Australian National Nominees Pty Limited & Ors v GPC No. 11 Pty Limited & Anor

JURISDICTION: Equity Division Commercial List JUDGMENT OF : Einstein J DECISION : Short minutes of order to be brought in.

CATCHWORDS : Contract - Whether representations created binding contractual obligations - Principles - Damages - Principles LEGISLATION CITED : Corporations Act 2001 (Cth) Trade Practices Act 1974 (Cth) Aitken v Trans Tasman Timbers Pty Limited (New South Wales Court of Appeal, 26 September 1985, unreported) BC8500514 Commonwealth Bank of Australia v TLI Management Pty Ltd [1990] VR 510 Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; (1991) 104 ALR 1 De Lassalle v Guildford [1901] 2 KB 215 Esanda Ltd v Burgess [1984] 2 NSWLR 139 Gates v City Mutual Life Assurance Society Limited (1986) 160 CLR 1 Gould v Vaggelas (1985) 157 CLR 215 Heilbut Symons & Co v Buckleton [1913] AC 30 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 Hyundai Elevator Co Ltd v Liftronic Pty Limited (New South Wales Court of Appeal, 9 December 1994, unreported) BC9403386 CASES CITED : Johnson v Perez (1988) 166 CLR 351, 82 ALR 587 JJ Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435 Manser v Spry (1994) 181 CLR 428; 124 ALR 539 Nemeth v Bayswater Road Pty Ltd [1988] 2 Qd R 406 Nominal Defendant v Gardikiotis (1996) 186 CLR 49 Oscar Chess Ltd v Williams [1957] 1 WLR 370 Osric Investments Pty Ltd v Woburn Downs Pastoral Pty Ltd (2002) 20 ACLC 1; (2001) 48 ATR 184; [2001] FCA 1402 Parramatta City Council v Lutz (1988) 12 NSWLR 293 Reardon Smith Line Ltd v Yngvar Hansen-Tangen (1976) 1 WLR 989 Ross v Allis Chalmers Australia Pty Limited (1980) 32 ALR 561; 5 ALJR 8 Zoneff v Elcom Credit Union Ltd (1990) 94 ALR 445 Australian National Nominees Pty Limited (First Plaintiff) Davali Group Pty Limited (Second Plaintiff) Invest Projects Pty Limited (Third Plaintiff) John Joseph Carter (Fourth Plaintiff) PARTIES : Margaret Spencer Carter (Fifth Plaintiff) Laurie Fuller (Sixth Plaintiff) Beryl Eva Fuller (Seventh Plaintiff) GPC No. 11 Pty Limited (First Defendant) GPC No. 12 Pty Limited (Second Defendant) FILE NUMBER(S) : SC 50030/04 COUNSEL : Mr DPF Officer QC, Mr VRW Gray (Plaintiffs) Mr B Coles QC, Mr J White (Defendants) SOLICITORS : Kells The Lawyers (Plaintiffs) Kemp Strang (Defendants)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

50030/04 Australian National Nominees Pty Limited & Ors v GPC No.11 Pty Limited & Anor JUDGMENT The proceedings 1 The proceedings are brought by seven plaintiffs who loaned moneys to either the first defendant GPC No 11 Pty Ltd ["GPC No 11"] or the second defendant GPC No 12 Pty Ltd ["GPC No 12"] following the issue by those defendants of invitations to the public [in the form of Information Memoranda] to lend money to those defendants. The loans were to be secured by promissory notes. The plaintiffs' claims 2 The plaintiffs centrally advance factual/legal contentions that: · Great Pacific Capital Limited ("GPCL") is a company the shares of which are listed on the Australian Stock Exchange; · in 2002 GPCL had two subsidiaries: GPC No. 11 and GPC No. 12; · on 2 September 2002 GPC No. 11 and GPC No. 12 issued the subject "Information Memoranda" relating to invitations to the public to lend money to GPC No. 11 and GPC No. 12; · the plaintiffs (other than Invest Projects Pty Ltd) loaned monies to GPC No. 11 on the basis of the information set forth in the Information Memoranda; · such information included representations as to the basis on which GPC No. 11 and GPC No. 12 invested their capital, namely on loans which fulfilled certain lending criteria; · the plaintiffs loans to GPC No. 11 were evidenced by promissory notes issued by GPC No. 11; · Invest acquired a promissory note issued GPC No. 12 evidencing a loan to GPC No. 12 on the basis of the information contained in the Information Memorandum issued by that company; · in the event GPC No. 11 and GPC No. 12 failed to invest their capital in accordance with the representations contained in their respective Information Memoranda; · this failure constituted a breach by GPC No. 11 and GPC No. 12 of conditions of the contracts of loan entitling the plaintiffs forthwith to terminate the contracts of loan and require repayment of their loans. A claim only brought in contract 3 It will be observed that it is central to the plaintiffs' contentions that the terms set out in the Information Memoranda were terms of the contracts of loan evidenced by the respective promissory notes. Indeed the plaintiffs have expressly responded to the defendants' request for particulars by stating that "[t]he source of the entitlement is the law of contract". The matter was litigated accordingly. The defendants' stance 4 The defendants contend that the agreement between each of the defendants and the respective plaintiffs was comprised exclusively by the respective promissory notes. The promissory notes are said to be complete on their face, in that they identify: · the particular noteholder; · the principal sum invested by the particular noteholder; · the maturity date of the note; · the interest rate applicable to the investment recorded by the note; · the obligation to repay the principal sum and the interest thereon, on the stipulated maturity date. 5 The defendants emphasise that each of the plaintiffs was issued with signed promissory notes, which make no reference to any other documentation. The proposition put forward is that the notes are the exclusive repository of the terms of the respective agreements between the plaintiffs and the defendants. 6 The defendants deny that either the GPC No 11 Information Memorandum or the GPC No 12 Information Memorandum contained the terms of any agreement. The defendants assert that those documents are, at best, representational. The proposition is that the Information Memoranda do not satisfy the description of a term (let alone a condition) of contract, on which the plaintiffs' case depends. 7 It is apparently common ground that the third largest shareholder in GPCL was Ace Bond Capital Limited ["Ace Bond"] believed by the plaintiffs to be incorporated either in the Virgin Islands or in Hong Kong. 8 GPCL's activity is primarily focused on the development of structural finance products and the provision of debt facilities to assist in funding commercial development. 9 Relevantly for present purposes GPCL was engaged in two enterprises: · the provision of finance for the purpose of the purchase of Bellambi West Colliery near Bulli where the ultimate strategy was to rehabilitate a prime portion of the land, to construct roads and services and to undertake a substantial and subdivision; · the provision of finance for a development at Avondale in the Illawarra escarpment where a disused quarry was being converted into a Greg Norman golf course and residential subdivision and retirement village. 10 The convenient course is to initially set out the particular terms used in the Information Memoranda and to then deal with the questions of principle which separate the parties. The Information Memoranda 11 Each Information Memorandum is divided into a number of sections with capitalised headings. Important notes 12 The section under the heading "Important Notice" which included inter alia:

GPC No. 11 Pty Limited (the Issuer) has authorised the issue of this Information Memorandum and accepts responsibility for it. …

Each offer or invitation to issue or purchase a Note must comply with any applicable laws and regulations. …

Only information contained in this Information Memorandum or as otherwise authorised in writing by the Issuer may be relied on as having been authorised by or on behalf of the Issuer. No Other Material Authorised

The Issuer has not authorised any person to make any statements which are not contained in this Information Memorandum. Investors should not rely on any other statements or representations no matter what the person making those statements or representations claims. Limited Responsibility for Information

The Issuer is not liable for any loss or damage of any kind whatsoever arising as a result of any information contained in this document, notwithstanding any negligence, default or lack of care by it or that such loss or damage was foreseeable, except to the extent that liability under the Trade Practices Act, the Corporations Act 2001 or any other applicable statute or other law cannot be excluded. Documents Incorporated

The following documents are incorporated by reference in and form part of this Information Memorandum: · all amendments and supplements to this Information Memorandum prepared by the Issuer from time to time; and · all documents issued by the Issuer and stated to be incorporated in this Information Memorandum by reference…" Corporate Profiles 13 The section under the heading "Corporate Profiles" which included:

" 1. Issuer: GPC No. 11 Pty Limited GPC No. 11 Pty Limited is a wholly owned subsidiary of Great Pacific Capital Limited. The primary activity of the Company is the provision of finance for commercial transactions secured by subordinated mortgages over real property where the loan to valuation ratio of all secured moneys does not exceed 85% and the term of the loan does not exceed 2 years.

2. Parent Company: Great Pacific Capital Limited Great Pacific Capital Limited has positioned itself as a niche player in the property sector of the investment financing industry in Australia. Its primary focus is in the development of structured finance products and in particular the provision of subordinated debt facilities to assist in funding residential and commercial property development and infrastructure projects. These facilities are regarded as quasi capital and are usually provided to bridge the gap between senior debt and owners' equity. In terms of distinction, senior debt facilities are generally secured by a first ranking mortgage or charge whilst subordinated debt facilities are secured by a second ranking mortgage or charge. The higher risk profile attaching to a subordinated debt facility gives rise to a significantly higher return. The Company is targeting projects that fall within the cost range of between $5 million and $50 million. The major portion of the funding required for these projects would typically be comprised of senior bank debt with the Company providing a subordinated debt facility up to a maximum of 20% of project hard costs (land and construction costs). Management follows comprehensive due diligence procedures, credit policies and risk analysis guidelines to assess these business opportunities. This is to ensure the Company manages the downside collateral risk whilst maximizing the return on funds invested. The Company has the credentials to become a niche player in this industry due to its Directors' considerable experience in development, funding and management of property development projects; their extensive network and contacts for source of funds; their successful history in operating companies with similar activities and the fact that currently in Australia there are only a limited number of banks, financial institutions and specialist venture capitalists actively involved in this sector..." 14 It should be noted that under the "Project Information" sub-heading there is a reference advising that at present several members of the Great Pacific Capital Limited Group have entered into agreements to provide finance in respect of a number of property projects. A short reference to the Avondale and Bellambi projects is given. The Project Information segment appearing in relation to each of the Information Memoranda are identical save for the final paragraph which: · where the Issuer is GPC No 11, reads "It is anticipated that GPC No. 11 Pty Limited will provide finance for similar property related projects undertaken by members of the Great Pacific Capital Limited Group"; · where the Issuer is GPC No 12, repeat this information but referring to the anticipation being one relating to GPC No 12. Terms of the Notes 15 The "Terms of the Notes" section includes the following:

Principal Value of the Issue A maximum of A$5,000,000

Principal Amount of each Note Not less than A$50,000

Form The Notes will be issued in bearer form. The form of Note is attached as Annexure A.

Repayment The Notes will be repaid in full on the Maturity Date.

Interest The Notes will bear interest at a rate of 20% per annum payable on maturity. Security The Notes are secured by a floating charge over all present and future assets of the Issuer. The floating charge is held on behalf of Noteholders by the Security Agent as Trustee under the Security Trust Deed (see The Security on page 7 for details). The assets of the Issuer will primarily comprise the mortgage securities obtained by the Issuer in respect of the loans made to borrowers.

Events of Default under the Security Trust Deed An Event of Default will occur under the Security Trust Deed upon the occurrence of either of the following: (a) A failure by the Issuer to repay the Principal Amount of any Note or to pay Interest on the due date; or (b) An order is made or a resolution is passed for the winding up, dissolution or administration of the Issuer. The occurrence of an Event of Default gives Noteholders the enforcement rights discussed below.

Consequences of an Event of Default If an Event of Default occurs, any Noteholder may instruct the Security Agent to enforce the Security following the expiration of (14) days after the Issuer has received notification from the Security Agent to remedy such Event..." "Summary of the Note Issue" 16 The "Summary of the Note Issue" section: is set out in full below:

Each Note contains the payment obligations of the Issuer with regard to its Principal Amount and Interest. All other provisions relating to the Notes are contained in the Security Trust Deed to be entered into by the Issuer and EMC (Nominees) Pty Ltd as Security Agent. Noteholders agree to be bound by the terms of the Security Trust Deed in order to benefit from the security constituted under that Deed.

Investors should note the following: · The Issuer gives limited warranties which relate to its authority, status and the enforceability of its obligations under the Notes and the Security Trust Deed; · The Issuer gives no covenants or financial undertakings other than the negative pledge discussed under "The Security" below; · The Security Trust Deed contains limited events of default relating to insolvency-type events and non-payment of principal or interest on the due date; · Following an event of default relating to non-payment of principal or interest on the due date, any Noteholder may following the expiration of 14 days after the Security Agent has notified the Issuer to remedy such non-payment, instruct the Security Agent to enforce the security and the Security Agent will be obliged to act upon such instructions; · The Notes may not be accelerated under any circumstances; · The full amount payable under each Note is the aggregate of its Principal Amount and Interest. No more is payable. · The Security Agent is a wholly owned subsidiary of EMC (Services) Pty Limited. The majority shareholders of EMC (Services) Pty Limited are also partners in Eakin McCaffrey Cox, Solicitors, the law firm advising Great Pacific Capital Limited in its proposed public listing.

Investors must also notify the Issuer at the time after the purchase of the Notes of the account to which payments under the Notes (including the Principal Amount) are to be made. They must also notify the Issuer immediately if their account details change. Persons who acquire Notes from the initial investors must also notify their account details to the Issuer.

Payment by the Issuer to the account most recently notified to it by a Noteholder will discharge the Issuer's obligation to pay under the relevant Note.

The Issuer charges all its present and future assets to the Security Agent as security for its obligations under the Notes and the Security Trust Deed. The charge operates as a floating charge.

As a result of the floating charge, the Security Agent may appoint a receiver over the assets of the Issuer or realise the security during a voluntary administration of the Issuer.

The floating charge will rank behind any existing or future security granted by the Issuer by way of fixed charge over the secured assets. The Issuer agrees in the Security Trust Deed that it will not grant any other security over the secured assets without the consent of 75% of the Noteholders.

The assets of the Issuer will, following the issue of the Notes, consist of the loans made to borrowers secured by mortgages over real properties.

Further details of the type of transactions that GPC No. 11 Pty Ltd will provide finance can be found in Annexure B.

The charge over the Issuer's assets held by the Security agent for the noteholders, will effectively allow the Security Agent to exercise the Issuer's powers under the mortgage in the event of the Issuer's default caused by any of its borrower's default.

Copies of the Security Trust Deed are available for inspection at the Sydney office of GPC No. 11 Pty Ltd at Level 7, Kyle House, 27 - 31 Macquarie Place, Sydney NSW 2000." Pro-forma Promissory Note 17 Annexure A is the pro-forma version of the Promissory Note. Transaction Summary 18 Annexure B is the Transaction Summary reading as follows:

GPC No. 11 Pty Limited will only provide finance for transactions which have the following features:

1. The amount advanced must be secured by one or more real property mortgages, which may have a second or other subordinated ranking.

2. The loan to valuation ratio shall not exceed 85%, that is the aggregate of the amount advanced by GPC No. 11 Pty Limited and the money secured by any prior mortgage must not exceed 85% of the value of the security property.

4. The borrower will need to demonstrate a viable exit strategy and implementation of appropriate repayment arrangements." 19 Outside of what has already been mentioned the only differences between the respective Information Memoranda issued by GPC No 11 and GPC No 12 is a small variation in the wording of paragraph 1 of Annexure B which in the case of the GPC No 12 Memorandum reads:

"... The amount advanced must be secured by one or more real property mortgages, which may have a second (but not lower) ranking priority…" The Mortgages 20 There were a number of titles involved in particular instances. On occasion each title apparently required a separate mortgage. Only some of the mortgages are appropriately summarised below. The Avondale Mortgage 21 The terms of the Avondale Mortgage identify GPCL as the mortgagee, this being an 'all moneys' mortgage. 22 Clause 1.1 defines the term "Collateral Security" as meaning "…a present or future Security Interest (other than this mortgage), guarantee or indemnity given by the Mortgagor or another person to secure or otherwise provide for the payment of the Security Money including the documents identified in item 1 of schedule 1". 23 Schedule 1 includes within Item 1 the following:

Loan Agreement between the Mortgagee, as Lender, and Avondale Projects Pty Limited, as Borrower, David Hickie and Robert Mitchell Renshall, as Guarantor, and the Mortgagor, as Third Party Mortgagor, dated around the same date as this Mortgage.

Deed of Guarantee from David Hicki and Robert Mitchell Renshall.

Fixed and Floating Charge over Avondale Projects Pty Limited." The Bellambi Mortgage 24 The terms of the Bellambi Mortgage identify Ace Bond Capital Limited as the mortgagee, this being an 'all moneys' mortgage. 25 Clause 1.1 defines the term "Collateral Security" as meaning "…any Encumbrance, other than this Mortgage, Guarantee or other document or agreement at any time which any person alone, or severally or jointly with any other person grants to secure the payment to the Mortgagee of any of the Secured Money". 26 "Transaction Documents" are defined to mean: "…(a) this Mortgage;

(b) the Deed of Loan dated on or about the date of this Mortgage between the Borrower and the Mortgagee;

(d) any document which the Mortgagee and the Mortgagor agrees is a Transaction Document." 27 The definition of "Secured Money" is as follows:

" Secured Money " means all the monetary obligations and liabilities of any Relevant Person to the Mortgagee under or by reason of any Transaction Document or any other transaction, matter or event whatsoever and in any capacity and without limiting the generality of the foregoing includes any such obligations and liabilities which:

(b) are actual, prospective, contingent or otherwise;

(d) are already in existence prior to or come into existence after the date hereof;

(e) are owed to or incurred by or on account of any Relevant Person alone, or severally or jointly with any other person;

(f) are owed or incurred for the account of the Mortgagee alone, or severally or jointly with any other person;

(g) are owed to any other person as agent (whether disclosed or not) for or on behalf of the Mortgagee;

(h) are owed or incurred as principal, interest, fees, charges, taxes; duties or other imposts, damages (whether for breach of contract or tort or incurred on any other ground), losses, costs or expenses, or on any other account;

(i) are owed to or incurred for the account of the Mortgagee directly or as a result of: (i) the assignment to the Mortgagee of any obligation or liability of any Relevant Person; or

(ii) any other dealing with any such obligation or liability;

(l) comprise any combination of any of the above." The Trust Deed 28 The Declaration of Trust Deed identifies Ace Bond as "Trustee" and GPC No. 8 (Bulli ) Pty Limited, GPC No 11 and GPC No 12 as "Beneficiary". The Deed includes the following:

A . The Trustee has at the request of the Beneficiary entered into the loan documents.

B. The loan advance and other money required to be paid to the borrower under the loan documents has been provided by the Beneficiary from the Benefiary's funds.

C. The Trustee has at all relevant times agreed to act as trustee of this trust on the terms of this deed.

1.1 Definitions In this deed unless the context otherwise permits: (a) loan documents means the loan agreement and various collateral securities particularized in the schedule to this deed. (b) trust estate means all of the rights, title and interest arising by law or in equity and conferred on the lender or mortgagee (as the case may be) under or by virtue of the loan documents.

1.2 Interpretation In this deed unless the context otherwise permits: (a) reference to the singular number includes the plural and vice versa and the reference to one gender includes all other genders and each of them; (b) reference to a party to this deed includes a reference to that party's personal representatives and successors; (c) the headings are not to be taken into account in the interpretation of this deed; and (d) the terms of the deed are to be construed in accordance with the laws of New South Wales.

2.1 Declaration of Trust The Trustee declares that the trust estate is held by the Trustee on trust for the Beneficiary.

2.2 Transfer to Beneficiary The Trustee must at the request and cost of the Beneficiary transfer the trust estate to the Beneficiary or otherwise deal with the trust estate in such manner as the Beneficiary directs.

2.3 Beneficiary's Reservation of Rights Nothing in this deed entitles the Trustee to beneficial ownership of the trust estate or to deprive the Beneficiary of the rights of beneficial ownership of the trust estate, except where the rights of the Trustee or of a third party may become paramount by reason of the failure of the Beneficiary to carry out and perform all matters required to be carried out and performed by the Beneficiary…" 29 The schedule to the Deed lists the following Loan documents and collateral securities:

"1. Loan Deed between the Trustee as lender and GPC Bellambi Pty Limited as borrower dated 21 March 2003.

2. Real Property Mortgage between the Trustee as mortgagee and GPC Bellambi Pty Limited as mortgagor dated 21 March 2003.

3. Old System Mortgage between the Trustee as mortgagee and GPC Bellambi Pty Limited as mortgagor dated 21 March 2003.

Mining Mortgage between the Trustee as mortgagee and GPC Bellambi Pty Limited as mortgagor dated 21 March 2003.

Fixed and Floating Charge between the Trustee as chargor and GPC Bellambi Pty Limited as chargee dated 21 March 2003." The Priority Deed 30 It seems unnecessary to set out the terms of the Priority Deed of 31 October 2003 The Deed of Loan of 21 March 2003 31 Ace Bond is identified as the "Lender" and GPC Bellambi Pty Ltd as the "Borrower". The recitals state that the Lender has agreed to provide a loan facility to the Borrower the principal and amount of which is not to exceed A$9,000,000.00. The Schedule of Securities covers the Bellambi Properties including also identified mining leases mortgages and a fixed and floating charge over the assets and undertakings of the borrower. The Security Trust Deed and Charge 32 The convenient course is to annex the Security Trust Deed and Charge pertaining to GPC No 11, there being no material distinction between this document and that pertaining to GPC No 12. Alleged conditions said not to rise from the Information Memoranda 33 The defendants further contend that there are terms alleged which do not reflect the words used in the Information Memoranda. The alleged conditions said to be affected by this problem are (by reference to relevant paragraphs of the Points of Claim): · paragraphs 2(a) and 20 (a): ( the contention is that nowhere in the respective Information Memoranda does it state that either GPC No 11 or GPC No 12 would "use its capital" to provide finance for the transaction under which moneys were to be advanced); · paragraphs 2(b) and 20 (b): ( the contention is that nowhere in the respective Information Memoranda does it state that any real property mortgages referred to in the Information Memoranda would be "legal mortgages of real property in Australia to [GPC No 11 or GPC No 12] as mortgagee"). 34 In the result the defendants contend that the plaintiffs have not pleaded or particularised any case which permits these terms to constitute any part of the contracts between the plaintiffs and the defendants. The principles 35 It is convenient to commence by identifying the relevant principles which were not seriously in dispute. 36 Gibbs CJ in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 put the matter as follows [at 61]:

"A representation made in the course of negotiations which result in a binding agreement may be a warranty - i.e. it may have binding contractual force - in one of two ways: it may become a term of the agreement itself, or it may be a separate collateral contract, the consideration for which is the promise to enter into the main agreement. In either case the question whether the representation creates a binding contractual obligation depends on the intention of the parties. In JJ Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435, at p 442 and Ross v Allis-Chalmers Australia Pty Ltd (1980) 55 ALJR 8, at pp 10 and 11, it was said that a statement will constitute a collateral warranty only if it was "promissory and not merely representational", and it is equally true that a statement which is "merely representational" - i.e. which is not intended to be a binding promise - will not form part of the main contract. If the parties did not intend that there should be contractual liability in respect of the accuracy of the representation, it will not create contractual obligations. In the present case Mr Blackman, who made his statements fraudulently, had of course no intention that they should amount to contractual undertakings, but he could not rely on his secret thoughts to escape liability, if his representations were reasonably considered by the persons to whom they were made as intended to be contractual promises, and if those persons intended to accept them as such. The intention of the parties is to be ascertained objectively; it "can only be deduced from the totality of the evidence": Heilbut Symons & Co v Buckleton [1913] AC 30, at p 51. In other words, as Lord Denning said in Oscar Chess Ltd v Williams [1957] 1 WLR 370, at p 375: "The question whether a warranty was intended depends on the conduct of the parties, on their words and behaviour, rather than on their thoughts. If an intelligent bystander would reasonably infer that a warranty was intended, that will suffice."

The intelligent bystander must however be in the situation of the parties, for "what must be ascertained is what is to be taken as the intention which reasonable persons would have had if placed in the situation of the parties": Reardon Smith Line v Yngvar Hansen-Tangen (1976) 1 WLR 989, at p 996. 37 It is appropriate to consider the whole of the Information Memoranda in the search for whether or not what is disclosed, applying the objective test, is seen to disclose an intention by way of a binding promise to which would be attached contractual liability in respect of the accuracy of the representation. 38 Clearly then, in order to be considered a term of a contract, there must be an intention [objectively ascertained], on the part of the maker of the relevant statement, to guarantee the statement: JJ Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435; Ross v Allis Chalmers Australia Pty Limited (1980) 32 ALR 561; Gates v City Mutual Life Assurance Society Limited (1986) 160 CLR 1. The former decision - which concerned the nature of statements made by a vendor as to the performance of boat engines - contains the following passage frequently cited in the cases (at 442): "The Full Court seems to have thought it sufficient in order to establish a collateral warranty that without the statement as to the estimated speed the contract of purchase would never have been made. But that circumstance is, in our opinion, in itself insufficient to support the conclusion that a warranty was given. So much can be said of an innocent misrepresentation inducing a contract. The question is whether there was a promise by the appellant that the boat would in fact attain the stated speed if powered by the stipulated engine, the entry into the contract of purchase of the boat providing the consideration to make the promise effective. The expression in De Lassalle v Guildford that without the statement the contract in that case would not have been made does not, in our opinion, provide an alternative and independent ground on which a collateral warranty can be established. Such a fact is but a step in such circumstances towards the only conclusion which will support a collateral warranty, namely, that the statement so relied on was promissory and not merely representational." 39 The Court went on to state the three courses open to the purchaser in that case, as follows:

"He could have required the attainment of the speed to be inserted in the specification as a condition of the contact; or he could have sought from the appellant a promise - however expressed, whether as an assurance, guarantee, promise or otherwise - that the boat would attain the speed as a prerequisite to his ordering the boat; or he could be content to form his own judgment as to the suitable power unit for the boat relying upon the opinion of the appellant of whose reputation and experience in the relevant field he had, as the trial judge found, a high regard. Only the second course would give rise to a collateral warranty." 40 Their Honours concluded:

"That the statement actually made by the appellant was intended to have some commercial significance upon a matter of importance to the respondent can be conceded; that the respondent was intended to act upon it, and that he did act upon it, is clearly made out. But those facts do not warrant the conclusion that the statement was itself promissory." 41 Clearly also, a statement may constitute a representation and an inducement, and be made in circumstances where the plaintiff was intended to act upon the statement, yet fail to satisfy the promissory criterion which is essential to an action framed in contract: see also Ross v Allis Chalmers Australia Pty Limited (1980) 32 ALR 561, per Aicken J at 569; Nemeth v Bayswater Road Pty Ltd [1988] 2 Qd R 406 per Connolly J at 408. Even the existence of fraudulent intent on the part of the representor in making the statement is insufficient to establish that the statement operated as a contractual warranty: Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 per Gibbs CJ at 52. 42 The task of determining the true character of a statement is performed objectively: Hospital Products per Gibbs CJ [at 427]; Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 at 996; [1976] 3 All ER 570at 574; Esanda Ltd v Burgess [1984] 2 NSWLR 139 per Samuels J at 146; Aitken v Trans Tasman Timbers Pty Limited (unreported, New South Wales Court of Appeal per Hope, Samuels and McHugh JJA, 26 September 1985) and Hyundai Elevator Co Ltd v Liftronic Pty Limited (unreported, New South Wales Court of Appeal per Mahoney, Priestley and Handley JJA, 9 December 1994) where it was stated (per Priestley JA at 19):

"…the question whether the words used were promissory over and above being representational is to be decided objectively. The subjective intentions of the parties, if they could be known, would not be conclusive. If both had in fact had it in mind that the statements were promissory, then it is very likely that this understanding would have been manifested so that a reasonably intelligent bystander would have recognised that a binding promise was being offered…" 43 The presence of uncertainty or ambiguity in the statements said to constitute the relevant terms is one basis for doubting that the contents of the Information Memoranda (in particular) had the requisite promissory quality: Commonwealth Bank of Australia v TLI Management Pty Ltd [1990] VR 510 at 516ff. 44 As Gibbs CJ said in Gates (at 5):

"The question whether the statements constituted a collateral contract depends on the intention of the parties: Heilbut Symons & Co v Buckleton [1913] AC 30 at 49-51. In the present case the statements were not promissory in form - they purported to be descriptive or explanatory of one of the terms of the formal written contract into which the parties proposed to enter. I find it impossible to say that either of the parties actually intended that the statements should constitute a term of the contracts between them or (if it matters) that an objective inference can be drawn that they did so intend. The statements were representations and nothing more." (See also Zoneff v Elcom Credit Union Ltd (1990) 94 ALR 445 at 467) Dealing with the matter 45 Clearly enough: · the Information Memoranda contain various written statements; · the promissory notes constitute contracts between the respective parties, complete on their face. 46 In my view the plaintiffs' central contention that the terms set out in the Information Memoranda were terms of the contracts of loan is incorrect. Those documents to my mind at highest can be regarded as representational. 47 Indicators which support this view include the following matters identified by the defendants: · The security details proffered in the Information Memoranda are in general terms. Thus readers of the respective Information Memoranda are informed (at page 5 thereof) that "[t]he assets of the Issuer will primarily comprise the mortgage securities obtained by the Issuer in respect of the loans made to borrowers." [As the defendants have submitted use of an expression such as "primarily" does not put one in mind of particularity in terms of utilising words of hard obligation but would appear rather to be indicative or aspirational] · Readers are directed to page 7, which explains the charging of GPC's assets to the security agent for that purpose. There they are informed that GPC's assets will consist of "loans made to borrowers secured by mortgages over real properties." The identity of both the "borrowers" and the "real properties" remain at large, nor is there any explanation of the terms upon which the mortgages are to be granted. Further the statement is expressed in futuro; the assets are not identified in any meaningful way; there is no statement that those assets presently exist, nor when they will become GPC assets. The reader is simply informed (in that statement, and in the annexure "B" to which it refers), about "the type of transactions" that the GPC entities will provide finance for. · As already noted annexure B to each of the Information Memoranda indicates:

• that the moneys advanced must be secured by real property mortgages, which may have a second ranking priority (in the case of the GPC No 12 Information Memorandum) and a second or lower ranking priority (in the case of the GPC No 11 Information Memorandum);

• a requirement that the borrower demonstrate a "viable exit strategy and implementation of appropriate repayment arrangements." · The sample promissory note affords no basis for the terms pleaded by the plaintiff. The converse is not true: there is no reference in the promissory notes to the incorporation of any other document by reference, including the Information Memoranda. 48 A further indicator which negates the central proposition put by the plaintiffs relates to the particular respects in which the Information Memoranda are sometimes inconsistent in the requisite terminology. Precision is of the essence where any question of the suggested term is in focus. I have here in mind: · The somewhat loose reference [referred to above] in the "Terms of the Notes" to the assets of the Issuer primarily comprising the mortgage securities obtained by the Issue in respect of the loans made to borrowers. · This may be compared to the Summary of the Note Issue section under the subheading "The Security" where the following sentence appears: "The assets of the Issuer will, following the issue of the Notes, consist of the loans made to borrowers secured by mortgages over real properties" · A further comparison concerns the sentence in the Transaction Summary [Annexure B] which following the representation that "GPC No. 11 Pty Limited will only provide finance for transactions which have the following features…", reads: "…The amount advanced must be secured by one or more real property mortgages, which may have a second or other subordinated ranking..." [emphasis added] [It will also be appreciated that the plaintiffs' proposition is that (where the Issuer is GPC No 11) one must read into the above sentence describing the features the following: "The amount advanced must be secured by one or more real property mortgages [ in favour of GPC No 11 ] which may have a second or other subordinated ranking." 49 There is substance in the defendants' submission that it is inappropriate to regard Annexure B as in effect a 'stand-alone' covenant in the face of the clear statement in the Summary of the Note Issue section that the Issuer gives no covenants or financial undertakings other than the identified negative pledge. 50 A particular indicator contradicting the central proposition put by the plaintiffs is to be found in the initial two sentences in the Summary of the Note Issue segment where the Notes are referred to. The sentences read:

"Each Note contains the payment obligations of the Issuer with regard to its Principal Amount and Interest. All other provisions relating to the Notes are contained in the Security Trust Deed to be entered into by the Issuer and EMC (Nominees) Pty Ltd as Security Agent." 51 In short the sentences make plain that the Notes contain the relevant payment obligations and that the Security Trust Deed sets out all other provisions of relevance to the Notes. There is no suggestion that the Information Memoranda identify contractual obligations. 52 The second bullet point under the subheading "The Notes" [part of the Summary of the Note Issue] further expressly advises that the Issuer gives no covenants or financial undertakings other than the particular negative pledge referred to under the heading "The Security". 53 It should also be observed that the Summary of the Note Issue makes plain that the Notes may not be accelerated under any circumstances. 54 It is further significant that the Issuer is not simply charging in favour of the Security Trustee, the mortgages that it may take out, but is also charging all of its present and future assets of whatever kind, in favour of the Security Trustee. In terms of the essential content of the investment, so far as security for the moneys of the investors is concerned, they are taking a security over the entirety of the assets of the Issuer. 55 It is convenient to presently record the submission put by the defendants to the effect that there is nothing in terms which asserts that the content of the promise [to be found within Annexure B as part of clause 1] includes as part of its binding feature that the amount advanced must be secured by one or more real property mortgages in favour of any particular person or in favour of the Issuer as such. The proposition is that a trustee for the Issuer would suffice. The submission seems to me to be one of substance.

56 The word "Mortgages" in the material "Charge" provision [Clause 3.1], although capitalised, is not a defined expression. As the defendants have submitted this could include legal or equitable mortgages. It could include contributory mortgages. The matter which is particularly significant is that the entire assets of the Issuer are eventually available to secure the repayment obligation. 57 The Events of Default clause 7 when considered in light of the definition of "Events of Default" in clause 1.1 makes it plain that an event of default is restricted in the extreme, covering only the making of an order or a resolution being passed for the winding up, dissolution or administration of the Mortgagor and covering also a failure by the Mortgagor to pay interest or principal on the due date under any Note.

58 However as the defendants have submitted, a mere representation has never been regarded as a term of a contract, particularly in circumstances where there is a complete, executed document which satisfies all of the tests for the existence of a contract. The promissory notes are such documents. The recital to the Promissory Note clearly states: "The Issuer has agreed with the Noteholder to issue this Note on the terms contained below". [emphasis added] 59 I am unable to discern an objective intention that the words upon which the plaintiffs rely were promissory over and above being representational. 60 It is presumably unnecessary to state the obvious but the fact is that certain of the complaints made by the plaintiffs may well have been able to be pursued had they pursued representational cases either at common law or pursuant to the Trade Practices Act. Whether such cases would have been successful does not presently arise for determination. However the plaintiffs have deliberately eschewed any such course. Avondale loan repaid 61 It should be noted that on the evidence [PX 27 et seq] the Avondale loan was repaid on March 2004 so that the present concerns would appear to be with the state of the securities held for the Bellpac loan only. Breach 62 It has not been demonstrated that the amounts advanced to the Issuer were not at material times secured by real property mortgages, that is to say by mortgages over real property. The fact that the mortgagee happens to be a trustee for the mortgagor does not mean that the amounts so advanced are not secured by real property mortgages. 63 In any event [even if the central proposition of the plaintiffs concerning the proposition of intent to be bound by promissory terms be accepted], the particular question which arises is as to what is the contract said to have been breached. 64 The only breach could have been breach of a contract collateral to the main contract (constituted by the promissory notes), and having an independent existence: Heilbut Symons, per Lord Moulton at 47. By definition, a breach of such a contract can sound only in damages. 65 A breach of a collateral contract does not as a general rule create any entitlement to treat the main contract (constituted in this case by the promissory notes) as repudiated: Chitty on Contracts (28th ed, 1999), paragraph 12-006. Damages 66 It seems to me that each of these submissions advanced by the defendants is of substance and is appropriate to be adopted. In short: · the claim really advanced is for the return of the whole of the monies invested by the plaintiffs. That is, in effect, a claim for restitution of the monies invested. Such relief could be provided only upon a successful claim for rescission of the contracts ab initio, which has not been pleaded; · in any event, such a claim could not be sustained as rescission is a remedy which goes to the formation of the contract, not the breach of one. The plaintiffs make no complaint which goes to the formation of the contract; indeed the pleadings are necessarily inconsistent with such a complaint; · putting the plaintiffs' case at its highest, the claim can only be for damages for loss of bargain. That is the relief available for the breach of condition of a contract; · the plaintiffs have not, and could not have lost their respective bargains with the defendants. The maturity date of the promissory notes is yet to occur. The defendants acknowledge their obligations to repay principal and interest in accordance with the promissory notes;

· in terms, the plaintiffs plead a claim for damages. Presumably, this is a claim for damages for breach of warranty, however the plaintiffs plead no basis for such a claim, nor adduce any evidence upon which such a claim could succeed; · the plaintiffs have made no attempt to identify the proper measure of damages to which they assert an entitlement by reason of breach of those warranties. In contrast, the measure of damages for breach of warranty is to place the injured party in the position it would have been in if the warranted statements were true: Gould v Vaggelas (1985) 157 CLR 215 at 265. This is simply a particular application of the principle that damages in contract are awarded to place the applicant in the position in which it would have been had the respondent performed the obligation that was breached: Johnson v Perez (1988) 166 CLR 351; 82 ALR 587; Parramatta City Council v Lutz (1988) 12 NSWLR 293; Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; (1992) 104 ALR1; Manser v Spry (1994) 181 CLR 428; 124 ALR 539; Nominal Defendant v Gardikiotis (1996) 186 CLR 49; · the loss must be identified by reference to the position of the plaintiff after the defendant's breach, and the plaintiff must establish what has been lost: Amann Aviation Pty Ltd. · on that test, the plaintiffs' damage both at the time of commencement of the proceedings, and at the time of hearing, is illusory. The promissory notes have not matured, and there is therefore no basis upon which the plaintiffs could have suffered any loss as a result of the breaches alleged (which are denied). 67 A feature of the present litigation simply concerns the fact that the plaintiffs have failed to prove the loss. The necessity to identify the proper measure of damages to which a plaintiff says it is entitled by reason of breach of contractual obligations was recently considered (in the context of a collateral warranty claim) by Drummond J in Osric Investments Pty Ltd v Woburn Downs Pastoral Pty Ltd (2002) 20 ACLC 1; (2001) 48 ATR 184; [2001] FCA 1402:

"In any event the applicant has made no attempt to identify the proper measure of damages to which it says it is entitled by reason of the breaches of those warranties. Its submission is that the measure of damages payable to the applicant will be the same whether damages are assessed in contract, as restitution, or under section 82 and 87 of the Trade Practices Act, viz repayment of the whole of the $349,021 paid by the applicant to the first and third respondents. The submission is incorrect. The applicant would be entitled to damages for breach of the warranties set up assessed on a basis quite different from complete restitution of all moneys paid over. Such restitution might well be, prima facie at least, the measure of damages recovered under section 87 or for a contravention of section 52 of the Trade Practices Act since assessments under 82 and 87 direct attention to a comparison between the position in which the party who alleges it has suffered loss or damage is in and the position which the party would have been but for the contravening conduct… The measure of damages for breach of warranty is in contrast, to place the injured party in the position it would have been if the warranted statements were true…

It is apparent by way of example that the damages recoverable for breach of warranty that the investor's herd of progeny would be produced from specific recipient cows leased would very likely be something quite different from restitution of all moneys paid by the applicant to the first and second respondents." Evidentiary rulings 68 Certain objections to the statements of evidence of Mr Carter and of Mr Fuller were reserved. The gravaman of the issue centrally related to an attempt by the plaintiffs to adduce evidence that these persons initially decided to invest in Promissory Notes on the basis of representations contained in particular material including the Transaction Summaries and the Information Memoranda. 69 As already observed, it is of course quite plain that the task of the court is to determine the true character of statements objectively. Hence it would be permissible for Mr Carter and Mr Fuller to identify the materials which they had received on the basis of which they determined to invest for the purpose purely of identifying those materials. It does not seem to me permissible for them to go outside of that form of statement. Their personal subjective understandings simply fall outside the field of admissibility. 70 Accordingly the evidentiary rulings are as follows: Statement of Mr Carter Paragraph 1 - allow Paragraph 5 - reject the words "on the basis… representations" [the words are also inadmissible as a matter or form] paragraph 7 - reject paragraph 9 - reject

Paragraph 1 - allow Paragraphs 5 and 6 - reject the words "on the basis … representations"[the words are also inadmissible as a matter or form] paragraph 7 - reject paragraph 10 - reject 71 It is convenient to note that even had each of these sections of the statements been allowed the ultimate decision would have been no different. 72 It should be noted that the matter of the application of the parol evidence rule was not specifically adverted to. Short Minutes of order 73 The proceedings will be stood over to permit the parties to bring in short minutes of order and to argue costs.

I certify that paragraphs 1 - 73 are a true copy of the reasons for judgment herein of the Hon. Justice Einstein given on 30 August 2004

      Susan Piggott
      Associate
      30 August 2004

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