so with knowledge of that system, or of any inadequacies in it, or with dishonest intent. 28 Even taken at its most favourable to the plaintiffs' case, the scenario that emerges is far from sufficient to permit a valid inference of mala fides to the necessary extent. That is, even if the plaintiffs are able to establish every assertion of fact contained in the particulars set out in paragraph 25, that would not give rise to the inference they seek to have drawn and that is essential to their case in deceit. Moreover, even if that were wrong, and an inference could be drawn that some individual or individuals within EFIC had the necessary fraudulent state of mind, that individual is, or those individuals are, not linked with any of the individuals said to have made the false representations. 29 Even if the plaintiffs are able to prove each of the particulars contained in paragraph 25, from which they seek to have the inference drawn, I am satisfied that those facts and circumstances would be insufficient to warrant the drawing of the inference. 30 It is well recognised that an allegation of fraud is a most serious allegation, whether the fraud is attributed to an identified individual (or individuals) within an organisation, or (impermissibly) to the organisation as a corporate entity. No doubt that is why the draftsperson of the proposed pleading has stopped short of making such an allegation in explicit terms against any individual. 31 As I have indicated, I would not, at the pleading stage, regard the inability to nominate the individual or individuals concerned as necessarily fatal to the proposed pleading, where post pleading pre-trial procedures may be available to provide information to plug the gap. But in the circumstances of this case, having regard to the procedures that have already taken place, it is fatal. The inference I draw is that the plaintiffs are not able, and will not be able, to nominate any individual or individuals guilty of the fraud they allege. That is sufficient to cause me to refuse the plaintiffs leave to file the proposed pleading in deceit.

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In each case the misleading or deceptive conduct is, once again, pleaded as the representations said to have been made by employees of EFIC that the declarations had not been received, which are also said to be untrue. 34 It is not suggested on behalf of EFIC that the proposed pleading, in respect of these claims, is technically defective. The reason EFIC opposes leave being granted to the plaintiffs to advance these causes of actions is also that they are statute barred; and that in the case of the claim under the ASIC Act, that Act has no application. 35 Under s82(1) of the Trade Practices Act, damages may be awarded to a person who suffers loss or damage by, inter alia, contravention of s52(1). S82(2) provides as follows: "An action under sub-section (1) may be commenced at any time within six years after the day on which the cause of action that relates to the conduct accrues." 36 In that form, s82(2) came into effect on 6 July 2001. Prior to that, the limitation period for which it provided was three years. A question was raised, but never debated, as to which limitation period was applicable. The parties have agreed that the plaintiffs' claim under s52(1) will not be statute barred if it accrued on or after 22 December 1997, and will be statute barred if it accrued on or before 21 December 1994, regardless of which limitation period is applicable. s12GF(1) of the ASIC Act, similarly to s82(1) of the Trade Practices Act, provides for the recovery of damages by a person who suffers loss or damage, inter alia, as a result of contravention of s12DA. Subs(2) also provides a limitation period of six years. 37 The critical question requires the identification of the date on which the cause of action relating to the conduct alleged accrued. It is EFIC's contention that each cause of action (to the extent that it accrued at all) accrued before 21 December 1994, and is, accordingly, statute barred. 38 It is, I think, generally accepted that a cause of action accrues when loss or damage resultant from the conduct the subject of the claim is suffered: see, for example, Registrar General v Cleaver (1996) 41 NSWLR 713. There Clarke JA, with whom Handley JA and Abadee AJA agreed, said: "A cause of action under s127 of the [ Real Property ] Act arises when a person suffers loss or damage consequent upon a relevant omission. Accordingly loss or damage is an essential ingredient of the cause of action. It follows that, prior to the suffering of the relevant loss or damage, there is no complete cause of action. Consequently the search for the time of the accrual of the cause of action focuses on the date at which the respondents' (sic) first suffered loss or damage. Once loss has been suffered the cause of action accrues and time starts to run. It is no moment for the purposes of the Limitation Act 1969 that at later dates additional, and much greater, damage resulted from the omission. " (emphasis added)

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(i) the loss of the contract claim (to Ag-Exports only) by reason of the expiration of the limitation period (this occurred no later than February 1998); (ii) the insolvency of Ag-Exports (and loss and damage consequent thereon - this occurred on 2 March 1993); (iii) the bankruptcy of Lawn (and loss and damage consequent thereon - this occurred on 7 June 1994). 40 Axiomatically, loss and damage were suffered by Ag-Exports when the receiver was appointed, in March 1993, and by Lawn on the declaration of his bankruptcy, in June 1994. It is therefore unnecessary to decide whether a six-year limitation period or a three-year limitation period applies to the Trade Practices Act claim; either way, the limitation period had expired well before initiation of these proceedings by statement of claim filed in December 2000. The claim under the Trade Practices Act is statute barred. 41 Leave to file the proposed pleading in respect of the Trade Practices Act claim would be futile. I refuse to grant leave. 42 In my opinion, reliance on the ASIC Act is entirely misconceived. The Act did not come into effect until 2001, well after the events upon which the plaintiffs rely as establishing their causes of action. Senior counsel for the plaintiffs made no attempt to show that the plaintiffs could proceed under legislation that was not in existence at the time of the events said to give rise to the cause of action. I will not grant leave to the plaintiffs to file the proposed pleading in so far as it asserts a cause of action under the ASIC Act. Even if the ASIC Act applied, the cause of action thereunder would be statute barred. 43 That makes it unnecessary to consider in detail the discretionary factors raised on behalf of EFIC. They are, as the history recounted at the commencement of these reasons would suggest, compelling. The procedural history alone is sufficient to warrant the refusal of leave. The agony must end. Not only does justice to EFIC require the termination of the proceedings. In my opinion it is doing no favour to the plaintiffs to allow them to pursue a case that is plainly futile, and which they are simply unable validly to plead. 44 The orders I make are:

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