Burns v Grevler

Burns v Grevler - [2010] NSWSC 1219 - NSWSC 2010 case summary — Zoe

[13]

JUDGMENT 1 REIN J: The plaintiff, Ms Sarah Burns (for whom Mr M Aldridge SC appeared with Ms M Campbell of counsel), invested approximately $3.5 million in a restaurant business that failed. She has recovered some money following the failure of the business, but a large amount remains outstanding, which amount she seeks to recover from the defendant, who practises as a chartered accountant in the firm Lucie-Smith Grevler & Co. and for whom Mr I Faulkner SC appeared with Mr A Lo Surdo of counsel. It is alleged against Mr Grevler that he engaged in misleading and deceptive conduct in breach of s 42 of the Fair Trading Act 1987 (NSW), breached the duty of care owed by him to Ms Burns in connection with her investment in the restaurant business, and breached fiduciary obligations owed by him to Ms Burns. 2 The defendant disputes any liability to Ms Burns. The dispute is one both as to fact and as to the legal consequences of the facts asserted by Ms Burns. Uncontentious matters 3 I shall endeavour in this section of the reasons to set out the matters that are not in dispute. 4 In and prior to 2001, Mr Grevler, Mr James Ingram ("James") and James' mother, Mrs Beverley Ingram ("Beverley"), were involved in a restaurant known as "The International" in Kings Cross. 5 In 2001, the landlord terminated the lease and The International closed. James had a one-third interest in the business and Mr Grevler had a one-ninth interest. Both received a portion of the net proceeds derived by virtue of the early termination of the lease. 6 Ms Burns had met James socially through a mutual friend, Ms Michelle Trembath. To Ms Burns' understanding, James owned or had a substantial share in The International, and she had dined there on occasion. 7 After The International closed, Ms Trembath informed Ms Burns that James was looking to set up a new restaurant, and Ms Burns indicated that she would be interested in investing in the new restaurant. 8 James then introduced Ms Burns to Mr Grevler, Beverley and James' brother, Mr Jonathan Ingram ("Jonathan"), and Ms Burns indicated her agreement to support the new venture ("the Rockwall restaurant"), which would be located in leased premises at Potts Point. Jonathan is a designer of restaurant interiors and operates a business called "InDestudio". 9 The structure of the investment put forward to Ms Burns was that a syndicate would be formed with the following participation: James: 40 percent Jonathan: 15 percent Beverley: 15 percent Ms Burns: 15 percent Mr Grevler: 15 percent 10 A company, Rockwall Bar & Diner Pty Ltd ("RPL"), was to be established and would operate the restaurant business. Shares in RPL were to be allocated in the same percentages outlined in [9] above, and capital contributed for the respective shares. 11 Ms Burns was told initially that she would need to contribute $700,000 to the enterprise and shortly afterwards she was told that the amount required would be $900,000, and in August 2004 she agreed to contribute the latter amount in a manner which I shall describe. A deed of loan and guarantee ("the Rockwall Deed") was entered into by James, Jonathan, Beverley, Ms Burns and Mr Grevler. By its terms, James guaranteed repayment of the $900,000 (which was to be borrowed by Ms Burns) as to 40 percent, and Jonathan, Beverley and Mr Grevler each guaranteed 15 percent of that amount. The guarantees, at Mr Grevler's suggestion, were expressed to be several. 12 Ms Burns had a portfolio of shares that was managed for her by Merrill Lynch. Merrill Lynch was prepared to loan money to Ms Burns, with the security being the shares she owned, and the loan of $900,000 (and subsequent amounts) was organised in this fashion.

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14 James then promoted the idea of establishing a restaurant at premises in Liverpool Street, Sydney, which he had identified as suitable. These premises were twice the size of the Potts Point premises. Ms Burns was asked whether she would be willing to increase her level of funding (by the same means as previously), and she indicated that she would be willing to invest another $1 million, provided that her share in the enterprise increased. The increased share for Ms Burns that was agreed upon in respect of the Liverpool Street project is in dispute, but nothing turns on this. Ms Burns indicated that she did not want additional investors involved. 15 The Liverpool Street project did not proceed, but in its place there arose another prospect in premises known as "The Kirketon" in Kings Cross, as part of a hotel of that name. This did proceed but, at Mr Grevler's suggestion, utilising a new corporate vehicle, IBG Pty Ltd ("IBG"). Ms Burns agreed to invest a further $1 million in the syndicate in return for her share increasing to 22.5 percent. Mr Grevler arranged for the existing debt of RPL to Ms Burns to be transferred to IBG. A deed of loan and guarantee in respect of this further investment was entered into ("the Kirketon Deed") and it included several guarantees as before, but in the proportions James 40 percent, Jonathan 15 percent, Beverley 10 percent, Ms Burns 22.5 percent and Mr Grevler 12.5 percent: see page 321 of Exhibit A1. 16 A lease of the Kirketon premises was entered into by IBG, and renovation work and fit-out work commenced and continued until the restaurant (also known as "The Kirketon") was ready for business. 17 Even before the work was finished, James and Mr Grevler, appreciating that IBG had insufficient funds to complete the work, sought a further investment of monies from Ms Burns to enable the restaurant to open. I shall later describe the agreement that was reached about this further investment of $600,000, as well as additional amounts of $60,000 and $940,000 sought after the restaurant had opened and was not earning sufficient funds to meet its liabilities. The restaurant opened on 19 June 2006, and IBG was placed in the hands of administrators on 6 February 2007. 18 There is no dispute that Ms Burns invested a total of $3,515,000 in the business, of which $15,000 and $25,000 were for shares in RPL and IBG respectively. The loans made by Ms Burns can be grouped thus: (1) $900,000 (2) $1,000,000 (3) $600,000 (4) $60,000 (5) $940,000

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19 There is no dispute that written guarantees for loans (1) and (2) were given, and that James, Jonathan, Beverley and Mr Grevler agreed to guarantee loan (3) on the same basis as loans (1) and (2). There is a substantial dispute in relation to loans (4) and (5). 20 There is no dispute that Mr Grevler was an investor in the Rockwall and Kirketon projects. He does not dispute that he was to act as an accountant for the Rockwall and Kirketon restaurant businesses. He admits that he represented himself as acting as the accountant for the syndicate: see paragraph 4(a) of the Amended Defence and paragraph 3.2 of the defendant's short outline of submissions dated 17 August 2010. 21 The fit-outs proposed for the Rockwall restaurant and put in place for The Kirketon were of a very expensive kind - "Rolls Royce" was a description used. There is no dispute that The Kirketon did not make sufficient money to meet its costs and that its financial position was precarious from the time it opened in June 2006 until it closed in February 2007. 22 The only amounts that have been repaid to Ms Burns are a total of $335,000 received from Mr Grevler and a total of $267,286.98 received from Beverley. The plaintiff's case 23 The case advanced by the plaintiff at the hearing was much truncated compared to what had been put forward in the plaintiff's pleaded case through the Further Amended Statement of Claim ("FASTOC"). Mr Aldridge confirmed that the subject matter of the claims for misleading and deceptive conduct under s 42 of the Fair Trading Act and breach of a duty of care was limited to the following matters: (1) the offering of and provision of guarantees by James and Jonathan which, to the knowledge of Mr Grevler (and James, Jonathan and Beverley), were worthless; (2) the absence of any advice that Ms Burns obtain independent legal and/or accounting advice; (3) in relation to the advances of $60,000 and $940,000, Mr Grevler's failure to inform Ms Burns that IBG was insolvent and could not meet the obligation to repay her; and (4) there was also a claim that Mr Grevler guaranteed the last $1 million (that is, the combined $60,000 and $940,000).

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Legal principles 24 On each of the three heads of claim, there was no disagreement as to the relevant principles, and I draw the principles largely from the submissions of the plaintiff on the three heads of claim and the issue of damages. Misleading and deceptive conduct 25 Reference was made to Kimberley NZI Finance Ltd v Torero Pty Ltd (1989) ASC 55-943, Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31, Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 39 FCR 97, Warner v Elders Rural Finance Ltd (1993) 41 FCR 399, Dwyer v Craft Printing Pty Ltd [2009] NSWCA 405 and Semrani v Manoun [2001] NSWCA 337. In Dwyer at [56], Young JA referred favourably to and quoted a passage from Semrani at [62] per Beazley JA (with whom Mason P and Ipp AJA agreed): "in order for the silence in that case to be 'actionable, [the defendant] must have had actual knowledge of a matter which he intentionally refrained from telling [the other party] in circumstances where there was either a duty to disclose or else where [the other party] had a reasonable expectation that such information would be disclosed to him.'" Breach of duty of care 26 The plaintiff relied on Semrani in this context as well. In Semrani, Mr Williams, an accountant, had been asked to advise in respect of a corporate structure in which Mr Manoun, an investor, and Mr Semrani, his business partner, wished to establish a business utilising equipment that, to the knowledge of the accountant, had been purchased for $54,000 but was described in the documentation for the new venture as having a value of $2 million. Mr Williams was to be the accountant for the new venture. The trial judge and the Court of Appeal held that the accountant had engaged in misleading and deceptive conduct in saying nothing about the value of the equipment, but also held that he owed a duty of care to the investor. Beazley JA said at [102]: "Manoun approached Williams with Semrani for the purpose of advising in relation to the structure of the business. Williams advised on the structure, knowing, on the findings made by [the trial judge], that the underlying asset stratum of the business, supposedly to be contributed by Semrani and to be reflected in share allocation and loan accounts, was virtually non-existent. In that situation, he had a duty to disclose what he knew about the machinery." Breach of fiduciary duty 27 Reference was made to the judgment of Mason, Brennan and Deane JJ in United Dominions Corporation Limited v Brian Pty Limited (1985) 157 CLR 1 at 12: "A fiduciary relationship can arise and fiduciary duties can exist between parties who have not reached, and who may never reach, agreement upon the consensual terms which are to govern the arrangement between them. In particular, a fiduciary relationship with attendant fiduciary obligations may, and ordinarily will, exist between prospective partners who have embarked upon the conduct of the partnership business or venture before the precise terms of any partnership agreement have been settled. Indeed, in such circumstances, the mutual confidence and trust which underlie most consensual fiduciary relationships are likely to be more readily apparent than in the case where mutual rights and obligations have been expressly defined in some formal agreement. Likewise, the relationship between prospective partners or participants in a proposed partnership to carry out a single joint undertaking or endeavour will ordinarily be fiduciary if the prospective partners have reached an informal arrangement to assume such a relationship and have proceeded to take steps involved in its establishment or implementation."

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Amendment of the FASTOC 36 In closing submissions, Mr Faulkner complained that the plaintiff's submissions had ranged into territory that was not within the ambit of the FASTOC. After further argument and elucidation, he focused upon two matters, and the plaintiff sought leave to file an amended FASTOC. It was agreed that the question of whether the amendments sought should be allowed should be determined and reasons for the determination included in this judgment. 37 The plaintiff seeks leave to insert a new paragraph 24(d): "James Ingram and Jonathan Ingram were in a position to meet their guarantees should they be called upon" (as an additional implied representation) and similarly seeks to insert a new paragraph 30(e). 38 In relation to the proposed paragraph 24(d), Mr Faulkner withdrew his opposition, but he maintained his objection to the proposed paragraph 30(e), because this related to the guarantee of the $600,000 and Ms Burns "is silent about it in her evidence and [Mr Faulkner] didn't open the topic with her, because it wasn't pleaded": see T358.35-37. Mr Aldridge's response was that the same factual issues arose on the breach of fiduciary duty and breach of duty of care claims: see paragraphs 58 and 61(c) of the FASTOC. 39 In paragraph 29 of the FASTOC, the plaintiff pleads that Mr Grevler and James requested from Mrs Burns a further $600,000 to complete The Kirketon, and if this further loan were to be provided, it would be provided on the same terms and conditions as the previous loans advanced to RPL and IBG. Paragraph 30 asserts various implied representations said to arise out of the representations in paragraph 29 but, unamended, the FASTOC does not assert that there was a representation that James and Jonathan were in a position to meet their guarantees. 40 Paragraphs 58 and 61 of the FASTOC are in the following terms: "58. In breach of the said duty, the defendant both represented and stood by whilst James Ingram and Jonathan Ingram represented that each of them were persons who could support the guarantees given to the plaintiff in circumstances where the defendant knew or had reason to suspect that they were not persons of financial means at all to support the guarantees given to the plaintiff or alternatively had no knowledge of the financial means of James Ingram and Jonathan Ingram to support the guarantees given to the Plaintiff. … 61. By reason of the above matters and, by expressly agreeing to act as the accountant for the Syndicate and, the giving of impartial and professional advice to the Syndicate including the plaintiff, the defendant had a duty of care to take reasonable and prudent steps in the provision of that advice and to give it impartially and in a reasonably proper manner. In breach of that duty of care the defendant: (a) Advised and supported and encouraged the plaintiff to make each of the advances that she did; (b) Failed to disclose to the plaintiff that any of the advances made by the plaintiff as set out above were unlikely to be repaid and or were improvident; (c) Failed to advise the plaintiff that the guarantees to be provided by James Ingram and Jonathan Ingram were likely to be or may not be of any value; (d) Failed to advise the plaintiff that she should seek independent advice; (e) Wrongfully advised the plaintiff that the money advanced to Rockwall and used by it on structural work and renovations to its proposed premises would be able to be recovered from its landlord and had not been wasted; (f) Failed to advise the plaintiff that it was a term of the Heads of Agreement that no building works be undertaken at the Rockwall Restaurant until approval had been obtained by the City of Sydney Council; (g) Failed to advise the plaintiff that it was a term of the Lease that no building works be undertaken at the Rockwall Restaurant until approval had been obtained by all authorities; (h) Failed to inform the plaintiff that considerable building works were undertaken at the Rocwall Restaurant without approval from the City of Sydney Council; (i) Failed to advise the plaintiff that an amount of $940,000 was insufficient to cover the debts that had been incurred by IBG as at 21 July 2006; (j) Failed to inform the plaintiff at any time that the restaurant was not trading profitably and that no further funds should be advanced."

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Q. And you thought that James had a duty to tell her but you didn't? A. Yes, I thought I had a duty to get a message over to her somehow that she must go and get her own advice." (4) in connection with (3) above, James said that Mr Grevler had not told him that he had a duty to ensure that Ms Burns obtained advice: see T265.41-43. I would add that the notion that James (who, on Mr Grevler's own evidence, had criticised Mr Grevler for being too negative about the risks of the restaurant: see paragraph 24 of Mr Grevler's affidavit sworn 11 February 2010) would be an appropriate person to whom to entrust that task is itself implausible; (5) Mr Grevler attempted to distance himself from active involvement in the work of RPL and IBG. At T238.24-28, he denied that he had done so, but see T185.5-9, T205-209, T219-222, T225.44-226.48, T235-238 and pages 23, 25, 42-45, 101-110, 112 and 114 of Exhibit C; (6) he said that he had recommended at the meeting of 9 April 2004 that Ms Burns obtain independent accounting advice, but he said nothing about this in his letter to her of 22 April 2004: see page 13 of Exhibit C and see also T165.31-46; (7) he said that he viewed Mr Wawn, a solicitor, as acting for all members of the syndicate, but he knew that he had sought advice from Mr Wawn on behalf of himself, James, Jonathan and Beverley, and not Ms Burns: see T156.42-157.10 and T171-173; (8) he asserted that his proposal that there be several guarantees, rather than joint and several guarantees, was to the benefit of all concerned: see T166. That proposal was his (see T165.50-166.2) and it was for his benefit (and Beverley's). It was significantly to the detriment of Ms Burns, as he must have appreciated: see T157 and T166.9-13; (9) in relation to the last $940,000, Mr Grevler gave the following answers at T200.31-41: "Q. Let there be no mistake, I suggest to you at the time of the meeting on 21 July 2006 you knew that this company was in dire financial straits? A. I wouldn't agree with that. I actually in July believed the company would trade out of its difficulties.

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Q. It was in dire straits because it didn't have the money? A. Oh yes." (10) he asserted initially that he had discussed the abandonment of the unit trust with Ms Burns, but he conceded that he did not: see T169.6-38; (11) he said that he did not think that he had told Ms Burns that, prior to the Rockwall restaurant, he had never invested in a restaurant business before (see T150.35-37), but not only did Ms Burns say that he told her this, Mr Naumberger said that Mr Grevler told him the same thing: see paragraph 14 of Mr Naumberger's affidavit sworn 20 November 2009; (12) his evidence that there was discussion at the meeting on 9 April 2004 as to the percentage of RPL that Ms Burns would obtain (see T151) does not sit comfortably with the evidence of the involvement of another potential investor who dropped out of the picture and whose proposed share was to be 15 percent (see T254.14-16), the fact that there was a close connection between Mr Grevler and James and Jonathan (and by extension Beverley), and Mr Grevler's inability to describe the discussion at that meeting which led to Sarah obtaining a 15 percent share: see also the evidence of Jonathan at T282.2-10 and Beverley at T274.26-35. Further, neither Mr Grevler nor any of the defendant's witnesses gave any evidence about a discussion with Ms Burns about proportions; and (13) his letter to the leasing manager for the Liverpool Street premises (see page 738 of Exhibit A2), in which he mentioned that he had provided tax and accounting services to James Ingram, appears to be a subtle attempt to imply the financial worth of James at a time when Mr Grevler knew that James had none, notwithstanding his denial that this was its purpose. James Ingram 54 The same submissions were made by Mr Aldridge about James as about Mr Grevler, and again no attempt was made to support James as a credible witness. 55 I found James to be a most unimpressive witness, not only because of his demeanour generally, but also for the following reasons: (1) he was cross-examined about representations he had made in a brochure to potential investors following the collapse of The Kirketon: see pages 215-216 of Exhibit C. The representations in that document concerning the reasons for the failure of The Kirketon were untrue, and his explanation for what he had said demonstrated an untruthfulness: see T246-248. (2) he gave several answers in cross-examination that were demonstrated to be incorrect, for example see T261.26-262.8 and T271.15-34; (3) his evidence that he had a close relationship with Ms Burns was demonstrated to be unreliable: see T250; (4) his evidence as to why he would volunteer details of his financial position to Ms Burns before she had indicated any interest in investing was not credible: see T251; (5) his assertion that the word "syndicate" had never been used in connection with the Rockwall restaurant and The Kirketon and that he had not heard it used (see T258.32-259.20) was difficult to accept - his mother and Jonathan had heard it used, and Mr Grevler used it in his letter to Ms Burns; (6) he asserted that he had taken a financial risk in connection with the restaurants (see T267-268), but apart from a loan from his mother for $40,000, he had risked nothing because he had nothing; (7) he claimed that he told Ms Burns that he had been left with $100,000 after tax from The International: see T250.39-41. He agreed that that would have been incorrect (see T250.43-44), but maintained that he had told Ms Burns that; (8) his evidence as to whether he had sought advice in relation to his investment in RPL (such as it was) involved inconsistencies and was not credible: see T259-260; (9) he was unable to provide much information about what work had been done on the Rockwall restaurant: see T269-271; and (10) his evidence that Ms Burns had told him in response to his statement that he had no assets that this did not matter and that she had another $50 million (see T266.50-267.5) was highly improbable. Jonathan Ingram 56 Mr Aldridge made submissions concerning Jonathan as he had made about Mr Grevler and James, and nothing was said in reply. I did not have the same degree of disquiet about Jonathan that I did about Mr Grevler and James, and indeed Jonathan's evidence did at least corroborate Ms Burns' claims that the syndicate had already been formed before she arrived: see T282.2-10. Jonathan was, however, vague about his understanding of IBG's financial position when the final $940,000 was sought: see T287-289. He, like James, was prepared to give guarantees that had no value, and I did not find his claim that he did not fully comprehend his obligations credible: see T285.7-14. He was unable to explain what he meant by his email of 20 July 2006 (pages 231-232 of Exhibit C): see T285-287. He was also was unable to provide much information about what work had been carried out at the Rockwall restaurant by or on behalf of RPL: see T290-291. Further, I think that it is clear that he and Mr Grevler, James and Beverley decided after the event what they should say about whether the $60,000 and $940,000 loans had been guaranteed: see pages 1239-1240 of Exhibit A4. Beverley Ingram 57 No submissions were made concerning Beverley's credibility as a witness. Like Jonathan, she confirmed that the syndicate shares had been determined before Ms Burns became involved, but she could not recall the details: see T274.26-35. Beverley asserted that Mr Grevler had said that everybody should obtain their own advice on many occasions: see T277.37-38. She said that there was no mention of the word "guarantee" at the meeting in 2006 to discuss the $940,000 advance: see T278.45-49. Beverley says that she was never asked whether she was prepared to guarantee the $600,000, and she has never subsequently accepted that she agreed to guarantee the $600,000: see T279.5-13. 58 Given the contest between the plaintiff, on the one hand, and Mr Grevler, James, Jonathan and Beverley, on the other, as to whether Mr Grevler told Ms Burns that she should obtain independent advice, one possible explanation is that Mr Grevler told James, Jonathan and Beverley that they should obtain advice. We know that Mr Grevler did obtain Mr Wawn's advice for himself, James, Jonathan and Beverley, so that would be consistent. I take the evidence of Beverley, and less significantly, Jonathan into account, but I prefer Ms Burns' evidence on this point, since: (1) I accept her credibility generally; (2) there is no written confirmation from Mr Grevler of the advice he says that he gave; (3) Ms Burns had ready access to legal and accounting advice if she had thought it necessary; and (4) Mr Grevler obtained legal advice for everyone but Ms Burns.

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Reliance 59 The issue of reliance looms large in Mr Grevler's defence against all three claimed causes of action, so I will deal with it first. I have referred to Mr Faulkner's submission that Ms Burns approached the restaurant venture as a "whimsical indulgence". Ms Burns was without doubt commercially unsophisticated and naïve, and I think it is clear that she found the idea of investing in what she believed would be a high profile and successful restaurant an exciting one. I think that her lack of sophistication is the reason she was drawn into what Mr Grevler knew was a very uncommercial arrangement (see T145 and T161-162), namely a 15 per cent share in return for borrowing all of the $900,000, with only personal several guarantees from the other syndicate members. Mr Grevler did ask Ms Burns for the name of her accountant (as well as details of real estate which she owned), which she provided (see page 11 of Exhibit C), but this was in the context of Mr Grevler stating that he needed to satisfy himself that Ms Burns had the financial wherewithal to provide the initial $900,000: see paragraph 23 of Mr Grevler's affidavit. The only time Mr Grevler contacted Mr Naumberger was in relation to the redeemable preference share proposal in 2006. The other syndicate members were persons whose asset position Ms Burns did not know and did not make any enquiries about: see T75.43-48. The increase in loan monies, albeit with a small additional percentage share, only magnified the lack of commerciality of the investment for Ms Burns. 60 However: (1) Ms Burns thought that she was dealing with a very successful restaurateur in James, and that image was promoted by Mr Grevler himself, since he told her that he had never before invested in a restaurant business (which was untrue, since he had invested approximately $40,000 in The International: see T150.16-17) and that if anyone could make it work, it was James; (2) Ms Burns knew that Mr Grevler was an accountant who had a great deal of experience with restaurants, which was in fact the case: see T142.21-40; (3) Mr Grevler told Ms Burns that he would be the accountant for the syndicate (and Mr Grevler's letter of 22 April 2004, although sent in the context of a proposed unit trust, refers to his being the "accountant" and "providing accounting and taxation services"), and she thought that he would have regard to her interests. I think that Mr Grevler intended to convey the impression to Ms Burns that he would be looking after the interests of all of the members of the syndicate, not merely some of them, and she understood that to be the position; (4) Ms Burns understood (and was meant to understand) that a solicitor had been appointed on behalf of the syndicate members; and (5) Ms Burns understood that James and Jonathan together were taking a 55 per cent risk in the venture. She did not know that they were in fact not taking such a risk and that even the capital of $40,000 and $15,000 respectively invested by them was the subject of a loan from Beverley. Ms Burns therefore thought that she had a 15 percent risk in relation to the first $900,000, when in fact it was a 70 percent risk, which became 77.5 percent in respect of the later loans.

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62 It is true that when The Kirketon seemed to falter and require increasing amounts of money to survive, Ms Burns (to the complete surprise of Mr Grevler) continued to support it with further advances. The matters to which I referred in [60] above remained uncorrected, but also relevant is the fact that by that stage, Ms Burns had already put a significant amount of money at risk, even on the 15 percent basis. 63 I note that at T64, Ms Burns agreed in cross-examination that the only matters upon which she had based her decision to lend were the reputation of James in the restaurant industry and Mr Grevler's experience as an accountant and his involvement in the syndicate. Standing alone, this would negative the reliance on the provision of guarantees by each of the other syndicate members, but Ms Burns had not only given evidence of this in her affidavit (see paragraphs 26, 40, 61, 77 and 78 of Ms Burns' affidavit), she also steadfastly asserted the importance of the guarantees in cross-examination (see T43-44, T71-73, T75, T81 and T 85-86) and it was not put to her that her answers were false in the light of what she said at T64. 64 Section 5D(3) of the Civil Liability Act 2002 (NSW) provides: "(3) If it is relevant to the determination of factual causation to determine what the person who suffered harm would have done if the negligent person had not been negligent: (a) the matter is to be determined subjectively in the light of all relevant circumstances, subject to paragraph (b), and (b) any statement made by the person after suffering the harm about what he or she would have done is inadmissible except to the extent (if any) that the statement is against his or her interest." 65 In this case, there were three causes of action pursued: negligence, misleading and deceptive conduct, and breach of fiduciary duty. Mr Faulkner argued that the prohibition against taking into account statements as to what the plaintiff would have done applies not only to a claim of negligence, but all matters capable of being so described (whether or not the plaintiff chooses to so characterise them): see T5-6. I rejected that proposition because, in my view, s 5D deals only with a cause of action in negligence.

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66 Nevertheless, there is ample authority which encourages caution in relation to the acceptance of assertions as to what the plaintiff would have done that are made with the benefit of hindsight: see Chappel supra at 246 per McHugh J and at 272 per Kirby J and Rosenberg v Percival (2001) 205 CLR 434 at 441-442 ([16]) per Gleeson CJ. 67 When regard is had to all of the circumstances, I do not have any difficulty in accepting Ms Burns' evidence that she regarded the existence of the guarantees as a matter of considerable importance in deciding to invest the $900,000 and the $1 million. Considered objectively, I think that the existence of guarantees would be regarded as important by any investor. I draw the inference that Mr Grevler intended that the guarantees would be seen by Ms Burns as relevant to her agreement to invest money in the venture. I do not accept that there was anything in Ms Burns' conduct which establishes that the guarantees were not of importance to her. 68 I shall deal first with the $900,000 and $1 million loans, and then separately with the $600,000 loan, the $60,000 loan and the $940,000 loan. The $900,000 and $1 million loans 69 I make the following findings of fact based on my acceptance of the evidence of Ms Burns and the documentary evidence: (1) Mr Grevler represented to Ms Burns that he was the accountant for the syndicate; (2) The "syndicate", other than Ms Burns, had already been formed when Ms Burns joined; (3) Mr Grevler represented to Ms Burns that Mr Wawn was the solicitor for the syndicate when he well knew that Mr Wawn acted for the Ingram interests and Mr Grevler and that Mr Wawn would have been placed in a position of conflict; (4) Mr Grevler knew that the guarantees of James and Jonathan were worthless; (5) Mr Grevler did not tell Ms Burns that, to his knowledge, the guarantees of James and Jonathan were worthless; (6) Mr Grevler remained silent in relation to his knowledge of the financial positions of James and Jonathan, and I draw the inference that he did so because he recognised that if he had disclosed their true financial positions, Ms Burns would have been very likely to withdraw from the syndicate; (7) Mr Grevler recommended the adoption of several guarantees, rather than joint or joint and several guarantees, to protect his own position at the expense of Ms Burns; (8) Ms Burns thought that her exposure was as to 15 percent of the loans she made; (9) Had Ms Burns been informed that neither James nor Jonathan had any assets and that their guarantees were worthless, she would not have proceeded with the investment in the Rockwall restaurant, or later, The Kirketon; (10) Ms Burns had no idea that neither James nor Jonathan had any assets whatsoever out of which their respective obligations under the guarantees (as to 40 percent and 15 percent) could be met if called upon; (11) The involvement of Mr Grevler as the accountant for the syndicate and Mr Wawn as the solicitor for the syndicate (as Ms Burns understood the position) provided, she thought, safeguards for her in relation to the investment; (12) Mr Grelver was aware that the investments made by Ms Burns were "uncommercial", "very surprising" and "a very odd thing to do": see T145; (13) Neither Mr Grevler nor James ever suggested to her that she should obtain independent advice in respect of the terms of the loans or the nature of the investment; and (14) The only time it was suggested that Ms Burns refer to an accountant was in respect of Mr Grevler's suggestion that redeemable preference shares should be the security for a further loan of $940,000 (which I deal with below).

[52]

73 I think that Mr Grevler had a duty to disclose what he knew to Ms Burns, not only because he knew the information, but also because he must have known that it was important and detrimental to her. It was also relevant to his own decision to encourage the use of several guarantees rather than joint guarantees, again to the detriment of Ms Burns. 74 I think that Mr Grevler was obliged to tell Ms Burns of the fact that the guarantees of James and Jonathan had no value, and he failed to do so. At one point, Mr Grevler contended that he could not tell her the true position because he was James and Jonathan's accountant, and if that were true, he was then in a position of conflict which required him to do one of two things: advise James and Jonathan that he would need to have their permission to tell Ms Burns, or cease acting as the accountant for the syndicate. He did not do either of those things. I have no doubt that Mr Grevler proposed that the guarantees be several because he knew that 55 percent of the security being offered was worthless and would be worthless to him as well if the venture failed and joint guarantees were called upon by Ms Burns. The utilisation of several guarantees was very much to Mr Grevler's benefit and to Ms Burns' disadvantage, and it highlights the importance of the information about James and Jonathan of which Mr Grevler was aware but did not share with Ms Burns. 75 In their written submissions, counsel for the defendant asserted that it was "Not necessarily misconduct for one party in arm's length negotiations to withhold information, even where the parties have conflicting interests", pointing to the judgment of Gleeson CJ in Lam supra. Gleeson CJ said at page 475 (with the agreement of Samuels and Meagher JJA): "Where parties are dealing at arms' length in a commercial situation in which they have conflicting interests it will often be the case that one party will be aware of information which, if known to the other, would or might cause that other party to take a different negotiating stance. This does not in itself impose any obligation on the first party to bring the information to the attention of the other party, and failure to do so would not, without more, ordinarily be regarded as dishonesty or even sharp practice. It would normally only be if there were an obligation of full disclosure that a different result would follow. That could occur, for example, by reason of some feature of the relationship between the parties, or because previous communications between them gave rise to a duty to add to or correct earlier information."

[53]

76 His Honour went on to draw attention to a well-known passage in the judgment of Bowen CJ in Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 12 FCR 477 at 489-490: "Where silence is relied on in order to show a breach of s 52 it will depend upon the circumstances whether the silence constitutes conduct which is misleading or deceptive. As in the case of other sections of the Trade Practices Act 1974 the court may gain assistance from consideration of cases at common law and in equity dealing with related types of situations. However, the court is not confined by such cases because it is concerned with the interpretation and application of the words of the particular statute. Dealing with the question of misrepresentation constituted by silence, there are cases which show, for example, that an omission to mention a qualification, in the absence of which some absolute statement made is rendered misleading, is conduct which should be regarded as misleading. So too is the omission to mention a subsequent change which has occurred after some statement which is correct at the time has been made where the result of the change is to render the statement incorrect so that thereafter it becomes misleading. This also may be regarded as constituting misleading conduct. However, the general position between contracting parties has been expressed in the following way: 'The general rule, both of law and equity, in respect to concealment, is that mere silence with regard to a material fact, which there is no legal obligation to divulge, will not avoid a contract, although it operates as an injury to the party from whom it is concealed.' ( Smith v Hughes (1871) LR 6 QB 597 at 604; and see Ward v Hobbs (1878) 4 App Cas 13; W Scott, Fell & Co Ltd v Lloyd (1906) 4 CLR 572; cf Chadwick v Manning [1896] AC 231 at 238). Under the general law it is important to consider whether there is a legal obligation to divulge. There are particular relationships which have been held to raise an obligation of disclosure. Contracts uberrimae fidei come to mind as examples of this type of relationship. Indeed, there are many particular relationships which raise duties of disclosure. These include trustee and beneficiary, solicitor and client, principal and agent and guardian and ward. Where an obligation to disclose arises an omission to inform the person to whom the obligation is owned may, perhaps on the basis that that person is entitled to assume some fact or circumstance which does not exist, constitute or be an ingredient in misleading conduct. The notion of relationships giving rise to an obligation to make disclosure is one which may well prove useful in determining some of the cases which may arise under s 52 of the Trade Practices Act . However, the court will not be restricted to cases where such a relationship has already been held to exist at common law or in equity. The court is likely to be faced with situations under s 52 between particular parties, where it will feel bound to hold that such an obligation to disclose arises from the circumstances." 77 In Lam, Mr Lam, "an experienced and intelligent banker and businessman" was negotiating subordination arrangements in respect of a city hotel, and the facts of which he claimed he should have been appraised "did not render false the representations that had been made to him". The trial judge held that in certain limited respects, Ausintel had engaged in misleading and deceptive conduct, but the case failed because the trial judge concluded that the reason for Mr Lam's entry into the arrangements was not his reliance on what he had been told: see page 476. 78 I do not think that Lam is of any assistance to Mr Grevler's case. In my view, the circumstances here were quite different to the two parties to a commercial transaction in Lam, and in any event, misleading and deceptive conduct was established in that case.

[56]

85 I accept that it is important for the Court not to seize upon a conflict of interest and work backwards to conclude that there must therefore be a fiduciary obligation: see Breen at 109 per Gaudron and McHugh JJ and Ausintel Investments Australia Pty Ltd v Lam (1990) 19 NSWLR 637, discussed in P W Young, C Croft and M L Smith, On Equity (2009), Thomson Reuters, Sydney at [7.80]. 86 In Rawley Pty Ltd v Bell (No. 2) (2007) 61 ACSR 648, Finn J said at 710-711 ([261]): "It is sufficient to note for present purposes that: (i) the distinguishing characteristic of a fiduciary relationship is that "its essence, or purpose, is to serve exclusively the interests of a person or group of persons" (which, as in the case of a partnership or fiduciary joint venture, can include the fiduciary): see generally Meagher, Gummow & Lehane, at pp 5-005 ff; (ii) a relationship may be fiduciary in part and non-fiduciary in part: Hospital Products Ltd v United States Surgical Corporation at CLR 97-8; ALR 454-5; IPR 329-30 ff; (iii) in so far as the fiduciary relationship is claimed to be founded on mutual trust and confidence, the circumstances must nonetheless be such that the parties to the relationship can reasonably expect loyalty from the other, that is the subordination of self interest to joint interest: Gibson Motorsport Merchandise Pty Ltd at [11]-[13]; (iv) a person who provides information, suggestion or advice to another upon which that other may reasonably be expected to rely is not for that reason alone necessarily in a fiduciary relationship with that other, though that person will be a fiduciary if the factual matrix is such that that other is in the circumstances reasonably entitled to expect that the information provider etc is acting in the matter in that other's interest: compare Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165; 180 ALR 249; 38 ACSR 122; [2001] HCA 31; Commonwealth Bank of Australia v Smith (1991) 42 FCR 390; 102 ALR 453; (v) the loyalty obligation imposed on a fiduciary is that he or she cannot: (a) in any matter within the scope of the fiduciary relationship (see Bertchnell v Equity Trustees Executor & Agency Co Ltd (1929) 42 CLR 384 at 408; [1929] ALR 273 296-7) have a personal interest or an inconsistent engagement with a third party; or (b) use his or her position to own, or to a third party, possible advantage, unless this is freely and informedly consented to by the person(s) to whom loyalty is owed, or is authorised by law: Chan v Zacharia (1984) 154 CLR 178 at 199; 53 ALR 417 at 433; Breen v Williams (1996) 186 CLR 71 at 113; 138 ALR 259 at 289; 43 ALD 481 at 508; [1995] HCA 63; (vi) outside of commercial agency, partnership and trust relationships, care needs to be taken in concluding that commercial parties are in a fiduciary relationship for some or all purposes - not because a commercial relationship cannot be fiduciary, but because such a relationship, commonly, possesses characteristics (for example, known adversarial interests, the reasonable expectation of self-reliance etc) which negative a fiduciary finding: Gibson Motorsport Merchandise Pty Ltd , at [2]-[18 ]; News Ltd v Aust Rugby Football League Ltd (1996) 64 FCR 410 at 539-41; 139 ALR 193 at 311-14; 21 ACSR 635 754-6; 35 IPR 446 at 565-7."

[60]

90 I conclude that Mr Grevler owed Ms Burns a fiduciary duty not to allow his own interests to conflict with hers and not to prefer the interests of other persons over Ms Burns' interests and that Mr Grevler breached these obligations. I think that Ms Burns is entitled to recover the amount of her entire investment in RPL and IBG, since it was procured as a result of Mr Grevler's breach of fiduciary duty to her as a prospective syndicate member. Breach of duty of care 91 I think that the case has some similarity to Semrani. I conclude that Mr Grevler owed Ms Burns a duty of care in relation to the advice that he was proffering to all members of the syndicate as to how the loan would be structured. At the very least, he was required to encourage Ms Burns to obtain her own independent accounting and legal advice, particularly if he felt that he had a conflict between the obligations he owed to James and Jonathan and the obligations he owed to Ms Burns, and even more so given the proposed utilisation of several guarantees rather than joint and several guarantees. 92 Mr Grevler's evidence was that he said that investing in restaurants was a high risk business and that "There is no guarantee of success. If the public doesn't like it, it could go badly and we could all lose our money": see paragraph 21 of Mr Grevler's affidavit. Ms Burns accepted in her affidavit that Mr Grevler had mentioned that "restaurants are always a risk", rather than a "high risk" (see paragraph 23 of Ms Burns' affidavit and T56.24-27, but see T14.26-35), but Mr Grevler did not advise Ms Burns about the worthlessness of the guarantees and the additional risk associated with several guarantees or advise her to obtain independent advice. The $600,000 loan 93 There is no equivalent of the Rockwall Deed or the Kirketon Deed in relation to this loan. 94 The meeting at which the $600,000 was discussed was held in late 2005 at Mrs Burns' home. In attendance were Mr Grevler, James and Jonathan. According to Mrs Burns (see paragraph 34 of Mrs Burns' affidavit sworn 26 November 2009), Mr Grevler said: "there is a current shortfall of just under $600,000 to complete the project without compromising the standard of finish or the integrity of the undertaking as a whole. Will Sarah be able to advance a maximum $600,000 loan on the same terms and condition as other monies she has lent to IBG? All interest and charges Sarah incurs in borrowing these funds will be paid by IBG and interest will be paid at the same rate as on the other funds she has advanced to IBG and the capital of this loan will be paid prior to any other loan funds being repaid by IBG." and Mrs Burns responded that Ms Burns would be able to advance that amount. Mrs Burns says that she subsequently discussed the loan with Ms Burns and that Ms Burns agreed to the loan. Mrs Burns described conversations between herself and Mr Grevler where she queried why the project was costing so much. In the course of one conversation, Mr Grevler said that "Wildfire at Circular Quay cost $3,000,000 and I know of plenty of other restaurants which have spent similar sums": see paragraph 35 of Mrs Burns' affidavit. Mr Grevler denied that he had made that statement about Wildfire, but I accept Mrs Burns' evidence that he did. 95 Mr Grevler sent an email on 8 December 2005 to Mrs Burns in which he confirmed (see page 553 of Exhibit A2): "You have kindly agreed to advance the additional funds up to a maximum of $600,000 as a loan on the same terms and conditions as other monies loan to the IBG Holdings Pty Limited (IBG)." 96 Mr Grevler says that at the meeting in late 2005, he qualified his answer to the question of whether the loan would be on the same terms and conditions as before, but he agrees that by his email, he confirmed that it would be (and he says that he spoke to James, Jonathan and Beverley before doing so). 97 Ms Burns accepts that her mother made the commitment to advance the $600,000, but it is clear that Ms Burns accepted that proposal when her mother told her that the loan would be on the same terms and conditions as the previous loans advanced to IBG and RPL: see paragraph 79 of Ms Burns' affidavit. Further, the cheques were actually signed and handed over by Ms Burns, not her mother. 98 In my view, Mr Grevler, on behalf of himself, James, Jonathan and Beverley, agreed to guarantee the $600,000 on the same basis as the $1 million (and the $900,000, except as to percentages). If Beverley, James and Jonathan did not in fact agree, as at least Beverley's evidence (if accepted) establishes, then Mr Grevler's representation that they had agreed was false. 99 The same conclusions reached above in relation to the $900,000 and $1 million loans apply to the $600,000 loan. The $60,000 loan 100 According to Ms Burns, on 23 June 2006, Mr Grevler or James in Mr Grevler's presence said to Ms Burns and Mrs Burns that "We need $60,000. Can you give us a cheque for that amount as part of your loans?", to which Ms Burns agreed: see paragraph 84 of Ms Burns' affidavit. 101 Mrs Burns does not deal with this topic. Mr Grevler says that he said: "I need to say to everyone that we have been trying to work out the exact cost of getting to the finish lien but a lot of the figures are estimates only. What we do know is that the business is going to be very short of cash in relation to all the costs that seem to be mounting up. Right now the business has a very pressing amount to pay of $60,000. It would be a big help if you could advance that amount to the business and we will work out the total liabilities as accurately as we can as soon as possible. James, Jonathan, Beverley and myself are not in a position to put up any more guarantees. We could look for other investors but they will be very difficult to find at this stage of the proceedings. Perhaps you would like to discuss this with your accountant first." and that Mrs Burns said that she thought that Ms Burns could lend another $60,000: see paragraph 81 of Mr Grevler's affidavit. 102 I accept Ms Burns' version of the conversation, but even on her version, there was no express discussion about guarantees. 103 In the context, I think that there was an implicit representation that the $60,000 would be loaned on the same basis as previous amounts had been loaned, but in any event, because by this stage Ms Burns had already committed a large amount of money to the project and understood that she was at risk for her percentage, I think that this further loan was a consequence of the earlier loans. The conclusions reached earlier apply to this loan as well. The $940,000 loan 104 On Ms Burns' version of events, James told her on 21 July 2006 at a meeting of the syndicate (see paragraph 88 of Ms Burns' affidavit): "The restaurant is being really well marketed and we are getting some really good publicity. I have a printout of people who have dined at the Kirketon since 17 June 2006 until 14 July 2006. You will see there are some really well known names. We are being really well received and we have really good prospects of success." and Mr Grevler then said (see paragraph 89 of Ms Burns' affidavit): "That was the good news, now for the bad news. We need another $940,000 to cover debts or we will have to close the restaurant's doors. I do not think that we should borrow this but that we should all put in our share. I am good for my share." 105 Ms Burns indicated that she thought they could obtain the money, but she would need to speak to Ms Nellie Polly at Merrill Lynch. Ms Burns says that Mr Grevler then said (see paragraph 90 of Ms Burns' affidavit): "I suggest that Sarah's shareholding percentage be increased to 30% and that the other shareholders have their shareholding percentage adjusted to accommodate Sarah's increased percentage and that Sarah be granted a charge over the business." Between that date and 25 July, when Ms Burns delivered a cheque for $940,000 to James, Mr Grevler sent an email to Mrs Burns in which he proposed that Ms Burns be granted redeemable preference shares and a charge over the assets of the company. The email pointed out that at present, the break-even turnover, including interest, was $9,000 per week more than had been earned. 106 It is now apparent that the reason Mr Grevler made the proposal that he did was that he did not believe that IBG could meet a further debt of $940,000 to the syndicate members. This is clear from what he told Jonathan by email on 20 July 2006 (see page 233 of Exhibit C): "If the business pays the interest it will require approximately $560,000 profit to pay interest and repay the loan to the end of the lease. The International never got close to this amount and its rent was about $80,000 pa. It can never in my opinion manage the burden and will go broke." 107 Mrs Burns sought Mr Naumberger's advice concerning the redeemable preference shares, but before she had received that advice from Mr Naumberger, Ms Burns had handed over the $940,000 cheque. 108 Of course it was imprudent for Ms Burns to hand over the cheque: (1) without having had the benefit of Mr Naumberger's advice; (2) without having had confirmation from Mr Grevler as to the agreement concerning the precise percentages in which the guarantees would be given; and (3) without close analysis of the likely trading position of The Kirketon.

[61]

Against this, however, are these matters: (1) Ms Burns now had, at a minimum, a risk as to 15 percent of $900,000, and 22.5 per cent of $1 million, $600,000 and $60,000 (that is, $508,500); (2) she was carrying exposure of $2.56 million to Merrill Lynch; (3) The Kirketon had only recently opened and there had been positive statements by James about its prospects which were not dissented from by Mr Grevler, except in relation to the pressing need for a further injection of funds; (4) whilst Mr Grevler had subsequently proposed an alternative scheme of redeemable preference shares, he had, on 21 July, indicated a need for a further injection of capital of $940,000; and (5) Mr Grevler admitted that Ms Burns was entitled to his opinion on the financial viability of IBG: see T197.26-28. 109 I do not think that it can be inferred that Mr Grevler was speaking for anyone but himself in relation to the $940,000, and it is not possible to determine what amount he was agreeing to put up, because until the 30 percent for Ms Burns was agreed upon by the other syndicate members, with adjustments which may or may not have reduced Mr Grevler's share, it is not possible to determine whether Mr Grevler was to put in 15 percent or something less. Even if a promise to put in "his share" could amount to a form of guarantee, until that share was clear, the terms of the guarantee were uncertain. 110 However, in my view, Mr Grevler was, in all the circumstances, required to make clear to Ms Burns (through Mrs Burns or directly) the facts of which he was aware - that a further loan of $940,000 was unsustainable. The material in his email to Mrs Burns of 24 July 2006 certainly went some way to providing information of concern, but it did not spell out the dire position in which The Kirketon found itself and of which Mr Grevler was aware. When the cheque for $940,000 was received, it was banked by James or Mr Grevler on behalf of IBG in circumstances where only half of the truth had been made known to Ms Burns by Mr Grevler. In my view, Mr Grevler, knowing that Ms Burns understood him to be acting as the accountant for the syndicate, had a duty to give her the same advice that he gave to Jonathan, and he breached that duty.

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