Beehag v Star Dreamer Holdings Pty Ltd

JUDGMENT 1By way of a notice of motion filed 4 September 2013, and the further amended statement of claim annexed to the affidavit of Gordon Jeffrey Bryant sworn 4 June 2013, the plaintiff seeks to allege the following. In 2006, he decided to sell some real property in the Sydney suburb of Kingsford. He retained a valuer in order to determine the appropriate sale price. The valuer consulted the directors of a local firm of real estate agents in order to inform himself about local property prices. The directors of the real estate agency misrepresented a number of significant matters to the valuer. The valuer relied upon those misrepresentations in coming to a valuation that was erroneously low. The valuer provided the plaintiff with an erroneous valuation as a result, without informing the plaintiff of the misrepresentations of the directors of the real estate agency that underpinned it. The plaintiff sold the property below its true market value. Unbeknown to the plaintiff and the valuer, the directors of the real estate agency were the true purchasers. 2The plaintiff filed an amended statement of claim on 20 December 2012 founded upon the above factual allegations. There were five defendants to this pleading: the valuer engaged by the plaintiff (the first defendant); another entity engaged by this valuer to provide property valuations (the second defendant); an employee of the second defendant (the third defendant); the real estate agency (the fourth defendant); and the directors of the real estate agency (the fifth defendants). 3The amended statement of claim asserted that the defendants had engaged in conduct that was misleading or deceptive or likely to mislead or deceive, contrary to s 52 of the Trade Practices Act 1974 (Cth). The plaintiff claimed damages pursuant to s 82 of the Trade Practices Act (as well as other relief). That section provided: 82 Actions for damages (1) A person who suffers loss or damage by an act of another person that was done in contravention of a provision of Part IV or V may recover the amount of the loss or damage by action against that other person. [Emphasis added] ... 4Before the Registrar, the plaintiff sought leave to file and serve the further amended statement of claim. This pleading omitted the first, second and third defendants; that is, the valuer and its associated entities. In other words, the further amended statement of claim sought relief only from the fourth and fifth defendants, the real estate agency and its directors. The fourth and fifth defendants are the respondents in the proceedings before me. For convenience, I will henceforth refer to these two remaining defendants as "the defendants". 5Before the Registrar, the defendants opposed leave being granted on the basis that the further amended statement of claim did not plead a valid cause of action. That submission was founded on an analysis of two decisions of the New South Wales Court of Appeal: Digi-Tech (Aust) Ltd v Brand [2004] NSWCA 58; (2004) ATPR 46-248 ("Digi-Tech v Brand") and Ingot Capital Investments Pty Ltd and Others v Macquarie Equity Capital Markets Limited and Others [2008] NSWCA 206; 73 NSWLR 653 ("Ingot v Macquarie"). 6The Registrar accepted that submission and delivered a concise judgment explaining why he did so. The proposed claim was not allowed, and the proceedings were dismissed. 7The plaintiff has sought a review of that decision of the Registrar, pursuant to r 49.19 of the Uniform Civil Procedure Rules (2005). Both parties accept that these proceedings do not require a detailed consideration of the nature of such a review. They accept that the simple question for determination by me is: did the Registrar err in law in striking out the proceedings upon the basis of the principles enunciated in Digi-Tech v Brand and Ingot v Macquarie? 8I note for completeness that, by way of a notice of motion filed on 1 October 2013, the defendants seek that the proceedings be dismissed or struck out. In short, the position of senior counsel for the defendants was that both the amended statement of claim and the subsequent proposed further amended statement of claim suffer from the same basal defect. The two decisions of the Court of Appeal 9It is convenient to consider immediately the background to the appeal in Digi-Tech v Brand. To state things very succinctly, Digi-Tech owned the intellectual property rights in relation to two electronic devices. Investors invested in a scheme with regard to the devices promoted by Mr Urwin of Howarth and Howarth. One of the attractive aspects of the scheme was a large tax benefit. An evaluation of intellectual property rights was an important aspect of the scheme. Digi-Tech retained Deloittes, an accountancy firm, in order to provide an evaluation. The valuation by Deloittes was based upon projections from Mr Rowe, CEO of one of the Digi-Tech companies. 10Investors put substantial sums into the scheme. Things did not proceed as planned: there were delays in bringing the products to market; sales did not materialise; the expected tax benefits were not obtained; and the Commissioner for Taxation determined not to allow deductions. 11In due course, some of the investors sued Digi-Tech. They alleged that Digi-Tech had engaged in misleading and deceptive conduct with regard to both existing and future facts. They claimed relief pursuant to ss 82 and 87 of the Trade Practices Act 1974, and the equivalent provisions of the Fair Trading Act 1992 (ACT). (Section 82 is extracted above; s 87 empowers the court to make ancillary orders as necessary to redress injury caused by the offending conduct.) 12The learned trial judge divided the alleged misrepresentations into two categories: the so-called "suitability representation" that the products were suitable for and capable of ready exploitation in Australia, and the so-called "profit potential representation" that the products had a high revenue and profit potential. 13At first instance, his Honour rejected the proposition that the investors actually relied upon the "suitability representation". To put it bluntly, the trial judge did not believe the sworn evidence of the investors. His Honour said "Reliance has not been established". On a different basis that does not require detailed analysis, his Honour also found that the investors failed to prove reliance on the "profit potential representation". 14The Court of Appeal identified two errors in the approach adopted by the trial judge to the question of reliance. The factual question of reliance was not determined by the Court of Appeal but remitted for a retrial. 15The discussion of the "indirect causation theory" propounded on appeal by the investors commences at [147] of the unanimous judgment of the Court. It was an alternative basis upon which it was submitted that the investors could succeed. The indirect causation theory in a nutshell was that, if Digi-Tech had not behaved in a misleading and deceptive manner, then Deloittes would not have produced an incorrect valuation. Without that incorrect valuation of Deloittes, the scheme would not have proceeded, and Mr Urwin would not have proposed it to investors. Therefore, so the theory went, the misrepresentations of Digi-Tech had led to the loss to investors, and the requirements of the statute had been established. 16The indirect causation theory was rejected by the Court of Appeal on two bases. The first was that the theory did not demonstrate sufficient causal connection between the alleged misrepresentations of Digi-Tech and the loss suffered by the investors to permit relief pursuant to the section. The second was that the theory was propounded for the first time on appeal and had not been pleaded at first instance. 17The Court (Sheller, Ipp and McColl JJA) referred to the decision of Janssen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) 37 FCR 257, which was followed in Stockland (Constructions) Pty Ltd v Retail Design Group (International) Pty Ltd [2003] NSWCA 84. It was said at [156]: The Janssen-Cilag and Stockland category of claim is materially different to that which occurs when plaintiffs suffer loss because they, themselves, are induced by misleading representations to perform some act or omission by which they are prejudiced. The difference lies in the fact that in the first category of case no conduct on the part of the plaintiff forms a link in the causation chain. In the second category, the inducement of the plaintiff and his or her act or omission causing loss is an essential part of the chain. Without such inducement and a consequential act or omission on the part of the plaintiff there is indeed no linking chain between the misleading conduct and the plaintiff's loss. 18In discussing the application of the indirect causation theory to this second category of case, the Court said at [159]: We accept [the submission of counsel for Digi-Tech] that, whatever might be the position in other contexts, in cases of this kind (misrepresentation inducing a transaction) the courts have required reliance by or on behalf of the plaintiff on the misrepresentation as being essential to the proof of causation as required by s 82(1) of the Trade Practices Act 1974. Persons who claim damages under s 82(1) on the ground that they entered into transactions induced by the misrepresentations of other persons must prove that they relied on such misrepresentations and, therefore, "by" that conduct, they suffered loss or damage. As [counsel for Digi-Tech] pointed out, were it otherwise, representees could succeed even though they knew the truth, or were indifferent to the subject matter of the representation. 19Turning to Ingot v Macquarie, it is unnecessary to set out the factual background of the appeal in that matter in any detail. Stated very simply, the appellants claimed damages for losses suffered as a result of a converting note issue in which they had invested a great deal of money. Their claim was based in part on s 995 of the Corporations Law 1991 (Cth), which prohibits "misleading or deceptive conduct". Section 1005 of that Act relevantly provided: 1005 Civil liability for contravention of this Part (1) Subject to the following sections of this Division, a person who suffers loss or damage by conduct of another person that was engaged in in contravention of a provision of this Part may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention, whether or not that other person or any person involved in the contravention has been convicted of an offence in respect of the contravention. [Emphasis added] It is apparent that this section is substantially similar to s 82(1) of the Trade Practices Act. 20Some facets of the case of the appellants were based on an indirect causation theory. That theory in a nutshell was that, had the contraventions of the Corporations Law not occurred, the note issue would not have taken place, the appellants would not have invested, and the appellants would therefore not have suffered any loss. 21Ultimately, the majority of the Court determined that, in a case where misleading or deceptive conduct is said to have induced action on the part of the plaintiffs that caused loss, the plaintiffs must prove that they were actually misled. It was found that the indirect causation theory propounded did not so prove, and the claim of the plaintiffs on this basis therefore failed. 22Three separate judgments were delivered; it is convenient to set out pertinent extracts of two of the judgments that deal with the indirect causation theory. 23Ipp JA discussed the decision in Digi-Tech v Brand and its application to the matter at hand at [612]-[619]. Relevantly for present purposes, his Honour said: [617] The approach adopted in Digi-Tech is to be distinguished from cases such as Janssen-Cilag Pty Ltd v Pfizer Pty Ltd [1992] FCA 437; (1992) 37 FCR 526 where a person, by misleading conduct, induces another to act to the prejudice of the plaintiff. In the Janssen-Cilag Pty Ltd v Pfizer Pty Ltd category of case the plaintiff is a passive victim of misleading conduct. No action or omission by the plaintiff affects the loss it suffers. By contrast, in the Digi-Tech category of case, the plaintiff acts or refrains from acting to his or her prejudice by reason of conduct of a third party brought about by the defendant's misleading conduct; the plaintiff's conduct is a necessary link in the chain of causation. [618] The rationale of Digi-Tech is that loss incurred by plaintiffs in acting (or refraining from acting) to their prejudice can only be loss caused "by" conduct contravening s 52 if the plaintiffs are misled by that conduct. Likewise, in my view, such plaintiffs can only succeed in cases based on a contravention of s 995 if, in fact, they are misled. I stress that by "such plaintiffs" I mean plaintiffs who claim to have suffered loss brought about by their own actions or omissions coupled with misleading conduct by the defendants. As was noted in Digi-Tech, were it otherwise, such plaintiffs could succeed on the ground that, by making false representations, the defendants engaged in misleading conduct, even though the plaintiffs well knew the truth of the representations or were indifferent to them. As I have noted, different considerations apply to the Janssen-Cilag Pty Ltd v Pfizer Pty Ltd category of case. 24Giles JA agreed with the reasons of Ipp JA, subject to some additional comments. At [12]-[13], his Honour said: ... The distinction drawn in Digi-Tech (Australia) Pty Ltd v Brand is between cases where conduct on the part of the plaintiff "forms a link in the causation chain" (at [156]) and where it does not. Where it does, there must be reliance on the misleading conduct in the manner next explained. Where it does not, there may be recovery if the act of the innocent party induced by the misleading conduct "by its very nature, causes the plaintiff's loss" (at [155]), but that is where the plaintiff passively suffers loss from another's act (as in Janssen-Cilag Pty Limited v Pfizer Pty Limited (1992) 37 FCR 526 at 529-530, where consumers were led by the misleading conduct to buy less of the plaintiff's product). [13] In saying that in a case of "misrepresentation inducing a transaction" reliance on the misrepresentation was required for proof of causation (at [159]), from the facts before them and their Honour's discussion they meant a case where the plaintiff was not a passive sufferer from another's act, but was someone who made a decision to enter into the transaction to which the representation was material. Their Honours did not mean direct inducement, but that the decision and the materiality to it of the representation was a link in the causal chain. 25Hodgson JA did not express a final view about whether it was necessary for investors to establish that they had actually relied on the misleading conduct, and therefore left open the issue of whether the indirect theory of causation could succeed: at [80] - [83]. Submissions 26Senior counsel for the defendants submitted that the Registrar had correctly understood those two decisions. In other words, in a case founded upon reliance by a plaintiff on a misrepresentation by a defendant, the plaintiff must demonstrate direct reliance by the plaintiff on the explicit misrepresentation alleged against the defendant. He submitted that it is not alleged that the plaintiff himself relied on or was misled by any information allegedly provided by the real estate agency to the valuer. As a result, the further amended statement of claim does not disclose a valid cause of action against the defendants, and the proceedings should be dismissed. 27Senior counsel for the defendants submitted that the plaintiff could not rely on Stockland (Constructors) Pty Ltd v Retail Design Group (International) Pty Ltd or Hampic Pty Limited v Adams [1999] NSWCA 455 as these decisions deal with a different category of case. He submitted that the more recent decisions of Digi-Tech v Brand and Ingot v Macquarie make clear that, in cases where a misrepresentation induces a transaction, direct reliance by the plaintiff on the misleading representation made by the defendant is required. 28To the contrary, senior counsel for the plaintiff respectfully submitted that the Registrar had misunderstood the two cases. He submitted that, in a reliance case such as this, it is sufficient to demonstrate indirect reliance on a misrepresentation by a plaintiff through a third party, without a requirement of transmission of the explicit misrepresentation through that third party. Accordingly, senior counsel for the plaintiff submitted, the plaintiff's reliance on the valuer, and the valuer's reliance on the misleading or deceptive conduct of the directors of the real estate agency, as outlined in the proposed pleading, satisfy the causal link required by the use of the preposition "by" in s 82 of the Trade Practices Act. 29Senior counsel for the plaintiff submitted that the decision in Digi-Tech v Brand does not restrict or modify the words of this section. Rather, it merely emphasises that a plaintiff must prove a causal connection between the alleged misleading or deceptive conduct and the loss suffered. The indirect causation theory put forward by the investors in that appeal did not meet that requirement, as it did not establish that the investors relied upon the misleading or deceptive conduct at all, whether directly or indirectly. Senior counsel for the plaintiff submitted that the facts of this case are markedly different, in that the plaintiff did in fact rely on the misrepresentations, albeit they transmuted through a third party. 30Senior counsel for the plaintiff submitted that adopting a distinction between "direct" and "indirect" causation or reliance obfuscates the fact that the relevant legislative provision simply requires that the complainant suffer loss "by an act of another person". He submitted that the artificiality of any such distinction is apparent when one considers that, if the valuation had been performed by an employee of the plaintiff rather than by an independent third party, there would be no so-called "indirectness", and the causal requirement would in all likelihood be satisfied. He submitted that, so long as the evidence establishes a "chain of reliance", it is immaterial how many intervening parties there are between the defendant's misleading and deceptive conduct and the plaintiff's loss. Determination 31I accept the submissions of senior counsel for the plaintiff. I respectfully consider that the Registrar fell into error. That is so for the following reasons. 32First, Digi-Tech v Brand and Ingot v Macquarie need to be read in context. In both cases, the judgments rejected a propounded indirect causation theory. It was in that setting that their Honours proceeded, as an ancillary matter, to discuss the attributes of a case founded on "direct causation" by way of reliance. In those circumstances, I do not interpret the judgments as constituting an authoritative delineation of the attributes of a "reliance case". 33There is no doubt that Digi-Tech v Brand requires "reliance" in a case such as this; the question remains what is meant by reliance. I do not consider that Digi-Tech v Brand and Ingot v Macquarie determined that question adversely to the plaintiff with such clarity as to call for these proceedings to be struck out as hopeless. 34Secondly, in truth the cause of action is statutory, and the concept of causation is encapsulated in the word "by". That word is elastic and does not call for rigid categorisation of the parameters of the concept of causation. As was said by Mason P and Davies AJA (Giles JA agreeing) in Hampic Pty Limited v Adams, "the requirement of causation is not a stringent one." That passage was referred to with approval in Digi-Tech v Brand at [154]. 35Thirdly, it is well established that cases founded upon misrepresentations that were relied upon by third parties (such as consumers) and thereby caused damage to a plaintiff who is a competitor of the defendant can succeed pursuant to the section: see Janssen-Cilag Pty Ltd v Pfizer Pty Ltd. In that sense, the concept of causation is broad indeed, requiring as it does no reliance on the misrepresentation at all on the part of the plaintiff. To my mind, it would be anomalous in that context for cases based on reliance to be circumscribed in the way for which senior counsel for the defendants contends here. In short, I do not accept that the concept of causation can be very broad in one setting but must be very narrow in another. 36Fourthly, at the hearing senior counsel for the defendants accepted that, if the valuer had in his report explicitly quoted the misrepresentations of the defendants and the plaintiff had relied upon them, then the plaintiff would have no difficulty in bringing an action for damages pursuant to s 82 of the Trade Practices Act. In contrast, his position was that, although the plaintiff contends that the valuer relied on the misrepresentations and the plaintiff relied on the valuer, the cause of action founded on those contentions must fail. I respectfully reject the proposition that the cause of action could stand or fall on so capricious a fact as whether or not the valuer happened to mention in passing the misrepresentations of the defendants in the report that was passed onto the plaintiff. I do not accept that the "chain of reliance" must be so prescribed. 37Fifthly, senior counsel for the defendants at the hearing did not dispute that, if the valuer had been internally employed by the plaintiff, the reliance by the valuer on the misrepresentations could found a valid cause of action. But here, he submitted, because the valuer was a third party, the cause of action must fail. Again, I do not accept that a "chain of reliance" must stand or fall on whether there is an intermediary such as is alleged here. Indeed, to my mind, the concept of such a chain must admit of the interposition of third parties. 38Sixthly and finally, and as against the possibility that the whole of my foregoing analysis is incorrect, there is an ancillary aspect. In short what the defendants seek to do is to maintain an order that shuts the plaintiff out of relief in this Court. Such an order should only be made when it is "clearly demonstrated" that there is no cause of action: General Steel Industries Inc v Commissioner for Railways NSW (1964) 112 CLR 125 at 129. 39Even if the foregoing analysis of the principles enunciated in Digi-Tech v Brand and Ingot v Macquarie and their application to the facts of this case is incorrect, it at the least demonstrates that the interpretation of the statutory provision put forward by the plaintiff is arguable. In the circumstances, I am not satisfied that the case for the plaintiff is "manifestly groundless" or "so obviously untenable that it cannot possibly succeed": General Steel Industries Inc v Commissioner for Railways NSW at 129. 40In short, for six reasons I conclude that the learned Registrar erred in refusing the application for leave to file the further amended statement of claim, and dismissing the proceedings. 41It follows from the above reasoning that I consider that the notice of motion of the defendants seeking to have the proceedings struck out or dismissed in their entirety should be dismissed. 42To my mind, there is no reason why costs should not follow the event. Orders 43I make the following orders: (1)The orders dismissing the plaintiff's notice of motion and that the plaintiff pay the costs of the fourth and fifth defendants made by Registrar Bradford on 13 August 2013 be set aside. (2)Leave is granted to the plaintiff to file and serve a further amended statement of claim as per the copy of the document that is annexure "D" to the Affidavit of Gordon Jeffrey Bryant sworn 4 June 2013 which was filed with Plaintiff's earlier notice of motion on 5 June 2013 (incorrectly stamped as "5 May 2013"). (3)The fourth and fifth defendants are to pay the costs of the plaintiff of the application before the Registrar. (4)The parties have leave to approach the Registry in order to have the matter re-listed at a time and date convenient to them no later than two weeks from today. (5)The notice of motion of the fourth and fifth defendants filed 1 October 2013 is dismissed. (6)The fourth and fifth defendants are to pay the costs of the plaintiff of the plaintiff's motion filed 4 September 2013 and the defendants' motion filed 1 October 2013.